PNB Housing Finance in the news
PNB HOUSING FINANCE IN THE NEWS
I. Brief History: PNB Housing Finance (PNBHF) proposal to raise Rs.4000 cr. by way of preferential allotment of equity shares and share warrants to Carlyle Group of companies and two others, hit a road block with the split decision given by SAT (Securities Appellate Tribunal), one annulling the decision of SEBI and the other upholding it . Sequence of events that preceded the above decision is as under:
Ø 31.05.2021: PNBHF board approves capital raise plan of Rs.4,000 cr. thro’ preferential issue of equity shares and share warrants to Carlyle group of companies (80% contribution) and two other existing shareholders namely, Ares SSG and General Atlantic (20% contribution).
Ø The board also approves convening of an EGM of the shareholders on 22.06.2021 to pass a resolution on the above, along with other resolutions.
Ø 08.06.2021: Stakeholders Empowerment Services (SES), a proxy advisory firm, raises concerns on the grounds that (i) the proposal did not factor the ‘control premium’, since post allotment, the promoter PNB will cede control to Carlyle Group (ii) Rights issue would have been a better choice instead of the decision on the proposal being left to 85% of the existing shareholders and (iii) non-compliance of Articles of Association (AoA) of the company, which stipulates obtention of valuation report by registered valuer.
Ø 18.06.2021: SEBI informs PNBHF that the resolution proposed for voting in the EGM of shareholders relating to issue of preferential shares/warrants by way of private placement to Carlyle Group and two others is ultra vires of AoA. It also directs that the same shall not be acted upon, until a report on valuation of shares is obtained from an independent registered valuer as prescribed under sec 19(2) of AoA and the same is considered by the company’s Board, while deciding on preferential allotment
Ø 21.06.2021: SAT issues an interim order, based on an application filed by PNBHF, staying the order of SEBI and also permitting completion of voting on the said resolution, with a caveat that the decision of the EGM shall not be declared, till disposal of the case.
Ø 09.08.2021: SAT gives a split decision - The Presiding Officer allows the Company’s Appeal and quashes the SEBI Letter, but the Judicial Member gives a ruling to dismiss the Company’s Appeal. In view of the difference in opinion between the two members of the bench, the order directs continuation of the stay passed against the decision of SEBI on 21.06.2021, till further orders.
II. Main Issue: The main contention appears to be the price of Rs.390 per equity share/share warrant fixed for carrying out the proposal. While PNBHF maintains that the process followed in determining the issue price for the preferential issue is in line with the ‘market practice’ followed by listed companies and is higher than the floor price arrived as per section 164(1) of the ICDR regulations@, SEBI had ruled that the price should have been arrived at after obtaining a valuation from an independent valuer as prescribed under section 19(2) of AoA*. SES, the proxy advisory firm, contends that the price fixed is at a huge variance with the book value (Rs.530 on 31.03.2021) and also did not factor the ‘control premium’
Clarity on this issue may emerge only after a final order is issued.
III. May become a Precedent: Incidentally, whether ‘control premium’ and ‘book value of share’ shall be factored, in addition to complying with relevant SEBI regulations, might come for a heated discussion again, when the government disinvests its stake in IDBI Bank or privatise PSBs.
IV. Interests as a retail investor: Irrespective of how the capital will be raised finally, as a retail investor, I intend to look at how the stock fared in the past, the possible reasons attributing to such behaviour and what might be the financial parameters that might affect the market price in future.
The following factors appear to have determined the movement of the share price of the company, since launch of its IPO in Oct 2016:
Market sentiments seems to have revolved around two assumptions. Expected growth in the economy/industry and the expected growth in the company.
Point 1. The company successfully raised Rs.3000 cr. in the last quarter of 2016 at an issue price of Rs.775 per share, when the economy and the company were on the up mode. The buoyancy in the share price continued till March 2018 and during Nov 2017, the promoter successfully offloaded 6% of its share at Rs.1325 per share and pocketed Rs.1325 cr. Incidentally, FY 2016-FY 2019 was the period when the market share of the company (among HFCs) went up from 4.2% to 6.9% and its loan assets went up to Rs.74023 cr.
Point 2. Beginning April 2019, except for one quarter ended 31st March 2020, in which it incurred a net loss of Rs.242 cr. due to increase in impairment provisions, PNBHF’s net profit and other important key ratios were decent, though they were less than that reported in FY 2018-19. In fact, the company improved its CAR from 14.0% in FY 2018-19 to 18.7% in FY 2020-21 (Tier 1 from 11.0% to 15.5%) and improved its gearing from 9.6 to 6.7. But the market reckoned that the improvement in the said ratios were due to de-growth of the balance sheet by more than 19% in the said period, which effectively translated into dip in market share from 6.9% to 5.7% among HFCs. The company’s share price gradually declined from 900 plus levels in April 2019 to less than 400 levels in January 2020 (before touching a low of below 150 in March 2020, due to uncertainty in economy on account of COVID). During most of the period in FY 2020-21, the share price was in the range of Rs.300 –Rs.400 levels only, though the quarterly financial results showed a marked improvement over FY 2019-20
Point 3. During the Current FY 2020-21 also, the share price was quoting in the range of Rs.350-Rs.430 levels, even after declaration of much better financial results (for FY 2020-21) on 27th April 2021. The jump in the price started in a significant way, only after PNBHF informed the exchanges about the proposal to raise capital by Rs.4000 cr. on 31.05.2021, which gave an indication that the balance sheet will be grown again. The share price, which reached a high of Rs.880 on 07.06.2021, is quoting in the range of Rs.670-Rs.720 levels since then, though the first quarter results of FY 2021 points to increased impairment in loan assets. I find only two possible explanations. The market still believes that PNBHF will be able to raise the capital as proposed and also takes into account the information that plans are afoot to raise non-convertible debentures aggregating to Rs.35,000 cr. - both of which are sure signs that the board and top management are quite optimistic about the prospects and have already charted out their plans for a big growth.
Factors which may determine the share price movement in future:
a. Credit rating on debt instruments: Any change in long term credit rating of the company or its debt instruments, normally has an effect on the market price of the share. PNB reduced its stake from 51% to less than 39%, when PNBHF went for an IPO in 2016. It reduced its holding further to less than 33% thro’ a stake sale in 2017. But even now, CRISIL reckons the PNB brand in its rating exercise. While retaining the long term rating of CRISIL AA (negative) in April 2021, CRISIL stated that the ratings also factors in the brand-sharing benefits that PNB Housing derives from its parentage of Punjab National Bank (PNB, rated: 'CRISIL AA+/CRISIL AA-/Stable’), a PSB and its largest shareholder. So any change in the share holding percentage that relegates PNB from being the largest shareholder, is likely to have an impact on the credit rating of PNBHF, though it is uncertain up to what extent the impact will be.
b. Growth and Gross Interest Margin: While aiming for growth with focus on retail, maintaining the gross interest margin will be a big challenge, as major competitors in the field are banks, holding sizeable low cost deposits as a major resource. Gross margin is healthy at 3.3% as on 31.03.2021, mainly due to reduction in cost of borrowings by 30 bps in 2020-21. The company could achieve the reduction in cost by reducing its debt securities and simultaneously increasing its resource portfolio under refinance from NHB, loan from banks, ECB and deposits from public, all of which are available at historic low rates due to reduction in repo rate and various liquidity measures of RBI. PNBHF intends to raise NCDs in a big way to achieve growth in loan assets, the cost factor of which depends on market trends and is also related to the company’s credit rating for such issues. Hence, relying on cost of borrowings alone for healthy gross margin will be difficult. So growth in the resources and loan portfolio have to be proportionately balanced to ensure optimum returns, as ultimately net profit with growth in business determines the market price of the share.
c. Stressed Assets Portfolio: Movement of stressed assets portfolio will have a significant impact on the share price movement, as increased provision impacts net profit and RoE. PNBHF has a significant share in financing the self-employed under its various housing loan schemes with main focus on loans against property. This segment is expected to have the maximum stress due to COVID related economic uncertainties. As on 30th June 2021, the GNPA of the company was 6% and the net NPA stood at 3.6%. In addition, the company has restructured loan assets of 2.9% under COVID 1.0 and 2.0. The above ratios are generally in line with the industry and are also reflection of the stress in the economy in the current scenario. As long as the portfolio is contained at present levels, it is unlikely to have a significant bearing on the share price.
V.Viswanathan
19th August 2021.
@Section 164(1) of ICDR: in the case of frequently traded shares, the price of equity shares
shall not be less than higher of (i) the average of weekly high and low of the
volume weighted average price during the twenty six weeks preceding the
relevant date (ii) the average of weekly high and low of the volume weighted
average during the two weeks preceding the relevant date
* Section 19(2) of AoA: Notwithstanding anything contained in sub-clause (1) hereof, the
further shares aforesaid may be offered to any persons (whether or not those
persons include the persons referred to in clause (a) of sub-clause (1) hereof)
if authorized by special resolution either for cash or for consideration other
than cash, if the price of such shares is determined by the valuation of a
registered valuer.
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