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

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 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 Ms. Vishakha Mulye, CEO, Aditya Birla Capital Limited. Thank you, and over to you, ma'am.

Thank you so much. Good evening, everyone, and welcome to the earnings call for Aditya Birla Capital for Q2 FY 2024. Joining me today are my senior members of my team, Bala, Rakesh, Pankaj, Kamlesh, Mayank, Pinky, Vijay, Ramesh and Sanchita. I will cover our strategy and approach across businesses, and I request Vijay to cover the financial highlights, followed by a discussion on performance of our key businesses by respective CEOs. The Indian economy continued to be resilient amidst the uncertainties in the global environment. The underlying growth momentum is visible with expansion and manufacturing and services PMI, real estate buoyancy and higher demand for travel. GST collections increased by 13% year-on-year to INR 1,73,000 crores. Passenger car sales [ increased ] by 16% year-on-year in October. Though there has been a pause in a monetary policy cycling globally and in India, trend in inflation needs to be monitored closely. We expect the positive macroeconomic trends to continue and Indian economy to perform well in FY 2024. At Aditya Birla Capital, we follow One ABC, One P&L approach to focus on quality and profitable growth by leveraging data, digital and technology. The 3 pillars of our approach are one customer, one experience and one team. This approach has helped us to accelerate our growth trajectory, build scale and increase market share across our businesses. Our total lending portfolio across NBFC and HFC businesses grew by 41% year-on-year to INR 1,09,000 crores. The total AUM across mutual funds, insurance businesses increased by 12% year-on-year to over INR 4,00,000 crores. The total consolidated revenue grew by 22% year-on-year to INR 8,831 crores in Q2 FY '24. We are happy to share that our consolidated profit before tax grew by 46% year-on-year and crossed a INR 1,000 crore milestone during this quarter. Consolidated profit after tax grew by 44% year-on-year to INR 705 crores. Our endeavor is to provide one experience to our customers across all channels. We follow an omnichannel architecture for distribution and give our customers the complete flexibility to choose their channel of interaction. Digital first is at the core of our strategy for product innovation, direct acquisition and seamless transaction experience. On our AMC business, about 78% of our customers were onboarded digitally. In Life Insurance, 80% of renewals were done digitally. In our health insurance business, 85% of our business is delivered by auto underwriting. As you are aware, our comprehensive B2B platform for MSME ecosystem Udyog Plus went live earlier during this year. I'm happy to share that we have seen a very robust response for our Udyog Plus with more than 1,64,000 registrations as of September end. It offers paperless digital journey for small ticket businesses loan, along with the PIFA solutions and various value-added services to our MSME clients. We have integrated Udyog Plus with several government and private e-commerce websites via OCEN to provide various credit facilities to sellers on these platforms. We have started integrating Udyog Plus with ABG ecosystem to provide channel financing to our dealers. Udyog Plus has reached a monthly run rate of INR 50 crore disbursement with ABG ecosystem, contributing 2/3 of this business. We will continue to scale the businesses in ABG ecosystem as we expand our market footprint in B2B segments. As we continue to strengthen our digital offering, we are also focused on expanding our physical footprint. Our branch expansion is targeted at driving penetration into Tier 3 and Tier 4 towns and capturing white spaces across our customer segments. Our overall branch count increased by 71, and we had 1,403 branches across all our businesses as of September end. In line with our One ABC approach, we continue to expand our co-located branches, which increased by 70 during the quarter to 691 branches across 201 locations as on September end. We are also leveraging the extent at ABG and ABCL ecosystem to accelerate our growth trajectory across various businesses. ABG and ABC ecosystem contribute about 7% of our total disbursement in our Housing Finance business during this quarter. We also follow a One customer approach through which we build deep understanding of our customer profiles and provide them best-in-class solutions across PIFA for their financial and business stage needs. We have mentioned in our previous earning calls that we are developing an omnichannel D2C platform with various touch points through which we'll acquire new customers and provide holistic financial solutions to our existing customers. We are progressing well in this journey and the mobile app of [Technical Difficulty] 90 days. Going forward, we will continue with our One ABC One P&L approach to grow and build scale in each of our key businesses. Now I request Vijay to briefly cover the financial performance of our key subsidiaries for the quarter. Over to you, Vijay.

Thank you, Vishakha, and good evening, everyone. Coming to the financial performance. Consolidated profit after tax grew by 44% year-on-year and 9% sequentially to INR 705 crores. The total revenue grew by 22% year-on-year and 8% sequentially to INR 8,831 crores in Q2 of FY '24. In our NBFC business, we continued with a strong momentum of disbursement and granularization of our book. Disbursements for the quarter grew by 32% year-on-year to INR 16,477 crores in Q2 of FY '24, which helped the loan portfolio to grow 44% year-on-year and 9% sequentially to INR 93,522 crores as of September end. The NBFC business had an healthy ROA of 2.51% and ROE of 18% in Q2 FY '24. During Q2 FY '24, we also infused equity capital amounting to INR 750 crores in our NBFC subsidiary to support the growth momentum and maximize our share of opportunities. Our housing finance business continues to see healthy momentum with disbursements increasing by 52% year-on-year and 16% sequentially to INR 1,882 crores during Q2 of FY '24. The loan portfolio grew by 23% year-on-year and 6% sequentially to INR 15,439 crores as of September end. ROA was a healthy of 2.03% and ROE of 14.5% in Q2 FY '24. Coming to our AMC business, the average asset under management increased by 10% year-on-year and 5% sequentially to INR 3,10,899 crores, of which equity AUM contributed approximately 42%. Our passive AUM grew by 68% year-on-year to INR 28,438 crores in September end. In life insurance business, our individual first year premium grew by 13% year-on-year. Net VNB margins expanded by 195 basis points year-on-year and 240 basis points sequentially to 14.2% in H1 FY '24. Embedded value increased by 13% over March 2023 and crossed INR 10,000 crores mark. In our health insurance business, our unique and differentiated Health-First model helped us to deliver a growth of 23% year-on-year in the quarter 1 of FY '24. The combined ratio was 119% in Q2 FY '24. With that, I will now hand over the call to Rakesh to take us through the NBFC business performance in detail.

Thanks, Vijay, and good evening, everyone. In Our NBFC business, we saw a sustained momentum across all segments in quarter 2, contributing to 9% quarter-on-quarter and 44% year-on-year growth and our AUM, taking it to INR 93,522 crores of loan book. Our retail and SME segment AUM grew 49% year-on-year and now stands at INR 62,577 crores contributing to 2/3 of the AUM mix. Our active customer base grew to 5.9 million customers, compared to 5.3 million last year, a 13% growth year-on-year. New business sourcing was strong in quarter 2. We disbursed INR 16,477 crores, which is 32% higher than quarter 2 last year. All product segments contributed to this growth with our business loan segment being the biggest contributor in terms of this disbursement, mix at 41%, followed by a personal and consumer loan segment at 32%. Our strong sourcing quality in this segment is demonstrated by 87% of the portfolio having a credit bureau score of 700 plus. Our net interest margin expanded by 16 basis points year-on-year to 6.87% in quarter 2. Our OpEx to AUM ratio reduced by 26 basis points year-on-year to 2%. Our cost-to-income ratio reduced by 428 basis points year-on-year to 28.76% for the quarter. Our profit after tax for quarter 2 was INR 548 crores, growing by 53% year-on-year. As a result, the return on equity for the quarter expanded by 42 basis points year-on-year to 18.01%. The asset quality has shown a consistent improvement over the last year, with Stage 2 and Stage 3 combined book coming down from 8.50% in quarter 2 of last year to 5.24% in quarter 2 of this year. Gross Stage 3 book has dropped to 2.64% from 3.53% in quarter 2 of last year. Our Stage 3 provision cover has increased to 48.3%, which is higher by 5.2% over quarter 2 of last year. As I had mentioned in last quarter earnings call, we launched Udyog Plus, our unique and differentiated unified B2B platform for MSME customers. In a brief duration of 6 months, we have over 164,000 MSMEs registered on the platform as of September '23. To deepen our geographical reach through physical presence, we added 43 branches this quarter and 154 branches in the last 12 months, taking our branch count to the total of 375 branches as of September '23. We will continue to scale Udyog Plus and invest in enhancing our distribution capacity to fuel our growth momentum. I'm happy to share that we successfully concluded the maiden public issue of NCD non-convertible debentures for INR 2,000 crores in October 2023. The issue received an overwhelming response and was oversubscribed by 1.22x with over 10,000 applications across categories of investors. To conclude and reiterate our performance, we had a robust quarter in terms of growth, leading us to a return on assets of 2.51% in quarter 2. In the last few quarters, we will continue to build a granular portfolio and enhance our retail and MSME segment mix. As we build scale, enhance capacity and invest in technology, we remain committed to delivering a sustainable return for the forthcoming quarter. With that, I will now hand over to Pankaj Gadgil, MD and CEO of Housing Finance business.

Thank you, Rakesh, and good evening, everyone. I'll now cover the performance of ABHFL in Q2 FY '24. We maintained strong momentum in disbursals and book growth. Robust financial performance and focus on portfolio quality has led to consistent improvement across all return metrics. Q2 key highlights are as follows: As Vijay earlier mentioned, disbursements of INR 1,882 crores, which is an increase of 52% Y-o-Y. I'm also happy to announce that we have crossed INR 15,000 crores mark in AUM and as of September '23, it stands at INR 15,439 crores, an increase of 23% Y-o-Y. The customer base also has grown, and it has grown by 18% Y-o-Y and now stands at 58,400 customers. NIM is at 4.88%, and our profit before tax for the quarter is INR 97 crores, which is our ever highest in the quarter with an increase of 28% Y-o-Y. On asset quality, Stage 2 plus Stage 3 has reduced by 38 basis points Q-o-Q and 390 basis points Y-o-Y. The PAT for Q2 FY '24 is INR 75 crore, an increase of 26% Y-o-Y, and the ROA for the quarter is 2.03% with an ROE at 14.50%. You can refer to the detailed financials on Slide 25 of the presentation. On portfolio quality with focus on quality of origination, 96% of our disbursements in Q2 FY '24 are towards 700 plus CIBIL or new to credit. The contribution of 730 plus CIBIL to origination is at 74%, which is significantly higher than the industry average of 42%. Our gross stage 3 has shown significant improvement decreasing from 3.75% in September 2022 to 2.63% in September 2023. We are maintaining stage 3 PCR of 34%. The details of the same are provided on Slide 23. Moving to treasury management, we've maintained an average cost of borrowing of 7.60% for the quarter, prioritizing our diversified borrowing mix. The contribution of NHB to our total borrowings has increased from 16% to 21% in September 2023. We have maintained positive ALM across all buckets and the CRAR stands at 20.38%. You can see that we've demonstrated consistent improvement across all aspects of book growth, asset quality and core profitability. Now I'd like to provide you a brief 6-month update on the organizational road map that we presented in our discussions in April 2023. Firstly coming to the growth and distribution network. We've been growing at a consistent pace in both the prime and affordable segments. We now have a nationwide presence with 131 branches covering about 85% of the total addressable market of the housing finance industry. We witnessed a twofold growth in channel partner onboarding in the last 6 months. And like Vishakha earlier mentioned, the ABG ecosystem contribution of the disbursements now stands at 7% for the quarter. Secondly, on digital reinvention of our entire customer journey, I am pleased to announce, and as of August 2023, we have successfully deployed our new, unified digital lending platform Finverse in all branches as per plan. This expansion follows our discussion during the last call when it was initially deployed in 33 branches in June 2023. Within just 1 month of its pan-India launch, Finverse adoption is now more than 40% in September 2023. Finverse, to reiterate, offers unified interface for all stakeholders, like customers, partners, employees and vendors with 95-plus API integrations and built-in data-led algorithms for easy credit assessment. It also had additional capabilities like real-time dashboard and customer portal. This simple and intuitive user-friendly interface ensures the benefits like easy login, real-time query resolution, digital collection and validation, access to loan status for customers amongst other features. Lastly, on the analytics front, we are well on course. We have built the team now in the last 6 months and the adoption of our initial models, including attrition prediction, pre-delinquency management and lead scoring models, performance is very encouraging and consistent with our envisioned plan. In summary, we continue to invest in long-term growth while maintaining robust profitability and a quality portfolio, all while maintaining customer centricity at the core. With that, I now hand over to Bala, MD and CEO of our Asset Management Company.

[Operator Instructions]

Yes, can you hear me now?

Yes, sir, please go ahead.

Yes, thanks, [ Sanjay ]. As I present at the AMC analyst call, [ I'll just give a briefing ] of the AMC performance for the quarter ending September '24. Our overall average asset under management, including alternate assets reached INR 3,24,000 crores and growing by 10% year-on-year basis. The mutual fund quarterly average AUM has crossed INR 3,00,000 crore and equity quarterly average AUM crossed INR 1,30,000 crores. Our SIP flows compared to the last year has gone up from INR 931 crores to INR 968 crores and overall folio count remain about 80 lakhs. Our strategic efforts across channels have enhanced market presence with the Focused Fund Offer campaign gaining -- the Focused Fund Offer campaign that they have created gaining traction and driving an upswing. The sales ecosystem, including VRM, Sampark and service to sales our digital distribution have also been yielding positive results. On the passive front, our offering grew by about 68% to about INR 28,400 crores as of September 2023 and has been growing a customer base along with that about 5.4 lakhs folios. On the AIF front, the fund raising is underway in the ABSL India Special Opportunities Fund Category III AIF. After setting up our GIFT City, we have launched the industry first ABSL Global Emerging Equity Fund this strategically feeds into ARGA Emerging Market Equity Fund enabling investors to access and benefit from emerging market opportunities where we have closed the first tranche of this fund and garnered collection of about $11.2 million. Moving on to the financial for the quarter. Our revenue from operations for the Q2 FY '24 was at INR 335 crores versus INR 311 crores in Q2 FY '23, up by about 8% year-on-year. Our operating profit for Q2 FY '24 was INR 181 crores versus INR 172 crores, up by 5% year-on-year. With this, I'll hand it over to Kamlesh Rao, who is the MD and CEO of Aditya Birla Sun Life Insurance company.

Thank you, Bala. And I will now speak about the life insurance business performance. The first half saw a growth rate of 13% for the individual life insurance business in line with the private industry growth and higher than the overall industry growth of 8%. This growth in value was supported by a 19% growth in policy count. Our growth was driven through higher growth in our proprietary channels at 22%. We saw a degrowth in our largest bank partner in Q2, which was driven by their strategic shift to contribute more to their subsidiary life insurance partner. Our other bank channel saw a robust 39% growth in Q2. During the quarter, we commenced business at IDFC First Bank, and our Bank of Maharashtra business will go live in the month of November. We are hopeful by the end of Q3, we will further strengthen our Banca propositions to drive growth going forward. Products launched in the last 1 year contributed 44% of the business in H1 of financial year '24. In the individual business, traditional products contributed 79% and the ULIP contributed 18% to our overall business. This has resulted in strong gross margins. Upsell to existing customers contributed 28% of the business in H1 of '24. This helped productivity growth in both our proprietary as well as partnership channels. The Group Life Insurance business segment for the industry saw a degrowth of 23% in the first half while ABS Life degrew at 10%. We continue to remain #1 in the ULIP segment of this business with an AUM of INR 10,455 crores. We maintain our guidance of growth for the full year projection for this business for '24. Our total premium of INR 6,827 crores has registered a growth rate of 7% over last year. Growth came from new business growth as well as renewal premium growing at 19% and digital collections now accounting for 80% of our renewal premium. Persistency across all buckets did well with the 13th month persistency now at 87% and the 61st month at 59%. We continue to maintain an upward bias in our forward guidance for these persistency numbers. Our assets under management now stand close to INR 76,999 crores with a Y-o-Y growth of 19%, 25% of the AUM is in equity and the balance 75% in debt. Our investment performance has been better than respective benchmarks across all 3 categories of either equity, debt or even balanced funds, either from a 1-year or a 5-year perspective. Our digital adoption across various areas is demonstrated on Slide 44. 100% of the new business customers are onboarded digitally. 83% of all our services are now available digitally covering 62% of our customer transactions and our customer self-service ratio now stands at 89%. Our net VNB margin continues to grow well with an expansion of 195 basis points to 14.2% in H1 of this year as seen on Slide 41, we expect to deliver 23% plus net VNB margin in financial year '24. Our effort is to continue to growth trajectory of this business ahead of the industry, backed by both productivity and capacity. We expect continued improvement in the quality of the book. Growth will come from a diversified mix of both proprietary and partnership channels. We will continue to be best in class in our digital infrastructure across prospecting and onboarding in sales, underwriting and customer service as well as claims. With this, I'll hand over to Mayank, MD and CEO of our health insurance business.

Thanks, Kamlesh. Let me now present the performance of our health insurance business. In the first half of this year, we have registered a gross premium growth of 23% year-on-year, in line with the market. We've seen some good traction in retail sales towards the end of this quarter. And we saw an overall growth of about 38% in September '23, against a SAHI growth rate of 23%. Post the changes we have done in our channel strategy in the first half of the year, we now expect this growth traction to continue. Our market share in SAHI has improved from 10.4% at the end of the last financial year to 10.7% in the first half. We saw good traction in our larger retail channel with the proprietary channel growing at 34%, backed by the capacity additions done over the last 12 months and a very focused geography strategy. The share of proprietary channel is now close to 30% compared to 25% in the same period last year. Our adviser count has now crossed 1 lakh for the first time, demonstrating the large scale of our agency channel. Our focus on driving superior product mix has led to contribution of fixed benefit products growing from 12% in the first half of last year to 16% of the portfolio in this first half, which will positively impact profitability in the forthcoming quarters. We continue to add new capacities in our bancassurance channel with the onboarding of Yes Bank. Activation of new partners added in the last few months will support our retail business growth in the coming months. Our corporate business grew at 37% year-on-year driven by our strong focus on profitability. This is enabled by sharp selection of customer segment, sell, upsell, corporate wellness and the industry-leading OPD product. We continue to focus on mid-corporate and SME segments to create a sustainable and profitable corporate and affinity business. By prioritizing both growth and profitability, we are trying to build a resilient franchise. Our net loss for the first half is reduced to INR 140 crores from INR 149 in the same period last year. Claims and expense ratios have trended well overall at a company level. Our CoR in first half is higher compared to same period previous year, mainly due to the impact of seasonality of growth for the last 12 months. Individual components are trending very well, and we expect the CoR to normalize in the coming quarters, in line with what we saw last year. As a tech and digitally enabled dealer-driven health first business, we remain committed to investing on a sustained basis, both in our tech and digital capabilities, digitally powered hyperscale -- hyper-personalized engagement allows us to gain deeper insight into our customers, accessing a wealth of health and lifestyle data. Our app downloads have increased 67% year-on-year and our monthly average users have grown by 35% year-on-year. Self service transactions now stand at 79% compared to 67% Q1. Leveraging high-end data analytics tools, we drive better business outcomes enabling us to make informed decisions that positively impact our customer lives. This involves personalized product offerings, targeted health and wellness intervention and a personalized service approach, all aimed at enhancing overall customer experience. In addition, the investment in data augmentation and analytics is helping improve our cross-sell retention and most importantly, fraud, waste and abuse management. We continue to bolster our digital health and wellness ecosystem and now have more than 60-plus partners, and we are working with multiple insure techs and health tech players to enhance customer value and operational efficiency. In the last quarter, we launched the first of its kind digital based campaign, health assessment feature at scale to augment customer health data, working with the health tech partner. It now contributes to more than 15% of our total health assessment significantly good acceptance by customers. Looking ahead, given the compelling opportunity and enabling regulatory environment, we remain optimistic on the growth potential of the health insurance industry. Our vision continues to be to expand our franchise aggressively, but maintaining best-in-class unit economics with a clear focus on profitability. Thank you. I now pass it back to Vishakha for her closing remarks.

Thank you, Mayank. This concludes our comments on our performance. And now we'll be very happy to take any questions.

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

So the first question I have is on the personal and the consumer segment with an average ticket size of INR 33,000. Now we get a lot of queries on the bureau data, which shows stress in the less than INR 50,000 categories. But when I look at our earnings, the GS3 has been stable Q-o-Q. So we -- it doesn't seem to be any kind of stress in our portfolio. But can you talk about the early delinquency trends in this quarter? And any action we have taken on the customer cohort for the new sourcing in this segment?

So if you look at, Anuj, our unsecured and personal consumer loans with ticket size less than INR 50,000 and tenor less than 30 days is only 1% of our total loan book. And unsecured person and consumer loans with ticket size less than INR 50,000 and tenor less than 30 days, which comprises BNPL sourced through partner is only 2% of our overall loan book. So clearly, I think the portfolio is very small for both these segments. And in terms of what -- as you rightly mentioned, our portfolio looks very, very stable. But we have been monitoring this portfolio very closely in terms of taking wherever decisions in terms of tightening. We are doing our underwriting and scorecards, we are tightening the scorecards. So we -- our initial -- all the indicators are looking fine at this point in time, and we have no cause of concern, but we have started tracking the leverage of these customers. So to give you an example, customers who were onboarded 9 months back, 12% of the customers have now leverage, which is 1.5x of what they were 9 months back. So clearly, we are tracking the leverage of these customers also and keeping a very close watch on this portfolio. So very calibrated growth in our business is what we are looking at in the segment.

Got it, Rakesh. And the second question is on the sourcing from the digital ecosystem partners. Now one of the peers today commented that the delinquencies in this portfolio sourced through the digital ecosystem on the fintech partners are higher versus traditional partners. Can you talk about your experience here in your portfolio? And secondly, within the -- and there is a slide here as well, where you have mentioned that you're using the customers acquired through the digital ecosystem for cross-sell. For this cohort of customers, can you talk about the cross-sell rate? What have you achieved till now?

So I think the cross-sell almost 40% plus of the new personal loans come through these consumer loans. So that's our cross-sell conversion. Your first question in terms of what we are seeing through the digital partners. So again, we are not seeing any deterioration in terms of -- yes, we have calibrated, if you look at our personal and consumer in quarter 4 was growing at 21% quarter-on-quarter, which came down to 15% and then in last quarter, it's come down to 9%. So we are calibrating, and we are really tightening wherever needs to take proactive measures we are doing it. At this point in time, we don't see any deterioration, and portfolio looks quite stable. But very, very proactive in terms of through the door analysis, looking at the bounce trends, looking at the resolutions. And in terms of the leverage, as I mentioned earlier, we are looking at it very closely and taking calibrated calls in terms of doing business.

Anuj, one more point is that -- well, I'm not sure what the others are doing. But as far as we are concerned, as we said in our remarks that we follow an omnichannel approach. So irrespective of the fact which channel the customer approaches, as far as our credit standards and underwriting standards are concerned, they are identical, okay? So that's a very important point which is there. So even though they come through the digital channel for us, we take them like any other channel and our underwriting standards are same across our channels. So that also kind of helps us to manage. So it's not that because it's coming from 1 particular channel that our asset quality is not as good as it is from our own channel or through our DSA channel or through our direct channel. And of course, as Rakesh said that we are very proactively managing this portfolio, wherever required we're also tightening it.

So Vishakha, will it be fair to assume that the delinquency trends irrespective of the challenge will be quite similar, though not exactly, it will be similar across channels?

Yes, for the similar customer segment, it is identical.

Okay. Okay. Okay. Got it. And the last question is on the capital. So while we injected capital in the NBFC in this quarter, like Vijay mentioned, the Tier 1 is still 13.8%, capital adequacy 16.3%, and this business has been growing pretty impressively, and I think the trajectory also remains strong. So how should we look at the capital requirements of this business maybe over the next 2 years?

So Anuj, we raised INR 3,000 crores of capital, if you recollect during the month of June, which at a franchise level, we are confident that it will suffice us for 2 years, which is closure of FY '25. And within that, a large part of the allocation will continue to go towards our lending businesses. So we see the trajectory clear and for the next 2 years, we are sufficiently funded.

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

Congratulations on good quarter. Just wanted to understand and you've already spoken about personal loans, consumer loans and business loans, what we are doing aside that we are calibrating, I just wanted to understand given that we have a fairly good tie-up with some of the fintechs, digital players, we have -- I mean, I would say, a good number of partnerships in the digital ecosystem through which you source personal loans. Have you had a chance to check what proportion of your personal, consumer or unsecured business loans is being originated through this fintech ecosystem? And likewise, what is the average ticket size of these loans? And currently, as on September, what was your gross stage 3 in this portfolio?

A total of INR 19,200 crores, which is a personal and consumer. The consumer, which is around INR 4,200-odd crores, which is 22% of our retail and consumer business, that's where the digital partnership really plays out. And I also mentioned about the proportion and the percentage of less than INR 50,000 ticket sizes in our overall portfolio, which is less than INR 50,000 is -- and less than -- and more than 30 days is only 1% of our overall portfolio. So that's how it is, Abhijit.

Okay. And currently, in these loans, like you said, consumer is predominantly the portfolio originated through digital partnerships. What is the Gross Stage 3 numbers that you're seeing right now?

No, this is again in our -- if you look at improving the asset quality slide, which is there on Slide#10. If you look at both our Stage 2 and Stage 3, it's quite stable, including Stage 2 and Stage 3 last quarter was 4.1%. And this quarter also, it's 4.1%. And if you look at 2.1% was the Stage 2 and 2% is Stage 3. It's been very, very stable, Abhijit.

Got it. So essentially this entire consumer portfolio that we're talking about, fair to assume, I mean, a large part of it is originated through digital partnerships?

Consumer, consumer business, yes. Apart from that some ecosystem and internal ecosystem and all also, but yes, these are small ticket loans.

Got it. And just one last question. Just trying to understand, I mean, because our asset quality is still holding up very well, I mean, and the fact that you've already shared that you've already calibrated your underwriting, I mean, are you not seeing any fintech partners where you are evaluating whether we should continue that partnership or whether you should not? In other words, what I'm trying to understand, when there is so much that's been discussed at the industry level, there are no early warning indicators that you're seeing in your consumer portfolio at this point in time?

In terms of we review these portfolios on a regular basis, on a weekly basis, we have a monthly cadence with our partners, we review the portfolio. Whichever cohort partnerships or segments, which are not looking good, we close it and tighten it then and there. So it's not about that -- so we would have taken a call maybe 12 months back or 15 months back with a few of the partners, quite a few partners. So this is an ongoing process. We keep reviewing this. So you are right, there are certain partners where the portfolio quality might not be good. But we don't wait for long. We take a decision then and there and we just tighten it or stop that partnership, and there are a lot of examples where we have stopped doing any business with them.

Our next question is from the line of Parag Thakkar from Anvil Wealth.

Yes. I am audible?

Yes, sir. May I request you to use your handset, sir.

Yes, yes so basically, my first question is that what kind of margin picture you see and ROI picture you see on the NBFC side as well and housing finance side? Because generally, we are seeing this new moderation across the sector in the lending space. And the other point is that as everybody is alluding to the asset quality, which is related to fintech or digital partnerships. So what kind of red flags are there in your system, for example, bounce checks rate or whatever, if you can highlight? Will give us comfort that on the consumer side, especially in the digital partnerships and fintechs, our asset quality will remain robust.

So Parag, I will just address the NBFC and then I will ask Pankaj to add for the housing. But in terms of the margins, I think first point was on margin. If you look at our cost of funds went up by 14 basis points, though our yields improved for the quarter. But because of the cost of funds went up, that is the reason why the margin slightly -- and from the same range, if not. And we are quite confident that with the change in the product mix, we will be back to the normal margins, which we have delivered previous quarter and whatever we have committed going forward. So with a change in the product mix, we should be able to -- also, we believe that we are at the fag end of the increase in cost of funds. And once that stabilizes, the change in the product mix will start really delivering the improvement in the margins. So that was your first question. In terms of second question...

So just to interrupt. Sir, our guided range is, what, 6.5% to 7% NIM and 2.5% to 3% ROA?

Yes. So 2.5% ROA is what the last quarter also we delivered 2.54% and this quarter also is in the same range, 2.51%, very similar range. I think we will continue and deliver these ROAs and continue to, as our commitment is, we will continue to improve the ROAs over the next couple of years.

Great. And what is your loan book -- based on the economy, based on the economic momentum, what kind of loan book growth you envisaged in the NBFC? And we'll come to Housing later, on your NBFC part, what kind of loan -- for example this quarter, I think you have provided what 44%, right?

Yes, Parag.

Yes. So what kind of sustainable growth we can assume with improved ROAs trajectory as you rightly said in the coming 2 years, I would say?

So Parag, again, if you look at, we invested in our distribution. We increased our branch footprint. If you look at our branch, 2 years back was 119 branches, that has gone to 375, we are looking at 500-odd branches. We have increased our headcount in terms of manpower. So we have built in the capacity and which is what is playing out. But yes, going forward, the growth will be slightly moderated, compared to what we have delivered last quarter. On guidance, which we have always given is that we will double our book in the next 3 years. And that's what we are really working to deliver.

This improvement in ROA from 2.5% to, say what level in the next 2 years? I'm just asking about the approx numbers, not necessarily I'll hold on to that but the ROA improvement as you are saying, from 2.5%...?

Yes, Parag.

So what kind of ROA we are targeting in the next 2 years? So we are doubling our book in 3 years and ROA, ROA what is the...

Sorry to interrupt, Mr. Parag. May we request you to use your handset please.

So Parag, our committed guidance from this front is that we will double our book in the next 3 years, and we will take -- improve our ROAs to 3% in the next 3 years, with a change in the product mix and improvement of margins.

Correct. Correct. Okay, all right. And second question was on the red flags. How do you see, for example, if there is a loan given through a digital channel, how do you see that there is a red flag and this loan can turn bad. So what is the first sign, the check bounce rate, right?

So Parag, I mentioned earlier, I think we are tracking the leverage. See, when we give the loan, we know what is the kind of debt the customer has, because you have access to the credit bureau score and everything. But post that, how many more loans a customer takes and increases the leverage and debt, I think that's what we are really watching very closely. And I mentioned, that 12% of our customers over the last 9 months, we have seen that they we have taken -- their leverage has gone up by 1.5x. So we are tracking these customers, this 12% of the customer, we are tracking it very closely, and we will continue to track the customers where the leverage is going up. Also, we track the vintage delinquency very closely. And as I said, the first indicator is the bounce rate. And our bounce rate is still improving, and it's quite stable. So I think that's the first indicator. Things are looking stable, and we will continue to monitor very, very closely the leverage, the vintage delinquency, all these parameters, we will continue to look at very, very closely.

[Operator Instructions] Our next question is from the line of [ Shloka from Carnelian Capital ].

This is [ Kunal ] here. I have 2 questions. One was on this corporate and mid market book. Year-over-year, we've had a very good growth of about 37% on year-on-year basis and 8% quarter-on-quarter basis which construction finance from about INR 4,000-odd crores has gone up to like INR 5,500 crores, right? So 2 questions to this part. One was basically from construction finance, what kind of lending is this? And you could help understand the growth that is coming here? And second on the overall corporate and mid market, how do we see the growth in this particular segment is the competitive intensity out there, which would kind of impact the NIMs going ahead? Some highlights on this particular segment of the overall loan book growth would really help. That's the first question.

So if I can address that, then maybe you can ask the second question. So if you look at the developer finance, INR 4,200 crores, which went to INR 5,300 crores, INR 5,400 crores, we have growth of INR 1,000-odd crores in that portfolio. This is a very, very stable portfolio for us. See the drawdown in this business is dependent in terms of how the project is moving and when the requirement is. So that's the reason I think the drawdown in this quarter has been slightly higher. And majority of our exposure in this portfolio is to category A developers across the country, primarily focused on Mumbai, Pune and Bangalore. So these are the 3 markets where our prime exposures are. And it's a very, very stable, very well-performing portfolio for us. So that's question number one. On the mid-market and corporate see, again, corporate book is looking very, very good at this point in time. The corporate portfolio, the leverage, which the corporate businesses have looking very good. We are looking at a very calibrated growth in this business. Our growth drivers will remain retail and SME, and this business will -- yes, we will not miss an opportunity. But clearly, the growth drivers will be retail and SME.

Got it. And in the construction finance, is there a concentration or again, it's kind of spread out about INR 1,000 crores, right. And if I see compare it from last year, right, so from INR 3,000 crores to almost doubling of the book to about INR 5,500 crores. So is there a concentration here or it's fairly diversified between the lenders and between the projects or how is it?

So these are well diversified. See last year comparison is not -- it was coming out of COVID and a lot of projects were slow at that point in time. If you look at -- just before COVID also, our portfolio used to be INR 4,000 crores plus. So from that point of view, there is no significant over the 2, 3 years, because the construction activity was slow, that's the reason the portfolio has come down. But now the real estate has picked up and construction activity has picked up. So that's the reason you see a uptick in this. And it's quite well diversified. As I mentioned, category A developers, primarily focused on Mumbai, Pune and Bangalore, yes, some amount of Hyderabad. But primarily, these are the markets, which we really cater to.

Got it. Got it. Interesting. The other question that I had was within the NBFC piece, the active customer number for the last 4 quarters has been more or less hovering around the same number. But we have had robust growth when it comes to the unsecured piece, the personal and consumer loan piece, right? So how should one read this? While active customers number more or less remained the same in the last 4 quarters, if I read the numbers correctly, but then we have had robust growth on the asset side. So how should one read this 2 data points put together?

We mentioned this, we are looking at a very well-calibrated business with our digital partners so small ticket loans may have been -- that has come down. I mentioned it to you that in quarter 4, 21% and 15% and 9%. So it's been coming down. We are really looking at mining the existing customer base and cross-selling to the existing customer base, the customers who are performing well. So our clear focus is that we cross-sell to the existing customers, and we are churning the small ticket wherever -- very calibrated in terms of -- so that's the reason why you see, though the customers -- in terms of customer acquisition would be higher, but active customers has been slightly -- and because that's a very, very strategic call, which we have taken in terms of calibrated growth in this segment.

No. But if I understand correctly, cross-selling would be of different products, right? I mean the other businesses that we have, that will be something, which we will be cross-selling, right, particularly about the NBFC customer base growth and the loan book growth?

So again, I think cross-sell maybe not the right term, up-sell. So a consumer loan customer who comes in, then we -- once the perform -- we see and track the performance of these customers, then we up-sell our personal loans. So a consumer loan, customer moving to a personal loans, but the number of customers is not increasing...

Okay. So basically average ticket size for one customer is going up, right? There could be different segments of loan for that particular customer, right? And therefore, the active customer base not go up, but the loan book growth would be right to understand, average outstanding for one customer going up in the last few quarters is one of the reasons it is driving growth. Is that a fair understanding then?

Fair understanding, but yes, that's a fair understanding.

Our next question is from the line of Bhaskar Basu from Jefferies.

Yes. I just had 2 questions. Firstly, a housekeeping question. What was the write-offs in the NBFC book this quarter and the prior quarter.

Prior quarter was INR 419 crores. And this quarter, it's INR 369 crores.

And which of the segments is the write-offs coming from?

Primarily, it will come in the small-ticket, unsecured loans.

Okay. My second question was basically within the INR 19,000 crores of PL and consumer loan book, I mean what percentage is basically fintech originated? I think you answered to it in the earlier question, but especially in the cases where the loan is originated at the fintech and you subsequently also kind of upsell them to PL, that would also be part of fintech-originated loans. So what proportion of the total book would be fintech originated?

So Bhaskar, we mentioned that most of the fintech origination comes in the consumer segment, where we acquire customers, which is a small ticket customers, in the consumer segment.

Because my understanding is a lot of this upsell loan effectively again, goes back to the fintech in a way, right? So that's where I'm coming from.

No, Bhaskar, that's -- I think we have an analytics team, which builds the scorecard and all. The majority of the customers, upsell, is done by us. In certain cases, if it's done by the partner there is fees to it, it's a commercial arrangement, which is there with them. That's how the arrangement is.

So do you kind of approach the customer directly or through the fintech is what...?

So again, see, the scorecard, and I think Vishakha also mentioned this, we have a clear omnichannel in terms of our scorecard, which is very, very similar, even if we acquire for the same customer segment, for the same ticket size we acquire through direct or through the digital partners. So all of these scorecards and BREs are built on our system and by us.

Okay. And where do you kind of reflect the FLDG or the performance guarantee, et cetera in -- for some of these fintech arrangements, which -- where in the P&L does it come in?

Bhaskar, we have 2 partners where we have signed on FLDG. We are assessing others. It's very early days, but yes.

Okay. Okay. So no FLDGs on your arrangements, is that a fair understanding?

So the way it happens, it's like recovery. So it will be -- if the FLDG is recovered, it will be shown as a recovery.

So Bhaskar, you note there were various eras of digital lending. So there was an FLDG era, after that the digital new guideline of RBI came, where we moved to that lending where FLDGs were not allowed. But as we had explained before, it gets adjusted in the lending rate and the fees that we paid to our digital partner. Recently, RBI has again come out with the guidelines. According to which, 5% we can have FLDG. We are engaging with our partners. In terms of 2 of our partners, we have kind of have concluded and moved to an FLDG kind of an arrangement. In terms of accounting, the way it happens is, FLDG is recovered in cash from the partner. And therefore, that is considered as a recovery. There's an actual cash that you collect on FLDG, and it is considered as recovery. And therefore is booked in the provision item as a write-back. We do it on a cash basis when it is never accrued, use the same and only then it gets booked as a write-back. So that's how it happens. But it is not -- since the guideline is quite new, and just 6-9 months back, the whole system has moved from an FLDG era to a normal lending era. Again, going back involves our discussion, involves a negotiation and actually implementation on the ground, which is what is happening right now.

Our next question is from the line of Nischint Chawathe from Kotak Institutional Equities.

The first one for Pankaj. And if I look at the housing business yields, the yields have been sort of flattish or in fact, have gone down a little bit sequentially. How should one read this? And some of the players have been kind of talking about increasing competition in the space. So maybe if you could share some thoughts on that? And even for that matter, any slowdown in demand that you may be seeing in the prime segment?

Yes. Thanks. So the question is around effective interest rate. So rightly said, I think the rate that you were having in quarter 1 was 11.56% as EIR, which is now to about 11.37% that is where the EIR is. So EIR, like you would know is obviously will come down because of compression on the margins, because we have the ability of passing on the rate that was increased on the repo side to our customers last year. So 2Q [indiscernible] points that you had increase of repo rates. Obviously, they were passed on. But on our side of it, the banks, which lend to us, obviously, there is lag in terms of they passing on the increase in rates to us. Now I feel that cycle is almost kind of come to an end. So in my assessment, one compression has happened because of the cost of funds, which has gone up. But like would have been seen that amongst all the finance companies and on cost of borrowing will be amongst the top quartile clearly because of our ability to borrow even AAA as well as our NHP contribution, you would have also seen, which has gone up to about 21% versus 16%. So that is one side of the story. The other side that is there is that how this will play out is that while the yields are getting a bit compressed on that side, for us, really, the ROA tree has 2 other functions, which is, of course, the credit cost and also the cost to income ratio. And I think you would have observed that the credit costs have significantly come down, which is coming at the back of very smart positions. And I would say, very smart recovery as we've seen in stage 2 to stage 3. This is also shown. So sequentially also the stage 2, stage 3 has come down and of course Y-o-Y it has come down very handsomely. So that is really helping us on the credit cost which is coming at the back of good quality of sourcing. We speak about the 96% sourcing that we've got, which is 700 plus and also NTC it's also the reflection of the pre-delinquency management that we do and of course, the rigor of collections. So on that count, I think well it's -- in my assessment, of course, they have slightly come down over Q1, but I think it should be broadly stabilize here. Yes, market is very competitive. There are [indiscernible] wanting to get into this space. It is, of course, heating up. But I think efficiencies our entire stack on the digital, which has gone like it's also going to bring in more operational efficiencies, which would help us in re-calibrating the cost, and that should ensure that the ROA is within the range that we are today at and will remain the range bound like in the zone of about between 2% to 2.10% that is where we are.

Sir, you mentioned on the ore borrowing costs being in the upper quartile. But what is the marginal cost of borrowing for the quarter? I'm not sure if I could see it anywhere in the presentation.

So when I said at or among the best, so it is not amongst the highest. So I just want to reconfirm that, so that is one of the best. And broadly, cost of funds, it is in the range of about 6.5% for the company. Anyways on the background of our ability to borrow at the best rates in the market, being a AAA consistently in the last 5 years and also NHB, as you will know, we have decent contribution of affordable -- you get affordable refinance so that helps you to improve the overall cost of funds.

That's helpful. Just quickly moving on to the insurance business, life insurance business. I'm just trying to understand, most of the players have, at this point of time, reported a compression in margins while you have reported a fairly healthy 200 basis point sort of expansion. What kind of explains that? And if it is just a product mix, then what kind of an optimal product mix are you looking at?

So our product margins, if you look at through the year actually go up. So it's not -- I mean, the buildup happens through the year. If you look at last year, same point of time, we would have been at about 12.5% range and ended the year at about 23%, and that's the pattern that you will see in the first half of this year. The expansion is essentially on account of maintaining our traditional book mix. We've seen some uptake on the business that we are doing on the protection side, but also because still, we continue to reap the benefits of higher productivity as compared to what we get -- what we got last year, largely in our proprietary channels and direct channels. We are seeing the uptick. Like I said, we maintained our guidance for end of the year, to be say, last year, we were at 23%. We would be around that range, 23%, 24% margin even by the end of this year.

But is it so that the margins in proprietary channels are higher than that of partnership? And is that growing faster?

So it depends on what state and what size you are building on the proprietary. I think in general, the answer to that question should be a yes. But even on partnerships, depending on different cohorts, depending on what bank relationships you have, depending on what size some of them contribute, because lot of them are functions of what kind of investment that you put in. So some of the small banks could have as value-creative margin that what I'm seeing on the proprietary side, depends one when it becomes scale, it could be a combination of your volume as well as margin game. But yes, proprietary would have a tendency of bringing significantly larger value accretive margins in the business.

And my final question is to Mayank, what explains the increase in combined ratio?

Yes. As I said that it's just the seasonality of the growth because last year, our group business grew more in the first half of the year. It will start normalizing it from the third quarter, because individual components are all trending well. Our retail loss ratio is going down. Our corporate loss ratio is in line with what we have quoted and therefore it's a profitable segment. Our expense ratio -- just because of the NY2. So if I look at NY365, each component is going very well.

Towards the end of the year, probably be neutral or probably improve a bit is what you're saying?

It will start seeing the change in Q3 itself?

Our next question is from the line of Shubhranshu Mishra from PhillipCapital.

So I think there have been quite a few questions around the personal loan and the consumer loan part. I just want to know what is the outstanding number of loan accounts in that? And what was this a year ago? And how many of these customers have 2 or more trade lines when you onboard them?

You said how many -- I think what we will do is we will get back to you on this, Shubhranshu.

Okay. Sure. And also if we can have some sort of 0 plus or rollback rates for this? Because the average ticket sizes were too low to be adjusted in gross Stage 3 and those kind of numbers. So we can probably publish that as well.

We will consider that, Shubhranshu.

Sure. And just because you didn't answer any of my questions, as you mentioned that you are going to do something like FLDG. What does like FLDG mean? You either do FLDG or you don't do FLDG?

No, no, like [Foreign Language], we will have to do FLDG. As I said, there were different guidelines of Reserve Bank of India, where there was FLDG before, then they came with digital lending guidelines where they've prohibited FLDG, and now they've again announced FLDG up to 5% of the total [ things ]. So what I said is that we will engage or we are engaging with our digital partners to see whether we can get into the old -- the arrangement which is in line with the Reserve Bank of India guidelines. So we will -- if we do FLDG, it will be exactly according to the Reserve Bank of India guidelines.

Right. And these fintech partners includes Paytm where we'll get -- where we will do FLDG as well?

Paytm is one of the partners.

On your earlier question, on number of customers, it's 59,37,141 customers.

That's in the personal loans?

You want personal loans?

Yes, only personal loans, only personal loans.

Okay. I'll give you that as well. I will share that with you. I think separately, I can share that.

Ladies and gentlemen, that was the last question of our question-and-session. I would now like to hand the conference over to Mr. Vishakha Mulye, CEO, Aditya Birla Capital Limited for closing comments.

Thank you, everybody, for joining us today evening and happy Diwali to all of you and your families. Look forward to be in touch. Thank you.

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