Can Fin Homes Limited (511196) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Can Fin Homes' Q3 FY '24 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nidhesh Jain from Investec Capital Services. Thank you, and over to you, sir.

Thank you, Yashashree. Good afternoon, everyone. Welcome to Q3 FY '24 Earnings Conference Call for Can Fin Homes Limited to discuss the financial performance of Can Fin Homes. And to address your queries, we have with us Mr. Suresh Iyer, MD and CEO, Mr. Ajay Kumar Singh, DMD; Mr. Apurav Agarwal, CFO; Mr. B.M. Sudhakar, Business Head; and Mr. Prashanth Joishy of Can Fin Homes Limited. I would now like to hand over the call to Mr. Suresh Iyer for his opening comments. Over to you, sir.

Yes. Thank you, Nidhesh, and good afternoon to all of you, and thank you for taking the time to join the investor call. To start with, I'll just give a brief couple of points or a few points on this quarter performance, and then we can go for question-answers. As you all know, that the third quarter has been in terms of the business parameters of disbursement and recovery, there has been a little bit of a step back. But talking in that sense, that was not kind of guided or which was not expected. In terms of the disbursement, as you all know, in the last quarter, we had indicated that we have some process changes and some tightening of processes that we have initiated, namely the centralization of disbursement and centralization of the reconciliation besides a couple of other things. Because of this, the disbursement, particularly in the month of October has been a little subdued and that has hit us in terms of our disbursement. But in December, we are back to our old numbers of INR 700 crores in terms of our run rate per month disbursement. So in the Q4, we expect that with the last quarter push also, we should be around INR 2,500 crores to little above that also which should get us in the range of about 13% to 14% kind of AUM growth by the end of the year. In terms of recovery performance, we had again guided that we have about INR 670 crores of restructured book of which about INR 450 crores had come out by the end of June and the consequent NPA up till September was already reported of around INR 68 crores last quarter. And we had indicated that the balance portfolio also would be coming out of our restructuring in this quarter. And as a result, there's some impact, which is to the tune of about INR 30 crores would be there. We had indicated that we are also carrying the management overlay of about INR 34 crores. So additional provisioning in that regard may not be required per se and we should be -- that should be able to meet us. And the results have also been on the same lines that we have not crossed INR 30 crores in terms of additional provisioning. However, as a prudent measure, we have not gone for reversal of the management overlay, and we have continued with the same. As a result, this has -- the provisioning number in the third quarter has been high. But in terms of the total NPA and the restructured book, this is coming to a little below 15% of the total book, which is around INR 93 crores which is -- INR 98 crores, sorry, which is in line with the 15% guidance in terms of the total restructured book of INR 670 crores. In terms of recovery going forward, the entire pain from the restructured book is almost now experienced by us. So going forward, we don't expect further pain in terms of the restructured book. In terms of the nonrestructured book, our NPAs are still within -- are well within our norms of this thing, and it is around 0.62%, which is not very different from the 0.55%, and this is more seasonal. And by March, that also we expect to come down. So in Q4, going forward, we expect some INR 20 crores to INR 30 crores reduction in the absolute recovery figure, that is the gross NPA number, which should, therefore, help us reach the number of about 0.75% to 0.80% gross NPA numbers by the end of the year. Third point as regards the yield and cost, we had a ratings upgrade from ICRA for our borrowing program. And now we are rated AAA. Earlier, we were AA+. So that has helped us in terms of some borrowing. And going forward also, we expect that will help us a little bit in our borrowing, particularly our NCD. And in this current quarter, we had therefore not a very high increase in our cost of borrowing. And as compared to that, the increase in terms of the yield on the loan book, thanks to the INR 6,700 crores of opening book, where one rate reset was yet to be passed on. The yield has improved. And therefore, the spread as well as the NIMs have also improved in this current quarter. Going forward, at the end of the fourth quarter, we expect that we should be able to sustain a spread of about 2.6% and around 3.7% to 3.8%. So that's the kind of line because in terms of the costs, we don't expect much of an increase because some of it was aided by our ratings upgrade. And second is that we are also hopeful that we might be able to get NHB refinance, which is our cheapest source of borrowing. In terms of the strategy or the directional movement that we had indicated, we're looking at going forward. A couple of points on that. One is that the DSA sourcing, which we had -- which we are upwards of 80% close to 85% in Q1, we had guided that we want to come -- bring it down. And in the end of about 2 to 3 years, we would like to bring it to a 60-40 breakup. That in the end of the current quarter has come to below 80%. It's about 79%. So from 85% to 82% in the third quarter, we have brought it down to 79%. The second, in terms of expansion, branch expansion, we have opened 5 offices during this quarter. And all the 5 offices are in the north and western part of the country, which is also in line with the indication we had given that we would like to strengthen our operations and thereby bring down our total dependence on the southern geographies. Consequent to this, our disbursement in our southern geographies, the 5 states, has come down from 74% to 72% in the third quarter. So that also in terms of the direction is as indicated earlier. And the last point is the ticket size where also we have seen an improvement in our ticket size of loans in the more than INR 20 lakhs -- INR 20 lakhs to INR 30 lakhs and more than INR 30 lakhs segments, which is also there as one of the slides in our presentation. So these are some of the critical points in terms of our performance for the third quarter. And as indicated going forward, we expect to have a disbursement upwards of INR 2,500 crores in Q4 as we have already reached a INR 700 crore run rate per month. So that would help us have an AUM growth of 13% to 14%. And NPA -- as I once again summarizing our NPA, we expect to be down to 0.75% to 0.80% at the end of the fourth quarter. And spread and NIM is at around 2.6%, 3.7%, 3.8%. That's the kind of thing. The last point in terms of cost-to-income ratio, we had guided that our cost-to-income ratio could go up to around 18% in the year because of our investment in our IT transformation project. But the IT transformation project because of the number of bidders and some of the queries that has come has slightly been delayed. So as a result, some of the expenses that we had anticipated may not happen in the current year. So the cost-to-income ratio might end around 16%, not the original 18% or 18.5%. However, going forward, for the next year, we continue the guidance that it will be around 18%, 18.5% as the entire cost will happen in the IT transformation project. So these are some of the key points in terms of our performance and what we expect going forward in the Q4. I thank you once again for joining us in this earnings call, and we can open -- we will be open for questions. Thank you.

[Operator Instructions] We have our first question from Haresh Kapoor from Alchemy Capital.

Am I audible?

Yes. We can hear you. Please go ahead.

Sir, just want to get a perspective around next year, you did mention the ALM and the spread BT risk and this year at 13%, 14% is the growth. But when you're kind of looking out to next year, let's say, rate cuts are kind of expected. You have a reset, which is done on a yearly basis, for the kind of resetting lower, there's a risk of BT out next year, right? So how do you optimize between margins and growth and yearly reset that you have and also keeping BT rate possibility in mind if you're kind of looking at a yearly reset. So how are you kind of approaching this?

Thank you, Haresh. Yes. So in terms of this reset clause, we had, again, one of the points raised in a couple of quarters back as well. And we had indicated that our current reset will all end in the month of December. So from January, we will look at the reset change in our policy as regards reset. So in line with that, in the last month, we have got our Board approval for change in our policy to reset it to quarterly reset. So this will help us in our ALM position as well as in terms of managing our BT outs because you will be able to pass on going forward also, the rates to the customers when the rates start going down in the market. So that is one point. And so how it will work is that in the -- for the new customers, all of them effective 1st of January are on a quarterly reset basis. And for all existing customers, we have given an option to reset to a quarterly reset with a -- we've already informed all our customers and those who opt for it will also move to a quarterly reset basis. And as you rightly said, if going forward, the rates come down, I'm sure customers will be more than happy to shift to a quarterly reset basis. So that, I guess, answers your question.

And sir, the second thing I just want to understand on the disbursement side, right? You did mention some ground central reconciliation and disbursement. But when we look at your business today, 80% largely is coming from DSAs, which is obviously coming to your team and you're kind of filtering out the cases. But then that should be easier to kind of vet in, in some of the cases that you want disburse and centrally disburse. So where is the gap? And where are you kind of finding work to be done so that is more smoother ahead?

No. I mean, we are saying what is the process issue, right? So it was just a shift in the -- the branches earlier were having complete power to -- or authority to disburse the loans. The checks were also being prepared at the branches and dual signatories were there at the branches. It is just a process change where we have now added another layer at the head office, where the disbursements which are scheduled will be verified and documentation will be once again checked and before instructions are given to the banks to issue the DDs, so all disbursements up to 2:00 which are scheduled in the system, will get -- the DDs will be generated and delivered at the branches on the same day by 5:00, 5:30. And for cases which are received after 2:00, the DDs will be received in the next day. So I mean, if that is what you are trying to understand, that's the process. So now it's almost streamlined and all the branches are already into that system. There is no issue in that.

Sure, sir. And just last thing is considering where the reset that you've had on a quarterly basis now, do you believe you -- in the near term, is there any implications if the customers come and reset they are revoked in any way? And do you believe you will be able to hold on to your 2.6% spread and margins even for next year? Or do you believe that you will reset lower for next year? Because for next year, you also will see elevated OpEx. So in terms of delivery and holding on to this metrics but also the reset that you're talking about, do you believe the same metrics you'll be able to deliver for next year or we should believe that will be a little lower and that's how we should think about it?

No. So in terms of the reset, obviously, it will be passed on as we experience a reduction in our cost of borrowing. And because we have our rates, our card rates, which are there for new customers. And so obviously, that will be aligned only as and when we experience our benefit in our cost of borrowing and the new customers who come for a reset will also effectively get the card rate in that line only. So therefore, it will not be a kind of an effect where we'll have to pass on to the customer before we actually experience it on our borrowing side. So in that sense, the spread will be kind of maintained. However, as in one of the earlier points we had mentioned that we are looking at a slight increase in our ticket size and moving up in terms of the ticket size ladder. So that may have a little bit of impact in terms of the competitive pricing that we will have to offer to the new customers in the higher ticket size segment. So that's why while we are having 2.66% spread today, we said by 2.6% by the end of the year and maybe 2.5% plus in a year or so later in FY '26 kind of.

The next question is from the line of Shubhranshu Mishra from PhillipCapital.

Wish you a very happy new year. Two or three questions. The first one is, why have we seen a lower OpEx in this particular quarter versus the last quarter? And what -- you did guide for the cost to income, but then what would be the average quarterly OpEx that we can expect in FY '25, that's on the OpEx. Second would be on the disbursements, what is the number of loans that we do on a monthly basis? The third part is you did mention about builder connects and getting the higher ticket sizes. But then these would be more affluent customers, and there is a possibility that it can lead to faster rundown of the book because they would be more affluent, and they would have higher prepayment capacity. So these are my three questions.

Thanks, Shubhranshu and Happy New Year to you and to everyone also. See, in terms of the OpEx, to your first question. See, in the second quarter, we had a couple of one-off, onetime cost that we had mainly in terms of the incentive to the staff and annual incentives that we pay out in the second quarter. That was one of the things. And some of the -- yes, and some of the one-off costs, which we had for the process changes, this payment that we had to make. So that is why we had roughly about INR 52 crores or something in the second quarter, which has come down to around INR 49 crores in this quarter. So that's the only reason why compared to Q2, it has come down. Going forward, we can expect on a quarterly basis, it should be somewhere around INR 52 crores to INR 53 crores in the next year would be the OpEx in absolute value, okay? Second, in terms of number of customers, new customers, which we add in every month, it's roughly in the range of about 4,000 to 4,200. That would be the range of new customers we add every month. And the third is, as we move up the ticket size ladder whether there is a profile chain in the customers, resulting in a higher prepayments. Well, it is possible because as you rightly pointed out, in the higher ticket size segment, there's a propensity to prepay or have shorter tenures or higher incomes, which can be prepaid is always there. But it's something where it also -- these are also customers who keep on coming for other add-on loans and we have a constant requirement of funds for various purposes. So these kind of customers can also kind of be offered additional loans and so it can be always managed in that manner. So it may not affect the prepayment rate in a big way.

Understood. And if I can just squeeze in one last question. If we have to split the OpEx in terms of cost of acquisition, cost of collections and business as usual, what would be the ballpark percentage?

I'll just give you in two minutes. Maybe we can move to the next question, I'll come back and answer this. If you wanted the break up into cost of acquisition, recovery and...

Cost of collections and business as usual OpEx.

I guess we don't have a separate cost monitoring in terms of the recovery cost because it's all part of the regular this thing. But acquisition cost or what we pay out to the DSAs, that certainly I'll be able to share. If we can probably move to the next question, I'll come back on this.

And the next question is from the line of Anusha Raheja from Dalal & Broacha.

Am I audible?

Yes, a little faint though.

Is it better now?

Yes, please go ahead.

Sir, I just want to understand the disbursement number that have come for this quarter. If you can just provide us the break out how much growth has come in, in less than INR 25 lakh buckets and more than INR 25 lakh average ticket size?

I think we have a slide in our presentation on this aspect. I will just tell you the slide number. We have not broken up INR 25 lakhs or INR 25 lakhs. I think it's INR 10 lakhs, INR 20 lakhs, INR 30 lakhs and INR 30-plus lakhs. That is the breakup we have given. I'll just give you the slide number. So it's already given how much of business has come from this particular segment. For the year, it is in Slide #23.

Okay.

The disbursement in the up to INR 10 lakh is around 13% -- sorry, last year, which has come down to 12.87%. 25% is in the INR 10 to INR 20 lakh segment. INR 20 lakh to INR 30 lakh is around 26% and more than INR 30 lakhs is around 36% for current year.

Okay. And in terms of your -- if I look at your AUM growth and the loan book growth relative to the peers, if I would say I think the growth is slightly on a lower end. So how can we expect the number to be over the next 2 years' time? So I want to understand why is it at the lower end as compared to the peers? Is it because of the competition or how do you sense it?

No. See, first of all, in the beginning of the year, we had a -- we began well, and we had a good 18% growth. But in Q2, we had an unfortunate event, a fraud at Ambala branch, one of our branches. And because of that, we had some impact -- which has impacted our business because we had to undergo a lot of process changes, strengthening of the systems and all. So as a result, it is -- the growth has come down. But this year, whatever we have lost in terms of our business expectation or business disbursement that we were expecting, we would have to cover up a little bit in the coming year. . And going forward, roughly, we would like to have about 20-odd percent growth in the -- on a consistent basis. So a CAGR of 20% would be what we would look at because we would like to have a doubling of the book in about 4 years. So next year, we can expect -- like as I said, we are around INR 700 crore run rate in the current -- present scenario. So about INR 3,000 crore disbursement on a quarterly basis, on an average is what we would expect. So anywhere around close to INR 12,000 crores is what we would target in the next year.

Okay. And sir, on the margin side, you said that it will be close to around 3.6%, 3.7%. And if I just look at it a large part of the incremental growth is coming on the higher ticket size segment, where the competition intensity is high and plus the -- where other players are also there, banks as well. So how do you sense that this -- if I just look at it, there is also sequential decline in your portfolio yields. So how -- I mean, because of this factor, don't you think so the margins will remain under pressure for the next fiscal as well?

See, in the current quarter, where we've seen about 35% of the business coming in the INR 30 lakh-plus segment also, our yield on the books has been 9.91%. So if you look at it, that also gives us a spread of 2.6%. So incrementally, also, we would not be comfortable working or operating at a spread below 2.5%. So that's the kind of thing. So therefore, the spread being 2.5% and NIM was around 3.5% plus going forward also, we should be able to maintain that is what is our this thing. Because this quarter also, it was 9.91% for the third quarter alone -- standalone basis. And our cost of borrowing is around 7.35%. That's why I gives the 2.6% spread even on the incremental lending in the third quarter.

And last thing on the branch expansion side. So just to get a defocus from the southern region, I think 72% is coming -- loan book is coming from the southern states. So any strategy there to have a pan-India presence and having relatively more branch expansion in non-south geographies over a period of time?

Yes, definitely. In fact, we have already indicated that even in this quarter, the 5 branches that we opened have been in the North and in the Western region of the country. And going forward also, we will have a more tilt towards the north and the western region of the country, particularly, we have Gujarat and Maharashtra where we have a lesser penetration. And we have not got a presence much in Punjab, Haryana and all those cases. So these are the states where we look at -- we're looking at the expansion. And that definitely will help us slightly tilt the kind of sourcing towards more of the 60-40 is what -- which we are kind of targeting in the next 3 years kind of.

The next question is from the line of Dhaval from DSP.

I just had a couple of questions. First is on growth. I just wanted to probe a little bit more in terms of the exit for 3Q, what's the kind of run rate growth that you ended with, like Y-o-Y or in absolute terms? And this INR 3,000 crores a quarter, I mean, how do you get that confidence? I mean, if you could share a little bit of more detail around ability to generate this on an ongoing basis on a consistent basis. So that's the first question that I had.

Yes. So in terms of the disbursement, we have already given the breakup of the disbursement and run down during the quarter wise for the last 11 quarters. So that's one of the things that you will find in Slide #19. However, as I have already explained that this current quarter, we've had a bit of a dip in terms of disbursement. But what gives us the confidence that we'll be able to do INR 3,000 crores in a quarter in the next year is that one, we are already back to our INR 700 crore run rate in December. So that's already one of the things. So even if you extrapolate that in the -- with a little bit of push in the Q4, we should be INR 2,500 crores plus. And second thing is we are tying up with -- for our CRM and which is not mentioned actually in the presentation, but we are also tying up with a CRM and lead sourcing from digital channels, which will -- which we are working on in this current quarter. So that's one of the things which we are looking at good amount of growth coming or business coming from the digital channel as well, onboarding from the digital leads that we are getting. Plus these branches, which we are opening because we have already opened 3 in the second quarter, 5 in the third quarter, and we have another 7 -- 6 or 7 lined up in the last quarter. So some -- as these branches also stabilize, there will be some business coming from this also. Plus the third point, which is positive, is that the push for slightly higher ticket size business is reflecting in the numbers because right now in this current year, if you see the INR 20 lakh to 30 lakh segment has grown from 25% to 26%. And the INR 30-plus lakh has grown from 34% to close to 36%. So there is almost a 3% increase in the INR 20-plus lakh segment, which is what is also -- will also give us a little bit of push in terms of the business. So these are the 3 points which we have in mind and on which we are working right now. I hope that answers your question on the INR 3,000 crores.

Yes, it gives perspective. So just one point on the INR 700 crores that you did in December, what was the same number in December '22, like Y-o-Y, what kind of growth we were clocking in December?

Last year, of course, it was a push -- it was a different push and there was, of course, different thing. Last year, we had -- Q4 was INR 2,500 crores. So that was almost INR 800 crores per month was the kind of run rate last year. So we are back to the INR 700 crores already. And even if you are going back to the last year's number, as you said, it was -- last year was already INR 800 crores.

Understood. So okay. And sir, full normalization, in your view, starts from 1Q onwards? This close to INR 2,500 crores, INR 2,800 crores start of next year and then sort of move to INR 3,000 crores plus by 4Q of FY '25. So full normalization happens from 1Q next year or it could take some more time in your view?

No, it will definitely start happening because as I said, all the three points. One is in terms of the ticket size, we have already started seeing, these 15 branches will also start performing and some of them have already started the disbursement. And in terms of the third point, if we are -- this digital channels that we are doing, also will get implemented in this current quarter itself, so that also should get some results in the first quarter of next year. So we should definitely kind of be able to maintain INR 800-plus crores, INR 900 crores, INR 1,000 crores in the first quarter. And then average it out to around INR 3,000 crores every quarter in the next financial year.

Understood. And just one last thing on growth is this loss of growth that we saw in FY '24, do you see a potential sometime in FY '25 to make up with slightly higher year-on-year growth? I mean directionally, you started FY '24 with 18% -- 18% to 20% kind of CAGR in 3 to 4 years' time. Given that this year, we'll end up with probably 12%, 13% Y-o-Y, do you see a catch-up happening in FY '25? Or it can -- if it happens, it happens in FY '26, '27, just how do you think about...

In terms of the disbursement, definitely, there will be some catch-up happening in the next year because from a INR 9,000 crores, close to INR 8,700 crores, INR 9,000 crores that we'll end this year, INR 12,000 next year will definitely be a very, very good growth. But obviously, the disbursement growth reflecting in terms of the AUM growth will be spread over a couple of years as we look at it. So next year also, we can look at a 15% plus and then consistently around 17%, 18% plus on a regular basis.

Got it. Very clear. Just lastly, on credit cost. So you explained the flow-through from the restructured bucket and the conservatism that you've built in the provision as well. Just given that bulk of this flow-through has sort of been behind us, as I understand the last part of that was in November or so. So maybe something in Q4, but largely, I'm sure you'll have a view of how things are shaping up there. Should we expect from next quarter normalized kind of credit cost somewhere in that low double-digit or high single-digit kind of credit cost number? Or do you think it will take a few more quarters before you go back to those normalized kind of credit cost?

See, this Q4 -- this last October, November also, we had a very small portfolio of restructured book. Mostly the major chuck of it, almost 90% plus has already came out of the restructuring by September itself. So whatever impacted it has to happen in terms of the NPA has already been experienced. So Q4 also, as I had indicated in the opening remarks also that we don't expect any further pain from this because it will be a small -- some small book only, which is -- which has come out in October and November. In fact, in the Q4, we would probably -- we are expecting about INR 20 crores to INR 30 crores of gross NPA coming down in absolute value. So from a INR 309 crores, we would look at somewhere around INR 280 crores is what we would probably -- we can look at by the end of the Q4 in terms of absolute gross NPA. And thereafter, since there will be no additional pain and the non-restructured book as is already been experienced is not having much of a movement and it's a very stable book, which has not -- where there are no spikes. So we should be able to come back to that kind of credit cost levels as before.

Understood. Got it. And then there is a possibility of a write-back also in Q4, given that there will be a reduction in gross NPAs, that possibility also.

Yes, in terms of the requirement of as per ECL model, yes, there could be a definite possibility if the NPAs come down. Now how much we choose to do is up to the Board as to whether we will continue and take the conservative call of having a management overlay as we have done in this quarter also because INR 34 crores was what we had kept in Q2 for the balance restructured pool to come out and consequent provisioning. But we have not reversed it in this quarter. So again, we will take a call in Q4. But at least in terms of the ECL requirement of provisioning, it will probably not be required if -- as we are expecting as per our numbers in terms of our NPA reduction in gross amount.

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

Just an extension to what Dhaval was asking. So from a credit cost perspective, how should we look at the provisions which are sitting under management overlay and restructured loans on the balance sheet, given that almost all the loans are out of the restructured pool now. Is there any view that the management has in terms of either retaining or utilizing these provisions over the course of next 1 to 2 years?

In terms of the 10% provision that was required for the restructured book as per the COVID restructuring guidelines, we have -- which was originally INR 68 crores that has come down to around INR 60 crores in this quarter -- INR 58.87 crores in this quarter, mainly because of the loans which have been completely closed since there is no asset, obviously, that we have not carried. But yes, there is some portfolio where more than 25% of the principal amount has been reduced and where 50% of that could have been reversed, but we have not taken that call to reverse it. So that also is a little bit of a buffer that is being carried in terms of provisioning. Going forward, as I said, in terms of the current fourth quarter, we may not require additional provisioning in terms of the ECL guidelines. But again, in terms of the PCR, we may look to have some number where we would prefer to have some kind of a buffer in terms of the PCR. To that extent, we will carry. So that, I think, would be more clear in the Q4 and the Board will probably take a call at that point in time. But in terms of the ECL requirement, it may not be required in Q4. That is all I can say right now. The rest I guess the Board will take a call. But some -- but looking to the kind of conservative approach that we have taken in this -- the first three quarters of this year, we may still carry a little bit of provisioning definitely to have a stronger PCR.

You mean to say, carry a little bit of provision over and above whatever the ECL requirement is?

Absolutely. Absolutely. That is in the form of management overlay.

The next question is from the line of Jigar Jani from B&K Securities.

So like you guided on OpEx of about INR 52 crores to INR 53 crores quarterly next year, would this be inclusive of the IT transformation cost, IT transformation cost of about INR 30-odd crores, which we are expecting?

Without IT transformation cost. IT transformation costs will be an extra to this because this is a pure OpEx that will be there.

And that will be close to INR 30 crores for next year?

Sorry, that will be how much you said?

That would be close to INR 30 crores for the full year next year, IT transformation costs?

No. Actually, it will be an additional INR 15 crore is what we are looking at because we are already having some OpEx because of -- on our existing thing. So the incremental would be around INR 15 crores -- INR 15 crores to INR 20 crores, yes.

Okay, understood. And sir, on credit cost. So next year, we would go back to the 10 bps guidance of credit cost overall if everything goes as per what we are guiding?

Kind of because we -- in terms of our NPA, where we are having it, it is roughly in the range of about 0.65% to 0.7% is what we would be looking at by the end of next year. This year, it will be 0.75%. So that way, in terms of that, the actual credit cost would not be very high...

And just one technical question on the numbers. On Slide 14, we have seen your yield on loan portfolio and your cost both yield going down, costs going up marginally spread coming down. But your margins are increasing sequentially when you compare on a 3-month basis. So what is driving that margin increase?

See, in the beginning of this quarter, we had INR 6,700 crores of -- so in the beginning of the quarter, we had INR 6,700 crores of book where one 35 bps rate hike was yet to be passed on. So that is why the open -- the yield on the overall book on the closing book has increased from the -- in the current quarter. However, the incremental yield has slightly come -- is slightly lower at 9.91% because the current disbursement that we have done and as was explained earlier also with a slight change in the mix of the ticket size is at a slightly lower rate. So that is what will be the incremental yield about 9.91% going forward. So that from the current 10.01% would slightly moderate to by about 5, 6 bps or something like that.

Yes, sir. But your spreads are also coming down, but your NIMs are going up from 3.8% to 3.9%, even on an incremental basis.

No, our spread on the book -- entire book obviously has improved from 2.6% to 2.66% and in fact, we had also mentioned that because we have that buffer with us, that is what is giving us the comfort to offer a more competitive rate and slightly move up and we'll be able to offset it because -- that rate by the increase in the overall yield that we are expecting. So that we had also indicated. So that was a conscious call that we have a buffer because of which we'll be able to offer competitive rates and able to get some business in a slightly higher ticket size segment.

The next question is from the line of Pavan Kumar from RT Capital.

Sir, first of all on the DSA side, the number of DSAs has come down so I would like to understand what is the strategy going forward. And number two, of the INR 650 crores of restructuring book that has come out, my understanding is this book would have -- I mean after coming out the book would be around 6 months old, so do you believe that the entire pool of GNPAs that might have come out from this particular pool have already -- are already there in the system?

See, first point about your DSAs, see we have definitely churning or reviewed our DSA portfolio and some of the -- basically it is mostly the non-performing DSAs or those who are not contributing much who has been removed and of course also a few where we had some delinquency in the pool, so where SMAs are high we have had cut off and we have a little clean mostly in them, but mostly it is in terms of DSA is who are not very performing, so we are mostly sticking to people who are at least having some minimal level of business who are giving and it is not that it is a permanent business -- permanent reduction that is going to be there. We will also be adding people, but on a regular basis we will be churning and removing those who are not performing, because there are lot of other activities also for the DSA, so no point carrying the DSAs who are not performing so that is the first part of your question. And second in terms of the restructured you are asking whether the entire pool has been with us for more than 6 months post coming out of restructuring? Not exactly but we had a small portfolio as I said up to 90% of our book has already come out up to September and 3 months or more than that has already been experienced and the performance of the pool is well known to us. There is a small portfolio which has come out in October and November, where 1 or 2 months is what we have experienced in terms of the repayment. However, overall we had anticipated that even the portfolio which has come out much earlier the general tendency is that about 15% of the pool goes into NPA and out of the INR 670 crores therefore about INR 100 crores should have gone into NPA of which already INR 93 crores is there and we do not expect much to happen. In fact November was the last month where we experienced a fresh flow from the restructured pool into default and into NPA, but in December actually our NPA's absolute value slightly came down. That indicates that whatever -- even if some small book does come into NPA, we are able to cover it up with more recoveries and higher recoveries than the amount which actually flows forward. So the flowback has been higher than the flow forward and that we experienced in the month of December itself, for the first time after the restructured pool started coming out, first time in the month of December, we saw the NPA numbers in absolute number coming down.

Okay. And one final comment on growth rates for FY '25, what would be our understanding?

AUM growth, we would definitely expect or would look at around 15% plus. And in terms of disbursement, since, of course, we will be back to around INR 3,000 crores a quarter that will be on a higher side because this year, it will be almost about 40% in terms of the disbursement growth compared to the current year, which -- because this current year has been a little on the lower side. So averaging it out for the standard basis, it should be around INR 12,000 crores for the next year.

That is disbursement?

Yes. In terms of disbursement, it's on the higher side, but in terms of the lower AUM growth around 15% plus.

[Operator Instructions] The next question is from the line of Mohit Jain from Tara Capital Partners.

Sir, I have a question on the loan growth number that you are discussing. So you are saying that we will have an incremental INR 2,500 crores of disbursement in Q4, and...

Sorry, can you -- it's a little -- can you be a little more clearer, or closer to the mic, please?

Yes, can you hear me now?

Mohit sir, can you use your handset?

Yes, can you hear me now? Hello?

Are you on your handset?

Yes, can you hear me now?

It's a little distant. It's sounding a little distant. So it's not very clear actually. But please go ahead.

Yes. So I'll try my best, sir. So you said that we are expecting a disbursement number of INR 2,500 crores for quarter 4. And sir, assuming the rundown rate of 3.6%, which you have stated in this slide, so we'll have approximately INR 1,200 crores of repayment coming into the books. So I think net-net, we have a INR 1,300 crores of AUM increase, which will be taking it to around 12% increase for the entire year. So my question is, sir, what can we do -- what is the thing that you will be doing if you take it to the 14% [ per band ] as you suggested?

See, INR 2,500 crore is a broad number, frankly. I understand it, we will have to do INR 2,800 crore to do a 13% growth. So we are working on, in fact, a little higher number only. And -- but for the numbers sake, I'd say, INR 2,500 crore. But clearly, you're absolutely right. We will require a INR 2,800 crore kind of a disbursement in Q4 to have a -- maintain a 13% growth.

Okay. And sir, just one question on the restructuring portfolio. In Q2, we had almost like INR 1,600 crores of portfolio -- [ INR 150 crores ] of portfolio, which was out of restructuring and the incremental increase in NPA from the restructuring portfolio in the current quarter is INR 32 crores. So if I'm looking at an incremental amount flowing into the NPA on the restructured pool, it is coming to 20%. So is it then correct to say that it is not just the incremental pool, but also the old pool, some of which have flown from becoming performing to non-performing in the current quarter?

See, in terms of the portfolio, we had about INR 450 crores, which had come out in the -- by the end of Q2, and that -- sorry, up to -- by June, which -- on which we had a INR 68 crore kind of an NPA. And by the end of December, that is we have had almost -- up to September, we have had another INR 200 crores, which has come out, against which our growth in NPA has been to the tune of about INR 93 crores it has reached. So INR 93 crores minus INR 68 crores would be roughly in the same range of about 15%. It would not be higher than that. But to answer your question as to why in absolute value, yes, there is also a growth in our loan book in our non-restructured book and there is some NPA also coming from the non-restructured book which reflects in the total NPA pool. So that is why the number looks a little higher, not entirely attributable to the restructured book. In terms of the restructured book, it is INR 98 crores at the end of the current quarter, and which was in terms of the second quarter, it was INR 64 crores, INR 64 crores, INR 65 crores.

Okay. And going forward, we are not expecting any further gain from this portfolio?

Not really. We are not because even if something is there, we obviously expect a flow back. So that we should definitely offset. We don't expect any further this thing coming from the restructured pool.

The next question is from the line of Sonal Minhas from Prescient Cap Investment Advisors.

This is Sonal Minhas. Am I audible?

Yes.

My first question is with regard to you speeding up the pace of disbursement. And you are talking about using a CRM in a digital channel? Two things around this. First of all, what gives you the confidence of saying that the leads generated and the quality of leads generated by that portal -- sorry -- the CRM, sorry, essentially will be of good quality. So maybe if you can share some understanding behind that. And secondly, any white space you are seeing in the market, given that the competitive intensity in the real estate sector is going up. So what gives you the confidence that overall, we can grow at that level? That's the first question.

See, in terms of the digital, the inquiry would be, obviously, through the digital channel. But in terms of the appraisal, it would be absolutely within the norms that are being followed for any other customer that we would be onboarding. So we have also the slide where we have mentioned the entire process, how it flows through, where we have the KYC verification. We have the -- so basically, everything right from the onboarding of the customer, right up to the sanction and disbursement, all the processes will be the same. So effectively, at most it could have a different ratio of conversion. Maybe it could be at 2.5% instead of a normal 3% that the market experiences. That could be a different thing depending on our lending norms. But obviously, it will be entirely as per our policies only and processes that we follow. So there would not be any compromise in terms of the sourcing that we do from the digital channel. So that's the first point. Second, as regards to the disbursement and competitive environment. I think there is -- obviously, competition is there and Q4, normally, there are a lot of offers on -- by most players. So nothing very different in this quarter. In fact, we don't see the same kind of intensity or the same kind of very lucrative offers as yet in the market. But this is something which has been there in the industry as a normal feature, that Q3, Q4, normally there are offers in the market. So that's fine. Nothing very special. As regards to the competitors who normally are there in the market with whom we face competition, I would say it's the same names that are there. It would be -- for us, it would be LIC. It would be PNB HFL and it would be Bajaj of late.

Got it, sir. Okay. And I'm assuming going forward, the mix remains the same in terms of salaried and self employed. Is that how it's largely going to be or the mix is what will be which we tweaking a little for the next year or 2?

No, it is around 72% salaried and 28% SENP. We would like to probably not go beyond 70%, not go below 70% for salaried segment. Not a major change, and no specific attempt to kind of change it or anything. If it happens on a normal on-ground kind of thing, it will happen. But again, we will -- as I said, it will be 70-30 at most. That is where we'll be comfortable, not below that.

Second question, sorry, sir if I may have a follow-on, am I allowed to?

Yes, go ahead. I mean, I guess.

So in terms of, I think the IT infrastructure and the digital system, I think you mentioned that there is a lag, essentially. Just from an understanding perspective, where we are in terms of current systems, you or the, let's say, the next 10, 15 people who are in designation wise let's say minus one to you, are there systems which basically throw out things on their dashboard and say, that let's say there is a stress building up in certain geography, certain branch, there is a mismatch in terms of disbursement, collection or any of the risk parameters, per se? Do you have dashboards as we speak right now and your minus ones have those dashboards where you know what are the achievables, just trying to get a sense of your current IT infrastructure at the senior level, essentially, in terms of tracking and monitoring.

See, in terms of the IT infrastructure, one is, of course, we are looking at a complete overhaul of our system, but that is because our existing system is almost kind of 12 years old and we've been using the same system. But we do have a strong -- we do have alerts, and we have increased the number of alerts and monitoring and everything, post this event also. So there are regular OTMS reports, which are being generated by the risk and being monitored by them. We also have a proper audit plan which is in place, which also covers -- every branch is covered at least twice during the year. We have also started this quarterly cluster level because we have clusters where a group of 8 to 20 branches, depending on the size and location, we form a cluster. So we at a cluster level also, we are doing a cluster monitoring where there are almost 18 parameters for each cluster, which are being reviewed every quarter. So that also throws up a lot of data in terms of whether there is any pressure building up in any particular area or any particular area amongst those 18 points parameters where some of the areas are lagging behind or some of the clusters are lagging behind. So that quarterly monitoring in terms of this also is coming from the system. So that way, we have a good -- we have a monitoring system, and we are also upgrading our existing system, not to mention that the new system, whenever it comes, will come, but even in an existing system, we are constantly monitoring and upgrading. So that's not an issue.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Suresh sir, I had a question on, I think, I mean, somewhere during the call, you had guided for INR 12,000 crores of disbursements next year and a 20% kind of a loan CAGR. So just trying to understand that subsequently while you were answering other participants in the call, did you say that loan growth of 15%? Or are we kind of still trying to say that we're looking at a 20% kind of a loan guidance so that the loan book doubles in the next four years?

You are very correct, good observation. The point is what I was saying was that the loan book, even though next year, we are looking at about INR 12,000 crores disbursement, and we will have a higher growth in the next year in terms of the disbursement. In terms of AUM, there is a little lag that always comes, so 30% disbursement growth will not reflect in a 30% growth in AUM. It's not a straight equation. So there will be a little lag. And next year, because this year has been a little lower, there would be an impact in the next year. But in terms of the longer-term story of about 3 to 4 years, yes, you would be looking at a CAGR of about 20% in terms of our AUM growth. So next year could be a little less, although we'll be doing a little higher growth rate in terms of our incremental disbursements.

Got it. So essentially, next year, the growth could be lower than 20%. But over the next 3 to 4 years, CAGR basis, you're looking at a 20% [indiscernible]?

Absolutely, absolutely.

Got it. And sir, just one last question that I wanted to understand. The kind of margins that we are operating at today, they are almost historically high margins that we, as a franchise, have operated at. In addition to the things that you talked about, which will act as levers for growth, digital, lead sourcing, newer branches, almost 15 branches planned in '24, higher ticket size contributing to growth, don't you think we should also maybe start looking at NIM as a lever to spur growth because at the end of it, today, we are operating at somewhere around 2.1% kind of a ROAs, even if we're talking about some moderation in margins from here, it is only next year where you are going to see some higher cost-to-income ratios. So rather than operate at these kinds of margins, sir, is there merit in looking at margin as a lever to spur growth?

Definitely, that's what we have initiated because in incremental yield, if you see is lower than the book yield that clearly reflects that we have looked at slightly moving up in terms of the ticket size ladder, where we will have to be a little competitive. So a couple of bits of impact in terms of the spread could be there, but that will help us in getting the growth in terms of higher ticket size loans and maybe penetrating segments also. So that's exactly the answer. That's exactly what we are looking at, that even if a 2.66% is not what we have been guiding in terms of spread or 3.92% in terms of the NIM. We have been going in terms of a 2.5% for spread and 3.5% for NIM in the longer-term basis. And the obvious reason is that we are looking at having slightly more attractive offers, things or more competitive pricing in terms of our loans to attract a slightly higher ticket sized customers also.

Got it. And sir, just one last thing. Sorry for this. Just one last thing I wanted to understand now that you have two AAA, CRA, Credit Rating Agencies, giving you a AAA credit rating, will you now be looking at more debt market issuances going forward? And will that benefit your cost of borrowings?

In the real sense, yes, it should bring us some benefit in terms of our cost of borrowing. But in the present scenario, where the NCDs are going at a rate of around -- 3-year NCDs at the rate of around 8.3%, 8.4%. Our bank borrowing is still at a lower rate than that. So while the rates probably would be about 10 bps lower going forward from what we were doing on a similar state basis about 2 months back when our rating was AA+. But still today, our bank borrowings are at a lower rate than the NCDs, mainly because of the liquidity position. But going forward, theoretically speaking, yes, if liquidity eases, yes, we should be able to have a lower rate of our NCDs, and we may, at that time, have a better rate on our NCD borrowing as compared to a bank borrowing. That is possible.

The next question is from the line of Dhaval from DSP.

Yes, all my questions are answered.

The next question is from the line of Anusha Raheja from Dalal & Broacha.

Sir, if I just look at your disbursement growth number for the first nine months of FY '24, that is closer to around INR 6,400 crores. And if I add this to your loan book of previous nine months, that is still coming to around 20% plus. But your loan growth current is 13%. So what I understand either the BT out rate prepayments or that run down is more on the book and that is one of the reasons that the loan book, AUM growth is not coming. So am I right?

See, there is a rundown, but if you can just look at Slide 19 of our presentation...

So the rundown is closer to around INR 2,600 crores odd. So what you are adding also, near to around 1 quarter's growth is -- the rundown is closer to around 1 quarter's growth.

No, that is obviously because this quarter the disbursement has been slightly on the lower side. But if you look at Page 19 of our presentation, the prepayment or amortization plus prepayment as a percentage of the opening book has been quite stable for the last 11 quarters. In fact, we've probably in the current three quarters, of this year, we probably have had a lower amortization plus prepayment ratio compared to the previous years. So I mean, yes, to that extent your observation is correct that the prepayments and amortization has been almost equal or maybe 40% of our disbursement. But that is also because in this quarter, we have done a little lower disbursement, which is obvious which is the main reason. Otherwise, if in terms of a normal run rate, if were to look at about INR 3,000 crores or even INR 2,700 crores on a regular basis, our incremental addition to the book should be much higher. It should be almost INR 1,500 crores. Should have INR 1,500 crores.

So broadly, how do we assume this rundown, either in terms of BT out rate or prepayments in the next fiscal. You said that AUM growth could be closer to around 20%, disbursement growth of around INR 3,000 crores odd per quarter. But how do we -- what assumption that you make on the prepayments and the BT out rate, the rundown that will happen next fiscal?

No. I guess the same Slide 19 should give you an idea that it normally ranges between 3.54% to around 4%. So that would be the range that we can -- at worst case scenario, you can expect a 4% run down, and do the math. But basically, it is on ground, the effort will always be and attempt will always be to ensure that we retain our good customers. And that is an ongoing kind of activity, which is there for everyone. I mean it's a normal regular activity.

And more so, I believe that isn't that, that we are heading for a declining interest rate scenario next fiscal, and the banks if they decline the MCLR, your -- the competitive edge will decline since the banks will also be offering the lower interest rate. So in that scenario, the BT out rate could be on the higher end? Or that wouldn't be the case?

No, I think we've answered it earlier also that we have also moved to a quarterly reset. So on a quarterly basis, on the -- and the anniversary -- the quarterly anniversary basis, the customers will get a benefit of the lower interest rate as we also really keep reducing our -- as our borrowing cost comes down, our card rates also will keep reducing and we'll pass on those rates to our customers. So if we -- with that kind of fairness to the customer, I guess, BT out will not be impacted as much.

The last question is from Raghav Garg from AMBIT Capital.

I just had a couple of questions. So if I look at the branch productivity for FY '23, and I think I've discussed this with you, we were disbursing somewhere around INR 205 crores in a year. I think with the new developer tie-up that we are targeting, eventually, we're targeting some 10%, 15% efficiency improvement. Is that correct? So our disbursement run rate per branch would go to some INR 220 crores, INR 230 crores. Is that understanding correct?

See, normally, also, yes, if it is INR 200 crores today, it should go up a little bit. That productivity would always -- improvement was always there. And with some kind of IT interventions also happening, we are -- yes, there is a possibility to slightly improve on the productivity of the branches. So yes, you are right.

Sure. And sir, did I also hear you correctly when you said that you would try to bring down the DSA proportion to 60% and 40% contribution would be direct sourcing?

Yes, what I meant was that, basically, we are going to push for higher direct sourcing and more different -- to the digital channel. So while the DSA would probably continue at the same level, our sourcing from our direct and from the digital channels would increase -- should increase at a higher rate. That is what we are trying to do. So that eventually, the percentages come down.

Understood. So sir, in that INR 200 crores that we did for FY '23, 80% was DSA, right? So about INR 150 crores, INR 160 crores was coming from DSA and the rest, INR 40 crores, INR 50 crores from direct sourcing. Now if we were to target that incremental productivity that we're planning to unlock, if we plan to go to INR 220 crores, INR 230 crores, that would imply a serious improvement in our direct source of productivity or the productivity of the in-house employees or branch staff. What gives you the confidence that, that can go to INR 40 crores to nearly a run rate of INR 70 crores, INR 80 crores over the next 2, 3 years?

See, we have a lot of possibilities in terms of digital tie-ups where we can source inquiries. And as I had mentioned earlier also, we are looking at a tie-up with some -- with this CRM and all those things where we can have a processing of these inquiries and conversion at a much better rate. So this is basically what we are looking at, so that this will help us increase the number of doable leads to the branches could be increased at a much higher level. So if we can outsource inquiries and the conversion could improve, that would bring in a lot of more doable inquiries. That is the strategy that we are looking at. So basically, the branch would be, use more for the strength, which is the credit appraisal and thereby, we could be able to maintain our quality and the sourcing could be through this CRM module and through this channel that we are looking at.

Understood. And sir, just last question. So I also understand that in the developer channel our yields would be lower given the higher ticket sizes and the higher competition. But what kind of commission payouts would we be doing, if anything at all to the developers? And ultimately, would this be an ROA-accretive business for us?

See, in terms of the DSA channel, our normal payouts are anywhere between 0.3% to 0.65%, and for us, this works out to around 0.43% -- sorry , it comes down to around 0.43%, whereas in terms of the developers, depending on the quality of the developer, they expect anywhere between 0.10% to 0.25%. So that way, about 15 bps of savings in terms of the initial payout will definitely can be saved, even if we are looking at a good quality developer.

But what would be the yield or how much would the yields be lower in the developer-sourced loans?

See, right now, irrespective of the developer loan or the non-developer loan, we are offering a rate of around 8.95% for a customer in the more than 700 CIBIL score category, where the ticket size is INR 20 lakh plus, okay? And so in terms of -- it's not that for the developer-generated model, we are offering something more attractive than what we would offer to a normal customer. So this is as a strategy itself, we are offering a rate which is around 65 bps higher than what SBI or an HDFC would be offering in the market. Yes, thank you. Just a second, I think there was one question on OpEx regarding how much is the cost of acquisition. I'll just answer that, just a second. We have about -- see, out of the INR 49 crores, INR 50 crores that is the OpEx in a quarter, the average payout to the DSA, which would be around somewhere in the range of INR 6 crores to INR 6.5 crores. The rest of it is the regular business expense and part of the recovery expense. I think there was one question raised earlier, which I said I'll answer -- respond to later. So about INR 6.5 crores, INR 6 crores to INR 6.5 crores is the payout to the DSA currently in a quarter. Yes. So I guess that's it from our side. Any more questions? Or was this the last question?

This was the last question. I will now like to hand the conference over to management for closing comments.

Yes. First of all, thank you to all of you for taking the time out. And I hope all the questions have been answered. But in any case, if there are any more questions, feel free to please get in touch with us. And once again, thank you for joining this conference.

On behalf of Investec Capital Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.

Thank you.