Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aavas Financiers Limited Q1 FY '25 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 may be recorded. I now hand the conference over to Mr. Rakesh Shinde, Head of Investor Relations at Aavas Financiers Limited. Thank you, and over to you, sir.

Good evening, everyone. I extend a very warm welcome to all participants. Thank you for participating in the earnings call to discuss the performance of our company for quarter 1 FY '25. The results and the presentation are available on the stock exchanges as well as on our company website, and I hope everyone had a chance to look at it. With me today, I have entire management team of Aavas, including Mr. Sachinder Bhinder, MD and CEO; Mr. Ghanshyam Rawat, President and CFO; Mr. Ashutosh Atre, President and CRO; Selvin Uthaman, Chief Business Officer; Surendra Sihag, Chief Collection Officer; Ripudaman, Chief Credit Officer; Mr. Jijy Oommen, Chief Technology Officer; Mr. Anshul Bhargava, Chief People Officer; Mr. Rajaram Balasubramaniam, Chief of Strategy and Analytics. We will start this call with an opening remarks by our MD, Sachinder Bhinder; CFO, Ghanshyam Rawat; and CRO, Ashutosh Atre, followed by Q&A session. With this introduction, I hand over the call to Sachinder. Over to you, Sachinder.

Thank you, Rakesh, and good evening, everyone. I welcome you all to our Q1 FY '25 earnings call, and thank you for joining the call in the evening. Let me now take you through the key highlights of our performance in Q1 FY '25. We are delighted to report a robust growth of 22 percentage Y-o-Y in AUM, reaching INR 178 billion, along with this strong growth, we have ensured best-in-class asset quality with 1+DPD at 3.65 percentage, an improvement of 3 bps Y-o-Y and GNP of 1.01%. Our net profit for quarter 1 FY '25 stands at INR 1.26 billion, registering a growth of 15 percentage Y-o-Y. In terms of business updates, in Q1 FY '25, we disbursed INR 12.11 billion, delivering a growth of 13 percentage Y-o-Y. At the end of Q1 FY '25, our AUM stood at INR 178.41 billion, up by 22 percentage, which aligns with our target to grow our AUM by 20 to 25 percentage. The robust 25 percentage year-on-year growth in the sanction serves as a clear indicator of our robust trajectory. This instills confidence to deliver sustainable growth in the disbursals for the entire FY '25. We have opened 4 new branches during quarter 1 FY '25 in our existing states to deepen our reach. We've seen a strong uptake in the logins, led by diversified omnichannel lead generation funnel, including digital, e-Mitra, RRO and Mitra, resulting in better disbursement and building a healthy business pipeline. In terms of technology update, I'm happy to share that we have completed the milestone of adoption and stabilization of Salesforce with 1.9 lakh-plus loan applications processed through Salesforce. Additionally, we have stabilized Oracle Fusion, our ERP application. Our new lead management system built in Salesforce has successfully gone live with selected branches in pilot form. Our loan management system on Oracle FLEXCUBE is at an advanced stage of testing and will go live in the coming quarters. Technology is playing a key role in transformation and turnaround time improvement. Our login to sanction turnaround time has improved to 8 days in quarter 1 FY '25. In terms of financial performance for the quarter, our net profit grew by 15 percentage Y-o-Y, led by growth both in interest income and noninterest income. Our consistent efforts to optimize costs have resulted in a remarkable improvement in OpEx-to-asset ratios by 52 bps, which is now at 3.27% in quarter 1 FY '25 from the previous year's quarter at 3.79%. Our asset quality continues to be pristine with 1+DPD at 3.65 percentage as of June '24, down by 3 bps over quarter 1 FY '24. Our GNPA stood at 1.01% in quarter 1 FY '25, and credit costs remain at 20 bps. In terms of liability, we are one of the best well-diversified liability franchises. We have always been innovative in exploring new avenues of sourcing, and I'm happy to share that we have started exploring co-lending. Our incremental borrowing costs increased by 30 bps Y-o-Y and 17 bps Q-o-Q to 8.31%, indicating the cost of borrowing picking out in line with the benchmark rates. The FY '25 Union Budget marks a transformative leap in addressing India's housing needs by significantly expanding the Pradhan Mantri Awas Yojana to include 30 million additional houses, the government of India's commitment to providing housing for all. We are committed to a strong growth. And our focus on innovation, technology and cost optimization will continue to drive our success. And I'm confident with our dedicated team and strategic initiatives, we will achieve our goals and deliver value to our stakeholders. I would now hand over to our CFO, Ghanshyam Rawat, to discuss the financials in detail.

Thank you, Sachinder Ji. Good evening, everyone, and a warm welcome to our earning call. First to update on the borrowing. In terms of borrowing, we continue to borrow judiciously and raising around INR 11.35 billion at 8.31% in quarter 1 2025. Total outstanding borrowings as of 30th June 2024 stood at INR 158 billion. Overall borrowing mix as of 30th June 2024 is 47.8% from term loans from the bank, 24% from assignment and securitization, 19.6% from NHB refinancing and 8.6% from debt capital market. During the quarter, overall cost of borrowing increased by 1 basis point quarter-over-quarter to 8.08%. Our incremental cost of borrowing for quarter 1 FY '25 was 8.31%. Lender support continued to remain extremely strong. There is access of diversified and cost-effective long-term financing. We maintain a strong relationship with the development financial institutions. To meet long-term business growth, we have progressed on co-lending tie-up with the PSU bank. As of 30th June 2024, we maintain sufficient liquidity in the form of cash and cash equivalents and unavailed cash credit limit of INR 17.5 billion and documented unavailed sanction of INR 12.6 billion. In terms of spread, as of 30th June 2024, the average borrowing cost of 8.08% against an average portfolio yield of 13.08% resulted in spread of 5%. We have been able to maintain our spread around 5% in line with our guidance despite competitive pricing pressures. Our margin, NIM as a percentage of total assets during Q1 FY '25 stood at 7.31%. Our NIM in absolute terms has increased by 10% year-on-year Q1 FY '25. In terms of costs, our OpEx-to-asset ratio has improved 52 basis points to 3.27% in Q1 FY '25 versus 3.79% in Q1 of FY '24. We are committed to gradually bring down to OpEx ratio around 3%. Credit cost during the quarter stood at 20 basis points in Q1 FY '25 versus 16 basis points in Q1 FY '24 and Q4 FY '24. In terms of other parameters, corporate after tax during the quarter increased by 15% year-on-year to INR 12.61 billion. ROA stood at 3.01% and ROE 13.14% in Q1 FY '25. IGAAP to Ind-AS reconciliation has been explained in detail, profit after tax and net worth on Slide #30 and #32 of our presentation. We are very well capitalized with a net worth of INR 39.03 billion and CAR at 44.48%. Total number of live accounts stood at 223,600, translating into 16% year-on-year growth. Employee count was 5,904 as of 30th June 2024 versus 5,700, 30th June 2023. Now I would like to hand over the line to our CRO, Ashutosh Atre, to discuss assets' quality.

Thank you, Ghanshyam Ji. Good evening, everyone. I'm pleased to share the key portfolio risk parameters with you. Asset quality and provisioning. Our asset quality, as mentioned by Sachinder Ji, continues to show improvement. The 1 day past due metric improved by 3 basis points to 3.65% in Q1 FY 2025 compared to 3.68% in Q1 FY 2024. As of 30th of June 2024, our gross stage 3 stood at 1.01% and net stage 3 at 0.72%. In terms of geography, 1+DPD and GNPA in our core vintage states remained well below 4% and 1.1%, respectively, whereas other emerging states, 1+DPD and GNPA remained well below 3.5% and 0.9%, respectively. Similarly, in terms of ticket size of more than INR 15 lakh, 1+DPD and GNPA remained well below 3.3% and 0.8%, whereas in case of ticket sizes less than INR 15 lakh, 1+DPD and GNPA remained below 4% and 1.25%, respectively. Our total ECL provisioning, including that of for COVID19 impact as well as Resolution Framework 2.0, stood at INR 907.5 million as of 30th of June 2024. Aavas is strongly positioned to continue delivering industry-leading asset quality. With this, I open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Shreepal Doshi from Equirus.

So my first question was on business momentum and particularly on disbursements. So the run rate has come off materially from the 4Q levels. And within housing, the degrowth is even higher. While I understand that 1Q tends to be soft, but what is it that led to this lower disbursements during the quarter?

Thanks, Shreepal. As you really appreciated and you highlighted, we always have a muted quarter 1. But here I would like to highlight on against robust sanctioned growth of about 25 percentage, we had sanction to disbursement around 78%, which led to the growth being muted on the lower side actually. But as really pointed out, on a 25 percentage sanction growth, we expect the momentum to come back in the coming quarters.

So, sir, for -- if you have to look at it from a different angle on a yearly basis, what sort of a disbursement that we are targeting? And how do you see it shaping up over the quarters?

See, as I said, one parameter on which is that the sanction growth is there on the clients. And I said that we are at around 77 percentage on this quarter. And in the coming quarters, we'll have the sanction to disbursement ratio really covering up to the normal levels of 85%, 87%, that's a normal range, which will remain. So we are confident of bouncing back on the quarter numbers. So what gives -- instills confidence is one is the login growth, and second is the sanction growth. These are the 2 parameters which really help us give that confidence of -- there. So unlike a normal one, we have a sanction growth, which is already available with us, actually. And that will translate in the coming quarters.

So are you saying that there was no, I mean, material momentum decline in terms of the number of logins during the quarter?

No. As you reflect, as I highlighted, there is a growth in login and there is a growth in sanction and both of them we've given the numbers out. So there's no momentum growth, if I were to really put across. There's a decrease in the sanction-to-disbursement ratio, which has resulted into the disbursement take on the little muted side.

Okay. And sir, the second part was pertaining to the end use of the other mortgage category that we have classified this quarter. So what would be the end use there?

So other mortgage, if you really look at it, it is the MSME side of the part, which is the micro MSME, where it is typically the unserved, undeserved, which we really focus on as a specialized HFC, which is very unique to Aavas on -- which really helps in building the capital creation for the working capital customers on the micro MSME side. And you've seen the degrowth on the LAP and the top-up side, and it really has gone into the capital consumption on the MSME side, and that's around 180 -- that's around 22 percentage.

Okay. So the end use is for the MSME -- micro MSME purpose?

For the micro MSME, right? Shreepal, if I have to get it...

No, I was talking about the other mortgages.

These are typically the loan against property and the top-up loans, which are home loans, which you have the top-up loans, which gets classified as the loan against property and the loan against property which is for the personal consumption. These are all backed by self-occupied residential properties.

Okay. Okay. So the last question was on pricing. So we had done rate hike a couple of quarters back. So I think -- so why has there not been any improvement on the yield side during the quarter? So that was the question, sir.

So I think if you see the disbursement yield, there is an improvement on the disbursement yield on quarter-on-quarter and compared to the previous quarter. But on the overall yield side, I think you've seen not that kind of compression which is -- which was normally there in the earlier time, so -- and maintaining a consistent spread of about 5 percentage.

The next question is from the line of Mr. Renish, ICICI Bank.

Sir, congrats on a good set of numbers during an extremely challenging environment. Sir, just two questions from my side. One on the spread in the NIM side again. So when we look at the incremental cost of borrowing at around 8.3% versus blended cost 8.7%, which essentially means that going ahead, the blended cost will converge towards the incremental cost. And when we look at the yield, it's trending -- down trending since last many quarters. So how confident we are about sort of maintaining this 5% spread for the full year? I mean though we know that we've increased our PLR by 40 basis points, I think, in April, but that doesn't reflect in this quarter. Maybe it should reflect in -- from second quarter. So what is your internal assessment, sir?

So I have the -- there are two parts of the question. The second part, I'll have Ghanshyam ji to respond. On the first part, we've been giving a guidance. Our endeavor is to maintain 5%. And as you will really appreciate that there has been a spike in the incremental cost of borrowing, and the same transmission has not been possible at the ground. So as a result of which you do not see this incremental increase in the cost of borrowing being able to pass on to the existing set of disbursement customers. And on the yield side, on the placement, I'll have Ghanshyam ji to really respond on the second part.

Thank you, Sachinder. This quarter, when we borrow fund, NHB contribution has always remained low than what we borrowed for full-year basis. So this year, new limit will come once we complete this quarter. Then the contribution of NHB borrowing will increase in overall borrowing. So we are confident that now cost of borrowing is almost peaking out at this level, basically. And we borrowed a good amount of money as T-bill link, repo-link money. So whenever the rate cut comes, it will have a positive impact on Aavas' overall cost of borrowing basically. On yield side, if you see, last quarter to this quarter, we have almost a 17, 18 basis points higher yield on the new business we got in this quarter. So we are quite hopeful that we are going more granular, more smaller ticket going forward in our business strategy. So I hope that, that will also help to maintain our overall yield level basically or new disbursement will have further increase in yield basically. So our endeavor is to maintain this 5% spread going forward.

Got it. And my last question to Sachinder sir again on the disbursement side. Sir, when we say our sanction to disbursement remains at 77% versus 85%, 87% normally, which means disbursement is lower by maybe 7% to 10% this quarter because of seasonality, is that a fair assumption?

One is the seasonality and second is the recognition of the disbursement. As you are aware, I think both of the parts have led to the current. But the positive side and the green shoot is that you have the momentum, which is there, which is reflected in the numbers.

Got it. Got it. And would you like to share the absolute disbursement expectation for this year?

So see, we've always guided on our AUM growth of 20 to 25 percentage. I think we are confident of the fact that we will be able to deliver in that range. And I think that would come across by two parts. One is disbursements coming across quarter-on-quarter and plus the foreclosures being controlled at the rate at what we have been able to manage. I think both of them really contribute. So we are confident on this side of delivering the growth on the yield, which we've always guided to 20 to 25 percentage with disbursements side contributing and the BT out being restricted to at a level at which we are comfortable at.

Got it. And then just last bookkeeping question. What is the interest reversal because of the RBI circular?

I think, Renish, we can discuss offline on this. Whatever is there on the RBI stipulation, we've followed completely what is required as per the guideline, what has been mandated. So we follow the rules and the circular in total.

Okay. So it is right to assume that by end of June, we are fully compliant and going ahead there should not be any reversal impact?

So we are compliant on that, Renish. What we are saying is on the coming quarters, we'll have the bounce back of our disbursement coming into play.

[Operator Instructions] The next question is from the line of Shweta from Elara.

Sorry, I'm harping on the same question all over again. So we had seen 25 bps PLR increase in Q4, right? But if I look at the yield movement, I mean, there might be one-offs in Q1. But when do you see this reflecting ahead on the yield front?

Can you present the question again, please?

Sir, we had seen 25 bps of PLR increase in Q4, right? So why is it not reflecting in the yield movement? .

If you see, last quarter, we published a 13.13% and -- which -- and we increased 25 basis point in the March itself basically. So in a contractual rate, a high basis point drop is on account of fresh because fresh business is still lesser than the AUM build basically. So there is a -- I don't think there's any contraction in yield reported in our investor deck. Yes, at a computed level -- if you ask me at a computed level, obviously, due to RBI circular, there is a certain interest cost reversal and some -- this March to June end, NPA also increased. So that 90 days period also interest got reversal. If you both the factor there, then there is the only marginal drop, which is equivalent to my AUM will drop.

Okay, fair point, Sir. Secondly, how are we placed today on the BT out cases? Has that number seen sort of spike? Because if I go by the calculations on your prepayment and repayment, so could you just throw some light on BT out for this quarter?

If you see in this quarter, overall BT in the industry is a 5.6% at annualized basis, which is within our control and which is within our last year's track record also basically. We generally assume in our budget 6% is a BT out to industry. And during the quarter, as customer close his -- partly close accounts, they pay the EMIs also. So overall, my reduction in the AUM is 16%, which is within as per the budget as per our -- within our assumption and the past year track record also.

Okay. So there is no unusual spike here, right, on BT out?

No, no unusual spike. Last year, if you see, overall 16% to 17.6% was a repayment from opening AUM to closing AUM. We still are at 16% in this quarter.

The next question is from the line of Raghav Garg, AMBIT Capital.

Just my first question, what is the total number of employees that you had as of June end? And a related question is why have the employee expenses declined on a Y-o-Y basis? Those are my first two questions.

On the employee count, as of 30th June, there were 5,904 employees and compared to the previous year, it has increased about 204. There is a onetime set off, which is the long-term incentive plan and ESOP cost, which has got reversed, as a result of which there is an employee cost reduction.

Understood. Sir, my second question is from the annual report for FY '24. So what I see is that there is a certain purchase of software worth about INR 29 crores, which has been capitalized. And when I look at the intangibles under development line item also, there is about INR 22 crores or INR 23 crores worth of expenses waiting to be capitalized, I think, next year, again, related to software. So can you tell us what is the nature of this expense? And it doesn't seem to be a onetime capital expenditure because it happened last year, it happened in FY '24, and probably you're going to capitalize it again in next year. So if you can explain what is the nature of this expense? And if this is going to be a recurring expense, then why not expense it rather than capitalizing it?

Raghav, I think in last few years in the quarterly call and annual call, we explained that Aavas took complete tech transformations in the company. First, we took Salesforce as LOS, as tech transformation. Then we took ERP Oracle Fusion as a tech transformation. As well as during this time, we took a lot of digital initiatives also to be -- have a very, let's say, different level of customer experience onboarding to exit of a customer. And now in this quarter, we are under progress to go live with Oracle FLEXCUBE as an LMS system basically. All 3, 4 systems and apart from that there are a few peripheral systems are there, like we took a treasury software also, along with that we had updated our people -- Human software also basically. So all put together is a total CapEx in the company, roughly. In 2 years, something we already capitalized, something will be capitalized. Put together, everything will be INR 45 crores around the capitalization basically, INR 45 crores to INR 50 crores capitalization, all this put together basically. So there is no any revenue expense is getting capitalized. Capitalization is a revenue expenditure. It's purely capitalization expenditure, the company will get benefit in the next 10 years and the entire growth generated will benefit to us basically.

Understood. So ideally, maybe in a couple of years or maybe after next year, this capitalization, whatever this amount, it should run down, right? It won't continue at this INR 25 crores, INR 30 crores kind of a run rate beyond, say, next year? Is that the right assumption?

No, no, no. This year is the final year in capitalization. In this year, by this period, 2 years put together, we will have a capitalization of INR 45 crores to INR 50 crores.

Understood. Sir, the reason why I asked is that given my limited understanding, I thought it was more of a subscription-based model. But given that this expense is going to run down after next year, maybe I'll try to understand it offline from you as to what exactly is the nature of this expense. Sir, my other question is from your annual report, it seems that the MIG and LIG...

Mr. Garg, may we request you to return to the question queue for follow-up questions? The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

So first things first, I mean, you spoke about disbursal yields earlier. What was the disbursal yields in 1Q?

Sorry, Abhijit. You said disbursal...

Disbursal yields in 1Q.

So Abhijit, we've always guided on our -- the spreads and on our AUM growth. The incremental disbursal yields, which we don't comment because I think that trades off, moves across on quarter-on-quarter. I think important is that we've been able to maintain a spread of 5 percentage on a basis of that. On a sequential -- on a basis of Q1 previous year, I can really say that it is in the range of 15 to 17 bps. Comparatively of the previous, it is higher by 17 bps actually.

Got it. This is fair. This is fair. Sir, the other question that I had was on spreads. Already a lot of questions have come your way on spreads. But given our guidance of 5% and now that we are eventually here, just trying to understand, given the competitive intensity, which is not allowing you to transmit higher cost of borrowings to customers, right, are you also doing something on the mix side to ensure that even if cost of borrowing stabilizes and the competitive intensity remains this way, which will need continued pressure on yields? Are we doing something about mix as well to see -- to ensure that the spreads can at least be maintained at 5% kind of levels?

Yes, Abhijit, you are right. I think the endeavor, as you rightly said, and I would really articulate in the form that the focus on the ticket size, which is going to be less than INR 15 lakhs to contribute is really higher. And even in the buckets which we are there, incremental increase granularly on the yields or the disbursement yield is our endeavor. And because of that, we will really see -- try to maintain our spreads, and when we see the peaking out of the cost of borrowings really peak out, we'll try to maintain, and our endeavor is there, and we're working on that. As a result of which, when we say that we've been able to have our disbursement up. So there is within -- the focus really is to work across on higher yielding products, which are there, which is within the segment which is there, which is self-occupied residential properties, home loan segments, really to build in those lines actually. So that's been our focus, and we will continue to build on that.

Got it. And sir, just one last clarification. Just trying to understand two things or two clarifications. One is, I mean, have we changed the way in which we report or compute NIM? Because for the last financial year FY '24, you have reported NIM of 7.91. For this quarter, you have reported a NIM of 7.31. So is there a change in the way we conclude and report NIMs? .

No. There is no change in the reporting at NIM basically. NIM is the same way we compute what we have reported earlier and now reported. But in this quarter, NIM got impacted by the two reasons. One is the assignment income for this quarter is lesser than what we see for the full-year basis because first quarter generally remain muted for assignment. But as you progress on a full-year basis, it will be catch-up on the assignment income. Then on a full-year basis, we will be back to that number. Secondly, obviously, cost of borrowing got increased, that has also impacted there. Secondly, as we mentioned, our spread got -- let's say, came down. So that has also impacted at a NIM level basically. But onetime impact of assignment will come back, will come back on the full-year basis. .

Got it. But our presentation is actually showing a 70 basis points decline in the reported NIM.

Yes, a few basis points because the spread also came down. So if you take the spread reduction, which is there, then around 20 to 25 basis points is on account of AIS -- on account of assignment basically. So that will come back in the remaining year. Already, I think, there was a question on the spread and all these things. We always say the thing, we will maintain this spread. But you will appreciate this thing, we always give one more commentary if we lose at a spread. So we will make up the same thing through OpEx leverage basically. So this quarter or last few quarters, now OpEx leverage, we have around 50 basis points in this quarter.

[Operator Instructions] The next question is from the line of Jigar Jani, B&K Securities.

So on the OpEx front, we were guiding for 20 to 25 bps each year progression. But if I compare on an FY '24 basis, we were at 3.58%. This quarter, we are already at 3.27%. So we are well below what we have guided for the full year. So how should we see the OpEx-to-asset number for the full-year FY '25? That's the first question. And secondly, the growth guidance that we are making in this, which is 22% to 25%, how much upside would be there because of the CLSS announcement in the budget? And if you could also simultaneously share in what format if you have had any discussions with NHB on this and what format is the CLSS scheme is going to come in?

So we've always guided on the AUM growth of 20 to 25 percentage. On the OpEx-to-asset ratio, we are at around 3.25% (sic) [ 3.27% ] for the current quarter. Our endeavor is to continue to maintain and some of them, I think, on the employee cost side, which was incidental in nature, which came across in this quarter, I think operationally, we will try, and it is in a long-term guidance in the coming year to come to a level of 3%. So we continue to strive towards that and maintain that slide. And on the CLSS, I think Aavas as a normal strategy has never built the growth based on any of the subsidy schemes or other. We are into specific ones which are going to the self-construction individual homes. Definitely, that housing for all PMAY work will have a positive impact for us. But nothing on the CLSS specific, we have been guiding on those lines.

The next question is from the line of Shubhranshu Mishra, PhillipCapital.

Just to harp on the CLSS part again. There has been some degree of budget announcement without any fine print. We know the fine print comes out, do you think that will change our AUM, our disbursement growth guidance going forward? Second is what really changes when you see this fine print of CLSS? Because when CLSS got knocked off in 2022, since then the developers have pivoted towards other kind of inventory. So for them to repivot back into affordable housing will take some time. So in that case, certifying disbursement at scale with this scheme would also take time. Is that a fair assessment?

Sorry, actually, you are not audible.

Am I audible now?

Now it is much better.

Which part did you not hear? The first question or the second one? Should I repeat everything?

So on the first question, what we heard and what we heard you right is that we continue to have a guidance of AUM growth of 20 to 25 percentage for the coming quarters.

No, my question was, with the fine print of CLSS coming out in the next few weeks, will this change our AUM and disbursement growth? That was the first question. Second one was, in 2022, the CLSS got knocked off and the developers repivoted towards other kinds of format, which is not affordable housing. So there has been a supply-side crunch. This supply-side repivoting itself will take some time for the developers to realign to the fine print of CLSS. So do you think that the certification of disbursement at scale will also take time, maybe 12 to 18 months?