MOSL: PNB HOUSING FINANCE (INITIATING COVERAGE)-In the Big League-A perfect blend of growth with quality

​PNB HOUSING FINANCE (INITIATING COVERAGE): In the Big League; A perfect blend of growth with quality

(PNBHF IN, Mkt Cap USD3.7b, INR1412, TP INR1675, 19% Upside, Buy)

• PNB Housing Finance (PNBHF) is a classic turnaround story. While the company was incorporated in 1988 as a wholly-owned subsidiary of Punjab National Bank, the turnaround started two decades later in FY10. This was effected by a change in shareholding (Destimoney Enterprises, a subsidiary of the Carlyle Group, purchased 26% stake in PNBHF) as well as a change in management.
  
• Over FY10-15, the company invested in technology, re-jigged its operations and processes, diversified its loan book, and expanded in new geographies. Consequently, over FY12-17, PNBHF's loan book grew from INR40b to INR400b+, and PAT increased from INR0.8b to INR5.2b.
  
• PNBHF has effectively leveraged on a unique hub-and-spoke model, where customer acquisition happens at the branch level while underwriting takes place at a hub. The company has incurred significant technology and branch infrastructure costs over the past few years and we expect operating leverage benefits to accrue with strong growth, resulting in a 600bp reduction in the C/I ratio to 22% over FY17-20.
  
• PNBHF's asset quality has been one of the best among peers, with a GNPL ratio (2-year lag basis) of 0.5% as of FY17. However, as the loan book gets more seasoned and on account of increasing corporate exposure, we expect a modest increase in GNPA and credit costs. Yet, we expect RoA to remain largely stable at ~1.5%. With increasing leverage over time, RoE should cross 19% by FY20. We initiate coverage on PNBHF with a Buy rating and a target price of INR1,675 (22x Sep 2019E EPS), implying 3.7x Sep2019E BVPS.