Monday, October 24, 2016

PNB Housing Finance IPO - 7 Reasons Why It is Attractive

PNB Housing Finance, the country's fifth largest dedicated home finance company, will open its Initial Public Offering (IPO) tomorrow, 24th October. The Rs.3000 crore IPO is likely to attract high investor interest due to various factors. The anchor book was invested heavily by institutional investors today, with 30 times subscription being recorded. Here is a look at 7 reasons why PNB Housing Finance IPO is a reasonable public offer that may be considered by investors who think long-term.

1) Promising Sector:

Each bullish phase of the market has its buzzing sectors, and no market watcher will disagree that the NBFC segment has been this bull-run's most buzzing one. While most sub-segments in NBFCs like SME finance, consumer goods finance, and gold loans are on a roll, the highest performance so far has been exhibited by the Housing Finance Companies (HFCs). While there are many reasons for the same, the most evident reason has been the Central Government's push on housing-for-all by the next few years. While this may remain a difficult dream to achieve, the Government has backed it up by various subsidy schemes that is giving a boost to the housing finance sector, especially its affordable segment. No wonder then that almost all listed HFCs are sitting on significant gains since the last two years. PNB Housing Finance is the latest entrant to this listed space.

2) Safe Yet Scalable Book Size:

The bull-run in various listed HFCs has not been symmetrical during the past two years. While many factors contribute to this, size as measured by loan book or assets-under-management (AUM) has been an important factor. The bigger HFCs have been struggling to grow against a big base, while the smaller HFCs have been literally flying. Thus the biggest HFCs like HDFC, LIC Housing Finance, & DHFL have all seen only reasonable gains while relatively smaller ones like Can Fin Homes, Gruh Finance, and GIC Housing Finance are all sitting on multibagger gains in the stock market during the past few years. On the other hand, the smallest HFCs listed in the market will have their own risks, especially on the fund raising front. Due to this, investors have been on the lookout for safe yet scalable AUMs which leaves room for growth. PNB Housing Finance fits this expectation like a T with its nearly Rs. 31,000 crore loan book which makes it medium-sized, as the 5th largest HFC.

3) Track Record of Growth:

While size is one determinant of growth, it is not everything as seen from the fact that not all similar-sized HFCs are growing at comparable rates. Investors have nothing else but the track-record of growth to fall back upon, to assess future growth potential. This is because the growth appetites of different HFCs vary a lot, based on their risk appetite as well as superior strategies to contain the risk. PNB Housing Finance comes across as a strong contender in this category, with nearly 62% (CAGR) growth rate during the last four fiscals - from FY'12 to FY'16. This is arguably the fastest growth among similar sized HFCs. Listing in the market usually improves the focus on growth, and for a housing finance company that has maintained industry-leading growth rate even without listing, the growth focus at PNB Housing Finance will only get sharpened over the next few years.

4) Asset Quality:

Next to size and growth rate, comes the crucial factor of asset quality. While housing loans taken for a first or primary house results in better asset quality for companies across the sector, it is a known fact that NPAs vary between each and every company in the sector. As HFCs fight for growth at any cost, asset quality becomes the next crucial metric. This is a no-brainer as rising NPAs will call for provisions that will erode the bottomline sooner or later. In the years to come, asset quality will emerge as an even more crucial metric as in the push for growth, many HFCs are funding second or third homes of customers, as well as getting into riskier businesses like Loan Against Property (LAP) and developer loans. That is why PNB Housing Finance's superior asset quality as seen from its Gross NPA of 0.27% and Net NPA of 0.10%, comes across as really comforting for prospective investors.

5) IPO Size:

Initial Public Offerings come in different sizes, and this size is a major determinant of the kind of institutional investors it attracts. While small IPOs of good companies are technically alright, they may not attract the best-in-class institutional investors that drive visibility and long-term prospects in the market. This is especially important in bull phases, such as the current boom, as smart money is looking for suitably large but prospective spots to invest into. PNB Housing Finance with its Rs. 3000 crore IPO is the second largest IPO to hit the Indian market in 2016. The bigger IPO size has already started working in PNB Housing Finance's favour with the anchor-book offering of Rs. 900 crores getting oversubscribed by around 30 times by various domestic and international institutional investors, today.

6) Reasonable Valuations:

At the end of the day, whether investors will make gains depend on the valuations of an IPO. Looking by the way of price-earnings multiple, PNB Housing Finance's asking price in the IPO (Rs. 750 - Rs. 775) translates to a P/E of around 28 which is at par with the industry. But, compared on the other crucial metric of price-to-book-value, the IPO price comes across as cheaper at 2.3x P/BV, which is cheaper compared with many peers trading at 6 or more times.

7) Promoters' Pedigree:

PNB Housing Finance is promoted by Punjab National Bank (PNB), one of India's state-owned larger banks which holds 51% stake (pre-IPO). The other 49% is held by Carlyle, a US based private equity major. Post IPO, PNB's stake will come down to around 38%, while Carlyle's will come down to around 37%. While the strong pedigree of the core promoter and investor will attract investors, the corporate governance of the post-IPO company too is expected to improve due to broader participation by institutional investors and mutual funds. PNB Housing Finance will also cease to be a subsidiary of PNB post the IPO, giving the company more flexibility in charting its own course independently.


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