PNB Housing Fin - Fast Growing HFC

Appears like you have misunderstood me. My question is not about my conviction on PNB Hsg or its quality.

I do differentate the the three companies. In fact I don’t even equate CFH with PNB Hsg as their customer segmentation appear to be different. Both of them can co-exist on the same area without biting into each other. That is my view.

But it is about judging a NBFC solely based on RoA at the exclusion of RoE.

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The single point agenda is to “buy low, sell high”. That leads to the question: How do we identify the lows and highs? I think that the low is when the price of the asset/share is less than its value. Similarly, high is when the price is higher than the value. Yes, it is simple.

The key here is arriving at the value of the asset/share. Comparison with other assets (relative valuation using ratios like RoA/RoE), looking at macroeconomic variables, etc. are the thumb rules that people use to arrive at the value of the asset/share. If you like to hold a concentrated portfolio, then you can study the stocks in detail and value them. Valuing the asset directly by quantifying the expected cashflows and cost of capital is superior to relative valuation. I consider valuing the company by projecting the cashflows for the expected high growth period (5 to 10 years) and taking a terminal value after this expected high growth period to be superior to relative valuation. You do not need to bother much about the thumb rules once you have done the hard part of valuing the company. I think that you have already done the hard part of delving into the details and valuing the companies.

There may not be exact comparables of companies to rely on relative valuations. Also, when we are comparing similar looking companies to arrive at decisions, we are intuitively thinking about a pair strategy - buying the company that we think is trading cheap and selling the other that is trading expensive. However, in reality, we do not execute a pair strategy. Consider a scenario where we invested in the company that was trading at cheaper valuations and ignored the company that was expensive but offered the same value. Afterwards, the industry/market went through a bad phase and the share prices declined. We would lose money even if the value of the company that we did not invest in declined more than the company that we invested in. Relative valuation in an industry does not give insights about the valuation levels of the overall industry. However, if we value the company directly, then we are less prone to such problems. In short, I consider relative valuation mostly lazy investing.

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Well PNB HFL mgt has provided some clarifications on the aspersions being cast upon the functioning and management of PNB HFC. This calirification should answer the doubts for people who were commenting “baap jaisa beta”.
In no 2 ways they have clearly stated that other than sharing a common brand with PNB it has an arm’s length relationship with PNB. PNB Housing Finance limted network,data center, branch network, customers as well as raising of financial resources is indpendent and no way related to PNB.

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PNB cannot reduce its stake below 20% before Nov 2019.

This post by Yogesh has the answer to my question. Thanks to everyone who provided their perspective.

Good Insight in Jeffferies Report , How there is Near-Term Headwinds for plain vanilla Housing Finance Companies and specially which have higher share of salaried Housing Loans due to increasing Bond yield.

It is actually good strategy of PNB Housing Finance managment, that they diversified asset portfolio (Housing Fin,LAP,LRD,Construction fianncing) which will help them to maintain spread and NIM when interest cycle is inching up. Same was echoed in Indiabulls Housing Fin Q3 Concall

Also as per that report , PNB Housing Finance Ltd. ,with a higher share of non-salaried loans at nearly 40 percent may be less impacted due to this bond yield rise.

But have to watch the coupon rate of upcoming IFC 400M $ masala bond to get an idea about the future spread and NIM

Discl: Invested

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Well some more developments to counter “Bap Jaisa Beta” Crisil and ICRA ratings for PNB housing remains unchanged.


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It seems Rising Bond yield will affect the growth .

Bond is not only the option to raise capital for PNB Housing finance. There are other options also like Fixed deposits ,Banks Term Loans,ECBs, NHB Refinance etc . Deposits helps alot during this type of situation.

Discl:Invested

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Management of PNBHF has guided for borrowing mix in following nature

Deposits 25%, NCD 45%, CP 15-18 %, Banks 10%, NHB 5%.

Management has also indicated the spreads to remain between 195 to 210 bps.

The key driver of improvement in ROA going forward should be cost to income ratio.

About the parentage of PNB and its impact on PNB HF, one only needs to listen to the concall and hear the CEO Sanjay Gupta to get an idea about the kind of management running the business. He comes across as a veteran in the field who knows his business.

Sometimes opportunities come amidst adversities and those who seize these opportunities can gain a lot.

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Thanks @hitesh 2710.I believe NIM of pnb housing is around 3%.Therefore how is spread lower than nim.i presume both r same as per definition

Just to add to Hitesh Bhai’s words, the processing hubs which got added recently are at an utilisation of 40-45%. In an year’s time that would nearly double. Similarly the office space has increased by nearly 50% from the start of the year. So when the optimum use of these happen in the coming days, the CoI will start to improve.

As for the loans nearly 73% of the loans are variable. When the borrowing cost increases the same will be passed on keeping the spread.

The NIM might have peaked or may have one quarter more in the rising interest scenario.

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NIM and Spread are completely different financial parameters.

NIM =(interest income-interest expense)/interest earning assets
whereas spread =(interest income/interest-earning assets)-(interest expense/interest-bearing liabilities)

Now suppose if
interest income = Rs 150 cr
interest expense - Rs 80 cr
interest earning assets- Rs 2250 cr
interest bearing liabilities -Rs 2000 cr

NIM=(150-80)/2250 = 3.11%
whereas Spread= (150/2250)-(80/2000) =2.66%

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May thanks for detailed explanation​

Thanks. For my understanding what does Spread represents in terms of message and NIM. Both the terms are frequently used in analysing HFC counters

First read this article
https://blogs.timesofindia.indiatimes.com/minorityview/why-does-indian-banks-have-lower-profits-despite-high-spreads-between-deposit-and-credit-rates/
And then this
http://www.times.mw/why-interest-rate-spread-matters/

Though I think definition wise spread is clearly highlighted by @amitayu , importance and it’s interpretation would make sense once analyzed along with other metric like one case highlighted above

@amitayu can throw more light.

I like to use Spread and capitalization levels, rather than NIM. Spread is the difference in borrowing and lending RATES, and hence, not affected mechanically by Equity/Debt ratio of the lender. But,

NIM = (Interest Income – Interest Expense)/Asset
= Lending Rate – (Borrowing Rate * Debt)/Asset, since Interest Expense = Borrowing Rate * Debt
= Lending Rate – Borrowing Rate * (1 - Equity/Asset), since Debt = Asset – Equity
= (Lending Rate – Borrowing Rate) + Borrowing Rate * (Equity/Asset)
= Spread + Borrowing Rate * (Equity/Asset)

On writing the basic equations, it looks like the difference between Spread and NII depends on not only the capitalization levels but also the Borrowing Rate. When the spread and Equity/Asset are same for two Lenders, higher a Borrowing Rate mechanically results in a higher NIM.

For example, consider two lenders A and B with same Equity/Assets, Compared to B, A lends to somewhat riskier borrowers. As a result, A has both lending and borrowing rates higher by 1%. To summarize, A and B have the same spread and same capitalization levels but A is in riskier business. In this example, A will have higher NIM, because it has higher borrowing rate. I would rather prefer to invest in B, while NIM will point to A. (You can replace A and B with Repco and Gruh three years earlier.)

NIM is not used in the US; it looks more like an Indian innovation.

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Spread is more meaningful and important as NIM is dependent on Tier-1 Capital and Gearing Ratio which can be altered

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Latest PNB HF Presentation:

Details ALM, NIM, Spread etc. There is a gradual shift to Non-Housing Loans as well as increasing pie of non-salaried loans (Self Employed & Corporate) in loan book segmentation.

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The scrip is being hammered continuously. Apart from having an unfortunate parent- Is there something else gone wrong which market knows. Invested at 1500 levels.