PNB Housing Finance - Tight ALM; all eyes on the proposed capital raise - ICICI Securities

PNB Housing (PNBHF) reported a beat on earnings (PAT: Rs2.57bn vs I-Sec: Rs0.7bn) driven by better control over opex (down 26% YoY) and lower credit costs (down 54% YoY). COVID provisions of Rs0.7bn in Q1FY21 took the aggregate additional provisions to Rs5.4bn (~65bps of AUM). As on June 2020, Moratorium 2.0 declined to ~39% (retail: ~29%). Other important considerations are 1) Headline asset quality (GS3: 2.76%) was largely stable because of in-force moratoriums (~85% of the corporate book) 2) Retail collections were muted in the months of April/May and picked up predominantly in the month of June 3) Continue to await clarity (pending Board meeting of promoter PNB) on its participation in the rights issue. Vulnerability of PNBHF's balance sheet to new corporate (and continuing retail) slippages is still a cause of concern. PNBHF is running a very tight ship in shorter ALM buckets leaving very little room for disappointment. Upgrade to HOLD (from Reduce) with a target price of Rs215.

- Credit costs in the remainder of current fiscal will be a function of how COVID unwinds: Collection trajectory would need to be closely monitored once moratorium gets over in August (unless otherwise extended by RBI). While the lower provisions in Q1FY21 is suggestive of the management stance that the aggressive provisions made in Q4FY20 are adequate, we feel that the company should have taken the opportunity to continue building COVID provisions to strengthen the balance sheet.

- Equity capital raise - imperative for de-leveraging and improving credit rating: A rights issues of up to Rs17bn at current valuations will be significantly book-value dilutive. Despite healthy capital adequacy of 18% (Tier: 15.3%), it is imperative that PNBHF completes this proposed capital raise to bring in confidence and risk capital to mitigate the lurking risk of a further credit rating downgrade driven by concerns around potential slippages in the corporate book and high gearing on the balance sheet. Investors before participating in the proposed capital raise would typically want more clarity around the new CEO (details of which is expected to be announced shortly).

- Transformation - Change in business plan for FY21 (and even beyond): PNBHF will focus on the mass housing lower risk weighted retail segment. It expects the AUM to remain flat in FY21 will increasing proportion of retail in the AUM mix. No major retail loan securitization planned In FY21 - To that extent, the gain from de-recognition of financial instruments will be very low in FY21. PNBHF guided that it will reduce the absolute opex by 5%-10% in FY21 driven by focus on cost rationalization and efficiencies.

- Valuations - completion of capital raise pre-requisite for a rerating: PNBHF is pivoting its business model towards retail while trying to further sell-down its corporate loan-book. If the new CEO can demonstrate credibility and the company can complete the planned equity capital raise, it will improve investor confidence. We upgrade the stock to HOLD with a target price of Rs215 (0.4x FY22E P/BV).

Shares of PNB Housing Finance Ltd was last trading in BSE at Rs.210.25 as compared to the previous close of Rs. 200.25. The total number of shares traded during the day was 82509 in over 2010 trades.

The stock hit an intraday high of Rs. 210.25 and intraday low of 200.5. The net turnover during the day was Rs. 17091066.

Source : Equity Bulls

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