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Oct 20, 2016 07:28 AM IST | Source: CNBC-TV18

'PNB Housing priced aggressively, don't expect steep IPO gains'

In an interview to CNBC-TV18, Digant Haria, AVP Research, Antique Stock Broking spoke about upcoming initial public offering (IPO) of PNB Housing Finance.

In an interview to CNBC-TV18, Digant Haria, AVP Research, Antique Stock Broking spoke about upcoming initial public offering (IPO) of PNB Housing Finance.

Below is the transcript of Digant Haria’s interview to Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Latha: Does PNB Housing look expensive at all?

A: Given the positivity in this space, everybody is trying to price the issue to perfection. So, PNB is also one of that. Housing finance is a very discovered story, so you had Equitas Holdings and Ujjivan Financial Service which gave phenomenal returns after the initial public offering (IPO). But those were domestic issues, slightly undiscovered stories, but PNB yes, they have clearly priced it aggressively. So, if we have to say that if you want returns from this, you definitely need to look at FY18 and not FY17. So, that is the very rough overview of how we think about it. It is more of an FY18 story, you need to look at two years of growth and then you can expect some returns out of that.

Latha: Rs 775, what is the price to book for FY17 for you?

A: FY17, it will be at 2.3 times. We need to understand that in a financial company, fund raising works like a booster shot that when you get a lot of funds at a higher book value, your per share ratios look better, your return on assets (ROA) look better, you capital adequacy, credit rating, everything becomes nicer. So, after this issue, our price to book value comes to around 2.3 times on March, 2017 and March, 2018 it is 2 times.

Sonia: So, should one subscribe or not?

A: There are more than 12-13 companies available in this space. One has to decide what is one looking for. So, as we see, PNB Housing Finance is clearly focusing on urban areas, on the salaried class, on the large ticket, on the loan against property (LAP) whereas there are a lot of other players like Can Fin Homes, Repco, they are focusing on the small ticket housing. So, we at Antique, since the last three years, have a view that small ticket housing is where a lot of action is, where there is genuine demand and where there is genuine government thrust. So, we think that as a space, small ticket is more attractive that large ticket, but given the fact that we are in an interest rate easing environment, housing finance companies in general do well. So, PNB housing also, if we take a year to a year and half view, there is some money on the table, maybe 20-25 percent.

Latha: In terms of autonomy of operation in the public sector, if you are the government’s child, then you go to Central Vigilance Commission (CVC), Central Bureau of Investigation (CBI), everything and you are hampered. But the government’s grandchild is not normally subject to all these. Now the stake of PNB goes down from 51 to 39 or thereabouts. So, does this make it an operationally better company than before?

A: The fact that PNB has done so well in the last four years is because it has been granted complete operational freedom. So, if you look at the board, you look at the management of PNB, there are just two executive directors of PNB who are non-executive directors with PNB Housing. So, they have a complete autonomy to work at. So, you look at the way they originate loans, the way they chase up the customers, you have do not get a feeling that it is a PSU or it has any vestige of a PSU character in it. It works completely like a private organisation. Our ground research tells us they are even more aggressive than the likes of HDFC or LIC.

So, they are out to do a lot of business and this operational freedom is helping them. You have to understand one more thing. They have a AAA credit rating from two credit rating agencies and that is the back bone of this company. If you ask me what is one good thing about PNB Housing, it is the credit rating. So, you have access to unlimited funds at a great price. So, you just need to go out and grow and pick the right customer and that is what PNB is trying to do.

Sonia: Two quick numbers from your end. The compounded loan book growth has been very strong over the past four years about 61 percent. What do you expect going forward and this 2.3 times that you spoke about, FY17, how does it compare to its peers?

A: It has grown from Rs 10,000 crore to Rs 30,000 crore in the last two years. That is almost 60-70 percent kind of a compounded return. I do not think such numbers are possible going ahead. The fast growth happened because it had very good borrowing profile. It could get as much money as it can, it focused on the salary class and it was expanding into new regions. Now, except for east, they have captured all the large cities, so they are present in 20-ish large cities. So, now they need to go deeper and going deeper always takes a lot more time.

So, the growth rates would calibrate to something like 25-30 percent and second thing is large ticket housing is anyway slowing down. You look at HDFC, you look at Dewan Housing Finance Corporation (DHFL). DHFL reported numbers, 20 percent loan book growth, but individual housing just grew 11 percent. HDFC reports 15-16 percent, but individual housing is the slowest piece, same for LIC. So, I think the large ticket housing is slowing down.

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