PNB Housing Finance Limited IPO (PNBHFL IPO) has received a BUY call from Bangalore-based JainMatrix Investments. The IPO, which opened today for subscription, is offering shares in the price band of INR770-775 apiece. As an investment, PNBHFL IPO is rated a medium risk, high return type of offering. Investors may BUY PNBHFL with a 1 year perspective, said the report. At a FY16 P/B post IPO of 2.45 times, the valuations are reasonable. The P/E ratio at 39 (ttm) does look stretched but with good growth and margin expansion, this will stay in an acceptable range. The report added that grey market premium (GMP) for this IPO is in the range of INR50 – 52 per share.
PNBHFL is the 5th largest housing finance company by loan portfolio. Over 5 years, PNBHFL has implemented a business process transformation and re-engineering program, which contributed to them becoming the fastest growing large HFC in India. PNBHFL’s revenue and PAT have grown 55.6% and 43.4% CAGR from FY12 to FY16. PHF’s loan portfolio also grew at 61.8% CAGR in this period. The operations have become broad based and cover North, West and South India quite equally.
Main risks and negative aspects of PNBHFL IPO
- The recent crackdown by GoI on black money and tax evaders has resulted in housing prices going flat to negative across India. Housing prices are believed to be artificially high in relation to income levels and the related housing rental market. We may be at the start of a multi-year price correction. This could affect housing loan demand.
- The pricing and valuations of PHF look stretched in comparison to peers. The P/E of 39 times (of post IPO capital base and FY16 EPS) is high. However a more critical parameter is P/B and at 2.45 times post IPO, this is reasonable.
- The growth rate of PHF over the past 5 years may be difficult to continue over the next 5 due to high competition from banks and HFCs, and the natural high base effect.
- Margins appear low for PHF compared to peer group. This is acceptable with high revenue growth rates, but if growth slows down, PAT will slow sharply and affect perceived valuation.
- The banking sector offered limited competition to HFCs with few new licenses given by RBI. However this is changing with RBI doling out 20+ new licenses to Payment Banks and Small Finance Banks. See article New Banks: Big Changes In Small Change. RBI is also moving towards Bank licenses on tap in future. This can intensify competition over the years for PHF.
- A slowdown in economic growth in India or global economic instability could result in an adverse effect on their business, financial condition and results of operations.