The approval of the board of directors of PNB Housing Finance (PNBHF) for a preferential issue, to increase Rs 40 billion @ Rs 390 per share, reduces the surplus on the capital injection and / or the sale of long-awaited stakes . This also comes with a few notable positive triggers: (i) Carlyle increases her stake to 50% and PNB’s stake to 20% (should not go below), thus ending the surplus from any further sale of participation in the interim; (ii) the appointment of Aditya Puri to the board of directors will give considerable credibility to the business transition and the strategic intentions of the company; (iii) the capital cushion (CAR> 28%) is strengthened to adequately cope with the potential stress due to the disruption of Covid, and gradually improve visibility on the rating upgrade.
Strategically, the business transformation is underway with a new program to target retail housing, develop the high yield Unnati portfolio and increase efficiency through cost management. However, in the intermediate transition phase, growth and RoE will be modest. Given a dilution of equity greater than 60% and too less than the book value, it would be dilutive up to 10% compared to the book value and 25 to 30% compared to EPS and would further moderate RoE at 10% (instead of 12%).
The strengthening of the board of directors, management, governance and risk management, coupled with a scarcity premium, may result in a revaluation to 1.2x the FY23E book. Upgrade to Buy with a revised target price of Rs 678 (previously: Rs 385). Main risks: (i) The commercial transition takes longer than expected; and (ii) stabilizing the company’s portfolio and resolving tensions would be key controllable elements.