PNB Housing announced its Q4 FY19 results in May. 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.

You can also watch the video for the results overview for Q4 FY19 below:

Financial Analysis

The table below shows the performance of PNB Housing for Q4 FY19 with respect to Q4 FY18.

Item Q4 FY19 (Crores) Q4 FY18 (Crores) Growth(%)
Revenue 2148 1638 31.13%
Expenses 1603 1261 27.12%
PBT 545 377 44.56%
PAT 380 252 50.8%
  • Revenue: After a consistent revenue growth for many quarters, Q4 saw a drop in revenue growth. The table below lists the revenue growth for the past few quarters.
Item Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%)
Revenue Growth 31% 47% 42% 42% 46% 44%
  • Expenses: Growth in expenses was contained in Q4.
  • PAT: Growth in PAT was very positive for Q4 FY19. The table below lists the historical PAT growth for the company.
Item Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%) Q2 FY18 (%)
PAT Growth 51% 32% 33% 50% 44% 58% 51%

EPS:

EPS growth followed the PAT growth.

Q4 FY19 Q4 FY18 Growth (%)
EPS 22.68 15.10 50.19%

Let us look at the expenses breakup.

Expense Item Q4 FY19 (Crores) Q4 FY18 (Crores) Growth(%)
Finance Cost 1427 1025 39.2%
Employee Cost 91 46 97.8%
Other Expense 57 76 -25%
Impairments and Write-offs 10 84 -88%
  • Employee Cost: There is a substantial increase in the employee cost. Management attributes this to the integration of the sales team to the company payroll. Previously the sales team was treated as 3rd party cost and was being amortized. But due to the amalgamation of sales team, there is a year-on-year increase in the employee cost for the company.
  • Provision and Write-offs: There is a drop in impairments and writeoffs. Happy to see these numbers!

Disbursements

Disbursements continue to disappoint.

Q4 FY19 (Crores) Q4 FY18 (Crores) Growth (%)
Disbursement 8562 8739 -2%

Disbursement growth has seen a decline over the past three quarters. I am disappointed by these numbers. The effect of drop in disbursement will not felt in the current quarter it shall be felt in the revenue and profit numbers for the upcoming quarters. Zor ka jhatka dheere se laga.

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

Portfolio Analysis

As of Q4 FY19, the entire portfolio can be divided as below. As expected, individual housing loan makes up a major chunk.

Product % of total portfolio
Individual Housing loan 58%
Construction Finance 13%
Loan Against Property 17%
Lease rental discounting, Non-residential premise loan, Corporate Term Loan ~12%

Spread and NIM

In Q4 FY19 both the NIM and spread saw a drop of close to 40 bps.

Q4 FY19 (%) Q4 FY18 (%) Growth (bps) Q3 FY19 (%)
Spread 2.59% 2.98% -39 2.56%
NIM 3.18% 3.59% -41 3.06%

Cost to Income

Q4 FY19 saw the cost to income at about 20%. In the long run the management would like to see its cost-to-income ratio reduce to around 16%.

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

Return on Equity

ROE has seen a smart recovery over the past few quarters. At close to 21 percent, it was a positive surprise. However with the managements plan to raise money via issuance of equity, the ROE will drop in future. Even otherwise 21 percent seems like an exception to me. By the way the ROE for FY19 was 17.44 percent.

Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 FY18 FY17 FY16
ROE 20.77% 16.22% 15.14% 15.75% 14% 14.92% 17.12%

Borrowing Cost and Borrowing Profile

The borrowing cost has marginally increased.

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

Let us now look at the borrowing profile as of Q4 FY19. 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 seem to have dried up. Moreover, the company had to rely on higher cost term loans from banks. There was one round of ECB but this did not contribute significantly to the Q4 borrowings. There is one positive development though. In Q4 the company predominantly raised long term liabilities. This should take care of ALM to a certain extent.

Borrowing Profile Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 FY18 FY17
NCD 27.97% 30.05% 33.41% 34.75% 37.52% 37.73%
Commercial Paper 9.57% 11.03% 11.73% 15.67% 17.48% 11.32%
Deposits 17.23% 16.74% 17.72% 18.01% 19.47% 25.86%
ECB 5.69% 6.11% 2.29% 2.36% 2.47% 3.92%
Bank Term Loans 18.20% 17.32% 19.98% 16.26% 7.73% 6.39%
NHB 8.45% 7.22% 5.36% 5.79% 6.54% 7.12%
Assignment 12.88% 11.54% 9.51% 7.18% 8.80% 7.67%
  • NHB: About 3500 crores of NHB refinancing (that was approved in Q3) was utilized in Q4 which is why we see an uptick in contribution of NHB.
  • Deposits: As of Q4 FY19 the company has about 14300 crores in the form of deposit money which is about 23 percent increase from Q4 FY18.

Capital Adequacy Ratio

With every quarter, as expected, the CAR is coming down. The company is talking with IFC to raise Tier II capital. The company is also planning to raise Tier I capital in the next few months. For Housing finance Institutions, the CAR should be more than 12% and the Tier 1 capital should be more than 6%.

 CAR Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Tier – I 11.0% 11.37% 11.38% 11.41% 12.77% 13.33% 13.99% 15.50%
Tier – II 2.98% 3.12% 3.47% 3.46% 3.92% 4.06% 4.39% 4.8%
Combined 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 15-bps increase in GNPA. Quarter on quarter the numbers are consistent though. For the first time I see the company admitting to stress in corporate loan book with five accounts being under stress these are not NPA yet.

Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.48% 0.47% 0.45% 0.43% 0.33% 0.42% 0.34%
NNPA 0.38% 0.37% 0.35% 0.33% 0.25% 0.33% 0.26%

Branch Expansion

The company fell short of its branch expansion goal of 24 branches. It was able to open 18 branches in FY19.

FY19 (Executed) FY19 (Planned) FY18 FY17 FY16 FY15 FY14
Branches added 18 branches in 15 new cities 24 branches  in 17 new cities 21 16 9 6 32

The footprint details as of Q4 FY19 is as below:

  • Total Branches: 102 spread over 62 cities
  • Total Outreach centers: 29
  • Total Hubs: 23 (These cater to the branches and the outreach centers)

Other Information

  • The company is maintaining cash and liquid investments to the tune of 7000 crores. This should cushion the company against sudden credit demand.
  • On the corporate loan book, we were provided additional information by the management. Seventy percent of the corporate loans during FY19 were to repeat customers which indicates that trust is an important factor for corporate loans. The company provides these corporate loans to about 170 developers in 12 major India Tier I and II cities. The weighted average security coverage is close to 2.2 times.

Red Flags

This quarter had enough red flags that made me uneasy.

  • Disbursement growth is negative for the first time in all these years. Slowdown in disbursement does not impact the current quarter, but it will hit the results of coming quarters when we will see drop in revenue and profits.
  • The company is relying on assignment (aka MBS). A lending agency that mobilizes loan accounts and then ties them into bundles and sells them to other financial institutions. The company then relies on the fee or commission income from these accounts and it becomes a significant part of the company’s borrowing profile! Haven’t we turned ourselves into commission agents.
    • Bharat shah rightly push the MD to divulge the amount of profit earned through assignments and the MD informed that the company would have earned about 150 crores of profit due to assignment for FY19.
  • Connected to the above point on assignment, I found one rather strange justification for ALM. When quizzed about the ALM mismatch, the management informed that wherever there is an asset liability mismatch, and if the company cannot bridge the gap (via long term borrowing) then they could go the assignment way and sell the loan accounts (the management is fairly confident that there are enough buyers of its loan accounts). Wow assignment is the new tool to tackle ALM when your borrowing sources dry up! Please note that this a mere suggestion from the MD in response to a question on tackling ALM. However the very fact that such a thought process exists, makes me uneasy.

Summary

  • On the positive side, the Revenue growth and profit growth exceeded my expectation (But then, if one were to remove the profits accrued from assignments that leaves one with something like an operating margin. This leftover profit growth is just about OK).
  • On the negative side, disbursement growth has decreased, NPAs have increased, some loan accounts are under stress. Margins are down, borrowing costs are up. Branch expansion goal was missed as well. Things have definitely been challenging in Q4.
  • Additionally, the company is not able to increase deposits significantly and had to rely on bank term loans for its long term borrowings. This would have led to an increase in its borrowing costs and would have impacted the margins.

With overall sentiment being negative for NBFCs, there are enough challenges for the company going ahead. I guess FY20 is going be a tough year for the company.

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.