Aavas Financiers Limited (AAVAS) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening, and welcome to the Aavas Financiers Limited Q1 FY '21 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in a listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Please note that the conference is being recorded. I now hand the conference over to Mr. Rakesh Shinde, Head of Investor Relations of Aavas Financiers Limited. Thank you, and over to you, sir.

Thank you, Swapnil. Good evening, everyone, and a very warm welcome to all participants joining us today to discuss our financial and operating performance of Abbas Financial Limited for quarter 1 FY '27. The results and the investor presentation have been uploaded on the stock exchanges and are also available on our website. I hope you have had a chance to review them. We have also uploaded an Excel fact sheet containing historical data on our website for does reference. Joining me today is the entire management team of ours. We will begin this call with opening remarks from our CEO, Manu Singh; and Interim CFO, Gansham Gupta. This will be followed by a Q&A session. With that, let me now hand over the call to Manu, -- over to you, Manu.

Thank you, Rakesh. And a very good evening to everyone joining us today. We appreciate you being here. Quarter 1 FY '21 has been a strong quarter for us and marks an important milestone in our growth journey. The strong performance during the quarter reflects a business that is becoming faster, fitter, more productive, with greater accountability and sharper execution across our organization. We have started the year on a very strong note. . During the quarter, we disbursed loans worth $16.1 billion, delivering a robust growth, 41% Y-o-Y, albeit on a lower base. This performance was broad-based and driven by a strong pickup in volumes meaningful improvement in resource productivity and healthy 38% Y-o-Y growth in the home grown segment. The quarter reflects the early benefits of our focused executive strategy, stronger field level accountability and continued emphasis on customer acquisition. The momentum witnessed during the quarter strengthens our confidence in our strategic initiatives, which are underway and provide a solid foundation for the rest of the year. Our AUM grew by 15.4% Y-o-Y to INR 239.3 billion as of June end. Encouragingly, our monthly AUM addition improved by nearly 50% Y-o-Y during the quarter, enabling us to achieve in 3 months what previously took close to 5 months. This reflects the positive impact of our efforts around customer acquisition, productivity and execution sharpness. It's a long journey ahead. These improvements give us confidence that Aavas is well positioned to accelerate growth and deliver sustainable 20% growth over the medium term. We delivered 23% Y-o-Y growth in net profits driven by a healthy 18% Y-o-Y growth in NII, supported by robust business growth. In addition, improved operating efficiencies reflected in a 254 bps Y-o-Y improvement in our cost-to-income ratio, which further strengthened profitability during the quarter. As we move ahead, our focus remains on unlocking the full potential of our franchise and translating it into superior operating performances. Our priorities are accelerating customer acquisition, improving productivity, driving higher revenue per resource, enhancing our branch profitability and getting our product and sourcing mix right with increased operating leverages. We are also leveraging data and technology to strengthen decision-making, improving conversion across the to disbursement funnel, strengthening governance processes and deliver super customer experiences across our life cycle. Importantly, our credit-first approach continues to underpin our best-in-class asset quality. Our 1 plus DPD improved by 39 bps Y-o-Y, reflecting the strength of our underwriting as well as collections. As a result, our gross NPAs improved by 11 bps Y-o-Y further reinforcing the resilience of our portfolio. During the quarter, we expanded our branch network to 440 across 15 states. We will continue to invest in branch expansion to further deepen and diversify our presence. At the same time, our focus firmly remains on ensuring faster branch-level breakevens and closely monitoring performance of newly opened branches to drive better productivity and profitability both with clear accountability across functions and a strong alignment throughout the organization, we are making greater execution, discipline and rigor at every layer of the business, underpinned by unveiling commitment to compliance and governance. Our collective ambition is anchored in a simple philosophy, people, performance, perseverance. With that preamble, I'll now take you through our quarterly performance. Our net profit for quarter 1 FY '27 grew 23% Y-o-Y to INR 1.71 billion led by a robust 18% Y-o-Y growth in NII on account of healthy improvement in NIMs. Our net worth continues to compound steadily, growing at 16% Y-o-Y with the strength of our capture position driven by consistent compounding internal accruals. Our NIM expanded by 22 bps Y-o-Y to 7.70% during the quarter, supported by improvement in cost of borrowing, coupled with our continued focus on risk-adjusted pricing. Our cost-to-income ratio improved by 254 bps Y-o-Y to 43.7% in quarter 1 FY '27, driven by better cost efficiencies. As a result, our operating cost to assets ratio improved by 9 bps Y-o-Y to 3.37%. We continue to deliver industry-leading asset quality with all key indicators trending positively and remaining well within our guided range. Our 1 plus DPD improved by 39 bps Y-o-Y to 3.76% in quarter 1 remaining comfortably below 5%. Gross Stage 3 improved by 11 bps Y-o-Y to 1.11%, while net Stage 3 improved by 13 bps Y-o-Y 2.1% underscoring the resilience of our portfolio over time and effectiveness of our credit-first approach which continues to be the pivot of our operating mechanism. Credit cost stood at 24 bps, well within our guided ranges. Our ROA improved by 25 bps Y-o-Y to 3.19 and ROE improving by 78 bps to 13.3% in this quarter. We remain focused on delivering quality, profitable growth with a strong risk discipline, tackled efficiencies consistently creating long-term value for all our stakeholders. With that, ladies and gentlemen, I would now hand over to Mr. Duncan Gupta to discuss the financials in detail with you.

Thank you, Manu. Good evening, everyone, and a warm welcome to our earnings call. To provide an update on the borrowing side, the quarter closed on a constructive node with was maintaining stable cost of borrowing despite a volatile interest rate environment and uncertain geopolitical break drop. This underscores the strength of our diversified liability franchise and strong lender relationships. We continue to enjoy broad-based lender support providing us access to diversified long-term and cost-effective funding to support future growth. We continue to borrow judiciously, raising around INR 14.4 billion at a competitive rate of 7.4% for quarter 1. Total outstanding borrowings stood at INR 207 billion, a well-diversified liability franchise linked with various benchmarks and competitive price. We were able to deliver a 38 basis points year-over-year improvement in our cost of funds for current year Q1. During the quarter, we implemented an additional 10 basis point reduction in our PLR effective June 2026. Taking the cumulative reduction of 25 basis points since March 2026 and passing on the benefit for the interest of the customer. As a result, our spread moderated and stood at 5.06% during the quarter. Our average tenure of borrowing continued to be longer than our assets, ensuring a positive across all the tankers. We have optimal mix of various benchmarks of interest rates, such as 42% of borrowings linked to external benchmarks such as REPO, and IBOR and 34% linked to sub 3 months MCLR, enabling faster repricing to nearly 76% of our borrowings in line with interest rate movements. As of 30th June 2026, we maintained ample liquidity, including cash and cash equivalent and unavailed CC limits up to INR 80.8 billion. Documented and available sanctions are INR 4.85 billion. In terms of profitability and capital position, our NI for the quarter grew by 18% Y-o-Y. Our NIMs in absolute terms, grown by 17% year-over-year. And the NIMs as a percentage of total assets expanded by 22 BPS year-over-year to 7.7%. Our disciplined cost management approach coupled with a continued focus on profitable growth has started yielding encouraging results reflected in a 254 basis points year-over-year improvement in our cost-to-income ratio to 43.7% in Q1 FY '27. Our pre-provisioning operating profit grew by 22% year-over-year to INR 2.33 billion. Our PAT growth was 23% Y-o-Y leading to an ROA expansion of 25 basis points year-over-year to 3.19% and ROE improvement by 78 bps Y-o-Y to 13.4%. We remain well capitalized with a net worth of INR 52.2 billion and a capital to risk weighted assets ratio CAR of 44.6%, significantly above the regulatory requirements. With these words, I just open the floor for Q&A.

Thank you so much. Ladies and gentlemen, we will now begin with the question-and-answer session. [Operator Instructions] We will take our first question from Prashant Poddar of ADI. Prashant, you can unmute a microphone and go ahead, please.

Manu, quickly, if you can help us understand 2 things: one, on competitive environment in the 2 or 3 categories of loans that you participate in any geographical heat map also if you can share in terms of competitive environment and therefore, its impact on potential profitability outlook or margin outlook on the spread outlook on the business for the full year? Second question is how much of, if at all, any -- do you expect any spread compression? How much of that can be addressed by operating leverage? Yes, these are my 2 questions. .

Thanks, Prashant. I think I'll answer both the questions to get there. First, on the question of competitive environment, I do think that we are witnessing healthy competition across geographies. Yes, there is pressure on spreads. As I look for the complete year, I do believe that spread compression from the existing point will go down to sub 5%. However, I'm pretty clear on the operating levers that we have put in action and are showing results in quarter 1 that the ROE and ROA outlook remains stable. There are enough and more opportunities to work levers on the cost-to-income side, more so on the income side. And hence, we are acutely focused on productivity per resource and revenue per source being driven day in and day out at each of our 440 branches, reasonably confident to make sure that the ROE and that we have planned for the year remains where it is, even if some slight compression does take place on the competitive environment, more so, Prashant, I'm heavily focused on regaining our market share in the HL segment, which is the primary aim of the HFC. Doubling down on that business will have a little bit of impact on NIMs, but we are confident of making sure that we cover it up through both cost measures as well as improved operating levers on the income side.

We are now moving to our next participant. We have [indiscernible] of ICICI. Renish, please unmute and go ahead with your question. Renish, please unmute your microphone.

Am I audible now?

Yes, yes. Please.

Congrats, Manu on good set up numbers. Just 2 things, first on this repayment rates, right? So historically, our repayment rate has always been around 16%, 17%, which has gone up to more than 19% since last 2 quarters. So just wanted to check, is it due to some change in product mix in a sense we are doing more of a shorter tenor loan like lab which is projecting in high repayment rate? Or is there something else because the payout rate has also come down this quarter. So I'm just wondering why the repayment rate on sequential basis is so sticky.

Yes, Anish, we did see a small uptick in the early part of the fiscal opening, which is April and early May in specific segments, especially interest rates upwards of 14% small ticket. But as we closed the quarter in the month of June. It has rallied back to its usual trend. I don't expect this to continue. Parallelly, we are focused on improving our AUMs, as I mentioned in my opening comments. It's the speed at which we are feeling our leaking bucket is increasing across our branches. . So to your question of BT, I don't see any specific trend which is alarming has tapered down in June and I expect it to be normal. Yes, part preprints did see some uptick, but that was more in the early part of the month, not in June.

And secondly, on this spend run rate, right? So obviously, this quarter, we closed at 600 plus, which is typically highest you do in first quarter. So how 1 should look at this trajectory over the next 9 months? And also if you can share the June month disbursement number will be helpful. .

So on the next 9 months. Yes, we were very conscious of making sure that the early part of the year, which is quarter 1 gets us onto the right footing on run rate. For 2 reasons, we are now heavily oriented towards P&L and the more that you upfront your business the more earnings you have in the entire part of the year, that has been the guiding force across the businesses. Secondly June numbers are upwards of INR 600 crores. For the next 9 months, we are committed to delivering our yearly commitment of 22%, 23% top line growth, and that remains steadfast. On disbursement, and that moves to about 16%, 17% on AUM. Renish, could you hear me.

Yes, I actually have missed 1 part. So you said 20% to 23% top line growth and 16%, 17% AUM growth. Is that correct? .

The disbursement growth, yes, 22% to 23% and 17% to 18% on an AUM, Yes.

17% to 18% of Okay. Okay. Okay. That's it from my side. In fact, I have a couple of more, but maybe I will come back in the queue. .

We are moving to our next participant. We have Shreepal Doshi of Equirus. Shreepal, please go ahead. .

My question was on the asset quality trends and also heavy -- so basically, on the asset quality trends, there have been -- there is some inch up there, but I think that's because of seasonality. However, are we seeing any trends in any specific geograph fee, which is, let's say, a little more alarming or showing signs of stress? Or -- and have you taken any additional measures on underwriting side, given the macros as well as uncertainty on the rain as well. So any caution or any measures taken on these 2 -- because of these 2 events? .

To answer your first question, no. We continue to see healthy trends on both lead and lag indicators. Absolutely no geographic customer segment stress coming in. Having said that, we are very cautious about the fact of keeping our collections in complete control towards the same. In the early part of February, proactively, teams have taken certain policy changes, looking at the macro environment, certain segments which would be affected by both the ongoing war as well as the ensuing expectation of shortfall of rainfall. We are also constantly looking at indicators across industries. For example, Tractor Grove, tractor sales have shown a rebound after a long period of time. All in all, all our eyes are on the rare humor as well as looking at what is happening around the industry today, we are very confident of keeping our guidance on our credit quality to where it is. .

All right. Sir, could you just double-click on the changes that you were talking about at ground level lens as well as on the underwriting side? .

This is largely mainly focused on segments that we would have -- we see could be impacted, which is tour and travel, restaurant, more so from the crisis in the Middle East and the fuel crisis.

Got it. And then, have you seen any, let's say, trends on rejection rates increasing in any particular category, maybe it could be salaried or self-employed or any particular geography? .

I wouldn't call any visible trend out to suggest a change in our customer segment or our approach. Our business is about looking at risk, which is assessed at a branch level, that is continuously fortified on a monthly basis with training, outlook, lead indicators of bounce such that nothing creeps into the system to come up as a shock.

Got it. I have more questions, sir, I'll come in the queue. Thank you so much, and good luck for the next quarter. .

Thank you. Shreepal. [Operator Instructions] We are taking our next question from Raghav Garg of AMBIT Capital.

I have a couple of questions. One, so when you guide for a 20% sustainability AUM growth, what kind of disbursement per branch are you budgeting in that? I'm sure you've done the math. I think right now, you're at INR 1.5 crores of disbursements per year. So when you guide for 20% AUM growth, what is that disbursement per branch that you're building into that? That's my first question. .

Raghav, I think I'd like to be factually correct on your understanding and my understanding. The current year guidance is 17%, 18% AUM growth, 20% is a medium-term guidance.

Sure. So when you guide for the medium term, what is the disbursement per month that you are...

I'll come to -- I'm coming to your second question. Today, when we look at -- branch is a cumulative factor of small branch, large brands. I look at when I drive teams together, we look at productivity per resource, deployed on the field. So there could be large branches, small branches, there from an average of about INR 8 lakhs to INR 10 lakhs productivity per resource we are looking at doubling this to at least INR 20 lakhs to INR 22 lakhs per resource deployed in the field.

By resource you mean employee, right? .

Yes.

Okay. So essentially you're saying per employee, you're going to double the disbursements, right? .

Yes.

That's essentially what you're saying and say, over a period of 3 years. Is that understanding correct?

I would shorten it.

Sure.