Capri Global Capital Limited (531595) Earnings Call Transcript & Summary

Thank you, Pavitra. Good afternoon, everyone, and welcome to Capri Global Capital Limited, our new call to discuss the Q3 and 9 months FY '20 results. We have on the call Mr. Rajesh Sharma, Managing Director; Mr. Ashish Gupta, Chief Financial Officer; and Mr. Hardik Shah, Vice President Corporate Strategy, with us. We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risk that the company faces. May I now request Mr. Rajesh Sharma to take us through the company's business outlook and financial highlights, subsequent to which we will open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Rajat. Ladies and gentlemen, a warm welcome, and thank you for joining us on today's earnings call, con call. I hope you have seen the earnings presentation which has been uploaded on the exchange and on the company's website. The overall operating environment remained bleak as the economy continued to struggle. While the government and the Reserve Bank of India has taken multiple measures to boost economic growth, the sentiments are still weak and recovery is expected to be long and a little slow. The NBFC sector has started the stress in the Indian economy, continued to struggle with the liquidity and asset quality concern. Consequently, we have taken a cautious approach for our business in the last 6 months and have focused on profitability and improving our margins and maintaining the quality of our group. We have rationalized our branch network and substantially reduced our cost-to-income ratio to 39% as compared to 49%, 9 years -- last year. We are primarily funded by leading Indian banks and they constitute over 90% of borrowing mix. During the last 9 months, we have built and maintained a strong liquidity position, have undrawn credit lines of almost INR 450 crores, the highest ever in the history of Capri Global. Consequently, we have also got one of the highest capital adequacy of 38.4%. It is the result of our stringent cost controls and strong risk management framework. We have reported the highest ever profit after tax at INR 49.6 crore in Q3 FY '20, a growth of about almost 41% year-on-year. Our net interest margin has also improved to almost 10.3%. And our net interest income in Q3 was 16% higher as compared to last year. During the 9-month period, we disbursed approximately about INR 800 crore, taking our AUM to INR 3,945 crores. MSME lending continues to be the key focus area and constitute over 50% of the book. Our gross NPA was about 2.8% and net NPA was about 1.52% at the end of quarter 3 of FY '20. We maintained a strong portfolio yield across all our business verticals. We have maintained credit rating of A+ CARE Rating and AA- of Brickwork amid peer downgrades especially for construction finance lenders. I will now briefly touch upon the sector outlook and how we are positioned in the current scenario. We have strengthened our systems and processes in the challenging environment and have worked towards creating a leader in the agile organization. At the same time, we are well positioned to immediately benefit from a rebound. We will -- however, on the side of caution, we will be stringent on our disbursement. Accordingly, we have rationalized our long-term guidance to -- by FY 2025, we would like to reach to -- build a book of INR 20,000 crore with MSME and affordable housing being our key focus area. With this, I would now like to open the floor for questions.

[Operator Instructions] We have first question from [ Parthiv Jhonsa ] from [ NVS Brokerage ].

Yes. Sir, my first question is, can we just have the cost of funds for bank borrowings and NCDs?

So our average cost of fund of entire borrowings is in the range of about 10.25%.

10.25%?

Yes.

Okay. Okay. And can -- is it possible to give a bifurcation between bank borrowings and NCD, any possibility?

So NCD is also in the same range of about 10.25%. And our -- we have no borrowing of short term, so NCD is also for 10 years. And the entire bank borrowings is in the range of 5 to 8 years. So looking at the tenure of the bank borrowings, this price is very, very attractive.

Okay. Okay. Sir, my second question is, the gross and the net NPA for the quarter have increased basically, especially due to certain segments. So just can you throw some light on it? Especially because of the housing finance sector, but just -- can you just throw some -- can you just elaborate the same?

So while -- the NPA has a little gone up, but still it remains in the overall range of less than 3% at the company level. And in housing finance, it's less than 2%. If we look at the...

So are you confident of closing the year around this level or it will improve, sir, from here?

Our target is to -- not to let beyond this level. I would like to point out that in the segment we operate in, MSME, average yield is about 16%, and home loan, where average yield is about 30%, 30.5%. In this range of customer, this kind of NPA levels are expected, where new NPA keep coming and old NPA keep resolving. So we don't see that while all the loans are collateralized and well secured and with a good margin, where LTVs are lower, recovery will be a problem. So NPA, while it is a classification of accounting way, but it does not indicate a significant high credit losses.

Okay. And regarding the entire NBFC sector as a whole, how do you foresee it for the fourth quarter and for FY '21, just going forward?

I think with the continuous various measures taken by government as well as the Reserve Bank of India, the credit flow have come back to NBFC and housing finance companies. I feel that the trouble is behind, and well-managed NBFC and housing finance company will come back to the growth path. And they have a great opportunity to grow and corner the business.

So basically, the dip that you had in disbursements for Q3, you believe that it will come back on track towards previous levels?

Yes.

We have next question from Ravikant Bhat from IndiaNivesh.

Congratulations on a good set of numbers. Just a couple of questions. One is, you referred to the cost rationalization that have happened. Now I mean, your [indiscernible] cost has been flattish/marginally lower Y-o-Y. If you could just explain whether this whole -- what the rationalization initiative was? And whether it's over and we might see costs rising here on?

So cost rationalization was -- when we expanded the brand, there were -- certain branches were not producing adequate productivity and adequate business levels. So we have consolidated those branches to the nearest level. And some of the manpower we have realigned where the productivity has improved. So the cost has come down, whereas the numbers have improved. Our collections also we are focused upon. So basically, any cost associated, which were not contributing towards business growth, we have asked them to go and replace them with a better profile and better people. Based on that, our costs have come down. Some of the branches we have merged with the nearest branches also. So all the nonproductive branches have been merged with the existing branches.

Okay. And what was the number of such branches, if you can share that?

So there are about 10, 12 branches, though, of course, we opened the new branches also. So overall, the number of branches have not gone down.

Right. Understood. And these branches were what vintage? I mean opened in the last 2, 3, 4 years or more recent?

They are of about last 1 year.

Last 1 year. Okay.

[Operator Instructions] We have next question from [ Raghav Kabra ] from [ Excel Investments ].

So I have a couple of questions. The first one is regarding our bank borrowings. Currently, our bank borrowings have majority of your borrowings. But now you have an approval for securitization and you are going to do co-origination as well. So how would your borrowing mix going to look like in the near future? And what impact would this have on your cost incrementally?

Securitization happens at a lower rate about -- securitizing happened about 75 to 100 basis lower than the existing bank borrowing. So however, securitization has the impact that you get all the money at one go, while in the term loan, you can draw in the tranches. So both have their own plus and minuses. I think borrowing cost and otherwise also is going to come down by about 50 basis or so. Securitization money will keep growing as and when we require, but all that money will come in one go. So there, you have to carry some negative carry for a couple of months. I feel, going forward, the securitization will be about 20% of total borrowing and 80% borrowing will continue to be let by bank borrowing of -- in the period of 5 to 8 years.

Okay. So second question, given a slowing macro environment and your MSME book not growing incrementally at fast rate, you're facing a lot of stress in your MSME book. What sort of risk mitigation process are you adopting to control this? How soon do you expect this to normalize back?

So the kind of in the yield segment we operate in, we except these kind of delinquency to remain. We don't expect the delinquency will go up. In the Q4, it always happens, the collection performance always comes better. So we feel some accounts should come back to the normalcy this quarter. And going forward, we feel our overall NPA will remain in the current level. It will not go beyond this level. And that is what the projected also.

Okay. And sir, one last question is that, there has been news floating around Capri's interest in Lakshmi Vilas Bank. Can you give us an update in regards to the scene? What is this?

We have clarified that we have taken in our family office book, not from the NBFC or housing finance company as an equity investment. So that is not from -- done from NBFC or housing finance company.

[Operator Instructions] We have next question from Anadi Kaistha from Vivriti Capital.

My first question is on stand-alone financials of the company. I think that quarter-on-quarter, sir, interest income has been reduced, whereas AUM is increasing. So what is the reason for that? That is the first question. Second question is that, on a quarter-on-quarter basis, employee expenses are decreasing, in a declining trend. So what is the reason for that?

So our construction finance portfolio we have shrunk by almost 13%. And it is happening quarter-on-quarter. So when construction finance portfolio is shrinking, then income is -- interest income, because their interest income is a little on a higher side, interest income is coming down, number one. Number two, since some of the branches we have merged and some of the nonperforming employees we have asked to go, and we have rationalized the cost multilayers -- wherever the multilayers were there, we have realigned the entire structure. So our employee costs have come down, and that is why our operating cost has substantially reduced.

So what would be the attrition rate for this quarter?

I think everything will stabilize. So this quarter is going to be remaining the same. Of course, this quarter, we expect that being the last quarter with every NBFC in the lending industry, disbursement happens the highest. So we also -- we see that. So our income yield should be better in this quarter.

Okay. And sir, the last question regarding the gross NPA. So in MSME segment, the gross NPA is increasing. Like if I will see the trend, so it has increased by 65 bps on quarter-on-quarter basis, whereas in the construction finance, it is more stable, where we have a good track record of -- where that will become NPA. So what is the preventive action you have taken for MSME? And what are the preventive actions you have already taken for construction finance?

So construction finance, we are funding to the small size of developers, where average ticket size is about INR 8 crore. [Technical Difficulty]

Participants, please stay connected while we connect the management team back on the call. Kindly do not disconnect the lines. Thank you. We welcome management team back to the call. Please go ahead, sir.

So can we go on?

Sir, please go ahead, sir.

Yes, sure, sir.

Yes. So our MSME NPA, I think they'll be more interesting from the collection. And we expect the vertical-wise MSME NPA should be -- come back to less than 4%. But when we are lending in the yield of about 16%, we take in our profitability in all projections and analysis that NPA will be in the range of about 4%. For a quarter, they have gone a little -- few accounts have slipped, but we are quite confident that by the March end, it will come below 4%.

[Operator Instructions] We have next question from [ Preeti Singh ] from [ Value Investments ].

We are seeing that most of the other NBFCs and banks are now shifting to granular and retail loans, especially in housing finance. So just wanted to know how do you see the competition from the other players for Q3 in the geographies that you are operating?

So while we are operating in the segment where borrower do not have an income proof or borrowers' income is not completely reflective in the bank statement. And this is a segment where we have developed the -- our own niche, not that every bank or every NBFC is competing in that space. However, there are a few players like HDB, AU and DCB and a few regional players who operate in that segment. At the same time, the segment offers so much credit gap that we believe that even few more players comes in, still this gap required to be addressed. So competition is not that great in this segment as compared to opportunity available.

Okay. Okay. Sir, my next question would be, what's your stance on the developer finance portfolio? You're lending to small ticket developers, and now that you have stopped sanction to these new developers and incrementally doing...

No, no, no. This year, I think we have sanctioned and disbursed out about INR 282 crore, and we are continuously sanctioning the new cases. We are more cautious that we should do only those cases which are location is good, developer has development experience, all approvals are in place. Markability in micro market we check about that segment and then we do it. So we do a thorough study plan. We are doing this in the last few years. So we have built a niche and expertise in this -- our team. We know what to do and what not to do. So whole construction finance, real estate segment cannot be painted with the same brush. The difference between the large project risk and the smaller project risk is different, where the smaller units in the range of INR 30 lakhs to INR 60 lakhs underlying apartment, finished goods of that real estate project are still moving at a reasonable pace. And the developers are able to realize this in the construction, plus we ensure that project is completed because we provide the entire funding to complete the project.

Okay. Just the last question, sir. It's a data-specific question. So what percentage of your home loans customers would be salaried versus nonsalaried customers?

So salaried customers are less than 30% and rest are self-employed people.

[Operator Instructions] We have next question from [ Siddharth Mehta ], an individual investor.

First of all, congratulations for the excellent job that you guys have been doing, running the company very, very well. And I had one -- the conference call system that we are using today is very difficult to understand. There is a lot of distortion on the line. The voices of everybody are breaking up, even people asking the questions, even the management commenting. And so may I request that we see whether we can come in through or maybe the next time we can have a conference call from a system that will be of a reasonable quality because...

Definitely. Thank you for a good feedback. We will definitely do this.

All right. And can you kindly -- I don't know how much you can talk kindly about some of the future prospects, how do you see the company moving in 1 year, 2 years or 3 years' time frame? Just on broad parameters, what...

So broad parameters, we are chasing the target to reach INR 20,000 crore of book by 2025. And the same have also been reflected in our investor presentation, which is uploaded on the company's website and the stock exchanges. So next 5 years we want to move in that direction. And I think we are well positioned to do that.

[Operator Instructions] Next we have a follow-up question from [ Raghav Kabra ] from [ Excel Investments ].

I want to ask why we have reduced our guidance on loan book target for next 5 years? I can understand for this year, but why slower growth over the next 5 years set?

So if you're -- this year, base have come down. So that is a base upon which you build every year. For example, you are growing at the pace of 40%. So the cumulative effect will -- definitely will be reflected after 5 years in that kind of a figure.

[Operator Instructions] Since there are no further questions, now I hand over the floor to management team for closing comments. Over to you, sir.

So thank you all. I think looking at the sector in which we are operating in, looking at the niche we have built in, in MSME and affordable housing to lend to those customers who are underbanked and underserved, where the customers don't have income group, India, as a country, has such a huge quantum of borrowers who do not get access to credit from the formal banking channels. We are glad that we are serving to that segment. And we see there's a lot to be achieved in that segment. We'll continue to lend in that segment. And we see there's a great growth opportunity in the next 5, 10 years in that. Thank you so much.