ValuePickr Forum

PNB Gilts Ltd. : A 50 cent Dollar?

Hello Mohit,

Thank You for starting this thread and sharing the information. Since it has been a while and assuming you still follow the stock, I would like to have your views on the stock as of now.
Do you think the market over-reacted to the results?
Also, do you think that too much importance is given to the RBI rate cuts and assumed it’s survival depends just on those cuts?

Disc:I am invested and do not have a very good understanding of the technicals.

Thanks,
Kavish

Dear Kavish,

I do continue to hold on to the stock.

In reference to your queries, please note :

  1. The market overreacts to everything. Ignore it. Just focus on finding
    the intrinsic value and then don’t worry about it.

  2. It’s income stream does actually depend on rate cuts and falling yields.
    The MD of the Company himself says that their earnings “sink or swim” with
    interest rates. That being said, the important thing is that even in a
    hostile interest rate environments (that is rising yields) in the past -
    the Company has not lost money in the last 10 years.

*Now, why do I continue holding? Only and only one reason - PNB has been
open about selling their stake in the company this year. And they fact of
the matter is that they seriously need to. They have said it openly. If
that is the case, I would expect nothing less than 70 bucks per share on
the table. They have 50 bucks of HTM securities (think of it as money they
have accumulated in the bank over the years). Plus average earning power of
2 rupees at a multiple of 10. *

I hope that answers your query.

Warmest regards,

2 Likes

Dear Mohit,

Thank you for writing back and I appreciate your clear views. That does answer my query.

Thanks again,
Kavish

Dear Mohit, Appreciate if you could share your views on the Q1 results. I feel, the company has done very well, as the Q1 revenue is the 3rd highest which it could achieve in the past 34 quarters.

Q1 interest costs at Rs. 77.79 crores seem to be disproportionately higher when compared to the interest costs of Q2 '17 (64.26 crores) and Q3 '17 (61.27 crores). Will you be able to throw some light on why it is so?

Also, the Employee Benefits Expenses have increased significantly in Q1. Does it indicate that, the company is foreseeing increased business and recruiting new employees?

Also, if the bond yields more or less stay at the current low levels, can we expect a better Q2, even if the interest rates are not reduced in August?

Hi.

My answer continues to remain the same. I am only holding for the asset
value (About Rs. 50 in HTM Gilts that are pretty much cash in the bank that
they are not using for their operations) plus their average cash flows per
year.

Second, they are planning a stake sale this year - not confirmed but
probable.

I don’t even look at the quarterly earnings in such cases - let alone in
the details you have gone into.

Regards,

1 Like

Here are my notes about the company.

Business:
PNB Gilts is a dealer of government securities in primary and secondary markets. It purchases debt securities directly from government as well as secondary market sellers and sells these securities to buyers of government debt. It holds these securities on its own book while it looks for a buyer. It has a securities portfolio of about 4,327 Cr as of March 2017 funded by short term loans of 3,514 Cr and equity of about 900 Cr.

Analysis of Income Statement.

It has two primary sources of income. Net interest income from its securities portfolio and trading income. Table below shows break up of income and expenses for last 10 years.

Source: Capitaline, RBI.

Note: Shaded areas for 2017 are estimates.

As can be seen from the table above, net interest income is stable as it has managed to keep its funding cost below its yield on its portfolio. Trading income is the volatile part of the revenue. When interest rates are rising, its portfolio looses it value before it can be sold to a buyer so company incurs losses. When interest rates are dropping, its portfolio rises in value so it earns a positive trading income.

Prior to 2013, company has incurred trading losses even when 10 Year GSec yields were dropping. Since 2013, company has earned trading profits when 10 Year GSec yields were dropping with the exception of 2015-16 when company lost 17 Cr even when benchmark yields dropped from 7.8% to 7.4%. company cited volatile rate environment for the losses. Chart below shows movement of 10 Year GSec yields for last 10 years. Chart does show that yields were volatile during 2015-16.

Source : RBI

Analysis of Balance Sheet.

Source: Capitaline.

Assets on the balance sheet consist of government securities so there is no credit risk. Yields on these assets are close to yields on 10 Yr Benchmark Gsec. Assets are funded by short term debt with low funding costs enabling company to earn a spread of about 1.7% in 2016-17. This spread is much lower than banks and NBFCs. This has resulted in low return on assets and low return on equity. Company is also conservatively leveraged with leverage of only 5 as of March 2017.

Valuation

Net Interest Income is the stable part of the income while trading income swings from gains to losses based on interest rate movement. Company’s ROE has averaged about 12% over last 5 years which is much lower than other financial companies. On the plus side, there is no risk of NPAs. Company is getting better at generating trading gains over the years and since RBI is now in an easing cycle, we can expect company to earn some trading profits in next 1 to 2 years. Government deficits are expected to be in check so yields on government debt are unlikely to rise sharply in next 1 to 2 years. Rising book value should enable company to grow its portfolio and increase its NII in future.

Considering all these factors, company should be trading at a small discount (10%) to its current (June 2017) book value of 925 Cr. That works out to be about 46 Rs/share against CMP of 53 Rs/share.

This is also not a typical buy and hold stock. Since it is no longer trading at a big discount to book value, one should invest only as a leveraged play on interest rates.

Disc: No position.

10 Likes

there is no trigger for the valuation gap to close.

Is there some takeover on the anvil?

Yogesh. A big thank you for a very detailed analysis. I learnt a couple of
new things. I agree with you - in normal circumstances - there is no juice
left after the Book Value for a company like this.

Karthik. Yes. There is expectation of a stake sale by PNB - the management
themselves have expressed their desire to do so.

So essentially, that is what I am holding on for. Stake sale will
definitely happen at a higher valuation. Plus the interest cycle is as such
that we can expect good quarterly results and hope that the market
overreacts.

Sensible-investing wise, there is little to nothing left on the table.

Just a fool waiting for the “greater fool”.

Regards

Mohit

1 Like

Once again, the Company is expressing their desire to sell their stake in
PNB Gilts.

Warmest regards,

People who follow this stock…does pnb issue has any impact on this stock ? or like pnb housing they are two different business and doesnt impact each other or share anything apart from the name ?

1 Like

Hamed.

If anything, the chances of a stake sale for PNB Gilts went up 10 fold
because of this scam. PNB needs the cash.

I cannot imagine a sale below 50 bucks a share.

The scam won’t hurt the Company in any negative way.

Regards

1 Like

The Company seems to be at interesting point now:
(1) possibility of rising interest rates spells some trouble for the business prospects, (2) cought in PNB crossfire and/or anticipated losses on its Gilts holding, share price touched 52Wk Lo today.
Though BV is close to Rs.50, at 0.7X p/b also, this opportunity may not be worthwhile- unless divestment at a good premium to CMP provides good bump-up.
Current div yield may not be of much help, as after a blockbuster FY17, FY18 seems to be back to normal, means dividend may be back to Rs.1/sh range.
Disc: no holding, watching the counter…

1 Like

Hi, Is anyone tracking this company? Company has declared results last week. Profit has considerably increased based on fall in interest rates. Company has declared a dividend of Rs.3/- (subject to approval) which translates into a yield of almost 9%. Discount of cmp to book value also seems to be pretty high. Views invited
Disc: Invested 3% of pf

1 Like

Amazing results from the company as expected. Quarterly EPS of 15.8Rs for against last year’s full year EPS of Rs.10.35. At Cmp the discount to book value seems really huge!

pnbgiltsQ1.pdf (2.7 MB)

I’ve been tracking pnb gilts forever. And I’ve never been able to quantify it’s business. One quarter it’s EPS is huge and the next it falls drastically. If(big if) this is a turnaround story then the returns on this share with dividend yield alone will be fantastic. However, I’m going to look into this in more detail again. There’s always reasons behind its jump in EPS (lower interest rates for eg) and they never turn out to be sustainable. Good buy at around 20 rs but at CMP it could just be a value eater. Again, need to do a deep dive again to check if this is a turnaround but in the business they are in it’s usually just a bumper quarter and then a revert back to normal

They are levered to market bond yields. Since the yields went down they had a fabulous quarter. Gains from capital appreciation was the largest in many quarters. Tough to repeat this performance.

2 Likes

PNB Gilts - a table-thumping, deep value Buy with high dividend yield

  1. PNB Gilts Ltd is India’s only listed, pure-play primary dealer (licensed activity by RBI) whose principal business is to hold and trade in Indian Govt securities
  2. It earns money through interest on g-secs and bonds and through profits made on trading in g-secs / bonds held by it
  3. It owns g-secs of roughly INR 10,000-11,000 cr out of its total investments of roughly 14,000 cr
  4. It has borrowings of roughly 12,000 cr (largely from RBI - LAF and REPO borrowings and some from banks including PNB)
  5. The current net worth of the co is roughly 1,500 cr and its m-cap is roughly 750 cr (0.50x Trailing Net Worth)
  6. The business is in a sweet spot and is benefiting on 2 accounts - reduction in interest rates (ie Repo rate - currently 4%) resulting in substantial and material reduction in borrowing costs and increase in g-sec prices resulting in substantial trading profit
  7. Management is professional and independent from PNB
  8. Borrowing franchise is solid; the co recently raised unsecured CPs at 3.45%
  9. Going forward, even if interest rates were to start rising again, PNB Gilts would be able to offset increase in borrowing cost (at Repo Rate) by increased interest income on g-secs (Bond yields are usually higher than the prevailing repo rate)
  10. In Q1FY21, the co earned 210 cr interest income and had borrowing costs of 103 cr. Over and above the co earned 280 cr trading profit (realised and unrealised), thus giving it a PAT of 285 cr for the quarter; to put this into perspective, for full year FY20 PAT was 186 cr
  11. Even assuming zero trading profit and rising interest rates (both highly unlikely), the co can easily return PAT of 70 cr per quarter only through net interest income after accounting for operating costs of 30-40 cr; Thus even at 280 cr PAT for the year, the co currently trades at a P/E of 2.5-3.0x
  12. Why buy now? From 2017-2019 the co’s net worth was stuck between 850 cr - 900 cr, which prevented it from borrowing more and hence investing in more g-secs; now that its net worth is 1,500 cr (and growing) a virtuous cycle of compounding and growth has begun - the co will be able to borrow more from RBI (at the Repo Rate) and from others and hence invest in more g-secs and other bonds and hence earn more interest (at at least the G-sec rate)
  13. The net worth (and hence cash flows) will therefore compound rapidly and sustainably and given the low risk nature of the business, the price would have to catch up with the net worth at some point
  14. The co is now also handsomely rewarding shareholders with higher dividend - Rs 3 dividend for FY20 which translated to a yield of 7.5% at CMP (9% yield on date of announcement)
  15. With the brilliant Q1 performance and therefore FY21, shareholders can hope for even more handsome rewards in years to come
  16. Risk - sudden and materially adverse movement in interest rates. Would like to stress on the words sudden and material because even in times of adversity, management has time and again demonstrated risk management, capital preservation and earnings capability
  17. Disclosure - invested. However, still buying
3 Likes

Second interim dividend of Rs 4 per share declared,huge jump in PAT due to trading gains.

UPDATED COMMENTARY

PNB Gilts - a table-thumping, deep value Buy with high dividend yield

  • PNB Gilts Ltd is India’s only listed, pure-play primary dealer (licensed activity by RBI) whose principal business is to hold and trade in Indian Govt securities
  • It earns money through interest on g-secs and bonds and through profits made on trading in g-secs / bonds held by it
  • It owns g-secs of roughly INR 12,000 cr out of its total investments of roughly 15,000 cr
  • It has borrowings of roughly 13,500 cr (largely from RBI - LAF and REPO borrowings and some from banks including PNB)
  • The current net worth of the co is roughly 1,500 cr and its m-cap is roughly 1,000 cr (0.67x Trailing Book Value)
  • The business is in a sweet spot and is benefitting on 2 accounts - low interest rates (ie Repo rate - currently 4% with very little scope for increase in the foreseeable future) and ample liquidity in the system resulting in low borrowing costs and higher trading profits
  • Management is professional and independent from PNB and borrowing franchise is solid; the co recently raised unsecured CPs at 3.45%
  • Going forward, even if interest rates were to start rising again, PNB Gilts would be able to offset increase in borrowing cost (at Repo Rate) by increased interest income on g-secs (Bond yields are usually higher than the prevailing repo rate). Currently the spread is 2%+
  • In 9MFY21, the co earned 608 cr interest income and had borrowing costs of 308 cr. Over and above this, the co earned 344 cr trading profit (realised and unrealised), thus giving it a PAT of 468 cr for the 9M period; comparatively, for full year FY20 PAT was 186 cr
  • Even assuming 0 trading profit and rapidly rising interest rates (both highly unlikely), the co can easily return PAT of 70 cr per quarter (net interest income - opex - tax); Thus even at 280 cr PAT for the year, the co currently trades at a P/E of 3.6x
  • Why buy now? From 2017-2019 the co’s net worth was stuck between 850 cr - 900 cr, which prevented it from borrowing more and hence investing in more g-secs; now that its net worth is 1,500 cr (and growing) a virtuous cycle has begun - the co will be able to borrow more from RBI (at the Repo Rate) and via CPs and hence invest in more g-secs and other bonds and hence earn more interest (at least at the G-sec rate) and then reinvest the income and gains
  • The net worth will therefore compound rapidly and sustainably and given the low risk nature of the business, the price would have to catch up with the net worth at some point
  • The co is now also handsomely rewarding shareholders with very high dividend: Rs 3 final dividend for FY20 + Rs 3 first interim dividend for FY21 + Rs 4 second interim dividend for FY21 which translates to a yield of 18% at CMP (all the above dividends ie Rs 10 per share received in the last 6 months)
  • Brilliant performance and sustained high profits expected in FY22 and beyond
  • Risk: sudden and materially adverse movement in interest rates. Would like to stress on the words sudden and materially adverse because even in times of adversity, management has time and again demonstrated risk management, capital preservation and earnings capability
  • Disclosure - invested. However, still buying
3 Likes

Since this is primarily Gov sec trading, the share price would move up to the point where the Div yield is slightly above bank FD rates? I too bought PNB gilts and expect the share price to fall as people try dividend stripping by selling immediately after ex-date. At least thats what I generally notice