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

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Good afternoon, everyone, and thank you all for joining us on this call. I hope you and your families are safe in these unprecedented times. This is extremely challenging time for all of us, and our thoughts are with those most affected by COVID-19, particularly those who are on the front lines of this crisis. I would like to highlight some of the ways we are responding to COVID-19 as a firm. We are focused on being there for our employees, our customers, our clients and our communities in what is an unprecedented and uncertain environment. While we don't know how this will play out and how long this will go on, we will be transparent here about what we know today. Our numbers are priorities -- our #1 priority is to continue to provide our services in an uninterrupted way, while also providing a safe work environment for all of our team members. We are incredibly proud of all that our firm has been able to do over the past few weeks. The need of the hour was to ensure that we provide our workforce the right tool to ensure that they are -- effectively can discharge the work from the -- remotely, including operations and finance teams, sales, credit risk managers, thereby ensuring their safety and well-being. Currently, we have majority of our workforce working from home across the company, except collection team. And for those who still need to go into the office or into a branch, we are taking extra precautions and being extremely mindful of their safety. We are aiding in other way too. For instances, we are offering free COVID-related medical treatment for all our employees and their dependents. To cater to various capabilities during these challenging times, we have distributed groceries and essential item to almost 4,700 families. We have been associated with the 8 NGOs to reach out to the daily wage workers, tribal family, children to deliver essentials in this pandemic situation. On the consumer side, we are proactively trying to service customers through every possible mode. The customer care team is actively in touch with the customers via calls, e-mails, and our business team is reaching out to customers and educating them about the impact of moratorium and other policy decisions. We continue to support our customers and clients by providing liquidity and advice during the challenging market environment. On the business front, the COVID-19 lockdown has now -- has not any impact on our ability to render services to our customers or lenders. The sales and credit teams are actively communicating with customers, reassessing their portfolio and assessing their risk and further any requirement, if any, which we can cater to. I would now like to discuss the highlights of our fourth quarter financial performance. It might be an obvious point, but the quarter was really a performance of 2 months, January and February. During Q4, the firm reported net interest income of INR 94 crore, profit after tax of INR 35 crore and an annualized return on equity was 9.2%. While the underlying [ business ] fundamentals, this quarter, performed very well, we reported numbers of significant items, all due to impact from COVID-19. Given the uncertainty over the potential macroeconomic impact, we have made extra provisions for expected credit loss on the financial assets for Q4 FY '20 and full financial year '20. Accordingly, the company has increased the outlay by increasing probability of default and loss given default by 15% to 30% and made provisions of about INR 13.6 crore, specifically pertaining to COVID-19 impact. Based on the current indication of future economic conditions, we consider these provisions as to be adequate. I would now talk through some key metrics. We continue to be extremely prudent about our expenses and continuously strive to improve our employees' productivity through at-most use of technology. This has, in turn, assisted us in bringing down our cost-to-income ratio to 38.4% in FY '20 against 46.6% in FY '19. They are primarily funded by leading Indian banks and they constitute almost over 95% of borrowing mix. During the last 12 months, we have built and maintained a strong liquidity position with the addition of new bank lines of about INR 2,000 crore and have undrawn credit lines about INR 605 crore, ending FY '20, the highest ever in the history of Capri Global. Additionally, we have around about INR 435 crore of cash and investment, which take us well placed on liquidity front at this point to tackle for any short-term headwinds. Also, we have one of the highest capital adequacy ratio in the industry at 38.7%, which places us well for our future growth plan once the environment starts on recovery mode. As a result of our stringent cost control and strong risk management framework, we reported a strong and healthy FY '20. Our profit after tax for FY '20 stood at INR 161.2 crore, a growth of about 19% year-on-year. Our net interest income was 20% higher at INR 387.2 crore for FY '20. During FY '20, we disbursed approximately INR 1,276 crore, taking our AUM to INR 4,035 crore. MSME lending continues to be the key focus area and constitute 50% (sic) [ 51% ] of the book, while the rest of the contribution comes from construction finance and housing constituting 24% and 22% of overall portfolio, respectively. Asset quality remained healthy with GNPA, 90-plus DPD portfolio at 2.36% and net NPA at 0.79%. Our net interest margin has improved to 9.5% in FY '20 compared to 9.3% in FY '19, while interest spend increased to 6.4% in FY '20 against 5.7% in FY '19. We have maintained credit rating of A+ and AA -- A+ from CARE and AA- from Brickwork, amid peer downgrades, especially for the wholesale finance lenders. Our ROE stood at about 11%, while our return on asset stood at about 3.7% for FY '20. We have also received approval from the largest lender of the country for securitization of loans to the tune of INR 500 crore and also an MoU signed with the top PSB for co-origination of loan during FY '20. We continued focusing on expanding our retail book and successful adoption of low-cost technology-driven hub and the spoke model, has assisted us impacting underserved markets in cost-efficient manner in optimized turnaround times. Sector has been adversely impacted due to the COVID crisis, and I would briefly explain how we are positioned in the current scenario. While the government and the RBI has taken multiple measures to boost economic growth, the sentiment are still weak as recovery is going to take some time. RBI also took unprecedented measures of permitting moratorium for all the loans until May 31. We applaud them for the same. However, there are moral hazards and potential behavioral issues by the borrowers that we need to be careful about. Given the severity of the shock, RBI will be required to take more and more such measures for NBFCs and housing finance companies, and the government must also intervene to take measures of reliable, specifically for sector like MSME, real estate, hospitality, et cetera. Talking about our major portfolio, that is MSME, which have been severely impacted due to the lockdown, especially for those MSMEs located in red zone area, sector is facing challenges in asset quality and repayment assistance due to the lack of visibility of cash flows of these borrowers, even when the lockdown is lifted. At Capri, we have been focused to lending in Tier 3, Tier 4 cities. Majority of branches falls in the orange and green zone, where businesses have resumed operations. As a matter of fact, only 1% of our total customers are engaged in industry such as tourism and restaurant that are severely impacted by COVID-19. While the industry was really under severe pain prior to COVID as well, we already had slowed our pace of disbursals due to slowdown in the business environment. Coming to our construction finance portfolio, it does not pose us with a much threat as the majority of our projects that we lend to are affordable housing projects. And our average exposure to our construction portfolio stand at about INR 7 crore per customer. As per ANAROCK Consumer Sentiment Survey made 2020, demand is undented post COVID-19, in case affordable housing project as well. So yes, probably middle-income group and higher-income group kind of projects, we are seeing subdued housing demand, which will impact project cash flows and deterioration of asset quality, but that is exactly not where we lend. On our housing finance subsidiary, we have been lending in affordable housing to small ticket size borrowers with average ticket size about INR 10 lakh. In this regard, we have been very proactive about our multilayer credit approach, which ensures that credit team personally spends time with the customer prior to disbursal to understand the income source, besides the adequate technical valuation, the legal team also do their due diligence. We have an average loan-to-value of about 59%, which would likely offset any fall in the prices and won't impact in our ability to recover in the event of default from a customer. While we are taking all possible steps to ensure we can get back to track, especially in areas in orange and green zone, the situation is still very fluid. However, this is still -- I would like to mention that we are in a comfortable position, given our strong liquidity over INR 435 crore cash in hand plus undrawn limits of INR 600 crore plus, which gives us enough headroom to manage our financial obligations. So to wrap up, the challenge we are also facing, all of us, the COVID-19 crisis continues to unfold around the globe are unprecedented. Although we don't quite know what the path will look like going forward, what we do know is that we will continue to be there for all our employees, clients, customers and communities, as we always have been. And we have the required talent, resources and operational resiliency to do so. Our employees have proven that being resilient is not just about maintaining operation, it is also about culture, and that feels stronger than ever with our team across the country working harder than ever to continue to serve our clients, customer and communities. We have never been proud of our people, and we simply can't thank them enough. And with that, we may please open the line for Q&A.

[Operator Instructions] First question comes Raghav Kabra from Excel Investments.

Am I audible, sir?

Yes, I can hear you.

Yes. Sir, I have a few questions. The first one is, sir, just wanted to understand your views in terms of what are the key problems that NBFCs are facing at this moment? Yes, sir, means, I will ask after you answer this question.

Okay. So I think there is no key problem as such. This environment of uncertainty how long this effect of COVID will remain and everybody is engaged in assessing their existing portfolio and also revisiting their underwriting policies. At Capri also, we have already evaluated which are the businesses are severely impacted, which are the businesses we are not going to lend, which are the businesses we are to lend more. So I think NBFCs are in the assessment mode, besides, in the retail side, we have to divide the problem between unsecured portfolio and secured portfolio differently. So while unsecured portfolio, the problem may be severe in terms of NPA and customer, not have a prioritized repayment and in the secured portfolio that the borrower is always prioritized to repay. A lot of NBFCs are -- which are focused on the more corporate lending and the big ticket size loans, I think they may not get the required funding from banks because banks are cautious and a lot of rating downgrades we are anticipating from rating agencies. So I think the effect and the problems will vary from a company to company depending on their portfolio and sector and how they operate.

Second one is, even if it is uncertain during this current environment, but can you still tell us what sort of numbers are you working internally in terms of growth and disbursements for the coming quarters, if you have done some assessment?

So I think book will be degrow in the first quarter, reason being, except those businesses which are in the retail, grocery and support system of retail and grocery distribution, there are no other businesses we may start lending. Once the lockdown is lifted, in every branch level, our local team will submit their analysis, what is their revised demand and what is the businesses they would like to lend. Our underwriting team is going to reassess that and then do the changes based on the localized policy for each region differently, and then we start lending. So I think precisely, we cannot say today what could be the growth numbers. We do not know how the situation will unfold in everywhere. However, our more than 50% branches are in the orange and green zone, which means that 50% of the business should resume operation by mid of June. However, we are cautious. We have not yet started the disbursement, except few retail grocery and the stores which are operational as of now.

Okay, sir. One more thing, how is the situation in terms of borrowing market as of now? Can you give us how much of bank lines have you added post this lockdown?

So we already have adequate liquidity, as I explained. However, one of the lender whose interest rate was high in this COVID time, we have prepaid about INR 50 crores and some of the bankers we are identifying to prepay their loan because we have adequate liquidity. We are expecting under the TLTRO, we will get few bank sanctions which are in the -- at the sanction stage and the final outcome of those bank lines, we will come to know by mid of June. However, these additional bank lines, we are going to use to repay the high-cost debt or reduce the cost of fund because, I think, for next 12 or 15 months, we already have adequate credit line, and that is not worrying. So these all additional credit lines which we get are going to be utilized to repay some of the debt, which is expensive than the new credit lines.

Next question comes from Darpin Shah from HDFC Securities.

If you can take us through the moratorium, which has been availed by borrowers in each of the segments?

So if you talk about our Housing Finance Company, Housing Finance borrowers have opted about 34%; and in retail lending, MSME sector, about 44% customers have opted for the moratorium; and in construction finance, almost 35% of the customers have opted for the moratorium.

So this is by number or by value? Number of borrower or...

By value.

By value?

Yes.

Okay. And sir, can you provide us the number for -- by number as well, if you have it?

Yes. We can provide by number as well. So if you go by count-wise, in CGCL, MSME is about 39.1%; in housing finance, it's about 29.7%.

Okay. Fair enough. And sir, one last question from my end is, how are the banks know -- what was the discussion with banks regarding moratorium for NBFCs? Are they availing -- are they allowing you to avail moratorium? Or what kind of discussions you are having with them?

So I think, of late, every bank have allowed. But since at Capri we are having so much liquidity available, it was not making any sense for us to go to avail the moratorium. So we are not going to avail -- our all banks -- majority of banks have offered us the moratorium, but we have already conveyed them in writing that we do not wish to avail the moratorium from banks. While we are giving to our customers, but we are not availing it from the banks.

Okay. And one last thing, how much repayment -- sorry, how much payments -- liability payments do we need to do in the next 6 months?

Next 6 months, it will be about INR 400 crore. But if you see we have a steady cash flow of repayment also and already their bank lines with us, including cash and cash equivalent which is lying in the mutual fund and all, that's about INR 435 crore and about INR 600 crore undrawn line. Plus, INR 500 crore additional lines is available for securitization, which we've not yet used. So huge liquidity available. We don't foresee that we will acquire any further funding. And despite our customer chooses the moratorium and even the RBI increases the moratorium further, I don't think the liquidity is issue. The major challenge is how to restart the business, how to redefine the right policy, how to take the advantage of the market where a lot of NBFC may not be able to lend even to the needy and good borrowers, and that is what we are strategizing. When the market reopens up, we will find that many players may not be willing to lend, and that is the time can we choose our borrowers very, very carefully and with the high LTV margin, with the more safety, by picking a good borrower, how we can grow our book.

[Operator Instructions] Next question comes from Pratik Chheda from IIFL Securities.

My question is, sir, you mentioned that there is a possibility of a moratorium being extended. So just wanted to understand if there is a situation where the moratoriums gets extended by a month or so, is there any anticipation where how much of the customer then would opt for moratorium? And if there is a steep rise in this number, what is the threshold level where you, as an NBFC, then would want your liabilities that you want to raise -- you would start applying for a liability side moratorium? And how are the banks approaching this? I mean are most of them allowing NBFC moratorium or they are hesitant right now? What is the current situation in that respect?

We do not know whether the moratorium will come or not. And whenever it comes, based on the situation, I think, case-to-case basis, we will take the approach. But as of now, we have not opted for the moratorium with the lenders. So we really cannot comment in a detailed way on these things if the moratorium is extended, how many months it will get extended and whether bank will do or not? I think that is left to the RBI and to the lenders.

Okay. Okay. And my second question is within MSME, I mean, is there any segment-wise breakup of which industries are witnessing good amount of collection efficiency and which are the segments which are pretty low in terms of collection efficiency?

So that analysis, we have not done, but our business is very small ticket size lenders. So it is not as such we may -- can figure out the sector wise. But I think these are all front-end and small units of manufacturing and assembly and service areas. We have not figured out that and maybe we can do that, and we can post that on website.

[Operator Instructions] Next question comes from [ Preeti Singh from Value Investments. ]

Sir, my question is, do you think that the measures taken by RBI are enough for smaller NBFCs to survive during this current pandemic? And what other measures do you think that the government or RBI should be taking in this front?

So I think RBI has timely intervened and done the targeted rep operations while whereby banks -- they pushed banks to lend to NBFCs. So I believe that NBFC and housing finance company may not have the major challenge in the liquidity side, except a few specific NBFCs, who might have because of their rating issue or maybe because of their high corporate or high exposure to the high ticket size real estate developers. I believe that some of the NBFCs may wish for onetime restructuring offering to their customers, which are in the real estate sector side. But so far, I think NBFC sector is quite comfortable on the liquidity side. I think major challenge every NBFC is figuring out how to do lending and which are the sectors they can lend, they have to figure out their way because, so far, it is not clear that when the normalcy is going to come back. I think that is a question nobody has the answer by when we'll -- we have a protocol medical treatment which is effective or maybe we can find a vaccine, everybody can be free from the fear of this contagious disease.

Sir, my next question would be, how do you think the housing market will pan out in the next few quarters since the repayment capability of many borrowers will be hit because of the salary cuts and the job loss?

So in housing finance, the -- I think demand from salaried customer may not get impacted much, but from the self-employment section, the demand may be slowed down. Further, I think the property price is also developer will start offering at lower prices to push the inventories. So we have to see while larger projects may face the problem of labor and -- because a lot of labor have already migrated. So this year is going to be a difficult year for real estate side. Smaller project may face the problem, which may not be that acute and the large project may have a much more difficult times.

Okay, sir. Also, sir, given the fact that the moratorium was available from 1st March, so your MSME, NPAs have gone up significantly in the quarter ended Q4. So what sort of stress do you foresee in your MSME portfolio in the coming quarter?

So coming quarter till May, there is a moratorium available. So I think we will know in the June. Definitely, there will be some spike in the NPAs, but we can't assess so far now. Once we start collecting from the customers whose moratorium is ended and who is impacted and who is not, that we are already trying to assess the situation on ground. Our credit team and branch people are already in touch with the customers. Some of the customers from their available cash flows, they are still paying and not opting for moratorium despite that is available. I think that kind of a customer when they require money, we'll be able to lend them further as well. However, the real impact on NPA we'll come to know only in June.

Okay, sir. Sir, one last question, it's data point. So what percentage of your portfolio be in the green or orange zone at this moment? And what are the trends in terms of repayments you are seeing in these zones?

So in terms of branch percent, it is 50% in the red and balance 50% in the red -- the orange and green. And as far as POS is concerned, Ashish, have you prepared that analysis?

Yes, at present, that is not there, but it is approximately, same, 50% around.

Okay, I think we should upload that on our website also. So ma'am, that detail is not readily available. You can either contact us or we can definitely upload this information, add one slide in the presentation and add it.

[Operator Instructions] Next question comes from Aalok Shah from Monarch Networth.

Two questions from my side. Clearly, the first question here in the strength for Capri lies in its strong capital position, capital adequacy of 38% and the strong liquidity, the numbers that you've talked about. But what is it that you're gathering from circles of NBFCs, especially the ones which are low on capital in terms of some kind of liquidity aid or some relaxation on the capital side because we also have housing finance norms in terms of increasing their capital adequacy that starts from this year?

Correct.

So what is it that you've been hearing, talking between your circles of NBFC entities to ensure that there is liquidity in the system to adhere to their liability obligations? Or what is it that should really provide a wheel to kick-start the overall credit cycle?

I think there's 2 aspects of it. One is liquidity available to NBFCs, so that they can meet their repayment obligations. That is one aspect. Another aspect is liquidity NBFCs require for onward lending for the fresh business. So liquidity available for repayment there, the banks are already proactively working with -- to knowing how much liquid obligation they are having or how much cash their deferment is happening because of moratorium. So the data is already sort by RBI as well as the banks from their customers. And based on that, they are addressing this need on a case-to-case basis where banks are taking term loan request and doing that. Yes. However, no, NBFC is able to just figure out how much lending they will be doing in the current year. So I think that question, nobody has a clear answer while everybody know their repayment obligations and all that. So I think it differs from a company to company. But I think liquidity is not going to be major challenge this year because banks are proactively providing and banks are taking corrective steps and government have realized all NBFC and housing finance sector is key important to deliver the credit to the sector and in the areas where banks can't reach.

Sure. Okay. And do you think in a vehicle like SIDBI or maybe not really MUDRA in its existing format, but those 2 vehicles can also play an important role in ensuring liquidity to the NBFC sector?

So I think SIDBI has already announced the INR 15,000 crore of a refinance window, a special window. Besides, they -- on a regular basis, also, they are offering refinance to their customers and all. So as I said, the worry is not on availability of liquidity. I think, the worry is only 2 accounts. What is that this degree of pandemic is going to affect the business? How long it is going to last? We do not know. And based on the length of it, where the normalcy while lockdown will be lifted, but we have to see that which are the areas where business is coming back to normalcy. So we believe that Capri being doing business in Tier 3, Tier 4 cities, where still the impact is not there. If we look at the analysis of the COVID-infected patient in our country, if you figure out about 20, 25 locations where 90% of patients are there. So if we see majority part of the population area is still where business will happen normalcy. So major challenge is going to be which are the areas you can continue to lend, which are the area still not come back to normalcy, something is going to major worry. And based on that, which are the customers will require restructuring and they won't be able to pay and which are the areas and sectors, specifically more in unsecured lending, how grave the situation can be of NPAs, we do not know.

So it's more about the asset side of the balance sheet, where there is a lot of uncertainty. On the liability side, there is sufficient liquidity in the system and being made available to NPA?

Yes. You're right.

Fair. Okay. The second point here is that as things open up and, come June, July, would it be safe to say that we would might face a situation of an increased working capital requirement from all of these SMEs or small units, one from expanding their businesses or covering over for their loss of opportunity and/or maybe trying to honor their obligations?

I think many businesses, which have lost their cash flow, they will require the working capital requirement. I do not see, except few sectors of where grocery and essential items suppliers are being at home and some of the people are able to grow their businesses. Barring those type of businesses, I think nobody is going to expand their business even on the retail borrowers. But they would need money because they are lost on cash flow of 2 to 3 months and further they can see the slowdown. So while they also do -- cut their costs and take various measures, then they might require [ the money ] for the working capital. There are a lot of borrowers despite this lockdown and their businesses are not generating adequate cash flow or no cash flow at all, from the past savings they are making their EMI payment. I think those type of customers are something they are showing a good repayment track record and any NBFC lend then should not be any hesitation.

Right. Sure. Yes. And sir, a last point here. The situation is very fluid, and it's evolving with every passing day. Would it be safe to say that this should be a 3 to 6 months journey for entire normalcy to come back? Or a longer period? Normalcy in terms of NPAs, in terms of business growth...

We believe that business coming back to normalcy will take longer time unless we see a certain way to treat the patient or the vaccine comes. People are not going to do a lot of activities like going to restaurant, travel, attending marriages or leisure vacations. All are not going to come back to the normalcy. While there are the ways of doing business and other things may change, people will go more on digital and work from home and maintaining social distance become a new normal, but a few businesses are not going to see their cash flow coming back to normalcy for quite some time till this pandemic and the cure is found in a certain way.

[Operator Instructions] Next follow-up question comes from Raghav Kabra from Excel Investment.

One question which I need to ask is like, we have seen many companies taking strict measures to manage their cost during this current -- to manage this current pandemic. If any, what sort of measures that you have taken on the cost side?

So we are taking measures like we are renegotiating the rent of the branches and offices because we have almost 85 branches. We are not hiring the new hiring -- wherever people are resigning or leaving, we are not replacing them where we think, yes, another 2, 3 months, the business is not going to start, so we can defer it. Besides, we also put our all expansion of branches on hold till the certainty comes to the markets and certainty comes in the way businesses are going to be conducted. Plus, incentive and all are going to be more on the collection side, the business side, there will be no payment of incentive. So on every front, we have taken the measures.

That was the last question for the day. Now I hand over the floor to Mr. Rajesh Sharma for closing comments.

So at Capri, we'll continue to pursue our stated line of strategy to continue to remain focused on MSME sector and continue to focus on the affordable housing. Construction finance, we are following a very unique strategy where ticket size of each transaction is -- each borrower exposure is about less than INR 8 crore. So I think we have to reassess our underwriting policies which we have already done. On ground, we are going to test it after the lockdown is open which other businesses are going to restart and looking at their requirement or those customers, who still during moratorium period are paying on time despite that option was available to them. These are the customers' requirement we will try to assess and extend them the credit facilities. So in challenging times, we have to be more careful. We believe that we are well positioned to understand the situation, and we already have [ local ] knowledge of every market, which is going to help us to keep our asset quality in good shape and we will focus on the growth once normalcy come back to the markets. Thank you so much. Thank you for attending the call.