PNB Housing finance is a Non-Banking Finance Company that specializes in housing finance. It was started in 1988 as an extension of PNB bank. Around the year 2011 the company went for a major restructuring with equity infusion from Destimoney (now part of Carlyle Group). The company came out with an IPO in Q3 FY17. Let us look at the company further.

Business Model Diagram for PNB Housing Finance

Every company has its own model and visualizes itself in a particular fashion. Below diagram is my way of visualizing PNB housing finance company (click on the image to enlarge it).

01_business_model

Company Highlights

The Assets Under Management (AUM) for PNB housing finance is close to 37,745 crores. The company has gone for securitization and has securitized about 3415 crores of loans. Hence the loan portfolio for PNB Housing stands at about 34,330 crores as of Dec 2016. The company predominantly operates in the six metropolitan areas and semi-metropolitan areas and about 65-70% percent of the disbursements are done to customers in these areas. Hence PNB housing is an urban centric lender.

In case of housing loans the average ticket size it is about 30 lakhs.  The average ticket size for non-housing loans it is about 70 lakhs. The average ticket size for Loan against property (LAP) is around 50 lakhs. In case of builder loans the average ticket size is about 51 crores. Though the company has interests other than housing loans, it makes sure that all its loans are asset backed. Hence 100% of the loans are backed by collaterals/assets.

Products offered by PNB Housing Finance

The company offers a range of products. Some of the prominent products are listed below:

  • Housing Loans: The Company offers housing loans for various purposes. For example, some customers avail the loans for outright purchase of houses. Some customers take loans for construction of new house, some opt for loans to extend or improve existing home. The company also provides loans to its customers to buy residential plots.
  • Loan against Property (LAP): Some customers avail loans against existing property by mortgaging their home.
  • Non-Residential Premise Loan (NRPL): The Company has also ventured into construction finance. It provides loans for purchase or construction of non-residential premise. Ex: commercial complex etc.
  • Corporate Term Loans (CTL): PNB Housing also provides general purpose loans to companies, property developers for their ongoing projects and business needs (loans backed by collaterals).
  • Lease rental discounting (LRD): The Company also provides loans to property owners who have leased the property to someone (Lessee). The amount of loan depends on the lease rental value of the property. The lessee generally deposits the lease rental directly into the account of finance company instead of giving it to lesser.

Loan book composition

The entire loan book can be divided into two parts: Housing Finance (~72% of loan book) and Non-Housing finance (~28% of loan book).

  • Housing Finance:

About 72% of the total loan book is for housing finance which roughly comes to about 24,900 crores (as on Dec 2016). Housing finance can be split into 2 Parts:

  • Individual Housing Loans (This makes up 61% of Housing Loan Segment) which is about 21,000 crores (as of Dec 2016). In 2016, the company saw 20% of its individual loans of less than 25 lakhs (i.e. affordable housing loans). As the company moves deeper into Tier-2 and Tier-3 cities it may see more of such loans in future.
    • The lending rate for housing loans is about 8.8% as of Dec 2016.
  • Construction Finance (This makes up the rest 11% of the Housing finance) is about 3,900 crores (as of Dec 2016).

Individual Housing Loans: 21,000 crores

  • The average ticket size of Individual housing loans is 32 Lakhs
  • The 21,000 crores of Individual housing loans can be further split into following parts.
Loan Product Percentage of Housing Finance Pie Amount (Crores)
Home Purchase 85% (~ 50% of total loan book) ~ 17850
Residential Plots 5% ~ 1050
Residential plots + construction 5% ~ 1050
Self-Construction Loan 4% ~ 840
Home Improvement Loans < 1%
Home Extension Loan < 1%
  • Non-Housing Finance:

About 28% of the total loan book is for non-housing loans which adds up to about 9500 crores.

  • Out of this close to 78% is made up of retail non-housing loans.
  • For Loan against property, the Loan-to-value (LTV) is 46%. This means that if the property is valued at Rs. 1 crore, the customer can get a loan up to Rs. 46 lakhs. The average age of the customer is about 45-50 years. These customers have an average of 10 years of business experience. These customers have documented income proof. Most of these customers have bank accounts in the form of either credit card account or over draft limits and other lines of credit from banks. The company appears to have adequate margin of safety in case the company ends up seizing the house due to non-repayment of the loan.

This 28% or 9500 crores of non-housing finance can be split into following parts:

Loan Product Percentage of non-housing Finance pie Amount (Crores)
Loan against property 61% ~ 5795
Lease rental discounting 13% ~ 1235
Non-residential premise loan

(Ex: commercial complex)

 14% ~ 1330
Corporate term loan

(including builder loans)

 12% (and 3% of entire loan book) ~ 1140
  • Customer profile within the Loan book.

The loan book has three types of customers, salaried, self-employed and corporate customers. The table below gives the composition of these customers within the loan book.

Customer Type Percentage of Loan-book Amount (Crores)
Salaried 41.7% ~ 14,315
Self Employed 41.8% ~ 14,350
Corporate loans 16.5% ~ 5,665
  • Yields and spread:
    • Yields: The table below shows the yields for the different type of loans. Clearly the company makes higher margins from construction finance and non-housing loans. No wonder the company is pursuing non-housing finance as well. The average yield works out to about 10.52.
Loan Type Yields (%)
Home Loan 9.58%
Construction Finance 13%
Non-Housing Loans 11.48%
  • Spread: The spread for the company is about 2.1% as of Dec 2016. With the equity infusion the company is in a position to reduce its borrowing costs to some extent. Also by playing smartly with the mix of products (i.e. home loan v/s construction finance v/s non-housing loans), the company hopes to improve its spread further. I would be keenly watching this number. The table below shows the spread over the past few years. Clearly it has come down which is not a very pleasant sight.
  FY17 (9 Months) FY16 FY15 FY14
Spread 2.08% 2.15% 2.23% 2.73%

Loan Book Growth and Disbursement Growth

The table below gives the loan book for the past four years. Growth in terms of percentage has been coming down. In absolute terms, however, the numbers are pretty staggering.

As on Growth (%) Amount (Crores)
Dec 31st 2016 41.15% 34300
Dec 31st 2015 58.82% 24300
Dec 31st 2014 62.8% 15300
Dec 31st 2013 9400

The table below shows the disbursement growth in the past four years. The growth in disbursements has been very positive over the years. FY17 numbers are only for 9 months hence the growth parameter cannot be strictly compared to the past.

Financial Year Growth (%) Amount (Crores)
FY17 (for 9 months) 1.3% (FY17 number is for 9 months) 14600
FY16 48.45% 14400
FY15 76.36% 9700
FY14 5500

GNPA and NPA

When the loan book and disbursements grow at such a rapid pace, there are always questions about the extent of NPAs. The table below shows the gross NPA and Net NPA values over the past few years. GNPA and NNPA seem to be under control in spite of the rapid pace of growth in the loan book and the loan disbursements. Most of its loans are 24-36 months old, and as per Sanjay, the MD of the company, generally loans defaults start after 24 months. So one needs to keep a close watch on the GNPA and NNPA numbers going forward.

As on Gross NPA Net NPA
Dec 31st 2016 0.37% 0.27%
Dec 31st 2015 0.35% 0.21%
Dec 31st 2014 0.25% 0.11%
Dec 31st 2013 0.5% 0.28%

Borrowing Profile

The company needs to borrow money to lend it to its customers. The table below shows the borrowing Profile (i.e. different sources of credit). There is a pattern which is clearly visible. The company has moved away from high interest “Bank term loans”. From a high of close to 40% it now makes up about 5.4% of total borrowing cost. The other trend being noticed is the emphasis on public deposits. At close to 28% of total borrowing cost, it is the second largest borrowing source for the company. NHB financing does not seem to make a large chunk. One reason for this would be the fact that average ticket size of the company is much higher than the NHB mandated ticket size. Moreover, NHB emphasizes disbursements of loans in Tier-2, Tier-3 and rural areas where PNB housing is not present. In future when PNB spreads itself to these areas we may see NHB option catching up. The major source of funds for the company is the non-convertible debentures (bonds of fixed duration that generate interest to the holder and cannot be converted to equity shares).

Mar 2014 Mar 2015 Mar 2016 Dec 2016
Percentage Amount (Crores) Percentage Amount (Crores) Percentage Amount (Crores) Percentage Amount (Crores)
NHB Refinance 9.7% 993 10.6% 1775 7.9% 2066 9.2% 2843
Bank Term loan 39.9% 4086 20.3% 3440 7.4% 1935 5.4% 1669
ECB 0% 0 3.6% 603 2.3% 601 4.9% 1514
Public Deposit 16.7% 1710 29.2% 4891 27.2% 7115 28.3% 8746
Commercial Paper 0% 0 9.6% 1608 19.2% 5022 8.1% 2503
NCD * 33.7% 3451 26.7% 4472 35.9% 9391 44.1% 13629

* Non-Convertible Debenture

The public deposit (i.e. Fixed Deposit) are rated AAA by CARE and FAAA by CRISIL. The NCD is rated AAA by CARE & India Ratings and it is rated AA+ by CRISIL & ICRA. Its commercial paper is rated A1(+) by CARE.

Because of the emphasis on low cost NCD, Public deposit and NHB refinancing, the borrowing costs have come down over the years. The table below shows the borrowing cost for the past 4 years.

Dec 2016 Mar 2016 Mar 2015 Mar 2014
Borrowing Cost 8.81% 9.10% 9.42% 9.66%

Branches

  • At the end of FY16, the company had 47 branches. In FY17 the company has added 11 more branches. In all the company aims to add 18 branches in FY17.
    • These branches act as the primary point of sale and originate the loans. They are also responsible for collection process, source deposits and customer service.
    • The company also has about 25 outreach centers which are more like extension of branches.
    • 37% of the branches and processing hubs are in North India. 33% of them are in West and 30% of them are in South. The company does not have a presence in Eastern India.
  • PNB Housing also has 16 processing hubs (including three zonal hubs in Noida, Mumbai and Bangalore) that are responsible for loan processing, credit appraisal and monitoring.
  • There is one central support office (CPO) in Delhi that supervises the operations at national level.
  • Other than this there are some offices for IT (technology) maintenance etc.

Employees and Support staff:

  • The company has about 840 employees and more than 7100 channel partners. Channel partners help to bring-in new business. Channel partners include the in-house sales team, direct selling agents, 3rd party tie-ups etc.
    • About 40% of the business is generated by the in-house sales team and rest 60% is from the direct selling agents.

Shareholding Pattern

As a shareholder one is always worried about the retail free float in the market. If a company has lot of retail free float then any rise in the price of share could result in offloading of shares by the retail segment thereby capping the share price growth. The table below shows the shareholding pattern for the company. Promoters, Carlyle group and FIIs together hold 92.4%! Retail holds mere 2.5% of shares. The company seems to have amassed long term shareholders which augers well for the company.

Entity Percentage of Shareholding
Promoter 39.1%
Carlyle Group 37.5%
FII/FPI 15.8%
Mutual Funds 4.0%
Corporate Bodies 1.1%
Retail & Others 2.5%

Positives and Future Scope

  • The company has been able to achieve all this growth with 58 branches (of which 11 were launched recently). These branches are present in 35 large cities. India has about 80 cities. As the company expands to these cities and adds more branches in existing cities, we should hopefully see more business coming to the company. The company is heavily banking on this strategy to retain its current revenue run-rate.
  • Overall urban housing demand in India is about 2.3 million units. Hence there is scope for business growth. If you ask me, this 2.3 million number seems all fluff something which I seriously don’t believe in. But nevertheless it points to a general fact that there is demand for housing and hence for housing loans.
  • The company has shown strong growth over the past few years. The company believes the reason for this is the following:
    • The people that are part of the organization. The company has decades of mortgage experience (from the PNB Bank legacy).
    • Emphasis on Technology and end-to-end integration of technology. (I am not very sure how this could be an edge as all NBFCs use technology to their advantage).
    • The PNB brand which carries certain weightage and brand recall among its customers.
    • Their operating model provides them an edge. (I could not get more information on this aspect though).
  • In an event where the company has to choose between growth v/s profitability, the company wishes to choose profitability. I am happy to hear this.

Summary

PNB housing finance seems a good candidate to track and possibly invest in. With an excellent record of revenue and PAT growth, the company has shown that it has the potential to be a good compounder. With a decent borrowing profile mix, very good loan book growth rate and an equally good disbursement rate, the company seems set for a decent run. The company’s NCD, fixed deposit and commercial paper have been rated highly by CARE, CRISIL and India Ratings. The spread seems to be on a lower side which I hope gets corrected in the coming quarters. With a theoretically low free float, the company seems to be backed by serious long term investors.  The lending rate, borrowing rate and the spread clearly indicate that PNB Housing Finance operates right in the middle of the war zone battling out with the big banks. I could not find a clear moat for the company, which leads to the ONE most important thing that keeps nagging me. Will it be able to sustain the growth for the next five to ten years? There is no clear answer to this question. We will only get to experience this as we keep tracking the company in the coming years.

References

[1] PNB Housing Finance Annual Reports

[2] PNB Housing Finance IPO RHP *

[3] PNB Housing Finance Quarterly results

[4] PNB Housing Finance Investor Updates.

*PS: By the way the number of pages that list out the risks for PNB housing finance in the RHP IPO document would be equal to the entire annual report for a small cap company  😉

Disclaimer

I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.