PNB Housing Finance Limited Rating: Subscribe 21 st October 2016 Research Analyst: Varun Gopal I G, ATS Wealth Managers Pvt. Ltd. Background PNB Housing Finance Limited operates as a housing finance company. The company provides housing loans to individuals and corporate bodies for the construction, purchase, repair, and upgradation of houses, as well as loans for commercial space, loans for purchase of residential plots, loans against properties, and loans for real estate developers. It also offers investment options to various deposit schemes. The company was incorporated in 1988 and is based in New Delhi, India with branches in India. PNB Housing Finance Limited operates as a subsidiary of Punjab National Bank. On December 9, 2009 PNB entered into a strategic partnership with Destimoney Enterprises Private Limited (DEPL) and sold its 26% stake to DEPL. DEPL which held 49% shares in the company until February 2015 sold its entire shareholding to Quality Investments Holdings, which is owned by Carlyle Group, a global investment firm.[5] The remaining 51% is owned by the parent bank i.e. Punjab National Bank Issue Details Issue Open 25-Oct 2016 to 27-Oct 2016 Issue Type 100% Book Built Issue IPO Issue Size Equity Shares of Rs. 10 Issue Size Rs. 3000 Crore Face Value Rs. 10 Per Equity Share Bid Lot 19 Equity Shares and in multiples thereof Issue Price Rs. 750 - Rs.775 Per Equity Share Listing At BSE, NSE Issue Breakup QIB Category 50% Non Institutional Category 15% Retail category 35% Recommendation PNBHFL is a well respected name in the market with wide customer base, significant market share, wide product offering and has shown consistent growth in revenue and profitability At the higher end of the price band, company is asking for a valuation 2.35 to 2.50 of price to book. This valuation looks at par with its peers. This coupled with the robust outlook along of HFC s along with low NPA of 0.22%, we recommend a subscribe to the issue at the upper band of Rs.775.
Company Info Operations The company has Pan India presence in more than 40 locations through a network of 48 branches as on May 13, 2016. Company s 16 hubs are located at New Delhi, Bengaluru, Chandigarh, Chennai, Noida, Jaipur, Dehradun, Lucknow, Kolkata, Cochin, Coimbatore, Mumbai, Pune, Ahmedabad, Indore and Hyderabad which support branch operations The company provides doorstep service for its products via Direct Sales Team (DST) channel. Other than the DST channel, company s Home Loan and Loan against Property business is also sourced via Direct Marketing Associates (DMA) and Digital Medium. Fixed Deposits, other than direct channel is also sourced via Broker Network Products Home Loan: PNB Housing provides housing loans to individuals for construction, purchase, repair, and upgrade of houses. Non Home Loan: The Company also provides loan against property, commercial property loan, lease rental discounting loans for commercial property, loans for purchase of residential plots and loan for real estate developers. Deposits: PNB HFL also offers Public Deposits of different maturities and various interest payment options. Objective of the issue To augment company's tier-i capital base to meet the future capital requirements which are expected to arise out of growth of PNB Housing's business and assets, primary the housing and non-housing loans. The money garnered through IPO would also help the firm comply with National Housing Board directions on minimum capital adequacy ratio, which consists of tier-i and tier-ii capital. Credit Ratings Fixed Deposits : CARE AAA, FAAA with Negative outlook by CRISIL Bonds/NCDs: CARE AAA, IND AAA with stable outlook by India Ratings (Fitch Group), CRISIL AA+ with Negative outlook and ICRA AA+ Bank Loans Long Term Rating: CARE AAA Commercial Paper Program: CARE A1+
Segment wise revenue breakup 9% 6% Reatil Construction Finanace Corporate 85% Shareholding pattern 49% 51% PNB Quality investments Industry Overview India s housing finance market is worth an estimated Rs. 9.7 trillion and has achieved steady growth over the last 3 years. The market is dominated by a handful of banks, accounting for close to 70% of the market. However, the housing finance market continues to face considerable supply constraints, particularly in the lower income segment due to the perceived high risk of lending to the informal sector. A low income household is classified as one with a monthly household income below INR 20,000 and price per dwelling unit below INR 10 lakhs. The lower-income housing market is worth over Rs. 1,100,000 crore, comprises of approximately 2.2 crore households and consists of both salaried and self-employed individuals. The housing finance market in India has the potential to expand and include these borrowers who are currently not being serviced by financial institutions. These are individuals in the
lower income segment that generally do not have formal proofs of income, a challenge for larger Housing Finance Companies (HFCs). This has paved the way for new entrants in a niche segment within the housing finance market, the affordable housing sector. The rapid pace of urbanization, combined with rising income levels across the country continue to drive demand for affordable housing, to the extent that supply has not been able to keep pace with demand. In a bid to encourage greater supply, the Reserve Bank of India (RBI) has recently relaxed its guidelines regarding external commercial borrowings for the purpose of onward-lending for low cost housing units. Traditionally, banks have been the largest player in the housing finance market, and they continue to hold close to 70% of the total home loan portfolio in India. The other players in the market include: HFCs, land development banks and housing societies. The National Housing Bank (NHB) was set up in order to accelerate housing finance activity in India and promote HFCs. Although their market share has been steadily growing, 37% as of October 2014, the majority of housing loans disbursed remain in a higher loan bracket of over INR 10 lakhs, according to NHB. Home loans below INR 10 lakhs, categorised as the low income housing market, provided huge opportunity for the existing as well as new HFCs. HFCs with a strategic focus on financing low and middle income segments in the informal sector have come to be known as Affordable Housing Finance Companies (AHFCs). Given the higher concentration towards the formal, higher income segment, immense opportunity lies ahead for players who develop a sustainable business model in lending to the informal market. The market has witnessed both existing NBFCs floating new subsidiaries to specialize in affordable housing finance (Magma, Au, MAS, Equitas etc.), as well as new HFCs coming up with an exclusive focus on affordable housing finance (MHFC, Aptus, Shubham, India Shelter etc.). Currently there are 63 HFCs registered with the NHB. The affordable housing finance market will achieve tremendous growth over the next few years, given the low base/shortage of supply and huge demand. Majority of HFCs in this space have stabilized operations and have witnessed excellent asset quality. At the same time, concerns on areas such asset liability management, access to a diversified investor base, rating limitations etc. persist. Given the considerable gap between supply and demand in the affordable housing finance market, there is still opportunity for new HFCs to enter the market while the existing HFCs continue to grow. Access to capital will be crucial to the growth of these HFCs in India. IFMR Capital s strategy and interventions/products are designed to address these concerns. Given the inherent limitations of domestic debt markets in providing access to long term finance, as well as to lower rated institutions, IFMR Capital s focus is on developing transaction structures with sufficient structural risk mitigation in order to incentivize investors to provide credit. IFMR Capital has already channelized more than INR 1200 Cr in the housing and mortgage lending space through structured finance, as well as plain vanilla products.
Growth prospects Wide market reach The geographical reach of the business covers the northern, western and southern regions of India. As of March 31, 2016, it has 47 branches that were supported by 16 processing hubs, three co-located zonal offices and the geographies where urbanisation, income and the demand for housing and housing projects are growing. As of March 31, 2016, 40.40% of the loan portfolio was originated in states within the northern region whereas 29.90% and 29.70% of the loan portfolio was originated in states within the western and the southern regions in India, respectively. Across the different locations in India, PNBHFL s loans and deposits are sourced through the marketing and distribution network, which comprised over 5,000 channel partners as of March 31, 2016. the channel partners includes in-house direct sales team ( DST ) and third-party channel partners, which include DMAs, deposit brokers and aggregator and referral relationships with reputable national brands enabling the company to capitalize on the demand from different segments of customers and different geographies. Consistent growth and significant market share PNBHFL is the fifth largest HFC in India by loan portfolio as of September 30, 2015 with the second largest amount of public deposits in an HFC in Indi as of March 31, 2015. It is the fastest growing HFC among the leading HFCs in India as of March 31, 2015, with the loan portfolio growing at a CAGR of 61.81% from Rs.39,696.63 million as of March 31, 2012 to Rs.168,193.17 million as of March 31, 2015. As of March 31, 2016, the loan portfolio had grown to Rs.271,772.68 million. Housing loan disbursements are expected to increase at a CAGR of 20.30% over Fiscal Years 2016 and 2017 to approximately Rs.4,780.00 billion by the end of Fiscal Year 2017, driven by the Government s current focus on supporting housing throughout India, stabilising real estate prices, declining interest rates and rising incomes of prospective customers. PNBHFL is expected to continue outpace the industry in terms of growth rate and increase its share in market. Wide product offerings PNBHFL offers a wide range of housing and non-housing loan products to meet the needs of customers. As March 31, 2016, the housing and non-housing loans constituted 70.34% and 29.66%, respectively, of the total loan portfolio. It offers secured, mortgage-backed retail housing loans to salaried customers, whose main source of income is salary from their employment and self-employed customers, whose main source of income is their profession or their business, for the purchase, construction, extension or improvement of residential house properties or the purchase of residential plots. In addition, it offers construction finance loans directly to real estate developers for residential housing projects, enabling PNBHFL to tap in demand from different segments of the market.
Risks and Concerns Rising competitiveness There has been an increase in the number of new entrants in the housing finance market, including HFCs promoted by existing NBFCs, new companies started by entrepreneurs and supported by private equity players. This has led to increased competition in the industry. The upcoming small finance banks may also target the housing finance segment (mostly affordable housing). Owing to sizeable sourcing of customers from direct sales agents whose commissions are based on incremental disbursements, nil prepayment penalties are encouraging balance transfers. Lenders typically charge lower interest rates to new borrowers and offer incentives in terms of lower processing fees. High business origination costs, coupled with balance transfers and lower lending yields could impact profitability indicators of PNBHFL. Repayment issues The risk of repayment due to the wide difference between the rates they charge to its old customers and lower risk offered to new customers can make negative impact on the margins of the company. Financials Profit and Loss account FY12 FY13 FY14 FY15 FY16 INCOME : Operating Income 460.07 651.3 1116.02 1776.73 2696.59 Other Income 3.03 10.14 0 0 0 Total Income 463.1 661.44 1116.02 1776.73 2696.59 EXPENDITURE : Operating & Administration Expenses 16.01 28.42 45.45 75.19 110.28 Miscellaneous Expenses 13.25 17.71 48.38 68.63 132.62 Interest 315.05 461.64 801.15 1264.84 1860.29 Less: Pre-operative Expenses Capitalised 0 0 0 0 0 Employee Expense 15.83 25.97 40.4 67.06 75.28 Total Expenditure 360.14 533.74 935.38 1475.72 2178.47
Gross Profit 102.95 127.7 180.63 301 518.13 Depreciation 0.37 1.66 4.89 5.23 15.04 Profit Before Tax 102.58 126.04 175.74 295.77 503.09 Tax 28.96 34.55 50.65 89.8 167.33 Fringe Benefit tax 0 0 0 0 0 Deferred Tax -1.58-0.02-2.35 9.87 9.28 Reported Net Profit 75.2 91.51 127.44 196.11 326.47 Extraordinary Items 0.01-0.01-0.14-0.22 0 Adjusted Net Profit 75.19 91.52 127.58 196.33 326.47 Balance Sheet FY12 FY13 FY14 FY15 FY16 SOURCES OF FUNDS : Share Capital 30 50 65.69 103.85 126.92 Reserves Total 373.97 570.8 868.95 1477.43 2018.98 Total Shareholders Funds 403.97 620.8 934.64 1581.28 2145.9 Secured Loans 3354.87 5616.24 8228.17 9754.15 13402.71 Unsecured Loans 562.2 1276.12 1882.29 6726.61 12610.96 Total Loan Funds 3917.07 6892.36 10110.46 16480.76 26013.67 Other Liabilities 16.07 43.18 182.94 340.34 261.72 Total Liabilities 4337.11 7556.34 11228.04 18402.38 28421.29 APPLICATION OF FUNDS : Loan / Non-Current Assets 3773.71 6318.35 8640.65 14382.17 25623.56 Fixed Assets Gross Block 5.75 16.1 30.79 52.2 85.55 Less: Accumulated Depreciation 2.09 3.53 8.02 12.62 27.44 Net Block 3.66 12.57 22.77 39.58 58.11 Capital Work in Progress 0.53 3.59 3.02 18.1 4.05 Investments 378.29 792.61 645.47 1585.98 1622.27 Current Assets,Loans & Advances Inventories 0 0 0 0 0 Sundry Debtors 0 0 0 0 0 Cash and Bank Balance 11.43 188.49 138.42 293.14 248.54 Loans and Advances 352.08 509.31 1996.98 2591.1 1926.4 Total Current Assets 363.51 697.8 2135.4 2884.25 2174.94 Less: Current Liab. & Provisions Current Liabilities 58.2 133.58 266.53 570.37 1148.07
Provisions 137.5 175.9 35.59 52.57 71.12 Total Current Liabilites & Provisions 195.7 309.48 302.13 622.94 1219.19 Net Current Assets 167.8 388.32 1833.27 2261.3 955.75 Deferred Tax Assets 12.31 22.33 14.68 37.24 66.7 Deferred Tax Liability 0 10 0 45.19 97.17 Net Deferred Tax 12.31 12.33 14.68-7.95-30.47 Other Assets 0.8 28.56 68.18 123.19 188.01 Total Assets 4337.11 7556.33 11228.04 18402.37 28421.29 Key Ratios FY12 FY13 FY14 FY15 FY16 Key Ratios Debt-Equity Ratio 9.57 10.55 10.93 10.57 11.4 Long Term Debt-Equity Ratio 7.16 8.14 8.67 7.57 7.45 Current Ratio 3.54 3.75 4.3 3.3 2.7 Loans Turnover 0.14 0.13 0.15 0.14 0.12 Advance / Loans Funds (%) 94.15 93.37 87.98 95.68 103.5 Tot. Income / Capital Employed (%) 11.76 11.12 11.88 11.99 11.52 Interest Expended / Capital Employed (%) 8 7.76 8.53 8.54 7.95 PBIDTM (%) 90.26 89.1 87.97 88.13 88.2 PBITM (%) 90.18 88.85 87.53 87.84 87.64 PBDTM (%) 22.23 19.31 16.19 16.94 19.21 CPM (%) 16.32 14.09 11.86 11.33 12.66 APATM (%) 16.24 13.83 11.42 11.04 12.11 ROCE (%) 10.61 9.88 10.4 10.53 10.09 RONW (%) 20.31 17.86 16.39 15.59 17.52 Payout (%) 8.9 11.43 12.04 12.6 12.69 PBIDT/Sales(%) 90.26 89.1 87.97 88.13 88.2 Sales/Net Assets 0.11 0.09 0.1 0.1 0.09 PBDIT/Net Assets 0.1 0.08 0.09 0.09 0.08 PAT/PBIDT(%) 17.99 15.53 12.98 12.52 13.73 Net Assets/Net Worth 10.74 12.17 12.01 11.64 13.24 ROE(%) 20.31 17.86 16.39 15.59 17.52 Price Chart Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.