Couple of weeks back PNB housing finance came out with its quarterly numbers for Q3 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 Q3 FY18 with respect to Q3 FY17.

Item Q3 FY18 (Crores) Q3 FY17 (Crores) Growth(%)
Revenue 1439 999 44%
Expenses 1105 791 39.7%
PBT 334 208 60.57%
PAT 217 138 57.8%
  • Q3 saw very good revenue growth of about 44%. This was in continuation of 36% Y-o-Y revenue for Q2 and 38% Y-o-Y revenue growth for Q1. In FY18 the 9M growth with respect to revenue has been very encouraging.
  • The growth in expenses seems to be in-line with the revenue growth. The trend is similar to the numbers seen in Q1 and Q2 FY18 results.
  • Q3 Y-o-Y PAT growth was again excellent at about 58%. In Q2 we saw a Y-o-Y growth of about 51%.
  • Overall very positive set of P&L numbers for Q3 FY18.

EPS:

EPS growth does not follow the PAT growth due to the increase in share capital due to IPO as well as the ESOPs. Hence the EPS growth is less in comparison with the PAT growth.

Q3 FY18 (Crores) Q3 FY17 (Crores) Growth (%)
EPS 13.05 9.18 42.15%

Expenses

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

Expense Item Q3 FY18 (Crores) Q3 FY17 (Crores) Growth(%)
Finance Cost 925 673 37.44%
Employee Cost 35 25 40%
Other Expense 82 57 43.8%
Provisions and Write-offs 56 31 80%
  • Finance Cost: Since PNB Housing is in lending business, it has to take loans to give loans. Hence a significant portion of expenses would be the finance cost. However finance cost growth is less than the revenue growth which is good and this indicates that the company is able to manage with lower borrowing costs and grow revenue at a higher rate.
  • Employee Cost: Growth in Employee cost was higher this quarter compared to Q1 and Q2. On absolute number terms the value is much less and as a percentage of revenue it is even lesser as shown below. This indicates that the company has extremely good average revenue per employee.
Q3 FY18 (%) Q3 FY17 (%) Growth (%)
Employee cost/revenue 2.43% 2.50% -0.07%
  • Provision and Write-offs: Compared to Q2 FY17 the provision numbers were much higher this quarter. Provisioning and write-off increased by 80% year-on-year! However in absolute number terms it is not very high though.

Disbursements

The disbursement numbers were over the top for Q3 FY18. 110% growth in the disbursements seems pretty high and this is not even on a lower base! Business seems to be very robust but I was wondering if this is sustainable. One should keep a watch on the NPA numbers.

Q3 FY18 (Crores) Q3 FY17 (Crores) Growth (%)
Disbursement 9,276 4,417 110%

Portfolio Analysis

The table below shows the loan portfolio for the company.

Asset Distribution Housing Loan Non-Housing Loan
Total Assets (%) 70% 30%
Total Assets (Amount in Crores) 38,555 16,741
Average Ticket Size (in Lakhs) 31 lakhs 80 lakhs
Weighted Avg. Loan to Value 69% 48%

Spread and NIM

The spread and NIM have been growing steadily. Spreads saws a healthy growth of 40 bps to 2.5%.

Q3 FY18 (%) Q3 FY17 (%) Growth (bps)
Spread 2.5% 2.1% 40
NIM 3.01% 2.99% 2

Cost to Income

For the 9M FY18 the cost to income is 18.32% compared to 22.43% in FY17 and roughly 31% in FY15. The company is able to generate more income at relatively lesser cost as it expands its branch network and over the years the company has brought down the cost to income due to lesser expenses compared to the income.

Borrowing Cost and Borrowing Profile

Q3 FY18 Q3 FY17 Growth (bps)
Borrowing Cost 7.49% 8.64% -115

The borrowing cost has come down by 115 basis points which is quite significant. Let us look at the borrowing profile as of Q3 FY18

Borrowing Profile Q3 FY18 Q2 FY18 Q1 FY18 FY17
NCD 43.2% 45.8% 41% 41%
Commercial Paper 17.3% 15.2% 16.4% 12.3%
Deposits 21% 23.1% 25.3% 28%
ECB 2.9% 3.3% 3.8% 4.2%
Bank Term Loans 10.5% 7.1% 6.8% 6.9%
NHB 5.1% 5.7% 6.7% 7.7%
  • Contribution of NCD (Non-Convertible Debentures) has remained constant and contributes maximum to the borrowing profile.
  • The company increased the Commercial paper borrowings in this quarter due to volatility. These are short term instruments and Sanjay confirmed that they will be switching to long term borrowing options in future. Since the company is planning to come up with a masala bond offering in Q4, the emphasis was on short term borrowing in Q3.
  • The deposits at the end of Q3 FY18 was 10,657 crores where as in Q2 FY18 it was around 10411 crores whereas at the end of Q1 FY18 it was at 10,025 crores. This is one of the lowest cost of borrowing for the company and forms the second largest source of borrowing.  PNB is one of the 18 deposit taking HFC out of total 91 HFC operating in India. The share of deposit as a percentage of borrowings has been coming down. The reason for this is that the company has deliberately keep its deposit rates very low to reduce its overall cost of borrowings. Hence the decline in deposits. The company is confident that over the coming quarter(s) the contribution of deposits should increase.
Q3 FY18 (Crores) Q2 FY18 (Crores) Q1 FY18 (Crores)
Deposits 10,657 10411 10,025
  • In future, the company plans to have a mix of the borrowing in the following order:
    • 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) for the past 3 quarters is as given below. 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. As per [7] the CAR for HFI should be more 12%. If the CAR falls then the company may have to come back to the equity market to raise money which would be bad news for existing shareholders. Over the past few quarters the CAR has been reducing. Sanjay indicated that the company may come back to raise equity in another 18-20 months. Looking at the rate at which the CAR is coming down, it might drop down to the levels of 12% in future. Hence the timeline for the next equity infusion after 18-20 months seems a reality.

 CAR Q3 FY18 Q2 FY18 Q1 FY18  Q3 FY17
Tier – I 13.33% 13.99% 15.50% 18.80%
Tier – II 4.06% 4.39% 4.8% 5.82%
Combined 17.39% 18.38% 20.30%  24.62%

GNPA and NNPA

Q4 has seen an increase in NPAs. In Q1 NPA was relatively higher and it had dropped in Q2. But in Q3 FY18 it has gone back to the Q1 FY18 levels.  This does not seem to be seasonal since GNPA and NNPA in Q3 FY17 were relatively less.

Q3 FY18 Q3 FY17 Q2 FY18 Q1 FY18
GNPA 0.42% 0.37% 0.34% 0.43%
NNPA 0.33%  0.27% 0.26% 0.33%

Branch Expansion

Major reason for the revenue growth for the company has been the branch expansion. The table below shows the branch expansion over the years (including the projected branch expansion for FY18). For the 9 months in FY18 the company has added 17 branches in all. Assuming that the company is able to stick to its projection of 23 branches in FY18, Q4 should see 6 more branches being opened.

Q3 FY18 Q2 FY18 Q1 FY18 FY18 (Projected) FY17 FY16 FY15 FY14
Branches added 7 branches 7 branches + 3 Hubs 3 branches 23 branches + 4 Hubs 16 9 6 32

The footprint details as of Q3 FY18 is as below:

  • Total Branches: 80 spread over 44 cities
  • Total Outreach centers: 34
  • Total Hubs: 21 (These hubs cater to the branches and the outreach centers)

The Company currently operates 210,000 sq. ft. of office space and it has already leased out 150,000 sq. ft. more space for its future operations.  The company is expanding at a very brisk pace!

Other Information

  • The company sources its business using their own marketing team as well as 3rd part Direct Selling Agents (DSA). At the end of Q3 FY18 the ratio of business obtained from their marketing team v/s DSA stands at 66% : 34%. This ratio was 64% : 36% at the end of Q2 FY18. In the long run the company wants to bring down this ratio to 60%:40%. There is a reason why we should be conscious of this number. If the company uses DSA then it will have to incentivize the DSA which means the company may have to shell additional money as bonus and incentives which can increase the expenses for the company.
  • Employee strength at the end of Q3 stands at 1254. At the end of Q2 the employee strength was 1,213. At the end of FY17 the strength was 1000. At the beginning of FY18 the company had guided that the employee strength by the end of FY18 shall be 1320. One can assume that the company has completed most of its hiring by Q2. Hence Q3 saw a marginal increase in employee strength.
  • Q3 FY18 saw the promoters, Punjab National Bank, selling 99.94 lakh shares which constitutes 6% of the paid up equity capital as an offer for sale.  Before the sale, PNB was holding 38.86% of the total shares which has come down to 32.86%. Since there is no equity dilution, this should not impact the EPS of the company.
  • Under Pradhan Mantri Awas Yojna, the company has about 1361 loan accounts.
  • The contribution of Construction finance to the overall protfolio looks a little higher. Sanjay made a very interesting point. Generally the Housing loan lasts for about 83 months where as a construction finance loan lasts only for about 28-32 months. Hence if we take one cycle of Home loan the company would have completed about 2-3 rounds of construction finance accounts. Hence the contribution from these accounts appear to be higher.
  • The company currently has 303 re-possessed properties worth about 203 crores and it is in the process of auctioning some of them in Q4.
  • The loan rejection rate at PNB housing finance is about 22%.
  • Advertisements: PNB has been aggressive in advertising in the past few months. The Ad features the bear (aka landlord) and the monkeys (representing the tenants). As per the management the ads are to increase brand recall and they would not like to take the current growth for granted.
    • When asked about the impact of the advertisement spree on the OPEX to AUM. Sanjay informed that there will be a 2-3 bps increase on the OPEX to AUM.

Summary

  1. Revenue grew at a very good rate of 44%. PAT grew at an excellent rate of 58%. The management aims to maintain the spread at around 2.10 – 2.25% and it has again surpassed this in Q3 FY18 with 2.5%.
  2. Disbursement growth was way higher than my expectation. The company has been lending big time. If the company can manage this without increasing the NPA then it is a big positive for the company and the shareholders.
  3. The company wants to expand the branch footprint by 71% (i.e. 150,000 sq. ft.) in the near future. This is a gain a sign of confidence. The company seems to expect very good business in the future.
  4. Branch expansion and employee hiring plan seems to be on track as planned in the beginning of the financial year and hopefully Q4 should see another 6-7 branches being added by the company.

With respect to P&L numbers, Q3 was an extremely good quarter and it is assume that the company will end FY18 will excellent set of number.

References

[1] Quarterly results Q3 FY18

[2] Investor presentation for Q3 FY18

[3] Analyst call transcript for Q3 FY18

[4] http://www.moneycontrol.com/news/business/stocks-business/pnb-housing-finance-falls-3-as-offer-for-sale-opens-punjab-national-bank-to-sell-6-stake-2449157.html

[5] http://www.moneycontrol.com/news/business/companies/expect-borrowing-cost-to-rise-by-12-15-bps-for-fy18-pnb-housing-finance-2468545.html

[6] http://www.moneycontrol.com/news/business/earnings/will-look-to-maintain-current-run-rate-in-the-future-says-pnb-housing-finance-2490251.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 advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.