Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aavas Financiers Limited Q2 FY '23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sushil Kumar Agarwal, MD and CEO. Thank you, and over to you, sir.

Good afternoon, everybody. Thank you for participating on the earning call to discuss the performance of our company for quarter 2 and Hl FY '23. With me, I have Mr. Ghanshyam Rawat, CFO; Ghanshyam Gupta, Investor Relations Officer and other senior member of the management team and SGA, our investor relationship advisor. The results and the presentations are available on the stock exchange as well as our company website. And I hope everyone has had a chance to look at it. I'm happy to inform you that during the quarter, the company's long-term credit rating was upgraded from AA- positive outlook to AA stable outlook by CARE, in line with the ICRA. I take this opportunity to thank all our stakeholders for their continued trust and support. After witnessing 90 basis point increase in record rate in first quarter, RBI has further increased the repo rate by 100 basis points during the second quarter. Consequently, we have also increased our prime lending rate by 75 basis points during H1 FY '23 and a further increase of 50 basis points with effect from 5th October 2022. For Q2 FY '23, we disbursed INR 11,467 crores, registering a 27% year-on-year growth and achieving 89% of the disbursement done in seasonally strong Q4 last year. We continue to grow in a calibrated manner and registered AUM growth of 24% as of September 2022. While maintaining our operating metrics and we have delivered PAT growth of 29% year-on-year for H1 FY '23. With our continued focus on collection, 1+ DPD stood at 4.45%, with an improvement of 22 basis points from first quarter. 90-day positive stood at 0.93% in September 2022, but we have also categorized 0.17% of up to 90-day past due asset as gross NPA or gross Stage 3 following RBI notification dated 12th November 2021 to harmonize IRACP norms across all lending institutions. As a result, total gross Stage 3 is 1.10% in September 2022. We'll continue our strategy of converting valid delinquencies and strive to maintain 1+ equity below 5% and 90-day past due below 1%. I would now hand over the line to Mr. Ghanshyam-ji, CFO, to discuss various business parameters in details.

Thank you, Sushil-ji. Good afternoon, everyone, and a warm welcome to our earning call. During the quarter, company borrowed an incremental amount of INR 9,467 million at 7.55%. As of September 22, our average cost of borrowing stood at 6.99% on an outstanding amount of INR 109,711 million. During the quarter, our long-term rating was upgraded by CARE from AA- positive to AA stable, while ICRA continued to maintain long-term credit rating AA stable. Despite the highest short-term rating A1+, we continue to maintain 0 exposure to commercial paper as a prudent borrowing practice. IGAAP to Ind AS reconciliation has been explained in detail for profit after tax and net worth on Slide #31 and 33 of our presentation. Key parameters. As on 30th September 2022, total number of live accounts stood at 163,639 that is 23% year-on-year growth. Total number of branches was 321, 24 new branches added in last 12 months. Employee count 5,702, 23% year-on-year growth. Assets under management grew 44% year-on-year to INR 125,443 million as on 30th September 2022. Product-wise breakup, home loan 70.9%, other mortgage loan 29.1%. Occupation-wise breakup, salaried 39.8%, self-employed 60.2%. Disbursement increased by [ 20,002% ] year-on-year to INR 11,467 million for Q2 FY '23 and 64.2% year-on-year to INR 22,402 million for H1 FY '23. As on 30th September 2022, average borrowing cost 6.9% against our average portfolio yield of 12.85% resulted in a spread at 5.86%. Borrowings, access to diversified and cost-effective long-term financing, a strong relationship with the development financial institutions. During the half year, we borrowed INR 18,451 million at an average rate of 6.62%. Overall borrowing mix as on 30th September 2022 is 41.8% from term loan, 23% from assignment and securitization, 20.5% from National Housing Bank, 14.7% from net capital markets. Now assets quality and provision. 1 day past due stood at 4.45%, growth in Stage 3 stood at 1.1%, net Stage 3 stood at 0.84% as on 30 September 2022. Gross Stage 3 of 1.1% MPU, 0.17% up to 90-days DPD, assets which has been categorized as a GNPA following RBI notification dated 12 September 2021. During FY '22, the resolution plan was implemented for certain borrower accounts as per RBI Resolution Framework 2 dated 5th May 2021. Some of such accounts with an amount outstanding of INR 1,012.5 million as on 30th September 2022 has been classified as Stage 2 and provided for as per the regulatory guideline. The ECL provision including that of COVID-19 impact as well as Resolution Framework 2.0 stood at INR 649.1 million as on 30th September 2022. Liquidity of INR 20,370 million as of 30th September 2022. Cash and cash equivalent of INR 13,270 million, unavailed CC limit of INR 1,100 million. Document unavailed sanction limit from other banks INR 14,000 million. Profitability, PAT increased by 29% year-on-year to INR 1,962.6 million for H1 FY '23. ROA was 3.42%. ROE was 13.44% for H1 FY '23. As on 30th September 2022, we're well capitalized with a net worth of INR 30,314 million. Book value per share stood at INR 383.6. With this, now I open the floor for Q&A session. Thank you.

[Operator Instructions] Our first question is from the line of Abhijit Tibrewal.

First thing that I wanted to understand is the absolute increase in your Stage 3B, which is greater than 90 DPD and is now up 50% in the last 2 quarters. I just wanted to understand, are these loans which have slipped from your restructured pool? Or are these customers who have defaulted because their EMIs have increased when you increased your PLR? And maybe a related question here is, from your past experience, do you think that there is a need for the industry to be worried about higher delinquency in the affordable housing segment when the EMI of the customer is increased?

So Abhijit, if I'm correct, you're asking from Q4 last year to Q2 this year?

Yes.

Yes. So Abhijit, I think we're normally in 1% here and there. And now from 1st of April, we have stopped market cater AFS which was earlier whenever any asset repossessed in the [indiscernible] we used to mark it AFS and [Foreign Language]. Otherwise it's around 0.9 [Foreign Language]. So we hope [Foreign Language]. So we thought we should be more conservative on that aspect and this is why this number is looking like this.

Understood. So now we don't classify any assets that we repossess as asset held for sale. They are still classified as Stage 3 norms?

Yes. At about INR 12 crore.

Got it. You said only -- the related question that I asked that, I mean when the EMI of the customer is increased, is there a reason to be worried that it can lead to higher delinquencies in the affordable housing segment?

I think it's a cycle, [Foreign Language], but mostly tenure-based [Foreign Language]. Very few cases are there where we need to increase the EMI of the customers also. That is, I think, less than 1% or 2%. So I don't think so there is much impact of that in the portfolio. And we are seeing the cycle 2 it ends now in the last 12 years.

Understood. Sir, my second question was on the OpEx. I'm just trying to understand that this elevated OpEx or cost-to-income ratio, is it really a function of higher [indiscernible] the attrition in the industry, especially at the field level is really high? Or is it more a function of your investments in branches in technology, which you're not really officially opened yet? And once it will be officially opened -- branches which will be official opened in the second half of this fiscal year, but the expenditure you have already recurred in the first half itself?

Abhijit, I have already mentioned in the last call also that for this year, OpEx will be a little higher going forward in coming years, then the leverage will come in into the balance sheet. This year, we are spending a large much amount on the digital transformation. And last quarter, we started implementing LOS, which is [ SFDP ]. And now we have signed up for LMS, which is core-banking system. So we have more a core banking system, [ Flex-U ], which is done by the large bank like HDFC and AU. And for our accounting software also, which is now called ERP in the banking parallel. So we are shipping to Oracle Fusion, which is used by the large banks like Kotak and [indiscernible] kind of balance sheet. So while this will be implemented, I think we have already given 6 to 9 months horizon it will take for implementation out of this. Secondly, we continue to do investment and -- like this year, again, we'll open 35 branches first half. The branches which is leased and the opening position is around 7, 8. So now second half, most of the branches will also be open. Thirdly, we are also investing in manpower and leadership, keeping in mind 5 to 7-year horizon. Also, now we are at stage of like INR 12,500 crore in the next 3 years, if the money should get double. So we are also spending money for leadership development. Like this year, we have tied up with IM Ahmadabad, where our 35 officers got the training and certification. And this will be second line, third line creation in the organization. So I think continuous investment in people, process and technology, but technology, the one big change which will compete to like next 6 to 9 months, I think from next year onwards, the OpEx decrease will also help us getting the optimization.

Okay. Very good to hear that we are spending or investing in manpower and kind of furthering the career progression of the leadership team. The last question that I had is that, I mean, have you availed any LLP borrowings in the first half of this fiscal year? And if you are looking at the sanctions that you have or you're expecting from LLP, what is the impact on spreads and margins that you foresee in the second half of this fiscal year? Sushil-ji, what I'm trying to understand is today, there are 2 schools of thought, one which says that it's okay if there is some spread in margin compression, but we want to focus more on growth, while another school of thought is, I mean, we kind of want to maintain the current spreads and margins that we have. So how are we thinking about these 2 things?

Abhijit, in the Q1, we have borrowed around INR 400 crores. Q2, we have not borrowed any money from NHB. But recently, we have got sanctioned of around INR 900 crores from NHB for the next fiscal year. As a CEO, maybe we want to attain both, we can achieve growth also, and we can maintain our spread. And I think that given the growth in our narrated [indiscernible] 22% to 25%, we are already at 24%. And at the same time, we are able to maintain our spread and profitability. And in the [ Elko ] and Board meetings, we continuously review what impact we will have because there are 3 kind of liability risk asset leverages. One is tenure-wise, one is fixed and surety-wise, one is earning at risk-wise. And we forecasted that next 3 to 6 months, how much price impact will get on borrowing -- in accordance with that, we have announced that from 5th of October, we are raising our prime lending rate by 50 basis point. So I think next, till 31st December whatever things we were able to envisage as a board and as a management team on the borrowing side, we have taken into account and accordingly priced the liability or priced the assets on the variable side.

Our next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

I have 3 questions. The first one is what would be your labor attrition rate in the second quarter? And across the industry, it seems that the attrition rate, especially at the field staff level has remained high. You talked about a few measures as far as, let's say, tying up with IM Ahmadabad et cetera. But at a field staff level, what initiatives are you planning to improve this attrition level? That's my first question.

So Karthik, thankfully, Anshul joined us around 6 months back. And as a organization, we have kept one of the key operating metrics, which needs to be tracked at employee attrition that we took the target that can be reduced by 50%. And I am happy to announce that Q2 we were able to significantly reduce our attrition rate in comparison to Q1 this year and half year last year. So the measures which we have taken at the ground level in terms of earnings, in terms of incentive level changes, now we are focusing and deactivating a reason of contribute rather than performance. And everybody should contribute and we are going for an incremental -- performance increment. So earlier, we may be to see everybody on one scale. Now we are seeing if somebody is 50 can we move him to 75 level. If somebody is 75, can we move him to 100 level. If somebody is doing 100 can we move to 125 level. And I think that has helped as a organization, though we are not at the range where we wanted to be, but we are happy with the success we got in last 4 to 5 months after our efforts on this particular piece.

Got it. Just one clarification Sushil-ji. You said the second quarter's labor attrition rate is down significantly. Could you give us some number or a range by how much is it down?

Around 20% down.

Around 20%. Okay. The second question Sushil-ji, as far as your payment medium mix is concerned, have you noticed any notable change, let's say, away from mediums like NASH to either wallets or using UPI in the last couple of quarters?

No. So Karthik, we -- when we gave the loan we ensured that this is present through NASH only. And any customer that gives -- which bounces, then we give the customer option either to pay through UPI, wallet, check, cash, online, website, different options. But our 100% incremental lending is supported by less funding -- NASH repayment option.

So even when it bounces, you have not noticed any change in payment through UPI? Is it like when your bounce rates go up or so people opt for UPI immediately, you have not noticed any such pattern yet?

So because, anyway 1 plus number is very less. So I think wallet to UPI, yes, we will change, but overall number is so less, so that is not significant to talk about.

Okay. My last question, Sushil-ji, is basically on the economics of the sector itself. What we noticed, even for Aavas as well as other industry participants is, in the last few quarters, the OpEx growth has been higher than the AUM growth. In your case, of course, there are very specific initiatives, whether in IT platforms or training, et cetera. But this is a trend that we generally observe. Now given where spreads are and given the interest rate outlook, would it be fair to say that going forward, the PPOP growth will, to some extent, lag the AUM growth? And if not, what are the other levers that you have to actually ensure that that growth is more or less in sync?

Karthik, I'm in sync with what you are saying, but I want to throw some number here. Q1 to Q2, income has increased 16%. OpEx has increased 12% and profit has increased around 20%. So the [ Jaws ] chart or increase in income, vis-a-vis increase in OpEx we are already in that -- I think that that thing is coming up. Once we are seeing cumulative number H1 I think it is looking like this. So at Aavas, we are cognizant of this. And though we are investing in people, process and technology and with a huge amount, but still, I think Q2 is showing that we are already in that -- what you can say Jaws chart favorable for the Aavas.

Our next question is from the line of Kunal Shah from ICICI Securities.

Firstly, with respect to the repricing. So as we clearly see in terms of almost INR 7,500-odd crores, INR 7,200 crores is a floating rate loan and INR 5,300 crores on a fixed side. So when we increase this lending rates by, say, 75 basis points and another 50-odd basis points, when do we see this repricing getting reflected in the INR 7,200 crores book? It will be a monthly effect or maybe a quarterly one?

As we announced, we published the date of effective also like this [indiscernible] which is going to get announced 5th October is effective. So it will have a impact from 5th October itself on a floating loan book. As far as fixed rate book, we have a contractual agreement for each and every borrower. Every 3 years some fixed rate contract also get repriced, like in the month of October, around INR 1,300 fixed rate account, which is sanctioned 3 years back was repriced. So every year, certain fixed rate book get repriced.

Yes. So it would be fair to say that this INR 7,200-odd crores ex of disbursements which have been done in this quarter or maybe the last quarter, besides that, the entire book would have -- would get repriced by 125 basis points from 5th of October, yes, cumulatively?

No, no. 5th October, we have announced 70 -- 50 basis points.

And earlier 75, yes.

75 which will be announced earlier 25 basis points and then 50 basis points, those effective on those days.

Yes, yes, yes. Okay. Got that. And when we are seeing this, maybe this is the behavior of this INR 7,200 because we are relatively on a higher side with respect to passing on the rates compared to that of other affordable housing finance companies. So any change in terms of the BP outs or something, maybe when we did this 75 bps? Because many players have not yet increased it.

So Kunal, on that side also, there is positive news, our BP out have come down. So earlier, it was around 0.6% per month, which has reduced to now 0.5%, but 0.6% down is a 7% to 8% on a yearly basis. Now the current run rate is going 0.5% or below. So that significant for the next 12 months, if everything will be in control, it's less than 6%. So there also, we are on a positive side.

Sure. And lastly, again, touching upon maybe in terms of the growth. So I think when we look at it in terms of the traction, it still seems to lag with the industrial peers, okay? And there is huge amount of investment, which is happening. So when do we actually see the productivity improvement as well, okay? And maybe given the kind of branch network, employee network that we have, in fact, we should get back to in terms of the disbursements for branch where we could see a significant improvement here?

Kunal, as a company, we are okay with growth of 20% to 25%. We are already on 24-plus percent as agreed. So I don't think so there is a challenge on that side. I don't see from industry peers also or when we were at the size of industry peers, our growth was more than 40% when we were debt AM side. And the current AM side, we are okay with 22% to 25% growth consistently year-on-year with maintaining asset quality and maintaining operating metric.

Okay. Sure. And one last question was with respect to securitization. So we have adequate liquidity, but maybe I think in terms of the securitization momentum compared to that of maybe the previous year, it seems to be on a higher side. So would we see that maybe in the second half, should we assume that the run rate could be relatively lower if I have to look at it on a full year basis, is it like or similar rate might continue?

[indiscernible] reply. But as a company, as a organization, I think overall ratio has not changed. Overall, 20% of book is assigned at the organization and I think we are into the trajectory as a company, as of course H1 FY '23 also. So I don't think so there is a challenge or there is change in strategy for the company on that side in terms of...

It's up to 23%, 25% or so, yes.

So yes, Kunal, Sushil-ji has covered, I think, very well. Last year, we've done on a full year basis, INR 180 crores. This year, whatever we see growth in the AU similar growth you can see in assignment also, nothing -- any strategy changed. It's only 1 quarter, 2 quarters here and there that becomes because of what opportunity, what price we get from banks and institutions and then we accordingly execute that deal.

Our next question is from the line of Shreepal Doshi from Equirus Securities Private Limited, Research Division.

My question was, firstly, on the yield side. So we've already taken 3 rate hikes. That is, I think, 25 basis point was in June, 50 was in August and recently we took 60 -- like we'll be taking 60 basis points. But just wanted to understand what are the rates that would be prevailing for HL and LAP? So we know if you could give some range there? And what would be the differential between the 2?

So our HL pricing is around 11.7% to 12% and non-HL rates are from 14% to 14.2% average.

The new business rate.

Okay. Then these are the latest ones, right?

Yes, the newest.

Okay. Got it. And sir, with respect to this asset held for sealed at line item that we had in the balance sheet. So I guess in the annual report that gross number was INR 30 crores. Now like I think, you highlighted to one of the participants that you have already incorporated to the Stage 3 number this asset held for sale, so that number has come down significantly? Or is it like...

So 30 has come down -- so as of 31st March it was INR 29.21. And after provisioning it was 24%. Now this is INR 19 crores after provisioning.

Okay. So INR 19 crores we have...

And we have lot many cases, EMD received. So I think we will see a significant reduction in this quarter also in December. Hopefully, my say by year-end this will be mostly 25% of the opening pool. The rest everything will be disposed of.

Okay. So sir, you said that this number has been added to Stage 3.

No. So new -- from 1st of April. And whatever AFS is doing, we are not marking that as AFS. So only opening pool will come down and new AFS as a...

Okay. Got it. Sir, just wanted to understand like the logic behind this, like why do we have it as a separate heading in the balance sheet? Because, yes, I just wanted to understand the logic behind this.

It's nothing or anything big any aspect, it is the normal accounting policy, which we adopted 6 years back. Now new region, we become like a socially mentioned in early remarks to become more prudent, more considerably of accounting policy. So we are keeping any AFS new assets as NPA and the old one is, as Sushil-ji mentioned, we are accelerating our disposal of those assets from today to 6 to 9 months as a time frame, it will be get disposed of.

Got it. Sir, one last question. What is the employee base number that we have for the 2Q end? And just another question in relation to that is that we have something called manpower contracts, which is part of the annual -- which is part of the other OpEx, if I'm right. So why do we have contractual employees when our entire thought process is to sort of source internally and also collect internally?

There are 2 kind of people which are on contract, one is the admin office boys [Foreign Language] and tele-calling staff. Second, in the sales side also [Foreign Language] they go out of the system.

Okay. Got it. And sir, the employee base number, if you can share?

Yes, 5,702.

Our next question is from the line of Shweta Daptardar from Elara Capital.