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Will Aditya Puri, Carlyle group entry be a game changer for PNB HFL?

The Puri brand and Carlyle’s deep-pockets will give an edge to the PNB HFL but it will be long before the HFC can challenge its bigger competitors.

June 02, 2021 / 04:57 PM IST
There are challenges lined up for Carlyle and Puri in PNB HFL, most importantly on the quality of the loan book.

There are challenges lined up for Carlyle and Puri in PNB HFL, most importantly on the quality of the loan book.

 
 
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In November last year, a month after he retired as HDFC Bank's CEO after a 26-year long stint, Aditya Puri joined as a senior advisor at global private equity firm, Carlyle group. Soon, Puri  will become a direct competitor to his former employer's parent, Housing Finance Development Finance Corporation (HDFC), by taking up a Board position at Punjab National Bank's housing finance arm, PNB Housing, as Carlyle's nominee.

In an announcement made on May 31, PNB Housing Finance Ltd (PNBHFL) said Carlyle Group along with its affiliates, existing investors, and Puri’s family investment vehicle will together invest up to Rs 4,000 crore in the housing finance company backed by India’s second largest PSU bank, Punjab National Bank (PNB), subject to regulatory approvals.

Pluto Investments, an affiliated entity of Carlyle Asia Partners IV and Carlyle Asia Partners V has agreed to invest up to Rs 3,185 crore through a preferential allotment of equity shares and warrants, at a price of Rs 390 per share. Existing shareholders of the company, funds managed by Ares SSG and General Atlantic, will also participate in the capital raise. The statement added Puri will likely get nominated on the Board of Carlyle in due course.

The announcement will, thus, mean that within a year of leaving the HDFC family, to which he was associated for a quarter of a century, Aditya Puri will now compete with his former employer’s parent.

Why did Carlyle choose PNB HFL?

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If one compares  PNB HFL with other leading names in the mortgage lending space--either by the size of the book or asset quality--PNB HFL isn’t arguably the best pick for Carlyle and Puri. There are bigger and better performing players.

In terms of total assets under management (AUM), PNB Housing Finance is far behind market leader HDFC, which controls 2/3rd of the housing finance market among NBFCs and has one fifth share in the mortgage lending industry. As on March 31, 2020, PNB HFL’s total AUM was Rs 74,469 crore, compared with Rs 5,69,894 crore of HDFC. In fact, PNB HFL comes at the fourth position behind LIC HFL (over Rs 2.13 lakh crore AUM) and IndiaBulls (Rs 80,741 crore) in terms of total assets size.

But, for Carlyle, PNB HFL is a familiar bet. The private equity has been an investor in the PNB-backed HFC for six years. Carlyle knows the company and its opportunities and weaknesses. There are analysts who think PNB HFL is a good bargain for any investor considering the backing of PNB and growth potential. Perhaps, that's the reason why Carlyle and Puri identified PNB HFL over others.

Carlyle, while announcing its latest investment in PNB HFL, cited its previous, long association. “We have developed a strong partnership with PNB Housing Finance since our investment six years ago, leveraging our industry expertise and networks to help the company navigate sector headwinds, strengthen its business, and position it for future growth.” The additional investment reflects Carlyle’s strong commitment to India as a core market, he added,” Sunil Kaul, Managing Director of the Carlyle Asia advisory team said.

Post this investment, Carlyle and its affiliates will be in the driving seat with around 50 percent stake of PNB HFL while PNB, the parent, will take a backseat with around 20 percent stake.

The Puri factor—a game changer for PNB HFL?

The Aditya Puri’s personal brand, which is long associated with the success of HDFC Bank’s consistent growth, will certainly give a leg up to PNB HFL brand, say experts. “Mr. Aditya Puri’s nomination to the Board will lend considerable credence to the company’s business transition and strategic intentions,” said ICICI Securities in a note on May 31.

“Of course, Aditya Puri is a very reputed banker. Obviously, the quality of the book will become what you call a high quality book. As far as the business environment is concerned, it is a very competitive market,” said Rajnish Kumar, former SBI Chairman to Moneycontrol on Puri’s entry into PNB HFL.

“Obviously, there will be some changes in their policies, I presume. Mortgage market in India is still under penetrated. There is a fairly good potential. I think it is a good development for the industry as a whole,” added Kumar.

Investors have cheered Puri's entry in PNB HFL. The Puri factor has already reflected in PNB HFL's share price. After the news of Puri’s investment became public, PNB Housing share price hit upper circuit and is trading at Rs 693.80 per share. “Puri got a good investment bet,” said an analyst who didn’t want to be named. “And stock market has rewarded his entry in two days,” said the analyst.

PNB HFL will benefit from the Rs 4,000 crore capital infusion in more than one ways. Established in 1988, PNB Housing Finance holds the second largest share in deposits among housing finance companies, with deposits of Rs 17,129 crore as on March 31, 2021.

With the fresh round of investment, PNB HFL hopes to augment its capital adequacy, reduce gearing and accelerate growth with a focus on retail housing, including self-employed and affordable housing loans. Assuming full capital infusion, including warrants, and no other change to the March 31, 2021 financials, the capital adequacy ratio of PNB Housing Finance as of March 31, 2021 would increase to over 28 percent from 18.7 percent.

According to ICICI Securities, the resultant capital buffer (CAR of >28%) is enhanced to adequately face the potential stress due to COVID disruption, and gradually improve visibility on rating upgrade. “Equity infusion of Rs 40 billion will lead to sharp uptick in CAR to 28 percent and reduce gearing to <5x (from 6.7x). This will instill confidence to debt market, thereby improving visibility on debt rating upgrade. PNB HFL will also accelerate its borrowing capabilities (at lower cost) for retail-focused growth,” said ICICI Securities.

Business transformation

PNB HFL hopes to use the strengthened team and the fresh money that comes in along with it for its next leg of growth. “Strategically, business transformation is underway with new agenda to target mass retail housing, build the high-yield Unnati portfolio and  drive efficiency through cost management,” the brokerage said.

To strengthen the core, PNB -HFL is firming up its management team with five external hires which include Head – Collections, Chief Information Security Officer, Head of SG&A, Internal Auditor, and business head of affordable housing and two internal promotions. It is also accelerating the digital drive, augmenting the data analytics team, improving business positioning, and strengthening underwriting and collection under the project IGNITE, ICICI Securities noted.

Can Puri-led PNBHFL take on bigger rivals?

The Puri brand and Carlyle’s deep-pockets will give an edge to the PNB HFL brand, but it will be long before the HFC can put up some serious competition to the likes of HDFC, said an industry analyst who didn’t want to be named.

“Mortgage lending is a different game for a banker who has spent most of his career in a retail-focused bank which has built its business on safe salary accounts and corporate relations,” said the analyst.

There are challenges lined up for Carlyle and Puri in PNB HFL, most importantly on the quality of the loan book. In terms of asset quality, PNB HFL lags behind bigger competitors with about 4.4 percent gross NPAs on loan assets at the end of March, 2021.

For HDFC, the GNPAs are equivalent to 1.98 percent of the loan portfolio in the same period while for IndiaBulls, the GNPA is 2.66 percent and for LIC Housing Finance, the GNPA is 2.86 per cent. Similarly, the new team will have to bring down the cost of borrowing which is a big advantage for bigger players like HDFC in the mortgage market.

“For the likes of HDFC, this has been a specialized area for decades. Even LIC, with its vast agent network, which could have been used for cross-selling of mortgage products, couldn’t challenge HDFC’s leadership for this reason,” said the analyst, adding there is no question of a direct competition to HDFC from PNB HFL in the foreseeable future even with big investors on Board.

The COVID-19 pandemic makes the game even tougher for PNB HFL which is already struggling with asset quality issues. In the loan against property division, about 80 percent of the borrowers of PNB HFL are self-employed as on 31 March, 2021.  The performance of this portfolio need to be watched. Retail constitutes 84 percent of the overall book whereas corporate loans constitute 16 percent. Corporate loans mainly constitute construction finance. If the pandemic effects prolong, HFCs too may feel the heat. PNB HFL can't be an exception.
Dinesh Unnikrishnan
first published: Jun 2, 2021 04:57 pm

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