Bajaj Housing Finance, PNB Housing Get UBS Initiation — Here's Why

UBS has initiated coverage on two prominent housing finance companies—PNB Housing Finance and Bajaj Housing Finance—highlighting their growth prospects and valuation metrics.

UBS initiated coverage of PNB Housing Finance Ltd. with a 'buy' rating and a price target of Rs 1,300. "PNB Housing Finance is one of the largest housing finance companies in India with a loan book of Rs 80,000 crore."

The company is diversifying into emerging and affordable loan segments, which UBS believes are a better fit given PNB Housing Finance's AA+ credit rating.

UBS forecasts a 16% Assets Under Management Compound Annual Growth Rate over financial years 2025 to 2027, driven by product expansion. It also expects 40% of the loan book to be non-prime by fiscal 2027. "We expect this, in turn, to drive yield expansion, leading to a 13% Earnings Per Share Compound Annual Growth Rate over Financial Year 2025 to Financial Year 2027."

UBS highlighted three key drivers of loan growth at PNB Housing Finance: affordable and emerging loans reaching 38% of the loan book by fiscal 2027, prime loans contributing 25% of loan growth, and entry into developer financing.

"We believe affordable and emerging loan growth will be supported by branch expansion," UBS said. Despite near-term margin pressure due to repo cuts, UBS expects PNB Housing Finance's margin to stabilise with a steady state 30 basis points credit cost from financial year 2027.

UBS has initiated coverage of Bajaj Housing Finance Ltd. with a 'neutral' rating and a price target of Rs 135. "Bajaj Housing Finance recorded a strong 37% loan book Compound Annual Growth Rate over Financial Year 2019 to Financial Year 2025 to become India's second-largest housing finance company in terms of loan book."

Bajaj Housing Finance focuses on the prime segment with an average ticket size of Rs 45 lakh. UBS forecasts a 24% Assets Under Management Compound Annual Growth Rate over fiscals 2025 to 2027, but flags limited scope to change the loan mix and expects Return on Assets to be range-bound.

"We flag near-term margin pressure due to repo cuts and forecast Return on Assets at 2.0-2.1%, which could limit Earnings Per Share to a 16% Compound Annual Growth Rate in Financial Year 2025 to Financial Year 2027," the brokerage said.

It highlighted Bajaj Housing Finance's optimised Assets Under Management mix, with reduced home loans and increasing high-yield segments such as developer financing and lease rental discounting.

"We estimate that Developer Financing is Bajaj Housing Finance Limited's highest Return on Assets product at over 4% Return on Assets currently." However, UBS does not expect further gains from a mix change due to the cyclical nature and risk involved in the construction business.