# Intrinsic Calculation For PNB Housing Finance Limited (NSE:PNBHOUSING) Shows Investors Are Overpaying

One of the most difficult industry to value is mortgage and thrift financing, given that they adhere to different rules compared to other companies. For instance, these lenders must hold a certain level of cash reserves on the books as a safety precaution. Examining data points such as book values, as well as the return and cost of equity, may be suitable for estimating PNBHOUSING’s intrinsic value. Today I’ll take you through how to value PNBHOUSING in a relatively useful and simple approach.

### What Model Should You Use?

Two main things that set financial stocks apart from the rest are regulation and asset composition. Strict regulatory environment in India’s finance industry reduces PNBHOUSING’s financial flexibility. Furthermore, mortgage and thrift companies generally don’t possess significant amounts of tangible assets as part of total assets. Therefore the Excess Returns model is appropriate for deriving the true value of PNBHOUSING as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.

### Calculating PNBHOUSING’s Value

The main belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (16.79% – 13.55%) x ₹507.66 = ₹16.47

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= ₹16.47 / (13.55% – 7.73%) = ₹283.17

Combining these components gives us PNBHOUSING’s intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= ₹507.66 + ₹283.17 = ₹790.83

This results in an intrinsic value of ₹789.67. Given PNBHOUSING’s current share price of ₹1,222, PNBHOUSING is , at this time, overvalued. This means there’s no upside in buying PNBHOUSING at its current price. Pricing is only one aspect when you’re looking at whether to buy or sell PNBHOUSING. There are other important factors to keep in mind when assessing whether PNBHOUSING is the right investment in your portfolio.

### Next Steps:

For mortgage and thrift companies, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
2. Future earnings: What does the market think of PNBHOUSING going forward? Our analyst growth expectation chart helps visualize PNBHOUSING’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PNBHOUSING is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on PNBHOUSING here.