Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aavas Financiers Limited Q2 FY '24 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 the 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 call is being recorded. I now hand the conference over to Mr. Sachinder Bhinder, Managing Director and CEO of Aavas Financiers Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, ladies and gentlemen. Thank you for participating in the earnings call to discuss the performance of the company for quarter 2 and H1 FY 2024. With me I have Ghanshyam Rawat, President and CFO; Ashutosh Atre, President and CRO; Siddharth Srivastava, Chief Business Officer; Surendra Sihag, Chief Collection Officer; Ripudaman Bandral, Chief Credit Officer; Jijy Oommen, Chief Technology Officer; Anshul Bhargava, Chief People Officer; Rajaram Balasubramaniam, Chief Strategy Officer and Head of Analytics; Ghanshyam Gupta, Investor Relations; and SGA, our IR Advisor. The results and the presentation are available on the stock exchanges as well as on our company website, and I hope everyone has had a chance to look at it. We are committed to support and strengthen the long-term Aavas Vision 3.0. I take this opportunity to thank all our stakeholders for their continued trust and support. For quarter 2 FY 2024, we disbursed INR 12,585 million, registering an 18 percentage growth quarter-on-quarter and 10 percentage year-on-year growth. We continue to grow in a calibrated manner, registering AUM growth of 22 percentage as of September 2023. Further, OpEx ratio has witnessed gradual moderation from 3.79% in the last quarter to 3.65% in H1 FY 2024. While maintaining our operating metrics, we delivered a PAT of INR 2,313 million, translating into a growth of 18 percentage year-on-year for H1 FY 2024. While we continue to borrow judiciously, we raised around INR 30,761 million at 8.19 percentage during H1 FY 2024. As of 30th September 2023, we maintained a sufficient liquidity of INR 50,037 million in form of cash and cash equivalents and unavailed cash credit limit of INR 20,987 million and unavailed document sanctions of INR 29,050 million, including INR 10,000 million from the National Housing Bank. We are undergoing an accelerated digital transformation with the adoption of best-in-class technologies like Salesforce, LOS, Oracle FLEXCUBE, which is LMS, and Oracle Fusion ERP. We have successfully rolled out and stabilized Phase-I of Salesforce. Oracle Fusion ERP-GL went live in September 2023 under hypercare. The new loan management system on the FLEXCUBE is currently under testing and migrations. I would now hand over the line to Ghanshyam Rawat, President and CFO, to discuss the financials in detail.

Thank you, Sachinderji. Good afternoon, everyone, and a warm welcome to our earning call. As on 30th September 2023, an average borrowing cost of 7.86% against an average portfolio yield of 13.15% resulted in a spread of 5.29%. We have been able to maintain our spread above 5% despite competitive pricing pressures. As on 30th September 2023, total number of live accounts stood at 198,947, translating into 19% year-on-year growth. Total number of branch count from was 350 with the 4 new branches being added in first half of FY '24. Employee count was at 5,731. Assets under Management grew at 22.1% year-on-year to INR 153,195 million as on 30th September 2023. Product-wise breakup, home loan, 69.7%; other mortgage loan, 30.3%. Occupation-wise breakup, salaried 40.1%, self-employed 59.9%. IGAAP to Ind-As reconciliation has been explained in detail for profit after tax and network on Slide #32 and 34 of the presentation. On the borrowing side, there is excess of diversified and cost-effective long-term financing, very strong relationship with development financial institutions. Total outstanding borrowing as on 30th September 2023 stood at INR 140,843 million. Overall borrowing mix as of 30th September 2023 is 49.6% of term loan, 20.8% from assignment and securitization, 18.3% from National Housing Bank and 11.4% debt capital market. Lender support continued to remain extremely strong. Liquidity of INR 50,037 million as of 30th September 2023. Cash and cash equivalent of INR 19,887 million, unavailed CC limit of INR 1,100 million, documented and unavailed sanctions from National Housing Bank INR 10,000 million, and other banks INR 19,050 million. Profitability, profit after tax increased by INR 17.9 million (sic) [ 17.9% ] year-on-year to INR 2,313 million as for the H1 FY 2024. ROA was 3.25% and return on equity was 13.6% for H1 FY '24. As on 30th September 2023, we are very well capitalized with a net worth of INR 35,136 million and capital adequacy ratio at 48.16%. Our book value per share stood at INR 4,044.1 (sic) [ INR 444.1 ]. Now I would like to hand over the line to Ashutoshji, President and CRO, to discuss the assets quality.

Thank you, Ghanshyamji. The key portfolio risk parameters asset quality and provisioning. One day past due stood at 3.58% in H1 '24 as against 4.45% at the H1 of last year. Gross Stage 3 stood at 1.04%, and net Stage 3 stood at 0.76% as of 30th of September 2023. Gross Stage 3 of 1.04% include 0.13% of up to 90 DPD assets, which have been categorized as GNPA following RBI notification dated 12th of November 2021. During FY '22, our resolution plan was implemented for certain borrowers -- borrower accounts as per RBI Resolution Framework 2.0 dated 5th of May 2021. Basis the perceived risk and as a matter of prudence, some such accounts with an outstanding amount of INR 779.6 million as on 30th of September 2023 have been classified as Stage 2 and provided for as per regulatory guidelines. Out of INR 779.6 million, INR 575.3 million is into 0 to 30 DPD bucket. Total ECL provisioning, including that for COVID-19 impact as well as Resolution Framework 2.0 stood at INR 797.3 million as of 30th September 2023. Total write-offs stood at INR 20 million in H1 FY '24. Aavas continues to maintain a pristine asset portfolio quality. With this, I open the floor for Q&A.

[Operator Instructions] The first question is from the line of Mayank Agarwal from InCred Capital.

Congrats for the good set of numbers. My first question is on employee cost. So we have witnessed low employee cost this quarter. Any specific reason for that? And what share of the reduction can be attributed to the employee count? Can you please also let us know what is the employee count this quarter? This is my first question. My second question is the reduction in the employee count is temporary or if something structural, which is led by the technology implementation? Yes. That were the 2 questions for me.

Yes. Thanks, Mayank. On employee cost, employee count is the same, what was in the first quarter or in the same quarter. And if there is a certain -- some reduction in the employee cost is mainly on account of in the last quarter, there is some onetime cost was there on account of incentive, bonus and one of the senior SMP got designed in that quarter. Apart from that, I think it's a steady state on employee cost now.

So okay, the trend would continue. Okay. And my second question is on your yield. So you have reported a 10 bps of decline this quarter. Is it due to the low rates on the new loans or reduction in the loan rate of the existing customer?

Mayank, this is Sachinder. This is partly because of the rate reduction on holding on to our existing customer and part is on the new placement, both put together has resulted in the drop in the yield.

So is it because of the increase in competition intensity, which we are witnessing because on the one end, cost of borrowing is increasing and we are witnessing the yield decline? And what could be the trend going forward on the margin? So basically, what will be your margin outlook? And until what we would be comfortable of keeping the excess liquidity? And what will be margin outlook for FY '24?

So as we have been saying that we were able to maintain the spreads at 5 percentage and above. So currently around 5.29%, our endeavor is there. But what we are trying to do is that the good customers are there. We don't want to let it go. So partly because of rate reduction on that side and some part and some bit on the pricing pressure on the new acquisition, so to say, so it's a mix of both. So from a guided perspective, I think we will try to maintain in range of 5 percentage as far as concerned despite and in spite of the cost of borrowings going up, actually. That would be our endeavor, and that's our aim, actually.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, first question on disbursements. In the first quarter earnings call, you had shared that large part of the teething issues were behind and things have stabilized in June and June disbursements had grown 17% year-over-year. Sir, but if I look at the second quarter disbursements, they are up just about 10% year-over-year. So what would you attribute this to? Is it that mortgages, especially lower ticket size is going through some kind of a slowdown? Or would you say that this could be the lagged impact of the withdrawal of the CLSS subsidy? Or is it just the competitive landscape, which is attributing to this sluggish disbursement growth? If none of these, was it again from teething issues from the digital transformation, which led to lower disbursement growth?

I think -- thanks, Abhijit. I think we will have to see that quarter-on-quarter we had an 18 percentage growth, whilst we are cognizant of the fact that there was a lagged impact compared to the previous year. But I think from a perspective of this, we will be guided in that range. And on the AUM base, we'll continue to be in the 20 to 25 percentage range. Secondly, on the part of -- there is a certain amount of lagged impact of sanctions not getting converted to disbursement. So if we were to really look at the earlier sanction to disbursement ratios, they have sequentially actually dropped from 90 percentage to 80 percentage actually, so to say. So there is some amount of the pickup, which was there on that side, which were not get converted actually. So it is attributed to 2. And secondly, all the technology transformation, we are out of the ports, but if you -- we'll be guided with the transition which is happening in the institution, a couple of quarters to really settle that out on a perfect basis because we got into the second phase of technology transformation, which is LMS and ERP. And we are taking this first -- this year as full year for taking the entire completion of transformation, actually, so to say.

Got it, sir. So by the end of this year, you're suggesting this digital or technology transformation will be completed, including the LMS and the ERP?

Yes, that's our target, actually, Abhijit.

Okay. And sir, this lagged impact that you were explaining of sanctions not getting converted to disbursements. I heard you right where you said earlier, we had 90% conversion of sanction to disbursement; right now, it's dropped to about 80%.

Yes, right.

Got it. Sir, second thing, again, kind of going back to the margins, while I -- if I look at your reported numbers from 3 months FY '24 to 6 months FY '24, you have reported margins of 8%, which are flat. So sir, if you kind of go to your P&L, look at the net interest income line, excluding the assignment income gain, sequentially we are seeing a decline from INR 226 crores in the first quarter to INR 222 crores in the second quarter. What would explain that, given that, I mean, our book has grown -- I mean, on a calculated basis, there is a good 40 basis points decline in margins in the quarter.

Yes. Abhijit, I think as you see the number, I think we will see in detail those numbers and -- but largely, it is only on account of -- you will see quarter 1 to quarter 2, we have seen a decline in the portfolio yield, which is 11, 12 basis points, which is, I think, mainly impacted on that line item. Apart from that, I think we don't see any sort of -- we've seen in there.

Got it. Sir, and one last question. There seems to be a lot of volatility in our employee expenses line. I recall we had shared even last quarter that in 1Q FY '24, we had one-offs in employee expenses of almost INR 1 crore, INR 1.5 crores due to KMP retiral benefit. I think before that in fourth quarter, we had a reversal of INR 5 crores on ESOP expenses. Subsequently, we had taken an ESOP charge of INR 7 crores in 1Q FY '24. During this quarter, I mean, from an ESOP perspective, were there any reversals, if you can quantify that? And going forward, I mean, how should we look at the employee expense segment?

Employee [Foreign Language], Abhijit, employee cost is seen in 2 ways: first thing, employee count is where we -- as I mentioned, we are a steady state -- same count of employees there in the last 2 quarters. So yes, annual increments and all these things has taken place in the first quarter. So that impact comes -- some of the things -- impact come in the first quarter and now first, second quarter come the full impact is there, basically. Yes, ESOP, all these things expense depend upon the 2 factors. If any new schemes comes, then extra cost comes in from that quarter to until the schemes run basically. And if there is any sort of, let's say, attrition in the employees. So for that, the remaining costs also get -- goes off from the -- in that quarter from the P&L side basically. So those are basically accounting principles, which everybody need to follow. Apart from that, I think we don't have any sort of any extra explanations on the employee cost.

Got it, Ghanshyamji. And sir, in the interest of time, I just wanted to squeeze in one last question for Sachinder sir. I mean, again, going back to the disbursements, I just wanted to understand, today, if I look at some of your listed peers, unlisted peers, right, there are listed peers, almost half your balance sheet size doing 78% to 85% of the quarterly disbursements that you are doing. I understand you've gone through some management change, as we've gone through -- we're going through a tech transformation. By when should we expect that we'll kind of start achieving disbursements that you internally aspire for?

Thanks, Abhijit. And you rightly articulated, I think the 2 points: one, we've envisaged on the transition on the management side as well as on the tech side. I think you have to bear with us for a couple of quarters. There is a fact that building the right foundation, which will see the performance based on the current set of things, both on the tech transformation, which we see and which we have and bought on the journey, along with the management transition. I think, give us a couple of quarters, and you'll see that back in action. But I think you have to be cognizant of the fact that despite a big transformational change from a tech perspective, we've been able to weather that out compared to what the peers or others would have done in our space. So I would request a couple of quarters to bear with us for -- we again would endeavor for a calibrated muted growth, but not that we'll come back in a couple of quarters back on track on what we are there on the range. But again, we get guided on the quality of what you have to really embark on is that some of the parameters in the health side continue to be very robust on the quality parametric, on the metrics of controlling costs wherever it is possible. And from a perspective of delivering the pristine quality of the base which we are noted for. I think it's a mix of both. I think we will be in a strong position to come back on the base of what we are there on -- at this period of time.

The next question is from Raghav Garg from AMBIT Capital.

One very specific question. You had a spread of 5.29% this quarter. Do you expect that this could decline further in the second half? Or will this remain at this level?

So I think we have guided, Raghav, with the spread of keeping it around 5%. I think it's a mix of the kind of cost of borrowing, which is the one, which is one input, which is beyond our control. Our endeavor is to be remaining in the range on level of around 5 percentage. So that's been our endeavor.

Sir, I'm coming more from a place where I'm trying to understand what is the competitive intensity as far as pricing is concerned. When we look at some of the larger players, they haven't really much on pricing. It remains as low as, say, until about 9 to 10 months ago. So should we expect that even in the second half, your pricing will remain impacted because of competition? And hence, that is something that will weigh on your spreads, and therefore, it will be lower than 5.29%?

So we say that we will remain above 5 percentage. That's what we have been guiding.

Sure. Sir, just on your securitization margin also. So in Q2 of FY '23, we had a gross upfront income on the assignment of about 590 -- sorry, INR 494 million, it's come down to INR 466 million. Why would that be the case?

Is -- basically, it depends upon the volume of what volume you do the assignment basically? And what sort of assets you do the assignment, what yield of assets assignment? Two, 3 factors determine that overall how upfronting income comes basically...

Sorry, assignment volumes have increased Y-o-Y, right?

Yes. Yes. asset classes also make a difference. What assets pricing will be sold at that point of time or what assets interest yield assets we sold this time basically, won't make a difference in that account.

Sure. And on the reversal of the income, which was recognized earlier on the assigned pool, right? That has also increased to about INR 335 million. So that would probably be because some of the assumptions that you would have made earlier have not played out or have played out adversely. So can you highlight some of the nuances which would have impacted such a reversal?

Yes, that is not a major impact of reversal. And it's not as volume got increased, so the reversal also won't get increased every quarter, basically. What assignment I had done in the, let's say, Q1, or let's say, Q4 of the last year, so those will have a full impact of reversal in this quarter basically.

Understood, sir. Sir, my last question is on non-HL book. So that's been growing at a fairly healthy clip, 30% for the last several quarters now, but we see that since last 2 quarters, the NPAs are also increasing in that book. Anything to read into this as to why the NPAs are increasing on this book?

No, I think -- now you see we gave all the mortgage -- loan, average tenor is generally 7 to 10 years. And so now this book is -- we are entering the fourth year. Almost this book is coming at a steady-state basis. So we see roughly gross NPA in other mortgage loans will remain between -- somewhere between 1% to 1.25% around. And the home loan book will remain less than 1% around, basically. So this is now almost at maturity level of gross NPA in both class of book.

Understood. You're saying it's more of a normalization rather than...

Yes. With the maturity of the asset cycle basically, with the maturity of asset-light.

Right. And sir, just -- sorry, one last question. Your share of variable rate book has been going up. So do you think that, that would be a risk in terms of, say, probably a balance transfer?

No. I think we don't see in this fashion, variable or fixed. The variable, fixed books depend upon what liability we source from the market, what opportunity available on the side and what deployed on the asset side. What we see in the asset side, accordingly we raise the liability. That is -- we don't take a risk in a floating and fixed while managing our ALM.

Understood. And sir, what was the BT out for this quarter? Can you highlight that number and compare to what was that in Q1?

It is flattish. So it is 0.5 percentage per month. So coming to around on a yearly basis, 6%.

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

A couple of questions. Actually you did answer, but you mentioned the fact that now the systems are stabilizing and you're almost settling and this should happen by the year-end. So what is the disbursement run rate we should look forward to, especially in the light of H2 being slightly better than H1?

I think, Shweta, we've been guided -- we've always guided on the AUM growth that we'll be in the range of 20 to 25 percentage. So I think from a perspective of quarter-on-quarter growth, you see in the quarter 2 growing on the quarter 1 at around 18 percentage. So we look at a moderated calibrated growth in the coming quarters, considering the 2 aspects, which I talked on the call earlier: one is the management transition; and secondly, a big transformational change in the tech side on 3 platforms all put together, actually.

Sure. That helps. And sir, secondly, a little bit on yields, sorry, I might sound repetitive. So we can imply that the repricing is completely behind, right? Because you are almost on the verge of customer retention and therefore we've opted for reduction rate. So the ability to pass on or the scope to pass on is limited from here on and therefore spreads would remain range bound. Is that assessment correct?

Yes. See, at this period of time, whatever was the last pass-on that happened. Subsequent to that, there's nothing which has increased on the PLR side. So you're right on articulating that is there a possibility of pass-on? No, it is only whatever is the placement yield, which is there. And some part of it, which I talked about earlier on the result in 11% debt and the yield is the one is on the retention side because we've been very cognizant of the fact that we retain the good quality customers. So there, it results in a drop in the yields and some part of the competitive pressure on getting the new business. So it's a mix of both.

Okay. And sir, one last question. So the MSME as a norm mortgage mix -- or the other home loan mix. Now if I just look at the percentage mix, more or less, it has remained steady. So -- and industry has falling out for concerns on small-ticket lending. So I understand you had given an explanation last quarter. So anything, any red flags, any read-through? What is your reading on the ground?

Shweta, as always, we've been there that we are in the business of cash flow-based underwriting. And all our loans are backed by the either self-occupied residential mortgages or the commercial properties, most of them self-occupied residential mortgages. And typically, we are not there in any way in the unsecured segment or a small-ticket size loan. And we are very -- of the fact that we don't depend on anything which is volatile, either from an income generation perspective, which is either subsidy based, which is dependent on weather gods or which is dependent on -- in terms which are volatile in nature. So this has been our basis of cash flow-based underwriting on this. So we don't see at this period of time, any reg flags on that segment.

Sir, just one bit there because you mentioned that we are not subsidy-based dependent. So just the CLSS subsidy going behind most of the affordable housing finance players have seen flattish growth. And I understand that ours is a very small portfolio. So could you just describe how small has been our CLSS portfolio vis-a-vis competition? And of course, that has not impacted anywhere on the growth prospects for Aavas, right?

So we've never been, Shweta, dependent on the subsidy base kind of schemes. And you would really appreciate that Aavas is an unserved, underserved unbanked and there too, on self-construction individual home loan category. And the self-construction individual home loan category was not the one which was under this segment. So when you are at 70, 75 percentage of the portfolio, which is on the self-construction individual home loan, these are not impactful items actually for us to really play out.

The next question is from the line of Renish from ICICI.

Okay. Just 2 things. One is on the average ticket size on the disbursement level, which is at 1.3 million. So what is happening on that side? I mean, given our key focus area has always been less than 1 million ticket size. But when I look at the disbursement ticket size, it is as high as 1.3 million. So practically, it is 25%, 30% higher than what we have been doing. So maybe in Q2, if you can highlight the number of, like say, files logged in or maybe volume growth versus the ticket size growth, sir?

It is not -- as such, I'll give the 2 point here basically: one, if you see my non-home loan average ticket size last year actually to this H1 is not any change. But in the home loan side, if you will order in that, started from Mumbai, then I think Delhi, then I think in Jaipur, state capitals and the big towns, we are seeing the property prices also increasing. And the thing we are seeing in our ticket size last 7, 8 years didn't risen at all, basically. So it is basically led by inflation, led by property prices. And we have seen some increase, almost, let's say, 10% increase in our home loan ticket size basically. As a business model perspective, we are not seeing any change or we are not following any change in our strategy, continue to focus in the same market, same customer base and similar property profiles.

Got it. Got it. And sir, secondly, again, circling back to the sanction-to-disbursement ratio, which fell to 80% versus 90% earlier. So what are the reasons for this fall? I mean have we tightened our credit filters or how is it?

See, it's a 2 bit: one is the kind of demand, which was there; and secondly, on the competitive pricing pressures, which we had to let it go and let it pass by, saying that kind of yield where competition was coming in. So probably it is twofold. As I said that we are there in the self-construction individual home loan category and I think certain part of India is on the places we operate are, were impacted by incessant rains, actually. So that also has stemmed the construction activity. So that was another -- one of the areas why it actually failed. So I think in the coming quarters, we will see that picking it up -- picking up in the coming quarters.

Got it, sir. And just last thing from my side, broadly on at the strategy level over the medium term. So when we look at, sir, at least on the listed side, players are doing at 30% plus. Our growth rate is -- or maybe we want to grow at 20%, 25%, around that number. So within these subsegments, we'll be losing market share for sure. I mean when we look at or when we compel the growth. So how we internally look at it? I mean, are we okay to, let's say, lose some market share and grow our balance sheet the way we want? Or maybe once the system, et cetera, stabilize, again want to sort of come back to market and gain market share?

So as always, it has been -- as we have always put out that our guidance has been in the range of 20 to 25 percentage AUM growth. So we would not let any opportunity passed by when it comes to -- once the management transition and the tech transition is fully in place. And as we said that some of the states where we are already there, would like to build and grow, wherein the AUM growth would be in excess of what we talk about on an average one. Second is the second level where it would be a moderated one, and that will help us to invest into the new states where we entered. So Renish, to put it in perspective, would -- we would really capitalize the opportunity available at the stages where we find there are risk-adjusted returns and the quality and metrics fits our steady state, actually.

Okay. Okay. So -- got it, got it. So we will not look at market share trend at all, I mean, internally?

So see, we are in that segment, probably we -- it is -- as we said that for us really to grow at our kind of metrics and our kind of things, which is 20 to 25 percentage on the deals which we are. So you'll really appreciate that we are currently 15,000-plus AUM. And on that base with a guided 20 to 25 percentage growth with the kind of quality metrics, which we are talking about, GNP of around 1 percentage, 1 plus of less than 5 percentage. I think these are the metrics which have to bear on a long-term basis.

The next question is from the line of Sonal Gandhi from Centrum Broking.

So I have 2 questions: one is, if I look at your non-home loan portfolio. So the borrowings -- just reported to the disbursements for the year are up by about INR 415 crores and AUM is roughly up about INR 408 crores on a quarter-on-quarter basis, suggesting that the repayment rate is very, very low. So can you please explain what has exactly happened over here?

Sonal, can you articulate again? One, was voice wobbling and we were not able to get your question right in right frame.