Apollo Finvest (India) Limited (512437) Earnings Call Transcript & Summary

Good morning, everyone. Welcoming you all for our earnings call. We'll start with a quick presentation. Mikhil is sharing his screen with us. What we'll do is we've divided our presentation between Mikhil and me into 2 parts. I'll start with giving you the updates of what's happening this quarter, and then Mikhil will take it forward in terms of telling you about what's next for us and what's our strategy in general. So let's start with the industry updates, the first slide. Well, for us, the industry update always starts with the big boss, which is RBI. So this quarter, in fact, not even this quarter, I would say, just a few days back, RBI has come up with new digital lending guidelines. Not a lot is new in the guidelines. What they have done is on the 8th of May, they came with a circular, which consolidates all previous circulars which have come in. So it's just to make things very simple and straightforward for digital lenders to understand. But just the key highlights of the guideline and for you to know how it impacts Apollo. So one big thing which a lot of digital lenders are a little wary of currently is the NPA provisioning recognition, which is being done. RBI [indiscernible] even for those -- even for that part of your portfolio where you have digital lending cover or any guarantees, even that part has to be taken into consideration when you're provisioning for your loans. Well, our team is quite conservative in these matters. And thankfully, that has always been the case for Apollo. So our PATs reflect the provisioning even on the FLDG covered that we have. So there, again, no impact for Apollo, no negative impact for Apollo. The other thing which the guideline is talking about in detail is the due diligence of LSPs. Now RBI expects the regulated entity, if they are working with any LSPs to do a thorough due diligence on them. In matters pertaining to either fair disclosure and transparency, they want to make sure that the DLA, which is a digital lending app, is very fair and transparent to the customer. Fair practices are being followed. Whatever is in the agreement is duly communicated to the borrower in a very transparent manner as far as APIs are concerned or any collection practices, any such matters of when is the due date and things like that. So of course, because with a regulated entity, we are very particular in terms of [indiscernible] due diligence [indiscernible] this is a journey and the entire collection call recordings, we're using AI also to monitor and constantly keep listening to their calls from an AI standpoint also using AI to do that. Other than that, sometimes we even go to the extent of physically sitting in their offices and doing a thorough check in terms of making sure that everything is proper. Other than that, a lot of norms which are always there as far as DLG caps are concerned, the 5% cap and all of that is something they have reiterated in this circular. So in a nutshell, no big impacts for Apollo from the new guideline standpoint. There's also another draft framework from a co-lending standpoint that RBI has come up with. For Apollo, again, nothing much changes. Of course, this is just a draft circular. So we'll be waiting for the final guidelines to be announced there. But the initial verdict here is that not much impact again to Apollo because fortunately, we've been co-lending within the norms of what RBI has outlined in the circular. So yes, all good there from an industry update standpoint. Let me take you through Apollo's updates on the next slide. We'll start with the financial update. Now what's been the highlight from a financial standpoint for Apollo. One thing I would like to point out here is the AUM growth. Now in all our earnings call or our annual meeting calls, we've been highlighting that now that the guidelines are here, the entire industry knows how to move forward. So the path is very clear as far as growth is concerned. It's been a bit volatile in the past few years. But obviously, with the guidelines being very clear, it's pretty straightforward. We know how to move forward, and that's reflecting in our AUM growth. We've grown 74% year-on-year. The next thing I would like to highlight here is our PAT, our profitability. So for Apollo, profitability has always been the key. We've always been speaking about ROEs and profitability and how it's important for us to build a sustainable book. And that's reflecting in the PAT that we've generated in this last financial year as also our net profit margin. And thankfully, our PAT per employee looks great because we're using tech to our advantage to make sure we're also operationally efficient. On the next slide, what I'll take you through is how is our performance as compared to the rest of the industry. Now because we're evaluating all of these digital lenders who we work with so closely, also from a financial standpoint -- and we benchmark as compared to the rest of the digital lending lenders out there, more specifically. And one thing which sort of I would like to bring your attention to here is the portfolio quality. Now if we look at the rest of the industry, the average 30 PAR numbers, which is [indiscernible] or so. For Apollo, that number is around 2.86%. And even the NPA numbers on an average in the industry range to around 2.4% and for us, it's less than 1%. And the reason we're able to maintain these really low numbers is because like we mentioned earlier, and I'll reiterate, it's because we get to cherry-pick the good loans from everyone's book. That's one factor. And the other is the way in which we've structured our exposure to digital lending. With the companies where we feel it's probably too soon or we're just starting to build a relationship, we have the whole term loan structure. And with term loans, of course, you have the cushion of the entire company's equity also available with you. We also, from a retail book standpoint, have the FLDG buffer, which also protects us. But all of these things in place help Apollo maintain a good quality book and yet continue to have exposure to digital lending companies or the portfolio directly. So yes, this is how Apollo performs vis-a-vis the rest of the industry. Let me talk about the next slide where we will take you through growth and scale. Now as I said, our AUM over the last 2 financial years has been growing quarter-on-quarter. And just to let you know what to expect in the future. Of course, you're seeing substantial growth because we have clarity now from a digital lending guideline standpoint. The industry has gotten a lot more streamlined, level playing rules for everybody out there. But one thing noteworthy to -- for our shareholders to know is that Apollo believes in sustainable growth. So for us, it's important that we grow provided we know we have a strong foundation. We believe in the motto that slow and steady wins the race when it comes to digital lending because we've seen a lot of people come and go. And we know for a fact that with Apollo, whatever we build is going to be sustainable and strong. So yes, that's going to be the expectation going forward as well. And what I'll do now is this is where we end the updates. Of course, we'll be more than happy to take any Q&As that you have as far as the updates are concerned. I'll allow Mikhil to explain more to you on what's the strategy going forward and in general, what to expect. Yes. Over to you, Mikhil.

Thanks, Diksha. Thanks for all the updates. Hi, guys. Good to see you guys again. Allow me some time, maybe what I'll do is I'll take you guys through some of the updates that we have for you, right? So let's talk about a few things, right? I want to talk about, one, where we are today, how we've reached here. Why are we doing what we're doing, and where do I see basically this going, right? So the first thing I want to talk about, which is very apparent from our numbers, right, is there has become a higher weightage towards term loans, right, as compared to the previous quarter as well. So if you see today, we almost have a 60-40 kind of split, right, where there's a 60% weightage towards term loans and almost a 40% weightage towards retail loans. So let's talk about how have we reached here and how are we evaluating term loans a little bit, right? Because one of the things which is very important as a shareholder is if you're doing term loans, how are you evaluating these companies thoroughly, right? And one of the things you've kind of realized is the way you kind of analyze companies, which are traditional companies, right, versus digital lending NBFCs. It's quite different, right? One of the things that we've kind of recognized quite a lot is the fact that it's very important to understand incentives inside a company, especially of those people who are running the company. And what I mean by this essentially is that given a lot of loans in this space are fairly short term in nature, right? And by short term, I mean most people in the digital lending ecosystem do loans to customers, which are probably sub-12 months, right? And maybe there's a smaller percentage of fintechs doing loans, which are less than a couple of years. So one of the things which we really examine inside the company is what are the incentives of the management team, right? Is it driven by long-term incentives, which are usually connected to equity? Or is it to do more on the lines of near-term results, which can obviously impact their compensation in any format, right? So this becomes an important kind of signal for us, especially because the signals that we are getting from RBI are more towards having sensible APRs and not taking advantage of borrowers, right? So this is some factor which we very closely look at because one of the things we've recognized is that in this space, if you have tremendously high APRs, almost it doesn't even matter how good your collections frankly are, because it ends up becoming an Excel sheet game, right, where almost anybody can end up making money. But the issue that we recognize over there is the fact that it may end up being a short-lived journey because the sense that we get constantly from RBI is that they don't want this space to end up becoming digital loan sharks essentially, right? So this is something which we look at very, very closely. Of course, any company when you're looking at from a financial services perspective, right, you can't escape looking at their numbers as well, right? And obviously, the usual suspects are mentioned over here. But one of the ones I would like to highlight is debt to equity. Now this space, what we've recognized, right, is a fairly new space, right? And by new space, I mean it is a space which the RBI constantly comes up with new guidelines. One of the things you must have recognized is that we started this earnings call with updates from RBI. So it's a space which is ever evolving. So one of the things that we are very cautious of is having exposures inside companies, which have very high debt to equity. And what's different about this space is that maybe in a traditional lending company, right, a debt-to-equity of maybe 4 or 5 may not seem excessively high, right? But what we've observed in this space is a debt-to-equity anywhere upwards of 2.5 in this space starts to look very, very heavy for the company, because a regulatory change may make their book incredibly volatile and they may not be able to manage their debt effectively. So this is something that we've kind of recognized after looking at data from across the industry. Of course, it's very important for us as to who are on their cap table. Both from an investor perspective, from an equity investor perspective, but most importantly, from a debt perspective, right? The lends that a debt equity -- a debt investor applies to a company is very different to a lends which an equity investor looks at a company, right? An equity investor looks more maybe slightly long term, a debt lender looks more short to medium term, right? And given the space is fairly compact, I would say in the ecosystem, the prominent lenders in the ecosystem would probably not be more than 5 or 6. So today, we have obviously associations with them all in some format or the other, right? So it allows us to get a lot of feedback about the companies that we're evaluating, both from a perspective that if you're on the cap table, what do you like about it? And if you're not on the cap table, what was the reason for exclusion, right? Because it's very rare that there would be a company now in this space, which is a decent size and it wouldn't have been evaluated by some debt investor or the other. Now portfolio performance is incredibly important. Again, here, our goal is to understand the kind of product the company is doing. And across the benchmarks that we have seen across the industry, what is their performance relative to the others, right? Because unit economics are dictated by portfolio performance to a large degree, combined with their performance as compared to the rest of the industry helps us understand what grading do we give this company, right? Are they outperforming the industry? Or are they underperforming? Or are they same as the rest, right? So this is a very important kind of metric, which helps us understand this, right? Now I want to talk a little bit about why have we gone about and done these kind of term loans, right? So one of the things this has helped us establish, right, is a fairly large distribution, right? And this distribution is incredibly important because it helps us now go to the next stage. Now one of the changes in strategy that Apollo has essentially done, right, is that in the past, we tended to partner with early-stage fintech companies because there were many, many companies back then. And at the same point in time, we felt the industry isn't mature enough. Today, we feel there is a sense of maturity setting in, inside the industry, where it's become easier for us to evaluate companies and put in that upfront investment, right, of time, analysis, various forms of diligence. And this is what we can do because we are exposing a term loan to them. Had we only be doing a BC co-lending partnership with them, it's not possible to do that level of diligence because the opposite company may not be willing to share the kind of information that we require. But given that we now are first collaborating with them in the form of a short-term term loan, right, which may be 4 months, 6 months or maybe maximum 12 months in duration, it allows us to get a lot of thorough diligence done. Once we like what we see, right, then we would -- we end up doing co-lending and BC partnerships with them. And when we do these partnerships, they are sizable partnerships now. So there has been one big change where in the past, when we used to do BC co-lending partnerships, we used to end up doing multiple partnerships, but they would always start small. Now the goal is to end up doing maybe fewer of these partnerships, but commit a significant amount of capital because we've done our diligence. And after looking at all the numbers, we are incredibly positive about these companies, right? So if I project our AUM going a little bit into the future, our expectation is it to be more towards retail, which is 70% towards retail and 30% towards your term loan book because that will always be to discover new partners potentially and 70% will be more towards the partners that we have done our diligence on, and we've really liked what we've seen. Now one thing I want to also talk about as the next step is what are some of the tools from a technology perspective which have allowed us to do all the things that I've spoken about right now. So the very first thing, which you must have noticed the theme in the conversation that we're having today is to talk about industry benchmarks. Now given our distribution strategy, we've basically been able to get real-time data inputs essentially from, I would say, the top 10 to 15 players in the industry, which really helps us in the following ways. One, it helps us understand what is going on in the industry in terms of what are the numerical benchmarks inside the industry as to what are the defaults that people are seeing in what kind of product. Which products are performing better, which pockets of loans are performing better, which geographies are performing better, which pin codes are performing better, right? And this -- all of this information helps us in 2 ways. One is obviously to do and have an internal ranking of all the companies that we are evaluating. And second, all of this feeds into our credit algorithm because usually, the credit algorithm, which is built by people is focused more towards the data that they see on their own loans. Now given that we are establishing a fairly large distribution when it comes to data inputs, we are able to take industry-level data and feed that into our credit algorithm, which along with the data that we are also seeing on our own loans, allows us to be a little bit more proactive and better when it comes to dynamically changing our allocations in the products that we have higher exposure to or companies that we may have a higher exposure to in terms of co-lending or BC, right? Next, this is something which Apollo, of course, has been building for multiple years, right? But I wanted to take this opportunity today to talk a little bit more about this because we've made a few interesting updates as well. We spoke last time about Senti, right, which is essentially an AI tool, which Apollo has built on its own proprietary data, which allows us to monitor all calls which are going to customers and understanding the tone and anything which is potentially noncompliant, it immediately flags it, right? And this is incredibly important, especially in a partnership model where we have to monitor multiple partners and the various call centers that they're employing to ensure that our borrowers get an ethical and good experience. Now we've gone one step further, right, which is what's the best way to be extremely cost efficient and at the same point in time, be 100% compliant when talking to customers. It's AI calling essentially, right? When you have voice bots essentially doing the calls, you can be assured that, number one, the calls will be done in a highly compliant manner. The conversations that they will have with customers are ones which are incredibly polite and nice, and they will never get frustrated, right? Because one of the largest feedbacks we've noticed from call centers is because of the large call volumes which happen, right, finally, a human being who's making these calls and constantly trying to do collections, it can be a frustrating endeavor. And human beings finally can let emotion show. So one of the beautiful things that we are finding out about some early tests that we are doing with our AI voice calling is that it's always in a good mode. It's always maintaining protocol, it's following the script and it's essentially always making sure it's compliant. And obviously, it never gets tired, and it's almost 10x cheaper, right? So there are a lot of interesting ingredients that we are noticing, which can be a replacement to the call centers, which typically people end up using from a collection standpoint. Now from even a collection channels perspective, right, there's a lot of work that we are doing in exposing multiple channels to the customer in order to make a repayment, right? Usually, people would have to go to the app to make a repayment. Now we are exploring channels such as WhatsApp, such as maybe even potentially apps like Paytm or apps like Google Pay, where they will see notifications about an EMI which is due or the loan amount which is due. And just by simply using UPI, they can make the repayment back. And it's more than just figuring out the right channels, it's also figuring out the right time in which to ping the customer to maintain the balance of convenience and at the same point in time, getting them to actually pay this loan back, right? And finally, of course, given the level of distribution, again that we've established and the diligence that we have done across the industry, we've also recognized a few best-in-class collection agencies across India, right, who are already working with some of the best fintechs in the ecosystem today, and we've onboarded and in paneled them with Apollo so that whenever we need to go to whichever part of the country, we do have the best-in-class collection agencies, which have already seen good results for the rest of the industry onboarded with us. So this is a few of the updates that I wanted to share. Now I wanted to pause and allow it -- allow you guys some time to ask us any questions you want to. With that, I'll pause the presentation. Thanks.

Thank you, Mikhil and Diksha for giving such an insightful presentation. Myself, Disha Khemani, Company Secretary and Compliance Officer of Apollo Finvest (India) Limited. We will now open the floor for questions. [Operator Instructions] So we have our first question from Mr. Nitin Sethi.

My question is when we will have our growth engine by timing? We have done a lot of partnership, but when we will get some amount of co-lending? Anything guideline about the time line by which we will get our business back as usual?

Yes, of course. I think -- great question, Nitin. As you kind of mentioned, right, I think there have been already a lot of movement in the co-lending space. And to me, I feel over the last year or so, we have seen a lot of positive movement in the AUM. I think we've grown almost 75% over the last 1 year. We do expect good progress to be coming as well in the quarters ahead. And there are some interesting partners that we've taken exposure on from a term loan perspective that we now will be converting to BC co-lending partnerships as well. So I think in the coming quarters, hopefully, we'll be able to share more light on which those partners are. But we're already seeing positive movement over there where we already have some partners live. And I think we're expecting more as well in the coming quarters. And that's what we've kind of given a guidance of as well, right? Like I think you should expect that a good portion of our book ends up becoming now retail loans, flipping from currently being in the mode of basically term loans, which was largely just to establish the distribution with the right people.

Sir, we have done term loan partnership with our partners. Can you please explain what is the NIM that we charge to them? What is the difference that we got from and what are our cost of capital?

Sure. So typically, our cost of capital is fairly varied, right? It goes anywhere between 10% to 13%, 14%, right? And on a blended perspective, I think our cost of capital must be sub-12% at this point in time. And typically, when we do the term loan, I think from an IRR perspective, everything is usually 16%, 17% and upwards, right? So that's typically what the cost structures look like for us.

That means we are earning -- if we are giving around INR 100 crores loan, we are earning around INR 3 crores or INR 4 crores annually. That's what I guided.

Yes. I mean your assumption is that all the money is debt, right, which is in due. Our debt to equity right now is fairly low. It's only 0.4%. So our NIMs end up becoming much higher.

Okay. Any other partnership that will be fruitful for our portfolio because we have done partnerships, but we are not growing substantially as we are growing previously.

So I think very honestly, our perspective here is slightly different, Nitin. Like I think the way we think about it is that our growth, we always look at 2 things. One is AUM. We want to grow sustainably, right? So if I think where we are at, I think our AUM has jumped almost 75%. We've been long enough in the industry to kind of recognize that there is no price to go fast over here. This isn't a space where being the biggest necessarily means being the best, right? I think in financial services, our focus has always been to err on the side of caution. And we've always indicated over the last few quarters that we see a good space now to grow. And I think the numbers have told that, right? We've grown almost 75% AUM-wise in the last quarter. And -- but just to kind of give caution to the rest of the investors as well, our goal really isn't to grow for growth's sake, right? We'll always see the right opportunity. And whenever we see the right opportunity, that is when we will end up growing, right? We don't want to be a company which is growing 1,000%, et cetera, because the reality is that whenever we've seen companies in the ecosystem kind of do that, it's not led to good results, right? And what I mean by that is it's usually been at negative ROE or ROE is less than FD rates, which isn't something that we are comfortable as a company doing. One of the things that we are incredibly proud of is that if you see our record over the last 8 years, despite it being a very young industry, our ROEs have always been in double digits, right? So that has always been and always will be the focus of the company going forward as well.

Sir, last 2 questions. There is a dip in AUM quarter-on-quarter-wise. And also, you have said that term loan 2.0, you will be bringing some term loan 2.0. Can you give me some highlights about that? What you mean by term loan 2.0?

Yes. So we spoke a little bit about our evaluation process when it comes to term loans today. So I think that gave you a few hints about how we are going about and doing term loans. And when it comes to AUM, I think it's a function of basically general business, right? Like again, we don't really look at it as quarter-on-quarter that we must increase the AUM. I think it's gone from 85% to 83%, if I have the numbers correctly. So I don't look at it as a meaningful dip either ways, right? I think as our thought process is more across looking at the year. So when I look at across the year, I think I do see that there's a significant jump. And again, our goal isn't to grow AUM quarter-on-quarter just for the sake of the numbers looking better than the previous quarter.

So our next question is from Mr. [ Paras ].

I just wanted to understand what's the plan for the next financial year? And are there any changes in the business plan specifically to increase the AUM?

Thanks, Paras. Yes, definitely, I think the plan for the next year, as we kind of mentioned in the presentation is I think a lot of the last couple of quarters has gone into establishing distribution via term loans. And of course, that has been reflected in the numbers as well, right? Today, there's a 60-40 split in the favor of kind of term loans. But what that's helped us do is understand the industry deeply in terms of, one, what are the kind of numbers which are going on in the industry, which allows Apollo to do 2 things, right? One is obviously evaluate the company that we are looking at a little bit more deeply. And second, also figure out who is actually outperforming the industry versus who's underperforming. Now that we know which are the companies out there, which are doing well and potentially outperforming in the industry, I think now in the coming quarter and in the quarters ahead as well, our plan is going to be to double down on these companies in the form of retail loans. So you will see the split hopefully changing to 70-30, where 70% over the next few quarters will end up being more retail and 30% will be on the side of term loans. And once we establish this kind of ratio, right, I think our growth engines will also start going in that direction as well, right, where we will utilize the capital that we will raise more and more towards doing the retail book rather than term loans. And I think that the cycle that we are starting to see already is that the more good partners you work with, the more capital you are able to deploy, the books also perform better. And the better the books perform, we are able to obviously raise capital at the right rates and also raise a lot of capital in order to continue the cycle of deploying capital with good partners, right? So I think that's the cycle that we are establishing. Finding good partners, deploying a lot of capital with them, ensuring the book is high quality, which ends up attracting good debt capital, which allows the whole cycle to continue, right? So this is the cycle that we are trying to set up.

So our next question is from Ms. [ Yogyata Jain ].

So I just have one question. I -- and I mean, even you will agree with this, that in the last 6 months, we have seen a huge dip in the industry. So I wanted to know your views about it. And do you think there will be like some betterment in the situation in the coming financial year?

Yes, absolutely. I think that's a fair question to ask, right? I think definitely, in the industry, we have seen some degree of slowdown. And I think it's been a combination of, one, a bit of regulatory scrutiny as well because from the RBI's perspective, I think a few months back, they had increased the risk weightages for unsecured books, right? Which led essentially from a top-down perspective, less capital to be available. So certain banks and NBFCs, obviously, as a response to RBI increasing the risk weightages in the unsecured space ended up focusing a lot more in the secured space, right? And largely the digital lending industry obviously lives in the unsecured space, right? So when there is a lack of capital in the ecosystem, obviously, it leads to a bit of slowdown. And potentially slowdowns can result in further issues inside the industry because loans stop churning. And when loans stop churning, it's potentially possible that the distress can end up reaching customers as well, right? Across the industry, one of the trends that we did observe is that certain loan books as well as partners ended up having higher levels of defaults and stress than before, right? Apollo was fortunate enough that our numbers really didn't change much, right, to be honest. But this was a change that we did observe. I think over the last couple of months or so, we are seeing shoots of recovery where now there is maybe a little bit of RBI relaxation towards the unsecured space as well because maybe potentially, I think it contracted more than their intended targets essentially, right? So I think given that, hopefully, I think over the next few quarters, we should start seeing some degree of rebound as well.

Okay. So we have one question in our Q&A. AUM is INR 500 crores in 3 to 4 years possibly. Are we working with any legacy DFI, which needs digital handholding?

Understood, right, so I think are we working with any kind of legacy companies today? The answer is no, right? I think our focus is more towards vertical integration where Apollo ends up building tech largely for itself or with -- or only for the potential partners it does co-lending or BC lending with, right? The reason is we strongly believe the tech is a secret sauce for us, right? And we don't want to potentially outsource it or give it to any other lender and honestly help them. We know that in the industry, especially in the legacy companies, right, tech ends up being an Achilles' heel, right? And getting them to adopt our tech will slightly distract us from our mission of making Apollo really the destination, right? I think our philosophy is more on the lines of that if you like what Apollo is doing, right, and if you believe that digital lending is going to be great over the next 10 years or so, the way to enter the space of digital lending is via Apollo, right? And you can take an exposure in Apollo in the form of debt, right? So that's what we kind of encourage legacy companies to do, right, that if you like what we are doing, you like the results that we produced and now we've had proof in the pudding, right? We've been doing this for 8 years and consistently delivered great ROEs with a risk-controlled book, right? So I think there is a lot of attraction from traditional lenders as well who want to get into the digital lending ecosystem. But the pipe that we encourage them to always use is going via Apollo Finvest in the form of taking direct exposure in us, right? So that is usually the thought process that we have for them.

Okay. So we don't have any more questions. So thank you for joining us today's call and for continued support and interest in Apollo. Have a great day.