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PNB Housing Finance - Preferential issue called off; overhang resurfaces - ICICI Securities

Posted On: 2021-10-18 12:06:53 (Time Zone: IST)


PNB Housing Finance's (PNBHF) Board has decided not to proceed with the proposed preferential issue of Rs40bn @Rs390 per share to Carlyle group, General Atlantic, SSG Group and other investors. Preferential issue has been held up for more than 4 months (after already taking over 2 years), due to the pending legal proceeding before SAT. Also, in an exchange filing, the company highlighted that there is lack of visibility or certainty as to the timeline for judicial determination of the legal issues and regulatory approvals were not expected to be forthcoming amidst litigation.

With proposed deal being off the table, the overhang resurfaces:

  • Carlyle raising its stake to 50% and thereby, PNB's stake coming down to ~20% would have put to rest the overhang of any further stake sale in the interim.
  • Equity infusion of Rs40bn would have led to sharp uptick in CAR and reduced gearing to <5x. Improvement in capital adequacy ratio and low gearing would have instilled confidence in debt market and hence, prospects of debt rating could have improved, which is now unlikely.
  • Carlyle group raising stake was in-line with the company's stated strategy of strengthening governance, management and the Board. Mr. Aditya Puri's nomination to the Board would have lent considerable credence to the company's business transition and strategic intentions.
  • With deal being called off, concerns related to asset quality and growth re-emerge. Proposed preferential issue was a notable trigger for re-rating of stock as it would have strengthened balance sheet and supported growth. Stock has almost doubled since the announcement of capital infusion in May 2021. With the deal being called off, stock is likely to derate again to 0.75x FY23E book (from 1x currently) as earnings and growth momentum would derail. We cut our earnings estimate by >10%/>20% for FY22E/FY23E. Given this adverse development, we revise our target price to Rs485 (earlier: Rs848). Downgrade to 'SELL' from Buy.
  • Lack of visibility and uncertainty force it to call off the deal: Preferential issue has been held up for more than 4 months (after already taking over 2 years), due to the pending legal proceeding before the Securities Appellate Tribunal (SAT). There is lack of visibility or certainty as to the timeline for judicial determination of the legal issues, in particular as a third member of the SAT is yet to be appointed. Also, there is no clarity on the shareholders' approval and regulatory approvals will not be forthcoming amidst pending legal proceedings. Board has, therefore, decided not to proceed with the preferential issue and the share subscription agreements executed with the proposed allottees have been terminated. Consequently, Pluto Investments will be initiating the process to withdraw the open offer made by them (at Rs403).
  • Equity raising a top priority; quantum and mode unlikely to be equally reassuring: Capital infusion is must and the Board too has taken cognisance of capital raising requirement at the earliest. However, the question now is what quantum will be raised and what mode will be evaluated. We believe it is unlikely to be as reassuring as the proposed preferential issue of Rs40bn (to existing PEs) that is now terminated.
  • Proposed preferential issue was a notable trigger: In May'21, PNBHF Board approved the much-awaited capital raising plan of Rs40bn @Rs390 per share through a preferential issue. Carlyle was proposed to contribute 80% of the issue, thereby, raising its stake to 50%. Other existing shareholders, viz. funds managed by Ares SSG and General Atlantic, would also have participated to maintain their stake at 10% each. A further confidence-boosting announcement was, Salisbury Investments, family investment vehicle of Mr. Aditya Puri (former CEO & MD of HDFC Bank), proposed investment of Rs250mn in the capital raise (0.2% stake post infusion). In addition, Mr. Puri was expected to be nominated to the Board by Carlyle in due course. With proposed deal being off the table, the overhang resurfaces with respect to promoters' stake (PNB and Carlyle). Also what initiatives are now being taken to strengthen governance and Board will be key.
  • Strategy is 'go retail': PNBHF is down-selling and deleveraging its corporate book - down 26% YoY for Q1FY22, thereby, dragging AUM down 14% YoY. Strategically, the focus is on driving retail growth which is more secured, granular and has lesser credit cost. Overall, the company was targeting disbursements of Rs140-150bn in FY22, higher than Rs100bn in FY21. With the probability of credit rating upgrade being deferred and given the price competition intensity, key will be to not only scale up individual home loans but also to manage balance transfer (out).
  • Business transformation agenda - mass retail housing and project IGNITE: Business transformation is already underway with a new agenda targeting mass retail housing leveraging the in-house expertise and building the high-yielding Unnati portfolio by strengthening distribution in tier-2/3 cities. To strengthen the core, PNBFH is firming up its management team with further three appointments over five in FY21 and three internal promotions in the last 6 months. It is also accelerating the digital drive, augmenting data analytics team, improving business positioning and strengthening underwriting and collection under project IGNITE.
  • Stage-3 assets elevated: In Q1FY22, stage-3 in corporate portfolio rose to 15.9% (12.7% QoQ) while for retail assets it spiked to 3.8% vs 2.5% QoQ. Nearly 30% of individual housing loans and 79% of LAP portfolio are aligned towards self-employed population which has resulted in elevated stress levels in retail segment. Overall, stage-2 remained stable at 6.45% (6.0% QoQ). The company has restructured Rs17.33bn equivalent to 2.9% of loan assets.
  • Corporate book - stabilisation and resolution of stress is key: In Q1FY22, 60% of corporate book comprised under-construction projects, 63% was zero DPD and 77% was performing well. Delay in resolutions and the concentrated nature of the portfolio expose PNBHF to the risk of even higher credit cost.

Shares of PNB Housing Finance Limited was last trading in BSE at Rs. 639.05 as compared to the previous close of Rs. 649.55. The total number of shares traded during the day was 16552 in over 1059 trades.

The stock hit an intraday high of Rs. 651.15 and intraday low of 634.80. The net turnover during the day was Rs. 10677922.00.


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