Motilal Oswal Financial Services has reiterated its BUY recommendation on PNB Housing Finance (PNBHF), assigning a revised target price of Rs 1,275, which implies an upside potential of nearly 28% from the current market price of Rs 998. The brokerage believes the housing finance company is entering a new phase of growth, supported by its strategic expansion into affordable and emerging housing segments, improving operational efficiencies, stable asset quality, and selective entry into higher-yield lending categories. While rising borrowing costs could create short-term pressure on margins, the company’s disciplined risk management framework, technology-led transformation, and focus on profitable growth are expected to drive sustainable earnings expansion over the medium term.

Motilal Oswal Reaffirms Buy Call as PNB Housing Finance Pursues Its Next Growth Engine

PNB Housing Finance is repositioning itself for the next stage of expansion by increasing its exposure to faster-growing and higher-yielding housing segments.

According to Motilal Oswal, the lender is executing a carefully calibrated strategy that balances growth, profitability, and asset-quality discipline. Rather than compromising its established prime housing franchise, the company is expanding aggressively into affordable and emerging housing categories, which are expected to become the primary growth drivers over the next few years.

The brokerage estimates that the affordable and emerging housing portfolio, currently accounting for approximately 39-40% of assets, could rise to nearly 50% of the total loan mix within two years. This transition is expected to enhance portfolio yields while maintaining credit discipline.

Affordable Housing Expansion Set to Drive Strong Loan Growth

Management is leveraging its existing branch infrastructure to unlock growth opportunities across underserved housing markets.

Previously, affordable housing sourcing was concentrated within around 230 branches. PNB Housing Finance now intends to extend affordable housing origination capabilities across its broader network, significantly expanding its addressable market without requiring substantial infrastructure investments.

The strategy is expected to benefit from structural tailwinds such as:

Rising urbanization
Growing home ownership aspirations
Infrastructure development
Government initiatives including PMAY 2.0
Increasing demand from Tier-2 and Tier-3 cities

Motilal Oswal expects these factors to support an Assets Under Management (AUM) CAGR of approximately 19% between FY26 and FY28.

Micro-Housing Entry Could Unlock Higher Profitability

The company is evaluating opportunities in micro-housing, a segment that offers significantly higher yields than traditional affordable housing.

While the current affordable housing portfolio generates yields of around 11.5% to 12%, management is exploring micro-housing opportunities capable of delivering yields between 14% and 16%.

Importantly, the company plans to target relatively higher-quality borrowers with ticket sizes of roughly Rs 11 lakh to Rs 12 lakh. Management has emphasized that it is not currently pursuing ultra-high-yield segments generating 20%-22% returns, where collateral quality and underwriting standards may be weaker.

This conservative approach reflects the lender’s preference for establishing operational stability before moving further along the risk spectrum.

Selective Developer Financing Adds New Revenue Streams

PNB Housing Finance has cautiously re-entered developer financing while maintaining strict exposure limits.

The company has launched Emerging Developer Finance (EDF), focusing on smaller developers involved in:

Low-rise residential projects
Redevelopment opportunities
Plotted developments
Small-scale residential construction

Individual exposures are expected to remain capped at approximately Rs 25 crore, while portfolio exposure across construction finance and developer lending is expected to remain below 8%-10% of total assets.

Management has reiterated that it will avoid the large-ticket developer exposures that previously created challenges for the sector. Instead, underwriting, monitoring, and approval mechanisms have been strengthened to ensure prudent risk management.

Funding Costs Present a Near-Term Challenge

Higher borrowing costs remain one of the few headwinds facing the company in the short term.

Motilal Oswal highlighted that incremental borrowing costs have increased by approximately 25-30 basis points, rising from around 7.2%-7.3% to nearly 7.5%-7.6%.

Management expects to absorb much of this pressure during the first quarter of FY27. However, the impact is likely to become more visible from the second quarter onward if policy rates remain unchanged.

Despite this challenge, the brokerage forecasts Net Interest Margins (NIMs) of roughly 3.85% during both FY27 and FY28, supported by a gradual shift toward higher-yield products and improving operating leverage.

Technology Investments Expected to Improve Efficiency

The company is undertaking a significant technology transformation aimed at enhancing productivity and underwriting quality.

Several initiatives have already been implemented, including:

A new Loan Origination System (LOS)
The proprietary workflow platform "Infinity"
AI-driven collection and customer engagement tools
Improved underwriting automation

Management believes these upgrades will reduce processing times, improve operational efficiency, and potentially lower backend manpower requirements over the next 6 to 12 months.

Motilal Oswal expects the cost-to-income ratio to improve from 26.3% in FY26 to approximately 23.3% by FY28.

Asset Quality Remains a Key Strength

Despite rapid expansion plans, asset quality indicators continue to improve.

Gross Non-Performing Assets (GNPA) declined to approximately 0.93% during FY26, reflecting stronger recoveries, disciplined underwriting practices, and enhanced collection infrastructure.

The company has also established a collection benchmark exceeding 98% efficiency in early delinquency buckets, which management views as critical for maintaining long-term asset quality.

Motilal Oswal forecasts credit costs of just 5 basis points in FY27 and 20 basis points in FY28, suggesting that recoveries and collection efficiencies should continue to support earnings.

Financial Outlook Remains Robust

The brokerage expects healthy growth across key financial metrics over the next two fiscal years.

Motilal Oswal projects loan book and earnings CAGR of approximately 19% and 12%, respectively, between FY26 and FY28.

Stock Levels, Valuation and Investment View

Current Price: Rs 998
Target Price: Rs 1,275
Recommendation: BUY
Expected Upside: Approximately 28%

PNB Housing Finance currently trades at about 1.2x FY27 estimated book value and 10.6x FY27 estimated earnings, valuations that Motilal Oswal considers attractive given the company’s growth prospects and improving franchise quality.

The brokerage believes successful execution of the affordable housing strategy, expansion into higher-yield segments, and sustained asset-quality stability could act as key re-rating triggers for the stock. While funding cost pressures warrant monitoring, PNB Housing Finance appears well positioned to deliver consistent earnings growth and shareholder value creation over the medium term.