PNB Housing announced its Q2 FY20 results in October. 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 Q2 FY20 with respect to Q2 FY19.

Item Q2 FY20 (Crores) Q2 FY19 (Crores) Growth(%)
Revenue 2230 1808 23.34%
Expenses 1804 1436 25.62%
PBT 426 372 14.51%
Tax 72.12 114.73 -37.13%
PAT 367 253 45.05%
  • Revenue: The revenue growth dropped noticeably in Q2 FY20. The table below lists the revenue growth for the past few quarters.
Item Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
Revenue Growth (%) 23.34% 35.5% 31% 47% 42% 42% 46% 44%
  • Expenses: Growth in expenses was higher than the revenue growth. This has been the case for many quarters now. The main reason for this in Q2 being, higher impairments and write-offs (we will discuss more under the expenses section). Higher expenses led to dismal PBT growth.
  • PAT: PAT has seen a higher growth predominantly due to lowering of corporate tax. The row on taxes clearly shows a 37% drop in taxes paid in Q2. The tax rate for Q2 FY19 was about 31% whereas, in case of Q2 FY20 it was abnormally low at 16.92 (the reason for the abnormally lower taxes in Q2 could to adjust the corporate tax cut for Q1 being adjusted in Q2).
 Item Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
PAT Growth (%) 45% 11% 51% 32% 33% 50% 44% 58% 51%

EPS

EPS growth was higher due to a higher PAT growth which, in-turn, was predominantly due to corporate tax cut.

Q2 FY20 Q2 FY19 Growth (%)
EPS 21.82 15.11 44.4%

Expenses

Let us look at the expenses breakup.

Expense Item Q2 FY20 (Crores) Q2 FY19 (Crores) Growth(%)
Finance Cost 1521 1229 23.75%
Employee Cost 71 81 -12.34%
Other Expense 41 38 7.89%
Impairments and Write-offs 152 65 133.8%
  • Finance Cost, Employee Cost, Other Expenses: The company managed to contain the finance cost, Employee cost and Other expenses. The major expense which is the finance cost grew in line with the revenue growth
  • Impairments and Write-offs: The item that skewed the numbers was the impairments and write-offs. There is a significant increase of about 133%! This was the major reason for drop in PBT. A sudden increase is a little concerning. I want to draw your attention to the history of provisioning ad write-offs growth via the table below. FY20 has been an extremely challenging year for the company. Never in the past few quarters has the company marked such a substantial portion of money for impairments and write-offs. The growth in business is getting negated by doubtful assets. By the way, most of the provisioning should be due to the five corporate accounts that the management has been talking about for the past couple of quarters.
 Item Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
Provisioning and Writeoff (Crores) 152 164 10 70 65 44 44 56 50
Provisioning and Writeoff growth (%) 133.8% 273% -88% 45.4% -14% -35% -33% 80% 317%

Disbursements

Disbursements dropped significantly. This is predominantly due to an 87% YoY drop in corporate loan disbursement. Retail loan disbursement de-grew by 27%. In Q1 we had seen the corporate loan book de-grow by 81% and retail loan book de-grow by 7% respectively.

Q2 FY20 (Crores) Q2 FY19 (Crores) Growth (%)
Disbursement 4970 8405 -40.8%

Disbursement growth has seen a decline over the past five quarters now. Future revenue growth depends on the current disbursements. If there has been a drop in disbursements for five quarters then clearly FY20 and FY21 should see slower revenue growth! This is disappointing!

Item Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
Disbursement Growth (%) -40.8% -22% -2% 1% 14% 25% 44% 100%

Portfolio Analysis

As of Q2 FY20, the entire portfolio can be divided as below. As expected, individual housing loan makes up a major chunk of loan book. By the way as of Q2 FY20 the retail portion makes up 81% of the total portfolio.

Product % of total portfolio
Individual Housing loan 59%
Construction Finance 13%
Loan Against Property 12%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~16%

Spread and NIM

In Q2 FY20 spread saw a growth of about 40 bps whereas the NIM grew by about 47 bps. I am guessing this is due to higher securitization.

Q2 FY20 (%) Q2 FY19 (%) Growth (bps) Q1 FY20 (%)
Spread 2.61% 2.22% 39bps 2.53%
NIM 3.19% 2.72% 47bps 3.14%

Cost to Income

Q2 FY20 saw the cost to income sustain around 16.8%. Good to see that the company is able to maintain it at lower levels.

Q2 FY20 Q1 FY20 FY19 FY18 FY17 FY16 FY15
Cost-to-Income (%) 16.78% 16.18% 19.61% 17.22% 22.43% 25.15 30.87%

Return on Equity

For the first half of FY20, the ROE was around 16.7%. Not a very high number. I hope that the company is able to bring out better numbers in the future.

H1 FY20 FY19 FY18 FY17 FY16
ROE 16.74% 17.44% 14% 14.92% 17.12%

Borrowing Cost and Borrowing Profile

The average cost of borrowing saw an increase in Q2 FY20. There was a 53 bps increase compared to Q2 FY19.

Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 FY18 FY17
Borrowing Cost 8.34% 8.31% 8.06% 7.59% 7.71% 8.55%

Let us now look at the borrowing profile as of Q2 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 Q2 FY20 Q1 FY20 FY19 FY18 FY17
NCD 21.79% 24.64% 27.97% 37.52% 37.73%
Commercial Paper 5.20% 7.65% 9.57% 17.48% 11.32%
Deposits 19.84% 18.24% 17.23% 19.47% 25.86%
ECB 6.16% 5.55% 5.69% 2.47% 3.92%
Bank Term Loans 21.85% 21.11% 18.20% 7.73% 6.39%
NHB 7.69% 8.11% 8.45% 6.54% 7.12%
Assignment 17.46% 14.64% 12.88% 8.80% 7.67%
  • Deposits: As of Q2 FY20 the company has about 17,179 crores in the form of deposit money. In Q1 it was 15,446 crores and in Q4 FY19 the deposit amount stood at 14300 crores. Overall deposits now make up close to 20% of borrowing profile. These are generally sticky accounts with a tenure of about 2.5 to 3 years.
  • ECB: The higher number for ECB should be due to $100 million raised from IFC in the month of July.

Capital Adequacy Ratio

CAR has been lower for the past many quarters. The company is firming up its plan for issuing equity shares to increase its CAR. Average gearing is about 9.04. Historically the company has had a gearing above 9 for many quarters now.

 CAR Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
Tier – I 12.69% 12.04% 11.0% 11.37% 11.38% 11.41% 12.77% 13.33%
Tier – II 2.98% 3.09% 2.98% 3.12% 3.47% 3.46% 3.92% 4.06%
Combined 15.67% 15.13% 13.98% 14.49% 14.85% 14.87% 16.69% 17.39%

GNPA and NNPA

Year-on-year there is a 39-bps increase in GNPA.

Q2 FY20 Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18
GNPA 0.84% 0.85% 0.48% 0.47% 0.45% 0.43% 0.33% 0.42%
NNPA 0.65% 0.67% 0.38% 0.37% 0.35% 0.33% 0.25% 0.33%

Branch Expansion

In Q2 the company opened 1 new branch. In Q1 of FY20, the company managed to open two new branches in two cities. Management has informed that it does not plan major branch expansions in FY20 as this financial year is a year of consolidation.

Q2 FY20 Q1 FY20 FY19 FY18 FY17 FY16 FY15 FY14
Branches added 1 2 18 21 16 9 6 32

The footprint details as of Q1 FY20 is as below:

  • Total Branches: 105 spread over 64 cities
  • Total Outreach centers: 30
  • Total Hubs: 23 (These cater to the branches and the outreach centers)

Other Information

  • The company currently has about 4557 crores in cash and liquid investments which it can use, in case, it has issues in borrowing money.

Red Flags

This quarter had many red flags. Below are some of them (the way I perceive them):

  • The profit growth of 45% odd percent is predominantly due to corporate tax cut. The PBT which came in at 15% clearly shows the pain.
    • I am not particularly unhappy that profits have got shored up due to tax cuts. After all this is a permanent event and will get factored in for all the future quarters. I am more worried about the next point which impacted the PBT.
  • Connected to the above point is the fact that provisioning has more than doubled in Q2 FY19 which shows that the company is expecting some defaults and, as a precautionary measure, the company has provisioned for this.
    • Sanjay Gupta made an interesting pass by remark when asked about this sudden increase in credit cost. He mentioned that, due to lowering of taxes, they had some room to move around and they utilized the additional breathing space so they provided more in this quarter.
  • Disbursements have nosedived. The management prefers to be cautious and hence they have dramatically brought down the corporate lending Y-o-Y. But this will hit the future revenue. If you don’t disburse loans you don’t earn the interest (or revenue) and a lack of revenue would result in lower profits. This drop in disbursements does not seem to be a one quarter thing. If you look at the numbers, we see that disbursement growth has tapered since the past three quarters. I believe we may see lower profits in the coming few quarters if the disbursement growth does not pick up.
  • The company has increased the direct assignment accounts to about 17.5% of the total borrowing profile. Essentially the company acquires loan accounts and seasons them for 24-36 months and then sells them off (securitizes) to other banks (it might still be the front end towards the customers, but at the backend the acquirer gets the interest amount and probably PNB housing ends up earning the commission). One can categorize assignment as a source of income/funding, but to me, this is a sad state to be in for a housing finance company.
    • There seems to be another reason for higher securitization. The Tier-I capital for the company is low and its capital raising plans are still in the working. So it cannot lend to new customers and risk its CRR going down and the gearing going up. Hence the company might be securitizing the loans so that it can stay well below the mandated CRR for NBFC-HFI.

Summary

  • Revenue growth was pretty decent and the company saw a good growth in PAT as well.
  • On the negative side, disbursement growth has decreased, NPAs have increased, some loan accounts are under stress, borrowing costs are up, provisioning is up. The environment has been 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.
  • With the capital raising plans for 2000 crores taking shape, we should expect the EPS to take some beating in FY20. The share price is down by a significant amount and if does not recover then the amount of dilution would be higher leading to a lower EPS.

I am disappointed with the Q2 numbers and I am expecting the pain to last for few more quarters.

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.