PNB Housing IPO Review: This loan may be costly

PNB Housing IPO opens for subscription next week in what will be 23^rd mainboard public offer this year. The upcoming IPO will remain open between 25 and 27 October 2016 with anchor book opening on 24 October. In total, the IPO will raise INR3,000 crore by selling shares in the price band of INR750 – 775 per share. There is no offer for sale (OFS) and all the shares sold will be newly issued shares. Investors can place their bids in multiples of 19 shares which are expected to be listed on BSE and NSE on 7 November 2016. Through this write-up on PNB Housing IPO review, we try to find out if it makes sense for retail investors to invest in the public offer.

PNB Housing IPO review – No OFS and we like it

Unlike the recently concluded IPO of Endurance Technologies, PNB Housing IPO has no OFS component. As we mentioned earlier, none of the existing investors will be selling their shares through the public offer. PNB Housing said it will use the IPO proceeds to augment its capital base and for working capital requirements.

We have seen in the past that absence of OFS is no guarantee for success but generally, existing investors will stay away from selling through IPO if they see further upside. Private equity (PE) investors have mandates to sell within a timeframe, usually 5-6 years, and thus, OFS by PE investors need not be seen in the negative light. But if they stick around, this shows confidence which is the case with PNB Housing IPO where PE giant Carlyle is an investor.

PNB Housing IPO Review – PNB, Carlyle and Destimoney

PNB Housing Finance is promoted by India’s second largest bank Punjab National Bank (PNB). The bank holds 51% equity stake while the remaining is owned by Destimoney Enterprises Limited which is, in turn, owned by Carlyle. Destimoney first acquired 26% stake in PNB Housing in December 2009. Through a series of transactions, Destimoney’s stake in the company increased to 49% and in February 2015, Destimoney was acquired by a Mauritian subsidiary of Carlyle.

Trivia – PNB’s cost of acquisition in PNB Housing Finance is INR71.19 per share

Banking and housing finance go hand in hand

Given PNB Housing Finance’s roots in banking through its parent, it is natural that it gets an advantage over its competitors. On the basis of loan assets, nearly 63% of the housing finance market is controlled by banks, according to a CRISIL report. Given the extensive network PNB maintain as India’s second largest bank, it helps the housing finance subsidiary tremendously even though the latter has its separate branch network comprising of 47 branches and 16 processing hubs which also includes a Central Support Office (CSO) in New Delhi.

In its prospectus, PNB Housing Finance claims to be India’s fifth largest housing finance player after Housing Development Finance Corporation (HDFC), LIC Housing Finance, Indiabulls Housing Finance and Dewan Housing Finance on the basis of loan portfolio.

Read Also: What makes PNB Housing IPO interesting?

Financial ‘rocket’ performance (that’s what 61.7% CAGR deserves to be called)

Going by the excellent market performance of companies offering consumer loans (Bajaj Finserv) in the recent past, this is very much in public knowledge that India is embracing loans like never before. As a result, improving balance sheets of housing finance companies don’t surprise us but the growth of PNB Housing Finance’s loan book has left us short of adjectives. Between FY2012 and FY2016, the company witnessed a CAGR of 61.7% in its total loan portfolio which grew from INR3,969.6 crore to INR27,177.2 crore during this timeframe. In these years, its revenues jumped from INR461 crore to INR2,699.5 crore while profits grew from INR77.4 crore to INR327.5 crore.

Rapid growth often comes with its own problems and mostly, these challenges are in the form of pressure on quality and margins. However, PNB Housing Finance has been able to maintain its margins and control non-performing assets (NPAs). PNB Housing’s gross NPAs stood at just 0.22% of its total loan portfolio in FY2016, marking one of the lowest NPA values among major housing finance players in India.

The other thing we notice in PNB Housing IPO review is that its cost of borrowings has gone down in recent years. From 9.3% in FY2014, the cost of borrowings slid to 8.65% in the latest quarter ended June 2016. As one can imagine, this has had a profound impact on margins. Net Interest Margin (NIM) for the company improved to 2.98% in FY2016 from 2.93% in FY2014, although NIM has since come down to 2.71% in Q1 FY2016.

Read Also: Varun Beverages IPO Discussion

PNB Housing IPO Review – Should you invest?

Most of the readers of IPO Central know it beforehand that India is vastly underbanked and it is no different is the case with loans. We are at the cusp of nothing less than a revolution in terms of credit availability at retail level. The success of consumer finance players is in a slightly different realm but it does share some fundamental aspects with housing finance as well. India is also plagued with low mortgage penetration and housing shortage and the megatrend of urbanization is only going to make this shortage more acute. As a result, the demand for housing loans is going to increase further and the government’s schemes such as ‘Smart Cities’ and ‘Housing for All by 2020’ are likely to act as catalysts for growth of housing loans.

While we can see there is a strong loan pipeline for companies like PNB Housing, an investment decision has to be based on the prospects of earning profits and that depends on valuations and how much is left on the table. PNB Housing posted earnings of INR27.58 per share in FY2016 which means the IPO is priced at a PE ratio of 28.1 at the upper end of the price band. Housing finance is hardly a segment where competition is not present and investors have a wide range of listed peers to pick from at different valuations. At the inexpensive end of the spectrum is Dewan Housing Finance which is nearly three times PNB Housing and is available at a PE ratio of 14. Even bigger players like LIC Housing Finance and Indiabulls Housing Finance are available at PE multiple of 18 and 13.7 respectively. Among more expensive options is HDFC which is truly a blue chip so it will not be wise to compare with PNB Housing. In terms of valuations, the IPO appears to be priced to perfection.

Over the last two years, the markets have shown a consistent tendency to reward players with high growth and this trend may continue with PNB Housing Finance as well. However, bull markets have a long history to trap investors at high valuations and thus, it would not be wise to assume the current cycle will continue to reward IPO investors. As a result, PNB Housing IPO looks a high risk, low-return offer and investors with long term horizon or with high risk appetite may subscribe to it. As PNB Housing Finance comes from a strong brand name and a financial powerhouse, its IPO will be fully subscribed in the QIB category without any issue. Time and again, retail investors have been following QIB and HNIs and this trend is unlikely to reverse anytime soon but we find through PNB Housing IPO review that investors should not expect great returns from the aggressively priced public offer.