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

Ladies and gentlemen, good day, and welcome to the Q3 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.

Thank you. Good evening, and welcome to everyone to this Q3 earnings call for Aditya Birla Capital. I'm joined by senior members of the team, and together, we will present our results and take any questions that you might have. I trust you have a copy of the presentation with you as we might make some references to the slides there. Q3 continued the strong momentum we have seen across our businesses for some time now with the Q3 consolidated PAT at INR 577 crores, double the PAT a year ago, on the back of strong disbursement and top line growth across our businesses. This PAT includes a gain of INR 161 crores on the sale of our 1% stake in our AMC business through the IPO in October '21. We had guided for over INR 1,500 crores of PAT this year, and we are well on track to deliver that. Slide 4 is a slide that demonstrates the result of our focus on the value drivers of our businesses. In our lending businesses, our focus on higher return segments have led to sharp increases in our margins, in fact, to the highest levels we've seen with a consequent positive impact on our profit growth and our return on assets. In our Asset Management business, with a focus on growing our retail and equity mix, we have delivered strong margin expansion and profit growth and a high ROE. In our Insurance businesses too the focus on growth with the right product and channel mix has led to growth in margins and a strong delivery of value. As we continue the strategy set out in each of these businesses, we will see continued improvements in all of these metrics. This, of course, was planned and was part of the strategy that we enunciated some time ago when we set our targets for each business for FY '24. Slide 5 of the deck will show that over the last 4 years, we have made consistent progress in these metrics and are well on track to deliver the targets we set ahead of time. Slide 6 will show you the strong momentum over 5 years in both our revenue, which has grown at a CAGR of 17% per annum over this period and our PAT, which has grown by 30% per annum, excluding the gain from the AMC stake sale this quarter to the highest ever quarterly profit that we have declared in this quarter. On the right of Slide 6, you would see the strong growth year-on-year across all of our businesses. Slide 7 steps back a bit further in time to show the build-up of growth since FY '17 but more importantly, the increasing momentum that we are seeing in each of our businesses. You will notice from this slide that on a 9-month basis, our PAT is up 67% year-on-year. As we deliver our guidance on FY '22 profits, you will note that we would have delivered almost 3x our PAT over the last 5 years. Slide 8 sets out the various benefits our business is enjoying being part of the ABC ecosystem, which underpins our growth, much of which we've discussed in the past and hence, I won't repeat today. I would only like to call your attention to Slide 10, which shows our own branch footprint across India and the initiative we are driving centrally at ABC to co-locate businesses at a single location so that we get cost and revenue synergies. In the next 6 months or so, we will have more than 150 locations where our businesses are co-located, driving annualized savings of something like INR 50 crores to INR 60 crores. With our expanded branch presence, we expect that there will be a branch of an ABC business in every town with more than 3 lakh population by March 2022. This geographic presence in addition to the reach of our partners gives us a distribution capacity and reach, which is truly immense. In the last quarter, I'd spoken about the transformation initiatives that we've undertaken across ABC, including newer products and segments, the big push towards digitalization, ecosystem partnerships, analytics and maximizing the synergy benefits across our platform. This has led to the growth in our customer base by over 40% year-on-year to over 31 million customers as of the end of Q3. This has also led to the growth momentum that I've described thus far as you can see in Slide 14. You will notice on Slide 14, the increased momentum across our businesses as the year-on-year growth is ahead of the 3-year CAGR for the metrics shown for each of the businesses on this slide. We are confident that our growth momentum will continue as we continue to expand our own distribution capacity, grow our partnerships, launch new products and segments and leverage analytics. We are, in short, very well-placed to continue our strong trajectory of profitable growth at Aditya Birla Capital. With that, let me hand over to Rakesh to take you through our lending businesses.

Thanks, Ajay, and good evening, everyone. I will now walk you through the performance of our lending businesses, NBFC and housing. In the NBFC business, we had a strong quarter with our loan book growing 4% quarter-on-quarter and 9% year-on-year. NIM hitting an all-time high of 6.24% and ROE of 2.3%, in line to meet our guided numbers for FY '24 ahead of time. As we have mentioned before, our focus in our NBFC business is on growing the higher-margin retail and SME segment sustainably. As the environment normalized, we focused on building our business with our disbursement in the NBFC increasing by solid 34% over last quarter and 55% over quarter 3 last year. Bulk of these disbursements, almost 70% have been to the retail and SME segments. This is in line with our stated strategy. As a result of this, our SME plus retail book has now grown by 7% quarter-on-quarter. In fact, our retail and SME book now accounts for 60% of our total book, the highest it has ever been with a 24% increase year-on-year. If I take you back by 2 years, these segments would have accounted for 51% of the book. Our focus on growing retail has resulted in our customer count growing 2x quarter-on-quarter to 2.3 million. Our focus on driving value through the product mix has led to continued upward momentum in our financial metrics. Our NIMs have expanded by 100 basis year-on-year and 1.45% over 3 years to reach the highest margin we have seen in this quarter. Our net interest income has grown by 4.4% quarter-on-quarter and 30% year-on-year to INR 799 crores in quarter 3. Margin expansion further supported with our continued focus on reducing cost income ratio has led to delivery of PAT at 1.5x year-on-year, taking our ROA to 2.3%, which was 1.7% last year. The financial numbers bear out the fact that the strategy we are following is delivering the required results as we continue down this path. We'll see better returns. Let me spend some time now setting out what has driven growth in the retail and SME segment and give you some sense of where we are headed. Like I described to you in the last quarter, our focus is on 4 essential pillars: Number one, product suite expansion with a strong customer focus; number two, enhanced distribution capacity will increase productivity; number three, cutting-edge technology with faster implementation; and number four, strong risk management catering to multiple product segments and delivering stable risk-adjusted returns. Like I did in quarter 2, I would like to share the progress we have made in these areas in this quarter. Starting with the retail segment. We are continuously evolving our product mix by increasing the contribution from new products like small ticket loans for the emerging income segment and customized ecosystem products like Buy Now Pay Later, checkout financing, education loans, merger close which now form 21% of our retail book mix compared to 6% (sic) [ 18% ] 2 years back. We have increased our sourcing from digital ecosystem channels to 46% as compared to 20% 2 years back. Our success with small ticket loan is driven by a lean branch expansion strategy in Tier 3 and Tier 4 markets. We took our Tier 3, 4 footprint from 50% to 73% of our total branches and increased our AUM mix originating from these markets by 50% in the last 2 years. We increased our branch count to 126 this quarter with 73% presence in Tier 3 and 4, leading to the retail book from Tier 3 and 4 markets growing by 2x over the last 2 years. As we further expand to 150 locations in FY '22, this financial year, primarily adding new locations in Tier 3 and 4 markets, we will have the branch network to support our growth from direct sourcing in the retail business. We will continue also to build our ecosystem partnerships to augment our sourcing capacity. From a technology perspective, we have a best-in-class agile plug-and-play API spec stack that allows us to integrate seamlessly with diverse set of ecosystem partners and drive digital sourcing at scale. We have consistently implemented the best technologies available at each stage of the lending process, leading to favorable outcomes. With these investments, over 94% of our customer acquisitions and 97% of our EMI collections have gone through digital platform. We have seen 86% of our customer service being catered to via digital interactions. All these capabilities have enabled exponential volume growth. The growth of our loan book has been accompanied by strong credit appraisal and risk management processes. We have put together a multi-pronged risk assessment strategy catering to the target customer segments, their context or movement of [ truth ] and the data available across public and third-party sources. Our diverse risk assessment practices include internally rated cash flow based underwriting for corporate and with corporate and the SME segment standardized program-driven underwriting for retail segment and scorecard-based onboarding and underwriting for our digital source loans with a very strong focus on collection frameworks. Hence our exposures are diversified across sectors, customer segments and products. We constantly review our concentrations risk in the portfolio. Our strong underwriting capabilities and calibrated risk approach has helped us with the multiple macroeconomic risks. And as you can observe, we have consistently delivered stable risk-adjusted returns. While these initiatives will continue to be significant growth drivers for the retail segment, I would like to share how we have been thinking about the SME business going forward. It will be a combination strategy of leveraging the Tier 3 and 4 penetration. We have achieved an establishing of digital MSME platform for sourcing from across the value chain. We plan to deepen our distribution with customized product offerings targeted to MSME customer based on industry targeting clusters underserved by banks. We are overlaying our chosen industries and geographies in the SME segment to target specific micro markets for strengthening our presence in the sector geography SME clusters. We target 46 micro market locations with SME focus this financial year and plan to activate 120 such occasions by FY '24. Having successfully created a digital consumer lending platform, our MSME platform approach will focus on integrating with online B2B trade platform, sellers, fintechs, especially for supply chains and other credit programs to serve customers from across the value chain. We expect our expansion strategy to yield 15% to 20% growth in the MSME portfolio over the next 12 to 18 months. Our strong balance sheet, ample liquidity, low cost of borrowing, agility to integrate with partner APIs, strong processes and these 4 product offerings provide us the right to win in our chosen segments. I would like to call out some of the key quality parameters on the overall book for the quarter. Our GS3 book is at 3.9% with a healthy provision cover of 42%, in line with the fact that we have almost 80% of our book, which is secure. We have had good track record in resolution as we would have seen from prior guidance on this, and we expect a resolution of INR 350 crores 0f INR 370 crores of Stage 3 assets over the next couple of quarters. Our selection efficiency has further improved to 98.8% better than last quarter as well our pre-COVID level. And we are confident we will be able to sustain the quality of our book going forward. With our Stage 2 portfolio going down, specifically the drastic reduction in 60-plus DPD book to 1.5% versus 2.3% in the previous quarter, an improvement in collection efficiency to better than pre-COVID level, we are looking at our overall collection -- we are looking at a much better financial performance for the next quarter. With a healthy capital adequacy, we plan to grow our loan book by 7% to 9% in the next quarter. Let me end by summing up on the NBFC front by saying that we are very well-positioned to continue the strong momentum we have been building over the last few quarters, driven by our organic growth and the new growth engines in the retail and SME. With our current growth trajectory and continued focus on key segments, micro markets, products, direct sourcing channels and deepening our digital ecosystem presence, we are confident we will achieve the target guided metric for FY '24 ahead of time. I will now move to housing finance performance. Coming to the housing finance business, we saw a similar strong growth in disbursement in our target segment in our housing finance business as well. In this business, we have earlier stated that we are growing our affordable mix as we expect to drive superior returns. Quarter 3 disbursements were 12% over -- 12% growth over last quarter and 34% over last year quarter 3. Of this, the affordable segment disbursement mix was at 50%. This has taken affordable mix to 35% from 23% previous year. We are targeting the affordable mix to be at around 40% by end of this financial year, in line with the growth we had indicated earlier and the FY '24 target. The shift in the segment mix supported by lower cost of borrowing has helped expand margins to 4.21%, an increase of 75 bps over last year. Not only have our margins expanded, but our customer collection and calibrated underwriting strategy has helped risk-adjusted returns, defined as NIM left -- NIM minus credit cost expand by 126 basis points over the previous year. The housing finance PAT was up by 39% year-on-year, taking our ROA to 1.8% and ROE to 13.7%. Growing our affordable book continues to be our focus, and this is demonstrated in the segment growth over the last 2 years, and this has grown at 40% compounded annual growth rate. We will continue to maintain the growth momentum in this segment going forward by expanding our branch footprint to at least 105 branches by March 22, with Tier 3 and 4 presence increasing to 70% plus. We are adding sales headcount, and we are hiring feet on the street to add the distribution capacity for our affordable business. Direct sourcing is another metric, which we follow very closely, and that is at a very healthy level at 76% in quarter 3. And this ensures higher customer stickiness, and we target to increase direct sourcing to 80% by March '22. Our progress in digital capability gives us confidence with scaling of ecosystem partnership as an alternate sourcing channel. Last time, we talked about our pipeline, and we already have 5 ecosystem partners under integration this quarter. On the technology front, we have made some good progress this quarter. We are the first housing finance company to enable customers to store loan-related documents in a Digilocker leading to a lower servicing turnaround time. We have completed the integration between sales management and customer on-boarding app to enable end-to-end tracking of leads, improve business predictability and field activity management. We have also enabled multichannel services, including Whatsapp, E-Bot, Google Assistant and self-serve portal leading to 77% of our customer interactions coming from the digital channels. Overall, 85% of our files are sourced digitally and over 98% of housing finance collections are through their digital means. Coming to asset quality, we have maintained our gross NPA and provision cover at a similar levels as last quarter. With over 30% reduction in our Phase 2 portfolio from INR 314 crores in last quarter to INR 200 crores in quarter 3, there's adequate liquidity. So that's a strong performance in terms of reduction of Phase 2. There is adequate liquidity in the business with a capital adequacy of 24.4%, which is a healthy level to continue to meet our growth momentum. With this, I would like to sum up the housing finance business. With this structured shift in our business mix, wide geographical footprint and increased distribution capacity, we expect to see continued expansion in our book, margins and profitability. We are already at the NIM and ROA we had targeted for FY '24, and our focus is now on growth as the operating leverage will now improve these metrics further. With this, I will stop my presentation and hand it over to Bala for asset management business.

Hello, everyone. I am Abdulrahman, AMC analyst call. I'll just repeat the models, updates we have given, but overall momentum point of AMC, we are gaining the momentum, assets under management grew the accounting year on year to close to about INR 3 lakh crores this side. On the back of continued investment performance that we delivered both on the income and liquidity. For our liquid assets management which is now close to INR 1.21 lakh crores [ the second growth about 10% ] year-on-year. The overall equity mix increased to 41% from 31% to reducing the similar quarter of the previous year. The fixed income continue to make [ inflation ] of [ INR 1.77 lakh crore ] asset management, which again grew by about 5% on a year-on-year basis. With respect to growing our retail longevity, if you look at our size, clearly we have now improved our number of customer base in terms of full year, from 7 million customer base today have about 7.5 million customer base. We have added about 9 lakh citizens, full year, have added in the 9-month period. And what [ the repeated ] assets makes it to the overall AUM maintained at about 48%, which again was about a [ 14% ] to [ INR 1,41 lakh ] crores because vis-a-vis, we continue afford the SME -- B2B focused has held the remaining market share close to about 16% in terms with the asset mix coming in B2B market maintain at 6%. We also made a significant progression of growth of our SIP AUM growth over 23% grew by year-on-year basis. The [ near term figure is ] Moved to INR 3.2 lakh crores per month in the Q3 and against the low we had about INR 1 lakh which was in the current year, which again grew about 16% on a year-on-year basis. With respect to our feeling about the switch in network, while we continue to keep a high focus on building our switch network to SMEs, bank and natural distributor, we also now made some more progress with respect to our [ SME ] quadrant tie-up with the fintech platforms also helping in adding more platforms in the portfolio, helping increase the volume coming from this segment. With respect to financial performance, our operating revenue has now INR 334 lakh crores, again, 20% year-on-year growth. In fact, our operating revenue average assets under management as a basis points has improved by 1.1 basis points to 44.4 to 44.3 of the previous year. PBT, average assets under management as the basis points again improved from 30 basis point last year to 33.1 basis points. In fact, our profit after tax as the highest level of profit after tax we reported, INR 186 crores, we taken 27% year-on-year growth and therefore leading to ROE of 37%. With respect to building our alternate business, we have shown significant improvement, one, by our launch of many products under the [ AUM ] and passive categories. In fact, we have now created a 16 new product pipeline as of now, which will launch over the period of next 3 to 6 months. Our assets under management in the package have large gone up three things, from INR 1,950 crores at March end to over INR 5,000 crores as of December 2021. Our focus on building alternate business also further even expanded in setting up our portfolio management companies we use today, which will help us in building products that can meet the global industrial needs that are existing in India. At the same time, we are also building fund management capabilities in the AUM category as we launch many products in this category as we move forward. With respect to our digital initiatives, of course, most of them are now business as usual kind of thing. And are having our adjustments for business happening in last year. We continue to see good transaction of getting onboarded to the digital platform. With this, I stop and hand it over to Kamlesh Rao to speak to the ABSLI performance.

Thank you, Bala. At insurance, the growth for ABSLI in the individual business has been 16% for the first 9 months on the back of a similar growth the previous year. The good part about this growth is that it has been an entirely productivity in that growth and the fact that we have added people in our various channels in December will help us maintain this momentum, not only for Q4, it will allow us to grow faster in the next financial year. Our new product success continue, and it has contributed to 41% of our business in the last 18 months. And our pre-approved from assured continues to give us a healthy 20% of our new business in the quarter. Our data models in PASA have now reached the stage where 6 out of 10 customers end up buying the propensity products that we create for them beforehand. Our average age of the customers being younger in the 36 to 37 years age has helped us immensely in our upsell initiative and 29% of our business this year has come from existing customers buying 1 more policy from us. Our group business grew 16% for the first 9 months on the back of a 60% growth in the previous year and the AUM in this business is now at INR 15,350 crores. And in the profitable unit segment, we continue to be the second largest player. We were amongst the first few players to change our pricing this year and that has helped the management of claims in the group from insurance business better through this year. Our renewal premium grew at a healthy 27% for the first 9 months, and our digital capabilities allowed us to collect 86% of our renewal premium digitally in terms of NOPs. We started a bot last year that we call ZARA to collect renewal premiums. And whilst in 9 months, we have collected close to INR 300 crores. In Q3 alone, we were able to collect double of what we did in Q1. Bot, alone, we believe now will give us the capability to collect close to INR 1,000 crores next year. Our total premium at INR 8,066 crores grew at 23% over last year, and we will continue this trajectory of growth for the latter part of the year too. Whilst that's the story of business numbers, the quality parameters have also consistently done well across persistency in the various pockets from the 13th month right up to the 61st month as well as our OpEx to premium ratio. OpEx to premium ratio, which has seen a slight increase for some peers during the COVID time, has seen a downward trend for us and it's 13.3% now. And we will meet our guidance on this for the end of year numbers. The form now manages an AUM of close to INR 60,000 crores, and we have had a great year on our investment management doing better than the benchmark as well as our peers and in the top 2 quartiles on performance for majority of our funds. We managed our gross margins at 43% and net margins were at 11.2%. The net margins in absolute amount was actually 2.2x of last year same time, and we are well on course to achieve 14% net VNB, which means we are 1 year ahead of our guidance in this area given before. The performance of net VNB is an outcome of managing gross margins and expenses very efficiently. COVID claims for the first 9 months was at INR 257 crores. And in spite of taking this hit, we have managed to grow our PBT by 14% as compared to last year. We are also carrying incremental provisions of INR 65 crores for COVID for the next quarters. And whilst numbers for COVID claims came down in quarter 3, we will watch for this over the next 3 months. On the digital capabilities, the key highlights continue to do better. 95% of our customers be onboard digitally now. Close to 80% of our customer-related services are now available online. In fact, in Q3 out of the total customer interactions that we had, 85% of them happened digitally and 40% of them actually happened through mobile. So overall, it has been a good year of strong growth of business for us with all our quality parameters doing well at well-managed OpEx, resulting in good growth and net margins for us. It's a large part of our growth coming out of productivity for the last 9 months and the investments we have made in Q3 will help us sustain this growth momentum through this year and do better in the next financial year. With this now, I stop for Life Insurance and pass it on Mayank for Health Insurance.

Thank you, Kamlesh, and a very good evening to all of you. At the Health Insurance business, clearly continued on our growth momentum. We grew about 31% in this quarter 3 year-on-year and for the year at 36% year-on-year growth, our GWP now stands at close to INR 1,200 crores, adding to our market share vis-a-vis previous year. Not only is our retail franchise growing very fast, but at the same time, we are continuing to focus and on grow, our profitable group and corporate business as well. Now we are covering about close to 17 million lives -- more than 50% ahead of where we ended last year same time. But at the same time, we are consistently moving on the right track on our guidance towards demonstration of our superior financial viability of the model with a combined ratio of something down to 113% just for COVID claims vis-a-vis 115% the previous year. And we are on track to demonstrate the viability by breaking in quarter 4, again, subject to the COVID 3 wave impact, which is significantly lower in incidence and severity versus the first 2 quarters. What has driven this strong performance security has been our differentiated health-first business model, which is clearly directed towards not only acquiring customers at scale, but also demonstrating good and, I would say, a much better claims performance vis-a-vis our competitors. It has two simple components. One is how do we offer products which are more attractive to the younger and healthier customers, therefore, improving the risk profile of our health risk pool. And at the same time, once customers are onboarded with us, how do we work with them to reduce the health risk impact which is result in claims over the period of their relationship with us. We do that by clearly using health data that we acquired by investing in that process to stratify their health risk under our proprietary score called lending score. And then based on where specific intervention is required by creating different cohorts of customers with a different risk profile, we intervene totally through our own intervention to in-house capabilities as well as through a whole string of partnerships that we have built in the health and wellness ecosystem, which we have given in the subsequent slide, where we use those interventions to bring down the health risk of our customers. It is clearly demonstrated in the superior outcome for customers that they are able to engage. Clearly, our average age of customers is younger by 5 years vis-a-vis industry. And our claims ratio lowered by 5%, persistency higher by 26% for all engaged customers. So as we expand the efficacy of our model, we will clearly consistently and with a much lower claims ratio vis-a-vis market. To make sure that we take this superior model of business to our customers at scale, we have a very diversified channel mix, as I've shared in the past. We leveraged the bancassurance model very heavily by going in there as a first mover. We today work with 12 banks with 3 more banks having added in the last quarter. At the same time, having done that, we are now looking at investing significantly in expanding our agency network, leveraging the One ABC branch concept that Ajay spoke about earlier. It not only gives us an ability to go to smaller locations at speed, but also doing that at a much lower cost than what our competitors would have done because it's co-located. At the same time, since we have invested in digital from the very beginning, we have used that to not only acquire customer at scale but also engage with them. The acquisition propensity is clearly demonstrated in the fact that our digital business, including the digital alliances, has grown close to 100% Y-o-Y in this 9 months of performance where we are now working with digital partners like Ola and the Vodafone, MakeMyTrip, Goibibios of the world. We also make sure that our additional capabilities help us in reducing our costs and creating much better customer experience. Today, about 66% of our service is completely digitally led. In spite of the fact that claims today is fairly an offline model in the industry. The other thing that we have done is to make sure that the health and other data points that we get from our high engagement model is used very effectively through our analytics capabilities across both the acquisition and the engagement stroke service propensity. And lastly, to reduce the risk profile because fraud rates and as we know is a high risk in our business. And our proprietary ML-based detection engine consistently helps us in making that claim detection -- fraud detection very efficient. In summary, I'd say that we will continue to stay ahead of the market in terms of growth, given the large opportunity that has unfolded, especially during COVID times and newer space for health insurance. And the superior financial viability of our model will keep us ahead of the market in terms of our bottom line results as well. I pass it back to Ajay now to take it ahead.

Yes. Thank you, Mark. In concluding, let me just say that we have seen sustained and strong growth momentum in our businesses over time in spite of all the disruptions and challenges we faced in the external environment, whether you take a 5-year perspective or look at growth over the last 4 Q3s or look at growth over the last 9 months or indeed growth for this quarter over last quarter, we have delivered strong and profitable growth. This has come on the back of a clear and focused strategy on the key value drivers of each business, which I hope we were able to explain to you in some detail today. So that remains our focus and endeavor going forward here. And now we open the floor for questions.

[Operator Instructions] The first question is from the line of Kunal Shah from ICICI Securities.

Congratulations for a good set of numbers across the board. So firstly, with respect to this entire digital lending initiative and now with that scaling up almost like -- in terms of the portfolio also, the digital ecosystem portfolio is now around about 10-odd percent and 32% of the disbursements. So maybe various dynamics and any regulatory impact, which we are seeing on that because of either the post-loss sharing and any impact which we'll see in the term? And what is the contribution we can see this portfolio will drive over the next 2 to 3-odd years?

The first question was in terms of what is the regulatory impact. All our agreements with the ecosystem partners are basis -- and every partnership is different and we have a different and customized arrangement with them. It bases the lead generation, it's collection efficiency, risk management. So completely different for each partnership. We don't see any major impact because of any regulatory changes. And as you can see, now it's contributing 32% of our retail disbursements -- new disbursement. It will continue to go up as we really drive our ecosystem and partnership and the entire digital space. So we will continue to see this going forward going up for now.

Sure. And even in terms of the credit cost profile with this proportion inching up, so any which way we seen an uptick in the retail GNP is now to almost like 3.7-odd percent. But should we then say that, okay, this is going to settle relatively higher and write-offs in the portfolio could be high, so credit cost in NBFCs will get to higher as the proportion goes up?

No, Kunal. I think -- and you'll have to see at the risk-adjusted return to the margins are also improving quite well. Also, this 3.7%, which you see, you see in a year of a COVID. This is both the impact on the entire environment, the economic environment, which you see. So we don't see this going up. In fact, once economy normalizes, we should see this in stabilizing slightly lower.

Okay. Quarter-on-quarter, retail was up. So not sure as to what would have led to that, and even some bit on the large and mid corporate. However, encouraging, you are saying that INR 350 crores, INR 375-odd crores will get resolved. So obviously, we are on the down trend, but what would be the reason for the uptick in the retail and the corporate GNPAs quarter-on-quarter?

This was primarily because of the restructured pool, which flow forward -- which has flown forward. That was the reason, Kunal.

Okay. So primarily, maybe it's the restructure, which is getting into this?

Yes. So that was the primary reason. But I think, collection efficiency is quite good on our restructured portfolio. So we don't see too much of risk on that. So if you look at our NBFC level, our collection efficiency on the restructured pool is closer to 94%. And within the retail segment, it's slightly lower or closer to around 90%, but it's very, very healthy for the restructured pool as well.

Okay. Okay. Got that. Secondly, on the housing finance. So affordable, I think this time, we have participated even on the prime as well as construction finance along with the affordable. So as and when the opportunity comes up, would we see the trend being there? Or this was more in terms of release either to the -- maybe for the completing the construction, or even maybe to the existing customers on the prime side? How are we seeing this? Because actually, when we look at it, maybe 50% is the affordable in the overall at this point in time. So how would be the participation as the housing market also gets more conducive?

So we are completely committed to affordable segment, and we are looking at growing that, especially in our Tier 3 and 4 markets. Yes, and the construction finance, which you see, we do that with the affordable segment only, and that's the reason you see the ticket sizes are pretty low. And as we move to Tier 3 and 4 markets and if we have the opportunity, we will be able to participate in that. But overall portfolio, you should see it's 95% of the portfolio, which is the retail.

[Operator Instructions] The next question is from the line of Subramanian Iyer from Morgan Stanley.

Congratulations on a good quarter. So I have one data perceiving question and another one as well. So the data perceiving question is that if you could share the absolute amount of ECL that you carry on an overall basis? And also if you can share what's the proportion of restructured loans in Stage 1? And the other question I have is that assuming the economy normalizes in FY '23, can we expect credit cost to be in the vicinity of 50 to 75 basis points normalized?

Second question, I didn't get. So can you repeat the second question? I couldn't quite understand the second question.

Yes. My second question was that assuming the economy normalizes in FY '23, can we expect credit cost to be in the vicinity of 50 to 75 basis points normalized?

So yes, if you look at majority of our portfolio is in Stage 2 and the restructured because by definition, majority -- as per the RBI guidance and the regulation, majority of the restructured portfolio will stay in Phase 2, and that's how it is for us. Your second question, whether the normalized credit next year. So clearly, we are looking at improvement in the credit cost and the ECL next year once the economy normalizes and we have seen all the macro indicators falling in line and the -- if you see the GST collection for the last couple of months have been very, very strong, that clearly indicate the economic turnaround. So we see credit cost normalizing and coming down. But also, we have to factor in that we are doing more retail and digital by nature because the margins are much higher. And as I mentioned earlier, the risk-adjusted return is what we need to really look at, and that's going to improve.

Yes. So I mean, it helps that if you could guide us to some -- say, what is the fair level of credit cost to think in that business and for your overall NBFC business? And a follow-up to that was, you have seen quite a bit of operating profit -- pre-provisioning profit, margin expansion in the last couple of years. Do you see more room for that as well?

So, Subbu, as we grow our retail and SME business, right now, 60% of our overall book is retail and SME. And the way it is growing is growing much faster than the other segments. So as we continue to grow the retail and SME, our margin expansion should happen. So clearly, we are looking at better margins.

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

This is Abhishek Saraf this side. Sir, I had a few questions on life insurance side. So if you can help me understand what has been the recent development in the -- on the reinsurance side for term life because many of our peers have seen activity that prices have been hiked and reinsurance schedules have been changed. So what has been the situation that you are in? And secondly, we are targeting like 14% VNB margin by the end of this year. So can you just help me understand how are we going to achieve that from around 11.5% for -- till 9 months? These two questions, sir.

Yes. So on your first question on reinsurance, I think insurance premiums have gone across the board, and they have gone by about 40% to 50% up. All of that is reflecting in increase in the prices. We've also filed our products. In one product, we've increased our price. In the other products, we've already filed with the regulator for the increase in price. And prices have gone up in the range of 25% to 30% up in the marketplace. So that is the impact of reinsurance and the term business in the marketplace. You can see the acceptability of those increased prices and what it will do to the potential business, we'll get a better idea of that after about 3 months' time. So that's the one on reinsurance. On your question of net margins -- net VNB margins, typically, if you see our trend last time when we achieved by the end of the year about 10.5%, at Q3, we're at about close to 5.5%, 6%. Our cost are distributed equally through the year, but obviously our volumes shifted significantly in quarter 3 and quarter 4. So both our gross margins are being stable at this point of time, and the cost that will be lesser because it is equally distributed whereas topline will be significantly higher. You'll see us achieving that 14% net VNB margin, which we said is one year ahead of our projected thing that we had said last time. That's how we achieve that 4% net VNB margin.

Okay, sir. So basically, it will be mostly operating leverage, which will play out in the fourth quarter and not necessarily the product-level margins or the product mix as such?

Product-level margins are pretty healthy. Like I said, we are close to about 43%. I don't see that changing or going down. In fact, with interest rates going up, there could be some positive bias from that in that sense because interest rates are going up and there is a part of your business you do where interest rates going up actually help you in terms of your overall margins. So I'd say, there could be some kind of an upward bias, but no downward bias at this point in time.

If, sir, you can just make me understand, what is our reinstalling [Technical Difficulty]. And also, secondly, on the non-par business side, with the [Technical Difficulty] what is [Technical Difficulty]?

I'm sorry, I couldn't hear your question very clearly, but whatever I understood, the threshold limit for protection on your books has moved from INR 20 lakh to INR 40 lakh, and that's what we intend doing. So INR 20 lakh will become INR 40 lakh because that's part of the arrangement with the reinsurer with all like insurance companies, by and large, apart from the increase in the price. And I heard you ask the question on non-par, I didn't get the question fully. But what we do, if you ask what is management point of view, then we very efficiently do [ for all ] in terms of our hedging. And obviously, when you knew that the interest rates were going up, we actually took a breather because, I mean, typically, that was a time there was a clear indication that interest rates would be going up, so we efficiently manage that. And the current rates, we have gone back to our prior principle that we follow where 100% of our expected maturity benefits are fully hedged from that perspective.

[Operator Instructions] The next question is from the line of Anand Bhavnani from White Oak Capital.

Two questions from my end. One is with regards to the reinsurance question an earlier participant asked. In our case, what is the mature level beyond which do we reinsure? And have we increased that limit, like the retention limit in order to accommodate some of the insurance price increases?

Yes. So to answer your first question, the price increases, which have come from the reinsurance now requires a mandatory movement, bulk of us for a INR 20 lakh has to move to INR 40 lakh. So the product that we filed right now is with the INR 40 lakh reinsurable. So this [ on us ] and balance will be with the reinsurer. We priced it for that. Also, different income segments reflect different behavior in claims. That's how the pricing has been impacted in the marketplace. We are evaluating that for a certain income segment. Can we take risk on our book slightly higher, but that's under evaluation. But for the products filed with the regulator, whatever is the bare minimum requirement of the reinsurer INR 40 lakh is what will have been filed for.

Noted. Noted. And with regards to our digital partnership, you indicated that 32% of retail is originated through these partnerships. At what percent -- of this sub 32%, what percentage would have FLDG currently?

So we don't have FLDGs. I think our arrangements are every partnership is different and we have a different arrangement with different partners. We have a lead generation agreement. We have corrections, risk management. So it's a combination of all. So that's how we look at each partnership.

Sure. And if I just seek a bit clarification, how does any prospective change by RBI on FLDG affect our plans for digital originations?

So we don't take FLDGs. So that's the point, which I was mentioning. This is related to lead management, collection efficiency or the collection arrangement, which we have or the risk sharing, which we have. So there is nothing which is FLDG we take from the partners.

Noted. And one last question, if I may squeeze in. On our health insurance, we have significantly improved on combined ratio, 230%. What -- at what level of individual premiums or overall profit and premiums do you see this coming below 100%?

That's a function of the growth rate also. So it's -- as you get close to INR 2,000 crores of premium, technically both become reasonably large to move towards profitability, and that's something -- and regarding growth opportunity, we'll continue to evaluate them and see where we would like to invest. But I think the fact that in quarter 4, we have given you the guidance for breakeven without COVID claims. I think that should demonstrate the efficacy of the model. and which effectively means that for quarter 4, the same COVID claims, we will be below 100% combined ratio.

The next question is from the line of Sahej Mittal from HDFC Securities.

Sir, so pardon me, but I missed out on the price hike question. So what is the price hike, which we have taken on our protection products, if you could just reiterate that?

So I said there are two products, which we have. One of them has already gone up by 15% at this point in time, and the one that is filed with the regulator is for a price hike of about 25% to 26%. We have waiting approvals on that. So that's the range of price hikes that we do. And the price hikes happened in the market are a function of two elements, what is the risk that you will take on your books; and what is the extent of policies that you write medically and non-medically because in the industry, some of the large players, right, close to 30% to 35% of their business on nonmedical basis. And the reinsurance premium for that has gone up close to double of what it used to be before. But at ABSLI, we're right about 98% of our policy is completely medical. So we've impacting the price hike based on the nature of the business that we do, keeping the risk in line of the predictions.

Got it. In terms of price hike from the reinsurer, so have we passed on that entire hike to the customers or are these -- will we take it gradually or I mean, will it be margin accretive? I mean, the question I'm trying to answer -- ask is that since we have increased our retention ratio, it should ideally be margin accretive, right, because that increases the portion of protection on our books. So how will it be for us?

Yes, it's not as simple because the moment you take your books and nobody knows when the post-COVID scenario is going to unfold. Typically, I'm saying when claims come in, you'll actually sell out a larger from your books also. So it's not necessarily -- if the risk on your books you take large, it has to be managed with a reasonable risk award kind of reiteration. Reinsurance premiums, whatever have gone up would actually warrant for maybe price hikes in the range of slightly more than what we are passing on. There is also, with the regulator a belief that you should do it slowly. So normal expectation is you shouldn't pass on more than, say, about 25% at one time. So within the control of that, what you can do best will what -- is what will make it value-accretive. Like I said, fortunately, because we do about 97%, 98% of our business medically, even if we are passing on between the 15% to 25% price hike, it will turn out to be value accretive for us for sure. But like I said, for people who do medical, nonmedical in the ratio of 60-40, I can tell you for sure that 25%, 30% price hike will not be good enough to have a value accretive margin. Of course, you can make it value accretive by significantly increasing the risk on the book. But with the environment the way it is right now and nobody knowing when the COVID scenario will unfold, I'm not sure whether it's a very prudent risk-adjustive strategy or not.

The next question is from the line of [ Roopa Dia ] from Intelligent Capital.

My first question is on housing finance. I see the collection efficiency is 96% and is restructured is roughly 7%. This, I mean, collection efficiency seems a little bit low and restructure seems a little bit high compared to industry. So can you please give some color on it? And then how do you see it moving in, let's say, Q4 and then FY '23, if you can provide some guidance there?

So we cater to the self-employed segment. And that segment has got impacted because of COVID over the last couple of years, and that has reflected in the restructured portfolio, which you're talking about. But we are quite comfortable. And if you look at the quarter 3, performance has been quite stable. And so going forward, we see a stability in the overall portfolio quality.

Okay. And how do you see these numbers next year, sir, FY '23, both collection efficiency and restructured?

Collection efficiency should continue to improve. But in terms of restructured portfolio, I think by definition, once the account is restructured, it has to remain in space to until unless the customer repays 20% and all. So that will take some time before the account gets upgraded to Stage 1.

Okay. And this -- I mean, which segment this is for? This is largely LAP, or which segment is this restructured?

No, this is primarily the home. As I said, we cater to the self-employed segment and across home loans and LAP or both. So this is across both the products.

Okay. And my second question is on NBFC. In that, sir, can you give gross slippages recovery rates, if you have the split?

[ Roopa ], we get this number offline, the NBFC number.

Okay. And did you, sir, say that the entire 3.9% of the restructured sits in Stage 2?

Majority of it sits in Stage 2.

Okay. So Stage 2 plus Stage 3 combined is roughly 10%, 11%. That is the stress. Is that a fair way to look at it?

So how did you get the 10% number? So 3.9% restructured portfolio in NBFC and 3.9% Stage 3. So restructured, say, around 7.8%.

Okay. And restructured collection efficiency is 94%. Did I hear that right? Just is that number right?

Yes. At the company level, that's 94%. At a retail level, that's around 90%.

Okay. And sir, I see 40% PCR in NBFC books. So this is the level do we expect to maintain in FY '23 also and in general?

No. So you are talking about the PCR 42%, that's the question?

Yes. What is -- I mean, would this number be higher now with the changing product mix, which will be lower? How will this number move?

So our overall portfolio is 80% secured, and it's in line with them. We are very comfortable with the provision coverage, which we have at this point in time. But based on the performance of the portfolio and the restructured portfolio, we will continue to improve our provision cover.

So this number will go up next year possibly, or you will observe the bucket movement and then you will take a call?

Yes. So this all is defined by ECL policy. Under Ind AS, we have an ECL policy, which is well established and it has been built over a period of time based on the performance of the last 10, 12 years and looking at the worst-case scenarios, which we build the ECL policy. So this is -- the PCR is -- this is our ECL policy, which we have. But to answer, if we see the restructured portfolio performance, we will evaluate that. And if there is a need, we will up that.

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

So previous question has been covered earlier. Sir, just one question. And I mean, maybe I'm asking a question on the earnings for the first time. So again, excuse me if I sound a little naive. Sir, I mean, if you were to just kind of try to kind of calculate -- back calculate rather the respective valuation of your lending businesses, effectively from your market, perhaps if we were to reduce the valuation of your AMC life insurance and insurance companies, I mean the maybe effective price to book at which, I mean, the lending businesses, the valuation that the lending business, is actually, I mean, very close to the book value. And to that extent, I mean, I would say this is very undemanding valuations. So I mean, I would say, we -- ever since, I mean, IL&FS happened, right? There has been this motion that anything wholesale, which in our case is largely with corporate, is that a move for the NBFCs? So if I would just ask a simple question that, I mean, how did that, we can give more comfort on this margin with corporate book? That will be all for my end, sir.

So I'll answer that question in two parts. I think like you yourself referred, this is happening now for the last 4 years. So I think you have 4 years to see how this book has performed, and I think that is obviously already there in the numbers that you see. That is point 1. And point 2, I think you've mentioned before, I'll mention again because you haven't got the data point in this presentation. But the average rating of our corporate book is A-. So actually, it's a very highly-rated and well-performing book. And like I said, even people have seen the comments of the book now over a very long period of time. So I'm not sure what else I can answer to augment that answer.

Right. Sir, I mean, the only thing is, I mean, like I said, I mean, whatever, I mean, valuations are being described to the lending business. I mean, at least in our conversations, a lot of kind of stems from the concerns, which are there around this large and corporate book. Like I said, I mean, those expectations are there since the last 3, 4 years since the IL&FS before it happened, but nothing has really transpired. So I mean, that's precisely what I was kind of trying to understand. That's all, sir.

Yes. I think I've shared my perspective with you on that. As I said, it's enough time to see the performance of the book, and our rating on that book is actually A-. So it's a very good quality. And we are very comfortable with our portfolio.

Sir, especially, I mean, let's see, even when you do that -- what's this kind of an analysis on that large and corporate book, you're really not seeing any stress, which could be there? I mean, there may be coming year, not looking very far ahead, but at least in terms of your [ service ], is there anything?

No. So we are not looking at anything significant coming from this portfolio. As we have mentioned in the deck, we are, in fact, looking at a resolution of overall INR 350 crores to INR 370 crores of Stage 3 assets. So I think only looking at improving it.

And if you look at what's happened to the segment itself, we've reduced the size of the corporate book. I mean, you can see from the peak is our almost INR 5,500 crores, INR 6,000 crores and we've reduced the average ticket size. So even from a risk perspective, those two metrics have also kind of flared up. The absolute number has come down and the average ticket has come down. So both of those would also improve the risk in addition to the A- rating that I discussed earlier.

The next question is from the line of Anand Bhavnani from White Oak Capital.

Sir, the question is on our [Audio Gap] book. In the budget, the credit subsidy scheme has been kind of withdrawn for urban areas and also for the rural areas. So if you can give us a sense of we have an ambitious target of taking the affordable housing book to, I think, [ 65% ] of the housing book. So does -- how does the target get impacted in the light of withdrawal of credit in subsidy scheme? And in our existing affordable housing book, if you can also share what percentage of clients have applied or received credit in subsidy scheme in the past?

So we can come with more details on this. But if you look at the focus of the government is on affordable segment, and this budget also, they have announced INR 48,000 crores of investment or -- so clearly, we are looking at this segment more from a strategic point of view as a majority of the customers an affordable are the first-time buyers. And the expansion in Tier 3 and 4 cities really mean that we are looking at this segment. So that's how we are looking at. Year subsidy might have gone up and then because they would have gone over the budget. So we will have to get into the details of that. But I think the entire focus of the government to drive affordable housing really ensures that there's a lot of opportunity, which is there in this business.

Sure. I'll reach out separately for the number of customers who have existing CLS scheme benefit.

Yes, we'll share that with you. Yes. PMAY, we will come back to you on that.

Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. Ajay Srinivasan, Chief Executive of Aditya Birla Capital for closing comments.

Yes. Thank you for joining this call, everyone. We hope we've answered your questions. If there are any pending questions, please do send in your questions to Pramod Bohra. We'll be very happy to answer them. Thank you, and have a good day.

On behalf of Aditya Birla Capital, that concludes this conference. For any further queries, you are requested to reach out to the Investor Relations team. Thank you for joining us, and you may now disconnect your lines.