Arman Financial Services Limited (531179) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Arman Financial Services Limited Q4 FY 2020 Earnings Conference Call hosted by Antique Stockbroking. We have with us today the management from Arman Financial represented by Mr. Jayendrabhai Patel, Vice Chairman, and MD; Mr. Aalok Patel, Joint MD; and Mr. Vivek Modi, Group CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bhavik Mehta from Antique Stockbroking. Thank you, and over to you, sir.

Thank you. A very good evening to all of you for having connected, and thanks to the management, Jayendra sir and Aalok sir, for taking the time off for the call. Arman Financial had come out with its results on 29th June. However, the time has changed when we had last hosted the call with that national lockdown, and implementation of the moratorium decision by RBI has impacted the business. So we would request the management to share their view on how has this affected the company? And what are we doing to maneuver this situation? And what lies ahead for us. So over to you, sir.

Thanks a lot, Bhavik. Hopefully, I'm audible to everybody, and good evening to everyone. Thank you all for joining this call and taking the time out of your busy day for the FY '20 fourth quarter ended results discussion. I'm joined on this call by Jayendrabhai, who's the MD; and Vivek, the Group CFO. We have issued a detailed press release and investor presentation for the past quarter and the past year. Hopefully, all of you have had a chance to review it. As we all know, these are unprecedented times, and many of you are very concerned about the COVID performance versus our past performance. However, I would be doing a disservice if I did not start with the terrific performance we have had in FY '20, at least until February 2020. Therefore, I'll begin by giving a brief overview of our financial performance for the fourth quarter and the full year and post that, provide an update on the operations, the liquidity, and the collections post-COVID lockdown. As you can see from the results, our operating performance was quite good in the fourth quarter until February, and we continued to witness good growth momentum. Our consolidated loan book grew by 26% year-over-year to INR 860 crores on back of robust traction seen in the MFI and the MSME segments, which grew by 28% and 48% year-over-year, respectively. Our COVID-adjusted consolidated AUM would have been approximately INR 940 crores with a 37% Y-o-Y growth had we managed disbursing all of our loans in the pipeline in March. Continued growth in new customer additions, coupled with a marginal increase in the average disbursement size, helped in achieving sustained growth in both of these segments. Our 2-wheeler book, however, recorded a decline of 7%, being adversely impacted by the ongoing slowdown in the 2-wheeler sales throughout last year, and further exacerbated by the emergence of the COVID pandemic in March. A silver lining here is that our rural 2-wheeler book continues to see a good traction, growing by 68% year-over-year to INR 11 crores at the end of FY '20. As a result, it constitutes more than 10% of the 2-wheeler AUM now. On the disbursement front, we recorded a marginal 4% year-over-year growth in Q4, even as the COVID pandemic impacted March disbursement substantially. We saw a strong pickup in disbursements up to February as the disbursements rose by over 30% in the first 2 months of the quarter. In March, however, due to the COVID-induced disruption, we were only able to complete 20% of our disbursement pipeline, and this led to a lower booking in AUM and disbursements by approximately INR 75 crores to INR 80 crores. Adjusting for this disruption, our AUM and disbursement would have grown by 35% to 40% in the fourth quarter. Net interest income grew by 36% during the fourth quarter. Strong growth in net interest income helped us post a sturdy operating performance as the pre-provisioning operating profit grew by 34% year-over-year to INR 15 crores. As a prudent measure, we earmarked INR 6.7 crores as contingent provisions for COVID and further took aggressive write-offs of about INR 3.9 crores for the pre-COVID NPAs during the fourth quarter. I know many of you are going to have questions around that. As a result of the higher provisioning, profit after tax declined to INR 3.8 crores. Adjusting for the additional COVID-specific provisions of INR 6.7 crores, the Q4 profit after tax stood at INR 10.5 crores, which is a 46% growth year-over-year. The adjusted ROE for the quarter stood at 24.7%. Discussing our performance for the full year FY '20. We've had a very good year barring, of course, the month of March. We posted a solid all-around performance with the pre-provisioning operating profits rising by 73% to INR 74 crores. And despite higher provisioning, profit after tax grew by more than 50% to INR 42 crores. For Arman, this is a milestone as it marks the highest annual net profit reported by the company since it came into existence a long time ago. Asset quality continued to remain robust with gross and net NPA standing at 1.1% and 0.2%, respectively, at the end of FY '20. Further, we remain adequately capitalized with a consolidated debt-to-equity ratio of 4.1, which includes -- excludes direct assignments, of course. We had a total of 211 branches. 170 of those are for MFI, 35 for MSME, and the balance for 2-wheeler as of March 2020. As a part of our expansion strategy, we launched 43 new branches during the year. Of the new branches launched, 32 were for MFI, and 11 were for MSME. Now moving on to give you an update on the post-COVID operations. As most of you are aware, we had to close down all of our branches -- well, temporarily, of course, close down all of our branches and HO post the lockdown announced in March. We gradually started reopening our branches from the fourth week of May. But movement on the field was highly restricted until June 1. I'm pleased to say that as of today, most of our branches are fully operational, with a few of them operating from alternative locations as they were initially located in containment zones. Further, during the past quarter, we rationalized our MFI branch network by consolidating some of the smaller branches into larger branches. This led to a reduction of number of MFI branches from about 180 at the end of Q3 to 170 at present. On the liquidity front, we have enough cash reserves to cover the necessary OpEx for the next 6 months and debt obligations for around 3 months. Our liquidity position has substantially -- or has improved materially in June with collections picking up. As a result, we have repaid all of our debt obligations due in June and not applied for any moratorium. During the month of April and May, we have received moratoriums from our lenders of 72% of the amount due. We had more than sufficient cash reserves to cover the rest. Further, we have raised approximately INR 75 crores since the lockdown at attractive rates to strengthen our liquidity position. 2 notable fundraises include NABARD and SIDBI, which have been raised at very attractive rates of sub 7%. As the ground level collections increased, we have also begun to repay the moratorium installments to many of our lenders. Moving on to the collection side now. We had extended a moratorium to all of our MSME and MFI customers for April and May. We have resumed collection process from 1st June onwards. And so far, the response has been quite encouraging, in fact, better than we were expecting. Repayment rates for June 2020 dues closed at 59% for the MFI segment and 85% plus for the MSME segment. The remaining customers remain under moratorium, though most of them have expressed a desire to resume repayments in 1 or 2 months and are not expected to use the full moratorium tenor available until August 31, 2020. We expect July to close with significantly higher repayment rates. On the 2-wheeler side, as the collections happened in electronic form via NACH and direct debits. We continue to accept collections -- we continued to accept collections throughout April and May, providing a moratorium to only the customers that specifically requested for it. Total moratorium for April and May were approximately 45% and 50%. However, in June, the collections have picked up sharply, with total collections against June demand closing at approximately 95% for the 2-wheeler segment. Operationally speaking, we feel that the worst is behind us and in the next few months, we'll be focused on getting the repayment rates back to normal towards which we have made significant strides in the month of June 2020. In terms of disbursements, we had stopped disbursements post-March 20 and have not resumed them yet. We have also not given any top-off loans or top-up loans. Depending on the repayment situation, we are planning to start disbursements slowly from 15th July onwards with tighter screen -- with a tighter screening process in branches which cross 80% to 85% repayment rates and are otherwise located in areas with low COVID disruptions. We do not expect disbursements to reach around pre-COVID levels until September 2020 at least. Finally, to conclude, our primary focus will remain protecting our asset quality, improving collections from the field, maintaining a healthy liquidity position, and keeping our operating cost in check. The situation on the ground will require us to be nimble and consistently adapt to a very dynamic situation on the ground. On the whole, we remain confident of overcoming these near-term challenges and getting back on our growth trajectory as the conditions gradually normalize. We sincerely thank everyone, including everybody on the call, for your support during this very difficult time. This pandemic is not an Arman or a microfinance or NBFC or financial services problem. It has affected every business and every person one way or another globally. This also means that the combined human ingenuity is devoted to defeating these problems. So we will all persevere and beat this together. I'm confident about that. For Arman, just like demonetization, in the long run, I hope COVID is a small footnote in a otherwise wonderful journey. With this, I think it is time to move on to the questions. Before we start the Q&A session, I just want to add a disclaimer that we might not be in a position to give answers to any predictive questions. So the answer we don't know should be considered a valid answer to questions like COVID-related loss estimates or projected timelines to normalcy or other kinds of questions, which, quite frankly, will be nothing more than educated guesses. So thank you once again and request Ayesha to open the line for questions.

[Operator Instructions] The first question is from the line of Anand Bhavnani from Unifi Capital.

2 questions from my end. One is in terms of our expansion plans, now we had a sharp increase in branch openings in last 2 years. How does that trajectory change? Like, would it be safe to assume that from here on we might see very subdued branch openings? That is one. And second, while the collection efficiency in microfinance is at 59% is interesting. If you could juxtapose this number with other peers if you have any sense of how collection efficiency has been for rest of the players in the sector?

Sure. So as far as expansion, of course, in line with what we normally do in the months of January and February, we had a very detailed expansion plan and expansion strategy in place. Of course, all of that has gone literally tossed out of the window at this point. And once the situation normalizes, we'll have to rework everything. So along with my disclaimer, my first answer is, I don't know at this point. Of course, come September, once the repayment rates normalize, I'm not against opening branches, it will be subdued compared to the previous years. But I'm okay opening it. As I said in my remarks as well, some of the smaller branches or some of the nearby branches, some of the split branches, we have -- just for a operating cost perspective and keeping everything streamlined, we have recombined them as well. So in fact, the number of branches have kind of reduced because we've increased their operating area. Wherever we could find efficiencies, we have kind of done that over this lockdown period. So let's see. I think I'll be in a better position to give you an answer once we talk again probably in September time frame. Now as far as microfinance repayments, see, it really depends on what kind of states you are in. As it seems right now, there are certain very good states. So from my -- and again, I don't have any hard numbers to give you. As far as your question related to peer collection, I have heard numbers between from 45% to all the way to about 70% is what I hear. People have different ways of calculating it. People -- some people have given top-offs and things like that as well. So it's all -- sometimes you have to take it with a grain of salt or a bag of salt, it just depends. But the states which are performing quite well. So for us, Gujarat has performed extremely well last month at almost 74% repayment rate. Everybody is having a problem in Maharashtra, in Orissa, we are not in Orissa, but Orissa is there. We are not in Assam, but Assam is there. People seem to be doing quite well in Bihar. Again, we are not there. So I think it's a mixed bag. To give you a further idea, MP, we managed collecting about 60%; Rajasthan, about 56%; UP, about 55%; Maharashtra was in the lower end at about 42%.

So wonderful. That's very helpful. Just a follow-up to the collection efficiency. Now 59% if in the first week of April I had told you that we'll be getting to 59%, would have you been happy, sad or neutral? So I just want to understand from the number that it has come, what is your -- is it in line with expectation or higher?

It was quite above my expectation. Now people have accused me of being a little bit of a pessimist. I think it's nice being a pessimist when you run a finance company. But my expectation, rather everybody's expectation was around 30% to 40%. So I think the industry itself is very pleasantly surprised. And if you talk about our MSME collection at 85%, that was clearly I was blown out of -- blown away. That is very excellent, well beyond of what I was expecting. The credit is my team. It's not like I went out and did it. And they did against all odds in places where it was very hard to move about with lot of threats and lot of violence and it was a mess. So the credit really goes to the team.

Sure. And lastly, is it safe to assume that given that government has extended the food security lines for the vulnerable section -- this -- and the other government programs, the MGNREGA scale-up and everything, this in effect is slightly positive for companies like us because this kind of...

Very positive. It's very positive. It's -- whether you agree with it politically or not is a different story, but any welfare kind of support that the rural segment or the bottom of the pyramid segment gets will be very good for me, of course, because that's one less thing for them to worry about and they can concentrate on their businesses. And once they start resuming their cash flows, they can start repaying there. So it's very good.

The next question is from the line of Viraj Mehta from Equirus PMS.

Congratulations, and hope you're safe. I just had a couple of questions. One, in terms of incremental lending you said will be started sometime in July. Just wanted to understand what are the credit checks that you will keep? Because see, when people are in moratorium, it's like we are flying blind. We don't know the credit quality of the person in moratorium. So how will we decide -- and that moratorium still exists till August. So how will you decide disbursement about credit checks at that point when you're still flying in this moratorium phase?

So it will be different for the different divisions. If I think about microfinance, we have a plan in place that -- see, we have many branches which have reached 100% repayment. So to lend money to those areas seems like kind of a no-brainer. Of course, there will be certain occupations and things like that we'll have to see away. So on a case-to-case basis, we'll plan that out with the area managers and the regional managers. But places where the repayment has gone up, I think there is not much of a risk of restarting it. In fact, these people really need money, right? I mean everybody needs credit at a time like this. The second aspect is there are certain occupations which are very less effective. So again, I'll just give you an example. So if you look at the western side of -- or the eastern side of Gujarat, excuse me, where the milk belt of Gujarat, that has been performing extremely well. During demon, that was badly impacted. This time, there is very little impact. So we are getting amazing recollections there. So that's another area that we can consider. Our past customers, people who did not take the moratorium and repaid on time. We have customers that are paying 2 or 3 -- 2 installments even together, even though they got a -- I mean, the month of April, we couldn't even go out and collect. But there is still a subset of customers that did pay us through electronic means and other means. So those are very safe customers that if they are done with their loans, we can start lending to them. So you can create these filters in place, right? And different places will have different filters. On the microfinance side, you certainly can. On the MSME side, on the 2-wheeler side, I mean, again, you can block out certain occupations, only give it to areas which people in the rural side in occupations that have not been impacted that much or, in fact, some of them are even thriving at a time like this. 2-wheeler, what we are doing is we are increasing the down payments, increasing the risk checks, and all of those other things. So just tightening the credit norms.

Sure. Sure. And my last question would be, at a time like this, the only thing in our control would be what kind of cost-cutting measures as a firm we can take right at an operational level to our finance costs and other things. If you can highlight few measures that we have done in this -- in these last few months to tighten our belt?

Well, I mean, operating cost side, if you want to discuss that, any kind of projects that could be put on hold we have put on hold. That includes the software conversions that we were planning, the other kinds of frill projects that we are talking about. We did not have much layoffs, to be honest with you. Still, there were certain people that were hesitant to come back because they were scared or they were located in areas or they were getting pressure from their wife or whatever it could be. So those guys, of course, they went out of the payroll and that saved us some money. A few of -- very few back-office kind of staff, especially related to the disbursement processing, we put on LOP after a while in the month of May, but those should be rejoining as soon as we start our disbursement, should they choose to. So on the operating side, honestly, I mean, there is not a lot of cost-cutting you can do besides what I told you. Our largest expense on an operation side is payroll. And I have always believed that you have to protect your people at a time like this. Otherwise, they will never stand by us. So we have not -- I mean I have been against laying-off, very honestly. So on the financial side, I mean, it's a sellers market, but due to government support or whatever, we got -- NABARD money came in at -- Vivek will know the exact figures, but about 7%, and the SIDBI money, it's actually been sanctioned in everything. We are about to receive it today or tomorrow. That came in at approximately 7% as well. MUDRA money we raised right before this COVID. That came in at about 7%, 8%, I believe.

Yes, 7%.

Strides of reducing that as well. Vivek, any corrections there?

Yes. No, that's absolutely fine. And in fact, even in March, we -- one of the few which were able to raise funds on ECB, External Commercial Borrowings. They were pretty well-priced as against our overall costing. And we also raised funds on NCD from our existing lenders in March. So I think proactively and with governmental support, as Aalok just said, I think on the cost -- finance cost side, it's been fairly well-priced in these tight circumstances. But it's going to be, again, a very tight market as we go further into the quarter 2 and so on and so forth. So we'll have to see how it phases out then.

Sure. Just last follow-up on this is what -- yes, I mean, with the yield -- government bond yields and repo rate everything is dropping, even though it's a sellers market, but what -- and you have raised money at 7% from both the organizations, would we see a slightly lower cost of debt for us going forward?

Yes. I think that's hard to predict right now. The repo rates and stuff are going down, but people see as there's incremental riskier. So their rates might be adjusted to account for that. But I think it's a fair assumption to say that, yes, at least in the short-term we should definitely see some rate benefits.

The next question is from the line of Amit M from 2Point2 Capital.

Just on this collections front, just can you explain this MFI versus MSME. The MSME numbers are actually quite good. So what has been driving this performance in the MSME segment?

Honestly, most of the portfolio is in Gujarat, and Gujarat has been doing quite well. And especially if you look at -- lot of the portfolio has been in the Western Gujarat as well, that's where 50% of the portfolio is. So if you look at it on the area wise, there is not much of a very large difference between MFI and MSME. Of course, MSME is about 5%, 10% little bit higher. And I'm not exactly sure how to explain away that 5%, 10%. But still, if you adjust it for geographies, it's little bit closer together. So I guess we lucked out of being in the right place, and that is not through talent or anything, it's just luck at this point.

So because you have lesser MSME portfolio in Maharashtra or Uttar Pradesh where collections are slightly lower because of that overall numbers look better for MSME?

Exactly. Exactly. So we have a very, very small portfolio in MSME in Maharashtra. And about -- Vivek, again, correct me if I'm wrong, but about 75% is in Gujarat.

Okay. And in the Q4 numbers, sorry, Vivek, you were saying?

Yes. So I mean, 75% still continues in Gujarat. And surely, I mean, as against microfinance, this is really a new portfolio. So the touchpoint is also much higher.

Okay. Understood.

In the Kutch area in MFI, for example, we have collected over 100%. So not only did we collect everything that was due in June, but people paid in -- even for the moratorium amounts. So it's really quite a different story when you go area to area.

Okay. Okay. And in Q4, the yields in the MSME and 2-wheeler business were down substantially quarter-on-quarter. So what was the reason for that?

Vivek, you want to get that because...

I probably missed maybe first line. Could you come again, Amit?

The yields in the MSME and 2-wheeler business were down Q-on-Q substantially. So can you explain that?

On MSME, what has happened is we've done some portfolio sell out in November. So that would have directly impacted the yields because that portfolio was off-balance sheet and you're recognizing only the gains. So to that extent, the revenue will not register that. In terms of 2-wheeler, I think overall 2-wheeler has been -- yields have been softening because of overheatedness and the overall 2-wheeler segment not doing so well. So you -- you've seen some bit of softening in the 2-wheeler segment anyways.

Yes. I mean, that segment has been struggling even before COVID and the overall sales have been down as well. So there was a portion of -- we had -- where we had to cut rates and things, especially during the Diwali time, the season time, we had some sessions going on. So that impact you would see like in the running quarter.

Okay. Okay. And on the liability front, what are the principal and interest repayments which are due for this quarter to lenders, for this quarter?

This month, it's about INR 48 crores. Next month, it's INR 42 crores. And Vivek, what is it after that, about...

Yes, September, would slightly increase again because we'll have some NCD interest payments and so on and so forth, but close to about INR 135 crores, INR 140 crores.

And this is including the interest payment as well?