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

Good afternoon, ladies and gentlemen. I'm Pavitra, moderator for the conference call. Welcome to Capri Global Capital Limited Q2 FY '21 Earnings Conference Call, hosted by Go India Advisors. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Mr. Rajat Gupta of Go India Advisors. Thank you, and over to you, sir.

Yes. Thank you, Pavitra. Good afternoon, everybody, and welcome to Capri Global Capital Limited earnings call to discuss the Q2 FY '21 results. We have on the call Mr. Rajesh Sharma, Managing Director; Mr. Jayesh Doshi, Whole Time Director and Group President; Mr. Vinay Surana, Head of Treasury; Mr. Hardik Shah, Vice President, Corporate Strategy; and Mr. Aishwarya Gupta, Vice President, Investor Relations. 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'll open the floor for Q&A. Thank you, and over to you, sir.

Mr. Rajesh Sharma, please go ahead, sir.

Hello? Am I audible?

Please go ahead, sir.

Yes. Thank you. Good afternoon, everyone, and thank you all for joining us on this call. I would like to start by saying that all of us at Capri Global Capital hope you, your friends and your family remain safe and healthy amid the continuing challenges with COVID-19. First, I will start by sharing the operating environment, which was prevalent during the last quarter and continues to be in the current quarter. Domestic economic activity has improved in quarter 2 and October trends remains supporting. Key leading indicators, for example, the manufacturing and services EMI, electricity demand, auto sales, GST collections, et cetera, indicate that economic activity has revised and almost up to pre-COVID levels. These trends do collaborate with some stabilization of the macroeconomic environment. While we remain conservative in our policy and processes, we continue to pursue growth wherever we see the right opportunity. Since our last meeting, when we discussed the Q1 FY '21 financial results, things on the ground has been improving on a day-to-day basis with shops and businesses slowly coming back to normalcy, more particularly in rural areas. The overall sentiment in rural and semi-urban India is that of hope. The optimist in sentiment is driven by some uptick seen in the rural income levels with agri economy being extremely well and suitably supported by government's various initiatives and schemes. I would now like to discuss some key metrics of our second quarter financial performance for FY '21. First and foremost, given that moratorium is now formerly behind us, giving us a better visibility for second half, I would like to provide you all the collection efficiency numbers. The company has registered sizable improvement in collection in September '20 to 87% in terms of POS versus 64% in June 2020. Further, post exclusion of GNPA that collection number further improved to 89% for September '20. We expect collection to improve further going forward, along with gradual pickup in domestic economic activity. Details of segment-wise collection efficiency are here under. In MSME, out of total MSME cost of INR 2,128 crore as on 30th September 2020, customers with POS of INR 1,729 crore service EMI in the month of September '20 versus 62% customers who service their EMI in the month of June '20. Further, post exclusion of GNP, the collection further improved to 84% in September '20. For further month-wise breakup, you can refer Slide 7 of our investor presentation. Similarly, in housing finance, out of total home loans portfolio of about INR 928 crore as on 30th September 2020, customers in POS of INR 876 crore service EMI in the month of September '20 versus 76% customer service their EMI in the month of June '20. Further post exclusion of GNP, the collection further improved to 95% in September '20. On Slide 8 of our presentation, you can see significant improvement in collections across the construction plants and indirect retail business segment as well, where the collection efficiency for the month of September has been 92% for the construction finance and 100% for indirect retail lending. Increased focus on collection with extensive use of analytical model coupled with own ground collection reflected in the improving collection parameters. As part of the collection strategy, we are proactively working with customers to ensure that they honor their commitments and headwinds to get back to normal payment habits. Furthermore, based on the interactions with our customers, we have gathered that the most of enterprises in semi-urban and rural areas are already back on track. While those in major urban centers, which are epic centers of COVID cases in India, should hopefully normalize soon. Hence, customer servicing EMI should improve further going forward. During the period, we maintained robust level of liquidity and capital to tackle through the COVID crisis with almost INR 5.5 billion of cash and cash equivalent and a healthy capital adequacy of 41.6%. Additionally, we managed to raise incremental bank lines of INR 13 billion during H1 FY '21 with INR 9 billion of undrawn lines at the end of the quarter. We believe the granularity and retail nature of our loan assets is assuring to the banks, where large ticket size lenders are finding it difficult for incremental liquidities. Additionally, the company has made a prepayment of loans ahead of its repayment schedule of around INR 9 billion in H1 FY '21, equivalent to 91% of overall scheduled payment, further reducing the overall cost of fund by 75 basis. As we continue to navigate this challenging and uncertain environment, this quarter's performance, once again, demonstrate the benefits of the diversification and scale of our platform. Also, as a result of our stringent cost controls and strong risk management framework, we reported a strong and healthy Q2 FY '21, I'll just touch upon a few highlights here in a bit. Our net interest income stood at INR 1,054 million for Q2 FY '21, growing 4% year-on-year and 13% quarter-on-quarter, with NIMS at 10.3% for Q2 FY '21. Sharp focus on cost management and improvement in employee productivity assisted in bringing down OpEx in Q2 FY '21 by 27% year-on-year, our cost-to-income at about 28.5% in Q2 FY '21 as compared to 42.5% in Q2 FY '20. This leads to a strong operational performance with our pre-provision operating profit at INR 822 -- INR 821 million for Q2 FY '21, registering a growth of 37% year-on-year. Pre-provision operating profit for H1 FY '21 came at INR 1,552 million, registering a growth of 32% over H1 FY '20. Our profit after tax for Q2 FY '21 stood at INR 610 million, which was a growth of 57% year-on-year. H1 FY '21 PAT came at INR 1,006 million, a growth of 31% over H1 FY '20. The asset quality remains healthy with GNPA 90-plus DPD portfolio at 2.17% and NNPA at 0.15%. Further, our gross NPA coverage ratio stood at 93% at the end of Q2 FY '21, which we believe more than sufficient to cover up any marginal rise in NPA numbers. We maintain a strong NIMS of 10.3% in Q2 FY '21 against 10.1% in Q2 FY '20. Our AUM ending Q2 FY '21 grew by 5% year-on-year and stood at INR 41.61 billion. Disbursement in Q2 picked up substantially, growing by 206% year-on-year. We expect the momentum to continue from here on. Also with the disbursement pace obtaining traction now is likely to be sustained in the festival season and beyond. Our ROE stood at 12.7%, while our ROA stood at 4.4% for FY '21 Q2. With our continued focus on the long-term borrowing, ALM is comfortably placed across all buckets. Bank funding is our mainstay and continues to be at 75% overall borrowing mix. We continue to focus on digital initiatives and have significantly ramped up our digital payment infrastructure and launched several technological initiatives, adding benefit in collection, underwriting, disbursement, risk, et cetera. Our restructuring of loan, we do not envisage any -- having to restructure too many of our loans. As of now, no customer has approached us for restructuring, and we don't see that many customers forthcoming for that. Going forward, we are witnessing a return of normalcy in our asset business. With recovery trends further sustained during the second quarter, we are quite optimistic about our growth in the second half of FY '21. Furthermore, our top priority continues to be the implementation of our risk control, credit underwriting, recoveries and regulatory work, though we are also taking targeted actions to improve the experience for our customers, client communities and employees. We continue to prepare for the ongoing economic challenges and look beyond market valuations in our overall assessment of risk. We maintain a strong financial profile and remain agile with our balance sheet as we continue to serve our clients. So to wrap up, even though recent economic data has been more constructive than we would have expected earlier this year, there remains a significant amount of uncertainty. And so we continue to prepare for a broad range of outcomes while focusing on serving our customers, clients and communities through this time. I would like to mention that I'm proud of the people at Capri Global, as they have worked tirelessly during this time to engage and serve our clients with this technology to ensure our resiliency and prudently manage our risk and financial resources. Additionally, I would like to convey my best wishes to you and your families for the festive season and with the hope that all of you are blessed with good health and prosperity. With that, we may open the line for Q&A. I would like that Jayesh, Vinay and Hardik can attend all the Q&A. Thank you.

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

I have couple of questions to ask for. So first question of mine is your MSME disbursements have picked up a lot in the current quarter. Can you give us a sense on the customer profile where the demand is coming from? And how do you see the disbursement over the next couple of quarters? Hello?

This is Hardik Shah. Basically I will take your question. So basically, most of our MSME customers are family from the Tier 3 and Tier 4 cities. There the economic activity has picked up better than actually what we are seeing in the other [ areas ]. So that has set up in matching the disbursement level, which was similar to the last year. Plus, we have seen a lot of our [indiscernible] are facing the liquidity crunch. And because of that [indiscernible] in the market, it's easy for us to give the market [indiscernible]. So that has also played a big role in helping up in the attracting the disbursement numbers. Going forward, we see that economic activity gradually picking up and our disbursement numbers along with the pickup in activity -- economic activity will improve going forward. So we will see like better numbers compared to the Q2 in Q3 and Q4.

Okay. And my second question is related to what's the total COVID-related provisioning you have done till now? And have you done any extra provisioning this quarter related to same? And what do you feel about the provisioning done till now? Is it enough for any stress that might arise?

So basically, with COVID-related provisioning, we have made INR 34 crores in the past 2 quarters, that is in Q4 FY '20 and Q1 FY '21. In this quarter, we have not made any additional provisions. And based on the current indicators of future economic conditions, we consider this provision to be adequate. So now our coverage ratio stood currently at 93% in the -- at the end of the Q2 FY '21, which we believe is more than sufficient to cover up any marginal rise in NPA numbers. [indiscernible] the home loan and MSME lending are expected to assist in lesser asset quality deterioration as compared to other asset classes, which are key focus here. So we believe like currently INR 34 crores which we have provided is more than sufficient to [indiscernible] marginal rise in the [indiscernible].

Okay. And one more question I have. Many banks and NBFCs have seen pickup in restructuring queries lately. So what's happening at Q3? And how has been the trend after moratorium got over now in October, actually?

I'd say so far like, frankly speaking, we've not seen any -- once the -- given the moratorium has ended, the company has not [indiscernible] restriction from customers. But it is possible some [indiscernible] may approach us in the coming months for restructuring. But we believe these won't have significant impact on our business given most of the customers have started [indiscernible] right now.

[Operator Instructions] We have next question from Augustya Dave from CAO Capital.

Sir, 2 of my questions were asked by the previous participants. So thank you to him also. Sir, one question. In all the 4 segments, if the collections stay where they are, what would be your estimate of loss given default? So let me be more specific here. So if I were to look at MSME segment, if 81% is the collection efficiency and, let's say, if they don't -- the remaining 19 people -- 19% people don't pay up, what's the estimated loss given default? Sir, please understand, I'm not saying that they will not pay, but I just want to understand the loss given default numbers.

So frankly speaking, like that 81% includes the GNPA numbers also. So first of all, we need to remove that, like the base the -- from the denominator that GNPA numbers also. So once we remove that GNPA number from the total cost of MSME, the collection number currently stands at 85%. And 3 months back, that number was 62%. And considering what feedback we have received from our sales people at the ground level, we are very optimistic that by November we will attain the numbers which was pre-COVID levels. So it will definitely be 95% plus, which was that pre-COVID levels. So we are very confident based on the figures we have seen so far.

Sir, I understand that part. That was very clear from your commentary as well, that things are looking up. I'm just wondering that if the current cohort of people who are not paying up, if any one of them default, what would be the loss given default? That is my question. It's not about 19% going to 0%. It's if someone defaults, what would be the loss given default on that individual account?

So basically, like auditors [indiscernible] even if there is a default from [indiscernible] especially MSME stands at 50%. So the recovery rate is pretty good for us. So in that case, recovery will be very less.

Great. And sir, for the other segments? For housing, I guess, it will be very high. But for construction and direct retail, what would be the similar number?

For construction, already commissioned has reached 92% and indirect lending right now is 100%. So like all the customers are paying for indirect lending. And collection also almost like reaching the pre-COVID levels. So we are feeling very comfortable for other segments.

So again, question was loss given default. In case in any of these segments...

Construction also right now -- basically, security covers almost 2x and 2.5x the cash flow curve, and the activity has started almost at the [ ongoing ] level. [indiscernible] if there's a default or so, we need to check with our auditors what is the case in [indiscernible] unlike MSME, like the 100% [indiscernible] or be it 50%. We need to check with our auditors like what is the level? Right now, I don't have the ready answer. We definitely will come back to you on the same.

No problem, sir, but I got an indicator.

No, Let me interrupt. The whole point is that we don't consider that, okay, everything will loss and let's calculate what will be the -- collections do not exceed more than 85% and the entire percentage to be considered as a loss. [indiscernible] estimate, it's not that we don't have the estimate, probably, the numbers are not yet to be worked out because that's not the -- the thought processes...

I understand, sir. I understand. I completely understand your point.

And so what...

[indiscernible] I just needed indicative one, sir.

We get your point, what we [indiscernible] of the things we will work around, and probably you can approach us, and we will tell you that this could be the potential loss if nothing happens. Though we are [indiscernible] loans.

[Operator Instructions] We have next question from Rajagopal Ramanathan, an individual investor.

My question actually goes back to losses in default estimates. Now the earlier gentlemen was asking you a more realistic estimate on the current portfolio and so on and so forth. My question actually does not have anything to do with that. But what are your general LGD assumption in your business? Under India, if I am not mistaken, the provisioning has to be based on LGD and PD. So essentially, whatever is your PD assumption [indiscernible] that you have assumed across the various portfolios that you run?

So basically, on base of the discussion with the auditor during this quarter, so they were quite comfortable with the total provision we have made so far, that is the addition provision, INR 34 crores. And based on assessment of our [ overall ] portfolio, [indiscernible] security curve we are having, as per the -- we didn't require any additional provisions for this quarter. So hence, like whatever assumptions were there regarding the LGD, we maintain the same. Hence, we didn't even made any addition provisions this quarter.

So I'm not in any way doubting this efficiency or raising questions on insufficiency of provision. The question is very simple. You have a default profitability, and you have an LGD assumption. Now the LGD assumption is based on historical track record based on your expertise, your belief systems, et cetera, et cetera, right? Now on that basis, what is the LGD assumption that you are basing to compute these provisions? I have nothing to do with what COVID-related risks are and so on and so forth, it's more a [indiscernible] related query. Supposing you earn...

So basically you want the LGD portion for this segment. Basically, the...

No. Or even let's not get too much into segments. But let's say, if you were to look at your total portfolio, let's say, you have various product lines, what is the basic LGD assumption that you work with?

So basically, the LGD provisions are decided by the auditors based on the past portfolio. The current number is not handy with us but we'll definitely get back you on the same.

I'm not requesting to share what the current numbers are. I'm only asking you that if you have to arrive at some provisioning, there are some [indiscernible] So what is that expected LGD that you work with? I'm not even asking you what your expected LGD for future portfolios or for [indiscernible] based on your experience, what's your LGD? [Technical Difficulty]

So basically based on past experience, in MSMEs, we have like a default rate of 4%. And in HL we work with a provision of 1% to 1.5%. And recovery...

You say a default rate of 4%. 1 minute, 1 minute, let me understand. You said default rate of 4%. That is PD of 4%. And you are working with a loss rate of 1.5%, right?

In HL is the default rate of 1% to 1.5%, in HL.

Okay. So 1% on 4% is 25%, right?

So 4% is for MSME and 1% is for the HL.

1% is for HL?

Housing loan.

Home loan.

Sir, let me make myself clear once again. You said default rate, default is probability of default, right?

So basically, I'm talking about the GNP action which is happening in our business case. So like we can say that PD is 4%, yes, you can take that.

Correct. So out of this PD of 4%, based on your experience, okay, based on your experience, how much money would you lose on this portfolio? Either you are saying that [indiscernible] will lose something, right?

So 4% is our PD, and LGD you can take 20% for the MSME [indiscernible] 4%.

That's exactly what I'm asking, sir. That's exactly what I'm asking. All that you need to do is...

No, no. LGD you can take roughly 20%, and you should get the exact number. But there is no number [indiscernible].

So is it fair to assume that your LGD assumptions across your entire portfolio will be around 20% to 25%, leave aside home finance where probably your LGDs will be much lower. Is it fair to say that?

Yes, 20%, 25% for the whole company and that is the thing I believe. Hello?

[indiscernible] 20% to 25%, right?

Yes.

[Operator Instructions] We have next question from Alia Patel from Value Investments.

Sir you have been bringing down the branches count sharply in the last couple of quarters. So I just wanted to know what's your plan on growth going forward? And how will the branches add in the next couple of years from here on?

So basically, like in the last -- since the beginning of the COVID, we could exercise that the analysis of the branches where the productivity was lower [indiscernible] branches or instead of keeping the branches as full fledged branches, we have started instead of that resident branches. So we have trained the staff also for those like branches where the productivity was lower. However, going forward, as the recovered economy [indiscernible] gradual recovering economy, we are planning to increase our customer reach in [indiscernible] in our existing geography in the near term. So we are planning to expand branches gradually taking the ground level scenario, keeping in mind.

Okay. Also, we are seeing that many other players are focused on digital and technology. What sort of initiatives have you taken? And how have you been benefiting in terms of underwriting collection expansions?

So basically, we have taken a lot of initiatives in the recent times. So we have launched a sales mobility application for sales people, which enables the [indiscernible] and complete digital customers on boarding. We also have multiple technology initiatives and the projects, such as application scorecard, data warehousing predictive analysis, et cetera. We believe these technology initiatives will help us in making the customer onboarding easier and reducing our turnover from present 10 days, to almost 7 to 8 days gradually.

Okay. And sir, in the construction finance portfolio, most of your developers are small developers and majorly they will be falling under affordable housing category. So how did you -- how has been the sales pattern of [indiscernible] developers in Q2 and October?

In terms of sales, basically, like because of the initiatives taken by the state government, like reducing the customers, stamp duty, plus the interest rate right now has been one of the lowest, [indiscernible] they have seen the steady stream of the demand from the end users. And once the Diwali festival, we expect these sales numbers to pick up. So we are pretty optimistic, our developer segment is well placed in terms of the returning to pre-COVID levels pretty soon.

[Operator Instructions] We have next question from Bunty Chawla from IDBI Capital.

My first question is on the industry part. If you can share your views, specifically SME where we have a large exposure. How the SME industry is going through the phase? Are we seeing good amount of improvement in the SME especially? And how you see the restructuring part, as you have suggested the data, 81% is the collection efficiency or you can say 6% has not paid a single EMI, how much from that portfolio will go or eligible under restructuring?

So in case of SME, [indiscernible] for towns except for metros, rural and semi-urban and urban areas, only back to new normalcy. From the month of August, we have achieved pre-COVID level of disbursement, and we expect the activity level going forward to pick up further. In terms of the collection, basically, like the customers who have not single EMI strength for the MSME right now at 6%. But we believe as the economy activity picks up gradually going forward, we expect this number to come down to the almost half level going forward. So we are quite comfortable with the traction we are doing -- happening in at least in our customer segments for the MSME.

So any expectation of restructuring from this [indiscernible] from SME will be -- will go for restructuring?

Definitely there with some customers who will come up for the -- at least 76%. But right now, so far, not any major customer segment has come up for the restructuring. But we will see, like, post Diwali, like how the things pick up and we will have discussion with the customers and based on understanding of the business activity, we'll plan up the restructuring activity for those customers.

Okay. And sir, how...

I just want to add one thing that the most painful period probably is over for most of the people. And we believe that whatever is needed to happen or could have happened has probably happened. For the idea of that would be that the uptick would be certainly much better during the Diwali and post Diwali and people confidence in terms of actual activity, economic activity picking up would increase. And hence, though we have not seen any restructuring request yet, on a conservative basis, we do feel that there could be some restructuring, but not the kind of restructuring which we probably thought we could have if I were to...

And secondly, on the credit enhancement scheme, how much sanctions you have done? And how much investments you have done?

Can you repeat your question, please?

Under credit enhancement scheme, how much sanctions you have done and how much investments you have done up till now?

It was [indiscernible] major amount kind of thing. It was like INR 24 crores for the ECLG scheme so far.

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

I have one question more to ask. Like, what is your medium-term strategy? Like few experts are cushioning NBFC model and are talking about transitioning to small finance bank. And also one more question is like, how will your medium-term growth will come, like will it be geographic spread or increased product offering to same plants?

I just want to basically say the focus is that we understand the business of retail MSME lending. We believe that the economic activity is yet to pick up, and then the growth will pick up. So that we are actually ready and having ample liquidity to meet those requirements. So we would continue to certainly grow our businesses in the sectors and in the segments, which we understand completely, which is retail and MSME lending and housing loans financing. And as you have seen that many of the NBFCs are struggling to keep up this kind of [indiscernible] liquidity. So what we have done as a strategic point is that have got that ample liquidity from the banks available. So there is no much -- and most of the loans are long-term loans. So we are pretty confident that as and when the activity does pick up, we would certainly be ready to take on that kind of growth rate. And as you've seen that in the last couple of months, we've also some tremendous uptake. First of all, we had to be conservative in ensuring that we have liquidity to match up most of the hiccups if there any would come. And secondly, definitely, be ready in the segments which we know and understand, and -- which are lending and the profiling of the customers, that is also going up. And probably, we are confident that we will certainly ensure growth in those segments.

[Operator Instructions] Ladies and gentleman, due to time constraint, that would be the last question for the day. Now I hand over the floor to Mr. Rajesh Sharma for closing comments. Over to you, sir.

I think Mr. Sharma had to leave, so probably he's not there. But I just wanted to just add that thank you very much for all of you to take this call, and we believe that most of the anxieties and the big concerns they are past. Yes, we are all awaiting the vaccines. As soon as we have the vaccine, probably people would be able to have much more confidence in what they have. But as you can see that India has really ensured that the COVID-related the new things are completely under control, and we believe the economic activities have already started picking up quite substantially, whether it -- be it cement, be it auto, be it 2-wheelers and be it agricultural. And hence, we are ready to be participating in the economic activity. Thank you very much and hope we are able to come out with all the questions and come out with the second and third quarters and any comment. Thank you so much.

Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha's conference call service. You may disconnect your lines now. Thank you, and have a pleasant day.

Thank you.