PNB Housing Finance’s (PNBHF’s) Board approval for preferential concern, to raise Rs 40 bn @ Rs 390 per share, reduces the overhang on significantly awaited equity infusion and/or stake sale. It also brings with it a couple of notable positive triggers: (i) Carlyle raising its stake to 50% and PNB’s stake to be down to 20% (not anticipated to go under this), placing to rest the overhang of any additional stake sale in the interim (ii) Aditya Puri’s nomination to the Board will lend considerable credence to the company’s small business transition and strategic intentions (iii) capital buffer (Automobile of >28%) is enhanced to adequately face the prospective tension due to Covid disruption, and steadily enhance visibility on rating upgrade.
Strategically, small business transformation is underway with new agenda to target mass retail housing, construct the higher-yield Unnati portfolio and drive efficiency via expense management. However, in the interim transitioning phase, development and RoE will be modest. Given equity dilution of more than 60% and that also under book worth, it would be dilutive to the extent of 10% to book worth and 25-30% to EPS and would moderate RoEs additional to 10% (from 12%).
Strengthening of the Board, management, governance and threat management, coupled with scarcity premium, can drive re-rating to 1.2x FY23E book. Upgrade to Buy with a revised target value of Rs 678 (earlier: Rs 385). Key dangers: (i) Business transitioning taking longer than anticipated and (ii) Corporate book stabilisation and resolution of tension would be essential monitorable.