(Pradeep Gaur/Mint)
(Pradeep Gaur/Mint)

Despite strong earnings, beware the exuberance in PNB Housing

  • Nearly 17% of PNB Housing’s loan book comprises funding to the real estate sector, which is currently in the doldrums
  • The management highlighted stress in five accounts with cumulative exposure of 910 crore

The PNB Housing Finance Ltd stock surged nearly 10% intraday on the National Stock Exchange (NSE) on Friday following its strong March quarter earnings. Net profit rose 51% year-on-year to 380 crore, beating analysts’ estimates. Other positives were stable asset quality, lower provisions and sequential improvement in net interest margins (NIMs).

The company’s loan book grew by about 30% from the year earlier, and its gross non-performing assets was steady on a sequential basis at 0.48%. Average funding costs fell surprisingly, which analysts say, was because of refinancing worth 3,500 crore from the National Housing Bank (NHB).

While the Street is celebrating the company’s stellar earnings, analysts aren’t gung-ho about the road ahead. The reason being PNB Housing’s exposure to the real estate sector, which is currently in the doldrums. Nearly 17% of its total loan book comprises developer loans.

In a post-earnings conference call with analysts, the management said PNB Housing’s total exposure to this segment is spread across 169 developers. Out of these, the top 29 developers constitute around 60% of the total developer loan book.

The management highlighted stress in five accounts with cumulative exposure of 910 crore. These pertain to projects in the National Capital Region, Mumbai, Hyderabad and Bengaluru.

Analysts have warned of tighter regulatory monitoring on non-banks engaged in developer loans, which could potentially increase problems for NBFCs (non-banking financial companies) and HFCs (housing finance companies) financing the real estate sector. Simply put, higher risk in the current environment of tight liquidity could push provisions higher, tempering overall earnings growth.

On the back of these worries, Kotak Institutional Equities has maintained its cautious stance on the PNB Housing stock with a revised fair value of 700 from 950 earlier. Some other analysts have doubts over the sustainability of the improvement in NIMs seen in the last quarter, especially since the NHB refinance was a one-off event.

Jefferies India Pvt. Ltd has also cut the stock’s target price from 990 earlier to 795. It said that though the estimated FY20 valuation multiple at 1.4 times appear reasonable, concerns around potential stress in developer book and possible capital raise may weigh on valuation multiples.

The PNB Housing Finance stock hit a 52-week low of 675 on NSE earlier this month. While the stock has recovered and is currently at 786, it is way below the 52-week high of 1,428 seen last August. And, given the above-mentioned concerns, it is unlikely that the stock may find its lost charm anytime soon.

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