In the first week of August, PNB housing finance announced the results for Q1 FY19. Let us take a quick look at the numbers. Before we begin looking at them, I would recommend you to have a look at the following links in case you have not done yet:

Financial Analysis

The table below shows the performance of PNB Housing for Q1 FY19 with respect to Q1 FY18.

Item Q1 FY19 (Crores) Q1 FY18 (Crores) Growth(%)
Revenue 1648.3 1160.2 42.1%
Expenses 1273.1 914.8 39.2%
PBT 375.3 245.4 52.9%
PAT 255.8 170.1 50.4%
  • Revenue: In Q1 FY19 the company saw the revenue grow by 42.1%. Q4 FY18 had seen revenue growth of 46%, In Q3 the revenue growth was 44% and Q2 had seen 36% Y-o-Y revenue growth. For Q1 of FY18 the revenue growth was 38%. Clearly the company is growing its revenue at a very brisk pace.
  • Expenses: In Q1 the growth in expense was less than the growth in revenue. The company was efficient in its operations.
  • PAT for Q1 grew at a much faster rate of close to 50%. In Q4 FY18 we saw the PAT grow at 44%. In Q3 PAT growth was much better at about 58%. In Q2 FY18 the growth was similar to Q1 FY19 at 51%. By the way in Q1 FY19, there is a Rs. 7 crore positive impact on the PAT due to IndAS accounting standard.
  • Overall a very positive set of P&L numbers for Q1 FY19 and it is very satisfying to see such numbers every quarter.

EPS:

EPS growth was lower than the PAT growth. Probably the ESOPs might have contributed to the lower EPS.

Q1 FY19 (Crores) Q1 FY18 (Crores) Growth (%)
EPS 15.31 10.53 45.39%

Now let us try to dissect the expenses.

Expense Item Q1 FY19 (Crores) Q1 FY18 (Crores) Growth(%)
Finance Cost 1099.8 750.5 46.54%
Employee Cost 50.6 32.1 57.63%
Other Expense 72.0 59.0 22.03%
Provisions and Write-offs 44 68.1 -35.38%
  • Finance Cost: Finance cost is naturally the main expense item. The company has to pay interest on the money that it borrows. The growth in finance cost was more than the revenue growth. Probably the company borrowed more than it lent to its customers.
  • Employee Cost: Employee cost seems to be negligible for the company. But then, the important metric is the employee cost as a percentage of revenue. The table below captures this aspect. As a percentage of revenue the value is very small. Year on year this number has seen an increase. This shows that the company might have paid its employees a tad more compared to the revenue that it earned from its employees. However we need to keep in mind that the company has been increasing its branch count at a very brisk pace. The branch does not immediately start generating revenue on-par with its older and more established branches. Hence, revenue growth from new branches come with a lag whereas employee costs for these branches are expensed upfront.
Q1 FY19 (%) Q1 FY18 (%) Growth (bps)
Employee cost/revenue 3.06% 2.76% 30
  • Other Expense: I do not have visibility on the other expense part. It is adding up to a decent amount with every quarter and stands at about 4.4%. Need to dig deeper to find the main contributors of this line item. Probably the branch expansion costs and expenses related to branch operations are bracketed under this line item.
  • Provision and Write-offs: Provisioning numbers were a pleasant surprise. In Q1 FY19 the provisioning has come down by 35%. Increasing revenue with a decreasing provisioning/writeoff is always a welcome sign! Even in Q4 FY18 we saw the provisioning/writeoff was down by 33.43%. One should look at this number in conjunction with two other numbers i.e. NPA and disbursement growth.  We can clearly see that disbursements are growing, NPA has remained stable and provisioning is down. A positive sign indeed!

Disbursements

In Q1 of FY19 the disbursement growth was rather tepid at 25.31%. This was in contrast to Q4 FY18 when disbursement growth was 44.5% In Q3 FY18 the disbursement grew more than 100%. To cross confirm if this is a seasonal issue I checked the Q1 FY18 numbers. The growth in that quarter was 54%! Clearly the disbursement was much slower in this quarter. When asked about this, Sanjay agreed that Q1 had lower disbursements. He said that Q2 and Q3 should see higher disbursals. Apparently the management had predicted the slower growth for this quarter. I trust the management and go by their assessment.

Q1 FY19 (Crores) Q1 FY18 (Crores) Growth (%)
Disbursement 9767 7794 25.31%

Portfolio Analysis

For Q1 FY19, the portfolio can be divided as below. As expected, individual housing loan makes up a major chunk of the portfolio.

Product % of total portfolio
Individual Housing loan 56%
Construction Finance 13%
Loan Against Property 16%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~ 15%

Let us now look more closely at the top three within the portfolio. The figures for weighted average loan to value clearly show that the company has a very good margin of safety on individual loan accounts.

Asset Distribution Housing Loan Construction Finance Loan Against Property
Total Assets (%) 56% 13% 16%
Total Assets (Amount in Crores) 38,403 8,915 10,972
Average Ticket Size 31 lakhs

Avg Yield: 9.3%

 67 crores

Avg Yield: 12.52%

 48 lakhs

Avg Yield: 10.43%
Weighted Avg. Loan to Value (lower the number, better) 69% NA 48%
Average Tenure of the loan 18.2 years 3.4 years 12.4 years

Spread and NIM

In Q1 FY19 both the NIM and spread is down compared to Q1 FY18. Even Quarter on quarter the NIM and spread is down.

Q1 FY19 (%) Q1 FY18 (%) Growth (bps) Q4 FY18 (%)
Spread 2.11% 2.15% -4 2.29%
NIM 2.74% 3.10% -36 3.0%

Cost to Income

Compared to the numbers of FY18 the cost to income has increased to 20.18%. From the table we can clearly see that over the past few years the cost to income has been coming down. Since the company is able to generate more profits per-employee and per-branch the rise in income has more than compensated the rise in costs. In Q4 FY18 the management had indicated that in the next two years the company would like to see its cost-to-income ratio reduce to around 16%.

Q1 FY19 FY18 FY17 FY16 FY15
Cost-to-Income 20.18% 19.54% 22.43% 25.15 30.87%

Return on Equity

Return on Equity tells us the profit that the company makes with respect to the equity that the company holds (Shareholder funds). A higher value of ROE means that the company is able to generate higher profit on the money that it is holding back from the shareholders. If the company has a low ROE (say less than 9%) then it might be better for the company to release these funds to shareholders and the shareholder is better off by investing in high yielding NCD or bonds or some other stocks which might give higher return. The table below lists the ROE of PNB housing. Note that couple of years back the ROE used to be higher. Post the IPO, this number came down. Hopefully, over the coming quarters, the ROE will improve.

Q1 FY19 FY18 FY17 FY16
ROE 15.75% 14% 14.92% 17.12%

Employee Efficiency

The below numbers are up to FY18. I could not get the details for Q1 FY19. From the numbers we can clearly see that, over the years, the company is able to extract more from its employees. The Company MD, Sanjay has always emphasized that the technological innovations have helped in achieving these higher efficiencies.

FY18 (Crores) FY17 (Crores) FY16 (Crores) FY15 (Crores)
Disbursement per Employee 28.99 24.25 21.23 17.16
Revenue per Employee 4.82 4.59 3.96 3.23
Profit generated per Employee 0.72 0.62 0.48 0.36

Borrowing Cost and Borrowing Profile

The total borrowings as of Q1 FY19 stands at 60,439 crores

Q1 FY19 FY18 FY17
Borrowing Cost 7.73% 7.71% 8.55%

In Q1 FY19 there was a marginal increase in the cost of borrowing compared to the entire FY18. Let us now look at the borrowing profile as of Q1 FY19.  I noticed that the borrowing profile numbers have been re-stated for the previous years. Additionally a new section called “Assignment” has been added (I believe assignment refers to a complete sale of home loan to some other lender and this does not get categorized under securitization).

Borrowing Profile Q1 FY19 FY18 FY17
NCD 34.75% 37.52% 37.73%
Commercial Paper 15.67% 17.48% 11.32%
Deposits 18.01% 19.47% 25.86%
ECB 2.36% 2.47% 3.92%
Bank Term Loans 16.26% 7.73% 6.39%
NHB 5.79% 6.54% 7.12%
Assignment 7.18% 8.80% 7.67%
  • The borrowing profile for Q1 is exactly opposite of what I was hoping for. I was expecting NCDs to go up but it is down. I was expecting deposits to go up (I believe interest cycle has hit a bottom so the company should have locked its borrowings by accepting more deposits). But the company has seen a decline in deposits. With respect to Bank term loans I was expecting it to go down but it has gone up. I was definitely surprised.
  • NCD: When questioned about the decline in the NCDs, Sanjay told that the market for NCD has currently dried up so there is a 3% decrease in NCD.
  • The deposit numbers in absolute terms is as given below. Clearly the deposit growth has been very slow. When asked about lower deposit growth, Sanjay said that they are planning for some tweaks in the deposits and after 15th of August they will come out with new things which will (apparently) surprise the market.
Q1 FY19 (Crores) Q4 FY18 (Crores) Q3 FY18 (Crores) Q2 FY18 (Crores) Q1 FY18 (Crores)
Deposits 11,723 11,568 10,668 10,411 10,025
  • The commercial paper (CP) borrowing at close to 16% seems to on the higher side. When quizzed, Sanjay mentioned that at this stage, he does not want to get locked up in products that have high interest cost. Hence more CP.
  • Bank term loans have shot up. When questioned on why Bank loans have gone up significantly, Sanjay informed that the Banks are flush with funds and are ready to lend. I assume that with fewer takers for NCDs and with banks lining up with funds, the management might have got swayed towards bank term loans. Depending on the type of bank loan availed by PNB Housing, the borrowing rates for these term loans could be anywhere between 8.3 to 8.6%.
  • In Q3FY18 the management had indicated that in future, the company has a goal to have a mix of the borrowing in the following order. We seem to be moving in the exact opposite direction.
    • NCD – Around 45%
    • Deposits – Around 25%
    • CP – Around 15 – 18 %
    • Rest 12 – 15% would be ECB, Term loans and NHB .

Capital Adequacy Ratio

The Capital adequacy ratio (CAR), consisting of both Tier-1 and Tier-2 capital, is as given below. The tier-I capital is the equity capital. CAR needs to be maintained above a certain value. For Housing finance Institutions, the CAR should be more than 12% and the Tier 1 capital should be more than 6%. If the CAR keeps falling, the company may have to come back to the equity market to raise money which would be bad news for existing shareholders. Such a move would be EPS dilutive. Sanjay reconfirmed that they would be raising capital sometime in Q4 FY19 or Q1 FY20. He does not want to initiate a capital raising cycle now when the promoters are in midst of divesting their stake.

 CAR Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 11.41% 12.77% 13.33% 13.99% 15.50%
Tier – II 3.46% 3.92% 4.06% 4.39% 4.8%
Combined 14.87% 16.69% 17.39% 18.38% 20.30%

GNPA and NNPA

Year-on-year, the non-performing assets percentage has remained constant.

Q1 FY19 Q1 FY18 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.43% 0.43% 0.33% 0.42% 0.34%
NNPA 0.33% 0.33% 0.25% 0.33% 0.26%

Branch Expansion

FY19 has started on a slow note with only 1 branch being added in Q1. Hopefully the pace should pick up as the company expands its footprint over the next three quarters.

Q1 FY19 FY19 (Planned) FY18 FY17 FY16 FY15 FY14
Branches added 1 24 branches + 4 Hubs 21 16 9 6 32

The footprint details as of Q1 FY19 is as given below:

  • Total Branches: 85 spread over 48 cities
  • Total Outreach centers: 34
  • Total Hubs: 21 (These cater to the branches and the outreach centers)

In FY19 the company plans to open 24 branches in 17 new locations and 4 more underwriting hubs.

Other Information

  • As of Q1 FY19, the asset under management for the company is 68,578 crores and the assets (loans managed by company) is about 63,906 crores. So about 4,672 crores of loans should be the securitized loans.
  • The company sources its business using their own marketing team as well as 3rd part Direct Selling Agents (DSA). At the end of Q1 FY19 the ratio of business obtained from their marketing team v/s DSA stands at 68% : 32%.
  • Employee strength at the end of Q1 stands at 1364.
Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q4 FY17
Employee Strength 1364 1290 1254 1213 1000
  • I heard the MD mention that this year the company will continue to expand and invest a lot more in technology. Expect more CAPEX this year!

Summary

  • Revenue grew at a very good rate of about 42%. PAT growth was very healthy at 50%.
  • The company managed to open one new branch in Q1. Hope to see accelerated expansion in the coming quarters so that the company meets its goal of opening 24 branches in FY19.
  • The NPA numbers are healthy and well within control.
  • The Capital adequacy ratio is coming down and the company may return to the capital market in Q4 FY19 or Q1 FY20.
  • Regarding Growth, Sanjay reaffirmed that the company will grow at 1.5x to 1.7x the industry average.
  • I am surprised looking at the borrowing profile. Hope to see higher contribution of NCD and deposits and lower contribution from term deposits.

Overall the company managed to keep the momentum going. The Q1 numbers were very encouraging. Great set of numbers!

References

[1] Quarterly results Q1 FY19

[2] Investor presentation for Q1 FY19

[3] Analyst call transcript for Q1 FY19

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.