PNB Housing finance came out with the results for Q4 FY17 in May. Let us look at how the company fared in the last quarter for the financial year 2017. But before you go through the results, I would recommend you to look at my brief write up on PNB housing finance at the below link:

Financial Analysis

The table below shows the performance of PNB Housing for Q4 FY17 with respect to Q3 FY17.

Item Q4 FY17 (Crores) Q4 FY16 (Crores) Growth(%)
Revenue 1076 785 37%
Expenses 834 629 33%
PBT 242 157 54%
PAT 152 103 49%
  • All the numbers are very encouraging. Especially the PAT growth of close to 50% is amazing! Probably we have got used to seeing these numbers now 🙂
  • The expenses section has not been expanded above. But if you look at the expenses the following is the observation:
    • In Q4, the Employee benefit expense grew by 74% from 16 crores to 28 crores. But then the number of employees have grown as well. Moreover employee expense forms 2.6% of the revenue. Hence the rise in employee expenses can be ignored.
    • Provision and write off has more than doubled (114%) from 31 crores to 64 crores. This needs some more analysis but then I could not find more information on this elsewhere. This is a little concerning. I hope this is not a trend. My personal feeling is that this might be an after effect of demonetization.
    • Finance costs forms a major chunk of expense. Finance costs increased by 29% from 525 crores to 628 crores. Considering the fact that revenue grew by 37%, the finance cost growth is much less than revenue growth. I am more than happy to see this number.

Now let us look at the numbers for the full financial year. The table below shows the FY17 numbers in comparison with the numbers for FY16.

Item Q4 FY17 (Crores) Q4 FY16 (Crores) Growth(%)
Revenue 3908 2699 45%
Expenses 3104 2196 41%
PBT 804 503 60%
PAT 524 326 60%
  • All the FY17 numbers with respect to FY16 are fantastic. PAT growth is extremely encouraging!
  • Expenses: If I look at the expenses I notice the following:
    • Finance costs grew by 42% from 1860 crores to 2644 crores. These numbers are inline with revenue growth of 45%.
    • Other expenses grew by 47% from 162 crores to 237 crores. I assume this is because of expenses due to branch expansion.
    • Employee expense grew by 35% from 75 crores to 101 crores. Employee expenses form 2.6% of total revenue.
    • Overall the expenses are either inline or below the revenue growth which in-turn should have led to a higher PBT and PAT growth.

Disbursements

The disbursement growth has been very good at 43% for Q4 as well as for the entire FY17. The disbursements towards housing loans accounted for 70.1% and the non-housing at 29.9%. The AUM registered a growth of 51% to INR 41,492 crores as on 31st March, 2017 from INR 27,555 crores as of 31st March, 2016.

Q4 FY17 (Crores) Q3 FY16 (Crores) Growth (%) FY17 (Crores) FY16 (Crores) Growth(%)
Disbursement 6047 4229 43% 20639 14456 43%

Spread and NIM

The spread and NIM have been growing steadily.

Q4 FY17 (%) Q3 FY16 (%) Growth (bps)
Spread 2.37% 2.23% 14
NIM 3.38% 3.24% 14

Cost to Income

The cost-to-income has come down from 25.15% in FY16 to 22.43% in FY17. PNB housing’s income has constantly been increasing over the years. However the cost-to-income metric is going down which indicates that the cost increase is not proportional to income growth. This is in spite of branch expansion. This indicates that the company is able to grow at a lower cost.

Borrowing Cost and Borrowing Profile

FY17 FY16 Growth (bps)
Borrowing Cost 8.55% 9.07% 52

The borrowing cost has come down by 52 bps.

Borrowing Profile 31-March-2017 31-March-2016
NCD 40.9% 35.9%
Commercial Paper 12.3% 19.2%
Deposits 28% 27.2%
ECB 4.2% 2.3%
Bank Term Loans 6.9% 7.4%
NHB 7.7% 7.9%

A major portion of the borrowing is NCDs. I could not find the interest rate for NCDs but I believe the rate should be comparatively less. Deposits (retail deposits in the form of FDs etc) have steadily increased over the years. In Q4, Management also informed that its higher interest deposits (liabilities) are going to mature in FY18 and FY19. This means that when the deposits are renewed by the deposit holders, PNB housing can issues the deposits at lower interest rates leading to lower borrowing cost. That is definitely a good news. Another aspect of the borrowing profile is the lower dependence on bank term loans. These loans generally carry higher interest rates. Since bank term loans comprise roughly 7% of borrowing profile it is a good sign.

GNPA and NNPA

PNB Housing has been able to maintain its GNPA and NNPA numbers steady. I was expecting to see the after effects of demonetization on the Q4 results, but the GNPA and NNPA numbers clearly show that the company has been able to withstand the shock.

31-March-2017 31-March-2016
GNPA 0.22% 0.22%
NNPA 0.15% 0.14%

Other Information

  • During the year 16 new branches were made operational, the company now has 63 branches with presence in 39 unique cities as on 31st March, 2017. The new branches (which were opened in the last 3 years) have brought 28% of new retail business. Six top cities constitute 60-70% of all the branches for PNB Housing. As per [6] the company plans to add 23 more branches in 14 cities in FY18. Hence the branch footprint for the company will increase by 35% in FY18.
  • The company has 999 employees as of Q4 and it wants to add 320 more employees next year. Most of these employees would be for new branches. This is an interesting point. Employee growth rate of 33% is also an indicator of the amount of growth the company is looking at, in the next financial year.
  • Median ticket size of the loan is Rs. 31.5 Lakhs. I believe, around their IPO timeframe, the ticket size was around Rs. 30 lakhs. I guess the absolute ticket size number as well as the increase in ticket size is expected considering two things, PNB housing operates mainly in Urban market and its customers profile generally includes people in their 40s and 50s who would be looking for bigger house.
  • The home loan conversion rate is about 85% (which means 85% of the loans are sanctioned). The Loan Against Property (LAP) conversion rate is 40-50%.
  • PNB housing finance works on the “documented income model” which means the customer has to show his proof of income when he comes looking for a housing loan. This is the model followed by most of the housing finance companies like HFDC, LIC etc. On the other hand companies like Repco and Gruh predominantly work on the “assessed income model” where the customer does not have proof of income and hence the company assesses their income based on various parameters and gives them loan. “Documented income model” has both advantages and disadvantages. The major advantage being that the company has a documented proof of the repayment capability of the company. The disadvantage being that a vast majority of Indian population cannot show documented proof of income and hence may not become potential customers of the company.

Affordable Housing: Pradhan Mantri Aawas Yojana (PMAY)

Affordable housing is being aggressively pushed by the government. The company has done business of about 1200 crores under the Pradhan Mantri Aawas Yojana (PMAY). They have received the money from the government and this money has flown in the Individual accounts of the customers. The company treats this money from Government as pre-payment towards the loans by customers and reduces their home loan outstanding by an amount equal to the sum it has received from goverment. So this means the customers have already started to see PMAY helping them reduce their home loan burden! In case of PNB housing, the 1200 crore business related to the affordable homes are for homes that are less than 60 square meters (which is about 600 square foot). But PNB housing also clubs houses up-to 110 meters under the affordable housing criteria and calls it smart housing. This got me confused, I was under the impression that house under PMAY should be less than 60 square meters. Then how can PNB, on its own, classify homes of bigger size in this category and get government subsidy. Then I went through the link on PMAY [1][2]. The government has four categories of homes in the PMAY:

  • For Economically Weaker Section (EWS):
    • Their salary is less than 3 lakhs
    • Can buy a home up to 30 square meters in urban areas and 60 sq meters in Tier II, Tier III and rural areas [3].
  • For Low Income Group (LIG):
    • Their salary is less than 6 lakhs
    • Can buy a home up to 60 square meters.
  • For Medium Income Group 1 (MIG 1) :
    • Their salary is less than 12 lakhs
    • Can buy a home up to 90 Square meters.
  • For Medium Income Group 2 (MIG 2) :
    • Their salary is less 18 lakhs
    • Can buy a home up to 110 Square meters.

So, PMAY covers a large section of home loan buyers! But the only caveat seems to be the fact that Government will bear the burden of up to Rs. 6 lakhs only as interest subsidy. So if you are in MIG2 category and you buy a house for, say, 35 lakhs, Government will directly pay PNB Housing, an interest subsidy of Rs. 6 Lakhs under PMAY.

  • Meaning of Interest Subsidy: If you took a loan of 35 lakhs at an interest rate of 9% then for the first 6 lakhs loan amount the bank will charge you an interest of 2.5% interest and on the rest of the loan you will pay an interest of 9%.

Future Growth

  • A company in housing finance segment can grow in three ways:
    • (a) Acquire new customers in existing branches
    • (b) Branch expansion
    • (C) Both new customer acquisition and Branch expansion.

As of Q4 FY17, PNB Housing Finance is in 39 cities and operating 69 branches. Its competitors have anywhere between 300 to 500 branches spread across India. This speaks a volume on scope of growth for PNB housing. As PNB spreads across India, the numbers for its loan book growth shoud ideally increase. The quantum of increase will depend on its marketing and customer acquisition skills.

  • The above point also begs a question on the market size. As of Q4 FY17 the market size for housing in India is about 3,50,000 crores per annum and PNB housing has done business of about 20,000 crores. Hence PNB Housing has a market share of about 8-9% of the housing finance pie.
  • Let me play devil’s advocate and try to predict the growth for PNB Housing Finance for FY 18 purely using the employee numbers. The company plans to add 320 employees to an existing strength of 999. Now all the 1320 people will not contribute to loan growth. We need to do some reverse engineering to get the exact count.
    • At the end of FY17 employee strength was 1000. Now loan disbursement per employee for FY17 was 24.25 crores. If all 1000 had disbursed loans then the total disbursement would have been 24,250 crores. However the disbursement was 20639 crores. This is possible with about 850 employees. This means 85% of employees are responsible for disbursement
    • For FY18, the company should have 1320 employees. So 85% of 1320 employees = 1122 should be responsible for loan growth. Let us take the “per-employee” numbers to be same as FY17 then the numbers should be:
Item Per Employee (Crores) Projection for FY18 (Crores) FY17 Numbers (Crores) Growth
Disbursement 24.25 27208 20639 31.8%
Revenue 4.59 5149 3908 31.7%
PAT 0.62 695 524 32.6%
  • The above calculations assume the efficiency per employee to remain the same as that of FY17. Let us assume the employees are 10% more efficient compared to FY17. So the new number should be as below (assuming employee count as 1122 and per-employee numbers are bumped by 10%):
Item Per Employee (Crores) Projection for FY18 (Crores) FY17 Numbers (Crores) Growth
Disbursement 26.675 29929 20639 45%
Revenue 5.05 5666 3908 45%
PAT 0.682 765 524 46%
  • Summary: I believe FY18 should see a disbursement, revenue and PAT growth of about 32%. In a normal scenario with 10% increase in employee efficiency, PNB housing should see a growth of 45 – 46% in disbursement, Revenue and PAT compared to FY17. These back of envelop calculations are purely based on the new employee recruitment that the company is planning in FY18. Also there is a big assumption that nothing will rock the boat! I might be completely wrong on the above numbers, so please take this with a bucket full of salt.

Word of Caution

  • One thing that makes me uneasy about PNB housing is the average age of the loans. The Average age of the loan is currently 18 months. And average age of 50% of the loans is 12 months! This essentially means that, in the past 12 months (as of Q4 FY17), the company sanctioned 50% of its entire loan portfolio. Now, in Q3 FY17 the MD, Sanjay himself had told that issues generally come up after around 3 years of loan disbursement. So a majority of the loans have not been time-tested to see if the customers have the wherewithal to payback the entire loan. Personally I would like to watch this aspect very closely.

Summary

  • Revenue, PAT and disbursements have seen a substantial growth in Q4 FY17 as well as for the entire FY17.
  • Branch expansion has been ongoing at a very steady pace.
  • Cost of borrowing as well as cost-to-income has been steadily decreasing.
  • Revenue per employee, PAT per employee and disbursement per employee has been growing steadily every year. This shows that the company is efficient in utilizing its staff.
  • The branch expansion plans for FY18 are encouraging. This should add a good delta to the revenue, PAT and disbursement numbers for FY18.

References

  1. http://www.pmawasyojana.co.in/carpet-area-super-built-up-flat-house-size/
  2. http://www.pmawasyojana.co.in/eligibility-criteria/
  3. http://economictimes.indiatimes.com/wealth/real-estate/even-urbanites-will-be-able-to-get-a-house-via-the-pradhan-mantri-awas-yojana-find-out-how/articleshow/57144953.cms
  4. http://economictimes.indiatimes.com/markets/expert-view/we-are-an-overcapitalised-company-but-our-spread-is-improving-sanjaya-gupta-pnb-housing-finance/articleshow/58679413.cms
  5. http://www.moneycontrol.com/news/business/earnings-business/branch-expansions-to-aid-growth-retail-portfolio-growing-strongly-pnb-housing-fin-2279211.html
  6. http://www.business-standard.com/article/companies/pnb-not-looking-to-sell-its-7-stake-says-pnb-housing-finance-md-117072100605_1.html
  7. PNB Housing Finance Quarterly Results Q4 FY17
  8. PNB Housing Finance Investor Presentation Q4 FY17

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.