PNB Housing Finance share price hits 20% upper circuit again, for 2nd consecutive session - Here is why Morgan Stanley maintains rating

PNB Housing Finance share price: Morgan Stanley said that the announcement of the large equity infusion should significantly improve confidence of fixed income and equity markets and bring PNB Housing Finance back on a growth path. Morgan Stanley believes this capital infusion could materially accelerate the business turnaround they have been writing about. Morgan Stanley discusses proforma impact herein. Morgan Stanley maintains overweight rating on PNB Housing Finance with price target of Rs 600. PNB Housing Finance share price today is Rs 630.75, up Rs 105.1. 

The capital raise is subject to regulatory and shareholders’ approvals (EGM on June 22,2021). PNB Housing Finance will issue 82 mn equity shares at Rs390/- share and will also issue 20.5mn convertible warrants at Rs390/- which will be exercisable within 18 months from the date of their allotment. For warrants,25% of the money will be payable to the company at time of allotment of warrants and 75% would be payable at the time of conversion, says Morgan Stanley.

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The capital raise is led by Carlyle contributing 80% of the capital raise with the remaining amount coming from the existing shareholders like funds managed by Alpha Investments (fund managed by SSG Group) and General Atlantic. Post this transaction, Quality Investment Holdings of Carlyle Group (QIH), Pluto Investments of Carlyle group (Pluto) and Salisbury Investments Private Limited will be classified as part of the “promoter group”. Punjab National Bank will continue to be classified as part of the “promoter group” following the completion of this transaction; its stake will dilute from current 32.2% to 20.3% post the issuance. Caryle's stake will increase to 50.4% following preferential allotment and warrant conversion from 32.2% currently, says Morgan Stanley. 

Salisbury Investments, family investment vehicle of Mr. Aditya Puri, former CEO & MD of HDFC Bank is also investing in the capital raise. Mr. Puri is expected to be nominated to the Board by Carlyle in due course. Carlyle has announced an open offer as required by regulation. It Has issued an open offer to acquire up to 70.79 mn shares (26% of the outstanding post issuance equity shares of the company) at a price of Rs 403.22 per share. See next section for discussion on proforma impact and exhibits 1 and 2for computations around proforma impact. Morgan Stanley will follow with updated forecasts once they have more clarity around the impact of COVID-19 second wave and confirmation around progress of the capital infusion highlights Morgan Stanley.. 

PNB Housing Finance Risks to Upside:

Improvement in real estate sector fundamentals, driven by strong progress made by the government's real estate fund 
Asset quality improvement

PNB Housing Finance Risks to Downside:

Rise in NPLs, especially retail NPLs 
Further aggressive price competition