Attractive valuations, improving retail realty demand to prop PNB Housing

PNB Housing Finance
The stock of PNB Housing Finance fell by about 7 per cent in the last one month while its peers were up were up 2-4 per cent during that period. The former now trades at 1.6 times its FY20 estimated book value, a 58 per cent discount to its three-year average. Stake sale by the parent  Punjab National Bank,  when the entire sector has been reeling under liquidity issues, has also hurt investor sentiment.  

However, an expected improvement in retail real estate demand with slash in goods and services tax is expected to drive demand and help drive loan growth of top-rated non-banking housing financiers such as PNB Housing over other smaller players. As of December 2018, 78 per cent of the company’s assets under management (AUM, indicating loan book size) was from the retail segment.

While there are upsides, there are some key factors investors should look at. According to G Chokkalingam, founder and managing director at Equinomics Research, growth in retail housing demand may not see significant pick up as prices of the assets are still higher and income growth is also not picking up. Thus the management's commentary post March 2019 quarter result is key.

A good credit rating also gives benefits in terms of cost of funds as compared to other low-rated peers. However, since liquidity concern is not behind, there would be marginal rise in funding costs.  Analysts at Motilal Oswal Securities estimate a meagre 5 basis point sequential contraction in PNB Housing's net interest margin to 1.8 percent in March 2019 quarter.

Yet, PNB Housing also had liquidity of Rs 6,000 crore as of December 2018 in the form of cash and investment and the management expects to end FY19 with enough liquidity, say analysts at Arihant Capital.

The company’s exposure to construction book and loan against property are key to watch given the high default risk. Both these segments accounted for 13-17 per cent of the company’s overall AUM as of December 2018. However, no bad loans from wholesale book offers comfort.

Overall, the attractive valuation can be an entry point for high-risk appetite investors, suggest analysts.

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