Indian equity bankers are set to end 2016 with a bang as PNB Housing Finance launches the country’s second biggest initial public offering of 2016, potentially adding Rs30 billion ($449 million) to the total value of what is already a blockbuster year for IPOs.
PNB Housing, the mortgage finance unit of Punjab National Bank, opened the IPO for public subscription on Tuesday after receiving massive demand for the anchor tranche, which accounts for nearly 30% of the total deal, according to sources familiar with the situation.
Unsurprisingly, the offer price for the tranche was settled at the very top of the Rs750 to Rs775 indicative range.
Allocations were made to 71 accounts in the anchor tranche, according to one of the sources. Singaporean institutions were among the major buyers, with the Singapore government and the Monetary Authority of Singapore subscribing to a combined 7.5% of the 11.5 million shares available in the anchor book.
Syndicate bankers are expecting similarly strong demand for the institutional and retail tranche during a three-day bookbuild that began on Tuesday. The company will issue 38.7 million shares at Rs775 per share, according to a termsheet seen by FinanceAsia.
Bookrunning lead managers for PNB Housing's IPO are Kotak Investment, Bank of America Merrill Lynch, JM Financial, JP Morgan and Morgan Stanley.
High growth stock
One banker said while PNB Housing was launching the share sale at a time when India’s stock market remains bullish, the company was attractive in its own right as a high-growth business in an expanding sector.
PNB Housing describes itself as the fifth largest mortgage finance provider in India, with a loan book of Rs309 billion as of the end of June. Yet according to figures from the IPO prospectus, it was the fastest growing company among major players, with top-line growth of 52% in the last financial year and net profit growing 69%.
By comparison, larger peers such as LIC, Dewan and Indiabulls grew at about 20% both in terms of revenue and profit last year, the prospectus showed. However, that could be partly attributed to the fact that each of their loan books was at least 50% larger than that of PNB Housing.
PNB Housing also has arguably the best quality assets among the large companies. As of the end of June, PNB Housing’s non-performing asset ratio was 0.24%, significantly lower than the 0.8% average for the group.
Prospective investors will find it hard to benchmark the company against other listed housing finance companies because Indian regulations prohibit syndicate banks from giving any forecast valuation.
Local non-syndicate analysts are mostly valuing PNB Housing at 2.4 times estimated book value next year, based on a maximum market capitalisation of $1.9 billion under the indicative price range. That puts it at a discount to LIC and Indiabulls, which trade at around 2.8 times book value, but a premium to Dewan at 1.7 times.
That said, investors are likely less price sensitive in PNB Housing’s IPO because India’s housing market is expected to grow steadily in the long run. The country’s young population and rising prosperity remain the key drivers for growth in demand for housing. The rising urban population also implies smaller average household size and thus higher demand for homes.
In the short term, however, housing finance companies could face increased competition from commercial banks as they expand their presence in the retail loan market.
Blockbuster year
PNB Housing’s IPO will add to the 79 deals already completed in India so far this year.
For the year to date, India’s IPO volume has reached $3.1 billion, the highest since 2010 and over 50% more than the full year volume of $1.9 billion last year, according to data provider Dealogic. The 2016 figure comes on the back of some sizable transactions by Indian standards including ICICI Prudential Life, which raised $912 million last month in the largest deal of the year, as well as Equitas Holdings and RBL Bank.
Indian companies are opting to list amid improving sentiment in the equity market, with the country’s Sensex index gaining 22% since it hit a 21-month low in February this year.
The improvement was partly a result of Prime Minister Narendra Modi’s effort to build a business-friendly economy by streamlining government bureaucracy and simplifying overly complex regulations on businesses.
The latest achievement of the Modi administration is the passing of the Goods & Services Tax (GST) Bill in August, putting an end to a regime that levies multiple taxes on corporations at different stages of the business. In addition, he has cut interest rates by 150 basis points to 6.25% since taking office in 2014 in order to boost investment.
"The flurry of IPO activity is likely to continue for the rest of 2016 and well into 2017, driven by upbeat economic sentiment, improved business confidence, easing inflationary pressure and stable foreign direct investment inflows," said Ashok Lalwani, head of Baker & McKenzie's India Practice.
Vodafone India and SBL Life Insurance, which are both preparing to list their shares next year, are likely to be beneficiaries if such bullish sentiment persists.
