PNB Housing announced its Q1 FY20 results in July. Let us look at the results. But before looking into the results I recommend you look at the following links, in case you have not read yet.

Financial Analysis

The table below shows the performance of PNB Housing for Q1 FY20 with respect to Q1 FY19.

Item Q1 FY20 (Crores) Q1 FY19 (Crores) Growth(%)
Revenue 2233 1648 35.5%
Expenses 1819 1273 42.9%
PBT 414 375 10.4%
PAT 284 256 11%
  • Revenue: The revenue growth picked up in Q1 FY20 (compared to Q4 FY19). The table below lists the revenue growth for the past few quarters.
Item Q1 FY20 (%) Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Revenue Growth 35.5% 31% 47% 42% 42% 46% 44%
  • Expenses: Growth in expenses was higher than the revenue growth. The two main reasons being higher financial costs, higher impairments and write-offs.
  • PAT: PAT saw a drop due to higher expenses.
Item Q1 FY20 (%) Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%) Q2 FY18 (%)
PAT Growth 11% 51% 32% 33% 50% 44% 58% 51%

EPS:

Drop in PAT growth had an impact on the EPS growth as seen in the table below.

Q1 FY20 Q1 FY19 Growth (%)
EPS 16.95 15.31 10.71%

Expenses

Let us look at the expenses breakup.

Expense Item Q1 FY20 (Crores) Q1 FY19 (Crores) Growth(%)
Finance Cost 1513 1100 37.5%
Employee Cost 68 51 33.3%
Other Expense 53.88 53.89 0%
Impairments and Write-offs 164.16 44.01 273%
  • Finance Cost: Finance cost grew a tad higher. Availability of credit is an issue in the market and the company had to borrow at higher costs (average cost of borrowing increased by 58 bps).
  • Provision and Write-offs: There is a significant increase in impairments and write-offs! This was the major reason for drop in profits. We will see more on this when we discuss the NPAs.

Disbursements

Disbursements dropped significantly. This is predominantly due to an 81 percent drop in corporate loan disbursement (to about 605 crores). Retail loan disbursement grew by 7 percent though.

Q1 FY20 (Crores) Q1 FY19 (Crores) Growth (%)
Disbursement 7634 9767 -22%

Disbursement growth has seen a decline over the past four quarters. The effect of drop in disbursement will be felt in the revenue for the coming few quarters.

Item Q1 FY20 (%) Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Disbursement Growth -22% -2% 1% 14% 25% 44% 100%

Portfolio Analysis

As of Q1 FY20, the entire portfolio can be divided as below. As expected, individual housing loan makes up a major chunk of loan book.

Product % of total portfolio
Individual Housing loan 59%
Construction Finance 13%
Loan Against Property 18%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~10%

Spread and NIM

In Q1 FY20 both the NIM and spread have seen a growth of about 40 bps.

Q1 FY20 (%) Q1 FY19 (%) Growth (bps) Q4 FY19 (%)
Spread 2.53% 2.11% 42bps 2.59%
NIM 3.14% 2.74% 40bps 3.18%

Cost to Income

Q1 FY20 saw the cost to income drop back to about 16%. Management seems to be comfortable with this cost to income. Hopefully the company can maintain this cost to income considering the fact the company plans to curtail its CAPEX in FY20.

Q1 FY20 FY19 FY18 FY17 FY16 FY15
Cost-to-Income 16.18% 19.61% 17.22% 22.43% 25.15 30.87%

Return on Equity

ROE has dropped back to its average of 14 odd percentage in Q1. With the plans for a follow on offer we can see a further drop in ROE in the near future.

Q1 FY20 FY19 FY18 FY17 FY16
ROE 14.81% 17.44% 14% 14.92% 17.12%

Borrowing Cost and Borrowing Profile

The average cost of borrowing saw an increase in Q1.

Q1 FY20 Q4 FY19 Q3 FY19 FY18 FY17
Borrowing Cost 8.31% 8.06% 7.59% 7.71% 8.55%

Let us now look at the borrowing profile as of Q1 FY20. The reason for the increase in the borrowing costs is quite evident from the borrowing profile. There is slower growth in deposit mobilization (compared to other sources like term loans). Relatively lower cost incremental NCDs are not available. The company relied on higher cost term loans from banks.

Borrowing Profile Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 FY18 FY17
NCD 24.64% 27.97% 30.05% 33.41% 34.75% 37.52% 37.73%
Commercial Paper 7.65% 9.57% 11.03% 11.73% 15.67% 17.48% 11.32%
Deposits 18.24% 17.23% 16.74% 17.72% 18.01% 19.47% 25.86%
ECB 5.55% 5.69% 6.11% 2.29% 2.36% 2.47% 3.92%
Bank Term Loans 21.11% 18.20% 17.32% 19.98% 16.26% 7.73% 6.39%
NHB 8.11% 8.45% 7.22% 5.36% 5.79% 6.54% 7.12%
Assignment 14.64% 12.88% 11.54% 9.51% 7.18% 8.80% 7.67%
  • Deposits: As of Q1 FY20 the company has about 15,446 crores in the form of deposit money compared to 14300 crores in Q4 FY19.
  • ECB: The company has raised $100 million from IFC in the month of July. This should get reflected in the borrowing profile for Q2 FY20. This shows that foreign funds have confidence in the company. A positive takeaway.
  • CP: On CP, the management confirmed that they are seeing rollover of CP. But they seem to be turning costlier with each rollover. All the CP participants be it mutual funds, banks, insurance companies are opting for rollover of CP. This is good for the company. I am not a big supporter of CP based funding though considering the fact that PNB housing is into housing loans which are long term loans.

Capital Adequacy Ratio

CAR has been coming down over the past many quarters. The company is firming up its plan for issuing equity shares to increase its CAR. There was an uptick in Tier-I capital in Q1, the management attributes this to balance sheet management.

 CAR Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 12.04% 11.0% 11.37% 11.38% 11.41% 12.77% 13.33% 13.99% 15.50%
Tier – II 3.09% 2.98% 3.12% 3.47% 3.46% 3.92% 4.06% 4.39% 4.8%
Combined 15.13% 13.98% 14.49% 14.85% 14.87% 16.69% 17.39% 18.38% 20.30%

GNPA and NNPA

Year-on-year there is a 42-bps increase in GNPA. The reason for higher NPA is due to one corporate loan account (of 150 crores) entering NPA and is subject to remedial action. This would have led to a higher provisioning and lower PAT. With respect to NPAs, the company follows an interesting strategy. It accelerates the accounts that appear to become NPA in the near future. It allows these accounts to go into NPA and then invokes SARFESI to recover the amount via legal means by Q4 of that particular year. This is the reason why we generally see a higher NPA in Q1 of each financial year for the company.

  • By the way, as of Q1 FY20, the company has identified seven accounts as stressed. Out of these seven, three have slipped into NPA (one new entrant in Q1 FY20 compared to Q4 FY20)
Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.85% 0.48% 0.47% 0.45% 0.43% 0.33% 0.42% 0.34%
NNPA 0.67% 0.38% 0.37% 0.35% 0.33% 0.25% 0.33% 0.26%

Branch Expansion

In Q1 of FY20, the company managed to open two new branches in two cities. Management has informed that it does not plan any more branch expansions in FY20 as this financial year is a year of consolidation. The two branches that were opened in Q1 were a spillover from FY19.

Q1 FY20 FY19 FY18 FY17 FY16 FY15 FY14
Branches added 2 18 21 16 9 6 32

The footprint details as of Q1 FY20 is as below:

  • Total Branches: 104 spread over 64 cities
  • Total Outreach centers: 30
  • Total Hubs: 23 (These cater to the branches and the outreach centers)

Other Information

  • As of Q1 FY20 the company is maintaining Rs. 5,000 crores as cash and other liquid instruments. This is down from 7000 crores in Q4 FY19. The company seems to have dipped into its excess cash (by about 2000 crores) to maintain its lending operations.
  • The company has seen a ratings downgrade from many rating agencies. Management attributes the downgrade in ratings to two factors:
    • Factor 1: The expected fund rising from the equity market.
    • Factor 2: A general negative sentiment towards NBFC sector.

By the way, the gearing level has reached 9.3x and the company needs to raise equity to raise its Tier I capital. The company plans to raise 2,000 crores from the equity market.

Red Flags

The management is quite ecstatic about the way things are going on with respect to assignment of loans. I believe when you go via the assignment route, it is like MBS and the company more or less sells the loan accounts to other institutions (like banks). To the customer it still acts as the front end but the account is virtually owned by another bank. PNB housing probably earns a commission out of these accounts. If this is true then I am not sure why does an HFC take pride in selling its accounts! The company has done a business of 2,300 crores by way of assignment and plans to do north of 12,000 cores in FY20. I understand that securitization is not the same as sell-down as the company retains the right to service the loan but I am clueless here on the enthusiasm of the management to give away its loan accounts and merely act as a maintenance guy!

Summary

  • Revenue growth was good but the profits are down due to higher provisioning & write-offs.
  • On the negative side, disbursement growth has decreased, NPAs have increased, some loan accounts are under stress, borrowing costs are up. The environment is challenging.
  • Management does not plan to open any new branches in FY20. With lower CAPEX in FY20 we should see better cost to income numbers in FY20.
  • The borrowing profile is still tilted towards the high cost bank loans. Even though the company is the second largest deposit taking NBFC, the rate of deposit growth (according to me) is far from the desired levels.
  • With the capital raising plans for 2000 crores taking shape, we should expect the EPS to take a hit in FY20.

Even with all the challenges in NBFC, I feel that the company is able to manage its business in a fairly efficient manner. I believe by Q4 FY20 things for the entire NBFC sector should start looking better and the company should be back to its normal self.

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.