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

Good afternoon, ladies and gentlemen. I'm Momita, moderator for the conference call. Welcome to Capri Global Capital Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to Mr. Rajat Gupta from Go India Advisors. Thank you, and over to you, sir.

Yes. Thank you, Momita. Good afternoon, everybody, and welcome to Capri Global Capital Limited's earnings call to discuss the Q3 FY '21 results. We have on the call, Mr. Rajesh Sharma, Managing Director; and other members of senior management 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'll open the floor for Q&A? Thank you, and over to you, sir.

Yes. Good afternoon, everyone, and thank you all for joining us on this call. We have uploaded our earnings presentation on the exchange and company websites. I hope you have been able to view the same. The past year was marked by a decline in economic activity in the first and second quarters brought on by COVID-19 and a dramatic reversal in the third quarter as economic output and unemployment partially reversed course. This volatility contributed to dislocation across asset classes, which was met by profound physical and monetary actions taken across the globe. I would now like to discuss some key metrics of our third quarter financial performance for FY '21. Q3 has certainly been one of the better quarters for us with disbursements of INR 379 crores for the quarter, up 82% quarter-on-quarter and 28% year-on-year basis. While all products saw a robust growth in disbursements this quarter, our mainstay products, MSME loans and the affordable housing loans, grew faster. MSME loan disbursements grew 82% quarter-on-quarter and 46% year-on-year basis, while in the affordable housing segment, loan disbursements grew 67% quarter-on-quarter and 132% year-on-year basis, and we will continue our focus in growing these further. In Construction Finance, we are maintaining a very cautious approach to keep stability in lending, and we believe that CF, as a percentage of overall loan book, may reduce going forward and other retail vertical would grow faster. We continue to maintain adequate liquidity for the expected future growth, and we are also well capitalized with capital adequacy ratio of about 39.3%. Additionally, we have prepaid high-cost debt during this quarter of about INR 177 crores, which were due in FY '22, further reducing the overall cost of funds. Our increased focus on collection with use of analytical models coupled with on-ground collections as reflected in the improving collections parameter is part of the collection strategy. We are proactively working with customers to ensure that they continue timely repayments. I will now touch upon some other key financial indicators. Profitability reduction in the high-yielding Construction Finance book and a conservative approach in the provisions had led to reduction in the overall net interest income to INR 94.4 crores, down 4% year-on-year and 10% on a quarter-on-quarter basis. However, this was partly offset by increase in retail lending. The profit after tax was lower at INR 49.2 crore, down by 1% year-on-year basis. Risk management and provisioning. In line with our risk management philosophy, this quarter, the company increased its coverage of potential bad debts by building higher provisions. Accordingly, our GNPA and net NPA for Q3 FY '21 stood at 2.08% and less than 0%, respectively. The company incurred additional expenditure this quarter towards enhancing the capabilities in digital analytics and talent acquisition, and this also includes provisions for CSR. With our continued focus on the long-term borrowings, asset-liability mismatch is comfortably placed across all the buckets. Bank funding is our mainstay and continues to be over 81% of our overall borrowing mix. Our return on equity stood at 12.4%, while return on assets stood at about 4.2% for 9 months FY '21. On the restructuring of the loans permitted by RBI, our total restructured book stands at about less than 2.5%. We'll continue to maintain our focus on the retail segment, and that will be the key driver of our growth. We are studying entry into newer product segment and exploring multiple options, and we'll focus on areas which fits our core business model. We are constantly striving for better customer experience and reduced turnaround time with the help of data analytics. Additionally, we have also strengthened our Board with the appointment of Mr. Desh Raj Dogra as an Independent Director who brings with him decades of experience in the financial sector and credit ratings. Our priority continues to be the implementation of risk control, efficient credit underwriting, collections with exemplary corporate governance. This pandemic has been a once-in-a-lifetime event where we have learnt many valuable lessons in handling crisis and have emerged stronger to manage any unforeseeable future risk. With this, we may open the floor for question and answers.

[Operator Instructions] First question comes from Mr. [ Tarun Somani ] from [ Rubix Investments ].

Sir, I have a couple of questions, and I would like to ask one by one. So my first question is, in Q2, you made a provision of INR 2 million and now if you look at the Q3, you had a substantial increase in that provision by INR 112 million. Actually, what changed between November and now? Is it because macro environment is changing? Or is it that the earlier estimates were lower? Or is it in anticipation of some other future stress that you are expecting? Can you highlight on any of those?

Yes. So I think in the -- first in March quarter, we made a provision of about INR 130 million and in June quarter, we made a provision of about $200 million -- INR 200 million. And September quarter, we made lower provisioning because that time numbers, we were anticipating -- the restructuring data were not available. This quarter, we have made a provision of being more cautious, and our profitabilities are good, so we have provided about INR 112 million provisioning towards bad debt so that our cushion is there. In case of any uncertainty, we can meet through our provisions. I believe that we have made adequate provisions in the past 2 quarters and this quarter and that should be able to meet any surprises in the delinquencies.

Okay, sir. Got it. And my, sir, second question is, like, can you tell us the rationale of slowing down your construction finance book? And what's the outlook on Construction Finance business going forward?

So if you look at our construction finance book nature, number one, this is lending to small developer where average ticket size is about less than INR 7 crore. These are the developers who are building 4- to 7-story building, mainly lower ticket size of the apartment ranging from INR 30 lakh to INR 75 lakh in cities like Pune, Vijayawada, Surat, Bangalore. And Bombay ticket size is in the range of about INR 1 crore or so. So they are affordable segment based on that city. And we have not grown that book in the last 2 quarters. However, the repayment is coming in. We have seen because of the stamp duty relaxation, a lot of sales has happened cumulatively in September and December quarter. That has resulted in foreclosure of some of the accounts as well. So the book, while we have not grown the book, but book is in the usual pattern. More than that, we have seen a lot of faster repayment and closure of the accounts. And that has reduced our book to about INR 770 crore. If you see about quarter-on-quarter basis, it's gone down about 15%. While all other books have grown, this book has decreased significantly. So this is the reason that -- and that shows a good underwriting quality of the -- our construction finance book.

Our next question comes from Mr. [ Ravikant Bhat ]. He's an individual investor.

Sir, I have got 3 broad questions. The first one is on the disbursals. Now you have had a very strong growth, which you mentioned in your commentary, both across MSME as well as home loans. Could you quantify the absolute amount, what this would have been?

So if we talk about absolute, total disbursement has been INR 379 crores during this quarter. If we talk about MSME, MSME disbursements were about INR 202 crores and housing finance disbursements were about INR 102 crores. Construction Finance is about INR 75 crores.

Okay. So broadly, you have had the similar number in the repayments, which is why your book has stayed flat, almost flat. I mean it's down Q-o-Q and it's just about up 1% Y-o-Y. Is that right? Is that understanding right?

Yes. So basically, in Construction Finance, there were more foreclosures, more repayments than the fresh disbursements. So that book has come down. In MSME book, on a closing basis, it grew about 5%. Home loans grew 8%, but Construction Finance has degrown the book. So on an overall basis, the book is about 3%, it has degrown. The contribution of degrowth has come only for Construction Finance, while MSME has grown and home loan has grown.

Sure. Sure. So sir, now that you have been sharing the ALM slide since many quarters now and you have always maintained higher inflows than outflows, so ALM has always had that positive gap. Going forward, I'm asking this more from a spread management perspective because you seem to have had a negative carry. Your borrowings have gone up, whereas your interest-earning assets have stayed where they were. So how do you see this affecting your spreads or net interest margin? And whether what we have seen in Q3 is something which -- where it will bottom out? Or are you going to see a further decline before it stabilizes?

So you are asking about the negative carry, the surplus fund we are carrying. Exactly this is what you're asking?

Yes. And I see your spreads seem to have also been affected. So how do you see this going forward?

So I think the spread is not affected because spread is a function of what cost you borrow and what cost -- what price you lend. And the negative carry is basically about the fund we carry in mutual funds where they face a lower yield versus the cost of our borrowings. Since we -- in the times, which were a little tough, we had maintained a very, very high liquidity, about INR 1,200 crores since last few months, and we have -- being conservative, we don't lend or park money in equity funds or we've not given money other than the debt. So we have tried to minimize this negative carry. This negative carry normally is part and parcel when you maintain a high liquidity. But I think last quarter, because the interest rate has fallen steeply and so there was negative carry, but going forward, I think our cost of fund is also coming down and this negative carry will come down. But this is never going to be 0 because any given point of time, we are going to maintain the funds. And we always maintain the liquid and the debt fund where the return is today currently in the range of about 6% and our cost of fund is about 8%, 8.5%. So that will always remain unless -- and we don't want to blend this money into risky, which we are maintaining for liquidity purposes. So I think this is part and parcel of overall cost.

Yes. So sir, this point is very well taken and understood. I think there's no doubt. It was always -- it was prudent to maintain whatever surplus liquidity that you maintained. My very limited question was, your spread has declined from 7.5% to 7%. It was even lower in Q3 last year. So is -- do you think it will stay at 7% or dip a little bit or it may stabilize and improve from here on? That was my limited question. I absolutely appreciate you maintaining the kind of liquidity you are maintaining. Probably it was more than warranted for the times that we were passing through, but given that the spreads have declined 50 basis points Q-o-Q, do you think they will stabilize or they can dip a bit and then kind of pick up from here?

So if you notice that our book from INR 917 crores to INR 771 crore in that Construction Finance book and that is where -- which is a high-yield book which has come down. And that is -- that has resulted in the contraction in the spread. I don't think the spread will go further down. And further, our cost of fund is getting reduced. So that should also improve it. And if we grow our overall book, Construction Finance book also will grow, not with pace, but our spread, I think, will come back in the next quarter around 7.5%. And going forward, this split can be maintained.

Sure. And sir, one last question -- okay. I'm sorry. So I think that's understood. I was just looking at the impairment of financial instruments. I think that is taken as provisions in the presentation. That's answered.

[Operator Instructions] Our next question comes from Renish Bhuva from ICICI Securities.

Sir, couple of questions. So one is on our indirect retail finance book. So what I can see in our PPT is that it's been very volatile since past many quarters. I'm assuming this will be short term in nature, and hence, in one quarter, if we didn't find the opportunity to lend, I think that book will unwind very quickly and that can impact the overall AUM growth. So what is the strategy to smoothen out these impacts going ahead, sir?

So indirect retail post IL&FS crisis, we have not grown that book. Earlier, we were lending to smaller NBFC, MFI. And then after that, we have not grown that [ book ]. However, certain times, to pass the liquidity, we have given the money to some of the people who deal in the AAA and government securities, and they [ meet their ] short-term limit. So that is also given as indirect lending. And that is where it comes as a volatility in terms of the AUM because suppose we have given against the PFC and REC bond, INR 50 crore, INR 100 crores of limit, for 45 days, so sometimes, quarter end will show up, and once the repayment comes, that book completely goes away. So that is the reason it shows this volatility.

Got it. Yes, sir, so I was just sort of thinking that. So maybe our indirect retail finance is more of an opportunistic lending or it's a part of our central strategy?

No, it is more of an opportunistic lending. And many times, we use it to pass our surplus funds also.

Got it. Got it. And sir, last question on the total provisioning buffer. So I think it's roughly around INR 40 crore or so. So do you think, sir, this provisioning buffer is enough to take care of any incremental [ stress ] we can -- which we can sort of start seeing from Q4 once the Supreme Court judgment comes?

So I think we are taking the cognizance of the overall delinquencies. We are not deciding our provisioning based on the Supreme Court guidance. So whatever way we think what could be possible and, based on the cautious approach, we have been quite aggressive in providing in the last 2 quarters. Again, this next quarter also, we'll be providing basis how the next quarter book is also going to grow. So I think provisioning part, we have always been conservative. Currently, I think our provisioning coverage ratio is almost...

80%.

80%. So that is quite healthy.

Right. But this gross NPA number will not capture the 9-month slippages, right, sir, because of the Supreme Court judgment? So maybe if you can share the pro forma numbers, it would be helpful.

So I have my colleague, Raj Ahuja, who is CFO. I would like him to answer this.

As on December end, we have actually created the provision based on our own internal DPD calculations and not taking into account the Supreme Court order. And based on that, we have done the ECL provisioning. And so to that an extent, we are not -- we have been very aggressive in provisioning and not taking benefit of the Supreme Court's order. So for the disclosure purposes as defined by the Supreme Court, we are not declaring those cases as NPAs, and we are not -- in our books also, we don't classify them as GNPAs. For your benefit, the numbers basically are exactly on the similar lines as the last quarter. It has gone up from March, obviously, to some extent. Our pro forma 90 days plus actual numbers stood at around INR 115-odd crores at group level versus INR 113 crores in September.

Got it. Is this on a pro forma basis or this is...

This is on a pro forma basis. Yes, this is on a pro forma basis. It is well within the [indiscernible] of the last quarter. In March, this number stood at INR 95 crores. So it has gone up from that level, but not very significantly alarming increase from INR 95 crores to INR 115 crores. And INR 113 crores was in September. So that's the number we have in the NPA category.

Got it. And sir, what would be the PCR on the Stage 3 assets, if you can tell us?

So on -- in total, at a group level, we have a PCR of 80%, and we do an ECL provisioning. And based on our security profile and our collection efficiency, we have roughly around -- different businesses have different ECL provisioning for the NPA bucket. So we have roughly around 24%, 25% weighted average PCR for the Stage 3 assets.

[Operator Instructions] Our next question comes from Mr. Nalin Shah from NVS Brokerage.

Sir, I just had a couple of questions. First, the AUM for the company is around the same range of INR 4,000 crores. So what are the plans for that going forward?

So on the AUM, as you know, it's all lending business. January to March quarter is always better among all the quarters. This quarter will be very good. And on an overall basis, we should be able to grow our book about 6% to 7% on a year-ending basis. Next year, we are already in process to add a few branches. And coupled with that, I think next year, our target is to grow the book about 25% to 30%. So next year will be a good year, full year. This year, as you know, March onwards, all the disbursements were stopped. And July and August onwards, when lockdown was eased, activity partially picked up and October, November onwards, full-fledge business has started across urban and rural branches. Despite that, we have not degrown the book much and next -- this quarter, we should be able to do good disbursement. So that should result in the growth of about 5% to 7%. Next year, I think it will be a very good year.

Okay. And sir, the provision coverage ratio is 115% for the company. So what kind of cushion you are comfortable with going forward in terms of NPAs and all?

So typically, on a overall basis, our NPA, we assume, is at a tolerable level at about 3%. And we don't expect much deviation maybe because of the pandemic and because of the restructuring. Finally, there could be some increase of NPA about 1%, 1.5% in the longer run. And for that, adequate provisioning has been made. I would like to draw your attention that we have -- all the 3 products are secured products, MSME and home loans. Our MSME customers', most important, property is mortgaged with us. In our home loan, most of the customers qualify for Pradhan Mantri Awas Yojana subsidy, and their further loan-to-value comes down. Having a hard collateral with us, NPA could be accounting entry. But as far as the credit cost is concerned, because we have a strong recovery mechanism, and now SARFAESI limits also have come down from INR 50 lakh to INR 20 lakh, we feel it is not going to impact our credit cost much because, ultimately, all these secured loans are going to be recovered. Does that answer your query or you have...

Yes, yes.

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

I just have a couple of questions. So my first question is, if we continue to lose customers to banks as their credit profile improves, how do we compete with the banks who are targeting the same segments and have much lower cost of funds? Like are we getting adequate returns for the effort? And when will our CI ratio come down from the 35% to 40% levels.

So normally, our customer, which is in MSME and affordable housing are those customers who have a business, self-employed, but they do not have adequate income proof. And these customers normally stay with us anything between 4 to 6 years' time and then only they are able to migrate to the bank. Looking at the overall opportunity and the gap in this underserved customer, we are able to acquire good growth and good number of customers. And our customer, which moved to the bank for a lower rate of interest and all, I think it is a good sign overall because our customers are acquired by the lenders after a period they are able to demonstrate a good repayment track record. I believe the kind of gap this segment has, another 7 to 10 years, there is a good growth opportunity to cater to this market. Parallelly, we are already in process. We are already in discussion with a couple of good consulting firms to identify the new product in the same geography, same kind of customers we can add on. And that will help us to do the cross-selling to our existing customers, our ability to retain them for longer and add new products and improve our margin by reduced cost of acquisition of the customers. So with the increase in the bouquet of the offering, we should be able to grow our overall book as well. And I think it's a huge segment. I think we need many more companies like us to cater to this market.

Okay. I have another question. Sir your team does not have enough NBFC experience. So are we looking to hire a business CEO with NBFC background?

So we have a good number of people on the business, credit risk, collection side who have done similar work in the last 15, 20 years. We have people who have been hired from AU. We have people who have been hired from ICICI Bank, Kotak Bank and L&T Finance. And also, I think, we have a good mix of the team from Aadhar. Our risk head comes from Aadhar. He was in Aadhar for more than 10 years. Now he is with us almost about -- it is his fourth year. We have a business head from AU, which is -- done in the AU and Gruh Finance more than 15 years is with us. So at senior level, we have all the people who have done a similar business during their previous stints with their employers. So I do not think there's any lack of experience with the team, which is doing the business, collection, credit underwriting.

[Operator Instructions] The next question comes from Radhika Lohia from Mirae Asset.

Sir, just 2 questions from my end. If you could give some color on your Stage 1 and Stage 2 assets? And the second question would be, if you have done any restructuring till date.

So I'll ask my colleague, Raj, to answer them.

Good afternoon, Radhika. Our Stage 1 and Stage 2 assets, obviously, have moved in quarter 3 versus quarter 2. In quarter 2, we had the privilege of moratorium, which went on until August. In September, when the moratorium was lifted, we had only 30 days in that quarter for the Stage 2 [ move ]. With that, we have seen a sudden increase in the Stage 2 assets in the current quarter. We have actually increased it from 400 -- sorry, just a minute. Yes. So we have actually increased the Stage 2 assets from INR 180-odd crores to roughly around INR 400 crores in December versus September. Our Stage 1 assets actually are, at this point of time, constant as compared. So we were at INR 3,021 crore earlier and now we are at INR 3,100 crore. So this is more or less in line with the industry. And we are not -- and this is in line with the pre-COVID levels also. We had similar around INR 400 crore levels, which is roughly around 10% of the book in the Stage 2 in the past also. And -- so September 2 was an aberration, but September 3 we have got up back to -- around 10% of our book is lying in the Stage 2 line.

Okay. Great...

Does that answer your question, Radhika?

Yes, yes, definitely it does. And on the restructuring side?

On the restructuring, we have -- on the housing loan, we had the time window until December for invocation and implementation in March. And SME, we still have the restructuring window open until 31 March '21. We have got roughly around -- requests of 2.5% of our assets to be restructured, which is well within the lines of the industry. Industry is reporting roughly around 3% to 7% levels based on the product mix, whatever they are having. And we are at 2.5% now. And by March, we are expecting another 1%, 1.5%. So I think we'll end up with more or less 4% around book in the restructuring zone. In December, we were at around 2.5% of our total book, where we have received requests for restructuring. And we intend to close the implementation by 31st March as per the RBI guidelines.

[Operator Instructions] Our next question comes from Mr. Bunty Chawla from IDBI Bank.

Sorry, I have joined late, if I am repetitive for that. So if you can share the Stage 3 numbers, which you have already highlighted, pro forma around INR 115 crores. What will be the provisioning against that? And as well as restructured assets, you have given 4%, which is INR 44 crores, then what will be the provisioning against that restructured assets? And similarly, what is your thought process for the credit cost and your slippages in FY '20?

Okay. So Bunty, we are at INR 115 crore in the Stage 3 assets, and I have already answered that question that we do ECL provisioning based on our security profiling and the recoverability profiling based on the past history. And our weighted average provisioning against Stage 3 comes to roughly around 24% to 25% out of the total pool, which translates to 80% PCR ratio. And that was the answer to your first question. Second, on the restructuring piece, the RBI has -- like, as per their guidelines, we are supposed to make 10% provision over and above the standard provisions what we do on the assets. And we have taken 10% provision flat on the restructuring group, which is roughly around INR 110-odd crores, 2.5% of our total book, so INR 110-odd crores. We have taken 10% provision on that particular book and that is outside the Stage 3 calculation. So this is over and above the provision done under the Stage 3 of 24%, 25%.

And thirdly, sir, outlook on slippages as well as credit cost for FY '22?

We are expecting a similar level of provisioning, maybe a little bit heightened provisions in quarter 4. I think as of now, we'll have to keep watching this space because we've just come out of the moratorium window and people have started -- the economy is going back on track now. So quarter 4 looks like that we might have some slippages, which is higher than quarter 3. But I'm not seeing it very alarmingly high mainly because of our profile and the security backups which we have. The customer obviously likes to pay first to the lenders where they have their personal securities mortgaged. So to sum up -- the answer to your question, I think it will be a little higher than quarter 3, but not very high. So like this quarter, we have done 11. I don't think this will go up by more than 20%, 25% at an overall level.

That was very helpful, sir. Secondly, you shared the collection efficiency for secured and unsecured for the December month. If I need to compare the pre-COVID level, what -- were these levels at a pre-COVID level type? Same for the check bounce rate also?

I don't have a check bounce rate readily with me, but the collection efficiency side, we are now at a pre-COVID level. And roughly, January, February, we were around at 85% level in SME and affordable housing loan segments, and we are back on the pre-COVID levels, which were roughly around 60%, 70% in the last quarter. So we are seeing that kind of a comfort [ going back ], and we have already achieved pre-COVID levels.

[Operator Instructions] Our next question comes from Mr. Tarun Somani from Rubix Investments.

So I have a couple of questions. So first one is like you have mentioned that you will be foraying into new business segments. So can you enlighten us a bit more on like what particular business segments or geographies are you targeting? And would it mean that you would slow down on the existing business verticals like MSME or affordable housing?

Yes. Okay. So I'll take up this first. So at this point of time, I think, like Mr. Rajesh has already said that we are looking at some new segments, but that is more [ past ] our business and a little bit more cross-selling in our existing customer base to optimizing the cost of acquisition. So we are very, very clear that this is not at the cost of the existing products. So our existing products are doing very good, and we have created a niche in those products, and we are very comfortable in those business segments. So we'll continue to grow the exiting business segments. On the new products, we are still working out on what other products where we can have synergies. We are [indiscernible] to close our product mix for the future. And as and when we do any kind of new product launches and all, we'll obviously come back to the community.

Okay, sir. And sir, one more...

But those products will be more synergistic to our existing lines, and we are not trying to get into very different or non-niche products for ourselves.

Okay, sir. Got it. And sir, one more thing, I just wanted to know, like, what is your 5-year AUM growth or target or how many branches you will have to open to meet up the target? Anything that you can say on that?

So currently, we are operating from Maharashtra, Gujarat, MP, Rajasthan and NCR. And currently, we have 80 branches. We intend to go deeper in these markets because we already have our regional team in place and [indiscernible] team is there, regional sales team, regional credit team, operational, the collection, everybody is there. So I think there's enough scope to grow there. So we can add another 60 to 70 branches in this region in the next about 2 years' time. Further from -- after 1 year, which is '23 onwards, we are going to add Karnataka, Tamil Nadu, Andhra is also a geography in the same product, MSME and affordable housing. So this will help us to grow our AUM on a good amount of maybe 30% plus. Second, we'll add a few more products to the same kind of customer we can offer from same branches, same kind of income profile. And that will also further contribute towards the growth in the AUM. And for that, we are already in discussion with good consulting firms. And I think by December 2021, entire plan will be ready, our entire technology as well as mapping team. And then we should roll out in the first quarter -- last quarter of the coming financial year. And then that product should get stabilized in '22, '23. So that is the plan.

[Operator Instructions] That was the last question for today. Now I hand over the floor to Mr. Rajesh Sharma for closing comments.

Yes, thank you all of you for joining the call. And as we said, we'll continue to remain focused on our strategy of growing the retail book. And we see that coming quarters in the next year is going to be quite exciting for us in terms of AUM growth as well as the profitability. Thank you. Thank you all of you. Thank you so much.

Thank you, sir. Ladies and gentlemen, with this, we conclude our conference call for today. Thank you for your participation and for using Door Sabha's conference call service. You may all disconnect your lines now. Thank you and have a good day, everyone.