Thinking of buying a home? Low interest rates, sops offered by developers, home loan subsidies by the central government, and reduced stamp duty, make this an alluring proposition for Indian buyers right now. The real estate sector is expected to report strong numbers. Positive momentum is already in motion as Sunteck Realty’s operational update declared pre-sales and collections growth of 36% and 47% YoY, respectively, for Q2FY22. With a lower likelihood of a third pandemic wave, the Reserve Bank of India maintaining low repo rates and realty developers gearing up with new project launches, the real estate sector is hoping for a good festive season. 

Quick Takes:

• PNB Housing’s board of directors terminated the Rs 4,000 crore Carlyle share sale deal on October 14, 2021, citing regulatory delays 

•  PNB Housing Finance expects 40-50% YoY growth in disbursements in FY22 

• The company is opening 13 new branches in Tier 2 & 3 cities especially, catering to the Unnati-affordable housing segment in FY22

• PNB Housing Finance expects corporate loans to decline to 12-13% of the total AUM mix by the end of FY22

• The company expects to maintain net interest margins between 300-350 basis points in FY22

PNB Housing Finance stock price below its IPO issue price

Real estate developers are experiencing high demand from home buyers and banks and housing finance companies (HFC) are disbursing home loans as the Indian real estate industry is seeing a surge in demand after the pandemic, following years of muted growth. In the housing finance industry, PNB Housing Finance evinced significant interest among the investing community over the past year mainly because of its fund-raising exercise. The management recently conducted an analyst call outlining its future growth strategy and apprising the analyst and investor community with respect to the Securities Exchange Board of India (SEBI) appeal in the Supreme Court against the Securities Appellate Tribunal’s (SAT)’s split verdict in the Carlyle-PNB Housing fundraising deal.

PNB Housing Finance’s stock is nowhere near its 2017 levels of Rs 1,700. At current levels, the company’s stock is trading below its IPO issue (2016) price of Rs 750. High exposure to stressed developers impacted its balance sheet strength. The pandemic made things worse, leading to the asset under management (AUM) declined at a compound annual growth rate (CAGR) of 6% over the past three years. 

Revenues and net profit at Rs 1,693 crore and Rs 243 crore fell 10% and 5% respectively in the June 2021 quarter. Disbursements at Rs 1,759 crore doubled YoY but declined 57% sequentially in Q1FY22. Now post-reopening, PNB Housing is geared for growth. The management, through an analyst call, explained the operational modalities of its medium and long-term strategy set in motion to bring PNB housing back to robust growth. 

Retail in the driver’s seat, corporate book to be downsized

Higher focus on the retail segment, reduction in corporate loans, and improving asset quality is the three-pronged agenda of PNB Housing Finance management. Along with Covid-19 driven moratoriums and loan restructuring programs directed by the Central Bank, high corporate exposure (18-20% of total AUM as of March 2020) impacted PNB Housing’s asset quality over the past three years. Cognizant of this fact, the management is focussing on retail loans which currently comprise 85% of total AUM in the June 2021 quarter. 

The company is positioning itself as a retail focussed housing finance company, said Deepika Padhi, Head Investor Relations at PNB Housing Finance. Retail disbursements grew by 145% YoY in Q1FY22 due to the lower base of the June 2020 quarter. Even then, it was nearly half of Q4FY21 retail disbursements.

Speaking on the management’s retail growth strategy, Padhi said that the company aims to increase the retail mix to 88% of total AUM by the end of FY22 with a strong focus on the housing loan portfolio. Housing sales doubled YoY in July-September 2021 period aided by low-interest rates, pick up in hiring across various sectors of the economy, and pent-up demand spill-over of Q1FY22. The strong performance of the real estate sector, especially the retail home loan segment is also due to risk weightage rationalization by RBI for housing loans (from October 2020) making it attractive for both borrowers and lenders.

Padhi said that the company is also working on the granularity of the retail book which mainly constitutes individual housing and loan against property and increasing its presence in Tier 2&3 cities. PNB Housing’s disbursements increased 37% over the past two years from Tier 2&3 cities, said Padhi.

Individual Housing constituted 59% of the total AUM while retail loan against property was at 22% in the June 2021 quarter. The company, through individual housing, is mainly focussed on its Unnati-affordable housing segment. This segment contributed 9% of the total individual housing loan disbursements in Q1FY22 and has an AUM of Rs 2,986 crore. The high yield Unnati segment has a ticket size of Rs 18 lakh. Padhi said that in the Unnati segment, the company is focussing on salaried as well as small businesses such as kirana stores. She further added that the company is opening 13 new branches in Tier 2 & 3 cities especially catering to the Unnati segment in FY22. 

PNB Housing’s Unnati segment lies between the lower income group (LIG) and middle-income group (MIG) category. In spite of second wave lockdowns, the Unnati segment registered 163% YoY growth in disbursement in Q1FY22. The company aims for double-digit growth from the Unnati-affordable housing segment in FY22. The overall retail segment will not be able to log in double-digit growth in the medium term, said Deepika Padhi. After declining over the past two years, retail loan book growth in FY22 is expected to be flat.

Corporate loans are expected to decline to 12-13% of the total AUM mix by the end of FY22. While the corporate loans give higher yield, the company aims to focus on stable retail loans which are more resilient during economic uncertainty. Padhi said that in the long-term, the retail and corporate mix is expected to be in the proportion of 90:10. The company plans to reduce its corporate loan book through sell downs and accelerated repayments. PNB HFC received accelerated repayments of Rs 479 crore in the June 2021 quarter and reduced its corporate loan book by 39% YoY in absolute terms as of June 30, 2021, from March 31, 2019 levels.

PNB Housing Finance shows cautious optimism

Till December 31, 2019, gross and net non-performing assets (NPAs) stood at 1.75% and 1.44% for PNB HFC. As on June 30, 2021, gross and net NPAs surged to 6% and 3.6%, respectively. High corporate book exposure in terms of construction finance and corporate term loans to stressed real estate developers and Covid-19 impact worsened PNB Housing’s asset quality over the past three years. Retail GNPAs stood at 3.8% and corporate GNPAs came in at 15.9% as on June 30, 2021. 

According to the management, while corporate loan book gross NPAs were mainly due to a few significant increases in credit risk (SICR) accounts slipping into NPAs, retail book gross NPA increase primarily emanated from the self-employed moratorium book. Though the management did not give specific guidance for asset quality performance, gross NPAs are expected to decline in absolute terms YoY by the end of FY22.

Speaking on real estate demand revival, Padhi said, “There is a lot of exuberance in the real estate sector post-second wave, but how much has flown into the housing finance sector needs to be seen in the next few months.”  

Housing prices have firmed up by 2-3% in the top seven Indian cities and as input costs increase, real estate developers might be forced to pass on costs to home buyers. Hopefully, the CPI inflation rate should remain at September 2021 levels. In case economic activity continues to revive at a higher pace, CPI inflation might increase to high single digits in the next few quarters. RBI might roll back its accommodative stance and start raising rates by next year. So, the best time to buy, the house of your dreams is now.

Uncertainty returns with the termination of Carlyle deal 

SEBI filed an appeal in the Supreme Court against Securities Appellate Tribunal’s (SAT)’s split verdict in the Rs 4,000 crore PNB Housing-Carlyle share sale deal. According to SEBI, PNB Housing’s issue price of shares and warrants at Rs 390 apiece was much lower than the existing market price and undermines the rights of minority shareholders. If the deal had gone through, there would have been a change in ownership in PNB HFC, triggering an open offer. SEBI contends that PNB Housing Finance violated provisions of its Articles of Association. But even before the Supreme Court verdict, PNB Housing’s board terminated the Carlyle-led deal on October 14, 2021, due to regulatory delays. 

Deal termination is a growth dampener for PNB Housing Finance looking for funds to spur housing sales amid low-interest rates and economic recovery. It will be interesting to see the next moves by PNB Housing and how it restarts its fundraising exercise all over again.