PNB Housing Fin - Fast Growing HFC


It might as well lose its PNB identity. The new owner will have to be one with an existing bankng or HFC arm, if not will have to create a new identity altogether. The PNB name is widely known with instant brand recall.

(Julian) #491

How about National Housing Finance Corporation (NHFC) or Kotak Housing Finance Corporation (KHFC)? As per SEBI regulations, open offer will have to be made, if the acquisition is above 25%. At these prices, any strategic investor would be interested to buy in full, the fastest growing large HFC in the country, with decades of growth ahead, (as described by Sanjaya Gupta in Q4 2017 conference call) with such scale of opportunity. The management’s hunger for growth is clearly evident in its plans to get equity capital to the tune of 8000 crores (by which they will be able to take 1 lakh crore of debt). Sanjaya Gupta has said that they will like to take equity once every three years showing his hunger for growth. Extrapolating this, we are talking about a 10 lakh crore market cap in 10 years, easily making it the second or third biggest company in India after HDFC. Vaidyanathan of Capital First in a recent interview said that Housing Finance is actually 50% of the indian banking business and that’s where they would like to concentrate on.
Disclosure: Heavily invested

(Yogesh Sane) #492

Businessmen in India prefer to build businesses from scratch than to buy them from market unless they are selling at distressed valuation or there are some synergies like cost optimization, cross-selling opportunities, new markets, new products, patents, key personnel, brands etc. I don’t see any of that can be a big factor for a potential acquirer in PNB housing.

Cultural mismatch is a big issue in any acquisition in India as businesses built from scratch reflects the DNA of the promoter and fitting an outside business into an existing group is like doing a major transplant operation.

Both Piramal and Bajaj Finance are building home loan businesses from scratch when they have the financial muscle to buy a readymade business like PNB Housing or Canfin. Valuation at which their stock is selling, such an acquisition will be immediately accretive but they are building a business from zero as it cost them just the book value rather pay 3-4 times book value for an existing business. Costs exceeds benefits.

Growth in housing finance companies is a result of industry tailwinds so even a new player will grow. Industry is large enough to have more players. Lot of business comes though DSAs so a new player might use an existing pool of agents to get started and then slowly switch to on-roll employees.

Just some musings about the industry.

(Julian) #493

The experience of Aspire Housing finance shows that developing the business from scratch is not such an easy job. The top 5 housing finance companies have already cornered 85% of the market and with their strong credit ratings and advantages of scale it is difficult for a new player to break into the market. PNB housing will still add value to an acquirer like Kotak. That 51% is going to be sold at one go is an indication that a buyer is ready. And dont forget that it took 30 years for PNB Housing to reach the position of the 5th largest Housing Finance company.

(Ronak) #494

Arjun, u are correct… Just to elucidate for the benefit of members, let’s logically think of when do companies have higher nims

Nim = yields (-) [ int paid / Avg Int. Earning Assets ]

So Logically speaking

  1. High Yields will increase NIM’s. Meaning, companies having higher exposure to High yielding Non Housing Finance segment, like construction finance, LAP, LRD etc will tend to have higher yields and therefore higher NIM’s. Also, loans to Non Salaried segment are higher yields.
    (Repco Home, DHFL come to mind). Surprising that PNB HF has a very high exposure to Non Housing Finance segment and Non salaried segment but has very low overall yields.
    That is one of the reason why street finds their portfolio risky. However, reported numbers so far have shown no stress.

  2. Lower Int. paid will result in Higher Yields. This has to do with 2 things
    a. Lower Absolute borrowings - Companies which have a high share of Retained Earnings and Reserves will prefer deploying them first before resorting to borrowings. Hence, the companies which have been in business and have grown stupendously will tend to have high Reserves and retained earnings and therefore have lower absolute borrowing (HDFC). Pls note that fast growing companies will resort to higher borrowings to meet their loan growth and will therefore have a high absolute borrowing (PNB HF)

  3. Lower cost of borrowing will also result in Lower Absolute Int.
    Here the credit ratings have a major role to play. HDFC has highest safety rating from all rating agencies. PNB HF is still at AA+

  4. Higher Int. earning assets.
    This is the key. How effectively one can park the funds into int. earning assets. What % of total earning assets are earning int.
    Companies in growth phase will have to invest in setting up branches, locations, Furniture and Fixtrues, IT Systems which will involve capex which are not generating int. Once the branches mature and business starts pouring in - incremental investment in these assets fall down and int, earning assets increase.

PNB HF has setup lot of branches and hubs in the recent past. It’s last concall still speaks of adding 1 lakh sqft of office space in FY 19. So, it’s investments into these F. assets will be high, pressurizing NIM’s. HDFC has a well established setup and incremental branch expansion is not so aggressive. Hence, higher portion of Int. generating assets. Mind you, HDFC has also other int. like HDFC Bank, where it recently added exposure, which are not int. generating assets. It only pays dividend, (Though markets capture it in it’s valuation after giving some holding co discount).

(Julian) #495

India’s biggest ever quarterly bank profit for Punjab National Bank in Q2 2018 on sale of PNB Housing stake.


the only NBFC which can absorb this elephant is Bajaj Fin without diluting its promoter holding a lot. Kotak can do it if they want a faster and efficient way to comply promoter holding norms.