PNB Housing Finance Limited (PNBHFL) is a 30 years old public sector housing finance company (HFC), headquartered in New Delhi with branches in major cities across India. The company is promoted by Punjab National Bank and is registered with state owned bank and regulation authority of India - National Housing Bank (NHB).The company provides housing loans & loan against property as a part of its product portfolio and also holds the license to accept public deposits.
Company’s deposit program is rated CRISIL FAAA/Stable (Highest Safety) and AAA by CARE. Company is rated CARE AAA for bank loans long term and CARE A1+ for commercial paper program. Company's is rated CARE AAA, IND AAA with stable outlook by India Ratings (Fitch Group), CRISIL AA+ with negative outlook and ICRA AA+ with stable outlook for Bonds/Non convertible debentures.
Recently Stallion Asset Mgmt team met the Management of PNB Housing and spend the entire day with the whole top management. We got amazing insights about the housing finance Industry & the road Ahead. These are the 5 main takeaways from the meet.
1) Opportunity Size – The Run up in Housing Finance Companies has been very strong and we wanted to understand the opportunity as every company is coming out with exciting target’s, for example newly launched Piramal is targeting 15,000 Crores AUM FY 2020, Reliance Home has guided to Increase AUM by 57% CAGR from 13000 Crores now to 50,000 Crores by 2020, Kapil Wadhawan of DHFL guided in an Interview last week to more than double AUM from 90,000 Crores to 2,00,000 Crores in 3 years, & Finally Indiabulls Housing finance has guided for 30% CAGR AUM Growth. This is more important as these guidance are coming at a point when the supply to new housing is very weak & most builders are struggling with weak sales.
Sanjaya Gupta, the CEO of PNB Housing and a man whose one of the most passionate 54 year old guy i have seen has spend his entire life in the mortgage Industry told me that there is no doubt that supply is weak in the new retail housing this year due to factors like RERA & Demonetization but a lot of builders are started to line up projects next year, and FY2018 will be the inflection point for affordable housing in India. He also added that he will sweat his assets and ensure that they have reasonable growth. The whole Industry is looking towards affordable housing and the same point was repeated by Khushru Jijina on Wednesday on the launch of Piramal Housing finance that FY2018 will be a super Kicker for Housing Finance Companies as affordable housing really starts. We at Stallion Asset always verify the information and we spoke to a few builders in affordable housing & their reply was every top builder in major cities are definitely foraying and betting big on it. The model of Purvankara of having a separate low cost housing subsidiary has been well taken by the market & that’s the model they will work on.
2) Growth – We all know Housing Finance Industry in India has been growing at 18% historically, though the banks have been growing at just 15% and losing market share to Housing finance companies who are growing at 21%, but what about growth ahead. The Question was that if we break up the growth for last 15 Years there was a 10% Growth in Prices of Real Estate & 8% volume Growth, but now that there is no growth in Real Estate Prices, will the Industry be able to grow at 18%? The Answer was affordability for housing has improved as prices have been stagnant for last 5 years and with falling interest rates and subsidies on housing loan, they remain super bullish.
The most Important point i picked up during the Conversation was that only 20% of new registrations for house that happen are new houses (Seller is the builder), and the rest 80% are Consumer to Consumer transfer (Resale).
3) Competition- Since Competition has increase from New HFC’s as well as banks getting aggressive on retail lending, our next concern was will the Spreads sustain? There is pressure on the Salaried Class for spread as government banks are getting aggressive there but self employed remain 50% of Retail book for PNB Housing where competition is limited.
4) Loss Given Default & Credit Risk – We asked that there is a common phenomena and the one that we at Stallion Asset also believe that Profits for an NBFC are Front Ended, Whereas Losses are Back ended. Sanjaya Gupta Clarified that it all depends on the Credit Quality, and we at Stallion Asset learned from our visit that PNB Housing definitely has the best System in Place for credit Checks. When i asked Jayesh Jain, CFO of PNB Housing about the Loss given default, he told me its about 4% of NPA i.e. if the loan book is 10,000 Crores, assuming NPA is 1% of that i.e. about 100 Crores, in that case only 4 crores is real bad debt, the rest is recovered from selling mortgage.
5) Conclusion – The Growth in Housing Finance going forward is going to be a volume game, Raamdeo Agarwal of Motilal Oswal who himself runs a Housing finance company (Aspire) gave PNB Housing a thumps up, calling a 1 Lakh Crore ki Kahani. Valuation of most HFC’s are pricing in a pick up in affordable housing, the housing finance story is now depended on affordable housing story, but remember only 20% of housing sold in India is via builders and the rest 80% is by Consumer to Consumer. The conclusion of the meet was that if Affordable housing really picks up the HFC’s would grow at 30%, and if it doesn’t they will grow at 15%.
Motilal Oswal's research report on PNB Housing Finance :
PNB Housing Finance’s (PNBHF) 2QFY18 PAT grew robustly by 51% YoY to INR2.08b, led by its strong AUM growth, YoY improvement in margins and lower C/I ratio (albeit off a high base). Disbursements grew 45% YoY to INR74b. While this is certainly a very strong performance, it was a tad lower than disbursements in 1QFY18, suggesting some impact of RERA, and possibly GST. Generally, the second quarter is seasonally strong in terms of disbursements for an HFC. AUM growth of 47% YoY was in line with estimates. The mix has remained largely stable on both QoQ and YoY basis. C/I ratio (calculated) declined over 1,200bp YoY and 160bp QoQ to 23%. The sequential improvement is commendable, in our view. One of the key factors driving this is improving employee productivity. As per company disclosures, both disbursements/employee and loans outstanding/employee have increased at ~20% CAGR over the past two years (note that this number does not account for off-roll sales staff). We believe continued operating leverage is key to RoA/RoE improvement, and thus, for valuations to sustain.
Outlook
PNBHF continues to deliver strong growth in its loan book. Increasing geographical spread and new branch openings (110 branches in FY20E v/s 66 in FY17) are expected to result in the loan book growing to ~INR1t by FY20 (37% CAGR). With the pace of investments slowing down, coupled with operating leverage benefits kicking in, the expense ratio is set to decline meaningfully. Credit costs, however, are expected to inch up marginally on account of portfolio seasoning. All these factors put together are expected to drive 41% PAT CAGR over FY17-20E, with RoE inching toward high-teens over the medium term. We upgrade our FY18-20 EPS estimates by 2-9%. Buy with a target price of INR1,750 (3.8x Sep 2019E BVPS, 22x Sep 2019E EPS).
Motilal Oswal's research report on PNB Housing Finance :
PNB Housing Finance’s (PNBHF) 2QFY18 PAT grew robustly by 51% YoY to INR2.08b, led by its strong AUM growth, YoY improvement in margins and lower C/I ratio (albeit off a high base). Disbursements grew 45% YoY to INR74b. While this is certainly a very strong performance, it was a tad lower than disbursements in 1QFY18, suggesting some impact of RERA, and possibly GST. Generally, the second quarter is seasonally strong in terms of disbursements for an HFC. AUM growth of 47% YoY was in line with estimates. The mix has remained largely stable on both QoQ and YoY basis. C/I ratio (calculated) declined over 1,200bp YoY and 160bp QoQ to 23%. The sequential improvement is commendable, in our view. One of the key factors driving this is improving employee productivity. As per company disclosures, both disbursements/employee and loans outstanding/employee have increased at ~20% CAGR over the past two years (note that this number does not account for off-roll sales staff). We believe continued operating leverage is key to RoA/RoE improvement, and thus, for valuations to sustain.
PNBHF continues to deliver strong growth in its loan book. Increasing geographical spread and new branch openings (110 branches in FY20E v/s 66 in FY17) are expected to result in the loan book growing to ~INR1t by FY20 (37% CAGR). With the pace of investments slowing down, coupled with operating leverage benefits kicking in, the expense ratio is set to decline meaningfully. Credit costs, however, are expected to inch up marginally on account of portfolio seasoning. All these factors put together are expected to drive 41% PAT CAGR over FY17-20E, with RoE inching toward high-teens over the medium term. We upgrade our FY18-20 EPS estimates by 2-9%. Buy with a target price of INR1,750 (3.8x Sep 2019E BVPS, 22x Sep 2019E EPS).
Bonanza's research report on PNB Housing Finance
Recently, the stock price of PNB Housing Finance Ltd. (PNB Housing) corrected by ~17% from 52-week high of Rs.1,717 despite reporting good set of numbers in the recent quarters. With a change in management in 2011, PNB Housing witnessed an impressive turnaround, with a robust loan CAGR of 60% during FY12-17, driven by increased market penetration, expansion into new territories, higher branch count coupled with increasing branch productivity. Consequently, its market share increased from ~0.5% to over 2%, making it the 5th largest housing finance company (HFC) in India. With a hub-and-spoke model and a central processing center (CPC), the company has ensured that branches focus only on loan sourcing, hubs focus solely on underwriting and the CPC focuses only on file processing. Unlike other HFCs, which are now focusing more on the affordable housing segment, PNB Housing caters largely to the middle and upper-middle class segment. Its average ticket size of Rs.3.2mn in home loans is ~30% higher than that of HDFC and IHFL.
Outlook
With impressive turnaround, expansion into new territories, well diversified portfolio, developed capabilities to underwrite, plans to further increase branch network, increase its presence in tier-II and tier-III cities in the southern and western regions and lowest funding costs, we value PNB Housing at 4.50x FY19E ABV of Rs.385.70 to arrive at target price of Rs.1,736, an upside of ~22%.
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