Should you buy PNB Housing Finance at CMP | Buy PNB Housing Finance |

PNB Housing Finance (PNBHF) is a classic turnaround story. While the company  was incorporated in 1988 as a wholly-owned subsidiary of Punjab National Bank,  the turnaround started two decades later in FY10.

This was effected by a change in  shareholding (Destimoney Enterprises, a subsidiary of the Carlyle Group,  purchased 26% stake in PNBHF) as well as a change in management.

Over FY10-15, the company invested in technology, re-jigged its operations and  processes, diversified its loan book, and expanded in new geographies.

Consequently, over FY12-17, PNBHF’s loan book grew from INR40b to INR400b+, and PAT increased from INR0.8b to INR5.2b.PNBHF has effectively leveraged on a unique hub-and-spoke model, where  customer acquisition happens at the branch level while underwriting takes place  at a hub.

The company has incurred significant technology and branch  infrastructure costs over the past few years and we expect operating leverage benefits to accrue with strong growth, resulting in a 600bp reduction in the C/I  ratio to 22% over FY17-20.

PNBHF’s asset quality has been one of the best among peers, with a GNPL ratio (2-year lag basis) of 0.5% as of FY17. However, as the loan book gets more seasoned  and on account of increasing corporate exposure, we expect a modest increase in  GNPA and credit costs. Yet, we expect RoA to remain largely stable at ~1.5%.

With increasing leverage over time, RoE should cross 19% by FY20. We initiate coverage  on PNBHF with a Buy rating and a target price of INR1,675 (22x Sep 2019E EPS),  implying 3.7x Sep2019E BVPS.

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