Aditya Birla Capital Limited (ABCAPITAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Aditya Birla Capital Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Ajay Srinivasan, Chief Executive, Aditya Birla Capital. Thank you, and over to you, sir.

Good evening and welcome to this call to discuss the results for Q2 FY '22 for Aditya Birla Capital. I do hope you have a copy of our presentation with you. I'm joined today by our senior team, and together we will get you through the highlights for the quarter and then take any questions that you might have. From a macro perspective, India's growth indicators are steadily improving, though what we are seeing is a K-shaped recovery. India's new COVID infections are now at the lowest level since March 2021. We are, therefore, seeing increased economic activity coming through as a result of all this, and that is partly reflected in our results. The momentum in growth and profitability continues to gather pace at Aditya Birla Capital. Let me take you back to Q3 of the last fiscal, where we declared our highest ever quarterly profit till then, which was INR 289 crores. In Q4 of FY '21, we grew even more strongly and delivered our best ever quarterly profit of INR 375 crores. In spite of the disruption of wave 2, Q1 of FY '22 was our best ever for Q1. And now our Q2 FY '22 results continue that strong momentum and have led to us [ using ] INR 377 crores of profit, the highest ever quarterly profit in our history, with a 43% year-on-year growth. Given this momentum, the fact that the second half of the year tends to be better, the fact that we hopefully will not see a severe third wave and the fact that we're looking to breakeven in Q4 in our Health business, we expect to cross INR 1,500 crores of PAT for the year. At Aditya Birla Capital, we aspire to being in the top 100 listed companies in terms of profitability. In Q3 of last fiscal, we had set out targets by business that we aim to achieve in FY '24. I'm happy to state that progress against these targets has been strong, and we hope to deliver those targets across our businesses, a year ahead of our expectations. If I can now draw your attention to Slide 4, you will notice robust growth, margin expansion and strong profitability as a recurring theme across our businesses. Our NBFC business is transforming itself with a focus on the retail and SME segment and grew this portfolio by 19% year-on-year, with this segment now contributing just under 60% of our total book. As a result, our NIMs have expanded strongly to 6.23% this quarter, the highest level we've seen in this business. This expansion in the NIM has led to us delivering a 60% increase in PAT year-on-year, with an ROA of 2.4%. As we continue with this strategy, we will see continued expansion in our ROAs. A similar pattern is playing out in our housing finance company. Here, our focus is on affordable housing, with this book growing 49% year-on-year. This growth, along with the fall in cost of funds, has led to the highest ever margin we've recorded of 4.32% and a growth in PAT by 43% year-on-year. The ROA in our Housing business reached 1.8% this quarter, a target we had actually set for FY '24. As we continue to grow our affordable book and gain scale, we expect our ROAs to expand. Our AMC, which is now listed, released its results recently. This business too has had a strong quarter, with domestic AUM growing by 26% year-on-year and equity AUM growing by 41%, such that it is now -- that it now accounts for 39% of our overall mix. The growth in equity AUM and economies of scale have helped expand margins, with PBT to AUM growing from 27 basis points to 31 basis points year-on-year. Our PBT in this business grew 41% year-on-year, with ROEs at a top decile 36.5%. Our Life Insurance business has grown strongly, with individual and group business growing ahead of industry. Our focus on the product mix and our expenses has led to a strong expansion in net VNB margin in Q2 to a high of 12.5%. The second half is always a better half to this industry and our business, and we expect net VNB for the year, therefore, to be ahead of our earlier guidance. Our embedded value for this business has grown 22% year-on-year to over INR 7,000 crores as of the end of September. Our Health Insurance business continues to grow strongly, with GWP up 30% year-on-year. Due to economies of scale, our product mix and our focus on expenses, we reduced our combined ratio, excluding COVID claims to 110%, putting us on track to breakeven in Q4 of this year as we have guided earlier. I'd now like to spend a few minutes on providing clarity on our capital allocation approach as set out in Slide 8. The funds we have raised over the last few years have primarily been utilized for growth capital in our Lending businesses and to fund the growth of our newer businesses, like Health Insurance and the ARC. With the Health Insurance business breaking even in Q4 of this fiscal, all our businesses will be profitable. And going forward, our focus will be to deploy capital to fund growth, mainly of our insurance and ARC businesses, to continue to invest in building our digital capability and to assess the possibility of beginning to pay dividends to our shareholders. Our funding requirement over the next 3 years will be entirely met through our own sources. I would like to end my opening comments by highlighting the benefits that any of our businesses enjoy by being a part of the ABC ecosystem. Or put differently, we set out some of the unique transformational and differentiated initiatives that we are able to drive centrally given our unique structure. One big initiative we are driving across ABC is leveraging analytics through a central -- center of excellence, which helps drive customer acquisition and in increasing our share of customer volume. We do this through a variety of programs, and these are resulted in the data that you will see on Slide 10. An increasing part of our new business is coming from the use of analytics, and this will only continue to grow over time. When our monoline peers in the industry talk about cross-sell, they refer to selling more and more products to their existing customers. We refer to that as upsell, and call cross-sell selling to a customer outside of the business itself, but within the ABC ecosystem. At the end of the day, upsell and cross-sell together lead to increasing the revenue that we earn from customers in the ABC ecosystem. The amount we are selling through both upsell and cross-sell is shown on Slide 10. And as you will note, there is a reasonable proportion of our retail [ sells ]. We continue to work on growing both upsell and cross-sell, and will come back with more details in a subsequent meeting. We also leverage analytics for helping us retain and win back customers, and that data is also provided at the bottom of Slide 10. The second initiative I want to mention is driving partnerships centrally through a unified approach that plays to our strength of being a multiproduct solution provider with a large balance sheet and our ability to tailor make offers to our partner ecosystems. As Slide 11 will show, we have partnered with over 150 such ecosystems, some of which are market leaders in their respective domains. Partnerships are a way for us to build customer scale rapidly, and we will leverage these in addition to the growth of our direct acquisition channels to capture the growth opportunities that exist in the markets that we are interested to expand into. The third and final initiative I'd like to call out is the transformative stance we have taken on how our distribution infrastructure should operate. We map each location where our branch exists to the business opportunity across product verticals, to then co-locate multiple business branches from a cluster into a one ABC smart branch format. This not only strengthens our position as a diversified solutions provider and as a brand, but potentially generates multiple touch points for the customer and significant cost savings, which are permanent in nature. Together with the abc.com, an adviser, a digital architecture, that we spoke about last time, this will be the perfect omnichannel experience that we envision to grow our multiproduct customers. Our common branch infrastructure will also allow a number of our businesses to enter new locations with a lean and low-cost model, thus posting revenue for each of these businesses. We would have completed this exercise for our branches in about 140 cities within the next 12 months, which should give us a saving of about INR 40 crores. I'll now hand over to Rakesh to take you through the Lending businesses. Let me reiterate the message that we are seeing strong momentum across our businesses. We have just delivered our best ever quarterly profit this quarter and are well on track to deliver our target metrics a year ahead of plan. Over to you Rakesh.

Thanks, Ajay, and good evening, everyone. I will now walk you through the performance of our Lending businesses, namely our NBFC and Housing Finance business. In our NBFC business, we had a strong quarter 2 across all financial parameters with our loan book growing 4% quarter-on-quarter, NIM hitting an all-time high and ROA expanding to 2.4%. As we have mentioned before, our focus is on growing the higher-margin retail and SME segments strongly. With things beginning to normalize, we have seen strong momentum in our business, with disbursements almost doubling year-on-year. Bulk of these disbursements, almost 70%, have been to the retail and SME segment, as a result of which, that loan book has grown by 19% year-on-year. Our retail and SME book now accounts for almost 60% of our book, the highest [ HD ]. Our focus on growing retail has resulted in our customer count growing by 6x year-on-year to 1 million customers. We have seen continued upward momentum in our financial metrics. Our NIMs have expanded by 91 basis points year-on-year to reach the highest margin we have seen at 6.23%. The net interest income grew by 21% year-on-year to INR 765 crores this quarter. While we have focused on growth with our addition of 25 branches in the first half of the year, we have kept a close eye on cost, operating at a cost-to-income ratio of around 30%. Our credit costs have come down by 44 basis points quarter-on-quarter to 1.2% in quarter 2 of this financial year. The strong performance across all operating parameters has led to a PAT growing by 60% year-on-year with a healthy pickup in ROA from 1.6% in quarter 2 last year to 2.4% this quarter. We are well on our way to deliver the target ROA we had guided for in FY '24, a year ahead of that guidance. Let me spend some time now setting out what has driven our growth in the retail segment and give some sense of where we are headed. Our growth in retail has been driven by new products, new channels and new geographies. On Slide 17, you will notice how we have expanded our product offering from traditional products, like personal loans, business loans, LAP, et cetera, to small ticket loans for the emerging income segment and further to niche ecosystem, products like Buy Now Pay Later, Checkout Financing, education loans, merchant loans, et cetera. As a result, the new product now contributes to nearly 20% of our retail book mix compared to 4% two years ago. The addition of new products has not just opened up the top line growth for us, but has also helped drive higher ROAs. I have always spoken about our investment in technology, and that has given us a unique edge in growing with ecosystem partners, where we leverage the partnerships being built across ABC. We have built a best-in-class digital lending platform, having end-to-end online journeys through plug-and-play tech-stack. Year-to-date, focus on ecosystems, such as education, health care, e-commerce, payment, merchants, et cetera. And we look to deepen our presence in these as well as open up newer ecosystems. Our partnerships allow us to acquire customers at scale with lower acquisition costs. We acquired about 1.5 million customers contributing to about 27% of overall retail disbursals in H1 itself. Slide 21 speaks about the rapid scale up through this channel. I see our strong balance sheet, low cost of borrowing, agility to integrate with the partner, API, strong processes and our bespoke product offerings as our right to win. While we will continue to build on these ecosystem partnerships, we are also building up all organic distribution channels through our direct sourcing team. This change in channel mix will also contribute to expansion in our ROE. In order to support our product and channel strategy, we are expanding our branch footprint. Our success with small ticket loans is driven by our lean branch expansion strategy in Tier 3 and Tier 4 markets. We took our Tier 3 and Tier 4 footprint from 50% to 73% and nearly doubled the AUM originating from these markets in the last 2 years. As we further expand to 150 locations by FY '22, this financial year and benefit from the omnichannel distribution architecture that Ajay explained at ABC, we will have the branch network to support our growth in our direct retail business, especially small ticket loans. As we scale up with the product, channel and geography focus I have described above, we will be delivering higher than our threshold ROAs of 3% in the retail segment. I would like to call out some of the key quality parameters on the overall book for the quarter. Our gross stage 3 book has stayed flat at 3.64%, and we have maintained the provision cover of 44.1%, in line with the fact that we have almost 80% of our book, which is secure. We have maintained the overall floating cover provision of INR 129 crores for our Stage 1 and 2 assets. Our collection efficiency is at 98%, and we are confident that we will be able to sustain the quality of our book going forward. We have a healthy capital adequacy of 23.7%, which will help us grow comfortably without having to rely on any capital infusion. With this, I would like to sum up on the NBFC front by saying with our current growth trajectory and continued focus on key segments, Tier 3 and Tier 4 market, products, direct sourcing channel and deepening our digital ecosystem presence, we are confident that we will achieve our NBFC guided metric for FY '24 ahead of time. Moving to Housing Finance business. Our Housing Finance business had strong momentum in disbursements in quarter 2, led by our focus on the affordable segment. Overall disbursement was at INR 974 crores, growing 3x quarter-on-quarter and 1.4x year-on-year. We launched the affordable segment in 2017 and have focused on building significant momentum in this space since then. The affordable segment constitutes 57% of disbursements in quarter 2 compared to 38% last year. Consequently, we have seen a sharp 2x growth in AUM within this segment over the last two years. As a result, the affordable mix is now at 33% compared to 21% same time last year. We cater to a variety of customers in the affordable segment in Tier 3 and 4 cities, including those with steady sources of income, the self-employed and more recently the informal segment. The affordable segments are largely first-time homeowners, who are assessed using cash flow-based assessment. Our current average ticket size of this segment stands at INR 14 lakh and is expected to go further down. Our affordable business is driven largely by our direct team across 80 branches across the country. 57% of our branches are currently in Tier 3 and 4 locations. We further plan to increase this to 120 branches by March '22. With the Tier 3 and 4 presence increasing to over 70%, we will take the affordable business even further. In addition to the above, we have a focused program to grow productivity of our sales force via customized trading program. We are in the final stages of tie-up with ecosystem partnerships and that too should add to our growth momentum going forward. With the focus on the affordable segment, leading to a change in the product mix, The company has seen an improvement in the margin, leading to a 28% increase year-on-year in net interest income to INR 119 crores. Driven by our lean branch expansion model, productivity improvement and operating leverage kicking in, especially in the affordable segment, we have managed to reduce cost-to-income ratio to 36.5% from 41% in quarter 2 last year. And as a result, our PAT has grown by 43% year-on-year and led to a healthy increase in ROA by 53 basis points year-on-year to 1.8%. Our ROE for quarter 2 is at 13.9% compared to 10.6% at the same time last year. We have invested in our capabilities to cater to the affordable segment by digitizing our customer onboarding journeys. 80% -- 81% of customers have been digitally onboarded in quarter 2, leading to 46% reduction in onboarding costs to serve this customer better. As the growth rate in our affordable segment sustained, we expect the affordable book mix to be at 35% to 40% by March '22. We will be well on our way to reach our target mix of 65% by FY'24. With this structured shift in our mix, wider footprint and increased distribution, we expect to see continued expansion in our margins and profitability. We are already at the NIM and ROA we had targeted for FY '24. And with our focus on growth and mix, we expect there could be some upside to this. I will stop here on housing and pass it on to Bala for Asset Management business.

Thanks, Rakesh, and good evening to everyone. Post listing of Aditya Birla Sun Life AMC and we announced quarterly results on October 25, then we had detailed presentation made to analyst. Hence I'm going to straightway come to the numbers and key highlights for the quarter and the broad strategy that we are applying to the AMC business to build further. Our total AUM for the quarter ending September 2021 stood at [ 3.7 lac ] crores, with the growth of 28% year-on-year, mainly on the back of robust contribution coming from equity, again backed by strong investment performance for the last 1 year and 3 years both from equity and fixed income. Our equity quarterly average assets under management grew by 41% year-on-year INR 116,000 crores, and equity mix and overall assets under management increased to 39% as of 30 September 2021. As you know, over the last few years, our focus has been growing our retail franchise and increase all the shares from B-30 cities. Our efforts have really worked well with the contribution of retail franchise increasing to 47% as on September 2021, compared to 41% the year ago. Out of the 280 location, we have over 80% of locations in the B-30 market and we continue to expand our [indiscernible] market percent by identifying newer locations. We also adapted Virtual R model and [ convenient ] sales concept to bring in a hybrid approach to serve additional market within India. In fact, our 3 months of pilots around VR model has shown us good results with an [ employment ] of over 1,000 MFDs, which we believe that will help in improving the MFD contribution as we follow that further. And most of the retail franchise growth has come from SIP growth. In fact, 45% of our total equity assets under management come from SIP contribution. Our renewed focus on building our monthly SIP book size has helped us improve from INR 804 crores per month to INR [ 857 ] crores coming from multiple locations across India. We have a long-term asset in focus with more than 88% of our SIP [ duration ] for more than 5 years, bringing stickiness to our AAUM. In order to further popularize the SIP [indiscernible] the SIP contracts, the relaunch of our business SIP combined to create awareness about the multiple -- multi-SIPs that eases the process of investing in multiple schemes. We have registered around 320,000 new SIPs in the quarter [indiscernible] '21 as compared to [ 127,000 ] registrations for the quarter ending September 2020 that we had. Our customer acquisition strategy remains the key area of focus. We've added close to about [indiscernible] in the first half of FY '22, and it is overall for full year and now improved about 1.3 million customer base. As part of our passive strategy, we have given a special emphasis in one large new product across the different segment of [indiscernible]. While doing that, we also emphasized on bringing Smart Beta strategy to ETF, and fund of funds investment. In fact, our passive AUM grew by about -- grew from INR 1,692 crores to INR 2,964 crores by September 2021, almost doubled in the last 6 months. And the alternate business, which we believe would also help us in building our profitability for the future, also catering to the various growing needs of HNI and family offices. Fund rising has been under the way and we have launched AIF Category III, India Equity Opportunities Fund. And also we launched a fund on the Real Estate Fund. In fact, we have signed the term sheet with BentallGreenOak, the arm of Sun Life International New York, to jointly source and underwrite deals for real estate fund, launched as a Category II Real Estate Fund AIF. In all of the [indiscernible] growing needs of NRI customers for investing in India and also offer differential product for them to invest in India, we are setting up a new IFSC unit in GIFT city and hope it actually also brings us more onboarding customers from NRI segment of the investors. On the investor education front, which has been another key area of focus for us as part of the subject to the growing needs of the customers, we have recently launched an exclusive initiative we call [indiscernible] aimed to financially educate women. We strongly believe that we can play a big role in promoting financial independence among women and spread the word on the importance of financial securities for the future in emergency and emergency requirement. On the financial front, very quickly, we are showing improvement for this operating profit, PBT, profit after tax and also high ROE of 36%. Again, one of the highest ROEs we are generating post depreciation of the dividend that we announced just after announcement of the past quarter numbers. With this, I'll stop and I'll hand it over to Kamlesh Rao, who is the MD and CEO of Birla Sun Life Insurance.

Thank you, Bala, and a warm good evening to all of you. Our Life Insurance business has been growing in strength. In the individual business segment, the life insurance industry saw a growth of 21% in Q2, and against that, we grew by 27%. The key contributors to that growth come from our new product launches, and after 18 months new product launches have contributed to 29% of our new business and to say for new products that we launched have already contributed to 12% for the first half. Our key differentiator of PASA, where the pre-approved the highest propensity products through a 3-click digital journey, continues to do well in our banca as well as proprietary channels. Last year, this contributed to 11% of our business, but the first half of this year has already contributed to 19%. PASA, along with our new product strategy, has contributed to our desired rise in the productivity level and we are now increasing significant capacity in our banca distribution, which will help our growth aspiration in the second half of the year. If you look at the last 2 years' data as evident on Slide 52, our growth momentum is evident from the fact that we have grown at 27% versus the industry at 11%, and we hope to continue this momentum going forward. In the group business, too, we [ added growth ] of 68% in the second quarter versus the industry at 7%. In fact, for the last 2 years, as shown on Slide 52, we have grown this business at 98% versus the industry at 4%. In the growth business, whilst our overall AUM is closer to INR 15,000 crores now with an 18% growth over last year, we are ranked in the top 2 in the profitable unit segment of this group business. Also in group -- insurance business, we're amongst the few to reprice our products, giving us some cushion, both in the margin as well as claims in COVID this year. I'll now spend some time on the quality of the life insurance business. Our renewal premiums have grown by 31% and total premium for half year close to INR 5,000 crores implies a 24% growth over last year. The key pillar of this growth are the analytical models we work on for various buckets of persistency. This has helped us take 13 months to 83% and [indiscernible] 51%. The way to look at these numbers, as shown on Slide 52 is that our rate of improvement over other players, and we have grown at close to double the rate of relevant peers as far as persistency is concerned. We collect 85% of our renewal premium in terms of NOPs and 73% in terms of value digitally. Also in our new business, we have now 90% out of it and all of this gives us the confidence that we will be top quartile across all persistency cohorts in the next 12 months' time frame. On OpEx to premium, which has seen a slight increase for [ some ] years during the COVID time has seen a downward trend for us, 13.7%, and we will better our guidance on this for end of year numbers. I'll now spend some time on margin. On margins, net VNB was 7.6% for half year. And whilst our guidance for the year is at 12%, we seem to be heading towards 14% by the end of this year. This number of 14% we mean we are running 1 year ahead of time in the guidance we have set for the next few years. In fact, over the last 2 years, as shown on Slide 52, we are doing better than the listed year in terms of the rate of growth of net VNB. The growth in margins will essentially come from our balanced product mix, resulting in higher gross margins and our well-managed OpEx contributed to growth in the net VNB too, and we are hopeful that with the production mix going up, we will have upward [ bias ] on these margin numbers. Embedded value crossed INR 7,000 crores, registering a 22% Y-o-Y growth and we'll be ahead of our guidance for the end of the year number to INR 7,500 crores with ROEVs around 14%, which is largely on account of both our margins doing well as well as our ability to show good growth within our renewal premium. On the digital [indiscernible], our investments in-sourcing journey allows us to do 93% of our business digitally. Our new third quarter and customer portal now has 4 out of 5 of our available services online, and customer interactions to mobile on this is now at 40%. Over the next 6 months, we'll be able to take our underwriting [ during ] automation 80%. And this will, at that time, allow us to do instant issuance of our life policies in both our banca and proprietary channels. The stability of automated underwriting at 80% and growing instant issuance of policies will significantly enhance our productivity at the back end, but also this would be another industry first for us in the Life Insurance business. And finally on COVID claims, number for first half of the year is at INR 242 crores. And our share of claims is in line with our market share in the business. We are carrying an additional provision of INR 90 crores in the second half of the year, and this provisioning of INR 90 crores is based on the fact that September number are already at 1/3 level of what we had in Q2 and slowly coming down too. Our PBT is at 16%, and this has been in spite of the significant increase in COVID claims through the first half of the year, our ability to manage gross margin, lower OpEx, our repricing group business has helped us manage profitability better than some of our peers. So broadly going into the second half of the year, we have an upward bias on both growth and net VNB as compared to H1. And with this, I now hand over to Mayank for the Health Insurance business.

Thank you, Kamlesh, and a very good evening to all of you. Let me share the update on the performance of our Health Insurance business. We had another successful quarter with good progress across revenue growth and earnings management and also on strengthening our very differentiated business model. Our revenue grew 30% during the quarter, ahead of industry growth, thus adding to our market share. Whilst the retail franchise continues to do well, we are encouraged by the pickup in our revenue-driven corporate business as well, increasing the value creation from our group. We are growing our profit customer franchise very strongly. And at the end of September '21, we now cover more than 16 million lives across all our business lines, a 70% growth over last year. We have a strong focus of managing expenses and our OpEx grew at 16% compared to the revenue growth of 39% in H1. Given the reduced incidence of COVID infections, the combined ratio for H1 has now come down significantly to 110% post adjustment of COVID claims. This puts us well on course for breakeven in the last quarter of this year, making us the fastest to breakeven in the industry. I'd like to take this opportunity to talk about the reason of our differential performance, which is a very differentiated business model. Our assessment of the current health insurance model is that it's a very reactive funding model for only hospitalization expenses. Given the guaranteed renewability regulations and that to lifelong and the impact of aging portfolio for the vintage health insurers to create sustainable business, we believe we need a more proactive health-first model with data-driven personalized engagement with customers for and around their personal health, thus attracting healthier customers and constant engagement with them to manage their health are key to expanding market, but also to create a more profitable business. As we have explained in Slide 55, we started by attracting a primarily uninsured young and healthier pool of customers by very innovative offerings, giving them an incentive to stay healthy and also taking away their concern of not seeing value in the regular observation products. We relaunched our flagship product, Active Health, early this year and it offers up to 110 -- 100% of the premium back to very healthy customers. It has been a huge success, adding more than 3.5 lac lives in just about 6 months. And this is also one driver for us to acquire distribution capacity at scale since this model expands market for our distributors as well. Once we acquire customers who then manage the health risk of the [indiscernible] tool to manage [ games ] better, we rely on our access to large core of health data of our customers. We have created a unique and proprietary health risk scoring methodology, Wellbeing score, currently using more than 200 health data points. We have created this for close to 7.5 lakh retail customers so far with an intent to create this for all our regular customers. Based on this course, we then stratify our customers into high, to medium, to low-risk customers and offer them very specific recommendations to improve their health and thus reduce care. For actual fulfillment of these recommendations, we are clearly a very holistic health and wellness ecosystem accessible to our industry-leading customer app active health, as we have shown on Slide 66. It has both digital and offline partners from regular doctor, pharmacy, diagnostic network to digital therapeutic covering medical, physical, mental, nutritional health and even access to communities of customers with similar interest on health issues. This is helping us create a very high-tech integrated and closed-loop health ecosystem, which will start feeding into each other as we move ahead. The early results of our model is very encouraging and some of the outcomes are as below, and this is creating a competitive moat for us. Our average age of customers is lower than industry by 5 years. We have been able to engage with more than 40% of our retail customers beyond the traditional claims and service engagement, and they get started on the [indiscernible] health journey. Our claims are lower by 5% to engage customers are persistently higher by 25% for similar engage customers. Now to be able to deliver this high engagement model, we have invested heavily in digital data and analytics data across our technology and people capability with a strong set of external partners, who then augment our announced capabilities. Since we get access to a large set of structure and unstructured customer data, we're able to then use that to personalize our intervention even further by using high-end analytics and deliver them to and add the convenience of the customer through an omnichannel experience, creating a virtuous cycle. Some of the key business outcomes of this approach are given in slides 67 and 68. To acquire relevant customers at scale, we have a very well-diversified distribution infrastructure across proprietary channels with more than 50,000 advisers, 11 Bancassurance partners, brokers and also industry-leading partnership with MFIs, but more importantly, with cool digital partners like Ola, MakeMyTrip, Vodafone, Idea, Paytm, et cetera. We will continue to grow our agency aggressively, which is now very well enabled by the One ABC branch initiative to help us grow very efficiently. We also added 2 bank partners, Federal Bank and Catholic Syrian Bank since we spoke last and we have more to come. We have the largest bank [indiscernible] capacity in the industry, which provides us scale access to younger customers, and we're also expanding our propriety channels at speed. Looking forward, given our differentiated market expanding and long-term sustainable business model, we expect we will continue to grow ahead of industry, and we expect to end this year anywhere between INR 1,900 crores to INR 2,000 crores of revenue, and also be the fastest to breakeven by having our first quarterly profit in Q4 of this financial year, with [indiscernible]. I now hand it over back to Ajay.

Thank you, Mayank, and we'd be very happy to take any questions that you may have [ at this time ].

[Operator Instructions] The first question is from the line of Anuj Singla from Bank of America.

Yes. Thanks for the opportunity. The first question is on the life insurance business, actually, 2 questions there. One is the industry participants have been talking about the reinsurance price hikes across the different products. So can you also confirm whether you have got a similar request from the reinsurers? And what kind of impact it's likely to have? And the second part is, when I look at the business mix, we seem to be concentrating a lot on the group side, which is very different from the strategy we are following on the NBFC and the HFC side more granular growth. Is this a conscious strategy that we are following there. And the experience from other players suggest that the group is a low-margin business and high-risk business. Maybe you can provide some color on your growth strategy in that business?

Let me answer your question, on the group reinsurance the prices have already gone up during the year. And like I said, we were among the early movers to actually reprice our product. And as I said, we've been able to reprice the product through this year to manage our margins pretty well. That's on the group side. On the individual business side, there is a discussion happening now specifically in the area of protection for the reinsurance premiums to actually go up, but it will basically start happening somewhere in the last quarter of this year, which is JSM so the price will be effective from JSM. Will that impact pricing for protection business? Yes, it will. But like I said, we are in discussions right now to see how we can manage to increase in the premiums, more of that will get passed on to the customer and how we can do that efficiently. So that's on the reinsurance premiums in both these businesses. Your question on group life insurance, I think we have a reasonable mix between what we do in the fund business, which is a very profitable business for us, which as I said we are already in that rank #2. Our ULIP is amongst the top 2 as far as our area is concerned. And we changed the credit life business like everybody else, that would be a small number, but of course, we are starting to grow that significantly over the next 2 or 3 years. And the third part is the term business on the group side. So there is, I mentioned saying that it could be a [ hybrid ] strategy on some of these. But I think that's how broadly the group business works, and we are presenting each of these players, and we focus more on the value-accretive part of our group business, and that's what we've been doing for the last 2 or 3 years.

Okay. Understood. And lastly, can you talk about the solvency in the life insurance and the health insurance business? How -- and especially in the health insurance side, how COVID has impacted that? And what are the capital requirements for this business for the next maybe 1 to 2 years?

So the light side, the solvency is significantly above the statutory level of 1.5, insurance share about 1.87 right now. We raised some sub debt in this year. And through this financial year, I think one years' time we don't see any need for any incremental capital on the life insurance. I'll hand it over to Mayank for [ details ].

Yes. So our solvency is fairly good at close to 1.75 as of end of September. And the COVID case impacted, of course, create additional loss as you would have seen from our cases. But adequate capital has been provided to fund that.

And for the health insurance side, any kind of estimate what kind of capital we are looking for, given our growth ambitions for the next 1 to 2 years?

I think bulk of the growth capital has already been invested. As I mentioned that for course of this financial year, we will breakeven. So going forward, while there will be some capital required to fund our growth, I think the peak annual, capital requirement is already going to be over this financial year. Going forward, we will have, I would say, marginal cap in the range of about INR 150-odd crores in next year.

The next question is from the line of Prashanth Sridhar from SBI Mutual Fund.

Just a couple of data keeping point from my side. What would be the gross stage 2 in the housing finance company? And cumulatively, how much of ECGLS disbursement which we have done in the end this year, [ Rakesh ]?

So stage 2 in housings business, you're asking?

Yes.

So that's 7.7% of our overall growth. And if you break that up, majority of it is not because of the DPD but because of the restructuring option which the customer would have opted for. And if you look at 60 DPD in housing business, that's less than 1%. It's around 1%. So yes, there might be some delay, but if you look at 60 plus, it's fairly under control.

Sir, the other one was on the ECGLS cumulative business?

Yes. So ECGLS, our total would be around INR 1,400-odd crores.

Okay. And that would majorly be within the NBFC [indiscernible].

Yes. I'm talking about the NBFC number.

Okay. Okay. Just last question in terms of the digital part of the book, we have a tendency to grow pretty exponentially. Is there some percentage of loan book that we are targeting? And in terms of products, such as BNPL, et cetera, how do we look at it in terms of credit costs? Would you have done a sort of study or estimated?

So the way we are looking at is, we are looking at acquiring customers short-tenor, small-ticket loans through the digital ecosystem and basis of performance and the traffic out of these customers, then we will go back and increase the ticket size and give it for a longer tenor like 2 years like personal loans and all, we will be able to offer to these customers. So clearly -- also in terms of the performance, we are onboarding these customers with minimum credit bureau score, in terms of propensity models, which we have built, the scorecard which we have built. So -- and the current credit costs includes the digital as well. So we look forward to in terms of a similar kind of credit costs for the digital customer segment as well.

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

So on the housing finance side, again, in terms of the restructured pool, so that's -- it has further gone up to almost like 7.5-odd-percent. So how would that be across the product segments? Is it more coming in from the retail or it's from the non-retail is where we are seeing this kind of further interest. So that's the first question, yes.

So if you look at our overall portfolio, 95% of our book is retail. We don't have large ticket exposure in housing at all. So majority of this restructured pool will be in the retail segment.

So 7.5% seems to be quite high, okay, when we compare it with the entire industry. So what could be the rational for that? Because across the board, we are seeing everyone settling at somewhere around 1% to 2-odd-percent here.

So we operate in the SME segment and the SME segment was impacted in COVID 1 and COVID 2 also, and that is one of the reasons why -- and SMEs because of the lockdown got impacted severely. So that's the reason why around these levels.

Sure. And if you look at the rundown in housing, so on an average, it's been still like INR 900-odd crores, maybe 8% to 9% of the outstanding book every quarter. So now when do we see, obviously, maybe it's moving more away from the prime towards the affordable. But when do we see it may be coming off. And finally, the disbursements also leading to the growth, and incremental sourcing yield is also coming off, it's like 11.2-odd-percent compared to 11.4%, 11.5% but still like margins are moving up. So do we see like margins having picked out in the housing finance business?

So your first question was -- what was the first question?

In terms of the rundown, in housing, so maybe we disbursed INR 900 crores -- INR 970 crores but book is flat. Last time we disbursed INR 300 crores and book declined INR 600 crores. So INR 900-odd crores is the rundown run rate?

Yes. So you answered it because we are focused on the affordable segment. We are looking at building the capabilities, and we have built the capabilities in the affordable segment. And Prime is where the attrition is coming from. I think in H2, we are seeing the momentum on disbursement front from H2 onwards, the quarter 3 and quarter 4 onwards, we should see growth coming back in the business. So attrition in the time, which is there, but we are covering that up through the disbursement in affordable, informal affordable. Also in the time, we will focus on the loan against property segment as well.

Sure. And in terms of sourcing yield?

Sourcing yield will remain in this because the mix is changing. So in sourcing yield you will see slight improvement because more and more we will source from the affordable segment. But loan against property and all will be focused on in the Prime segment, I think we should maintain these kind of yields.

The next question is from the line of Vikas Khemani from Carnelian Capital.

Congratulations. I think great performance all around. I think it's been a continuation of last couple of quarters, so keep it up. A couple of questions. On the NBFC side, I think you have not -- you've given ROA, but not target ROE is something, so could you be able to give what kind of leverage we are targeting or what kind of target of ROE would be there in case of NBFC?

Yes, Vikas, just one [ second ]. So if you look at our normalized leverage on NBFC was in the range of 5.5% to 5.8% and right now it's much lower than that. As the growth picks up, we should be able to improve our written ROE. And we have given a target of 16% to 17% ROE in FY '24. So that's what we are targeting. But in terms of the ROA, we should be able to, as I mentioned in my summary that we should be able to achieve it slightly earlier than FY'24.

Okay. And secondly, I think in case of a rising interest rate environment, how do you see its impact on our margin. Would it be a fair assumption that asset repricing would happen faster than the liability? Or any thoughts on that?

So if you look at almost 95%, 100% of our loan book is floating rate loans. And we have the ability to pass it on the increase in cost of funds to our customers, and we have demonstrated it over a period of time that we have been able to pass it on to our customers. So clearly, we don't see that as a risk. If the cost of funds go up, we will be able to pass it on to our customers. Also, if you see a lot of our sourcing, in quarter 2 you saw 70% of the sourcing is coming from retail and SME that will improve our yield and margin. So we should be able to maintain our margins.

And, Ajay, I think there seems to be a lot of work on the digital use of technology, automotive processes. So kudos to you and your team for, I think, this transformation. I would -- sort of curious to understand the Slide 10, when you make data and analytics, I really couldn't understand any of the data. What does this mean? Of course, you've given some percentage on acquisition, upsell, cross-sell. But what does this mean? This is -- these are the -- driven by -- what does this data mean?

Okay. So let me explain through a single color, I'll just take life insurance just to explain the numbers and I think that will make the rest clear to you. So if you look at acquisition, the 16% number we've shown for life insurance here, 16% of the premium that we have collected in FY -- in Q2 of FY '22 has come from the use of analytics to acquire new customers. So analytics-based acquisition of new customers has contributed to 16% of our individual first year premium, which is largely driven by the PASA program that Kamlesh referred to earlier that be a good sum assured. Similarly, if you look at the cell below that which is upsell and cross-sell. So 18% of the individual first year premium of life insurance has come from a combination of using analytics to sell more to an existing customer within the SLR or to cross-sell a life policy to somebody else in the ABC ecosystem. That is what the second cell means. And the last cell, the last row of the first column, 10% of the additional renewal premium. So 10% of this renewal premium has been collected using analytics, which allows us to win back customers and retail customers who otherwise would have left. So that's what the row means. I think is very self-explanatory after that, if you look at the other cells, Vikas. Does that make sense?

Yes, yes. And so given the fact that you have a huge customer base across especially the mutual fund and across all products. So is there a sort of target, because obviously, when you acquire a customer from an existing data base, your cost of acquisition is far lower. So is there a sort of journey you have put down that is how the cost-sell percentage would be over a period of time, let's say, over next 3, 4 years?

So I'll give you some numbers in terms of how this has moved, Vikas, and I think you'll get a sense of where this is going. So if I take our customer base for 2 years ago, and then look at what the products per customer for that base is today. So if I've taken that 2 years ago, Vikas, the product per customer would have been about 1.4 or so. Today, that same cohort would have a product per customer, 1.73. So there would be a significant uptick in products per customer for this cohort because we've added a lot of customers in the last 2 years. Also, if you look at our customers who now own 2 or more products, there will be a 33% increase in that customer base over the last 2 years. So I think you'll see across the board that actually there's a large focus on being able to get more from customers within our business as well as customers within the ABC ecosystem. I think there's a lot more opportunity and upside trend, that's what I referred we're focused on. And I said earlier in my talk, that we'll come back with a more detailed presentation on that probably in the next quarter. So that's a big area of focus for us, Vikas, as you rightly pointed.

Super impressive. I think I must compliment you guys for kind of transformation you've led over the last 3, 4 quarters. I think visible, I'm sure it's been going on for long. And you won't need any -- as you said that you won't raise any capital for the next 3 years?

Yes, absolutely not. We may need money in the businesses that I mentioned easier, but we don't expect to raise money from outside sources to fund this growth.

Right, right. I always wonder why market is not taking note of this company, but that's the market, but I hope that gets corrected soon. But all the best, I think impressive performance across the board.

The next question is from the line of Nidhesh Jain from Investec.

In the housing finance, just one clarification that 7.5% of the book is restructured. And in gross stage 2, which is 7.7%. It includes a restructured pool. So net of restructured pool gross stage 2 is just 0.2%?

Yes. That's right.

That's right, Nidhesh.

Sure. Secondly, in the NBFC business, we have seen very strong growth from the digital ecosystem. Can you give some more details about this? Are these customers been acquired by fintech and then we are giving them loans? And how is the risk-sharing between fintech and us playing out? And what is the possibility of further cross-selling a particular financial services product to that particular customer? So if you can give some example that would help us in appreciating this channel.

So Nidhesh, we have built out this digital lending platform over the last 4 years and we have built both in terms of open market sourcing and also the tying up with the partners and creating partnerships in terms of acquiring the customers. So we have both the models available with us in terms of where the risk is on and us. And also, there will be some risk with the partners, but there is a revenue sharing also and risk sharing also. So different partners have different models and that's how we take this forward. In terms of when we acquire through a ecosystem. As I mentioned earlier we look at a smaller ticket size and shorter tenor as we onboard the customer and the performance of this customer over the next 4, 5 months is good, then we give them longer tenor and slightly higher ticket loans to these customers. So that's what the strategy is and that's what we have been trying to drive. And the cross-sell, your question on the cross-sell. We have the right to cross-sell on these customers in terms of our existing product offerings which we have, which is personal loans and any other loans which we have on the merchant side we have the tie-up, we can provide them the loans, the cross-sell loans as well. We have the right to cross-sell.

Do we have the entire data about the -- of customers? So I'm trying to understand, whether customer is owned by the digital ecosystem or we are owning that customer once we have given the first lien.

So clearly, we are regulated by RBI, and we have the KYC of the customer. We have the transactional history of the customer. And the customer is owned by us completely. Yes, because of the leads and everything is coming from the fintech or the ecosystem partners, they will also own the information about the customer. But we have the right to cross-sell on these customers.

[Operator Instructions] Next question is from the line of Abhishek Saraf from Jefferies.

I had just a few questions on the life insurance business part. So if you can explain how the VNB margin, we expect it to go from 7.6% to 14% by year-end. So what would be the levers for that margin expansion?

Typically, if you look at even last half of the year, if you look at last half, we will be 1.6% in H1 and that moved to about 10.6% by the end of the year. Typically, because we skew of the business between the first half and second half moves differently. Expenses are more uniform through the entire year and obviously, business moves. So that tell you how the net VNB moves through the year. And essentially, if you come out of, like I said, the product mix that we have for the first half of the year, we think that will continue, becoming better. And in the second half of the year, there is incremental focus to see whether the traditional part of the business can go up. And you'll see some of upward buyers on the protection part of our business. So that's what we'll get the number of net VNB 12% to 14% is what our guidance is for the end of the year.

Okay. So just trying to understand a bit better, so would it mean that means our assumptions on expenses would be trued up by the year-end, so generally, that is how that could be probably be a key reason for driving the margin expansion?

No. No. Like I said, the difference between the 2 is, of course, their expenses, uniform through the entire year but there's a few difference business which is higher in the second half of the year as compared to the first half. It will carry a little more expense gap in the first half and that normalizes for volume into the second half of the year. That's one reason of the net VNB will always be better. And I -- to give you an example, like I said, -- last year, in the first half, we were at 1.6%, for the year we ended at 10.6%. And this number for the first half of the year against that 1.6% is already at 7.6%. So that's one factor. The overall OpEx being managed better will anyway contribute to the cause of the net VNB going up. And also, if you look at the gross margins that we get in the product, that also is better. And like I said, in the second half of the year, the protection contribution will go up from the first half of the year, that will also contribute to incremental net VNB margin.

Sure, got it. Another question I had was on our pricing of our product the DigiShield plan. So just wanted to understand, I believe that we had taken some price adjustment, which was on the lower side, probably I think we had a price cut. So if you can just help me understand what kind of led us to that, that action. Just because, obviously, the market had been seeing upward price pressure. So what was different in our case, especially in this product? If you can just help us understand, it will be very helpful.

The issue is with our flagship product on the individual protection life insurance side. And we had an estimate that once demand was higher because during the pandemic time, there was a natural trend to have more protection. So that was on the right. And we knew that the price point will change at some point of time through the year, which like I said, the intention of that from the reinsurance that it will change from January of this year. So we wanted to optimize on the opportunity a of protection. And b because we run a large part of our business on medically term protection. So whatever protection business we do is 95%, 96% medically [indiscernible] ready. We took the call of saying that if you look at the price point, protecting our margins, you will get significant growth. And you see that on the protection business for the first 6 months of the year, there is 24% growth that we've got as compared to last year. We wouldn't have been able to play this strategy when the insurance premiums -- reinsurance premiums would go up. So we did it in the second quarter. And like I said, we will have some play in quarter 3 also before the insurance premium, which will impact the price going up will happen in [ JSM ] of next year.

So it was largely a tactical move that we made going by the market conditions. And now this will again be probably be moved up again after the reinsurance discussion. Is that the right understanding on this?

So reinsurance premiums are due for going up. But I mean, we have some thought process in terms of how to be able to manage that. But like I said, it's too premature. We are discussing with the reinsurers right now. Premium going up is real. How do we manage that to be able to make sure that efficiently, we can manage it in the pricing as well as maintaining our margins is something that we'll be able to speak only in the present quarter once we execute that strategy.

The next question is from the line of [indiscernible] an Individual Investor.

And many congratulations on a great set of numbers. As you said, as you going to get a better sense from you on this combined branch that we are launching, what type of synergies, like because this is a differentiation that we have over any other competitor in the market. So what kind of opportunity do you see from this rollout? And any color you can give on the combined ABC app that you had launched, I think, 2 quarters back?

Thank you, [indiscernible]. Thank you for your question. I think the way we see this unified branch working, if there are for instance, 4 or 5 of our businesses that have a branch say in Delhi place. Then there's an opportunity to put all of them together. If we do that, we save significantly on every business because we need the overhead in our security or any other support staff that's common. We can start sharing common facilities for meeting rooms and stuff like that. So the space gets optimized. That leads to a significant ability to reduce costs. And as I said, over the next 12 months, we're expecting that cost saving itself to be something like INR 40 crores. So that's one element. But in addition to that, it allows some of our newer businesses like our health insurance business, or our retail lending business in our NBFC and our housing finance business to start entering locations where say our insurance business and our asset management business have been for a long time. And enter with a fairly lean low-cost model because their costs are much lower because in that state the branch infrastructure is spread across multiple businesses we do it that way. So we haven't really calculated the revenue upside, but there is revenue upside for all these businesses from entering new markets as well as the cost savings that I spoke about earlier.

Perfect. I just have one question. Sir, [ having that ] now because this is such a large differentiation over any other player in the market I would just request and all the managers who really very aggressive with marketing this kind of offering that we have and which is quite differentiated. And thank you so much, and we wish you a very happy Diwali.

The next question is from the line of [indiscernible].

Sir, still listed ABCL stock is underperforming and destroying shareholder value consistently. What market is not, why market is not taking cognizance of your growth strategy. If management feels that stock is undervalued then what measures, it will take to communicate it with -- it's growth strategy with the market players or the wider audience?

Yes. I think what is in our control is performance, and that's what the management is really focused on and started by giving you the performance over the last 4 quarters. And if you look at our performance, I think we've delivered on every number that we have been committing to. And in fact, we are now ahead of our FY '24 numbers. That is what is within our control sir, and I think we are doing our best in terms of doing that. I think valuation is a thing in the market sometimes leads, sometimes rallies. And I'm sure there will be a time when the value of our franchise will get recognized.

Sir, it's been 5 years now. I think you should communicate more with the larger players. So because even smaller players coming to the market, they are getting a huge valuation, some housing finance companies just recently listed and got INR 17,000 crore market cap of INR 4,000 crore loan book. So you have to increase the communication with -- you must -- because your presentation is fabulous. We understand that we are a shareholder because we understand you people are doing a great job. But market is the large and the market players they are ignoring it. So I think you must use your communication skill to convey your message to the wider portfolios by using the digital platforms or DTV channels available.

Yes, your point is taken. We are doing a lot, but obviously, we can do more, and we will do more. Thank you very much.

The next question is from the line of Manoj Bahety from Carnelian Capital.

Congratulations to you and to the entire team for great set of numbers. Just one question from my side. On Slide #29, if I see a big portion of your [ DTE ] is driven mainly by a reduction in interest cost which has come down from 6.6% to 5.6%. And I think partially this may also be due to the capital raise or equity raise, which we might have done. But just wanted to understand, how do you see sustainability of this interest cost to average lending book in a rising interest scenario? And also, if I correspondingly see the average yield, it has not come down, but your interest cost to average lending book has gone down almost by 1%. So just wanted to get some color on this?

So Manoj, percentage of capital raise, so I don't think the item is changed by any capital raise in this period. So that's a answer to your first question. Second is I think, you need to focus on the change in mix because as the mix changes as heavy as Rakesh mentioned in his talk, you will notice that we're focusing on higher margin retail and SME segments. As we are focusing on that, our ability to therefore to increase the yield, uniform environment where rates are falling, is generally what we demonstrated in the numbers. If we had not changed the mix you would have seen actually the average yield fall along with the fall in interest rate because the customers we would have getting to us would have been very different as against the mix that we currently build. So I think the fact that we're changing our mix is allowing us to increase the margin, which is what you've seen in the numbers.

If I can just add one point. If you look at the industry level, the lending rates have come down by 103 basis points. And our lending rate, we have been able to maintain the yield. So that's a demonstration of our product mix change and what we are really targeting.

Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to Mr. Ajay Srinivasan for closing comments.

So thank you very much, everyone, for joining this call today, and I wish each and every one of you a very happy Diwali and a very safe and prosperous year ahead. Thank you.

Thank you. On behalf of Aditya Birla Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.