The long-awaited rights issue of PNB Housing is finally out. Initially planned for ₹4,000 crore, the offer that is now rolled out is for ₹2,500 crore approximately of fund raise. With the rights issue ratio at 29:54, that is for 54 shares held by investors they will be allotted 29 shares, the issue has been priced at ₹275 a share. The issue opened for subscription on April 13 and will be available to investors till April 27. Shareholders till the record date of April 5 can consider the rights issue offer.

Valuations

At the rights issue pricing of ₹275 a share, the housing financier would be valued at around 0.5x on a 12-month trailing price to book value, making PNB Housing one of the cheapest NBFCs to own. So, should one be drawn by the attractive valuations?

Challenged business outlook

Fundamentally, PNB Housing has been challenged on growth and asset quality for a long time. It wasn’t spared of the asset liability management mismatch during the 2018 IL&FS crisis and the pandemic further cracked open the deficiencies in its business model. While there is a new CEO in place who has a track record turning around businesses, the mess in PNB Housing is quite deep that it may take a very long time for the efforts to yield results.

Girish Kousgi, the MD & CEO who took charge in October 2022, has indicated that asset quality, growth and profitability would be his key focus areas. In December 2022 (Q3 FY23) the lender closed at 4.87 per cent gross NPA. At over ₹2,000 crore of restructured assets mostly emanating from its corporate loan book, it represented 3.5 per cent of PNB Housing’s total loan book in Q3. The lender’s provision coverage ratio was around 33 per cent and its credit cost remained elevated at 2.12 per cent. Loan growth in Q3 was almost flat, though one could optimistically point out that the rundown of its book that was evident from June quarter of FY21 may have been arrested.

Yet, if there should be a stark improvement in the asset quality parameters led by growth, then loans will have to grow upwards of 25 per cent year-on-year each quarter. This time around, the company is targeting primarily the retail segment for growth. But with interest rates increasing, it’s already having a rub-off effect on retail housing demand and PNB Housing may be insulated neither from the slowdown that the market is witnessing nor the competition from banks, which is weighing on all non-banking housing lenders. Therefore, while in Q3 PNB Housing managed to increase its yield by 210 bps year-on-year to 11.8 per cent, thereby leading to 188 bps year-on-year increase in net interest margin or profitability at 4.5 per cent, the runway for further expansion in yield and profitability may be restricted, especially if the mortgagor has ambitious growth plans.

For brave hearts

Under these circumstances, if investors should evaluate the rights issue, those who have been long-term investors of PNB Housing for over 4-5 years and don’t want to take any more risk or further exposure, may give the fund raise a skip. Ever since the rights issue was announced, the stock has been under pressure and may continue to be so, considering the deep-discounted rights issue pricing.

However, investors holding shares of PNB Housing as on the record date with some appetite for risk and a 2–3 year time frame on the stock can consider subscribing to the rights issue while selling their primary stock of shares in the open market. By doing so, they will not be vulnerable to further downside risks in the share price and would get to hold limited stock of PNB Housing shares at least expensive valuations. After all, at 0.5x price to book, even if the worst may be fully behind the lender just yet, the downside risks seem to be reasonably priced in.

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