Last week PNB housing finance came out with its quarterly numbers for Q4 FY18. It is time to take a look at these number. 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 FY18 with respect to Q4 FY17.

Item Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
Revenue 1468.6 1010.6 45.9%
Expenses 1227.9 834.3 47.2%
PBT 342.3 241.6 41.68%
PAT 219.2 152.4 43.8%
  • Revenue: Q4 saw an excellent growth in revenue. At about 46% the numbers are very encouraging. Q3 had seen the revenue grow by about 44%. This was in continuation of 36% Y-o-Y revenue growth for Q2 and 38% Y-o-Y revenue growth for Q1. Revenue wise FY18 was a very promising year for PNB Housing.
  • Expenses: As we have seen over the past few quarters, the growth in expenses seems to be in-line with the revenue growth.
  • PAT for Q4 grew at a relatively slower rate of about 44%. In Q3 PAT growth was much better at about 58%. In Q2 the company saw PAT grow at about 51%. There could be seasonality aspects considering this was the last quarter for the financial year.
  • Overall, very positive set of P&L numbers for Q4 FY18 and it was personally very satisfying to see these numbers. The company MD Sanjay has reiterated that the company will grow at 1.7 times the industry average in the near future. A very reassuring statement indeed!

EPS

EPS saw a text-bookish growth of 43.4% and closely followed the PAT growth.

Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
EPS 13.2 9.2 43.4%

Now let us look at the different items that make up the expenses.

Expense Item Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
Finance Cost 1016.8 677.9 50%
Employee Cost 40.2 27.6 45.65%
Other Expense 119.4 57.4 108.01%
Provisions and Write-offs 44.4 66.7 -33.43%
  • Finance Cost: A lender’s major expense would naturally be the finance cost. In this quarter the finance cost has grown faster than the revenue growth.
  • Employee Cost: Growth in Employee cost was the highest in Q4 compared to Q3, Q2 and Q1 of FY18. I am guessing this is due to new branches being opened leading to more hiring. But then, the important metric is the contribution of employee cost as a percentage of revenue. The table below captures this aspect. We can see that, year-on-year, this number has remained constant.
Q4 FY18 (%) Q4 FY17 (%) Growth (%)
Employee cost/revenue 2.73% 2.73% 0%
  • Other Expense: I do not have visibility on the other expense part.
  • Provision and Write-offs: This number was a pleasant surprise. We see a decline of about 33% in provisioning and writeoff. Either the company had excess provisioning in the first 9 months resulting in lesser provisioning or the delinquencies have come down. One should look at this number in conjunction with two other numbers i.e. NPA and disbursement growth. As we see below, disbursement growth was higher, provisioning was lower, NPA was marginally higher. All positive signs!

Disbursements

The disbursement numbers were more realistic in Q4 FY18. The disbursement growth was in line with the revenue growth. Q3 had seen an over the top growth of more than 100% in disbursements and I was wondering if that was sustainable (Q3 had seen lot of high ticket corporate/institutional lending).

Q4 FY18 (Crores) Q4 FY17 (Crores) Growth (%)
Disbursement 8739 6047 44.51%

Portfolio Analysis

As of Q4 FY18, the entire portfolio can be divided as below. Housing loan makes up a major chunk.

Product % of total portfolio
Individual Housing loan 60%
Construction Finance 13.6%
Loan Against Property 17%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~ 10%

Let us now look more closely at the top 3 contributors of the portfolio.

Asset Distribution Housing Loan Construction Finance Loan Against Property
Total Assets (%) 56.2% 13.6% 17%
Total Assets (Amount in Crores) 32,043 7,727 9,656
Average Ticket Size 31 lakhs 67 crores 48 lakhs
Weighted Avg. Loan to Value (lower the number, better) 69% NA 48%
Average Tenure of the loan 17.8 years 3.5 years 12 years

Spread and NIM

The spread and NIM have been down Y-o-Y.

Q4 FY18 (%) Q4 FY17 (%) Growth (bps) Q3 FY18 (%)
Spread 2.29% 2.37% -8 2.5%
NIM 3.0% 3.38% -38 3.01%

When Sanjay was pushed on the reason for the drop in both NIM and Spread, he indicated that Spread and NIM may vary on a quarterly basis. He hinted that one should look at it on a yearly basis. When I looked at the yearly numbers we can see that both NIM and Spread have seen an improvement.

FY18 (%)           FY17 (%) Growth (bps)
Spread 2.36% 2.21% 15
NIM 3.07% 2.97% 10

Cost to Income

For the FY18 the cost to income is 19.54% compared to 22.43% in FY17. Over the years the cost to income has been coming down. Clearly the company is able to generate more profits per-employee and per-branch. Moreover economics of scale is helping in reducing the cost. Over the next two years the company would like to see its cost-to-income ratio reduce to around 16%.

FY18 FY17 FY16 FY15
Cost-to-Income 19.54% 22.43% 25.15 30.87%

Employee Efficiency

The cost to income generally goes down if the company is able to generate more loans per employee and earn more revenue per employee. Since the cost to income has gone down, these numbers should naturally have gone up. The table below confirms these findings. Efficiency and economics of scale are at work here.

  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

FY18 FY17 Growth (bps)
Borrowing Cost 7.71% 8.55% -84

On the yearly basis, the borrowing cost has come down by 84 basis points. Let us look at the borrowing profile as of Q4 FY18 and see the reason for the drop in the borrowing cost.

 Borrowing Profile FY18 FY17
NCD 41.14% 41%
Commercial Paper 19.16% 12.3%
Deposits 21.35% 28%
ECB 2.70% 4.2%
Bank Term Loans 8.47% 6.9%
NHB 7.17% 7.7%
  • Year-on-year, the contribution of NCD (Non-Convertible Debentures) has remained constant and it continues to contribute maximum to the borrowing profile.
  • Commercial paper is a short term instruments. In Q3 FY18 Sanjay had confirmed that they will be switching to long term borrowing options in future. Looks like this is still work in progress. In Q4 there has been an increase in commercial paper borrowing due to volatility in the bond market. The company wanted to play safe and hence went in for short term CP borrowing till the interest rates stabilize. Sanjay informed that may NBFCs took this route in Q4.
  • Deposits are one of the lowest cost borrowing options for the company and forms the second largest source of borrowing. We know that 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 come down.
Q4 FY18 (Crores) Q3 FY18 (Crores) Q2 FY18 (Crores) Q1 FY18 (Crores) Y-o-Y Growth
Deposits 11,568 10,668 10411 10,025 22%
  • In Q3 the management had indicated that as a long term plan, the company has a goal to have a mix of the borrowing in the following order. Looks like this is still work in progress. Both NCD and Deposits have to catch up to the below intended goal.
    • 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 four 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, I believe the CAR should be more than 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 as it is EPS dilutive. Sanjay has mentioned that they are planning to raise capital sometime in Q3 or Q4 of FY19.

 CAR Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 12.77% 13.33% 13.99% 15.50%
Tier – II 3.92% 4.06% 4.39% 4.8%
Combined 16.69% 17.39% 18.38% 20.30%

GNPA and NNPA

Q4 FY18 has seen an increase in NPAs compared to Q4 FY17. But it has remained within a range in the entire FY18 which is a good sign. In absolute number terms the NPAs would have increased though.

Q4 FY18 Q4 FY17 Q3 FY18 Q2 FY18 Q1 FY18
GNPA 0.33% 0.22% 0.42% 0.34% 0.43%
NNPA 0.25% 0.15% 0.33% 0.26% 0.33%

Branch Expansion

At the beginning of FY18 the company had projected to open 23 branches and 4 hubs. The company managed to open 21 branches and 3 hubs. Even though the company marginally fell short of its intended branch expansion plan for FY18, it still ended up being the year which saw the fastest branch expansion compared to the past three years.

FY18 (Actual) FY18 (Planned) FY17 FY16 FY15 FY14
Branches added 21 branches + 3 hubs 23 branches + 4 Hubs 16 9 6 32

The footprint details as of Q4 FY18 is as below:

  • Total Branches: 84 spread over 47 cities
  • Total Outreach centers: 34
  • Total Hubs: 21 (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 more underwriting hubs

Other Information

  • As of Q4 FY18, the Asset under management for the company is 62,252 crores and the assets are about 57,014 crores. So roughly 5,200 crores worth of loans should be the sell downs or the securitized loans. Securitized loans bring in additional servicing fees and I believe they also contribute to the spread. In order to securitize the loans, the company curates the loans for about 12 months before putting them on the table for securitizations/sell down. In Q4 FY18 the fees and other operating income was close to 101 crores. My feeling is that this includes the fees earned from securitization as well. Sanjay informed that the company is comfortable with about 8-10% of its AUM being securitized.
  • The company sources its business using their own marketing team as well as 3rd party Direct Selling Agents (DSA). At the end of Q4 FY18 the ratio of business obtained from their marketing team v/s DSA stands at 65% : 35%. This ratio was 66% : 34% at the end of Q3 FY18. In the long run the company wants to bring down this ratio to 60%:40%. A higher contribution from DSA may result in higher expenses.
  • Employee strength at the end of Q4 stands at 1290. At the beginning of FY18 the company had guided the employee strength to be 1320. The company came close to its estimated employee headcount by the end of FY18.
Q4 FY18 Q3 FY18 Q2 FY18 Q4 FY17 Q4 FY18 (Estimated at the beginning of FY18)
Employee Strength 1290 1254 1213 1000 1320
  • In Q4 the company was planning to issue Masala bonds (i.e. rupee denominated external borrowings). It has approvals from RBI to raise about $ 500 million. But the company did not raise the bonds in Q4. The company may borrow this money in two or three trenches. In the first trench the company would be paying 5 to 6 bps higher rate than the domestic bond market rates to attract buyers. The rates might go down in the second and third trench.
  • In Q4, the company has re-possessed properties to the tune of 179 crores. In Q3 this was about 203 crores and in Q4 of FY17 it was about 155 crores. So quarter-on-quarter the company managed to sell off some of the re-possessed properties.

Summary

  1. Revenue grew at a very good rate of about 46%. PAT growth was very healthy at 44%.
  2. Branch expansion was very close to the intended target for FY18. FY19 is projected to see 24 new branches and 4 more underwriting hubs. I believe FY19 should also see excellent growth numbers for both topline and bottomline.
  3. The NPA numbers are healthy and well within control.
  4. The Capital adequacy ratio is coming down and the company may turn to the capital market in Q3 or Q4 FY19. We need to be ready for a marginal EPS dilution (or should I say lesser EPS accretion) in FY19.
  5. In Q4 Sanjay reiterated that he envisages the company to see a growth of 1.7 to 1.75 times the industry average. That is a very positive and bold statement and it definitely warmed the cockles of my heart.

Overall Q4 was an extremely good quarter and I am more than satisfied with the performance. Looking forward for another year of positive surprises

References

[1] Quarterly results Q4 FY18

[2] Investor presentation for Q4 FY18

[3] Analyst call transcript for Q4 FY18

[4] Other articles on the results for Q4 FY18

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.