Bajaj Finance Limited (BAJFINANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, this call is not for media representatives or Bank of America investment bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America investment bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good day, ladies and gentlemen, and welcome to the Bajaj Finance Limited Q2 FY '22 Earnings Call. This call will be recorded, and the recording will be made public by the company pursuant to its regulatory obligations. Certain personal information such as your name and organization may be asked during the call. If you do not wish for it to be disclosed, please immediately discontinue this call. [Operator Instructions] I now hand the conference over to Mr. Anuj Singla. Thank you, and over to you, sir.

Thank you, Aman. Good evening, everyone. This is Anuj Singla from Bank of America Securities. Thank you very much for joining us for the Bajaj Finance earnings call to discuss quarter 2 FY '22 results. To discuss our results, I'm pleased to welcome Mr. Rajeev Jain, Managing Director, Bajaj Finance Limited and other senior members of the management team. Thank you very much for giving us the opportunity to host you. I now invite Mr. Rajeev Jain to introduce the management team on the call and take us through the financial highlights for the quarter, post which, we will open the floor for Q&A.With that, over to you, Rajeev.

Thank you, Anuj. Thank you, BofA team for hosting us. A very good evening to all of you. I have with me here in the room, Sandeep Jain, who's our CFO; Anup Saha, who's our Deputy CEO; Babu Rao, who's our General Counsel; Fakhari Sarjan, who's our CRO; Ashish Panchal, who's President, who runs the set of businesses and my Chief of Staff; and Kurush Irani, who's our Head of Operations and runs our business transformation initiative. I'll be referring to the investor deck that we have uploaded in the Investor section of our website. We uploaded that at 4:30 or so. I hope you had time to review that, and let me jump right in. I'll take 20 minutes to just talk through the key pages in the investor deck, and then we open to questions. Let's jump right in. Let's quickly run to Panel 4. If I summarize how the quarter went, I would just say that it is a quarter of strong revival. We live in famine to feast times. Last quarter was the famine, given the second wave, it's a strong revival across growth, debt management and financial metrics in the quarter that went by. In absence of the third wave, I would just say that we are quite confident about the second half of the year on growth, risk and financial metrics as a company. The business transformation, which is expected to go live on 31st of October is running behind schedule, mainly to an extent because of court fees for the festival season and due to second wave causing certain tech deliveries. So that will go live now on December 15. But I'll provide you some texture in some of the slides as to how under-the-hood business is beginning to dramatically change the way we conduct business. Go live for the business -- for the consumer app upgrade is now planned for mid-December, which is December 15. Very quickly on to numbers. AUM came in at INR 167,000 crores, tad below INR 167,000 crores. That's a year-on-year growth of 22%. OpEx to NIM,I'll talk about came in at 38.1%. PAT came in at INR 1,481 crores, a year-on-year growth of 53%. ROE, not annualized at 3.8% and net NPA came in at 1.1%. I'll be covering all these 5 points in a little bit of detail in the next 2, 3 panels. So just hold on for a moment. Year-on-year, let me -- I jumped on to Panel 5. First of all, year-on-year numbers are not comparable due to dislocation that was caused by the pandemic. AUM, I talked about, moved from INR 137,000 crores to INR 166,000 crores . The core AUM growth which is a strong core metric came -- grew by INR 11,150 crores. That's the highest ever we have done in the last -- I mean, that we have ever done in the quarter. So to that extent, the AUM momentum is quite good. When I cover the AUM composition, composition is pretty steady. What should not be going up, which is our auto finance business is not going up. What should be going up is other lines of businesses. They're all going up, but I'll cover that. So in absence of a third wave, we do believe that the quarterly AUM growth for the balance of the year should be quite strong. We booked 6.33 million loans in the quarter. It's still not at an ever high level. I think ever high level was at 6.88 million in Q3, 2019. So December, so 2 years ago, third quarter was the highest ever at 6.88 million, if I'm not mistaken. So we still have some distance to go there. Should happen in the following quarters. Customer franchise, just a tad below 53 million. We acquired -- the cross-sell franchise is now 29.4 million, growth of 23% Y-o-Y. The customer franchise also grew by 20%, the cross-sell franchise grew 23%. We acquired 2.35 million new customers in the quarter. In general, last quarter or this quarter, we are on track to add 7 million to 8 million customers a year on -- from a new customer addition standpoint. Geographic footprint stood at 3,330 additions, 120,000 distribution points. We added 216 new locations. I'll provide some texture as to where we are growing also in just 2 slides later. Overall margin profile across businesses is holding. We used to have earlier challenges in the mortgage side of the business. As the pricing has come off there, we are able to protect our margin profile there as well. So overall, across businesses, we are managing to protect margin profile, still may not be fully visible in the P&L due to interest income reversal, came in at INR 322 crores versus INR 216 crores in Q1 last year. The run rate of that number, we expect it to normalize to INR 180 crores to INR 200 crores from third quarter onwards. So in absence of a third wave, probably the worst is behind us, even on this metric as we get to Q3. Cost of funds reduced to 6.77%. That's not really the run rate number. The run rate number, you should read it at 7%, because a wave of IPOs that happened and we borrowed short term. This metric is a little -- not fully representing the real number. The real number should read at 7%. The company also raised a reasonable amount of long-term monies in the quarter that had gone by. In 2 years and above, we raised INR 6,800-odd crores. In that, of course, 10-year monies, we raised at INR 2,300-odd crores, came in at historical rates. So it is good quarter from a treasury standpoint. As a result of, however, such a large raise and bunch in end of Q3 -- sorry, end of Q2, the overall liquidity position was quite strong. We are hopeful that it should get normalized to INR 8,000 crores to INR 9,000 crores from -- by Q4, maybe by Q3, but definitely by Q4, depends clearly on how attractive the treasury markets look. If we took our long term, we'll cover long, is really our approach as management team. Deposits book, to granularize liability side continue to grow, grew by 33% Y-o-Y. In that, retail is 77; wholesale is 23. Our goal is 70-30. We're doing better than that, so we're quite okay. OpEx to NIM was higher, much higher than the normal. We exited the year at pre-COVID levels at 33%. It's a transient frame, is what I would say. We foresee OpEx to NIM for the quarter came in at 38%, which is high, as I said, straight 9 quarters, mainly owing to debt management costs because as clients move into Stage 2 and Stage 3, the collection costs go up. So that's -- but they are stable in those in bucket 1, and if they are stable, so reduces the -- or does not deteriorate the credit profile, but the cost of collection goes up. That was one reason. Second was the salary cost that went up. We added close to 2,000 employees to support our growth stance overall. As a company, that's an ever-high addition that you've actually done in a quarter. We expect this number to go down to 33%, 34% as mainly as the debt management costs normalize by Q3. That's 1 part and as the overall balance sheet grows, that's the second part. I think we should exit the year between 33% and 34%. And we should look -- by the time the 3-in-1 will also go live, so next year should look closer to 30%, 31% is what really what our thought process would be at this point in time. Loan losses and provisions came in at INR 1,300 crores. To protect ourselves against a potential third wave, we still continue to increase management overlay. We increased management overlay by INR 350-odd crores actually from INR 483 crores to INR 832 crores. That's virtually INR 350-odd crores addition that we did. Mainly, it is not important as I cover some points in the numbers, but we just want to protect ourselves against wave 3, so it's been done from a conservative prudent standpoint. Overall, debt management efficiencies across products was better. In absence of third wave, we do now expect that loan losses will normalize to the adjusted for balance sheet between INR 700 crores and INR 800 crores run rate for second half of the year and hopefully in the absence of a third wave. That's really where the number should look. GNPA and NNPA improved sequentially, of course, from 2.96% to 2.45%, 1.46% to 1.1%. There's material improvement in GNPA and NNPA. If there is no third wave, we expect GNPA as I had guided earlier to settle back at 1.7% to 1.8% at a GNPA level and 0.7% to 0.8% at NNPA level. We also had forecasted in Q1 that we overall estimate the loan loss for the full year to be INR 4,300 crores. We've already taken INR 3,050-odd crores. We really are left with INR 1250-odd crores. So if I take the previous sentence, clearly, run rate will probably be a little elevated of INR 700 crores to INR 800 crores depending on how the numbers -- how the debt management efficiencies pan out in Q3, but that's a residual number for next 2 quarters. If you look at the absolutes, leaving the percentage side, there was significant improvement sequentially, GNPA from INR 4,700 crores came down to INR 4,100 crores. NNPA came down from INR 2,300 crores to INR 1,825-odd crores. In that, the secured component, 57% of our NNPA was essentially contributed by auto finance, a significant marked improvement even there in terms of debt management efficiencies and mortgages. So between both of them, 78% is actually secured assets. Overall, stage 2 also dropped by virtually INR 1,500 crores from INR 7,400 crores to INR 5,950-odd crores. If you go to Panel 7 quickly, some more numbers, as you can see. Stage 2 assets dropped from INR 6,100 crores to INR 4,500 crores, which is other Stage 2 assets. We have a 23-odd percent provision against the secured -- so numbers are as you can see across. There is sequentially, there's marked reduction in all the numbers. So that's a good sign. We just want to make sure that having suffered from a second wave, we protect ourselves for the next at least 1 more quarter before we take a regularized view of loan losses and these numbers. Overall, our -- as a management, our view is that -- adjusted for balance sheet, the Stage 2, Stage 3 assets should look like INR 7,800 crores to INR 8,000 crores. That's really when we can say that we are back to pre-COVID level. At a design level, at this point in time, that number is INR 10,450-odd crores. So we still have some distance of INR 2,500 crores. If the current levels of debt management efficiencies and default rates that we are seeing incrementally across portfolios remain, we will naturally get there at a framework level. So the worst should probably be behind us on credit costs as we move on from here. As a result of -- so despite taking a INR 350 crore extra conservative provision on account of management overlay, the overall profit before tax came in at INR 2,004 crores. Profit after tax came in at INR 1,481 crores, which is a growth of year-on-year and not comparable but came in at 53% higher. Capital adequacy pretty strong, 27.5%. BHFL AUM, BHFL continued to do quite well. AUM grew by 33% to INR 44,000 crores. BHFL also launched a new vertical, which is the affordable housing finance business. It will move slowly, but that's a start that you have made to complete the product suite for BHFL as a company. BHFL capital adequacy also remained strong at 20%. They delivered 100% growth year-on-year on its profit after tax, came in at INR 166-odd crores. BHFL continued to retailize or granulize its securities business, acquired 109,000 odd customers. It could have been stronger, but we made some changes to the way our distribution model is organized, else we were hitting a run rate of 50,000; we have pulled back some of it to create a more sticky origination model rather than just a number. BFSL delivered a small profit of INR 3 crores. So that's really on the financials. Let me -- overall, I would say, good quarter on financials, marked improvement from where things were in Q1. As I said, famine to feast, the times that we live in. Let me just give you some texture on -- in July AGM, we talked about that -- how we see business to be. We've talked about it to investors that we see ourselves to be an omnipresent company, which essentially allows customers to move -- existing and new customers to engage, transact, and we service online and off-line and vice versa without friction. But it's really the frame that we are chasing and pursuing as a company, and we think creates a strong mode for us to grow in a sustainable manner for a long period of time. What I thought we'll give you a texture from here on, that's really how we'll provide updates to The Street on a quarterly basis. That's on Panel 9. So we are a regulated business. We think as long as KYC is relevant, as long as AML is relevant, geography -- as long as debt management is real, the geography will play as important role, and boots on the ground will play as important role than anything else. So the omnipresent frame fundamentally at the essence level also starts from geography. At a geographic level, we are at 3,330 locations. As I said, 120,000-odd distribution points, expanded 216 locations. The prominent -- the footprint, when we look at pan-India, we are essentially growing in North and East at this point in time as the GDP contribution in North and East in our overall -- versus our portfolio contribution is lower. When we stack the state GDP versus when we stack the portfolio mix, we clearly find that North and East, its contribution to national GDP versus its contribution to our portfolio is lower. So we're growing in North and East a lot more. The -- of course, it's a risk metric, to that extent, it helps reducing concentration risk, and of course, creates new growth opportunities because these are a lot more uncharted and virgin markets. In terms of omnichannel now, let me give you a texture on offline to online, online to offline. Let's start from the top of the funnel as to how are we originating customers and how do we incrementally originate customers. We originated customers mainly at the point of sale. However, in the last 2 years that started to change dramatically. In the quarter that went by, the company acquired 372,000 new customers to fully digitally, all the way to e-mandate, KYC and so on and so forth, acquired a tad below 400,000 new customers. These 400,000 customers, in general, walk into the store, have a 60-day activation of 22%, 23%, have a 90-day active of 28%, 29%. So they add to the point-of-sale business rather than we drawing from the point of sale.

[indiscernible]

Sorry, I'm not able to hear you. Yes. These are all paid cards to the point Anup was making to me. 50% of them pay fees as a payment gateway and buy the product. So clearly, there is a huge latent need for the product and 50% pay when they walk into the point of sale. The EMI store strategy is beginning to -- after a year of reasonable amount of effort, is now beginning to yield reasonably good momentum. The EMI store visits increased from 10 million in Q4 to 30 million in Q2. We started to stimulate or activate, use this as an asset to stimulate the entire customer franchise with whom we want to do business, resulted in -- close to 250,000 new loans in Q2. The total SKUs that client customers are able to see or prospects are able to see is close to 30,000 SKUs. Total 25,000 merchants have now become part of -- have uploaded their inventory infrastructure. This offering, eventually -- I forgot to cover the EMI card. As the consumer app upgrade goes live, this has made the journey a lot more seamless. Similar to the EMI store, this offering is already integrated with the current Experia app, so allows customer to do a single sign-on to actually get in. The point-of-sale transformation fundamentally has also started to deliver reasonably good momentum for our personal loan and credit card distribution business. It's a -- we've been added for the last 1 year. It's an integrated offline to online framework, which covers communication, call center and fulfillment right at the point of sale. We generated close to INR 400 crores of personal loans in the quarter right at the point of sale that went by and 27,000 credit cards distribution in the quarter that went by. The run rate of credit card distribution is actually higher. Because of the Mastercard issue, we were down for 30, 35-odd days. Otherwise, the run rate is close to 40,000, 45,000 accounts. So it's a -- the consumer, just to give -- take a moment on it, existing customer walks in. We have fundamentally pre-stamped him for a set of product options based on analytics infrastructure. We communicate with him to be able to take a loan, improve our D&C rates because he's an existing customer on one hand, reduces promotional effort and delivers a lot more integrated outcome. Point number 4, CDP platform, key to us delivering a consumer app upgrade has gone live. So the under-the-hood effort, it delivers a significant upgrade to our multichannel orchestration, customer communication, call governance infrastructure and integrated multi-dialier framework and a multilingual architecture. These are under-the-hood changes that we are making to the business model to ensure that when the consumer app upgrade goes live, it yields desirable standpoint for the consumers, an outcome that they like. So just to provide some texture, I can go on, but I picked the top 4 points to provide some update. On consumer app upgrade, we have 13 million active customers on it. As I said, delayed by 45 days because of court freeze for festival season, normally. We should have guided a little better, probably that -- we said -- instead of October, we should have probably said 15th of November. So because till 15th of November, during season, we don't make any changes. We knew Diwali is 4th of November, but should have been a little more careful, and certain tech deliveries are running behind. Overall, we are releasing in the sprint given it's a large infrastructure. Sprint 1, which essentially covers all customer service menus, payment options, play store, 20 engagement apps, and a robust search functionality of the entire app has actually gone live on play store for 10% of the customers. It went live for 1%, then 5%, and now it's 10%. We have held it there now. We'll now wait for the season to get over till 15th of November and increase coverage from 15th of November. The sprint 2 covers business journey, end-to-end insurance and mutual fund marketplace. And all of it will deploy between 15th of November to 15th of December. As I've articulated earlier, that's Phase 1. My satisfaction on the consumer experience, I would say would really be by April 30 when Phase 2 -- on what we see as Phase 2 because as we build this out, we have identified a whole host of things that we want to do as well to improve the customer experience and journey will happen. But it never gets done in one go, so it ought to happen in phases only. Just on payments, we onboarded 3.1 million wallet customers for festival season. One of the objectives of wallet was to create more integrated, more seamless journeys. We've integrated the wallet feature for seamless fulfillment. We do a whole host of promotions, cash backs and so on and so forth. And that was the objective of having a wallet or a payment tool. All our cash back reimbursement processes are all integrated for the season into -- through the wallet. On one hand, it will improve the cash back and reimbursement process. On the other hand, it will improve stickiness and engagement. Merchant app, that's really our second large app ecosystem that will go live by February. That's also probably behind the 30 days. It will enable both P2P and P2M across onboarding, transaction, promotion, rewards and settlement. We will weave into it or our earlier REMI business to -- and then hopefully be ready to grow that business from there on. We have applied in post Board approval, we have applied for PA and BBPOU licenses and so on and so forth. So that work is on. And we're expanding the payments team given the long-term strategic nature of the view that we have taken on the business. Just last 2 points of update. As I said, it's an omnichannel frame. The entire architecture is organized as everybody is on this ecosystem, which includes our EMI store connects to merchants, the productivity apps connects employees and distribution partners. So the new debt management services app went live across 37,000 merchants -- and 34,000 merchants and 9,000 employees, enables the entire end-to-end journeys of onboarding staff, agency staff. We always onboard agencies. Now we onboard even agency staff, the entire cash receipting, training, communication, compliance features, dialer integration and call recording. The entire new next-generation infrastructure went live fully, enables -- also enables the debt management staff to service the customer on a host of service-related queries, can instantly trigger a whole host of menu options to help the customer with requirements. One of the things, just to share what we keep telling people that as much as this business is about risk management, it's also about debt management. The company issued 13.5 million receipts in Q2 alone. That's the breadth and the depth of the effort that debt management involves. Sales one, because if a consumer is going to press a button, and based on the CDP platform, the lead should go to a call center or to the salesperson is as integral to the omnichannel strategy has started to now also go live. So we're targeting thereby December 15 this happens. By January 15 -- early, this would have also closed. This also enables staff to help customers with a whole host of service-related queries, transitions customer from online to offline. And this is online to offline because when a client presses a button and wants a particular product based on CDP platform, it needs to drop directly to him based on a design. So as the consumer-facing app ecosystem is, are these as well. We're hoping all of this fully goes live between December 15 and January so that the Phase 1 of this gets over. And hopefully, by then, COVID is also over by January, and we can all focus on business. That's really on the business. Very quickly, I'm jumping all the way to Panel 43 to give you a texture on business composition. As you can see, as I said, what needs to go down is going down, which is AFS, order finance down year-on-year 15% rightfully so because the business has really struggled, and it's down 15%. Its contribution also down to 6%, and the rest of the businesses have picked the weight up and have grown. So -- but overall, you don't see much movement. It's in corridor of 1% or 2%. Provisioning coverage, that's Panel 26 gives you the data I talked about, GNPA at INR 4,000 crores at 2.96% in June is down to 2.45% and NNPA 1.46% is at 1.1%. Still, autofinance is really where the pain is sequentially down. As you can see, gross NPA is down 3.1% and net NPA is down 3%. We are forecasting this will be down to 7%, 8% exiting Q4 and maybe a little better as we move on. Otherwise, you see improvement sequentially markedly actually. Our sales finance business is actually down over March. Consumer B2C is just about 40 basis points ahead. Rural sales finance is same. Rural B2C is up, but you can see a star there, the gold loan has created some noise. We used to club it there. So adjusted for that, the numbers are lower, but 1.65% also some had some amount of gold loans to that extent, it's apple-for-apple conversation. SME is still some way to go. The peak should be over by November, and you should see numbers go down by December. Mortgages, reasonably flat. Marginal uptick between 90 basis points to 97 basis points. Similar to NNPA as well, provisioning coverage remain same, so we are quite sorted. This is the last panel probably I'll cover; open it up for questions, Panel 49, you see lots of numbers here. As I said, marked improvement across all versus OTR INR 1,287 crores has gone to INR 1,512 crores because we have offered OTR in the mortgage business mainly to the tune of INR 220-odd crores, mainly mortgage. I would say, probably only mortgage. That's where the request came from. Normal Stage 2, as you can see, down INR 1,600-odd crores. Stage 3, down INR 600-odd crores. Provisioning, well covered. We've increased the provisioning coverage from 51% to 55%. Well prepared for wave 3, if it is to happen. If it didn't happen, we'll take a view on provisions by end of Q4. Last panel, overall management assessment on portfolio quality. We are good. We're still watching 2-wheeler and 3-wheeler. As you can see, rest of the numbers are down, 2-wheelers -- on this panel, 2-wheeler, 3-wheeler, logically ought to be at 85%, 86%, Stage 1. It's still some distance away from it. I think the next 3, 4 months, we should see some movement here. Otherwise, sales finance, digital products, B2C, also some distance, better than where it was in March, but still has to get to 98-odd percent of current, which is really where we were for 8, 10 years. We should get there by Q3 is what our assessment is. Our next panel, professional loans. We are virtually there. B2B, we're virtually there. B2C, we have some distance to cover. I think a little more distance to cover, probably will be there only by Q4 in absence of the third wave. Loan against property some distance to cover, may take a little longer than even Q4. Home loans, we are mostly there -- should be there by Q1 next year. That's really the quarter in summary. Happy to take questions, if any. We'll try to cover everything I thought, but happy to answer any questions.

[Operator Instructions] Our first question is from the line of Aditya Jain from Citigroup.

A lot of good details there. On the merchant app, if you could give us a little bit of color, what will that achieve? So if we were to think of the outcomes as improvement in productivity, a higher customer acquisition rate or maybe directly generating revenue, would you put merchant app and what its objectives are going to be? And especially given the payment gateway license that you've applied for and received, where does the merchant app fit in?

So as Rajeev explained -- this is Anup here. As Rajeev explained, merchant app essentially a starting point is we have this REMI business, which we are transforming to the payment business. So in our Phase 1, merchant app is essentially the categories under REMI, which we do -- will come under that. What it does to us, the merchant app is the complete onboarding to the payments to settlements to life cycle management of the merchant. So the starting point is fully digital onboarding. And as we bring this in, since we spoke about a 4-stack payment in our payments journey, the merchant app will enable and along with the merchant app what are coming in is the consumers, is the 4-stack payment, which is the PPI, UPI, EMI card, and credit card, supported by reward under the underlying mode. So that's what we had explained last time. So this is essentially the app which merchant will use, the ecosystem of ours. And currently, we have 119,000 merchants. Of that, REMI is about more than half of it. But what we are also expanding when we said P2P and P2M, because we are bringing the QR as the payment mode, which is the Bajaj payer, merchant app will enable the merchant to onboard instantly and digitally. And as we bring the journey on [indiscernible] this will play out in terms of productivity and coverage.

I'll just add to what Anup said, so that's the P2M part, Phase 1, we go live with P2M. Sometime by May or so, we go live with P2P because at a fundamental level, we have significantly high number of boots on the ground. We are sitting in retail spaces. We intend to use those boots on the ground to significantly expand retail, P2P payments ecosystem. So we start with going after our merchant ecosystem, which has, let's say, $80 million to $100 million of annual commerce, that's 1 part, and then Phase 2, go to P2P as well. So goal would be full fledged payments. And that's really what merchant app in 2 phases would cover. The third phase, parallelly just to complete the point, Aditya, is the full fledged acquiring business, because this is going live with QR. QR will be followed by the POS and the payment gateway business. So that is really how this will play out, and that's a strategic call we have taken that will play all 3.

On the POS transformation, so just to understand the journey. So the personal loan and credit card business is being cross sold when a customer is at the store? Is that right understanding?

Yes. It's being stimulated at the point of sale. So you walk into the store. We have 30 million customers that we want to do business with. You are one of the customers who's fundamentally existing customer, who's preapproved, gets stimulated based on our stimulation models and risk models for a PL or a credit card that we have pre-stamped. Says yes. Using the CDP platform, we route the call in 30 minutes. We give him 30 minutes in the store and reach out to him. The sort of -- so in a way, it's a huge optimization. It's a huge expansion of the pool because earlier, look, 45% of our customer franchise is DNC. This is embedded into the journey of the customer, addresses reachout problems. And customer chooses, whether he wants the product or not. But we do think this will significantly expand as we move. Anup wanted to make a point.

As the 3-in-1 comes in because he is at the point of store, it's the moment the trigger comes in. Even in the 3-in-1 app, he can consume the journey and go all the way until the final stage. So as of now, it is through the CDP and the real-time call back.

Yes, that's an important point Anup is making, and I made that point -- I made the point earlier that the journey will become a lot more seamless as the upgrade comes, should lead to significantly high velocity in the process.

[Operator Instructions] The next question is from the line of Abhishek Murarka from HSBC.

Thanks for the extremely detailed presentation as usual. So a couple of questions. One on OpEx. I know you mentioned that your collection costs have been higher this quarter. But one, roughly, how much of the OpEx would have been driven by this jump in collection costs? And two, just an extension of that, looking at the fact that your Stage 2, 3 is slightly higher than normal, and some of your buckets are also a little away from the normalized level, do you think collection costs will remain high for the next few quarters and therefore, that eventually hits your 34% exit target?

Yes. So Abhishek, it's a fair question.

Yes, it's a fair question.

Yes. Abhishek, to your point on collection costs or debt management cost that we talked about, the number has increased from INR 280 crores in the previous quarter to INR 520 crores in the current quarter. And it does have linkages to bounces going up as we call out in Q1. The bounces were up 10% versus where they were in the quarter 4, point number one. Point number 2 is as you called out very correctly, the Stage 2 and Phase 3 are at elevated levels versus where they were earlier in pre-COVID period. So that is the second reason because until such time that we see the Stage 2, Stage 3 go back to 8,000 kind of number, which Rajeev called out and we are estimating that by end of quarter 4. We should be there. The debt management costs may remain elevated. However, I have reason to believe that the cost has peaked out. You will see it sliding down in quarter 3. And by quarter 4 end, you should see it normalizing.

Okay. So INR 520 crores should be a peak and from there, it will dive back to [indiscernible].

Definitely, the peak. We'll see the number go down only from there.

Another important information, Abhishek...

To simplify, Abhishek, sorry, sorry. To simplify the conversation, the total number between Stage 2, stage 3 is down INR 2,500 crores. You look at it another way. So the exit run rate is [indiscernible] by 25%. So that is one part of the conversation, and the buckets will also ease, so that is just intuitively, I'm making the point.

The other piece, I think, that we've been talking about ever since the pandemic started, and I think the company started making higher provisionings and write-offs, et cetera. All of us are estimating hefty write-off recoveries in times to come. The number has moved. In fact, if you look at in the quarter when the number was INR 105 crores of bad debt recovery, in the current quarter, the number was INR 213 crores of bad debt recovery. Even this recovery creates cost for the company. So while it is giving P&L benefit that the amounts written off in the last year are getting collected and going in the income line, there is a corresponding cost that is also sitting out there.

Okay. Perfect. And secondly, I was just looking at the stand-alone fees. I think INR 700 crores was the gross for the quarter. If you could give some granularity there or some breakup between the distribution fee commissions, et cetera, that were there.

Yes. So Abhishek, we have discussed this in past as well. I think the fees are across various kinds of business that we do. It includes the processing fees -- not the processing fees, but the value add services that we offer to the customer. It does include the EMI card that we offer the customers as a proposition. It does have the distribution fee revenue pool that gets disclosed separately in the annual report as well. And it also has the bounce charges that is elevated because of the higher bounces that we have seen in the past as well as in the recent quarters as well.

[Operator Instructions] The next question is from the line of Dhaval Gada from DSP.

I had 2 questions. One was related to the new digital EMI card customer addition that we did during the quarter 3 like 72,000. Just wanted to get some perspective from which platform this was driven. And overall, the underlying question is to understand what will be required to accelerate the current customer acquisition journey from the 7, 8 million per annum guidance that we have. So that's the first question. The second question is on EMI stores. So I think about 4% of our loan booking in 2Q happened via EMI store. So just -- I mean on a normalized basis, sometime next year, what should be the normal loan origination from the EMI store? And how does that sort of impact profitability? If you could give some color around that. And last, just a clarification. On the REMI business, in the earlier comments, so I just wanted to understand, does the asset quality problem that we had in the COVID period, does that get addressed in the new architecture? If you could just clarify that part. Yes, those are the 2.

So look, digital EMI card, we've been at it 5 years ago. We launched during Diwali, 3 clicks and a Happy Diwali. It was the only time we did half page Times of India had realizing very little that it's some way off. We've been added on wanting to originate clients other than at point of sale. I think rapidly digitizing ecosystem at a country level -- and we didn't let it go. We didn't -- we stayed at it on one hand, and the country continued to digitize on this on the other. Infrastructure like CKYC, e-mandate, IMPS have made it possible -- PAN integrations have made it possible for you to sit at home and subscribe to a -- or take a preapproved loan. I think -- so that's one part. Having gained confidence, we now originated like the marketing function uses it as a product and does search engine marketing on this and through search engine optimization, we originate cards. And there is a product management team, which runs this. So that's one. Its run rate will accelerate. The 372,000 new cards probably could look like 0.5 million in the current quarter. It's very much possible. There's clearly a latent need for it. As I said, 60-day active, it adds to the point-of-sale franchise in terms of customer walking in and 90-day active at 30%. And sorry, going [indiscernible] and REMI -- so that's what will take to accelerate in a way that we just need to be added. We just went live with Flipkart. This is a port infrastructure that we integrated with Flipkart as well. We are now -- this is the first month, we just went live, will probably do 10,000, 12,000 digital EMI cards on the Flipkart platform as well. So we will see this probably grow as we -- and it's completely digital. Second, REMI business, wallet loans and REMI business are 2 businesses that we -- wallet loans we shut. And REMI business, we significantly restructured because one was a credit issue, another was a margin issue. The business lost 2, 3 years of earnings was the point that I made in both these. So that seemed like we had to restructure the business. The business side of it has got restructured. The average ticket size used to be 9,500, now it's at 15,000. The categories have changed. We moved to categories like tires, low-speed bikes, coaching classes, dentistry services and so on and so forth, which gives us a much better business P&L. Lower the ticket size, as we realized larger the problem so that -- it should grow. As the merchant app goes live, this business should probably accelerate sometime in the next year. But we will work only with an average ticket size of 14,000 to 15,000. We're not going to dilute on that. Were these the 2 questions you had? Or did you have another? Sorry?

On the EMI store, so the question was...

Yes. Sorry, sorry, yes. EMI store, look, it's a strategic call we've taken. Consumer is going online. We can't remain offline. Let's just go to 30,000 feet. We are investing in building that asset. Its contribution, as we said, was 250,000 accounts. It's a -- so we will keep growing this. Probably, it's possible next time, same year, it's originating 0.5 million accounts. It will originate 0.5 million accounts. As the asset gets warmed up, there's still a whole host of deliveries that are going live every month. We're still some distance away even in our assessment from making the asset as good as it can be. So the continued significant tech investments we're making in making the assets better. So it will grow, customer chooses, whether he wants to walk at the point of sale or he chooses to -- we are stimulating him increasingly on EMI. Our earlier engagement with a customer used to be a dumb SMS or let's say, it went to a bot. Now it goes to EMI store. It just logically lifts the engagement rate of the client from being able to purchase, so it will continue to move up and it will become a reasonably strong asset for us to pursue as we grow the business. And it lifts the merchant ecosystem as well, because we help bring him an asset against the large e-commerce guy.

[Operator Instructions] Our next question is from the line of Piran Engineer from CLSA.

Congrats on the quarter. I just had a couple of questions, sir, firstly, on Slide 15, and I've been tracking the company for a while. Our ROA targets earlier used to be 3%, 3.5% historically. This time, we're mentioning about 4%, 4.5%. Just wanted to know what really has changed that gives us more confidence for 100 bps higher ROA. My other question is regarding the eKYC license now that NBFCs can apply. What is the real benefit apart from turnaround time? And in BNPL, are we looking to move into other categories like tech or travel, like some of the fintech BNPL players have done?

This 16 panel moved up mainly as a result of tax rate cut. I must just -- we exited Q3 or if you take the whole 3 quarters of FY '19, that was, right? '19, '20? So mainly moved up as a result of tax rate.

We should have done it earlier. I think it was a miss. We corrected it in the current quarter. As the tax rate got revised from 33%, 34% to 36%, we should have corrected it. It was a miss from our side.

So nothing. It's just a mathematical point. On eKYC, we have applied to Reserve Bank of India. I think it's a welcome development, and it will be really beneficial. It helps the customer. I think that's first point, at the point of sale through biometric. Helps us that we don't have to redact images and so on and so forth. So improves compliance. I think it will help financial inclusion, I would say. Clearly, in smaller -- we are in 3,300 cities, helps inclusion in a huge way, I would say. So I think these are 3 benefits that will clearly emerge. On -- and we are waiting for -- hoping that we can get approval, and we can meet all these 3 objectives. BNPL, I don't want to use the word BNPL since you used it. That's what I tell investors that we were doing it for a long, long time. We used to call it REMI. I did not want to be dramatic and make that point. Categories, whatever our consumer is looking at, that's really how we are focused on. He was looking for tires. We got to tire ecosystem from Bridgestone to Michelin, to we're working with all to CEAT. He was looking for coaching classes. We got him that. He was looking for dentistry, we got that. He was looking for smaller appliances, we got that. So we don't have a fixed -- sorry?

Bike. Speek bike.

He was looking for -- the smaller cities were looking for low speed bikes, we are now doing 3,000 to 4,000 low speed bikes every month. So it's consumer focused. We build out the distribution to help him get this at -- on no cost for a period of -- the only thing that you should know, the tenures are shorter, it's only normally 4 to 6 months. So we will keep growing categories. But I just reiterate, ticket size has to be 14,000 to 15,000, that's really where we think the economics make sense.

The next question is from the line of Umang Shah from Kotak Mutual Fund.

Congratulations to the team for a good quarter. Two questions from my end. One, is there any change in terms of product pricing strategy? Because if I look at our interest fees on a sequential basis despite AUM mix remaining largely unchanged and despite a INR 300-odd crores of interest income reversal, there is a fairly good jump in interest income. So is there anything that I'm missing here?

There is no significant change in the pricing. I think what is being missed out is that the interest income also includes the revenue that gets generated because of surplus cash that we are managing. So that's an important metric to look at. It is not sitting in the loan book, it's sitting in investment book. I think once you club together, you will see the numbers matching.

If at all, there's anything else, there's pressure on that.

Yes.

So the holding margin profile, we have said, Umang, but there's pressure clearly across lines of businesses.

In fact, the gross yield on the mortgage side has gone down by almost 80 basis points or 90 basis points in the last 1 year.

No, across lines of businesses, there's pressure because there is clear chase for growth in retail assets. We are clear in most of the lines of businesses. If we take a lifetime view on profitability of the business, we had rather let go some business than to chase assets. So we will continue to sharpen our pencil rather than dilute margin.

Sure. And my second question is again on OpEx, so for the current quarter...

Sandeep has a point that IPO financing also had some role to play.

So in the last quarter, I think, as Rajeev was explaining, the cost of fund of 6.77 is not a right reflection of the effective cost of funds that we have, which should be read as 7%. The corresponding revenue of that is sitting in interest income without a corresponding balance sheet at the quarter end. So we had 3,000 in the last quarter end, but we have nothing in the current quarter in quarter end. But during the quarter, we have done a lot of financing on the IT side as well.

Good point.

Yes. I think that's a good point.

And my second question is again on OpEx. So I appreciate the color given on the current quarter OpEx. But just wanted to understand that probably over next 2 to 3 quarters by the time we launch a completely go live on our business transformation, will there be any lumpy expense maybe on advertising, marketing or any new planned hiring that you have, which can push up the cost at least in the near term before we normalize to anywhere between 30%, 32% cost-to-income run rate?

Answer is no. We will continue to probably still add staffing. It may not be 2,000 run rate, it may be -- we just hired a large batch of engineers from various large institutions, hired 300-odd engineers at this point in time to join between Jan and June, but no lumpiness. We've already taken into account large infrastructure spends that we're actually doing, which will get delivered, and it's baked in. We will just wait for normalization, Umang, of the NII to play. That's it.

[Operator Instructions] The next question is from the line of Vikram Subramanian from Spark Capital.

I had a couple of questions. First, on the EMI card. So you had mentioned about a 60-day activation rate and a 90-day activation rate, I think 22% to 23% and so on. Could you please explain what the definition of activation rates and what exactly it means for you?

Yes, yes activation is when you come and take a loan.

Sorry, I didn't get that.

Activation is defined as you come -- so out of 372,000 on a 60-day active basis, 22% would come and take a loan.

Okay. And how do you see that?

[indiscernible] loan, let's say, in a 60-day active period would happen and 90-day active would be 100,000.

Okay. So how do you see that going forward? Is there -- I mean is this the number that we are targeting? Is this too low?

So 2, 3 things. Normally, the B2B business happens in a seasonal manner. There are 2 big seasons, a Q3 and a Q2. We are yet to see because we started to build momentum only from this January onwards, and we have picked pace in the last 4, 5 months as the product went live. So we are waiting to see how the festival season plays out, whether the activation rates further jump up. So -- but on the other hand, I would just say because it's a paid product, customers bought it. The activation rate intuitively and by empirical evidence ought to be higher even than this. So I think now I won't put a number at it. We'll continue to share this number. We, of course, the product management group tracks it, but we'll share this number as you see how it moves.

Got it. And just to clarify, is this activation rate uniform across the POS originated cards and online originated cards?

No. In the POS -- we don't originate cards at POS. He takes a loan and then we offer him a card. It works reverse. Here, in fact, that's really the big change, right, at a design level. We are first creating a card and then a -- or a loan account, and then a loan. There, we create a loan account, and then we give a card. So that's the big change at a design level. 90% of the customers, they take a card, because they see the benefit of next time onwards, next time around, he doesn't have to do anything. He is fully KYC'd. So friction reduces dramatically. So it's 90% there. These are 2 different, I would say, pillars of originating customers is the way you should look at it.

[Operator Instructions] The next question is from the line of Sanket Chheda from B&K.

My question was answered please.

Next question is from the line of Shubhranshu Mishra from Systematix.

First off, I just wanted to thank you. I'm a flexiloan customer, and it's one of the most convenient personal loans being offered by any financial services in this country. That's the first thing I want to mention. A couple of questions here. First, we have a legacy offer book, which is still just 1 OEM. I don't understand the reason why it shouldn't be limited to 1 OEM. Why it has not been diversified? It should be [indiscernible] lesser demand for diverse application because that's what we have been doing for the last decade. [indiscernible]

Shubhranshu, we're unable to hear you clearly. You said 1 OEM with a [indiscernible]

You mean 2-wheeler, Shubhranshu?

2-wheeler and the 3-wheeler, but we are only limited to Bajaj. That's the first question. The second question is on customer relationships, that is, how do you define customer relationship value? What is that and what are you projecting in terms of customer life cycle value? That's the second question, and the third question was how many current line customers are there? And how many of them have 1 -- more than 1 outstanding loan ex of auto loans?

Yes. So there are 2, 3 questions. Let me -- you meant a 2-wheeler 3-wheeler, right? So 2-wheeler, 3-wheeler, I mean the business has gone through a reasonable stress period. And we have seen that concentration risk does have a role to play in this. So there are -- we are thinking that whether there ought to be more openness in terms of us evaluating other 2-wheeler OEs. So that's 1 part of the conversation. So we'll share some update in -- by January, February on what our stand is on whether we want to diversify. We will never do 3-wheelers. We are quite clear. We do that mainly with Bajaj Auto, and we will continue to do that only with them. On 2-wheeler, we do have a thought process that whether there's an opportunity to be more diversified to reduce, in events like this, pressure. So that's 1 part. Second, customer relationship value we used to publish until 2 years ago, the whole products per customer for many years, we've published at a design level that how many products the customer takes. Our PPM models, we don't have fortunately any product which should produce a loss. So to that extent, any product per customer eventually adds to a customer relationship value. We don't have any loss leaders other than -- we may have higher margin and lower margin businesses, but we don't have any loss leaders. So more product customer eventually takes, more is the relationship value grows to be at a fundamental level. Until 2 years ago, we used to publish that in the retail business, in the SME business and these are -- that's really what our business is, what our products per customer is. After publishing it for many years, we came to a conclusion, you guys were not interested in it, so we dropped it off. We first moved it to annexure and then we moved it out. Anup is looking at me. He's been with us for 4 years. He is wondering -- we used to, Anup, publish it. So I think that's -- but doing more with existing customers because on a more serious note, leads to lower loss, lower risk and more stickiness is the heart of the company. So we'll just keep doing more and more with those customers. 68% of the loans booked in the current quarter or 6.3 million came from existing customers. So customer satisfaction, if anybody was to say, I mean how many companies can talk about 68% of the customers coming from -- of the loans in a quarter coming from existing customers?

What is the dollar value and what are we saving here in terms of dollar?

Yes, dollar value, fundamentally, 90% of the customers would essentially be -- actually it will -- exactly 90% would be point of sale. 10% would be personal loans and mortgage loans and so on and so forth. On banking, to the question that how many are active today, we have, known 2-wheeler, 3-wheeler, the active banking is 19 million, sorry. 19 million?

17.5 million.

17.5 million.

17.5 million, sorry. So total banking is 19 million. Active banking at this point of time is 17.5 million known 2-wheeler, 3-wheeler. Total banking is 19 million. So that's really what the non-2-wheeler banking is. You could call that active, right, because we are banking on a monthly basis with client.

We have the next question from the line of Kuntal Shah from Oaklane Capital.

I have 2 questions. Can you give some flavor on the customer engagement on our new apps, including merchant apps in terms of retention, engagement, drop-offs, churn, all the metrics, which you must be tracking to see the users and the KPIs you track? Secondly, once our capital adequacy ratio hits around 18%, what would be the steady-state OpEx we can achieve at that scale because today, we are overcapitalized and our AUM is not getting reflected given the size of our manpower. But at scale, what do you think would be the OpEx number? Would we fall within 30% range at that level of capital adequacy?

That has not changed, Kuntal. Our stance is clearly the consumer app ecosystem should lead to significantly better customer engagement, customer take-up rate. That's really the purpose because we don't have a franchise problem. We have an engagement problem. And so the long term just because we've had a quarterly blip of number going from -- it's been going, right? 27 to 38 and then came to 33, 34. We are in transient times. I won't look at the number. If it was 27, I won't look at it. We talked about it. We discussed. If it's 38, I wouldn't look at it. The normalized number would be 33, 34, which is really -- it was pre-COVID. We made significant changes to our processes to lead to significant cost optimization across. The medium-term outlook or next year outlook does not change. We do think we'll get to 30%, 31% into as the normalized balance sheet growth happens. So that number is not changing. We are in transient times. We'll remain there for 2 more quarters and go back to normalcy. On app metrics, we do follow it -- so 2 quarters from now, we'll start to share a panel on what the metrics look like. So we would have published it even now. We've chosen not to. As I said, in the -- we've opened it just to -- we've opened sprint 1 to only 10% of the customers. There is a HEART framework. That HEART framework covers -- HEART is an acronym. So at a design level, it's happiness, engagement, app upgrade retention -- sorry, activation and retention and transactions. That's the HEART metric -- that's the HEART framework. We'll start to publish this in the next 2 quarters at a...

How is this HEART metric different from NPS score?

Kurush can respond.

Kuntal, Kurush here. Kuntal, NPS is a very specific one metric, which is the customer's promotion, right, where he's going to refer you to a customer. HEART is a much more holistic approach, wherein, HEART, you look at -- when we talk of HEART from a happiness perspective, and this is something that we have leverage and benchmarks from what Google uses. So happiness would look at reviews, your ratings, what is the mix of the ratings go. That's just on the happiness side. Engagement looks at your traffic, your MAU, DAU, your app launches for users and so on. And then as we get into activation and all, that's more to do with how many are retaining on your app. Retention, the name is explanatory. And then transactions is you defined a set of transactions or properties on the app that you want customers to use and what is the usage on, those specific properties within the app. So as Rajeev called out, we will start sharing that.

Give us 2 quarters probably as we stabilize, as we launch, as we stabilize these are the metrics that we're internally monitoring already, whether in the current app or on what has gone live at a 5% -- 10% level. We are monitoring them. Actually, that is what gives us the confidence to increase. So sprint 1 to sprint 2, as Kurush said, the happiness was, crash rate was high, we would not expand. We would not in this coverage. Cash rate is today at 0.43 so -- 0.3. So cash rate is at 0.3 and gives us confidence to expand the score from 10 to 25 to 40 to 200. There -- was that only your question, Kuntal, or you had another question?

Just one question. Would we be publishing GMV and all the other metrics given that...

GMV, I mean the loans that revoked as GMV, you guys want it, we will publish it. We stopped publishing disbursement data, right? That's really what is the meaning of GMV from our stands. You guys want it, we'll publish it. That's okay. I mean it's not a -- but the disbursement data would never correlate. But just -- so let's say, what we're doing 58 -- we had a run rate pre-COVID of 54,000, 55,000 crores of annual loan volumes. We were moving just in just B2B, just B2B. Where we're moving, answer is yes. And can we share that data? We can share. But it will become relevant. On a more serious note, it will become relevant as the P2P goes live to -- as that club with the P2P and P2M to the point Anup made as the payments, online PG goes live, all that clubbed together is how we are looking at GMV. So GMV will be relevant conversation as we accelerate the payments frame between P2P, P2M, PG, POS and our loan volumes. That's really how we see the payments start to be. These are the 5-stack frames, and we do foresee this number to be reasonably substantial in a 3-year horizon. Anuj, can we call it a day?

Thank you. Yes. Ladies and gentlemen, due to time constraint, that would be our last question for today. I now hand the conference over to Mr. Anuj Singla for closing comments. Thank you, and over to you, Anuj.

Thank you, Aman. Rajeev, any closing comments from you?

No. I wish you all a very happy Diwali and may the -- go and shop. The country needs it, and we are there to support you. Thank you, all. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of Bajaj Finance and Bank of America Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.