PNB Housing Finance Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. Our first question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.

First of all, congratulations on a good quarter and again, congratulations to Girish sir for recently completing two years at PNB Housing. First of all, thank you for, very enhanced disclosures that you are giving in the presentation. I think we also started to note incremental yields. So, I think that's where my first question also was, that in terms of incremental yields that we have given out in Prime, Emerging and Affordable, what proportion of this increase in incremental yields that we have seen over the last two quarters has come from our product mix change and what percentage has come from an increase in yields that you have been able to take in home loans?

Thanks for the compliments. So, the plan this year was to increase the yields on all the three segments starting from Affordable, Emerging and Prime. So, we started focusing on increasing the yields, let's say, from June of this year because Quarter 1, given the constraints and cyclical in nature and therefore we started this couple of months late and we have seen good traction. So, if you look at any of these segments, whether it is Affordable, Emerging or Prime, yield is driven largely by customer segment, geography, product and the program mix. So, these four things have driven to an increased yields in all the three businesses, Prime, Emerging and Affordable.

And sir, I mean, just a related question on yields again. Emerging, Affordable, we can understand. But the fact that you are also able to take yield improvements in Prime is just commendable, given the kind of competitive landscape that we have in the country. So, what is allowing us to improve yields even in Prime?

So, as I mentioned, even on the prime side, we are where we are and we will be always exploring opportunities, sub -segments within Prime so that we can try and increase yield. It is also a combination of the program and the product mix and customer segmentation within the Prime.

To add to what Mr. Kousgi said, Abhijit, the two bigger levers in Prime side of the business which have helped improve yields, one is shift down the pyramid. So, we have vacated the sort of ultra-HNI kind of customer segment. We see the possibility to charge better premiums when you go down the income segment. That is number one. Second is a little bit of product mix as well. We are doing a little more NHL than what we used to do earlier. We are also trying to see if we can move up that ladder. A combination of these and some of the factors which Mr. Kousgi explained is helping us increase the yields.

Thanks, Dilip. My second question was on margins. When Vinay sir was giving out his opening remarks, I think I heard that margins have been good for the first half of the year. We are still guiding for a margin of 3.5%. So, I mean, should we then conclude that maybe for next two quarters, we could see some NIM volatility and then as per your guidance, NIM should start improving from the next year onwards?

See, NIMs will start improving maybe after two, three quarters' time as I have been mentioning since a very, very long time. We are putting in all efforts to protect the NIM. We have given guidance of 3.5%. That is the threshold. So, NIMs will be upwards of 3.5%, while the endeavor will be to try and maintain at around 3.65%.

So, the last question again is, I think you have guided that for the next four to six quarters, we will continue to see recoveries from the written -off pool. I think, this was the second quarter where we took our provision write-offs, our provision write-backs into P&L. So, I want to understand two things in terms of recoveries. One is, when we go for repossessions and auctions in retail, what is the recovery that we see? In other words, what is the haircut that we are seeing in retail when we go for recoveries? And secondly, given that you spoke about almost Rs. 1,250 crores of written -off pool in Corporate and Corporate recoveries we know can be lumpy, anything happening on the Corporate recoveries and are you expecting any Corporate recoveries in the second half of this fiscal year?

Yes. So, as of now, we have Rs. 1,250 crores written -off pool on the Corporate side and 500 crores on the retail side. And if you look at Quarter 1, Quarter 2, I think together we have done about 28 plus 48 crores in Quarter 1 and Quarter 2, a little over 75 odd crores. So, this story will continue for next four to five quarters. On the Corporate side, as I had mentioned in the last earnings call, we were able to recover a bit in Quarter 1. So, in H1 FY25, we can expect good recovery on the Corporate side, also on the retail side.

So, this is useful.

I think I did mention H1 FY25. I think in H2 FY25 we are expecting recovery from Corporate also and retail recovery would continue for next five to eight months.

The next question is from the line of Renish from ICICI. Please go ahead.

Sir, first question again on the credit cost side. So, of course we do understand that the revamped collection underwriting structure is helping us in better recovery, etc. But on a normalized basis, given now Corporate is only 2%, so what kind of a steady -state credit cost one should assume in retail business, especially when we are, let's say, over the next couple of years, Affordable and Emerging will be larger piece than Prime? In a way, these two segments would be slightly more vulnerable than Prime. So, what's the steady-state credit cost one should assume for PNB Housing going ahead?

So, on a steady state, for example, we have given guidance in terms of retail book growth, reaching 1 lakh crore by FY '27 with a mix of 15% in Affordable, 25% in emerging and the balance in prime. So, on a steady state, given the mix between these three segments and corporate, we should look at credit cost of about 40 to 42 bps, in the medium term this is expected to be around 30 bps as earlier guided.

So, I think, see, on Prime, we are expecting on a steady -state credit cost of about 18 bps, on Emerging around 23-24 bps. On Affordable, since we are focusing on the low -risk and within- this segment, we are expecting about 50 bps.

Renish

Sir, second question, again, on the yield side in the Prime segment, as Abhijit was mentioning, this is one of the most competitive products per se, and in that segment, from last 2 -3 quarters, we are seeing the steady -state improvement on the disbursemen t, as well as the book yield as well. So, I mean, I do heard that we are vacating Ultra HNI and sort of for going down the pyramid, but structurally, what are we doing to sustain this kind of a yield on a more sustainable basis?

Yes, Dilip here. Like I said, we are trying to be on the fringes of the outskirts of the city. We are trying to cater to middle -income customers. We are trying to do a little more of NHL as compared to earlier. Between these 2 -3 levers, we are able to fetch h igher yields than before, and this is a journey. We have just started off. We have walked about 15 bps in the last 6 months. We believe there is still room for improvement there. I remember mentioning this in our earlier conversation as well, even if you take cities like Bombay, Delhi, NCR, the yields that the ultra -HNIs give us in the middle of the city are very different from what you get when you go to the outskirts of the cities. Even to catering to salaried middle income customers or self -employed customers gets us better yields. So, between these two, three things and a little bit of product mix NHL, we believe that we will be able to take the yields up. And early results see m to be showing that we are in the right direction. We will be moving ahead on this path.

Not really. It has come down a little. On the Prime side of the business, we are in the range of 35 lakhs. We are trying to be more granular. Four, five years back, historically we used to do many more cases which were sort of 5 crore plus and that has come down.

Yes, that's what. So, earlier maybe we were in crores, now we are in lakhs.

Yes, a little.

And my last question on the cost of borrowing side. So, despite the rating upgrade, incremental cost of fund has increased maybe marginally by a certain basis point. But ideally, incremental cost of fund should have come down, right? I mean, post rating upgrade. So, what am I missing here?

It is basically, Renish, due to some mix as the bank mix between short -term and long-term do keep changing quarter-on-quarter. That has led to some impact between Q1 and Q2. We have also got some ECBs and NCDs traction starting from Q2, which is also playing out for improving the diversity and mix perspective.

So, basically, just the mix change which is impacting this, there is nothing much to read.

And also, if you see, we got the rating upgrade in Q4 of last year and Q1 of this year. So, that will play out. And also, if you look at the difference between us in terms of cost of borrowing and some of the other leading companies, I think the gap is not much. So, we will be able to cover that up and also in next three to four quarters' time, it's question of time, we are also looking at possible upgrade and we should further improve on the cost.

However, having said that, I mean, overall borrowing cost from the portfolio has improved by 8 bps. So, there we have worked across all the instruments.

Thank you. Next question comes from Nilesh Jethani from Bank of India Mutual Funds. Please go ahead.

My first question was on the Affordable side. Just wanted to understand considering this 160 locations where our branches are present, any sense or any understanding, the Corporates which are operating around us, what could be typical AUM per branch for them, and of course, what kind of AUM per branch are we aspiring to when we target to reach this Rs. 15,000 crores AUM by FY27? That is question number one. Question number 2 is on what are you planning to do on the Affordable side trying to garner market share in Tier-2, Tier-3 cities or we are targeting mix of virgin and market share gain, just wanted to understand the philosophy?

See, in terms of growth, we had guided 17%, so this could improve in next couple of years since we are trying to scale up on all the 3 segments within retail. Now, looking that CAGR in terms of all the 3 businesses and what we have spoken, we are expecting to reach a book of about Rs. 1,00,000 crores by FY27. So, this by FY27, today we are at 303 branches, so in the next 3 years starting from this year, we will be able to reach to a level of 500 branches, so this split is going to be all the branches what we are going to open in future, I think 75% -80% will be on the Affordable side and the rest will be on the emerging side. I think 500 branches, 1,00,000 retail book by FY27 that is the plan and we plan to grow at about let us say this year we have guided 17%, next couple of years could be slightly high. I think that is the plan. In terms of the Affordable specifically, I would request Anujai to.

On the Affordable side, we will just try to set some context. When we were working on the distribution blueprint for this business, we realized that here there are about 155 districts across the country out of 550 -600 districts that we had at that point in time. So, around 155 districts were found to be high potential districts for our kind of targeted business and out of these 155 districts, so far through these 160 branches, we are catering to about 130 plus districts already. These districts are concentrated in about 14 -15 states in the country. Out of these 14 -15 states, we are already in some form we are present in about 13 states. Within these 13 states and plus, there are a couple of more states which we want to target, there is ample o pportunity to open about 150-200 more branches.

And on the AUM per branch, just wanted to understand currently in the locations where we are operating, our competition would be operating at what kind of AUM? Just wanted to understand today our AUM per branch optically looks much lower considering the f aster growth in branch addition what we have seen? And we wanted to understand, say from tomorrow itself hypothetically we stopped adding branches. So, what could be AUM per branch potential for us in the current location itself?

So, I think talking about Affordable, if you see some of the matured branches for us, we have reached little over Rs. 2 crores per month. So, we feel that on the Affordable side, on an average, branch could reach a potential of about doing Rs. 3.5 crores disbursement every month. So, that is, let us say, after 12-15 months from the start. So, depending on the vintage of the branch and the location potential, I think the branch could reach, let us say, about Rs. 3.5 crores on an average.

I am sorry to again settle back on the question. So, when so you mentioned that in the current location there is scope to add even 150 more branches. So, this refers to these are underserved area or we can capture the higher market share in a decent sized market. What is the thought process?

See it will be a combination of Tier-2, Tier-3 and Tier-4, right, it will be a combination of yield and volume. So, it will be a mix of these two. For example, Tier-2 and Tier-3 would get us more volume and part of Tier-3 and Tier-4 give us a better yield. So, it is a combination of these two which is why I mentioned I think one branch in the month can reach to the max potential of on an average Rs. 3.5 crores. For example, some of the Affordable branches, let us say in cities like Bangalore, Chennai, Hyderabad could do even Rs. 7 -Rs. 8 crores per month and some of the branches in Tier-4, they could do, let us say Rs. 1 -Rs. 1.5 crores, but the yield is going to be much higher. So, it is a combination of both yield and volume.

And one question on the Corporate side, wanted to understand the plan to rebuild up or refocus on Corporate from next quarter onwards or maybe the next two? Just wanted to understand how different this is going to be versus the earlier avatar PNB used to Fund. So, how different are we this time?

So, two things will be starting Corporate in the next couple of months and this time it will be very different. We will stick to the basics, and we will focus on ticket size around Rs. 200 odd crores. We would not get into chunky deals, and this would be only into construction finance and in terms of scale and size, the Corporate business at any given point in time would be less than 10% of the overall portfolio.

Thank you. The next question is from Harshit Toshniwal from Premji. Please go ahead.

Sir, on this Affordable piece itself you mentioned that the incremental yield which we are having is roughly around 12%-12.5% right now. But now if you look at this segment and the other peers now, do you think that this is a good enough yield to charge for that customer segment that can cover our OPEX and possible sustainable cyclical credit cost? That is the one and the second part, sir, so how much of our new disbursements in this segment are through DSAs, specifically the Affordable one, if you can help on that aspect? And when I say DSA, when you say that in- house, I mean employee sourcing mostly through DSAs, I would also want to look at that makes direct versus DSA part? And third, sir if you can just give a breakup of the employees between the prime emerging and Affordable as on today?

So, in terms of see within Affordable, there are 3 segments, low risk, medium risk and high risk. So, if you look at that yield in the first year, let us say, till last year, the yield was about 11.4%- 11.5% and this year we have guided the yield of about 12.6% and from next year the yield is going to be more than 13%. Now this would be largely driven by change in segment and change in profile both very salaried and self -employed right, and we will be focusing on low risk and medium risk. So, we would not really focus on high yield segment. And therefore, according to us, I think the yield from the Affordable segment would be a little lower 13% is what we would focus on. There could be an opportunity at a lower yield. There could be an opportunity at a higher yield, but I think our focus would be on lower risk and medium risk and in terms of it next year it is going to be a little lower 13%.

At this point of time, when we look at our disbursement, basically customers would have otherwise gone to AHFCs Aptus, Awaas although the larger set of AHFC, is our customer segment, they are very overlapping? And the second part was related to this itself of the incremental disbursement. How much is BT in our case where we are basically, it is not a new loan, but it is more coming from somewhere else?

So, in terms of the customer profile, I think to a large extent, if we talk about low risk and medium risk, I think the customer segment is the same, number one. Number two, in terms of BT in for Affordable, it is about 25%-26%. And one more question you had asked, in terms of what is the mix between direct and DSA. DSA is 31% in the Affordable and the rest is direct.

And sir, one last thing. I think on the employee part, you can give the breakup of employees between, specifically the sales or basically the branch employees.

I think for us whether it is credit or sales basically we have a branch structure. So, in the branch we have different categories, low potential, medium potential and high potential, so low potential would have one Sales Manager, one Credit Manager and one Ops resource. So, if it is mid-size then we would have one Sales Manager and totally one ASM and one underwriter. If it is a big branch then we could have two underwriters and we could have two ASMs and one Sales Manager. This is a structure. In terms of total headcount.

Out of total headcount on sales side on overall basis around 25% would be “Roshni” Affordable. Rest is between Prime and emerging.

25% would be Affordable. So, I remember sir, you last time mentioned that there were 333 employees in the Affordable segment?

Now, we have a little over 400 employees in Roshni.

Thank you. Next question is from Viral Shah from IIFL Securities. Please go ahead.

Girish, first question was on the point of with regards to the NIMs, I know that this was asked, but wanted to check, given where we are, does it make sense for us to say, raise the guidance or as you mentioned that this is the threshold, is it after taking into account so any impact of potential rate cut?

Yes, that is right, Viral, the environment is slightly volatile. So, we are baking in the impact of the rate cut that can come in. Our endeavor is to maintain 3.6% plus, but yes, the guidance, we would like to maintain 3.5% for the year.

And Vinay, as we go ahead as the mix kind of changes bit more in terms of borrowings, do you see the cost of funds further inching up?

And the last question I had was with regards to the asset quality front. So, you have given this data with regards to the 12 month and the 24 month and how the delinquencies have trended on 30 and 90 plus, can you help us with whatever this number say couple of quarters back? And also secondly, if you can help me with regard to the Affordable segment of this piece?

See, Viral under early mortality always have been the focus of the company to monitor the early delinquencies of 12 months, which we have strengthened now to cover even up to 24 months. So, if I look back couple of quarters, I think these numbers are shade better than the earlier times and having said that and even on the Roshni, “Roshni” is a pretty new book around Rs. 3,000 odd crores. So, there is hardly I think 10-12 number of cases into NPAs which our resolution is in process with sufficient cover available, so that is not a significant number as of now.

Jatul, when you said that this overall numbers are shade better than what they were, are you referring to say versus two or three years back or are you referring to say 2 or 3 quarters back?

Around 6 to 8 quarters back and this I am talking only on aspect of early mortality and overall, also as you can see the graph quarter -on-quarter on NPAs particularly coming down each quarter. So, that is on NPAs, but having said that, the pre -delinquency management has been strengthened because the business is on a growing spree now. So, we need to have stronger controls to restrict flows. If our flows are restricted and well, we have a well-defined strong mechanism in terms of taking properties to SARFAESI and then auctioning it on a regular basis. Almost, we are selling 2 properties a day now. So, that machinery will take care.

Thank you. The next question is from Omkar Shinde, who is an Individual Investor. Please go ahead.

I have a few clarifications before I ask my question. So, we said that we target 1,00,000 crore AUM by FY27 and 15% of the it will be Affordable. Was that correct?

Yes, that is right.

And two more clarifications, in one of the previous questions we had shared that credit cost in the Affordable segment could be somewhere in the region of 50 bps, 50 or was that 15 I did not get that properly?

50.

And now coming to the question, so again with respect to the branch structure, you have said the small branch will have one salesperson, one credit person for the small branch. So, is this also applicable for Affordable branches? Because now as you said 12 to 15 months is the gestation period for branch to reach Rs. 3.5 crores disbursement per month, so some of our earlier branches would have reached that. So, where in those small, medium, large would these earlier branches be now? And could you just reconfirm the medium and large structure?

What I had mentioned was for Affordable and what would happen is that let us say you open a branch, and depending on the potential you will increase the manpower and then the branch could peak to a peak level of Rs. 3.5 cores. So, this also has a combination of A, geography; B, in terms of potential. So, on an average, we have, let us say, 300-400 branches with a vintage of let us say 15-18 months’ time on an average, I think the peak could be about Rs. 3.5 crores. So, the branch structure what I mentioned was for Affordable on the emerging and on the prime. So, one branch could have multiple ASMs and multiple ROs over the field, Executive, Sales Executive and one Branch Manager, when I say Branch manager I mean Sales Manager, and then we would have credit and ops.

So, I was asking with respect to that only for the Affordable itself. So, when the branch reaching its peak level of Rs. 3.5 -Rs. 4 crores, what is the structure and at that point of time it is like a large branch or a medium branch that I wanted to understand?

So, let us say, we will categorize ABC category, right. A category branches would be doing, let us say about Rs. 6-Rs. 7 crores; B category branches could do about, let us say between Rs. 4 - Rs. 4.5 crores and C category branches at its peak now would be at Rs. 1.5-Rs. 1.8 crores only. So, it depends on the category of branches which is related to the potential and the geography and therefore I always talk about average.

And now with respect to sanction to disbursement, now what I have seen is on quarter-on-quarter basis, from what is mentioned in Slide # 21, our sanction to disbursement had drop to 56% approximately from 75% in Q2 last year. Why is there such a big drop in the sanction to disbursement and are we going to see some spillover effect in the coming quarters for this? I just wanted to understand this.

This you are referring to the Affordable business?

Correct, yes, slide #21. So, Rs. 630 crores of disbursement against Rs. 1,100 crores of sanction is 56%. So, there is a big drop from last year where it was approximately 75%. So, why is there a decline?

Yes. There is a decline only because of some process-related changes that we have done in July. The quarterly numbers are lower as compared to the previous quarters; however, if I look at standalone numbers for the August and September month, our conversions are back in order and from next quarter onwards, we will be able to see the similar conversions upwards of 70% as we move forward.

And finally, with respect to the incremental yield, we are at approximately 12% as per the slide mentioned where does the incremental yield settle over the next 3 -4 quarters because when the rate cut starts to come from RBI, we had very little headroom. So, what do you think that the incremental yield in the overall yield will pick out in the Affordable segment?

So, when it comes to incremental yield, we are confident. We will move towards close to 13% of yield.

See, I think the context is today, if you look at our cost of borrowing is around 7.8 -7.85. With this cost of borrowing level, we are talking about Affordable yield of 13% from next year. Suppose let us say the rate goes down, let us say by 100 bps, then the 13% would slightly moderate to that extent, it might slightly come down. So, what we are saying is we will protect the margin. So, for Affordable business on a steady state, the yield is going to be 13 plus percent, 13%-13.2% given the current cost of borrowing. So, if there is any change in the cost of borrowing accordingly, even the yield would vary.

And just finally one last one, the overall OPEX to AUM is also increasing that is I think as a function of expanding the branch is very fast. So, where is that finally settled over say by FY27 when we reach the Rs. 1 lakh crore AUM? Can you guide where in the ballpark range would that OPEX to AUM be?

See, we are expecting it to settle at the current level, so 1% -1.1% where it is right now as large part of the upfront investment is done. Now, it will be a minor investment of 40 -50 branches every year, which we will manage through the economies of scale in other business.

Thank you. The next question is from Nikhil Kumar Agarwal from VT Capital. Please go ahead.

I just had one question. You said that NIM will start improving after a few quarters and since like incremental cost of funds is going to be at the current level of 7.8% and yields are improving across products, then NIM should ideally start improving rig ht now, as in from next quarter itself. So, it should go very well as per whatever you have said about yield in cost of funds. So, can you please give more light on this?

So, there are a couple of things. So, one is we will be starting Corporate shortly. Once we start Corporate business, then the yields will add to yields, number one, it will improve margins. Number two, we also have the book depletion on prime, emerging and to a very small extent on the Affordable. So, that is one which will again impact revenue on date for the margin. Number three, we also have a repricing policy where we try to retain the customers allow and switch from a higher interest rate to a slightly lower interest rate. Now these things would pull the yield down while on one side, the yield would come down because of foreclosure , because of repricing. On the other side, we are changing segments. We are moving more towards Affordable. We are increasing the mix change which would come at a higher yield. So, this would though ensure that the yield would go up. So, I think this balancing would play out in the next 2-3 quarters and post which the interest start going up.

So, because of the dragging effect of the things that you mentioned, the current yield will be maintained for a few quarters and then net-net, yield should start improving after 2-3 quarters is what you are saying?

Yes.

And one clarification that you have already mentioned this, but I couldn't get it earlier. You said that once we start Corporate book in a few months, the difference between this new Corporate book and the one we used to have is in terms of ticket size. So, if you could please mention the differential ticket size that you did mention earlier as well? And the other thing that you said was, one was ticket size and the other thing?

So, one is we will start this business in very few select cities. We would focus on good quality developers, category A and category B. Third, we would do largely construction finance business. We will keep the ticket size lower. So, basically we would focus on very good quality of developers and good projects. There, the yields could be lower compared to what normally this business would fetch. We are looking at a yield of around 12%-12.25%. So, yield should be lower, much safer business. So, these are the changes.

So, would the yield be 12%-12.25%?

Yes.

And ticket size would be?

About Rs. 200 crores.

And ticket size in the Corporate book that we used to have earlier that was?

That was about Rs. 350-Rs. 400 crores.

Thank you. The next follow up question is from Harshit Toshniwal from Premji. Please go ahead.

Sir, I am just trying to do a calculation that we have Rs. 630 crores of quarterly disbursement in Affordable, roughly Rs. 200 crore per month and you said 70% is in -house that converts to Rs. 150 crores of disbursal per month in the Affordable. Am I right till here?

Yes, you are right.

Just one question is that if you say that 400 employees is what we have this segment sales team that urge to something like a 3.7 million per employee per month disbursal, which is say 2x, 3x or other, so if you can help me, that is our direct sourcing or basically non -in-house sourcing much higher than 30% or where am I going wrong because 3 -4 million disbursement per employee per month would mean sourcing of at least 7-8 million?

Harshit, I will just clarify that. So, 400 employees that we talked about, these are like all the full- time employees in “Roshni” business. They are spread across sales, credit, operations, legal, technical, all the various functions right. Plus, on top of that when it comes to our DST team, the feet on the street that we have, the sales staff, the frontline sales staff that is managed through our subsidiary which is PHFL and that number for sales right now is around 900. So, just to clarify it further, if I take a monthly volume of about, so September, we did Rs. 275 crores. Out of that, about 69%, close to 70% of business was sold in -house through these 900 people. My average productivity per sales staff per sales employee typically is around 20 lakhs – 25 lakhs per month. And I hope that’s clarifies.

Yes, that helps. Well, because this 900 is basically our, as 100% subsidiary which doesn't booking for us?

That is correct.

And the cost of these three will be more, I just wanted to understand more about the subsidiary. Does this holds purely for PNB housing finance in Affordable or do they others?

No, not specifically for Affordable. They support all three businesses-prime, emerging markets as well as Affordable. But these 900 people are dedicated Affordable business sales staff.

And they do business only for PNB Housing.

Thank you. Ladies and gentlemen, we will take that as our last question. I would now like to hand the conference over to the management for closing comments.

Thank you everyone for joining us on the call. If you have any questions and answers, please feel free to get in touch with Investor Relations. The transcript and the audio of this call will be uploaded on our website that is www.pnbhousing.com. Thank you.

Thank you very much. On behalf of PNB Housing Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.