IGI Logo

Larger than expected capital raise

* The board of PNBHOUSI approved an INR40b equity capital raise plan via a mix of preferential allotment (INR32b) and warrants (INR8b) to four institutional investors (Details in Exhibit 1). The preferential allotment and issuance of warrants are at INR390 per share. The quantum of capital raise is higher than initial estimates of INR20b.

* Post the preferential allotment and conversion of warrants, Carlyle Group’s shareholding (across its various funds) would increase to 50% from 32% currently. On the other hand, that of PNB gets reduced to 20.3% from 33%. Other key institutional shareholders, General Atlantic and Ares SSG, who are participating in the capital raise, would maintain their stakes ~10% each.

* Salisbury Investments Pvt., a family investment vehicle of Mr. Aditya Puri, is investing INR250m in the company. Mr. Puri is expected to be nominated to the Board of Directors by the Carlyle Group.

* The above transaction has triggered the mandatory open offer by the Carlyle Group. The latter has initiated an open offer for 70.8m shares (26% of the post-deal capital of the company) at INR403 per share. At full subscription, this would be an additional investment of INR28.5b by Carlyle.

* Key benefits of the capital raise: a) Decline in leverage to sub-5x, with CRAR increasing to 28%, b) The phase of Balance Sheet consolidation, witnessed over the past 1-2 years, will now be behind it and the company would be able to deliver loan growth in line with peers, and c) With increased capitalization, the cost of funds should reduce gradually.

* Given PNB’s reduced shareholding, it will pay a royalty to PNB, which is higher of 0.2% of revenue and 2% of PAT, subject to a minimum/maximum charge of INR150m/INR300m.

Valuation and view

Over the past year or so, the company has consciously slowed down on AUM growth and focused on higher down-selling to address the issue of high leverage. Its loan book declined to INR623b at present from NIR759b at its peak. Consequently, leverage fell to ~7x from ~10x in FY19. With the capital raise, it would decline further to sub-5x levels, in line with some peers. With the capital adequacy issue resolved, the company would be able to deliver loan growth in line with the industry.

Since the start of the COVID-19 outbreak, PNBHOUSI also significantly strengthened its Balance Sheet – total provisions jumped ~3x to INR25b. Provisions are largely adequate, unless there is a severe impact of the second wave in FY22. Mr. Puri joining the Board would be a positive for business strategy as well as investor confidence. We look to revise our estimates post shareholder and regulatory approvals and keep the stock ‘Under Review’ from our earlier ‘Neutral’ rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer