PNB Housing Finance (HFL) IPO Review – Should you invest?

PNB HFL IPO ReviewPNB Housing Finance Ltd (PNB HFL) IPO Review – Should you invest?

Delhi based, PNB HFL IPO would open for subscription on 25th October, 2016. PNB HFL offers housing loans to individuals and corporates. Its revenues grown by 5.8 times in last 5 years. It earned profits over 12% last year. It is growing at 55% CAGR in last 5 years. What are positive factors of PNB HFL Ltd IPO? What are the hidden factors in PNB HFL IPO? Should you invest in such PNB Housing Finance IPO or not? 

About PNB HFL Limited

They offer its customers “housing loans” for the purchase, construction, extension or improvement of residential properties or for the purchase of residential plots, and “non-housing loans” in the form of loans against property to property-owning customers through mortgages over their existing property and any additional security, if required; non-residential premises loans for the purchase or construction of non-residential premises; lease rental discounting loans offered against rental receipts derived from lease contracts with commercial tenants; and corporate term loans, which are general purpose loans to developers and/or corporates for purposes of on-going projects or business needs.

Its target customers for the housing loans are salaried customers, whose main source of income is salary from their employment, and self-employed customers, whose main source of income is their profession or their business. They also offer housing loans in the form of construction finance loans to real estate developers of residential housing.

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Issue details of PNB HFL IPO

IPO opens: 25-Oct-2016

IPO closes: 27-Oct-2016

Face Value: Rs 10 per share

Issue price band: Rs 750 to Rs 775 per share

Minimum Shares: 19 shares and multiples of 19 shares there-of

Minimum amount: Rs 14,725

Issue size: Rs 3,000 Crores

Lead Managers: Kotak Mahindra Capital, DSP Merrillynch, JM Financial, JP Morgan India, Morgan Stanley

Listing: BSE and NSE

Download PNB HFL Limited IPO Prospectus from this link

Purpose of the IPO:

(i) Augment our capital base to meet our future capital requirements; and

(ii) General corporate purpose.

Company Financials (reinstated)

PNB Housing Finance generated revenue of Rs 461 Crores for the year ended Mar-12 and Rs 2,699.54 Crores for the year ended Mar-16.  

Company posted a profit of Rs  77.44 Crores for the year ended Mar-12 and a Profit of Rs 327.56 Crores for the year ended Mar-2016.

Its EPS for FY 2016 is Rs 27.58 and last 3 years average EPS of Rs 26.15.

Reasons to invest PNB HFL IPO

Good revenue growth in last 5 years. Its revenues increased by 55% CAGR in last 5 years.

It is earning good profit of over 10% in last two financial years.

Fifth largest HFC in India and the fastest growing HFC among the leading HFCs in India;

Strong distribution network with deep penetration of key Indian urban centers.

Scalable operating model and centralized and streamlined operational structure.

Access to diversified and cost-effective funding sources.

Diversified product offering with specific focus on self-employed customers.

Customer-centric approach resulting in strong brand recognition.

Prudent credit underwriting, monitoring and collection processes.

Managed by experienced and qualified professionals with strong industry expertise.

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Reasons not to invest in PNB Housing Finance (PNB HFL) IPO

They may not be able to manage the growth of its business and loan portfolio effectively or continue to grow its business and loan portfolio at a rate similar to what we have experienced in the past.

Company business and financial performance may be adversely affected by volatility in interest rates.

They face liquidity risks as a result of maturity and interest rate mismatches between our assets and liabilities.

They face the risk of default and non-payment by its customers, in particular self-employed customers.

Company loan portfolio grows, an increasing proportion of its loans could be classified as non-performing and the current level of its provisions may not adequately cover any such increases.

Company and its Promoter are involved in certain legal proceedings and any adverse outcome in these or other proceedings may have a material adverse effect on its reputation, business, financial condition and results of operations.

Company inability to obtain adequate funding on acceptable terms or increases in its average cost of borrowings could result in a material adverse effect on its liquidity, business growth and financial performance.

The Indian housing finance industry is highly competitive and increased competition may lead to a relative decline in average yields and spreads.

They have had high cost to income ratios and they may not be able to successfully grow its loan portfolio to derive economies of scale.

Company business and operations significantly depend on its parent and Promoter, PNB. Following the Issue, company will cease to be a subsidiary of PNB and they may not be able to enjoy the benefits we received from being a subsidiary of PNB that we have enjoyed in the past.

Other risk factors (Internal and external) can be viewed in prospectus Page no. 17 onwards.

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Recommendation / Investment strategy:

At an upper price band of Rs 775 and EPS of FY2016 of Rs 27.58, P/E Ratio works out to be 28x.  For last 3 years average EPS of Rs 26.15, P/E ratio works out to be 29.6. Means, company is asking the higher price band in in the range of 28x to 29.6x P/E ratio. Its peers HDFC is trading at 28x and LIC Housing finance at 15x and Deewan Housing finance at 8x. Hence, issue price is over priced.

PNB HFL Limited revenues are showing good growth in last 5 years. It is generating competitive margins of over 10% in last couple of years.  Its IPO price is highly priced. Recently ICICI Pru IPO listed below its issue price. High risk investors can invest. Otherwise, one can wait for this shares to list and buy at lower price in case these are available at discounted prices later-on.

Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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PNB Housing Finance Limited (PNB HFL) IPO Review – Should you invest

Suresh KP


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