Buy PNB Housing Finance Ltd For Target Rs. 1,275 by Motilal Oswal Financial Services Ltd
Balancing growth, yields, and risk through strategic pivots
* PNB Housing Finance (PNBHF) is entering the next phase of its transformation, leveraging its retail franchise, distribution network, and improving operating infrastructure to accelerate growth in higher-yielding affordable and emerging segments.
* The strategic roadmap balances accelerating growth in affordable and emerging housing while preserving its prime housing franchise. PNBHF targets raising the affordable and emerging segment share from ~39% to ~45% by end-FY27 and ~50% within the next two years, driven by faster growth in these segments, rather than sacrificing its prime housing portfolio. We model an AUM CAGR of ~19% over FY26–28E.
* Growth is expected to be driven by improving branch productivity, expanding affordable housing sourcing across the existing network, and a calibrated entry into micro-housing—a higher-yielding segment that could meaningfully support margins over the medium term. PNBHF is also diversifying into prime and emerging developer finance, though management expects the wholesale loan mix to remain comfortably below 10% in the foreseeable future.
* Asset quality management is being strengthened through early-stage delinquency monitoring, improved collection efficiencies, and technology-led tools. Recoveries from written-off accounts remain a meaningful earnings contributor and are expected to sustain through FY27, helping contain credit costs (estimated at 5bp/20bp in FY27/28E).
* Ongoing geopolitical tensions in West Asia have led to a hardening of bond yields and are likely to increase the incremental CoB across all instruments. While the company will potentially absorb the impact in 1QFY27, higher incremental borrowing costs are likely to become visible in the weighted average portfolio CoB from 2QFY27, with spreads and NIM facing near-term pressure in the absence of RBI repo rate hikes.
* Overall, PNBHF’s strategy reflects a balanced focus on growth, profitability, and risk discipline. Successful execution of the affordable and emerging housing expansion remains the key re-rating catalyst. The stock trades at 1.3x FY27 P/B; we estimate loan/PAT CAGR of 19%/12% over FY26–28 and an RoA/RoE of ~2.3%/12.6% in FY28. Reiterate BUY with a revised TP of INR1,275 (1.4x FY28E BVPS).
Strengthening the affordable and emerging housing franchise
* Affordable and emerging housing, currently ~40% of the retail portfolio and ~47% of retail disbursements, remain key long-term growth drivers for PNBHF, with their share expected to rise to ~50% over the next two years, supporting stronger loan growth and improved portfolio yields.
* The company plans to accelerate affordable housing growth by expanding sourcing across its entire branch network. Earlier, affordable housing operations were limited to ~230 branches, while the remaining ~160 branches did not originate affordable loans. With the branch infrastructure already in place, incremental investments are expected to be largely manpower-led, supporting improved productivity and operating leverage.
* Underlying demand remains healthy, driven by urbanization, rising homeownership aspirations, improving infrastructure, and government initiatives such as PMAY 2.0, particularly across Tier-2 and Tier-3 markets. We model an AUM CAGR of ~19% over FY26–28E.
Valuation
* PNBHF continues to strengthen its positioning through a calibrated shift toward higher-growth and higher-yielding retail segments, while maintaining disciplined underwriting and strong asset quality. The company’s increasing focus on affordable and emerging housing markets, expansion into select developer-led opportunities, stable liability profile, and improving operating leverage are expected to support sustainable growth in earnings over the medium term. Prudent risk management, controlled exposure limits, and healthy recovery trends provide additional comfort on portfolio stability.
* The stock currently trades at 1.2x FY27 P/B. We estimate PNBHF to deliver a CAGR of 19%/12% in loans/PAT over FY26-28 and RoA/RoE of ~2.3%/12.6% in FY28. Reiterate BUY with a revised TP of INR1,275 (based on 1.4x FY28E BVPS).
* Key risks:
a) In the absence of any RBI repo rate hike, there could be near-term pressure on spreads and NIM, driven by higher incremental borrowing costs
b) asset quality deterioration and elevated credit costs arising from seasoning in the affordable and emerging segment loans.
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