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

Ladies and gentlemen, good day, and welcome to the Capri Global Capital Limited Q3 FY '22 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] I now hand the conference over to Mr. Ravikant Bhat from Capri Global Capital Limited. Thank you, and over to you, sir.

Hi, and good morning, everyone. This is Ravikant Bhat from Investor Relations. Thank you for dialing in to the call. We shall start with an overview of Q3 FY '22 business and earnings by our MD, Mr. Rajesh Sharma. Thereafter, we shall have the Q&A. I'll request Mr. Sharma to are the opening remarks.

Yes. Good morning, and a hearty welcome to everyone on the call. For much of the last 2 years, discussions on earnings calls have revolved on and around the effect of COVID pandemic and the ongoing or winning COVID waves. We experienced the Delta wave in the opening 2 months of the financial year and then hope a third way, if it occurred, would be milder than the second way. I'm sure you are relieved just as we are on the third wave turning out to be shorter and less impactful compared to the earlier 2 years. In the 10 states and union territories where we operate our MSME retail and Construction Finance business, 2 core cases have continued to register a steep drop and fresh infections have also declined sharply. The state governments have also announced an end to the restrictions put in place at the start of the third wave. With this, daily activities have fast returned to normalcy. At Capri, we tackle the third wave in the 6-week period between the last week of December '21 to first week of Feb '22 through a flexible work plan with the mandated work from home and need base work from office. Our field sales operations were barely disrupted and business in the month of Jan and Feb '22 indicates we are continuing to maintain the momentum and on the track to deliver over 22% year-on-year growth in the AU in FY '22. As you are aware, the Board of Capri Global approved the Q3 FY '22 results on Saturday, February 12, 2022. I hope you had an opportunity to go through the investor presentation. Let me now present a quick overview of business during the Q3 FY '22. MSME, the growth in MSME was robust with nearly 30% of incremental disbursals happening in the segment. The robust 9% sequential AUM growth is indicative of the growth potential for the portfolio in H2 FY '22. Although the segment currently contributes the highest to the restructured portfolio and NPA, we remain optimistic about new business while being watchful of legacy assets. Affordable housing, the housing finance segment has also delivered a robust growth momentum during the quarter. Although some customer segments overlap between MSME and Housing Finance, it is pertinent to note that salaried segment has contributed to a relatively better bounce back and recovery in the segment. As a result, the net NPAs considering aggregate ECL provisions stayed once again negative in this segment. Construction Finance segment continued to show robust momentum. It achieved the highest disbursal in 12 quarters. We, therefore, expect the vertical to continue the healthy growth trajectory going forward. Asset quality remains robust with GMP at 15 basis and net NPA negative, though overall contribution of Construction Finance and AUM basis will not cross 20%. New car loan distribution business. During Q3 FY '20, we expected -- expanded to 20 locations across 19 states and even territories compared to 186 locations across 15 states and even [indiscernible] in Q2 FY '22. Two new relationships, HDFC Bank and Bank of Baroda were added during Q3 FY '22 taking total tie up to 5 banks. We generated INR 550 crores new car loan businesses for these banks during the quarter. This was 60% higher quarter-on-quarter. The total disbursal originated in 9-month FY '20 stood at INR 950 crores. I'm happy to share this business broken even in October 2021. Co-lending model in December 2021, we entered into co-lending arrangements with the State Bank of India, Nation's largest commercial bank and Union Bank of India, the sixth largest public sector bank for the cognition of MSME loans. Under the arrangement, State Bank of India and Union Bank have initially sanctioned an aggregate amount of INR 850 crores for lending of which CGCL shall return 20% on its balance sheet. We have kickstarted this channel and made a small start we expected to gain strong momentum in the next 6 months. As of now, our primary growth target for co-lending is to fully utilize the initially sanctioned amounts. New product, we are gearing up for the launch of our new secured loan product that is gold loan. The business has already been onloaded. -- and people and physical infrastructure is being shaping up. We are targeting a network of 1,500 branches and the loan book of INR 8,000 crores over the next 5 years. New branch additions we have regularly highlighted that our business has people and touch intensity and therefore, requires a brick-and-mortar setup for sales and loan originations. Keeping this in mind, and our medium-term goal of 225 branch network, we added 11 branches during Q3 FY '22. This takes the total branch addition to 25, 9-month FY '22. -- higher than the 21 branches we added in FY '20. The last peak would be normal year. We are presently focusing on growing our agents and businesses in Gujarat, Rajasthan and Madhya Pradesh. Technology, the tech intensity takes over a potential customers identify for which we use both off-the-shelf and in-house software. We've also been in the process of rolling out our analytical dashboards for adding decision-making in credit appraisal and reducing turnaround time. Our technology team has made good progress on developing an in-house back suit, and we are looking forward to a data rollout in the next 2 quarters. I shall now briefly comment on our earnings and asset quality performance during Q3 FY '22. We reported consolidated net profit after tax of the INR 649 million in Q3 FY '22, higher 24% quarter-on-quarter and 32% year-on-year. The profit growth was supported by strong core profitability and continued resilience of our P&L to accommodate higher OpEx and credit costs. Core earnings, although our spreads dropped 20 basis quarter-on-quarter to 6.7%. Our net interest margin has been robust at 10.3%, driven in part by some one-off items and in part by improving mix of higher yielding portfolio. There is a widespread expectation of imminent monetary policy tightening with benchmark [indiscernible] already pointing in that direction. We are well positioned to face a tighter policy scenario, we can suitably adjust our asset yield to respond to such a change. In regard to our operating expenses, the cost income ratio in Q3 FY '22 at 38.4% is again within our target range of 36% to 40%. Adjusted for one-off earnings, the cost income ratio would be about 41%, marginally lower than Q2. As we have stated, some of the pent-up expenditure brands rollout associated hiring and [indiscernible] related spend shall keep this ratio elevated for some time. However, we have sufficient flexibility to control incremental expenses in case we believe business scenario could get adverse. As our asset quality ratios have improved with GNP ratio declining 27 basis quarter-on-quarter to 2.99%. Stage 3 asset in absolute terms were stable, in fact, marginally lower over Q2 FY '22. Provisions coverage ratio has been further improved to 84.6%. If you talk about our collection efficiency, it has improved in MSME from 93.1% last quarter to 96.2% in this quarter. In home loan, it has improved from 93.8% to 98.4%. In conclusion, I would like to reiterate that our growth theme focused on secured urban retail lending is on sound footing. It shall soon be complemented by revenue streams from recently launched and soon-to-be launched product. We remain committed to expanding leverage through organic route and deliver mid-teen ROE to our shareholders over medium term. With that, I conclude my opening remarks. We shall now take questions.

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Mayank from InCred.

Firstly, my question is on rising interest rate. Basically, I have 2 questions on it. Number one is that currently, we have seen a very good interest rate offering by banks to MSME. So have you seen any kind of pressure currently on that front? And if the interest rate rise, are we expecting the growth from banks to slow down in the MSME segment? This is my first question. And secondly is on interest rate side. How would our rates increase going forward? And how much more upside on yields can we see on that, if the interest rate rise?

Yes. So I think your first question is if banks are offering the customers at lower rate of interest MSME loan, how we will compete with them. Is that so?

Yes, yes, yes, yes, right, right.

Yes. So I think the customer, what banks are in MSME and what we serve are entirely different. We serve those customers who do not have adequate income proof or documentation to avail a loan from banking system. . These could be small in PA3, PA4 towns, maybe small mom-and-pop store, maybe a guy, a small restaurant on roadside, maybe a food vendor, maybe a small garment store who do not record all the transaction in their books, and thus, they are not able to show adequate sales and profitability and these are our customer segment. So this is absolutely entirely different than what banks sell and what we sell. Your second question is what kind of interest rate hike we can see. I think it is difficult to predict. But even though interest rate rises by 25 basis or 50 basis the most, we are able to pass on the same kind of interest rate hikes to our customers. So any hike comes. That will be really neutral to us. As far as our customer is concerned, they are more smaller, lower in the range of about INR 10 lakhs to INR 20 lakhs. And these businesses run on return on efforts rather than return on equity. So 0.5% of marginal hike to them is not changing their profitability at all. So I think that is not going to impact us. In past also, we have seen this cycle when post IL&FS and DHFL default when banks have gone slow down and increased interest rate. We have -- we are able to pass on and maintain the growth momentum.

Okay. So as for the new RBI circular norms for the G&P recognition, have we complied with that? And is there any additional provision we have made this quarter for that?

So if we talk about RBI circular, yes, we have complied with that. RBI circular was talking on the 2 points. Number one, you cannot roll back the NP account unless all the overdue EMIs are collected, number one. Number two, the NPA will be recognized on the very same 90th day evening rather than accounting till month end. So these are the 2 main effect of the RBI circular. Because of the RBI circular, about 6 accounts have been slipped in the NPA, about INR 74 lakhs. And it had not been RB circular come. Our effort on rollback would have been seen visible in lowering the NPA much lower. But because of RBI circular, this amount has gone up. So to that extent, we have been affected.

Okay. Okay. Okay. Okay. Correct. So lastly, on our restructured book, how is that performing?

So restructure book is almost about 4%, and we have done the adequate provisioning in that. As far as collection efficient those accounts is also concerned, user is becoming due. There is a positive trend. And in case we see some slippage, I think there is adequate provisioning we have done. And top of it, our entire portfolio is collateralized secured by some real estate, either self-occupied house or self-occupied business. So in that sense, we can always use the surfacing provision and recover. So we are comfortable on that front as well.

[Operator Instructions] Our next question is from the line of Aakash Bhavsar from Equirus Securities.

I wanted to understand that the reason why there has been increase in the disbursements during the quarter? Would there be any link in respect of changing in underwriting policy of us? Or has that remained seen across the quarters?

So underwriting policy remained changed, as we have stated earlier that we are going to aim for a growth of between 20% to 27%. And in that direction, we have added more physical branches, more people on the ground, and that is a result of taking all these steps that we are able to be on the stated path of the growth, and that is absolutely as per the strategy and the budget. So it is not because of the change or relax underwriting policy, but because of the more addition to the branches and people in the direction, it was decided.

Got it, sir. And one last question. With respect to our restructure pool, what percentage of our pool would now be out of restructuring in terms of billing?

So in restructuring, we have given some amount of moratorium and some relaxed way of repayment. So total restructured number of accounts, cost is about INR 228 crores. And I think their repayment will fall in now next 6 months, now 1 year. So we'll know that. But so far, as we have said that our restructured asset is also collateralized. And any sleep happen, we are quite capable to recover as we do for other cases also.

[Operator Instructions] Our next question is from the line of [indiscernible] from Wellwin Consulting.

My first question would be on your home loan side. So in this business, we are seeing a great traction in the housing demand. Would this mean that significant growth would come from this business vertical? And second would be your annualized ROEs are over 14%. Given that we have recently started our co-lending management, what sort of ROEs are we expecting in next couple of years. And are we planning to add more banks under co-lending? And what sort of monthly disbursements are we targeting under this model?

So first that whether the housing finance will continue to the same kind of growth? Answer is yes. Home loan is a very big market. And with the increase in number of branches, I think we will continue to achieve a growth in the range of 25% plus in the home loan segment. And if you talk about co-lending, I think largest bank, State Bank and Union Bank, 2 are adequate bank while we are getting the discussions and invites from other banks, but it would be difficult to manage more co-lending arrangements. So I think we will primarily stick with these 2 banks, State Bank and Union Bank unless we believe that we can get the better commercials from other banks in competition segment, yes, then. Now what kind of ROE accretive the co-lending will happen, it will depend on the volume we can achieve. So I think next year, next full financial year, we'll be able to see that based on the technology integration with the bank, banking partners, we'll be able to see how much volume we can do. If we can go full-fledged. It can be completely game-changer, but we are waiting how this volume and technology integration happens, so it can happen very smoothly. So we had to wait to see actual results in the next years.

[Operator Instructions] Next question is from the line of Seema Bajaj from [indiscernible] Consultants.

So sir, I wanted to ask specifically on our MSME business, which is at 51% of our overall AUM versus 56% Y-o-Y. So are we planning to take a cautious approach here and also, construction finance AUM composition have increased 200 bps in last couple of quarters. Like I wanted to know, while we are planning to go slow here, so would you please give a trend that -- will this trend continue or not?

So a key growth driver is going to continue to remain in the MSME segment and affordable housing. They will contribute 50% and affordable housing, 25% plus. If you talk about construction finance, we'll continue to grow and keep it in overall book bases at about 20% and even though in some quarter, it can show a little bit growth, but overall on the year-on-year basis, it will remain well within 20% range, and that is -- we will not let it go. Our 80% book, we are to continue to remain focused on the retail side.

Okay. Okay. Right. Sir, also, like with reference to digital and technology enabling within our company, so what are we doing? And how many people are working under a technological front? Also how to plan to enhance these resources? How are you planning on that?

We have already hired the CTO, who is taking care of all the new technology initiative as well as the implementation of that. All the planning and futuristic discussions. So about 20 people already there in technology team. Besides the normal, they're separate as a team, which takes care of the day-to-day, which we say they take care of the hardware and other requirements. But the hard code technology team is concerned, there are about 20 people, which include the engineers and programmers and coders and all that. Plus, we are about 6 people's team in the data science and analytics which is helping us on the pinpointed decision-making in terms of aligning and navigating our underwriting and other collections decisioning. We also hired one collection data analytics will be focusing on that, improving the collection efficiency in taking various measures. So overall, there is a very sharp focus on enhancing the tech and data science piece and for which adequate team is already on-boarded.

Okay. Okay. All right. sir. And 1 last question is that in view of so many areas that you are targeting to grow like why our guidance of 20% to 25% AUM growth is like still maintained, are we sacrificing a normal growth? Or have you peaked like what are your planing's on that?

So I think with the current product of MSME affordable thing, we can achieve 22%, 25% to growth, one product stabilizes in the next 12 months. We will see whether we need to revise any guidance, but this much minimum we will definitely going to achieve last year also, we achieved 20%. And this year, we already achieved more than 19%. So we are on that to achieve that.

[Operator Instructions] Our next question is from the line of Preeti Singh from Value Investments.

I just wonder about entering in the gold finance business and that we are targeting INR 80 billion over the next 5 years. What other geographies are we targeting when we look to ounces for this business? And what would our AUM product mix look like in the next few years?

If you talk about the gold loan, if you see the majority of competition, [indiscernible] and Manappuram are South-based companies, while they have their pages Northwest as well. But if you see there's a lot of scope just in the North and Western Indian markets. And also our MSME affordable housing business is also in that segment. So our gold loan branches is going to be in Delhi NCR, Rajasthan, Madhya Pradesh, Gujrat and Maharashtra. And that is the area where our 1,500 branches will be positioned. And we feel there's adequate opportunity just to create that kind of a book in this region as well as in this space.

Okay. And what about the AUM product mix in the next few years?

You are talking overall or you're talking about gold?

Yes, overall.

So overall, if we achieve by 2025, '26, we are trying to act book of about INR 25,000 crores. And in that, about INR 8,000 crores is going to be the gold loan. About 4,000 is going to be about -- 4,000 to 5,000 is going to be Construction Finance. And about INR 9,000 crores is going to be MSME, about INR 4,000 crores is going to be home loan. This is what we are targeting.

Okay. And my next question is on the car loan distribution. What are our plans for growing this business? Like who are we looking to tie up with? Any more banks for growth, any more banks?

So we already tied up with the 5 banks, which includes Union Bank, Bank of Baroda, Indian Overseas Bank, HDFC Bank and U.S. Bank. And this is a product where we are not lending. This is purely using our own infrastructure and [indiscernible] to generate a fee income. And you'll be happy to know that we have already achieved a volume of INR 200 crore car loan origination in the month of December. So I think this way, we intend to later also add the mortgage loan origination as well home loan, where the interest in the range of 7.5%, 8% salary customer. So this is going to be purely fee income business, leveraging our branch network, leveraging our understanding and leveraging our association relationship with the banking.

Okay. So got it. And so out of the INR 15 crore fee that we've made in this quarter, what is the cost and how the cost increase when it scales up and how much can we scale up?

So this business at this level, in October, we have broken even. I think next year onwards, we'll be targeting a new car loan distribution business about INR 12 crores to INR 15 crores of profit contribution.

[Operator Instructions] Our next question is from the line of [indiscernible] from Wellwin Consulting.

My question would be what are the economics of co-lending and what needs to be done to the [indiscernible] -- and second, how confident are we on to hold loans given that even existing lenders are struggling for growth and a huge spending by TSE.

So if you talk about the advantage of co-lending, it will be that without capital, we can increase our book because we will continue doing what we are doing. The only change will be that 80% book will be taken over by [indiscernible] on an ongoing basis. And plus further, there are some customer segments, we are not able to do it today because of the lower rate of interest. . Now with the State Bank and Union Bank being our partner, we can further go down interest rate in those core origination loans, and that can improve our productivity and offerings. So if the co-lending takes up in a full-fledged basis, then in future, we will not require any capital, and it will be very highly ROE accretive. It will be easier to reach ROE of 24%, 25%. And the co-lending takes a full fledge. But we are watching in the next year. And we are very confident with the focus of banking system and in government that NBFC should do the more lending towards co-lending so that everything is catered and it is a partnership between a bank of low-cost fund versus the low-cost operation and good collection efficiency of NBFC. So it's a good combination, and we are quite excited about it. This year, we are hoping that we should do about INR 75 crores to INR 100 crores, and the next year was that this technology integration happens, the volume can be much higher.

Okay. And so what happens to our NPAs in co-lending. Do we have to bear this proportionately?

Yes. So it will be true participation from the banks. But so is this 20-80 arrangement? So NPA happen, 20% credit cost will come to, 80% will go to them in the same proportion.

Okay. And sir...

The second question regarding gold loan -- sorry, you are saying something?

No, sir, you continue.

Yes. So in regards to gold loan, you said there's an adequate competition and even existing players is not able to grow. But I believe in Northern Western segment, this is our niche as far as presence is concerned in a second, we understand the customers who don't have adequate income proof. So I think with the help of technology in our patent and building a book of INR 8,000 crores should not be a problem in opening, the opportunity gap we see today.

Okay. And sir, what happens to the manpower planning and branch planning? How easy is to do this given the place of so many people during COVID?

So I think COVID is behind us. That is what we believe. And as far as gold loan is concerned, manpower and branch planning, while few branches will be overlapped with MSME, but most of the branches will be standalone gold loan branches because this is an entirely different business, different kind of customers we are capturing.

Okay. Sir, one last question, if I may ask. So how would the OpEx move over the next couple of years, given that we have plans to open so many branches.

We plan to open so many?

Branches, sir.

So I think if you talk about our capital investment, if you talk about gold loan, the first year capital investment will be in the range of about INR 25 crores and next FY '24 will be out in the range of INR 60 crores.

As there are no further questions from the participants, I would now like to hand the floor back to Mr. Sharma for closing comments. Over to you, sir.

Yes. So thank you all for joining this call. As we have said, we continue to grow on the path of secured lending, growing our MSME book, home loan book. And in that continuation, we added another secured -- we are going to add another secured product of gold loan. And we are quite confident. As you see year after year, our ROE is improving, our cost-to-income ratio is coming down, our NPA in the worst time of COVID have been driven in control despite that courts have passed the order, not to take an action, which has now been relaxed, hoping that this year, coming year, not only we will show a sharp roll back in the NPAs, but our growth momentum will also be maintained. And we have adequate capital adequacy, we have good banking relations. We have a strong track record of repayment. And I think collectively with this, we are on the path to achieve our stated growth of 20% to 27%. And we hope to achieve 14%-plus ROE in the coming year along with all these developments. So thank you so much. All of you, please stay safe and stay healthy. Thank you.

Thank you. Ladies and gentlemen, on behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.