In the fourth week of January, PNB housing finance announced the results for Q3 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:

The video below captures the results analysis for Q3 FY19 in an abridged form, I would encourage you to watch the video and read the below analysis as well

Financial Analysis

The table below shows the performance of PNB Housing for Q3 FY19 with respect to Q3 FY18.

Item Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Revenue 2077.7 1416.1 46.7%
Expenses 1636.9 1080.4 51.5%
PBT 441.6 335.8 31.5%
PAT 303 229.5 32%
  • Revenue: PNB continues to show excellent performance with respect to revenue growth. At 46.7% growth in revenue, one couldn’t as for more. The table below lists the revenue growth for the past few quarters. The company has been a consistent performer as far as revenue growth is concerned.
Item Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%) Q2 FY18 (%)
Revenue Growth 42% 42% 46% 44% 36%
  • Expenses: In Q3 the growth in expense was more than the growth in revenue. We saw this in Q2 as well. At 51.5%, expense growth is much higher than what I was expecting. Let us analyze the expense growth below.
  • PAT: For the past couple of quarters the growth in profits has mellowed down. As we can see from the table below, from the scorching numbers in the 50s the PAT growth has moderated to the 30s.
Item Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%) Q2 FY18 (%)
PAT Growth 33% 50% 44% 58% 51%

Overall the revenue growth has been very good. PAT growth has moderated a bit.

EPS:

EPS growth followed the PAT growth.

Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
EPS 18.09 13.77 31.37%

Now let us look at the expenses.

Expense Item Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Finance Cost 1410.3 925.7 52.23%
Employee Cost 81.1 36.8 120.38%
Other Expense 54.8 43.3 26.55%
Impairments and Write-offs 70.1 48.2 45.4%
  • Finance Cost: Even in this quarter, the finance cost is higher than the revenue growth. This is one of the major reasons for higher overall expenses leading to lower growth in PAT.
  • Employee Cost: Employee cost was a surprise in Q2 FY19. In Q2 FY19 the employee cost grow by a humongous amount of 172.63% to about 80 crores. Continuing the trend we saw the employee costs increase by 120% to 81 crores in Q3 FY19. But then this was expected considering that, if Q2 saw a rise then sequentially there cannot be a drop in employee salaries. In Q2, management indicated that the rise in employee cost was due to salary raise, ESOP expense and the integration of sales staff from a 3rd party organization into its own fold. Clearly, these expenses have had an impact on Q3 and would get carry forward and will reflect in Q4 as well.

The table below shows the employee cost as a percentage of revenue. There was 131 bps rise in this number.

Q3 FY19 (%) Q3 FY18 (%) Growth (bps)
Employee cost as a % of revenue 3.9% 2.59% 131
  • Other Expense: I do not have visibility on the other expense part.
  • Provision and Write-offs: Q3 seems to have seen higher impairments and write-offs. For the past four quarters there was a consistent drop in writeoffs. But Q3 saw a reversal and more provisioning had to be made. If we correlate this with the increase in NPA (which we will shall discuss below), it is evident that there were higher non-performing assets leading to higher impairments and writeoffs. This is slightly discomforting to see the portfolio quality depleting slightly. In absolute number terms the amount is still less though (as we can see in the table below). The company in its media release said that it had added 11 crores to the provisioning as a precautionary measure (for unforeseeable macro-economic factors) [5].
Item Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Impairment/Writeoff Amount (Crores) 70.1 64.7 44 44.4 56
Impairments/Writeoff Growth +45% -14% -35% -33% 80%

Disbursements

Year-on-year, the disbursement growth was a complete washout! At 1% this was the slowest growth that I have seen since I have been tracking the company.

Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Disbursement 9345 9276 1%

When asked about the drop in disbursement Y-o-Y, the company MD, Sanjay Gupta reminded that in Q3 FY18 there was a large LRD deal of close to Rs. 1,680 Crores which skewed the numbers for Q3 FY19. I captured the disbursement growth over the last five quarters and clearly you can see the fact that Q3 FY18 had a 100% growth in disbursement due to LRD deal. Hence, due to the base effect Q3 FY19 disbursement growth seems optically lower. Point to note is the fact that Q-o-Q there is a 12% growth in disbursement which is very healthy.

Item Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Disbursement Growth 1% 14% 25% 44% 100%

By the way, the disbursement for DHFL dropped by a whopping 95% to 510 Crores compared to 13,870 Crores in Q2 FY19 and 10,850 Crores in Q3 FY18 [4]. The NBFC crisis squeezed DHFL and it barely managed to disburse any loans.

Portfolio Analysis

As of Q3 FY19, the entire portfolio can be divided as below. As expected, individual housing loan makes up a major chunk. There has not been a major change in the portfolio composition in the past few quarters.

Product % of total portfolio
Individual Housing loan 57%
Construction Finance 13%
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. By the way, the average ticket size of the construction finance has risen from 67 crores in Q2 FY19 to 79 crores in Q3 FY19. This clearly shows that the company was focusing on large construction projects from developers.

With respect construction finance, Sanjay made a very interesting comment that has stuck with me. He says that for a company of PNB Housing size, it cannot grow at this rate with just retail housing loans. It has to do “Construction finance” or else it can never move to an ROE of 17-18%. This is quite true because retail loans have a very low yield of 9.3% compared to a yield of 11.6% for construction finance business. He even says that reaching this scale with just retail finance is not possible. I am reminded of Repco and Gruh which are predominantly retail finance and their look growth is relatively much lower. Sanjay also assures that they are very diligent in selecting the developers to whom they open up their purses. He feels that with the implementation of RERA we are seeing an emergence of 25-30 high quality developers. These developers will groom themselves at pan India level and PNB Housing wants to partner with these ‘Grade A’ level developers in a “Joint development” model.

Asset Distribution Housing Loan Construction Finance Loan Against Property
Total Assets (%) 57% 13% 16%
Total Assets (Amount in Crores) 45,746 10,490 12926
Average Ticket Size 31 lakhs 79 crores 47 lakhs
Weighted Avg. Loan to Value (lower the number, better in case of defaults from customers) ~70% NA ~49%
Average Tenure of the loan 19.9 years 4 years 13 years

By the way, the Corporate term loans that the company provides to its customers are secured loans (with collaterals). The repayment of these loans happen through Escrow accounts (which the borrower cannot touch even if he wants to default). These loans are generally taken by the companies to meet their working capital requirements.

Spread and NIM

In Q3 FY19 both the NIM and spread are similar to Q3 FY18.  Quarter-on-quarter there seems to be about 34 bps improvement in both NIM and spread.

Q3 FY19 (%) Q3 FY18 (%) Growth (bps) Q2 FY19 (%)
Spread 2.56 2.56 0 2.22%
NIM 3.06 3.02 4 2.72%

Cost to Income

Q3 FY19 saw the cost to income at about 21%. 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%. We are still far away from the goal. Let us hope that the company is able to achieve this number.

Q3 FY19 Q2 FY19 H1 FY19 FY18 FY17 FY16 FY15
Cost-to-Income 21.09% 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 3 quarters the company has been able to maintain the ROE above 15%. Now, 15% is like a baseline because the cost of capital is about 15% in India. An ROE above 15% is expected from any company in India. I hope the company can improve further, its ROE, in the coming quarters.

Q3 FY19 Q2 FY19 Q1 FY19 FY18 FY17 FY16
ROE 16.22% 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 Q3 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 Q3 FY19 stands at 69,166 Crores + Assignment (i.e. selldown or securitization) of 9,019 crores. Q3 FY19 saw a 72 bps rise in average cost of borrowing compared to Q3 FY18. The company correspondingly hiked its lending rate by 72 basis points.

Q3 FY19 9M FY19 FY18 FY17
Borrowing Cost 8.21% 7.97% 7.71% 8.55%

Let us now look at the borrowing profile as of Q2 FY19.  By the way the company raised 22,000 crores in Q3 (this should include the ECB (3,500 crores), NHB loans (3,324 crores), CP rollover and other borrowings).

Borrowing Profile Q3 FY19 Q2 FY19 Q1 FY19 FY18 FY17
NCD 30.05% 33.41% 34.75% 37.52% 37.73%
Commercial Paper 11.03% 11.73% 15.67% 17.48% 11.32%
Deposits 16.74% 17.72% 18.01% 19.47% 25.86%
ECB 6.11% 2.29% 2.36% 2.47% 3.92%
Bank Term Loans 17.32% 19.98% 16.26% 7.73% 6.39%
NHB 7.22% 5.36% 5.79% 6.54% 7.12%
Assignment/Securitization 11.54% 9.51% 7.18% 8.80% 7.67%
  • NCD: NCD continues to be the major component of the borrowing profile. But as a percentage of borrowing it is coming down.
  • Deposits: The deposit numbers in absolute terms is as given below. There has been close to 23% increase in deposits year-on-year.
Q3 FY19 (Crores) Q2 FY19 (Crores) Q1 FY19 (Crores) Q4 FY18 (Crores) Q3 FY18 (Crores) Q2 FY18 (Crores) Y-o-Y Growth
Deposits 13,088 12,394 11,723 11,568 10,668 10411 22.7%
  • CP: The commercial paper (CP) borrowing, at close to 11%, 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 anywhere between 3 to 12 months. As of Q3 FY19, the company managed to rollover (i.e. renew) commercial paper worth about 9,000 crores. The major investors in PNB Housing’s CP issue are Mutual Funds and Banks.
  • Term Loans: Bank term loans make up about 17% of the borrowings.
  • NHB: We are aware that in November 2018 the company managed to get refinance from NHB to the tune of 3,500 crores. Out of this 3,500 crores, the company has drawn about 2,000 crores in Q3 FY19 for lending activities.
  • Securitization/Assignment/Selldown: In Q3 FY19 the company securitized about 2,709 crores worth of loans. In nine months of FY19 the company has securitized 5,800 crores worth of loans. Specifically for FY19 the management wishes to securitize about 7000 crores worth of loans. So it still has a headroom of 1,900 crores for Q4 FY19. Cumulative the company has securitized loans worth 9019 crores. The company has a goal to securitize 10% of its assets every year. This is an internal goal and the company does not want to go beyond this number. If a company ends up with huge securitized loan segment then the market will start treating such HFC as loan aggregators rather than HFCs which does not bode well for the company.
  • 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) for the past few 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. For Housing finance Institutions, the CAR should be more than 12% and the Tier 1 capital should be more than 6%. The management has indicated that the company may do an equity dilution sometime between October 2019 and March 2020 to shore up its CAR.

 CAR Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 11.37% 11.38% 11.41% 12.77% 13.33% 13.99% 15.50%
Tier – II 3.12% 3.47% 3.46% 3.92% 4.06% 4.39% 4.8%
Combined 14.49% 14.85% 14.87% 16.69% 17.39% 18.38% 20.30%

GNPA and NNPA

Year-on-year there is a 5-bps increase in GNPA and 4-bps increase in NNPA. In the table below you will notice that in the past seven quarters this has been the highest GNPA and NNPA. And correspondingly the company has a higher ‘impairments and write-offs’ expense for this quarter. Delinquencies seem to have risen in this quarter.

Q3 FY19 Q2 FY19 Q1 FY19 Q1 FY18 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.47% 0.45% 0.43% 0.43% 0.33% 0.42% 0.34%
NNPA 0.37% 0.35% 0.33% 0.33% 0.25% 0.33% 0.26%

Branch Expansion

For the nine months ending Q3 FY19, the company has managed to open 16 new branches in 13 new cities. At the end of Q3, we have achieved 66% of our goal with respect to the branch expansion plan for FY19. The company opened two new hub in Q3 leading to the total hub count of 23.

Q3 FY19 Q2 FY19 Q1 FY19 FY19 (Planned) FY18 FY17 FY16 FY15 FY14
Branches added 4 11 1 24 branches + 4 Hubs in 17 new cities 21 16 9 6 32

The footprint details as of Q3 FY19 is as below:

  • Total Branches: 100 spread over 60 cities
  • Total Outreach centers: 34
  • Total Hubs: 23 (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 additional underwriting hubs.

Other Information

  • As of 31st December 2018, the company is maintaining an excess liquidity of 6000 crores. This excess liquidity is to tide over any possible squeeze in liquidity in the coming quarters.
  • As of Q3 FY19, the Asset Under Management (AUM) for the company is 79,736 crores and the assets (loans managed by company) is about 70,717 crores. So about 9,019 crores of loans were sold down via assignment route.
  • The company sources its business using its own marketing team as well as 3rd party Direct Selling Agents (DSA). At the end of Q1 FY19 the ratio of business obtained from their marketing team v/s DSA stands at 67% : 33%.
  • Employee strength at the end of Q3 stands at 1425.
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q4 FY17
Employee Strength 1425 1395 1364 1290 1254 1213 1000

Summary

  1. Revenue grew at an excellent rate of about 47%. PAT growth was tad disappointing at about 32%.
  2. Disbursement numbers, on the face of it, look disappointing but this slow growth is due to a very high base effect of Q3 FY18 wherein the company had managed to sign a large LRD loan. One can ignore the deceptive slow disbursement growth.
  3. The company opened four new branch in Q2. With this the company has achieved 66% of its intended branch expansion goal for FY19.
  4. The NPA numbers have inched a bit higher leading to slightly higher provisioning.
  5. The borrowing profile continues to be Term deposit heavy. Deposit growth has not kept up with the pace of capital requirements. This does not bode well for the company. It needs to increase the deposit growth rate.
  6. Sanjay has re-iterated that they will grow at 1.5x to 1.7x of the industry averages. If the industry average itself is about 20-25% then don’t expect PNB Housing to grow beyond 30-33% (which we are seeing right now).

Overall this was again a decent quarter. The company managed to keep the momentum going in spite of the NBFC crisis. Kudos to the management and I hope the company continues to perform at this pace.

References

[1] Quarterly results Q3 FY19

[2] Investor presentation for Q3 FY19

[3] Analyst call transcript for Q3 FY19

[4] https://www.bloombergquint.com/business/crisis-hit-dhfl-sees-95-drop-in-fresh-loan-disbursements-in-q3#gs.xLPF3zG9

[5] https://realty.economictimes.indiatimes.com/news/allied-industries/pnb-housings-net-profit-rises-by-32-in-q3-fy19/67672982

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.