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

Yes. So yes, these are retail loans that we do. Micro finance loans are also retail loans. Even they could be unsecured loans. But the difference is the income bracket of the borrower. So the way RBI has defined microfinance lending is basically giving a loan to a family member where the entire family's joint income is less than INR 3 lakhs per annum. So, we usually don't cater to that audience from a lending standpoint. It requires completely different underwriting methodologies. And as of today, Apollo is not looking at that [indiscernible.

So, our next question is from Mr. [ Sandeep ].

So my question is right now, the RBI come up with the co-lending directions. So, just wanted to know how do you see partnership and lending model evolving going forward?

Sure. I think we look at it as a positive sign really, right, like because I think already, as we kind of mentioned in the previous earnings calls, right, that we had obviously already started doing partnerships in the co-lending space. I think RBI has basically come in and trying to give more clarity over there, right? And at least our initial glance on what we've seen from a guideline perspective, I think it is good because it brings in a lot of clarity in terms of how the commission has to be shared basically or how the structure exactly should go, which basically clears out any ambiguity and makes partnerships that much more easier. And finally, in the end of the day, there was ambiguity whether NBFCs can even do these partnerships with other NBFCs, et cetera. But obviously, the ecosystem really has grown in terms of co-lending partnership between NBFCs, and it's good to see basically RBI acknowledge that and not only acknowledge that, but come up with a clear goal that we're going to come up with a clear set of guidelines, which will lead to this kind of partnership kind of prospering. So, we see this as a supportive action, and we see this as an action where RBI is trying to bring clarity on how can 2 regulated entities do co-lending together.

Our next question is from Ms. [ Annanya ].

So, I just wanted to ask, is warehousing loan a tested model in the sense that has it been implemented in the digital lending landscape before? And also in case the book quality deteriorates, how do you mitigate your exposure?

Sure. So actually, warehousing is a pretty interesting structure. It's actually done in, I would say, in countries like the U.S. and Europe more. I think it's not been replicated in India largely because as you observed from our slide, it requires a lot of tech involvement from both sides. Usually, at least in the fintech ecosystem, historically, what's ended up happening is that I think maybe fintechs were open to these kind of integrations. I think the problem has always been the lender being unable to do this deep level of integration into the systems of the opposite of the borrower in this case, which is the NBFC. So, I think now with, obviously, Apollo kind of paving the way, our expectation is that potentially maybe over the next 2, 3 years, depending on how much we're able to scale this, we feel like the rest of the industry will also be very interested in replicating structures like this because to answer your second question in terms of how does this kind of help with the risk, right? So just to give you an example, right, what typically our structures look like is they are very dynamic structures. And what I mean by that is potentially, initially, we may start with maybe collateral of, say, worth 20%. To give you an example, maybe against a INR 10 crores loan, the opposite person has to put in at least INR 2 crores of their own capital, and we hypothecate potentially 120% of the money that we've given. But in case that portfolio doesn't perform as per our expectations, maybe due to poor level of collections or whatever scenario, right, essentially, we do have clauses in our agreement, which enforce the opposite person to add in more capital as well, right? So, a 20% can potentially become 25% or 30% if the portfolio doesn't perform as per the expectations that Apollo has laid out in the legal agreements. And finally, as well in the case where for whatever reason we realized the NBFC itself is maybe not doing too well, right, Apollo can simply start withdrawing its money from the collection account that we opened up because all of the money coming from the retail borrowers who have been funded by this facility, they all have repayments, which are linked to this particular bank account. So as and when the money comes back from the borrower, all of it is just withdrawn and taken by Apollo, right? So, this obviously protects in 2 ways; one, from general portfolio deterioration and obviously, secondly, and more robustly in the case of the NBFC having liquidity issues, right? So it's a pretty robust structure in that way.

Okay. So, we have one question in our Q&A section. It says is long-term secular growth of, say, 20% year-on-year income possible? How do you estimate visibility of business?

I think I would say, aspirationally, that's very much possible, and that's what we want to do. But we always refrain from giving any future guidance in terms of revenue, et cetera, right, because our focus is more on the how than the destination, like just to use an old adage, right? Like the journey is more important than the destination, right? For us, I think over the last 8 years, we've learned quite a lot about this industry. And we've hinted in the past as well, like we feel like now is a very good time for Apollo to make, I would say, bolder steps and more dramatic changes and steps towards getting to where we want to go a little bit faster than how we were doing it in the past. So, I'm expecting the same trajectory to kind of happen over the next upcoming quarters. And this is also the 40th year of Apollo. So, we hope we can do some things over here, which are quite memorable and also make the year that much more interesting. And probably we'll have some interesting things to share in the coming quarters on that front as well. But for now, we're waiting for the proof in the pudding to talk about those things as well.

Okay. So our next question is from Mr. [ Mahaveer ].

Yes. Okay. This one question is from a short-term perspective. Like if you were to strip out this quarter's one-off income, that is around INR 2 crores, Apollo's annualized profits would be around closer to, say, INR 4 crores. And last year, we did around INR 9 crores. So with partner additions capped and our expenses structurally are going up also because we are expanding in terms of B2C lending partnerships and other things, so how exactly are we going to bridge this profitability gap going forward?

Sure. I mean, just to give you some perspective, right, like I would take this -- the changes that we are doing, just to give you some perspective, right, it is all in line with our expectation, which is that we are moving -- so just to give you a little bit of a long-term lens, right? Basically, as we kind of hinted in the last couple of quarters, we moved from a very retail-heavy focus towards a more defensive position, I would say, which is having more kind of term loans going on essentially, right? I think now we are switching back to retail because we feel lot of the volatility in the space, which was there largely from an RBI pricing perspective, that's kind of gone away. And that is reflective also in a lot of fintechs that we work with who have lowered their prices as well for the retail customers, and we feel like that space is a little bit much more solid than where it was before. Given this, I think we are in the middle of a transition period. And this is what I would say, this quarter has been all about, which is making that transition. And our goal is very, very clear that once we make this transition, right, our hope is going to be more towards scaling the retail book. That's something which we have experienced for over the last 7, 8 years. That's an area which we are very, very comfortable with, right? So, I think hopefully, over this year and the coming next year, I think I would expect a lot more growth coming from retail. And hopefully, all of that would translate into our numbers as well. But I would potentially say that last year is very different to this year because this year, if you just Google basically a little bit about RBI and digital lending, right, they've been very, very active this year, particularly when it comes to pausing even very, very large NBFCs such as Navi or a DMI, right, which has obviously huge impact on, I think, not only them but the rest of the ecosystem. So, that is something which we've had to absorb this year. So, our hope is with all the changes which have happened in the ecosystem, I think for the rest of the year and the coming next year, I think we should see positive reparations from that.

This one is more from a long-term perspective, like we have -- in the past, we have talked about Sonic and now Senti and other things. What are the moats that we are building very silently inside, which will look very obvious, especially to stock markets because given we are at a 3-year low or something like that? And I understand that. That is now beyond our control. But what are the things that are going to look very obvious in hindsight to the stock markets that are not visible right now?

I mean, to answer this question, I would just say that Apollo's focused, right? I'll elaborate on that, right? To me, the way I think about the strength of Apollo is that if there's one thing that we know is digital lending, and it's not about like knowing it from a qualitative perspective. I think we quantitatively know digital lending because we frankly have -- so we have data over the last 8 years doing just this, right? So, I think there will be a point historically looking back at this company where people will think that this was so obvious that a company was building in a space, which is basically, in my opinion, like digital lending is nothing but a math problem, right? Basically, it is, ultimately, all the lending which is done over here. If you have enough data, it's ultimately a math problem, right? Like you have to basically build a model, which predicts defaults essentially, right? And you have to -- for the riskier segments, you have to price it accordingly. So to me, ultimately, like if I was to look 10 years into the future, I would probably think that this would be very, very obvious looking at a company like this because if you ask me like that is a big issue, I think, or big mistake, which a lot of other lenders are pretty much doing, which is trying to go too fast and then you end up crashing the car and then there is no more car to basically drive, right? I think for us, what we've been doing very silently is that over a period of time, we have a lot of data. We have a wide variety of data. And this has really helped us basically in doing smarter and better underwriting, better pricing, everything across the board. And that's already beginning to reflect when you look at our NPA numbers, right, especially over the last few quarters. So if I was to just project this 5 years or 10 years down the line, I think all the actions that we will take from now onwards will keep reflecting this one strength of ours where we just know how to do this stuff. And it's not even about building, I would say, company DNA. It's about building the data to do this.

Okay. And one more thing is like, do you think capital is a hindrance for us because like, if I were to actually break it down to the 2 major components, one would be, we are lending, and that is the interest income that we are earning. And the other would be, obviously, Sonic, I guess. So, how we are doing on the front that is Sonic right now? Of course, we are in a building phase right now, but are we seeing any positive signs from our partners? Yes.

Sonic is basically the backbone of the company, right, in simple words. That is like -- I mean, that is the differentiator of Apollo to anything else, right, because variety of factors, right? I mean, number one, it allows us to integrate with any other lender, whether it is a fintech or NBFC in a couple of weeks where rest of the industry yet continues to take 6 months, right? There are jokes in the industry where integrating with somebody is equivalent to a pregnancy, right, where by the time your integration is done, a child is born somewhere right from start to finish, right? It's that slow and that painful. For us, like that's something, which is obviously not true at all, right? In a couple of weeks, we're able to integrate with somebody. And we are in a space in any start-up or any tech ecosystem, time is money. So, that's point number one. I think point number two, from a Sonic perspective is it helps in internal operations as well, right? Lot of the reports which other people are ending up doing manually, we've continued to build a lot of automations, which have made the jobs of our own team much, much easier. Obviously, a more public example of that is something like Senti, right, where we're doing a lot of partnership business. The biggest problem is that a lot of these guys end up having so many call centers doing calls to borrowers. And how do you monitor all of these calls and make sure that everything is compliant and we are speaking professionally with borrowers, right? Because this is a huge problem, not only, I would say, in digital lending, but in lending altogether, right? If we just [ look at ] bad collection practices, you will come up with 1,000 articles even from people like a Bajaj or an ICICI or whoever, all doing malpractices when it comes to doing collections, which I personally like to believe that it's not something that they want to do, but it's a rogue collection agent taking steps on their own just to earn more commission or bonus basically, right, by scaring the borrower, right? But obviously, that's not compliant. Now if you think about scale, you can't do this without basically high level of automation and that's where AI has come in, right? I think AI is going to change the game completely, especially to do collections. Now, I think one part which we've already publicly spoken about is doing -- monitoring collections using AI, right? But I think the next phase of digital lending is going to be collections itself happening through AI, through voice bots. And that's something which we've seen enough demos inside the company to truly believe that when these demo calls are happening and collections are happening through voice bots basically, right, it's pretty much indifferentiable from a human being talking to you, right? I think we are reaching that phase already. I think there are already enough beta tests going on for me to pretty confidently say that there are clear instances of a bot calling up a borrower to do collections and the opposite person not realizing that he's actually talking to a bot. So, lot of those things are basically already at play, right? And ultimately, I think the more and more I see all of these things, it makes me feel like every industry is ultimately a tech company or a tech industry where domain expertise is very important. But I think that tech DNA of Apollo Finvest, right, is what really helps us differentiate and do things, which other people can't do as efficiently or can't do as fast. It will always be very, very apparent, and we feel that every single day.

Yes. And I've been like tracking Apollo for the last 2, 3 years, and we have like, Sonic has always been a point in the conversation. So, this is a question on Sonic. Are we just like a 2x enabler for compliance and things for our partners? Or are we actually going to help them in 10x ways? That is one thing. And how sticky Sonic really is as in what would be our oldest partnership as of today? Do we have any partners that have like stuck on with us for the last 5, 7, 10 years? I don't know.

I think unfortunately, like most partnership -- I mean, the oldest partnership we probably have right now is like maybe 2.5, 3 years. And this is more a reflection of the space than it is to us, right? I mean, very honestly, if you just try to look at any company from a fintech perspective, which have been there for the last maybe 7, 8, 9 years, I think that list is incredibly small, right? And we've had very public examples of companies like a ZestMoney or a Lendingkart basically who are at some point in time, I would say, the poster boys of the industry, but are completely absent today, right? So, I think this space, I personally feel now, I think that will change significantly, right? And we said that in the last quarter as well. I feel now we are seeing a lot more industry -- a lot more companies actually being profitable. If you would have asked me this question like 2 years ago, I would have said maybe less than 5% of the industry is profitable. Today, I would say more than 60%, 70% of the industry today is potentially profitable, right? So, I think the industry is widely changing, and that is very, very helpful because from an Apollo standpoint, that leads to more stable partners. And also at the same point in time, the incentives are very much aligned of us and our partner, where in the past, they really wanted to scale up and at the cost of poor quality book. But now I think they are as worried about unit economics as we are to make sure that not only are our partners profitable, but obviously, at the back end, we are also profitable, which ends up creating a more stable partnership because nobody ends up wanting to break up a relationship where you're getting capital and in a really great technology as long as you yourself are making money as well.

Thank you, Mikhil. All right. It looks like we have covered all the questions as of now. If you have any further questions, please drop us an e-mail. Our team would be more than happy to get back to you. Thank you all for joining our today's call, and the continued support to Apollo's journey. Have a great day.