In the first week of November, PNB housing finance announced the results for Q2 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 Q2 FY19 with respect to Q2 FY18.

Item Q2 FY19 (Crores) Q2 FY18 (Crores) Growth(%)
Revenue 1808.26 1274.36 41.89%
Expenses 1435.78 998.49 43.79%
PBT 372.48 275.95 34.98%
PAT 252.99 190.05 33.11%
  • Revenue: PNB continued to show excellent performance with respect to revenue growth. Revenue grew by close to 42%. In Q1 FY19 the company saw the revenue grow by 42.1%. Q4 FY18 had seen a revenue growth of 46%, In Q3 FY18 it was 44%. By the way, in Q2 FY18 it had seen 36% Y-o-Y revenue growth. Clearly the company is growing its revenue at a very brisk pace.
    • One point to note about the revenue numbers is the growth in other income that came in at about 6.5% of the total revenue (i.e. Money earned through Fees and commission). This alone amounts to about 116 crores. In Q2 FY18 this was about 70 crores. So the company has seen a 65% growth in fee and commission income. The management believes that this is not a one off and it should be able to consistently generate fee income in future as well.
  • Expenses: In Q2 the growth in expense was more than the growth in revenue. A growth in expense at about 44% was a little higher than expected.
  • PAT for Q1 was a disappointment. PAT grew at a modest rate of 33%. In Q1 FY19 it grew at a much faster rate of 50%. In Q4 FY18 we saw the PAT grow at 44%. In Q3 PAT growth was much better at about 58%. By the way, in Q2 FY18 the PAT growth was about 51%! Considering the recent past, Q2 FY19 was not a damper.
  • Overall the revenue growth was good, but PAT growth was not on par with recent PAT growth rates.

EPS:

EPS growth was marginally lower than the PAT growth. This could be due to ESOPs.

Q2 FY19 (Crores) Q2 FY18 (Crores) Growth (%)
EPS 15.11 11.41 32.42

Expenses:

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

Expense Item Q2 FY19 (Crores) Q2 FY18 (Crores) Growth(%)
Finance Cost 1228.86 834.81 47.20%
Employee Cost 80.89 29.67 172.63%
Other Expense 37.81 34.76 8.77%
Impairments and Write-offs 64.69 75.60 -14.43%
  • Finance Cost: Growth in finance cost is higher than the revenue growth. This could be one reason why the overall expenses were higher, leading to lower PAT.
  • Employee Cost: Employee cost was a big surprise in Q2 FY19. This quarter saw the employee cost grow by about 172% to 81 crores! In absolute number terms this is still less though. But the growth in expenses was higher than what I was expecting. Management attributes this rise in HR costs to three factors:
    • The HR cycle for the company starts from Q2. So the company takes a hit due to salary hikes, promotions and bonus payouts as a part of Q2. This additional cost was about 8 crores.
    • The second reason is due to ESOPs. The ESOP premium is absorbed by the company which is reflected in the employee cost. This cost was about 9 crores.
    • The sales staff of the company were part of a 3rd party organization. The company absorbed the sales staff within it. When they were not part of the company payroll, their salaries were amortized. Once they become part of the payroll it cannot be amortized. This increased the employee cost by about 18-19 crores.

The table below shows the employee cost as a percentage of revenue. There was a 215 bps rise in this number due to the above three factors.

Q2 FY19 (%) Q2 FY18 (%) Growth (bps)
Employee cost/revenue 4.47% 2.32% 215
  • Other Expense: I do not have visibility on the other expense part.
  • Provision and Write-offs: The Company continues to be efficient. Provisioning numbers were down by about 14%. In Q1 FY19 the provisioning had come down by 35%. Increasing revenue with a decreasing provisioning/write-off is always a welcome sign! Even in Q4 FY18 we saw the provisioning/write-off was down by 33.43%.

Disbursements

Disbursement growth for Q2 FY19 was another surprise! At 14% this was one of the slowest disbursement growth in the recent times. In Q1 of FY19 the disbursement growth was seen at 25.31%. In Q4 FY18 the disbursement growth was robust at 44.5% and in Q3 FY18 the disbursement grew more than 100%. In Q1 FY19 Sanjay was predicting higher disbursements for Q2, however this did not happen. To me this was clearly a big disappointment. When asked about this, MD, Sanjay Gupta attributed the slower growth to two reasons:

  • Reason 1: The primary market itself grew at a much slower rate. There was a lack of demand and this should have uniformly impacted all the housing finance companies.
  • Reason 2: Management claims that they sensed the NBFC credit crisis beforehand and raised the interest rates in July itself. This apparently led to a perception in the market that the loans from PNB housing are at a higher rate compared to others. And this perception could have led some customers to not choose PNB housing. But once the actual crisis hit the market in September-October, other companies were faced with credit issues and they had to borrow at a higher rate. These companies in-turn had to raise the home loan rates, whereas PNB housing raised the rates marginally by 15 bps. This resulted in PNB Housing emerging as a low interest rate company. In effect PNB housing took a bitter pill in Q2 to ensure that they don’t get hit in Q3.
Q2 FY19 (Crores) Q2 FY18 (Crores) Growth (%)
Disbursement 8405 7385 14%

Portfolio Analysis

As of Q2 FY19, the entire portfolio can be divided as below. As expected, housing loan makes up a major chunk

Product % of total portfolio
Individual Housing loan 58%
Construction Finance 12%
Loan Against Property 16%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~14%

Let us now look more closely at the top 3 contributors of the portfolio.  The figures for weighted average loan to value clearly show that the company had a very good margin of safety on individual loan accounts and LAP.

Asset Distribution Housing Loan Construction Finance Loan Against Property
Total Assets (%) 58% 12% 16%
Total Assets (Amount in Crores) 42,712 8,696 11,919
Average Ticket Size 31 lakhs 67.6 crores 48 lakhs
Weighted Avg. Loan to Value (lower the number, better in case of defaults from customers) ~69% NA ~49%
Average Tenure of the loan 18.8 years 3.9 years 12.6 years

Spread and NIM

In Q2 FY19 both the NIM and spread are down compared to Q2 FY18. Quarter on quarter the spread has improved and NIM has remained constant.

Q2 FY19 (%) Q2 FY18 (%) Growth (bps) Q1 FY19 (%)
Spread 2.22% 2.27% -5 2.11%
NIM 2.72% 3.01% -29 2.74%

Cost to Income

Compared to the numbers of FY18 the cost to income for H1 FY19 has increased to 20.94%.  Specifically for Q2, the cost to income shot up to 24.5% due to finance costs, ESOP expenses as well as the employee costs. From the table, we can clearly see that over the past few years the cost to income has been coming down. 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%. Let us hope that the company is able to achieve this number.

Q2 FY19 H1 FY19 FY18 FY17 FY16 FY15
Cost-to-Income 24.5% 20.94% 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. Over the past two quarters the company has had an ROE of more than 15% which is healthy (It is higher than the cost of capital in India which is about 14%). However, there was a time when ROE was close to 17%. I hope the company is able to generate higher ROE (or ideally a company should disburse the excess amount as dividend and let shareholders decide the optimal usage of the money).

Q2 FY19 Q1 FY19 FY18 FY17 FY16
ROE 15.14% 15.75% 14% 14.92% 17.12%

Employee Efficiency

The below employee efficiency numbers are up to FY18. I could not get the details for Q2 FY19. From the numbers we can clearly see that, over the years, the company is able to extract more from its employees.

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 H1 FY19 stands at 63,627 crores

H1 FY19 FY18 FY17
Borrowing Cost 7.81% 7.71% 8.55%

In H1 FY19 there was a 10 bps increase in the cost of borrowing compared to FY18.  With the recent turmoil in NBFC sector I was expecting the borrowing cost to go up. However, I was surprised when the average cost of borrowing came in at 7.81%, which is hardly 10 bps higher than the FY18 numbers. Then I noticed that the marginal cost of fund was around 8.2-8.3%. So the new funding sources have resulted in slightly higher borrowing costs.

Let us now look at the borrowing profile as of Q2 FY19.

Borrowing Profile Q2 FY19 Q1 FY19 FY18 FY17
NCD 33.41% 34.75% 37.52% 37.73%
Commercial Paper 11.73% 15.67% 17.48% 11.32%
Deposits 17.72% 18.01% 19.47% 25.86%
ECB 2.29% 2.36% 2.47% 3.92%
Bank Term Loans 19.98% 16.26% 7.73% 6.39%
NHB 5.36% 5.79% 6.54% 7.12%
Assignment 9.51% 7.18% 8.80% 7.67%
  • NCD continues to be the major component of the borrowing mix.
  • The deposit amount in absolute terms is as given below. There has been close to 19% increase in deposits year-on-year.
Q2 FY19 (Crores) Q1 FY19 (Crores) Q4 FY18 (Crores) Q3 FY18 (Crores) Q2 FY18 (Crores) Y-o-Y Growth
Deposits 12,394 11,723 11,568 10,668 10411 19%
  • The commercial paper (CP) borrowing at close to 12%, has come down substantially. The company plans to maintain the CP borrowings around 12-13% range. Commercial paper borrowing is a short term borrowing option with a maturity period ranging between 3 to 12 months. The recent crisis of confidence in the NBFC sector was due to short term borrowing. There was a feeling that most NBFCs try to match their long term assets with such short term liabilities and if NBFCs cannot cover up the maturing CP then they will end up with an asset liability mismatch. However, as indicated in [4] and [5], PNB Housing was able to place CPs to the tune of 4225 crores. Hence all the CP roll-over happened smoothly. This shows that PNB Housing finance is treated as a trusted source by funding agencies like banks and debt mutual funds. Having said that, I believe, CP should definitely not be a major source of funding for any housing finance company. Considering that most of the housing finance assets run into multiple years, having a short term liability to match such assets is not worth the pain.
  • Bank term loans have further shot up and it now makes up close to one-fifth of all the borrowings. The company was planning to reduce its reliance on bank loans, but probably due to recent debt issues, the company might have had to rely on term loans. I hope the company is able to reduce its bank term loans.
  • By the way in November 2018 the company managed to get refinance from NHB to the tune of 3,500 crores [6]. This should get reflected in the Q3 FY19 borrowing profile numbers. By the way NHB has certain norms to be followed while lending (including the type of client base to which the amount can be lent to). So this line of credit has to be used for specific purposes only.
  • 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 are still far away from the intended numbers.
    • 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) considering both Tier-1 and Tier-2 capital) is as given below. The capital adequacy ratio is an important factor that determines the capital that the company has in order to cover up in case of sudden defaults etc. 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 as it is EPS dilutive. The CAR has been steady for the past two quarters at 14.8%. It is going to drop further in the coming quarters and the company may do an equity dilution sometime around October 2019 to March 2020.

 CAR Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 11.38% 11.41% 12.77% 13.33% 13.99% 15.50%
Tier – II 3.47% 3.46% 3.92% 4.06% 4.39% 4.8%
Combined 14.85% 14.87% 16.69% 17.39% 18.38% 20.30%

GNPA and NNPA

Year-on-year, the non-performing assets has remained constant. Even Quarter-on-quarter the NPAs have remained stable. It is heartening to see that the company has managed to contain its NPA. By the way the wholesale book continues to maintain nil NPA.

Q2 FY19 Q1 FY19 Q1 FY18 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.45% 0.43% 0.43% 0.33% 0.42% 0.34%
NNPA 0.35% 0.33% 0.33% 0.25% 0.33% 0.26%

Asset-Liability Profile

Due to the recent NBFC crisis, the asset-liability mismatch became a bigger topic of concern. PNB housing finance has shared its asset-liability status for different time-horizon which is captured in the table below.

Upto 1 month 1-3 months 3-6 months 6-12 months 1-3 years 3-5 years >5 years
Asset (Crores) 5774 2834 3779 7127 18820 11634 23582
Liability (Crores) 5487 3365 2313 9253 26664 11375 15093
Mismatch 287 (531) 1466 (2126) (7844) 259 8489

Note that if the liabilities are higher, the markets should be happy as it provides headroom for lending. The concern arises when assets are higher and the company does not have sufficient liabilities to match the assets. In the table above, we can see that for loans up to 3 years the major mismatch is for the 3-6 months period wherein the company does not have funds to match the assets to the tune of 1466 crores. However, if we look at the cash position of the company (not shown above) we notice that at the beginning of Q3 FY19, the company has cash and cash equivalents to the tune of 4413 crores and by the end of Q4 FY19 the company plans to close with cash and cash equivalents of 3,685 crores. Hence, in case the company is not able to garner enough money (liabilities) then it has sufficient cash to support the assets. I believe the ALM profile in the short to medium term is fairly comfortable. There is a major gap for loans >5 years where liabilities lag the assets by about 8489 crores. But then I am sure the company will cover it up as we go ahead (I believe the Indian bond market does not have many products/avenues that cater to credit requirements beyond 5 years. As we go forwards these long term loans would fall into 3-5 year window where there would be plethora of credit options for the company to choose from). By the way, in November the company managed to get the refinancing from NHB to the tune of 3,500 crores. The NHB financing is availed for 15 years, so this should partly take care of the ALM mismatch for the longer term assets.

Branch Expansion

FY19 has started on a slow note with only 1 branch being added in Q1 of FY19. Q2 saw a bunch of branches being opened. By the end of H1 the company has opened 12 branches in 10 new cities which is 50% of its planned branch expansion for FY19. The company opened one new hub in Q2 leading to total hub count of 22.

Q2 FY19 Q1 FY19 FY19 (Planned) FY18 FY17 FY16 FY15 FY14
Branches added 11 1 24 branches + 4 Hubs in 17 new cities 21 16 9 6 32

The footprint details as of Q2 FY19 is as below:

  • Total Branches: 96 spread over 57 cities
  • Total Outreach centers: 34
  • Total Hubs: 22 (These cater to the branches and the outreach centers)

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

Other Information

  • As of Q2 FY19, the Asset under management for the company is 73,482 crores and the assets (loans managed by the company) is about 66,792 crores. So about 6,690 crores of the loans were sold down via assignment route (i.e. Securitization).
  • Employee strength at the end of Q2 stands at 1395.
Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q4 FY17
Employee Strength 1395 1364 1290 1254 1213 1000
  • Management informed that they do not have any exposure to developers like Jaypee, Amrapali, Parsvnath, SRS, Era, Earth, Unitech or IL&FS. However, the company does have exposure to the tune of 280 crores to Supertech Developer. This in-turn is divided into two projects. The first project, for which a loan of 50 crores was disbursed, is now complete and the outstanding on this loan is 25 crores. The second project, which received funding from PNB Housing to the tune of 230 crores is still under development. The Loss Given Discount (i.e. the amount of money the company stands to lose in case Supertech defaults) is 65%. By the way this loan is linked to the escrow account and I believe this Escrow account would be the one where the homeowners would be depositing their money. So, in case Supertech does not repay then PNB Housing can take the money from the Escrow account. PNB Housing is not treating Supertech’s account as an NPA as the loan repayments are being received regularly from the company.

Summary

  1. Revenue grew at a very good rate of about 42%. PAT growth was a tad disappointing at about 33%.
  2. Disbursement numbers were a big disappointment. If the company is not able to disburse at a higher rate it will impact the revenue and profit for future quarters. I hope the company will be able to get back to higher disbursement numbers in Q3.
  3. The company opened eleven new branches in Q2. With this the company has achieved 50% of its intended branch expansion goal for FY19.
  4. The company managed to keep the NPA numbers under control.
  5. The borrowing profile is Term deposit heavy. I have been hoping to see higher contribution of NCD and deposits and lower contribution from term deposits. We still seem to be some time away from this goal
  6. Sanjay re-iterated that they will grow at 1.5x to 1.7x the industry averages (now, for this year, the industry average itself would be less due to the NBFC crisis. So PNB Housing might grow at a relatively lesser rate compared to its past quarters).

Overall, this was a decent quarter. Except for the disbursement numbers the company managed to keep the momentum going. Hope to see similar positive growth in the future.

References

[1] Quarterly results Q2 FY19

[2] Investor presentation for Q2 FY19

[3] Analyst call transcript for Q2 FY19

[4] https://www.bseindia.com/xml-data/corpfiling/AttachLive/B141B0BD_CF69_4F56_8ECA_B62163B50D62_131931.pdf

[5] https://www.bseindia.com/xml-data/corpfiling/AttachLive/97a79c1a-ed95-4e44-8a0d-517c641f2bcd.pdf

[6] https://www.bseindia.com/xml-data/corpfiling/AttachLive/8d99e374-8670-4388-9f20-1e39ef96fe48.pdf

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.