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Stock pick of the week: PNB Housing's growth is expected to pick up in the coming quarters

PNB Housing’s operating expenses fell by 8% y-o-y in the second quarter as a result of cost rationalisation. Besides, the fact that PNB is not planning to expand and is focusing on its existing branches has made the company a favourite of analysts.

, ET Bureau|
Updated: Nov 04, 2019, 07.39 AM IST
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The fall in disbursements is temporary and growth is expected to pick up in the coming quarters.
Despite strong parentage, stock market sentiment towards PNB Housing Finance (one of the second rung NBFCs) too was impacted by the recent crisis. PNB Housing lost 33% during the last one year, compared to 17% gain in the Sensex. Its reasonably high exposure to loan against properties (17% of loan book) and construction finance (12% of the loan book) is another reason for its underperformance.

However, analysts believe that PNB will improve its performance owing to several reasons. First, its numbers for the second quarter of 2019-20 were better than expected. For example, its net interest income (NII) and net profit for the quarter zoomed by 36% and 64% respectively. However, the disbursement fell in the second quarter (retail and corporate disbursements fell by 27% and 87% respectively y-o-y) due to increased caution exercised by the company. It is now only funding projects that are meeting the pre-defined completion targets.

Analysts’ views
Sell 2
Hold 6
Buy 11

Second, the improvement in profitability is expected to be sustained in the coming quarters as well. The management’s effort on cost rationalisation has started yielding results and its operating expenses fell by 8% y-o-y in the second quarter. Its ‘costs to assets ratio’ also improved by 16 bps y-o-y. Since PNB Housing is not planning to open new branches in 2019-20 and is planning to bring existing branches to optimum efficiency level, this improvement is expected to continue.

The advantage due to reduction in corporate tax rate will also be visible in the coming quarters. Third, there is comfort on its asset quality front. While its gross NPA from retail segment remained stable at 0.8%, the same from corporate segment fell to 0.8% from 0.9% q-o-q.

Diversified funding mix (retail deposits contribute around 20%) is another factor helping PNB Housing. Since the fall in disbursement is temporary, PNB Housing continues to raise funds to augment its lending power in the coming quarters. For example, it raised $175 million through the external commercial borrowing (ECBs) route and Rs 500 cr ore through non-convertible debentures (NCDs) during the second quarter of 2019-20. It plans to raise an additional Rs 10,000 crore in future through secured and unsecured NCDs. PNB Housing is also expected to raise around Rs 2,000 crore through equities.

To allow increased participation by private investors, PNB may also not participate in this equity capital raising. As of now, state-run Punjab National Bank holds only 32.66%. This results in a de-facto privatisation, it can be another upward trigger for the counter.

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PNB Housing compared with ET NBFC and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” in the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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