PNB Housing Finance is the fifth largest housing finance company (HFC) in India by the size of loan portfolio, which was incorporated on 11 November 1988, as a wholly-owned subsidiary by Punjab National Bank. In December 2009, the company offloaded 26% stake to the Destimoney Enterprises (DEL). DEL subscribed to additional equity shares, raising its stake to 49% of the equity share capital of the company.
The company became the fifth largest HFC in India by loan portfolio as of September 2015, with the second largest amount of deposits in an HFC in India as of March 2015. The company offers housing loans as well as non-housing loans such as loans against property (LAP), non-residential premises loans (NRPL), lease rental discounting (LRD), and corporate term loans (CTL).
The target customers for housing loans are 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. The company also offers housing loans in the form of construction finance loans to real estate developers of residential housing.
The loan portfolio of the company has grown at a CAGR of 62% from Rs 3969.66 crore at end March 2012 to Rs 27177.27 crore at end March 2016. The loan portfolio has further accelerated to Rs 30900.64 crore at end June 2016. Despite the strong loan growth, the company has maintained the loan mix stable, exhibiting healthy growth across segments. The company plans to maintain the current retail focused loan mix even post IPO.
The housing loans constituted 70.31% of total loan portfolio and retail housing loans constituted 86.52% of total housing loan portfolio at end June 2016. The average retail housing loans ticket size stands at Rs 31.8 lakh, with a weighted average loan-to-value ratio (LTV ratio) of 66.10%.
The non-housing loans constituted 29.69% of total loan portfolio and retail non-housing loans accounted for 78.27% of total non-housing loan portfolio. The average loan size (at origination) of retail non-housing loans was Rs 56.8 lakh, with a weighted average LTV ratio of 46.49%. The company expects the ticket size to decline going forward, with the shift to tier II and III cities.
The company has a network of 47 branches across the northern, western and southern regions of India and 16 processing hubs with central support office (CSO) in New Delhi. Its distribution network included over 7,110 channel partners across different locations in India as of June 2016, including in-house sales team as well as external direct marketing associates (DMAs), deposit brokers and national aggregator relationships with reputed brands.
The total borrowings of the company stood at Rs 30045.95 crore, with the average cost of borrowings at 8.65%. The company has access to diverse sources of liquidity. The share of borrowings from banks and financial institutions, domestic debt markets, deposits and the NHB stood at 12.40%, 52.82%, 24.75% and 10.04% of outstanding borrowings at end June 2016. Outstanding deposits grew at a CAGR of 110.41% from Rs 363.07 crore as of March 2012 to Rs 7115.85 crore as of March 2016. Outstanding deposits have moved up to Rs 7435.9 crore at end June 2016.
Gross NPAs, as a percentage of the total loan portfolio, were 0.20% as of March 2015, which was the lowest among the leading HFCs in India. GNPA ratio has remained negligible at 0.27% as of June 2016.
The Capital to Risk (Weighted) Assets Ratio (CRAR) and Tier I Capital CRAR were 13.04% and 8.40% (against regulatory requirement of 12% and 6%) at end June 2016.
The Net Interest Margins (NIM) have been hovering in a narrow range of 2.9-3%. The NIMs stood at 2.98% in FY2016.
The RoE (return on equity) of the company has been healthy at 17.6% in FY2016. However, the RoA (return on assets) was moderate 1.35% owing to high leverage. The company has the higher leverage ratio of 15 times against the industry level of around 8 times.
The Offer and the Objects
The issue comprises fresh offer of Rs 3000 crore which at lower price band of Rs 750 per share works out to issue size of 4.00 crore shares and at higher price band of Rs 775 per share, works out to an issue size of 3.78 crore shares. Post-IPO, the promoter Punjab National Bank (PNB)s stake will reduce to 39.1% from existing 51%.
The minimum bid lot is 19 equity shares and in multiples of 19 equity shares thereafter. The issue is to be made through a book building process and will open on 25 October 2016 and will close on 27 October 2016.
The issue includes a reservation of 2.5 lakh equity shares for subscription by eligible employees (not exceeding 5% of post-issue paid up equity share capital) at a discount of Rs 75 per share to the issue price.
The company intends to utilize the net proceeds towards augmenting capital base to meet future capital requirements and general corporate purpose. The company has to strengthen its capital base to support business and assets growth, primarily in housing and non-housing segment, and to ensure compliance with the NHB Directions. The proceeds are expected to be sufficient to satisfy companys Tier-I capital requirements for the FY2017 and FY2018.
Strengths
The company has emerged as the fifth largest HFC in India by loan portfolio with the second largest amount of deposits in an HFC in India.
It is the fastest growing HFC among the leading HFCs in India
The company has a strong distribution network, with deep penetration of key Indian urban centers. As of June, 2016, the company has 47 branches supported by 16 processing hubs, three co-located zonal offices. Region-wise, 39.67% of the loan portfolio was originated from northern region, 30.40% from the western and 29.93% from the southern regions.
The company has scalable operating model, which is expected to enable expanding at lower incremental costs to drive profitability. A streamlined operational structure has resulted in improved turn-around-time (TAT) for processing a loan application until loan sanction. The cost-to-income ratio improved to 25.03% in Q1FY2017 from 25.7% in FY2016 and 31.4% in FY2015, despite opening of additional branches. While currently the cost-to-income ratio is relatively high and as a result return ratio is relatively lower (compared to other HFCs), scope for operational leverage is good and good future growth can yield relatively higher profitability and increase the return ratios faster.
The company has access to varied and cost-effective funding sources which included term loans from banks and financial institutions, NCDs, deposits, ECBs, commercial paper, refinancing from NHB and unsecured, subordinated debt. Lenders include 31 banks, 10 mutual funds, 20 insurance companies, 545 provident funds and 153 pension funds, among others. The company has been reducing the cost of borrowing to 8.65% in Q1FY2017 from 8.67% in FY2016, 9.26% in FY2015 and 9.3% in FY2014.
The asset quality of the company is robust with GNPA ratio at 0.27% and NNPA ratio at 0.19% at end June 2016.
Weaknesses and concerns
The business and operations of the company significantly depend on parent and promoter PNB. Following the issue, the company will cease to be a subsidiary of PNB and may not be able to enjoy the benefits received from being a subsidiary of PNB that enjoyed in the past. There can also be conflicts of interest between PNB and PNB Housing Finance.
The company uses the brand PNB of promoter and is exposed to the risk that PNB may prevent the company from using it in the event its shareholding falls below 30%.
Any significant adverse changes by the government, the RBI or the NHB in their policy regarding regulations of the housing industry and/or housing finance industry or any adverse change in the tax incentives that the government currently provides to HFCs and its customers may have an adverse effect on business, financial condition and results of operations.
The company is exposed to fluctuations in real estate prices and any negative events affecting the real estate sector.
Business and financial performance may be adversely affected by volatility in interest rates.
The non-housing loans constituted 29.69% of total loan portfolio. The risks in no-housing loans are generally higher than housing loans.
The companys growth rates in the recent past have been very high and will be difficult to sustain. Moreover, high growth rates in the finance industry sometimes lead to pressure on asset quality in future.
Valuation
PNB Housing Finances EPS for FY2016 on post-issue equity works out to Rs 19.78. At the lower price band of Rs 750 per equity share of Rs 10 face value P/E works out to 37.9 times of FY2016 EPS of Rs 19.78 (on post-IPO equity). At the upper band of Rs 775 per equity share, P/E works out to 39.2 times of FY2016 EPS of Rs 19.78 (on post-IPO equity).
The book value of PNB Housing Finance is Rs 176.52 as of June 2016. Post-issue, the book value works out to Rs 313.95 per share at the lower band of issue price of 750 and Rs 316.39 per share at the upper band of issue price of Rs 775. The adjusted book value, net of net non-performing assets, at the upper band of issue price of Rs 775 works out to Rs 312.9 per share.
P/BV (post-issue) for PNB Housing Finance works out to 2.45 times and P/Adj BV at 2.48 times at the upper price band. Among the comparable peers, Gruh Finance is trading at P/BV of 13.7 times, Can Fin Homes is trading at P/BV of 5.3 times, Repco Home Finance is trading at P/BV of 4.9 times, HDFC is trading at P/BV of 4.0 times, Indiabulls Housing Finance is trading at P/BV of 3.4 times, LIC Housing Finance is trading at P/BV of 3.2 times and Dewan Housing Finance is trading at P/BV of 1.9 times. All BVs are as of June 2016.
At the price band of Rs 775 per share, PNB Housing Finance is offered at a P/E of 39.2 times (FY 2016 EPS on post-issue equity). Among the comparable peers, Gruh Finance trades at P/E (on EPS for FY2016) of 50.5 times, Repco Home Finance at 31.7, Can Fin Homes at 31.1, HDFC at 21.1, LIC Housing Finance at 18.4, Indiabulls Housing Finance at 18.4 and Dewan Housing Finance at 11.9.
| PNB Housing Finance: Issue highlights |
| For Fresh Issue Offer size (in no of shares ) | |
| - On lower price band | 4.00 crore |
| - On upper price band | 3.78 crore |
| Offer size (in Rs crore ) | 3000 |
| Price band (Rs) | 750-775 |
| Post issue capital (Rs crore) | |
| - On upper price band | 165.63 |
| - On lower price band | 166.92 |
| Post-issue promoter & Group shareholding (%) | 39.1 |
| Issue open date | 25/10/2016 |
| Issue close date | 27/10/2016 |
| Listing | BSE,NSE |
| Rating | 49/100 |
| PNB Housing Finance: Financials |
| 1203 (12) | 1303 (12) | 1403 (12) | 1503 (12) | 1603 (12) | 1606 (03) |
| Income from operations | 461.00 | 666.30 | 1120.32 | 1780.38 | 2699.54 | 863.44 |
| Other Income | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Income | 461.00 | 666.30 | 1120.32 | 1780.38 | 2699.54 | 863.44 |
| Interest Expenses | 314.40 | 461.95 | 801.60 | 1264.84 | 1860.29 | 607.99 |
| Other expenses | 34.49 | 62.17 | 106.00 | 174.70 | 238.81 | 75.62 |
| Gross profit | 112.12 | 142.19 | 212.73 | 340.84 | 600.45 | 179.83 |
| Depreciation | 0.22 | 0.97 | 3.31 | 8.28 | 15.04 | 4.47 |
| Profit before tax and Provisions | 111.89 | 141.21 | 209.42 | 332.56 | 585.41 | 175.36 |
| Provisions and write off | 6.28 | 12.47 | 30.43 | 38.11 | 81.13 | 27.98 |
| Profit before tax | 105.62 | 128.74 | 178.98 | 294.45 | 504.28 | 147.38 |
| Provision for tax | 28.17 | 35.92 | 49.29 | 100.38 | 176.71 | 51.35 |
| PAT | 77.45 | 92.82 | 129.70 | 194.07 | 327.57 | 96.03 |
| EPS*(Rs) | 4.68 | 5.60 | 7.83 | 11.72 | 19.78 | 23.19 |
* Annualized on post-issue equity of Rs 165.63 crore. Face Value: Rs 10
Source: Capitaline Corporate Database |
| Housing Finance Companies - Comparison |
| Can Fin Homes | Dewan Housing Fin | GRUH Finance | H D F C | Indiabulls Housing Fin. | LIC Housing Finance | Repco Home Fin | PNB Housing Fin |
| Equity (Rs crore) | 26.62 | 291.80 | 72.78 | 316.80 | 84.39 | 100.93 | 62.55 | 165.63 |
| Face Value (Rs) | 10 | 10 | 2 | 2 | 2 | 2 | 10 | 10 |
| CMP (Rs) (20 Oct 2016) | 1838 | 330 | 338 | 1360 | 872 | 609 | 782 | 775 |
| M-Cap (Rs crore) | 4894 | 10333 | 12298 | 215414 | 36800 | 30731 | 4889 | 12837 |
| PE (times) | 31.1 | 11.9 | 50.5 | 21.1 | 15.7 | 18.4 | 31.7 | 39.2 |
| P/BV (times) | 5.3 | 1.9 | 13.7 | 4.0 | 3.4 | 3.2 | 4.9 | 2.4 |
| Book Value / share (Rs) | 348.5 | 174.6 | 24.6 | 338.5 | 259.7 | 189.3 | 159.0 | 316.4 |
| EPS (FY2016) | 59.0 | 27.7 | 6.7 | 64.3 | 55.7 | 33.0 | 24.6 | 19.8 |
| | | | | | | | |
| 201606 | 201606 | 201606 | 201606 | 201606 | 201606 | 201606 | 201606 |
| TTM Total Income | 1084 | 7857 | 1275 | 53257 | 9226 | 12503 | 882 | 2700 |
| % Change | 33 | 22 | 20 | 10 | 27 | 15 | 27 | 52 |
| TTM RPAT | 157 | 749 | 244 | 10190 | 2345 | 1668 | 154 | 328 |
| % Change | 82 | 17 | 20 | 16 | 23 | 19 | 23 | 69 |
| CRAR % | 19.5 | 17.5 | 17.8 | 16.5 | 23.4 | 17.0 | 20.1 | 13.0 |
| NIM % | 3.4 | 2.9 | 4.0 | 3.8 | 3.2 | 2.6 | 4.3 | 2.7 |
| GNPA% | 0.2 | 1.0 | 0.6 | 0.8 | 0.8 | 0.6 | 2.2 | 0.3 |
| NNPA% | 0.0 | 0.0 | 0.3 | - | 0.4 | 0.3 | 1.2 | 0.2 |
| Loan Book | 11183 | 63647 | 11544 | 265731 | 71026 | 123681 | 7959 | 30901 |
| % Change | 28 | 18 | 24 | 15 | 31 | 15 | 25 | 62 |
| PNB Housing Finance: Operational and financial parameters |
| 1403 (12) | 1503 (12) | 1603 (12) | 1606 (03) |
| Revenue from operations (Rs crore) | 1120.32 | 1780.38 | 2699.54 | 863.44 |
| Profit after tax (Rs crore) | 129.70 | 194.07 | 327.57 | 96.03 |
| Net interest income (Rs crore) | 275.35 | 441.57 | 707.98 | 209.21 |
| Net interest margin | 2.93% | 2.94% | 2.98% | 2.71% |
| Average yield | 11.45% | 11.37% | 10.80% | 10.58% |
| Average cost of borrowings | 9.30% | 9.26% | 8.67% | 8.65% |
| Spread | 2.15% | 2.11% | 2.13% | 1.93% |
| Cost to income ratio | 30.14% | 31.39% | 25.69% | 25.03% |
| Return on average Assets | 1.35% | 1.27% | 1.35% | 1.19% |
| Return on equity | 16.71% | 15.45% | 17.60% | 17.52% |
| Gross NPAs to total loan portfolio | 0.32% | 0.20% | 0.22% | 0.27% |
| Provisioning coverage ratio | 51.47% | 66.82% | 36.25% | 30.77% |
| Loan book (Rs crore) | 10591.21 | 16819.32 | 27177.27 | 30900.64 |
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