MOSL: PNB HOUSING FINANCE | Annual Report Update (Buy)-Strong growth, improving profitability

PNB Housing Finance | Annual Report Update: Strong growth, improving profitability; Spreads improved in FY18, but outlook challenging

(PNBHOUSI IN, Mkt Cap USD3.0b, CMP INR1287, TP INR1520, 18% Upside, Buy)

• PNB Housing Finance (PNBHOUSI IN) reported a strong 59% PAT growth in FY18 with 50% growth in AUM YoY, ~40bp spread expansion and stable asset quality.
• Growth has been led by expanding branch count (up from 63 to 84 branches YoY) and higher share of in-house sourcing (up from 59% to 65% YoY). Also, the company continues to reduce geography-specific risks - the share of AUM coming from North India has reduced meaningfully from 52% to 32% over FY14-18.
• With smart treasury management, the company managed to expand spreads despite a tough interest rate environment. Almost all NCDs issued in FY18 were at a cost below 8%. Additionally, only 3% of secured NCDs will mature in FY19, thus minimizing refinancing risk in FY19. In addition, PNBHOUSI issued ~INR9b worth of ZCBs during the year.
• Asset quality remains robust with GNPL ratio of 33bp. While slippages jumped 3x YoY in FY18 (on a low base), upgrades and recoveries led to a steady GNPL ratio by year-end. Write-offs during the year were just INR183m (4bp of loans). However, increasing loan concentration to the Top 20 borrowers is a key concern for us.
• PNB and Quality Investment Holdings (Carlyle) have invited bids for a joint stake sale of at least 51% of the outstanding shares of the company. Non-binding bids are expected to be submitted early in September and the transaction is likely to culminate in three months. While the change in ownership could change company strategy and/or financials, we have not considered the impact on our estimates.