PMAY 20 And Branch Expansion Will Shape Future Housing Markets

Key Takeaways

• Expanding into underserved regions and reducing borrowing costs is poised to fuel revenue and earnings growth in affordable housing.
  
• Successful asset recovery and reduced NPAs boost profitability through lower provisioning and improved net interest margins.
  
• Execution risks and rising competition may restrict growth and compress margins, while regional disparities and policy rate cuts could impact revenue and interest spreads.

Catalysts

Operates as a housing finance company in India.

• Expansion into underserved regions and government support through PMAY 2.0 are expected to drive growth in the affordable housing segment, positively impacting revenue.
  
• The increase in retail loan book growth by 18.2% year-over-year, driven by disbursements in Affordable and Emerging markets, suggests potential for higher future earnings.
  
• Successful recovery from written-off assets and a reduction in gross NPAs to 1.08% will likely improve net margins and profitability due to lower provisioning requirements.
  
• A reduction in borrowing costs by 15 bps and an anticipated further reduction due to rating upgrades could enhance net interest margins, supporting earnings growth.
  
• Strategic expansion of the branch network by opening 51 branches in the Affordable and Emerging Market segments is expected to drive loan origination, boosting revenue and profitability.

PNB Housing Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PNB Housing Finance's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 58.7% today to 53.7% in 3 years time.
• Analysts expect earnings to reach ₹29.6 billion (and earnings per share of ₹113.9) by about May 2028, up from ₹19.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from 13.6x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.09%, as per the Simply Wall St company report.

PNB Housing Finance Future Earnings Per Share Growth

Risks

• Regional disparities in the housing finance sector may limit growth potential in certain areas, potentially impacting the overall revenue growth for PNB Housing Finance.
  
• The company faces execution risks in rapidly expanding its branch network and scaling operations, which may affect operational costs and net margins negatively.
  
• Rising competition in the affordable housing segment, which is key to PNB Housing's growth strategy, could pressure interest rate spreads and impact net interest margins.
  
• Any delays or challenges in recovering from the remaining written-off pool of ₹1,000 crores in corporate and ₹400 crores in retail could lead to higher-than-expected credit costs, affecting earnings.
  
• The anticipated policy rate cuts may lead to lower yields on new loans, potentially compressing net interest margins if mitigations like increasing the yield on new disbursements and product mix changes do not fully offset the reduction.

Valuation

• The analysts have a consensus price target of ₹1196.636 for PNB Housing Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1350.0, and the most bearish reporting a price target of just ₹1025.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹55.1 billion, earnings will come to ₹29.6 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹1010.2, the analyst price target of ₹1196.64 is 15.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.