Robust rise in retail disbursement for PNB Housing in the third quarter

PNB Housing announced the release of its 3QFY25 results on January 21, 2025, wherein it has reported strong fundamental performance. Retail disbursement rose 31% YoY to INR53.8bn during the quarter; retail loan asset increased 17.5% YoY to INR706.8bn as of December 31, 2024.

Additionally, the company posted an improvement in NIM performance QoQ, reaching 3.70% in 3QFY25, compared to 3.68% in 2QFY25. The cost of borrowing remained stable at 7.83%, and deposits stood at INR172.7bn as of December 31, 2024. Asset quality improved during the quarter, with gross NPA at 1.19%, compared to 1.24% in 2QFY25 and 1.73% in 3QFY24.

PNB Housing Finance Limited, with over 35 years of operating history, is India’s third-largest housing finance company by loan asset. The company’s portfolio includes Retail Housing and Non-Housing loans for prime customers, Emerging Market loans and affordable housing loans.

As of FY24 end the loan book stood at INR653bn and active loan and deposit accounts at over 500k. The North region accounts for 32% of loan assets as of December 31, 2024, South 34%, and West 34%. In terms of state, Maharashtra leads the way with a 22.3% share in retail loan assets. The company serves its customers through 300 branches, employing over 5,500 people.

Robust retail strategy

The company is heavily skewed towards catering to the Retail segment, which formed 98.3% of the loan asset mix as of December 31, 2024, the balance being comprised of the Corporate segment. Within Retail, Individual Housing Loan formed 72.2% of the product mix, and Non-Housing Loan 27.8%. Additionally, PNB Housing holds a well-diversified borrowing profile with 70% of the total borrowings at floating. Term loans form 40.4% of the total mix, followed by deposits at 28.8%.

As part of its broader retail strategy, PNB Housing plans to grow its retail loan asset, including the high-yielding Emerging Markets segment and expand its Affordable asset, especially in Tier 2 and 3 cities. The company’s push for growth in these segments could be demonstrated through a 23% YoY rise in loan assets of Emerging Markets to INR131.7bn in 3QFY25 and a robust 234% increase in loan assets of the Affordable segment to INR38.4bn. Further, the Affordable segment has witnessed a positive trend of rise in incremental yields, reaching 12.14% in 3QFY25 from 11.6% in 3QFY24.

Long-term NIM performance outpaced peer

PNB Housing witnessed a steady rise of 8.4% in net interest income CAGR over the period FY19-24 to reach INR24.9bn. The net interest margin demonstrated an increase of 81 bps to 3.74% in FY24. However, net income surged at a modest CAGR of 4.8% over the same period to INR15.1bn in FY24, impacted by loan loss provision and loss on sale of assets.

The company’s cash reserves witnessed a decline from INR40.3bn at FY19 end to INR21.4bn at FY24 end, primarily on the back of debt repayments during the period.

On the other hand, PNB Housing’s peer, LIC Housing Finance, outperformed with a CAGR of 14.7% in net interest income over the past five years to reach INR86.8bn in FY24. The net interest margin increased by 70 bps to 3.08% in FY24. Additionally, net income performance registered impressive growth, rising at a CAGR of 14.4% to reach INR47.6bn in FY24.

Improving trends in asset quality

The company’s asset quality has witnessed an improving trend in the past few quarters, with overall GNPA declining to 1.19% in 3QFY25 from 1.73% in 3QFY24; the NNPA decreased to 0.80% from 1.14% during the same period. GNPA of the retail segment reduced to 1.21% in 3QFY25 from 1.67% in 3QFY24, whereas NNPA declined to 0.81% from 1.14%. Consequently, the credit cost witnessed a declining trajectory during the same period under consideration, reflecting a fall from 0.34% to negative 0.19%.

Premium valuation tracking fundamentals

PNB Housing is trading at a premium P/B multiple of 1.2x, compared to its local peer, LIC Housing Finance, which is trading at a multiple of 0.8x. The company is also trading at a premium compared to its six-year average multiple of 0.9x.

Tracking overall positive developments, the stock has delivered returns of around 7% in the past one year. The stock is covered by a total of 11 analysts, out of which nine have given a ‘Buy’ rating, and one recommends a ‘Hold’ rating for an average target price of INR1,177, indicating a significant potential upside of over 53% from the current levels. The positive view of the analysts is further supported by an anticipated CAGR of 19.3% in net profit over the forecasted period FY24-27 to reach INR25.6bn.

Overall, the company is well poised to meet the retail credit demand through a well-planned retail strategy catering to each segment of the pyramid, and supported by decent growth in the loan book, improving asset quality and a well-diversified borrowing mix. However, PNB Housing is prone to a few risks inherent to NBFCs, including strict regulatory purview of RBI’s directives, access to high-cost funds and credit risk.