Cholamandalam Investment and Finance Company Limited (511243) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Cholamandalam Investment and Finance Company Limited Q2 FY '22 Earnings Conference Call hosted by Kotak Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities. Thank you, and over to you, sir.

Good morning, everyone. Welcome to the earnings conference call of Cholamandalam Investment and Finance Company Limited. To discuss the 2Q FY '22 performance of Chola and share industry and business updates, we have with us today Mr. Vellayan Subbiah, Chairman and Non-Executive Director; Mr. Ravindra Kundu, Executive Director; Shaji Varghese, President, Housing Finance; Mr. Suresh Kumar S., Senior Vice President and Business Head, LAP and SME; and Arul Selvan, President and CFO. I would now like to hand over the call to Vellayan for his opening comments.

Thank you, Nischint, and good morning, everybody. The -- we'll just go through key financial results for the quarter and the half, and then I will turn it over to you for questions. Disbursements were at INR 8,706 crores for the quarter, which is up by 35% and INR 12,341 crores for the half year, which was up by 23% Y-o-Y. Total AUM has basically been more or less flat at INR 75,000 crores. And our NIM was up at INR 1,393 crores, INR 1,393 crores, which is up 11% year-on-year. And it was -- for the half year, it's at INR 2,756 crores, which is up 23%. PAT for the quarter was at INR 607 crores, which is up 40%. And for the half year, it's at INR 933 crores, which is up 8%. So the last quarter, basically, we had several positives. First was the waning of the second wave, which I think has been the biggest effect; India outpacing other countries in terms of increased vaccination; and a good monsoon. So these events basically led to expectations of a swift revival in the Indian economy. And those expectations have been supported by an uptrend in most economic indicators that we've seen like tax collections, power, vehicle registrations, highway toll and e-way bills. And this survival has basically helped a recovery in Chola's disbursements and collections during Q2 FY '22. From an overlay perspective, we've continued to hold the management overlay -- additional overlay of INR 700 crores. And apart from this, we've created a 10% additional provision for all restructured accounts as per RBI guidelines. So as I said, we'll just go through kind of quick numbers at an individual business level. The vehicle finance business was at -- disbursements were INR 6,161 crores as against INR 4,781 crores, which is a growth of 29% for the quarter. The LAP business disbursed INR 1,736 crores in Q2 as against INR 1,052 crores, that's a growth rate of 65%. And HL, home loan, disbursed INR 494 crores as against INR 381 crores in the same quarter last year. AUM, like we've said, has more or less been flat at INR 75,000 crores as compared to INR 74,471 crores last year. And our PBT-ROA was at 4.5% for the half year. And the ROE was at 18.7% as against 20% for the half year in the previous year. So our liquidity position continues to be strong with INR 5,401 crores as cash balance, and that's including INR 1,500 crores in GSECs with a total liquidity position of INR 9,800 crores of being -- include undrawn sanctioned lines. The ALM is comfortable with no cumulative negative mismatches. And in terms of asset quality, at the end of September 2021, Stage 3 assets stood at 6.16% with a provision coverage of 36.45% as against 6.79% at the end of June with a provision coverage of 35.51%. Total provisions currently carried against the overall book is 4% as against normal provision levels of 1.75% carried prior to COVID. And total restructuring book with 1.0 and 2.0, restructuring 1.0 and 2.0, stood at INR 4,749 crores representing 6.85% of the total book in Stage 2. And total restructuring 1.0 was at 1.27% and restructuring 2.0 was at 5.58%, respectively. And in terms of capital adequacy, the capital adequacy was at 19.63% as against the 15%. Tier 1 was at 16.67%. And we also had an equity investment in a company called Paytail Commerce, and we invested INR 9.75 crores to get a holding of 16.29%. So with that, I'll stop the commentary. We'll happy to take it over -- hand over to questions.

[Operator Instructions] The first question is from the line of Rikin Shah from Credit Suisse.

I have 3 broad questions. First on the growth. While the disbursements have overall recovered, if I compare the growth between the different segments, the LAP and the home equity is now growing faster and constitutes almost 30% of our total AUM versus 25% 2 years ago. So just wanted to understand our strategy of growing this business faster going ahead as well vis-a-vis the vehicle. And that's the first one. The second one is on asset quality. Our overall stress loan pool still remains relatively elevated at around 19%. I just want to understand the plans or expectations of how low we can bring it down in the coming quarters. And if you could also provide some data on the ECLGS incremental disbursements during the quarter? And the third question is on our consumer strategy. A few quarters ago, you had articulated that we would chalk out a plan on the consumer lending. Are there any updates on the same?

Okay. Thanks, Rikin. So broadly, on LAP and HE, yes, we do see those 2 businesses growing faster than -- disbursements will grow faster than vehicle. And the other thing, obviously, is because of longer tenure loans, they will increase as a percentage of AUM, and we're quite comfortable with that. And so we do see that trend continuing for the next few years. The -- I think you had asked -- I'm going to let then -- Ravi, why don't you answer the question on asset quality and ECLGS? And then we'll come back to consumer strategy.

Yes. So asset quality as on -- I mean, if you see the collection efficiency, 2 way we actually calculate it, one is that against the billing, our cash flow. So our billing -- cash flow against the billing for the month of September was like 114.5%, which has improved in October, which is the month which we just completed now. It has gone up to 116%. And Stage 1 roll forward rate of vehicle finance is actually further improved, and it has come down to 1.67% -- 1.76%. So we have collected 98.24%. And more or less across all businesses, the numbers are similar. So Stage 2 also overstay. In September, it has further come down. These are all tentative numbers when I say for the month of October. Up to September number, all available in the presentation. So things are improving. As against June, we have improved in September, and October is also looking better than September. In terms of disbursement, we have done better in October further over September as well as last year in spite of there is a slight scarcity in supply and a lot of manufacturers are expecting their production and their supply will improve in next 2 to 3 months' time. In spite of that, we have seen our disbursement is going up further over September -- in October and also last year October to this year, our disbursement has been pretty good. ECLG, we have not done much disbursement, very negligible amount of disbursement.

INR 25 crores.

Only INR 25 crores of disbursement we have done in this financial -- in this quarter, quarter Q2.

And the 19% will include around 7% of restructured book. It is not -- it is in Stage 1, but it is not.

Yes. Hope I've answered, Rikin.

Yes, sir. Just a follow-up or clarification on the asset quality. September collection efficiency number, I missed that number. And second, I just wanted to get a sense on how the NPA levels are for our home equity and the home loan business as well.

Both has dropped.

Yes, September, I mentioned that September cash flow against the billing was 115%. In October, it has been 116% now when -- and in terms of roll rate also, our roll rate has come down from 2% to 1.6%. So both the sides, we have improved. In terms of our...

LAP, it has come down from 8.86% to 8.17%. And home loan also has come down from 4.29% to 4.19%. Marginal decreases, but that's the way the movement is happening because people have started paying one installment, but they will start paying more once the festival season is over.

The next question is from the line of Praful Kumar from Dymon Asia.

Congratulations on the quarter. Vellayan, what we are picking up from the ground that you are doing some pathbreaking work on the digital side. So can you please outline your vision, broad contours in terms of what product suite are we building? Is it more like a Shriram Mall or a like of any other product? What are the broad time lines you're looking at? Any pilots have you done? Any update that you can share on the digital journey that you have been growing for last few quarters now?

Yes. I think -- so there are a couple of things, right? First, I always want to warn that kind of -- it's a transformation and transformations take time, right? So I don't think that we should build expectations because its impact on kind of numbers in the near term is going to be fairly minimal, right?

Sure. No, I'm talking about a 3- to 5-year vision, just to understand...

Yes. See, what we have said is that we will develop around 3 ecosystems, right? The vehicle finance ecosystem -- or the vehicle ecosystem was one, the SME ecosystem is a second and the consumer ecosystem is a third, right? And so broadly, what we've said is either through -- so there are 2 parts to it. Kind of one is how to get -- acquire customers for these ecosystems. The second is what products to sell them, right? So from selling the -- selling products perspective, obviously, we need to introduce new products, which is what we're beginning to do, that we can offer to these customer sets, right, whether it's kind of customer -- consumer loans, whether it's small business loans and as such. So we're developing products there and individual product teams that have been -- have -- are experienced within Chola. We're also building up kind of new teams, but led by people who we feel very comfortable with and who are experienced from Chola to head those teams. That's on being able to offer them products. On the acquisition side, we have to acquire -- see, the auto ecosystem, we have an acquisition mechanism to our existing loans. But on the other consumer and SME, we will look at both partnerships and potential acquisitions by the company to basically look at how we can acquire customers into those ecosystems over time. So that, again, are partnerships that hopefully over the -- and these partnerships and acquisitions will happen, I would say, over the next 12 to 18 months to either look at acquiring customers for the SME ecosystem or acquiring customers for the consumer ecosystem. So broadly, that's kind of the strategy. And then like I said, as it gets more defined over time, we'll continue to discuss it with you.

Understood, understood. Just, Vellayan, one more last thing. Do we have an in-house tech team already? How long have been -- we have been building? Just a small understanding on how deep entrenched is the product suite already in terms of the state of development? Yes.

Yes. So there are 2 things, right? Yes, we do have an in-house tech team, but we recognize that we need to significantly strengthen there. So we're looking at alternative mechanisms of things. So -- by the way we split it into 2 teams, right? One is the tech team, one is the analytics team. We've just now gotten somebody to head analytics who's fairly experienced in the space. And then basically, he's going to build out a stronger team under him. So that's something that just -- he joined us this quarter, and so we're going to -- he's going to help build that out. On the tech side, honestly, we do have an in-house team that has been developing some of the new products, but our traditional approach has been to outsource most of the development. We recognize we need to change that. So there, again, we're looking at alternative approaches in terms of how to build up much more tech. The big challenge, obviously right now that's happening in tech is that most guys are in incredible demand. Even start-ups are having a tough time keeping people. So basically, we do recognize that we need to build up there, and I'd still say that, that's a work in progress. We don't have any good answers yet.

Understood. Understood. Looking forward to this phase of Chola.

The next question is from the line of Prashanth Sridhar from SBI Mutual Funds.

Just 3 questions from my side. On the vehicle finance, in terms of capacity utilization of the underlying customers, how far you would say we are from the FY '18 levels before the CV cycle sort of went back? On the LAP, I missed out, if you have given the restructuring on Stage 2 numbers. And lastly, the new RBI securitization guidelines of not including direct assignment profits in capital. What kind of impact could that have on the capital adequacy calculation?

Yes. Capacity utilization, as I've been telling that, there are 5 segments in terms of the heavy commercial vehicle. If you see the top of the pyramid, there's large fleet operators are there. Their capacity utilization has been good. And then replacement demand, whatever number you are seeing, is driven by them. But the medium-fleet operator and small road transport operator, in the Tier 1 town, they are still having a lower capacity utilization. That's the reason, the replacement demand, which is likely to come up, is getting delayed. However, in Tier 2, Tier 3 town, where we are operating or our heavy commercial vehicle customers are there, where the utilization is more depending on the transportation of the agricultural goods or the sand and transportation of the bricks and all, those are doing well. So the capacity utilization in Tier 2 for the small road transport operator has gone up to 80%, 85% level. And it is still lower than 2018, which -- because 2017, '18 was the peak capacity utilization, we went up to 100%. So we are expecting that the capacity utilization will start picking up when the mining activity, road construction and infrastructure development in across the country will pick up. And we are expecting that, that will start happening immediately -- in the next quarter. We are also expecting that the Kharif crops will start coming to the market in November end or December. So with that also in Tier 2, Tier 3 town, the capacity utilization will further improve. So now coming to the restructure...

Around 4.38%. So last restructuring, we have done 4.38% of the AUM gross.

Yes. With regard to the final question on the RBI, 2 points. One, we have not been doing DA for quite some time now. And even when we were doing 2 years back, we used to net it off against the capital and follow the way the RBI had already been suggesting. As now suggested, we have been already following that from the capital adequacy.

The next question is from the line of Manan Tijoriwala from ICICI Prudential Asset Management.

Sir, what would be the split of restructured loans? And what is the total restructuring across 1.0, 2.0? And what has been the increment in this quarter over the previous?

Yes. I think we gave you the 1.0, 2.0 split. So the total book is INR 4,749 crores.

Coming to 6.85% total.

Yes, 6.85%. 1.0 was 1.27% and 2.0 was 5.58%. Is that what you wanted?

Yes. In this quarter, it was 0.3% incremental, if I'm not wrong.

No, 5.28% is the total on restructuring, which is predominantly in the first quarter. In the current quarter, it has been around 1% increase -- 1.2% increase in the -- out of the 5.2% -- 5.5%, sorry.

Fair enough. And sir, any ECLGS in this quarter and last year's ECLGS and restructured loans will be coming up for repayment now. So any pattern in these 2 segments in repayments? And how would you rate them?

See, the ECLGS is -- only 20% was the amount of ECLGS loans. The predominant part of the loan still is carried in our book. And the overall Stage 2, Stage 3 movements reflect the overall position. We don't try to give this as separate independent numbers. So we have a larger exposure, secured with the underlying security with us, and that is the reflection from the Stage 2 and Stage 3 numbers.

The portfolio of ECLG is doing very well. There is no problem in time. Actually, we have to understand that the ECLG customer has already the original EMI, which is, suppose the customer's EMI is INR 20,000, on account of the ECLG, the customer's EMI would be another INR 4,000, which is now going to get due. But this customer is already paying INR 20,000 for last 12 months, so there is no problem in that.

Sir, just one last question. What will be the provisioning carries, specifically on, sir, restructured loan?

Restructured loans, around 10% as the provision percentage. Was that you want?

Yes, yes, right. That's it, sir.

The next question is from the line of [indiscernible] from Point72 Asset Management.

Just a couple of quick questions. Firstly, on the OpEx front. Is there any one-off this quarter? Because the cost to income and also the absolute OpEx seems to grow quite a bit Q-on-Q. And also, how should we look at OpEx for the second half? Shall we continue to grow from here or the overall cost to income will moderate down from this quarter onwards?

Yes. So there is no one-off revenue in the income line. And with regard to the OpEx, if you recall, we told that in the current -- in every year, second quarter, there will be salary increments given. And also, if you -- when you're comparing it with last year, it may not look so because last year, we did not give the increment in second quarter. We gave it in fourth quarter. We spoke about it over in the discussions in the fourth quarter review, and the salary cost looked very inflated at that point in time. Same way, the balance scorecard or what we have as a variable pay, it flexes with regard to the profitability of the company because we need to provide -- a large part of the variable pay is linked to the profits of the company. So this year -- this quarter as compared to first quarter, the profits are much higher. So the provision with regard to the variable pay will also be proportionately higher. These are the 2 reasons. So in -- going forward, the salary cost will be around the same numbers as what we see today in the Q2.

Got it. I understand. And on the credit cost front, how should we think about second half credit costs? Because we saw credit costs drop quite sharply this quarter. Is it safe for us to think about this quarter as kind of runway for the second half? Or second half, do you expect some increase from here?

See, in the second half, we expect it to trend at similar levels but for any worsening on account of COVID 3-related issues. If there are no relapses of COVID 3, we should trend at the -- at similar level as Q2.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Most of my questions have been answered. So just one -- maybe one question for Ravi sir. Sir, I mean, you have, I think, I mean, answered my question in distant passes -- distant pass in the prior question, but what I was trying to understand is, I mean, how is the demand in both the new and the vehicle financing side looking right now? I asked this because -- I mean, if I look at disbursements in 3Q and 4Q and now in 2Q of this fiscal year, I mean, it has been around that INR 6,000 crores mark. So I mean is it primarily driven by, I mean, supply side issues? Or I mean, is the demand, I mean, also weak? Because I'm sure, sir, I mean, you've kind of alluded to that in the past as well, wherein we keep comparing the demand to 2017 and 2018 level. So I mean, if you can just spend some time and give us some color on how you are looking at demand in both the new and the used vehicles, sir?

Yes. So see, for the month of October, which is the indicator that now the growth is actually kind of holding good. I mentioned that we have done well in October, and industry also has done well in spite of there is a constraint in supply side. And supply would have been 20% higher than what has happened in October from my -- various manufacturers put together. So that number will come to then at a normal level in the month of, say, December or January. That is what we are hearing from the manufacturer. In spite of that, we have grown 25% disbursement in October sequentially. And from here, used vehicle demand is looking very good and as well as the new vehicle also, lots of orders pending across all the dealerships. So if we don't encounter the COVID 3, then this growth journey will continue to happen. And as I mentioned, that in the month of November or December, we will get the Kharif crop back into the market. And after that, mining and agricultural activity will be normal. So from there, heavy commercial vehicle from the small road transport operator also will start picking up. So disbursement from the replacement cycle, demand from the HE will go up and other products like cars and MUV, 2-wheeler, tractor will be also good. In this month itself, tractor disbursement has gone up to the highest level during the financial year, and industry also did well for the month of October. So future is looking bright provided we don't encounter any other problem. Otherwise, the moment supply side, because of the semiconductor whatever number is down, if that started improving, then you will see industry is growing and our numbers also will go up across the segment, and used and new both will do better.

Sure, sir. And maybe my last question is for Arul sir. I'm not sure if you've already shared this data point because my line is not very good today. Out of the total restructuring, how much we did across vehicle, LAP and home loans?

Yes. INR 4,200 crores in vehicle, INR 600 crores in LAP and INR 300 crores in HL.

[Operator Instructions] The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

You've always taken a lot of trouble to explain the various subsegments of vehicle finance. You are also showing some optimism in disbursements. So are you seeing the same optimism in collection efficiency as it become more broad-based because last time you'd mentioned that people associated with urban hubs are facing a lot of trouble?

Obviously. So if disbursement goes up in the market where we are operating, obviously, because of the economy doing well, collection will further improve. And it is actually a bit -- the customers are able to pay 1 EMI, but they are not able to pay 2 or 3 EMI to roll back their account from Stage 3 to Stage 2 and Stage 2 to Stage 1. In spite of that, we have seen in the month of October, why I'm saying again and again October, because up to September, data is available with you. And October number also, Stage 2 has come down and Stage 3 also a little bit has come down. So that's the reason. The trend is good. And going forward, if you see the mining activity, road and infrastructural activity improves, that will further enable the customers to pay 2 EMI because their capacity utilization will go up significantly. As of now, they are able to manage the current month EMI, and that's the reason I mentioned that our Stage 1 collection efficiency has been 98.25%, and this can go up to 99%, 99.5%. And it is the billing, our cash flow is 116%, which is going to go up further.

The next question is from the line of Shubhranshu Mishra from Systematix Group.

A couple of questions. If you can explain the client segmentation in vehicle finance, how many customers are dependent on cash crops versus rain-fed crops versus mining, infrastructure activities? If you can differentiate that client segmentation in the vehicle finance? In LAP and SME, sir, apart from the property that has been leveled to us, what is the -- what are the kind of properties or -- what are -- or the amount of properties that the customers would have? That's the second question, sir. And if you've mentioned any kind of write-backs or write-offs, if you can -- that's a data-keeping question I want to know, any write-backs or write-offs, or if you can mention both of them.

So let's take that. So the first question, we don't have that kind of data in terms of how many customers. We don't give like when it comes to rain-fed crops, kind of what was that kind of stuff. We don't share that kind of data at all. Second question...

Yes, we'll give the -- we don't share this data for the first and second. The third one, I'll give you. INR 145 crores is the loan losses on account of repo sales during the current quarter. This is the repo sales losses.

Any write-back, sir?

The recovery is INR 10 crores out of the bad debts, and these numbers which I gave you is after adjusting the [ repos ].

The next question is from the line of Saurabh Dhole from Trivantage Capital.

A couple of questions from my end. The first one is on the coverage ratios. So if I look at the pre-COVID coverage ratios, you were somewhere in the mid-40s. But right now, you are well below 40. So could we have utilized the strong PPOP performance during the quarter to kind of raise this coverage ratio and trend towards the mid-40s level?

See, it is -- pre-COVID, it is not 40s level. Pre-COVID, it was in the range of around 34 percentage, 35 percentage is the provision coverage. During COVID, it went up to 40% plus because of the management overlay, which we created consciously for the COVID. So we are back to partially around that levels of the pre-COVID levels because, I mean, we have used INR 400 crores last quarter for the COVID 2. The balance, we're still carrying INR 700 crores. As we had indicated even in the earlier calls, part of this INR 700 crores, we will retain on a continuous basis, but some of it will get either adjusted to its losses arising out of the COVID book or will get reversed. So at a very broad level, we should be carrying anywhere between INR 250 crores to INR 300 crores out of the INR 700 crores. Balance would be utilized or reversed, but that will be done after we are clear there is no COVID 3 coming in.

Okay. But given that the Stage 2 assets are still elevated, do you think that the coverage ratios have to be raised as we go forward? Or do you think the mid-30s level is something that is -- you're fine with?

So Stage 2 levels are looking elevated because the restructured book is part of Stage 2. So if you remove the restructured book, consciously, we have kept that -- we will be tracking the restructured book. And as it moves up, we will -- if it moves up, we will create additional provisions for that when it goes to Stage 3. If it moves back even in the current INR 700 crores, around INR 140 crores are assets, which have been moved back to Stage 1, but we still carry it because there can be a possible COVID 3, et cetera. So we are conscious about it, and we are conservative about it.

Okay. And the second question is on the UCV part of the business. I think Ravindra sir was talking about how the outlook is pretty strong. But I'm trying to understand why the growth this quarter was so low because when I compare it with the largest player in the segment, despite a very large base, they have grown very sharply during the quarter. So any thoughts there?

This is also because of the base effect. Last year, in spite of COVID, we grew while many of the others did not grow. And that's where the growth in disbursement seems to be higher. But if you look at it, UCVs, we have grown. From normally around 24%, we have done around 27%.

Yes. So we have grown 27%. And you are comparing with the industry, but industry data, authentic data is not available. What we can say that when we compare with the leading finance companies, our growth rates are almost with the top player, it's same. And the players who are actually below us, their -- our growth rates have been higher than that. And in this quarter, for the July to September quarter, we were also focused more on collection. And when our collection efficiency and everything has come to the normal level up to March, then it is better to actually start driving the disbursement, which is going to be the strategy for the next coming quarters.

[Operator Instructions] The next question is from the line of Bunty Chawla from IDBI Capital.

As we have seen in the data front, you have shared the vehicle financing net interest margin. And it seems to be one of the highest margin after reporting the numbers through IndAS. So it seems to be 8.6%. So how we should see this number going forward with respect to 2 constituents? One, as we see that -- in the GSEC yields are moving up. So it's a chance that cost of funds might move up further going forward. And secondly, with the vehicle sales, it seems to be the passenger vehicle could get impacted through the chip, but CV cycle is turning very well. The second half, there are chances that CV disbursement much higher, which could result in lower yields. So how one should see this net interest margin going forward?

Yes, Mr. Chawla, it is -- we have always said that because we have a very wide portfolio where the yields are very different from as low as 9.5%, 10% to 18% types, the tracking of NIM alone may not be the right thing because it will change with the product mix. And of course, as you rightly pointed out, that can also be a cost of fund increase. But has the -- in relationship to the yield movement, OpEx and net credit losses will move. So it's better to track, in our case, the ROTA, which is more -- which balances out the differences in the NIM and the OpEx and the [indiscernible].

The next question is from the line of Shreepal Doshi from Equirus.

Sir, just wanted to understand what is the nature of restructuring that we have done for each of the segments? Like what tenure extension or moratorium that we would have given to the customers for each of the segments?

See, the bulk of the restructuring is like a 1-month moratorium and then a reduction in the load of the EMI to take care that they are able to pay. We have not given a large amount of moratoriums. I would say, around 50% to 60% would be 1-month moratorium and then maybe another 20% would be like a 2-month moratorium and another 20% would be 3-month moratorium. Beyond 3 months, there are hardly any cases. So that's the way we have done it, but we have tried to make the EMI lighter by taking advantage of spreading it over the 24 months that has been given, which would be the max extension that is possible for any given customer. Does that answer your question?

Yes, sir. Yes, sir. Sir, second question was with respect to, what will be the segment-wise Stage 3 number if you can give, like for VF, for home loan and for home equity?

We gave you the number. I can tell you the number. Yes, 5.73% for vehicle finance, 8.17% for loan against property and 4.2% for HL.

Got it. Sir, one last question was with respect to OpEx. So in the other OpEx also, we've seen very strong jump on sequential and on year-on-year basis. So what could explain that? And will it be -- like this is a new run rate that we can work with?

See, when there are other -- when there is an increase in activity with regard to disbursements, et cetera, there will also be a corresponding increase in other OpEx. And we are also strengthening our IT side, and there are other expenses that we are taking care of in this buildup towards the upcoming demand. So those will be there. So we have said, at an overall annual level, around 2.5% levels would be the numbers you should look at.

The next question is from the line of Kunal Shah from ICICI Securities.

Sir, last time, you had highlighted that almost 80%, 85% of the customers in Stage 2, they were generally paying like the full dues and some overdue as well. But in terms of the rollbacks from Stage 2 to Stage 1, that has not been much. So how should we raise this? Maybe when do we expect it to stabilize to the levels wherein we were earlier? And are we seeing that customers are now trying to meet more overdues, more than a month or a couple of months overdues that it can be rolled back?

So Stage 2 has come down. But Stage 2, there are 2 parts in Stage 2. One is a normal Stage 2 and restructured Stage 2. So that restructured Stage 2, although customers are non-delinquent, we have actually showed them into the Stage 2 because we have provided -- created the provision equal to Stage 2. So the normal Stage 2 is cutting now. And that has come down over June to September, and the trend is good even in this current month also.

Sure. In terms of normalizing it to the levels earlier, how long would it take?

So if you see that, the Stage 2 pre-COVID level was different and during the COVID was different. During the COVID, when moratorium given, customer did not have anything to pay and we were continuously collecting the arrears and we were reversing the -- all the Stage 2. So in the month of August 2020 and September, we have seen the Stage 2 came down significantly lower levels. So that level may not come, but we will definitely come to the level where it was in FY '19, '20, that means 1 year before. So that should be the target.

Sure. And one last thing in terms of capacity utilization you highlighted, but when we look at it in terms of the freight rates and the diesel prices, how are you seeing the movement across various segments of CV? Is it being passed on adequately across the board and there is not too much of a pressure on the cash flows of the operator? How are you seeing the ground level impact?

Rates are going up, but it is -- there is a lag between the freight going up and the diesel prices going up. Diesel prices are rapidly going up, so there is a problem as of now. That's the reason I mentioned that the people who are actually operating the vehicle, especially the small road transport operator in Tier 1 town, they are -- and it is also pertaining to the long-haul operation are under pressure. And that's the reason in spite of having 85% capacity utilization, they are not able to pay 2 EMI. They're able to serve only 1 EMI, and that's the reason Stage 3 is not coming down. And going forward, when the other activity will go up, then the capacity utilization will go up to 100%. And then in spite of diesel prices going up, the price rate will continue to go up to cover up the -- their income so that they can start paying more than 1 EMI.

[Operator Instructions] The next question is from the line of Rahul from Lucky Investment Managers.

You've already answered my first part. Just wanted to confirm the second part where you were -- have you given a guidance on the provisioning that you see as a -- this quarter was very low at 0.3%. You guided for a similar number going ahead? Or should we look at a slightly higher number?

I don't think we want to guide specifically, but obviously, kind of this number was very low kind of because of what happened in the first quarter, right? So I think expecting it to say at these levels is unlikely.

See, over a period, we have told it will be in the range of always anywhere between 0.8% to 1.2%, 1.25%. That would be the long range number. So you should look at it that way.

Sure, sure. And the cost to income, you basically said, expecting an annual run rate of about 2.5%, right?

No, cost to assets.

Next question is from the line of Nidhesh Jain from Investec.

Two questions. One is, sir, can you share the slippage from the OTR 1 pool? Or what is the slippage or what is the restructuring we have done in the OTR 1? And secondly, if you think about from a longer-term perspective, do you see the vehicle industry will remain -- believe that the structure for the vehicle industry will remain the same as it is today where a large part of the vehicle industry is unorganized, very small road transport operators. Or over a period of time, you see the share of large-fleet operators to increase in this industry? And how do we plan to -- what are your views on that? And how do we plan to play -- to change our business model if we believe that the vehicle industry would largely [indiscernible]?

Sorry, we do not want to break and give these numbers like restructuring 1, movement, restructuring 2 movement like that. We would want what is publicly available being shared is the business-wise numbers we have given, stage-wise numbers we have given. I think we will restrict at that. I think actually we are giving beyond what many others are giving. So I would request the demand for such information be restricted. With regard to the second question, Ravi?

Yes. No, the question what you're asking is actually the large-fleet operator, medium-fleet operator, SRTOs, market load operator is actually predominantly for the heavy commercial vehicle. For the light and small commercial vehicle, mostly the customers are the small road transport operators. Very small amount of the customers are in the large-fleet operator. And if you see the TIV of the entire vehicle -- commercial vehicle, which is small commercial vehicle, light commercial vehicle and heavy commercial vehicle, close to 30% is -- goes to heavy commercial vehicle. It's 30% to 40%. The rest is basically the small and light. So within the heavy commercial vehicle, this is what you're talking about, where it is the large-fleet operator is driving the growth as of now because as I mentioned that, they are able to get the load from the load provider. SRTOs are depending on the market. And market loads are depending on the consumption and small activities, which is happening, like construction, mining and other things. And that is likely to go up only in Q3 end. And so therefore, coming to the point that if you are asking that heavy commercial vehicle will move from small -- SRTOs to the large-fleet operator more, slightly it has gone up in the recent times, but it will come to the normal as and when the haulage starts selling to the SRTOs.

The next question is from the line of Kushan Parikh from HSBC Securities.

My question is on the operating costs. Basically, just wanted some further color on, if you could sort of break up and let us know how much the incremental salary cost is coming from the increments that we have made and how much will be from the variable portion of it due to the higher business activity? And also on the digital spend front, if you could sort of give us some guidance as to how that will -- how these spends are ramping up? And like how much spending are we expecting to do on an annual basis on the digital front?

Yes. So on the salary cost, the increments constitute around INR 20 crores, INR 22 crores, and the variable cost provisioning will constitute around INR 40 crores to INR 45 crores. And then there have been some new additions, as Mr. Vellayan was talking. We have added a few new positions, et cetera. So those costs are also contracted in that. Probably, this is the number, and then there is some amount of variable pay to the ground staff because they have also improved the efficiencies during the current quarter with regard to collections as well as disbursement. So that would be the number.

And sir, on the digital spend?

Digital spend, I don't think we've increased that significantly yet, right? So if we do obviously start moving on that front, then we will let you know. Like I said, I mean, it's a work in progress about how we're approaching it. So there's been nothing to increase such spend right now.

But it will be more OpEx than CapEx spend, for sure.

The next question is from the line of Chandrasekhar Sridhar from Fidelity International.

Just wanted some color on the fee to business this quarter. It seems that [indiscernible] you've added about 4% to 5% fee to total income, which moved to about 7%. So maybe just some color on that and what's driving this. And then just on the home equity business, you did a gradual NIM expansion over time, you're now heading at close to about 4.8% NIM. Just some color again on what's driving that.

NIM expansion and home equity, why are we at 4.8%? What's caused the NIM expansion?

Yes, that is -- yes, NIM expansion is primarily the cost of funds reduction and some amount of yield improvements also is reflecting out there.

Has this also have to do with the -- are you also doing maybe different customers now versus what you were doing earlier and able to get better gains, et cetera?

No, we are moving progressively into some amount of Tier 2 cities. So that would also give us a slightly better yield.

Right. And then just on the fee income because it seems to have moved up pretty meaningfully, is there something specific between [indiscernible]?

See, that relates more with regard to the disbursement, et cetera. So as we -- actually, what has happened is over the last few quarters, the quarters are not being comparable at all and so it is becoming a bit of a -- it looks like there is a spurt, but that's not the case.

Next question is from the line of Aditya Jain from Citigroup.

One, could you talk about the -- as you mentioned, you've classified a decent portion of restructured loans as Stage 2 despite the fact that they're paying. Could you talk about the policies for upgrades? So what kind of performance would you look for? And how are they tracking against that performance now? And then secondly, maybe this relates to the previous question. On the -- the LAP disbursements have been quite strong and so what is driving that? And on the tractor Q-o-Q, we've seen a reasonable decline in disbursements. So what is that variability Q-o-Q, prima facie seems more than normal seasonality. Those are my questions.

Okay. See, bulk of the Stage 2 is already in Stage 1 only, but we have grouped them under Stage 2. So there is nothing to make it better from where it is today. What will happen is as per RBI guidelines, almost like 20% of the outstanding cost needs to be collected before we could reverse the provision. We are right now wanting to follow the same mechanism to look at the reversal -- I mean, the movement from Stage 2 to Stage 1 as we go along that. So that's on the Stage 2 to Stage 1 part. With regard to the tractor, I think that's more seasonal. You want...

Yes. So for tractor, last quarter, which is Q2, the industry was again building the inventory for the festival season October, November, December . And we have seen that October has been good for the industry. October, in this current month -- or last month, industry sold 1 lakh unit after again a long time. So therefore, the disbursement is aligned with the industry number. Our disbursement is also in a similar pace only. We haven't lost market share, and it is actually remaining very strong, same level.

The next question is from the line of Shweta Daptardar from Prabhudas Lilladher.

Has the repositioned losses are also being included in ECL evaluation besides the normalized process, if you could throw light more there? And also what has been the repositioned scenario because one of your key peers have been seeing meaningful uptake in reposition? What's your view out there on the ground?

You're talking about the reposition of the vehicle?

Yes, yes.

So if you see that H1 number in terms of the repo sale, it has remained flat. Q1 last year, reposition -- repo sale was higher and Q2 was lower. This year, Q1 is lower and Q2 was higher. But if you add both the number, it is coming to the same level. So therefore, repositions are at the same -- in terms of the repo to the overall asset, it is at -- the percentage of that on YTD basis is the same level.

The next question is from the line of Sanket Chheda from B&K Securities.

Yes, my question was answered.

The next question is from the line of Piran Engineer from CLSA India.

I just have a couple of clarifications, sir. In vehicle finance, last quarter, our restructured book was INR 2,250 crores and it's gone up to INR 4,200 crores. Are my numbers correct?

I'm going to check it out. What's the next one? Like do you have any more?

And the next one is also on when Kundu sir mentioned about the roll forward rate, he mentioned that it was 2% in September and it has declined to about 1.75% in October. But if I recall, last quarter, in July, you all have mentioned it was 1.5%. So is it a seasonal thing that in September, October, it increases? Or is there anything more to read into it?

Yes, correct, correct. You're right. So in the month of July, it was 1.45%. In August, 1.6%. In September, because of the floods across the country and heavy rain, it went up to 2%. Then again, it has come down to 1.76%. So for the quarter, if you see that, it is around 1.6% for the last quarter. And this month, it has actually again come back to the -- the beginning itself is a very good, 1.76%.

Piran, it has been an increase of INR 900 crores in this quarter.

The next question is from the line of [ Harshvardhan Agrawal ] from IDFC Asset Management.

Sir, just wanted to understand, you said that restructuring book was at INR 4,750 crores, but the breakup that you gave, when I add that up, the number comes to around INR 5,300 crores. So just how do I reconcile the difference there?

You're talking about overall Chola? Are you're talking about overall Chola or vehicle finance?

Overall Chola, the restructured book that you mentioned.

INR 4,200 crores is vehicle finance, INR 600 crores is HE -- LAP and then INR 300 crores is home loan.

Okay. So sir, if I were to add this number that you just shared, it is INR 5,300 crores. But in the press release, the restructuring book is at INR 4,700 crores.

That would be restructured book, but then something would have also been paid back, runoff would have happened. Those are the numbers. That is -- see, the press release, RBI wants disclosure on what had been restructured. So that is at various points in time, at the time of restructuring, what is the book is the total of that.

Okay. So these repayments, mostly would have come from the vehicle finance book. Is that understanding correct?

It can be anything. I mean I can't find out. It's predominantly yes, but it need not -- I mean, we can't -- I'm not able to immediately draw a conclusion.

Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Nischint Chawathe for closing comments.

[Audio Gap] joining us today, and thanks a lot to the management for giving us an opportunity to host the call. Happy Diwali to everybody.

Thank you.

Thank you.

Thank you. Thank you, Nischint.

Thank you very much. On behalf of Kotak Institutional Equities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.