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

No, I don't think so, because I think if you look at MFIs, we are very, very adaptable. I think if our customers are ready to shift their focus into a digital mode of payments, I am ready to service them. In fact, today, that would be preferable for me, instead of having a 2,000-person team, I can make -- do with probably half of that. I mean I'm just kind of throwing numbers in the air. But it takes a lot of operations to collect on a cash mode. So I would be the happiest person to service my customer on a cashless mode. There is just one thing which we'll have to worry about is that high-touch model. One of the reasons why the customers have a very good repayment rate barring stuff like COVID, is what I feel is that high touch model where you are not a faceless corporation, you are meeting with them at least once a month or twice a month. So that might be one of the disadvantages. But otherwise, there are plenty of advantages. My operating cost will reduce. The customers' interest rates can reduce. So overall, I think if the customers are ready, we'll be ready. I don't see a threat coming externally.

Okay. Okay. And my last question is related to the collection efficiency of pre-COVID and post-COVID loan book? I mean do you have any bifurcation on that front? Or do you see any difference in the collection efficiency of pre-COVID loan book and post-COVID loan book? When I say pre-COVID, I mean, the loan book which originated before the first wave?

No. I mean I don't have a bifurcation. But all I can say is that the loan that was originated post COVID, that is performed -- I mean, that repayment rate went down to about 90% during the month of May. In June, that went up to 98%, and in July, it's 99% plus. So we are almost back to normal in that book.

The next question is from the line of [ Rajesh Kumar ] from [indiscernible].

Pardon for my ignorance, if you had already answered this. So I wanted to know like, sir, do we see the mix changing between the MSME, macro finance and 2-wheelers over the longer run, sir?

Do we see what? I'm sorry.

The business mix changing between the various segments of MSME? That's the financing question.

So not in the short term, but in the medium to long term, yes, my personal opinion is that things will -- the customers are already starting to prefer or already starting to demand on the individual higher ticket, higher underwriting kind of loans, which is why we created the MSME to begin with. So I believe in the long run, the individual loans, which is what we are doing under MSME will start having more weightage in the overall book, might be a few years away, at least 2, 3 years away.

Sir, also wanted to check like we have seen a very good recovery in terms of collections. And so how do you see the trend going forward, because till July, there has been a good recovery. So August, how has it been fared? And what is your outlook in the next quarter, sir?

So I wouldn't call the recovery good per se. It has recovered well, but the collection efficiency, what had reached about 94%, 95% in March, I was hoping by this time, we would reach like 97%, 98%. And 98%-plus would be a good repayment rate, it would be kind of a pre-COVID repayment rate. And I think what I have said basically to everybody pre-COVID -- or I'm sorry, pre-second wave was that we wanted to forget about COVID and just kind of move on from April 1st. So unfortunately, that did not happen. And I would not say we are back to square one, but we definitely took a few steps forward, and then took a couple of steps back. So that has been a kind of the theme of this entire COVID to begin with. Q2, I think July was on the -- July, August have started well, September will be even better. I think by the end of Q3, we should be back to at least March '21 levels, assuming that there is a good season, Diwali season and stuff. So yes, it will take maybe 1.5 quarters roughly speaking.

Sir, on your growth expectation, so considering the COVID disruptions and all, so like how do you see the growth in AUM panning out in FY '22 and '23?

Frankly, I've been so busy with the recovery, we have -- of course, we have projections and everything in place. Earlier, target was to reach somewhere around INR 1,200 crores, will definitely cross INR 1,000 crores, I don't have a doubt about that, barring any kind of third wave or any kind of other disruptions. That is always going to be my disclaimer. Now I mean, [indiscernible] somebody asked me about anything forward looking. But I don't know. I mean there will be a -- the AUM will have a healthy growth maybe start 10%, 15%, 20% easily. So I don't think that will be a problem. But don't hold me to it. Let us see how the next couple of months go.

Okay. And then, sir, on our provisions front. So do you see the worst of provisioning to be behind us, and now we should see better days ahead?

The worst itself has lost a lot of meaning in it. The moment we talk of worst, I think we are surprised by the next new one, the new worst.

I think my answer is the same as I gave it to the previous gentleman that I think that there is probably more than sufficient provisions at the parent Arman level for MSME and 2-wheeler. I believe there is at least one more quarter of provisioning, which will need for the micro side at least. I think that's my answer without getting into too many other details.

Sir, one just last follow-up question. On the rural front, like the second wave has created more challenges compared to the first wave. So -- and your business model is very much tilted towards that side. So hence, I wanted to see like, take your view sir, like do you see this setback in rural to have any kind of permanent impact there or like slowly, slowly once the COVID situation get normalized, they will get back to the same situation as earlier? And any change in the strategy or the plans of the Company to tackle any impact on rural due to -- rural like, I mean, per capita income or something which might be impacting the [ profit ] for them, because this time the disruption is more towards the unorganized sector and the lower income group side. So any change in strategy and how Company plans to go ahead with the future growth prospect and considering these factors in mind, sir?

No, we are definitely [indiscernible] so primarily most of our portfolio is in the rural segment. I think I've said it earlier that, yes, the rural segment is sensitive to, I mean everybody is sensitive to stuff like COVID. So I don't want to say they are more sensitive or less sensitive. Overall, I believe that the rural segment fared better during the last FY '21 lockdowns, at least, I don't want to call it a first wave, because it really wasn't a first wave at all, more disruptions related to loss of income due to the extended lockdowns. So I think that the rural fared better than urban. As far as this time is considered, urban probably fared better than the rural. And this is just my -- I'm in Ahmedabad, so I can provide a context of where I see and where I live. I know a lot of people will be joining in Mumbai and say that, oh, I my God, what is he talking about? That's not true at all. So on average, I think the urban fared better than rural this time speaking. Now as far as our strategy, I did say that we will probably be in the coming medium to long term, be concentrating more on the -- not more, but giving more weightage towards the individual loan side and the sort of the higher ticket, higher underwriting kind of loan product. But we are still pretty -- still rural focused. And I think largely speaking, after seeing a lot of ups and downs in the last ten years or the last 11 years for me personally, these customers are very, very resilient. So they tend to bounce back very quickly, as quickly as they get into trouble, they get out of it as well. So I'm not too worried about the long-term permanent damage to the rural economy, I think that these guys are much more resilient than we urban dwellers as are in general because they are used to dealing with such kind of situation very often.

Next question is from the line of [ Harish Sha from HS Capital ].

My first question was with regards to what would be your average ticket price looking like now across our segments?

So the average ticket size in the microfinance side would have been increased to about 33,000 to 35,000. Now there are 2 reasons for that. One is, yes, the ticket sizes for our renewal customers have increased to a small extent. The second side is also that if you look at throughout last year, most of the year, we were concentrating on renewal loans only. And so those come in at a higher ticket size to be general. In the MSME segment, it has remained somewhat consistent between INR 70,000 to INR 75,000. The 2-wheeler has -- we haven't done a lot of business in 2-wheeler, but whatever we have done has been slightly higher because the [indiscernible] BS VI, ABS and the insurance and pollution and all of that other stuff. So that has caused the price of the 2-wheeler to increase drastically in the last 2 to 3 years. So it went from like a 5-figure to a 6-figure thing for even normal motorcycles now. So that ticket size is, Vivek, about 55,000 to 60,000. [indiscernible]

And in terms of expansion, what are your CapEx plans? For example, opening of new branches or expanding into geographies. So if you can share some details about that would be helpful.

So the good news is we are already done with that. So in anticipation of all this amazing growth we were expecting starting from April 1st, primarily, we opened a lot of branches in Haryana and in Rajasthan, so about 30-odd branches, against the planned branch opening of about 40 to 45. So almost we are about 2/3 to 3/4 of the wave done. Post second wave, I have put a hold on any branch openings. I think right now is not that -- I mean, you can only concentrate on so many things, right? So I don't think that I want to thin out my operation upward and middle management people to concentrate on branch openings, when they should be concentrating on getting back to normal as far as repayments and disbursements are concerned. So the balance 10 to 15 branches we'll think about opening them in the next quarter, the third quarter. So right now, I'm not planning to do anything. In the MSME side, yes, we do have a plan to open about 10 to 15 branches. We have started slowly opening branches this quarter. So I think we have opened up about 3 branches this month itself. And will probably be done by before Diwali, for sure, with our MSME branch extension.

MSME we're taking the footprint into Rajasthan as well.

Yes, yes. So thank you. So as Vivek mentioned, we were in Maharashtra. Maharashtra, we only have a couple of branches, and we've kind of put a hold on the Maharashtra expansion for MSME. Instead, we are venturing into Rajasthan, given our good experience we've had with the micro portfolio there.

Okay. And sir, what would be the cost of opening branches, you may just give us some ballpark numbers, that would be helpful.

Ballpark it's not actually very, very expensive in the -- I think it depends like anything from a branch to branch perspective. I think the equipment cost somewhere around INR 1.50 lakh for the computers and the other stuff, maybe another INR 60,000, INR 70,000 for furniture plus, so yes, about INR 2.5 lakh to INR 3 lakh may, you'll get everything, including the safe and the CCTV and the gas and all that other stuff. So there's a template that we follow. So whenever we open a branch, there is like a minimum amount of stuff that goes in. And then there is other things, depending on the area, there might be safe, for different sizes of it or might be multiple computers if it's a regional office, more furniture, it just depends on what the need of that specific area is. But yes, ballpark about INR 2.5 lakhs, INR 3 lakhs of CapEx investment.

So essentially, the CapEx is not something really important for us when it comes to expansion. It is more as to whether we can have a consistent delivery in those areas, and we can have a good asset quality coming up. This is the [ normal process ] and having the right set of employees to man these offices is something what we still trust.

So the commitment to open a branch is not dependent on the CapEx expense. I think it's more dependent, as Vivek said, on the operating cost side. Because opening a branch is cheap, but keeping the branch running is not so cheap.

Point taken. So I just have a last question. What would be -- what would be your outlook in terms of cost of fund?

So that has been reducing. I think post COVID every quarter that has been reducing slowly. I personally feel, and actually Vivek will be the best person to answer this since he looks very closely at the liability side of things. But my personal opinion is it has still room to go down in the next couple of quarters. But Vivek, I don't know what you've to tell.

I think in the last 4 quarters or so, the cost of funds has consistently come down. And for sure, we look forward to kind of getting the benefit of the reduced MCLR by the larger banks for these quarters to start reflecting on our new and old lending. So that definitely is likely to go on. But along that side, if you look at it, I think the repo rate has stabilized, you're not seeing any further repo [ tracks ] in the last 2 quarters. So I think from an overall larger economic background, I think the lending rates by the bank seems to have kind of bottomed out for the time being. So not a very large room for our cost of funds to go down, as there could be further more efficiencies that can come in play and help us.

But the mix could also change.

And the mix would also change because we've been doing a lot of other -- the last fourth quarter, we started doing marketing debentures. Of the 2 structured products wherein get some smarter returns from organizations like us, have seen a higher increase or higher interest. So that will definitely help us. We definitely look forward to further reduction in the cost of funds.

Nothing too drastic is the bottom line.

The next question is from the line of [indiscernible].

After the pandemic, okay, when we are reading the news and newspapers, either it is national or international news, they are projecting that, okay, big companies are getting more bigger and stronger are getting more stronger, okay, and they have advantages of some sort or another. So in our industry, of course, in terms of cost of funds, bigger player would have advantage. But apart from that, I mean do you see that bigger players have more advantage or more efficiency in terms of getting customers or more financial stability or something like that?

Well, I mean, it's an interesting question, I guess. As far as the cost of funds go, yes, I think the larger players typically have a better rating from the rating agencies. And while I might -- I will personally disagree with that, a lot of the ratings are based on size, but let's not get into that debate because we'll run out of time. Typically speaking, yes, they do have a better control, marginally better control over their cost of funds. As far as their operating cost, I think in my experience, there are economies of scale to an extent. After that, it's not endless, whether you are -- after a while, I think whether you are INR 2,000 crores or INR 5,000 crores, unless something changes in your strategy or in your product structure, you're still going to need one FO for every 400, 500 customers, and you're going to need a chain above that, right? So overall, economies of scale will only go up to an extent. And what we have in fact noticed is that there are, at a certain level, there are diseconomies of scale. So especially when you go from a small MFI to a medium MFI, there is a lot of diseconomies of scale going on. Now how we combat that? Typically speaking, as per the current guidelines of the RBI, whatever savings that we get as far as the cost of funds, we have to pass that on to our customers. So that is the 10% margin or the 2.75x rule that RBI has. So overall, I mean, not us, but a lot of the people in the industry has become a little lazy because our customers are not very, very price sensitive. So when it comes to like getting bargaining for a better cost of funds, I think on the back of your mind, you're always like, well, if I say 20 bps here, I'll have to pass on 20 bps to my customers and my customers don't really care about 20 bps. So why am I struggling so much, I might as well get the fund, those kinds of things. With the new RBI whitepaper that has come out, which is really a game changer as far as I'm concerned. I think it's important to note, stuff like cost of funds will play a huge factor. Because that whitepaper is basically removing all margin caps. So if I say 1% in cost of funds, that 1% is going directly to my bottom line, which is all the incentive I need to try look high and low for the best possible rate that we can get. So yes, I guess, a little bit of a long answer, but I don't know if that helps you.

Next question is related to the AUM per branch that we have in microfinance. So basically, we are growing at a very high pace in microfinance. So our AUM per branch is lower, when I compare that figure with that of other players. So is it because we are expanding, so that is why it is low? Or is there any other -- our operational structure is different or what it is?

Well, our structure is different. So there are many factors as far as AUM per branch. Number one, you have to consider, what is the average -- the average ticket size of the loan, right? So let's say, if my average ticket size is 30,000 and the guy across the street from me is 36,000. So apples-to-apples, there should be a 20% difference in the AUM per branch. The number of clients might be the same. The second thing is about how -- the vintage of the branches. So how old is the branch. The third is that what your strategy as far as branch expansion is, are you going after the lowest hanging fruits where there are a lot of population, but a lot of competition. Ahmedabad for example, or are you venturing it out into places like Kutch, where there is a low density of population, and it could take you a while, but there is no competition and in general, better kind of credit discipline. [ Are you ] rural versus urban. So urban MFI typically tend to have a much, much larger branches, rural don't. So there is many factors to consider. And of course, let's take, I've just opened 30 new branches. Those branches will have no customers, and they will basically pull down the average for the rest of it.

The normal branch will take at least 3 quarters, or 4 quarters to reach the standard benchmark for the branch. So I think typically, we meet a breakeven point between 500 to 700 kind of customers. So we will try to get there at least in 6 months or so, typically speaking. And after that, it's -- I won't call it smooth sailing, but once you reach that critical mass, the growth, you don't have to push so much for the growth of the branch.

And the last question is related to equity fundraising. So if I'm not wrong, you passed a board resolution recently. So can we expect equity fund raising in next couple of months or maybe in the next quarter?

No. So I think what you are referring to is the resolution on a, the NCDs and b, the QIPs or other forms of -- so this is basically enabling resolutions that we take from the Board and the shareholders before every AGM, because otherwise, we raise a lot of NCDs, foreign NCDs, in particular. And going to the shareholders every time doesn't make a lot of sense, and it delays things by a huge margin and adds a lot of cost also. So for us, NCDs, term loans, whatever it is, is still debt. So we take an enabling resolution. So QIP resolution also, I think we have been taking for the last 3 years. Let's hope we use it this time. Typically speaking, the -- typically speaking, yes, I think you can expect some equity rates coming in the next 3 months to 6 months. I think that it's no big secret. We were in the market in March. Unfortunately, the timing of the second wave kind of hindered our plans, and right now, we are taking a little bit of a break. But once things are stabilized, and I think the investor, the equity investors are confident that the worst is behind and they get a little bit more confidence around the numbers specifically. 3 to 6 months, we should be okay. I think we have sufficient equity right now for growth for at least for 6 months -- 6 months to 9 months. So we are not in a too big of a rush.

Thank you. As there are no further questions in queue, I now hand the conference over to the management for their closing comments.

I don't have any closing comments. But thank you, everybody. Stay safe. If you can get some travel, then get it. I just got some done, and it was wonderful. And thanks for joining again. Take care, everyone.

Thank you very much. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.