All of us who are patient will be rewarded.When I look at PNB H numbers for the last several years-it gives a lot of comfort. On top we have a capable CEO.The entire HFC sector barring of course HDFC twins is under pressure.As and when the move starts it could swiftly move very high. Profits and price do not move in tandem for many mid /small caps and vice versa.I have absolute faith in this company
Disc: Invested
I seriously doubt HDFC bidding for stake in PNB. 12,000 Crores is a big investment for them now especially when they want to invest in HDFC bank to maintain their stake and fund acquisitions in insurance space.
My best bet will be Blackstone & Barings for bidding for stake in PNB Housing
HDFC has denied having discussions with PNB Housing. More such source-based-news will come. Investors have to be careful…
Kotak has denied the news too
In current scenario, we are bound to have different type of speculations & denials but we saw that CANFIN went through similar phase and there is nothing new except PNBHF seems to be on fast track & don’t want to drag the process. Going by recent experience we know that HDFC, KOTAK, Blackstone & Barings are exploring the options of expanding their business extensively & may purchase controlling stake in open options, where PNBHF is attractive available commodity. Moving ahead with denials from HDFC & KOTAK, the list of buyers is getting trimmed. Although we shouldn’t read too much into denials as it may be true that till now they have not started discussion & denials letters have such words leaving options of negotiations starting at later stage.
Let us keep fingers crossed & don’t get fingers burnt in pump & dump game.
“Ladki ki maa toh foreignor hai na dekhe…!”
The above were quoted by Basant Maheswari on Twitter .
Ladki ki saath nahi, ladki ki maa baap se milna hai. Yeh love marriage nahi, arranged marriage toh hai. Sanjay Gupta will never involve himself with such matters. During the concall, he was never interested on talking about this subject. The controlling interest is with PNB and Carlyle and any acquirer, should necessarily meet the girl’s parents. The girl has no say in the matter. The ET news is speculative and baseless to that extent. There is no reason why a beautiful girl should not be desired by all and sundry. So the content of the news need not be false. HDFC has already a bride in Gruh Finance. The second bride will also get the same treatment, ie., allowed to grow without raising equity. Kotak Mahindra bank should be the more interested party. They would be more ideal. Kotak could support the growth aspirations of PNB housing without restriction and allow growth with equity dilution.
Creeping acquisition through the market, especially when gullible investors are willing to sell the stock cheap, should not be ruled out. Based on the concall, where Sanjaya Gupta said that he expects current years growth to be better than last year’s, market expects 75% EPS growth for the current year. It is noted that there is no share dilution this year. Sanjaya Gupta has mentioned that 2018-19 will be the mega year for housing finance. So PNB and Carlyle will wisely go out, when PNB housing is firing on all guns.
Check out @ETNOWlive’s Tweet: https://twitter.com/ETNOWlive/status/1011092691067678722?s=09
PNB Hsg AR 2018
Hi Abhishek,
For the benefit of all lets understand basics. This is a bit technical, but if u put in effort, u will understand it well.
Lets take an e.g.
Yield = Total Int. Earned / Average Int Earning Assets of Current year and Last year.
Rationale - We earn Int. on Int. Earning assets (Loans + Investments). However, the Int. earning assets (Loans + Investments) would have accumulated over a period of 1 year on which we earned this int. It is incorrect to say that the Int. was earned on the Assets as on 1st day of year or last day of the year. Therefore Averaging these Assets is better. In my e.g. I am taking only 1 years figure for the sake of simplicity
Yield = 9.5 / 100 = 9.5%
Cost of Funds = Total Int. Paid for the year / Avg. Borrowings
Same rationale for Avg borrowings as discussed above, but for sake of simplicity I am taking 1 years figure)
Cost of Funds = 6.4 / 80 = 8%
NIM’s = Net Int. Income / Avg. Int. Earning Assets
NIM’s = [ Total Int. earned (-) Total Int. Paid ] / Avg. Int. Earning Assets
NIM’s = [ Total Int. Earned / Avg. Int. Earning Assets ] (-) [ Total Int Paid / Avg. Int. Earning Assets ]
NIM’s = Yield (-) [ Total Int Paid / Avg. Int Earning Assets ]
NIM’s = 9.5% (-) [ 6.4 / 100 ]
NIM’s = 9.5% (-) 6.4% = 3.1%
Now, lets see what is Spread
Spread = Yield (-) Cost of Funds
Spread = Yield (-) [ Total Int. paid / Avg Borrowings for the year ]
Spread = 9.5% (-) [ 6.4 / 80 ]
Spread = 9.5% (-) 8%
Spread = 1.5%
So, if you see carefully, the only difference between Spreads and NIM’s is the last part of the equation (As highlighted in Bold below). Also note that this equation is deducted from the Yield to arrive at the NIM’s or Spreads.
[ Total Int Paid / Avg. Int Earning Assets ] Vs [ Total Int. paid / Avg Borrowings for year ]
[ 6.4 / 100 ] Vs [ 6.4 / 80 ]
Even in the above equation, Numerator (Total Int Paid) is the same, hence the only difference will be the Avg Int. Earning Assets Vs Avg Borrowings.
Rs 100 (Avg Int Earning Assets) Vs Rs 80 (Avg Borrowing).
NIM’s = 3.1% Spreads = 1.5%
So, When Avg Int. Earning Assets are > Avg Borrowings - We will get Higher NIM’s than Spreads &
When Avg Int. Earning Assets < Avg Borrowings - We will get higher Spreads than NIM
Now coming to your Point on Why HDFC has higher NIM’s Compared to PNB Housing, inspite of similar spreads.
NIM’s = Yields (-) [ Int Paid / Avg Int. Earning Assets ]
When can NIM’s of one company be higher than the other.
3 possibilities -
1st When Yields are higher than it’s peer
2nd When Absolute Int paid is lower (which depends on the rate of borrowings) than it’s peer
3rd When Avg. Int. Earning Assets are higher than it’s peer.
This is a homework for you and other community members to get these figures.
It seems Mutual Fund houses are taking good use of fall in PNB housing share prices. Huge increase in Mutual fund holdings from period Feb 2018 to May 2018.
| Sector | No. of Funds | No.of Shares | No.of Shares | No.of Shares | No.of Shares |
|---|---|---|---|---|---|
May-18|Apr-18 |
Mar-18|Feb-18 |
||||
| Financials | 34 | 14,837,042 | 10,741,376 | 10,539,662 | 10,389,987 |
Source: https://www.rupeevest.com/Mutual-Fund-Holdings/217757
discl: invested and looking to add more
Great explanation ronak. I was looking at nim’s and roa data for various hfc’s and comparing to pnb housing, so basically while pnb’s spreads have been similar to other hfc’s their nim’s have been consistently lower resulting in lower roa’s (apart from other factor’s like high cost to income)
So bascially I guess one can say that better capitalization of other hfc’s that is lower leverage resulting in relatively higher avg interest assets to brrowings vs pnb has partly led to higher roa’s. In way other hfc’s use more capital to fund their growth vs borrowings compared to pnb which pnb didnt/couldnt do as they wanted to always grow fast
Would you guys agree with the above ?
A query. Will there be open offer in this case as both pnb and Carlyle wants to sell? In that case both pnb and Carlyle may sell 50% stake and acquirer will have to make open offer for 26% thereby controlling 75%+. The cost of acquisition may increase to that extent.
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.
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
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.
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.
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
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.
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)
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+
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).
