Towards the end of October, PNB housing finance came out with its quarterly numbers for Q2 FY18. Let us have a 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 Q4 FY17 with respect to Q3 FY17.

Item Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%)
Revenue 1316 970 36%
Expenses 996 763 31%
PBT 319 207 54.1%
PAT 208 138 50.72%
  • Continuing the good revenue growth from Q1 (38%), Q2 saw a healthy revenue growth of 36%.
  • Again as seen in Q1, Q2 had a relatively moderate growth in expenses.
  • PAT growth was excellent at 51%. I believe the company has very good expense management process leading to higher bottom line growth compared to top line growth.

EPS

Based on the PAT growth one would have expected the EPS to grow by about 51%. However the EPS growth was a meager 19%. This is because of the public issue of shares in November which increased the share capital and hence the EPS is down. Looking at the CAR, I am hoping that the company will not issue fresh equity till FY20 (at least).

Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%)
EPS 12.49 10.50 19%

Now let us look at the different items that are part the expenses.

Expense Item Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%)
Finance Cost 836 685 22%
Employee Cost 32 27 18.5%
Other Expense 72 70 2.8%
Provisions and Write-offs 50 -23 317%
  • Finance Cost: Compared to revenue growth, the finance cost growth is lesser. This is definitely good news and this indicates the borrowing costs are lower and have been coming down. I believe deposit growth (i.e. liability accounts) is playing a major role as well here.
  • Employee Cost: Growth in Employee cost was much lesser compared to the revenue growth. This clearly indicates that the revenue per employee has been incrementally higher. This is also highlighted by the company in its per-employee metrics.
  • Provision and Write-offs: Compared to Q2 FY17 the provision numbers were much higher this quarter. Hence due to the base effect of Q1 FY17, the growth in provisions and write-offs is optically higher. By the way company informed that out of the five accounts that slipped into NPA in Q1, four have spring back into regular accounts after enforcing SARFESI on these accounts.

PNB Housing v/s Can Fin

We will look at the performance of the housing finance sector in a separate article in future. However for a quick comparison let us look at the important P&L numbers for both the companies. From the table it is evident that numbers wise PNB Housing fared better than Can Fin in all the aspects. However efficiency wise Can Fin had a better PAT margin.

Can Fin

PNB Housing
Growth (%) Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%) Q2 FY18 (Crores) Q2 FY17 (Crores)
Revenue 15.48% 383.85 332.37 36% 1316 970
PBT 30.84% 114.19 87.27 54.1% 319 207
PAT 36.22% 74.99 55.05 50.72% 208 138
PAT Margin 19.53% 16.56% 15.80% 14.22%

Disbursements

Now let us get back to the Q2 FY18 numbers for PNB Housing Finance. The disbursement numbers were pretty good for Q2 FY18. In-spite of all the negative news flows on demonetization and its impact on lending agencies, the company has been able to disburse loans at a good pace.

Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%)
Disbursement 7385 5107 45%

Portfolio Analysis

At the end of Q2 FY18, about 29% of the assets (i.e. Loan given to customers) is for non-housing loans (i.e. about 14352 crores) and the rest 71% is for housing loans (i.e. about 34397 crores). Now, out of the 29% non-housing loans, close to 56% (i.e. about 8037 crores) is for Loan against property (LAP) which again is backed with a collateral.

An interesting aspect of the numbers reported by PNB housing finance is the average loan to value. In case of Housing loans the company has an LTV of 68.5% which means the company will only lend up to 68.5% of the actual value of the house. In case of Loan against property (LAP) the loan to value further drops to 47%. In case the borrower defaults and hence the company is forced to liquidate the asset to recover the dues, there is enough cushion to recover the loan.

The company is able to maintain this housing to non-housing ratio for some time. I hope that the ratio is maintained at this levels for the foreseeable future.

Asset Distribution Housing Loan Non-Housing Loan
Total Assets (%) 29.4% 71.6%
Total Assets (Amount in Crores) 14,352 34,397
Average Ticket Size (in Lakhs) 31 Lakhs 77 Lakhs
Weighted Avg. Loan to Value 68.5% 47% (For LAP)

Spread and NIM

The spread and NIM have been growing steadily.  Spreads saws 15 bps increase YoY.  The spread number is above the comfort zone of the management (2.10 – 2.25) which is a good sign indeed.

Q2 FY18 (%) Q2 FY17 (%) Growth (bps)
Spread 2.42 2.27 0.15
NIM 3.15 2.71 0.44

Cost to Income

Another important aspect of PNB Housing finance has been their tight control over costs. Even with the branch expansions, employee additions, the company has maintained a very health cost-to-income ratio. For the first half (H1) of FY18 the cost to income has come down to 17.86% compared to 22.43% in FY17 and roughly 31% in FY15. Clearly the company is able to generate more income at relatively lesser cost as it expands its branch network.

Borrowing Cost and Borrowing Profile

Q2 FY18 Q2 FY17 Growth  (bps)
Borrowing Cost 8.09% 8.74% -65

The borrowing cost has come down by 52 bps. The reason for the lowering costs of borrowing are clearly visibly in the below table. NCD which have lower costs forms a major part of the profile. Also the high cost deposits seem to have matured and the new deposits would have a lower interest outgo giving further boost in decreasing the borrowing cost.

Borrowing Profile Q2 FY18 Q1 FY18 FY17
NCD 45.8% 41% 41%
Commercial Paper 15.2% 16.4% 12.3%
Deposits 23.1% 25.3% 28%
ECB 3.3% 3.8% 4.2%
Bank Term Loans 7.1% 6.8% 6.9%
NHB 5.7% 6.7% 7.7%
  • As indicated in Q1FY18, the company is increasing the share of NCD in its borrowing basket. Since FY15 the contribution of NCD has increased from 27% to about 46%. The borrowing cost for NCD works out to be around 7.15%. PNB housing finance would like to see the NCD make up to 52% of the borrowing profile in the future. And they seem to be on track to achieve this.
  • The deposits at the end of Q2 FY18 is around 10411 crores whereas at the end of Q1 FY18 it was at 10,025 crores. Since the Interest on deposit are generally less, this helps in reducing the overall borrowing cost.

GNPA and NNPA

In Q1 FY18 we saw a sudden jump in the GNPA number. The company had informed that this jump was due to five accounts that had not paid their dues. Once the cases were filed against these customers under SARFESI, four of these accounts have turned back to standard accounts. Hence the GNPA is back to 0.34% in Q2.

Q2 FY18 Q2 FY17
GNPA 0.34% 0.26%
NNPA 0.26%

Branch Expansion

One facet of continued out-performance compared to its peers is its branch expansion strategy. The table below shows the branch expansion over the years (including the projected branch expansion for FY18). As we were discussing in Q1, the company has opened 7 branches in Q2. So branch expansion seems to be on track.

Q2 FY18 Q1 FY18 FY18 (Projected) FY17 FY16 FY15 FY14
Branches added 7 branches + 3 Hubs 3 branches 23 branches + 4 Hubs 16 9 6 32

Other Information

  • 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 64% : 36%. The company is inching towards its goal of maintaining this ratio at 60%:40%.
  • Employee strength stands at 1,213. At the end of FY17 the strength was 1000. At the beginning of FY18 the company had guided that the employee strength as 1320 for FY18. Looks like a bulk of hiring has been completed by Q2.

Word of Caution

  • As I mentioned in my previous articles, the average age of the loan is about 18 months. Hence the loans are not time-tested. This needs to be tracked closely.

Summary

  1. Revenue grew at a very respectable rate of 36%. PAT growth at 51% was very satisfactory. The management aims to maintain the spread at around 2.10 – 2.25% and it has surpassed its estimates for the spread for Q2 FY18.
  2. The company has been able to contain its expenses in spite of the branch expansion and new hiring. It is a very heartening sign.
  3. The company plans to grow at 1.5x of Industry growth rate. Sanjay re-iterated that the company is on track to defend this growth rate with respect to its peers.
  4. Branch expansion and employee hiring plan seems to be on track as planned in the beginning of the financial year.

Overall this was a very reassuring quarter and I hope the performance continues in H2 FY18 as well.

References

[1] Quarterly results Q2 FY18

[2] Investor presentation for Q2 FY18

[3] Analyst call transcript for Q2 FY18

[4] http://www.moneycontrol.com/news/trends/features-2/quest-for-excellence-heres-the-success-story-of-pnb-housing-finance-2368061.html

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 adviser. I may or may not have position in the above company. Please consult your investment adviser for all your investment needs.