In August, PNB housing finance came out with the results for Q1 FY18. Let us look at the results and see how the company fared. Before looking into the results I would recommend you to look at the following documents:

Financial Analysis

The table below shows the performance of PNB Housing for Q4 FY17 with respect to Q3 FY17.

Item Q1 FY18 (Crores) Q1 FY17 (Crores) Growth(%)
Revenue 1192 863 38%
Expenses 909 716 27%
PBT 283 147 92%
PAT 184.8 96 93%
  • Revenue growth has been very good and should bring joy to shareholders. 38% growth is very encouraging.
  • What adds icing to the cake is the fact that the expense growth has been 28% which is lower compared to revenue growth. This clearly shows that the company has been able to contain its expenses.
  • Excellent PAT numbers are a reflection of the decrease in the expenses. A Y-o-Y growth rate of 93%, I believe, beats everyone’s expectations.

Now Let us look at the expenses and gain insight into the aspects that have contributed to a lower expense leading to a very encouraging PAT growth.

Expense Item Q1 FY18 (Crores) Q1 FY17 (Crores) Growth(%)
Finance Cost 753 608 24%
Employee Cost 29 22 31%
Other Expense 74 53 40%
Provisions and Write-offs 48 28 72%
  • Finance Cost: Normally revenue growth should get mirrored in finance cost. If the revenue grows at 38% then ideally the finance cost should have grown at the same rate. A lower finance cost clearly indicates that the borrowing cost was less. This is clear when we look at borrowing cost has come down from 8.74% to 8.09%. This, I believe is due to fact that the company was able to retire its high cost NCDs and liability deposits.
  • Employee Cost: Employee cost has grown at a faster rate. I believe this could be attributed to the growth branch expansion leading to new employee additions.
  • Provision and Write-offs: There is a jump seen in the writeoffs this quarter. The amount per-se is not huge but the growth rate seems on the higher side. When quizzed the MD informed that the increase is specifically due to a deliberate decision to allow five loan accounts to fall into NPA category so that SARFESI law can be applied to recover the loans.

Disbursements

The disbursement numbers are fairly robust. 66% of the 7794 crore disbursement was towards housing loan and the rest 34% was towards non-housing loans.

Q1 FY18 (Crores) Q1 FY17 (Crores) Growth (%)
Disbursement 7794 5068 54%

Portfolio Analysis

At the end of Q1 FY18, 30% of the assets (i.e. Loan given to customers) is for non-housing loans (i.e. about 13270 crores) and the rest 70% is for housing loans (i.e. about 30734 crores). 30% seems a big number considering that each year the Asset size keeps increasing. This could be discomforting considering the fact that all housing loans are backed by a physical asset as a collateral and the assumption being that non-housing loans may not have a collateral.

However, if we look at the composition of the non-Housing loan, close to 55% is for loan against property which implicitly has a house as a collateral). Also in the previous conference calls MD Sanjay has clearly mentioned that all the loans provided by the company have a collateral to back the loans. Comforting to know that the assets are backed and hence cushioned from sudden shocks.

Spread and NIM

The spread and NIM have been growing steadily.  The yields on different types of loans is as below:

  • Home Loan yield is 9.45%
  • Construction finance yield is 12.95%
  • Loan Against property yield is 10.98%
Q1 FY18 (%) Q1 FY17 (%) Growth (bps)
Spread 2.14% 2.12% -2
NIM 3.16% 2.74% -42

Cost to Income

The cost-to-income has come down from 24.43% in FY16 to 18.19% in FY17. With a higher increase in income and steady increase in cost, the cost to income has come down. This is in spite of branch expansion. Good to see the cost-to-income coming down every quarter. The company keeps a close watch on cost-to-income and even their branch expansion strategy factors in the cost-to-income escalation care is taken to ensure that the expansion plan does not shoot up the cost-to-income.

Borrowing Cost and Borrowing Profile

Q1 FY18 Q1 FY17 Growth (bps)
Borrowing Cost 8.09% 8.74% -65

The borrowing cost has come down by 52 bps.

Borrowing Profile Q1 FY18 FY17
NCD 41% 41%
Commercial Paper 16.4% 12.3%
Deposits 25.3% 28%
ECB 3.8% 4.2%
Bank Term Loans 6.8% 6.9%
NHB 6.7% 7.7%
  • A major portion of the borrowing is NCDs. For PNB Housing the interest rate for NCDs is about 65 bps more than Gsec rates. Assuming a Gsec rate of 6.5%, the borrowing cost works out to be around 7.15%. The company sees NCD as a major source of funds and would like to see it make up 52% of the borrowing profile in the future.
  • The deposits at Q1 FY18 stands at 10,025 crores compared to 7,436 crores in Q1 FY17 which amounts to 25% growth. This is definitely a good thing. Interest on deposit are generally less. PNB housing is the second largest housing finance company with respect to deposits. Another interesting point to note is the fact that many high interesting deposits are going to mature in the financial year. Once these mature, the company will be able raise deposits at lower interest rate there by their average borrowing cost will come down even further.

GNPA and NNPA

Q1 FY18 saw a sudden jump in the GNPA number. The company informed that this jump is due to 5 accounts that have not paid their dues. The company deliberately allowed the loans to become NPA so that they can file a case on these 5 entities and recover the loans. If these 5 accounts would not have turned into NPA assets the GNPA would have been 0.33% for Q1 FY18. The company does not see any more similar accounts to crop up in the next three quarters of FY18. However, I believe there would be delinquent accounts in future as well, probably not the type as seen above.

Most of the NPA numbers are due to home loans. NPA for construction finance is

Q1 FY18 Q1 FY17
GNPA 0.43% 0.27%
NNPA 0.33% 0.19%

Branch Expansion

The company believes that its major growth driver would be branch expansion. As it spreads itself, it will be able to attract more customers. The table below shows the branch expansion over the years (including the projected branch expansion for FY18). FY18 will be a big year for branch growth. However branch additions in Q1 were rather less. So the rest 3 quarters should see an average of 6 branches per quarter.

Q1 FY18 FY18 (Projected) FY17 FY16 FY15 FY14
Branches added 3 22* 16 9 6 32

Other Information

  • The company plans to open 22 branches in FY18. Out of these planned 22, the company opened 3 branches in Q1.
  • 93% growth in profits raises eyebrows. When asked about this, MD Sanjay Gupta emphasized that over the past 2-3 years the company had invested in operational robustness. The company is reaping the benefits of this now and has complete confidence on its people, processes and monitoring systems. Like many, even I keep my fingers crossed.
  • 80% of the growth for the company comes from existing market and 20% from new markets. It is currently operating in 40 cities and wishes to expand to 80 cities in the next 3 years. The company works on the carpet bombing mechanism where it tries to open multiple branches in and around its existing branches before spreading to new cities.
  • The company sources its business using their own marketing team as well as 3rd part Direct Selling Agents. The ratio of business obtained from their marketing team v/s DSA is 66% : 34%. As the company grows it is comfortable to see this number drop to 60%:40%.
  • Regarding duration of loans, the company informed that Construction Finance loans have a duration of 3 years. Loan against property has a maximum duration of about 5-7 years. Even corporate term loans have a shorter duration. Only housing loans are long term loans for up to 20 years.
  • Competition can have an impact on the margins of any company. When asked about the competition in Housing finance, MD Sanjay informed that most of the competition is in the non-asset backed category. Most of the companies that are entering the market are looking at customers from informal sections. Sine PNB Housing does not play this area, the belief is that the recent entrants do not pose a threat to the company.
  • The average ticket size for housing loans is 31 lakhs and non-home loans is about 54 lakhs.

Affordable Housing and Pradhan Mantri Aawas Yojana (PMAY)

Under the affordable housing scheme, the company has disbursed Rs. 821 crore. In Q1 FY17 the company had disburse 555 crores. This amounts to a growth of 48%. To grow this further, the company plans to  expand in Tier-II and Tier-III cities.

Future Growth

  • The company expects to grow at 1.5x of the industry growth rate. Assuming industry were to grow at an average of 30% then the growth rate for PNB Housing could be at 45%.

Word of Caution

  • I mentioned this in last post (Click here) as well and I repeat again, the Average age of the loan is currently 18 months. So a majority of the loans have not been time-tested to see if the customers have the wherewithal to payback the entire loan. This needs to be tracked closely.

Summary

  1. Revenue, PAT growth has been extremely encouraging. Expense growth has been relatively less which again is very encouraging. Borrowing cost has come down which is good for the company.
  2. The company plans to grow at 1.5x of Industry growth rate. This clearly shows that the company is on a growth path. I only hope that the company does not throw prudence to the wind in its drive for higher growth.
  3. Brach expansion and employee hiring plan is very encouraging. Again this supports the narrative of the planned growth.

 

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.