CSL Finance Limited (530067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CSL Finance Limited Q4 FY '23 Earnings Conference Call hosted by TIL Advisors Private Limited. As a reminder, all participant lines will be in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors Private Limited. Thank you, and over to you, sir.

Thank you, [indiscernible] . Hello, everyone. Good afternoon, and thanks for joining the Q4 and FY '23 Earnings Conference Call of CSL Finance Limited. The results and investor presentation have been updated on the stock exchange and on the company website. In case someone does not have a copy, feel free to reach out to us or to be added to mailing list. To take us through today's results and update us on the business. We have with us Mr. Rohit Gupta, Managing Director; Mr. Amit Ranjan, Chief Operating Officer; Mr. Naresh Chandra Varshney, Chief Financial Officer; Mr. Chandan Kumar, Credit Head; and Ms. Rachita Gupta, Whole-Time Director. We will be starting with a brief overview of the quarter gone by and of the whole financial year from Rohit sir, followed by a Q&A session. I would like to remind you all that anything in SME setup plus that is said on this call that represents any outlook for the future, which can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we see. These risks have been mentioned in our annual report. Over to you, Rohit sir.

Yes. Thank you, Sayam. So good evening, everybody. I welcome you all to the quarter 4 and the financial year '23 earning call of CSL Finance Limited. Thank you all for taking out time to attend this call. It is a pleasure to address you all today and walk you through our performance for the quarter and the full financial year. So first of all, I will start with an update on our balance sheet. So our loan book stands at highest ever at INR 732 crores as FY financial '23, an increase of 41% year-on-year and an increase of 8% quarter-on-quarter compared to quarter 3 financial year '23. More importantly, the mix of AUM stands at 60%, wholesale portfolio at 40% SME retail portfolio. The highest ever in favor of SME retail. As many of you are already aware, we have been trying to grow our SME retail book faster, the results of which have been visible in the previous year's performance. The total disbursement for this quarter stood at INR 147 crores, which is lower both on year-on-year and quarter-on-quarter. The main reason for this has been intentionally lower disbursement on wholesale side. As we have explained earlier also, the wholesale is a little lumpy both in terms of disbursement and collection. Sometime in a particular quarter, we do a much higher disbursement and the corresponding with the collections are also higher. So it's the factor of collections also. And sometimes certain proposals illuminate more in a particular quarter. That's why it is better to see wholesale business from a year-on-year perspective than on quarter-on-quarter. And whereas the disbursement on the SME retail fund has been board in quarter 4, same as quarter 3. So collection efficiency as a whole for the company is 99%. A trend consistent for entire financial year, where our wholesale book has been with 0 equity and it's around 98-point-some-5% on the SME side. So you will notice we are carrying some higher liquidity as on 31st March 23, which was primarily on account of some scheduled NCD repayments in FY 2023 which we have paid amounting to INR 40 crores. We have enough sanctions in hand from the newly on-boarded lenders as well as from existing lenders for the coming quarters. On the leverage front, we have leveraged our book to 1.13% as of financial year '23 compared to 0.64% as of financial year '22 and 0.98% for the quarter 3 financial year '23. We are maintaining a healthy [indiscernible] ratio of 50% and a comfortable headroom to growth on the leverage side, especially now that we have a higher mix of SME retail in our loan book. The latest 4 lenders to be added to our portfolio of 15 lenders are Mathoot, Capital Services with [indiscernible] , InCare and HTCI finance. We also received new sanction farm existing lenders, partners -- lending partners like HDFC Bank and Tata Capital. I would also like to bring to attention our continuously improving asset quality, where we have been seeing a consistent decrease in our GNP and NPA for the last 8 quarters. As of financial year '23, GNPA stood -- stands at 0.61% and NPA stands at 0.35%. And these have been more than provided for us as presume coverage ratio stands more than 200%. In this year, we have also recovered bad debts amounting to INR 2.33 crores in financial year '23. We continue to see good production on the recovery side in the coming year also. Now coming to the profit and loss side. Our total income stands at INR 118 crores, an increase of 57% over financial year '22 primarily on account of growing loan book. Our net interest income stood at INR 88 crores, an increase of 43% over financial year '22. As you may have noted that net interest income growth has been lesser in financial '23 because of increased borrowing cost linked to MCLR repo rates. These higher borrowing costs have especially picked up during quarter 3, quarter 4 -- quarter 3 and quarter 4 and that is why -- it will dropped in those quarters. Going forward in coming few quarters, these costs will be passed on our customers, which will help us to improve our net interest margin. Further as a strategic move, we are getting more acting on transitioning our wholesale book towards floating rates, which will insulate us from certain moves in the interest rates going forward. You will see effects of this the coming 3 quarters. Consequently our PAT for the year stood at INR 146 crores, as an increase of 36% over the previous year. We maintained an ROE 12.56% and ROA for 6.94% for this financial year. Now coming to the operational update part. Operationally, we have been pushing out a lot of improvements on our tech side, the customer onboarding loan underwriting platform has witnessed a lot of improvements over the last year and many have been laid out in the roadmap given in our investor presentation for the coming year. Compared to a year ago, we are now much more confident of our technology capabilities processes team on the SME retail front. A lot of focus is on improving employee and branch level efficiency with the substantive training and migration programs already undertaken in financial year '23 and also planned for financial year '24. We are focusing on metrics like AUM per branch, AUM per employee and all efforts are going towards improving these metrics. So we see a better cost to income ratio. Looking at going forward, looking at response on our SME retail side and with more confidence in our abilities and the reason we'll be moving forward with the rolling out 6 to 10 new branches in the current financial year. We'll also take shutdown of some underperforming 1 or 2 branches. So the net branch addition will be of the tune of 8 to 10 branches in this financial year. On the team side, employee addition will happen on the branch level with new branches, but at actual level, we are well placed to cater to a larger set of operations. We will go for crediting review in the current financial year. Coming to our AUM mix, we further see a transition from our current 60-40 mix to 50-50 mix by the end of the next financial year. We are optimistic about the outlook for financial year '24 as the economy possesses the required team, technology, processes and capital further coming year. Now this was a brief update on all parameters. Now I would -- our team and myself to questions from your side.

[Operator Instructions] The first question is from the line of Vishal Prasad from VP Capital.

Sir, I mean SME loans, we have started a few years back and have been ramping it up very, very aggressively. So now it started 60, we plan to look at 50-50 [indiscernible] probably. So if you could talk about where do we see SME versus wholesale in the next 3, 4 years? And since we are not -- we are slightly new in SME segment. So what kind of risk do we see that we may face going forward and how we are trying to mitigate it?

So the next year, we have planned ourselves that we try to achieve a 50-50 mix, and we are very hopeful that we'll be able to do that based on the team addition and the kind of effort which has gone during last financial year, both in terms of processes, technology, training and the business that we have done. And now the team is fully motivated and geared up for the target that we have set for those zones and branches. As a broader level, we see that our focus will be more on the SME side. But depending upon the dynamics of the market, and we see that 50% to 60-40, maybe an optimum level in the next 2 to 3 years. But something -- certain things are a little dynamic, and if we see more space and become more confident as going forward. The SME will be our -- the focus area. And thirdly, about I think Amit will also add on the risk side. As a company, we have always thought of gradual expansion on the SME side just because we want to see that what kind of risks are coming and those risks are taken care of to our processes and enhancements in the credit policy and parameters, which we keep and throughout the digital platform, which we have kept, will start giving us information and start doing that analysis. So the core purpose of shifting to this platform, where a lot of effort has been done by the company in last financial year, last 18 months. And going forward, still, it's an ongoing process. And in next 6 months, we hope to see that the first level of -- to larger extent, the platform will be fully ready and -- so I think Amit will add more on the risk side.

Yes, Vishal, basically in SME, the main question you asked was what are the challenges we are going to face in coming financial year. First of all, the challenges were earlier also and challenges will be there in future and present. So we need to be very, very careful in identifying our clients. And we are not going very aggressively in terms of doing business. We want to have a very organic growth and customized approach is required. Wherever we are present, we are expanding within those areas only. We are not getting into new geographically because that is going to be a new area after 1, 1.5 years. And in terms of underwriting, we are trying to make most of the thing from subjectivity to objectivity by putting certain 10 to 11 parameters on which these clients are analyzed for their eligibility. So most of the things will be based on the platform [indiscernible] and lot of algorithm is going to be made in coming 6 months based on specific industries. Whatever we have done in the past 18 months, we have enough data on which we are -- our analytical team is working on, and we are trying to get most of the inferences from the past business. And we tried to rebuild on that information from this financial year. And like I said earlier, we are not aggressive. We don't want to open most of the branches and then there'll be issue in justifying the cost also. So we will be very cautious in opening branches. We'll be cautious in again, identifying the right kind of client. Mostly it is direct marketing team, which we are doing and direct sourcing from the market. So the most of the clients will be new to the company, and they will be new to credit, so it will be easier for us to make them understand educate also that paying AMIs on time is good for them so that they can come under main -- banking mainstream. So that's the idea we carry for SME for this coming financial year and we intend to do at least a new book of INR 200 crore or INR 210 crores to INR 220 crores in this financial year.

So what's the current breakeven AUM for the branch?

So currently, in branch, if we open up, it takes around INR 6.5 crores, INR 7 crores to have a breakeven and then starts making profitability. So at least INR 7 crores of a business is required for a branch which comprises of a Branch Manager, Credit Manager and 3 to 4 RM and RO. So this -- and it also depends on the rentals because we are present in Tier 2, Tier 3 cities, the rental and the cost of manpower also differs. So ideally, on an average, it is INR 7 crores of AUM by which only we can go for a breakeven.

Okay. So based on this INR 7 crore and what figure If got in the previous call. So you have mentioned that the branch becomes breakeven at INR 7 crores, become decently profitable at INR 10 crores and [indiscernible] the branch is doing a business and [indiscernible]. So out of 26 branches, how many of our branches are doing more than 20 crores and [indiscernible] to INR 20 crores?

So in our 26 branches, few branches, we have shifted from one location to different location, and there are addition of around 4 to 5 branches. Since we have started doing business from July and going onwards, prior to that, it was COVID, the business has not happened and it was in a lull period. So from July '21 till now, there are at least 50% of the branches which has got INR 10 crores. In INR 20 crores, there is not any branches. Why? Because the ticket size we are maintaining at an average of around 10 lacks to 12 lakhs. So reaching INR 20 crores this financial year, I hope that at least 50% of my branches will cross INR 20 crores of an AUM.

Okay. So generally, our AUM per branch is INR 7.92 crores and we are breakeven at INR 7 crores. So I understand most of our branches are new. Probably they are barely profitable. So if we today decide that we are not going to open anymore branches and we operate with the 26 that we have. So over a period of 2, 3 years when the new branches become more established, what kind of change are we seeing in terms of profitability of the SME segment?

So in terms of profitability, like I said earlier also, we are not aggressively opening branches, but we will definitely add on few branches in this financial year. So in terms of profitability, we see at least 2.5x in terms of per branch because INR 8 crores, we have already achieved at least in 82%, 85% of the branches. Moving from here we will be all -- because we are not adding any manpower -- additional manpower in any of the branches. It will be only a recruitment cost, which will be there. So we intend to do at least 2.5x profitability in coming 2 to 3 years.

So for a new branch, how much is the CapEx and OpEx will be doing in the first year?

So CapEx is generally is not beyond -- for a year, it is [indiscernible] salaries and fixed salaries and assets and rental parts. It does not go beyond the INR 15 lakhs to INR 20 lakhs. So we take as a INR 2 lakhs, INR 3.5 lakhs to INR 4 lakhs a month. So at least, INR 40 lakhs, INR 45 lakhs a year is the CapEx -- sorry, OpEx and the CapEx is not beyond INR 4 lakhs to 5 lakhs.

Okay. And out of 8 SME branches, which are more than 3 years old. So what is the total AUM under these 8 branches?

That figure I will have to update you. But generally, it is around INR 80 crores to INR 90 crores of that total branch, which is 3 years INR 80 crores to INR 90 crores of the AUM we are maintaining. Because practically, that figure, I will have to update you. But generally, it is around INR 80 crores to INR 90 crores of that total branch, which is more than 3 years, INR 80 crores to INR 90 crores of the AUM we are maintaining because practically, if you see most of the business has happened in the past year and July '21 onwards only, when we were rebuilding the SME after the COVID period. And we have increased a little bit on the penetration in the urban areas of the cities. So the ticket size also increased from 4 lakhs to 5 lakhs. Average ticket size 4 lakhs and 5 lakhs to 12 lakhs, 13 lakhs. So currently, most of the branches, which is more than 3 years will managing at least INR 80 crores to INR 90 crores of the AUM.

And pre-COVID portfolio is less than INR 30 crores as of now. We have seen a lot of foreclosures in last financial year. So that was also one reason that here -- our portfolio has run down. And so now most of the portfolio is post-COVID. So it is less than INR 30 crores belong 15% of our portfolio, 12%, 13% of portfolio pre-COVID portfolio.

The next question is from the line of Ajay Sharma from Cycas Investment.

I just had...

Mr. Sharma, your line queue has been unmuted. Please go ahead.

Yes. So I had a few questions. The first is, what's the company's cost of funds?

Cost of funds, which was less than 10% at the start of the financial year, it is around 11.25% as of now, 11.2%.

Okay. And do you see this going up or coming down over the next year?

11.1% and it has basically risen in the last 1 or 2 quarters. And so quarter 3 and quarter 4. So 11.1% is the weighted average cost of borrowing.

Okay. And Do you see this going up or down in the next 1 year?

No, that pressure we have not seen in last 1, 1.5 months, which was there, I would say, till March. Now whatever we are speaking to a lot of new lenders for the next -- in this -- for this quarter, and we are not seeing that. Now we are seeing a little ease. Now we have a little more bargaining power in [indiscernible] and that reduce the cost of borrowing and what was in March.

Okay. Okay. And I read on the presentation that the company is looking at launching advanced secured products. Can you tell us a little bit about this and also how you plan to manage risk with this product? Is it for existing customers? Or is it for new customers?

No. We plan to do that in the last quarter. But because of the platform, we built a different platform for that and where we want to do it on the same day. So we are targeting a particular segment. It's a particular segment where we are having a data from very big company, which is providing that source to us. And with a little bit of, I would say deterrence, bid for the borrowers. So that is a helping point for us. And so the ticket size will be around 2 lakh to 3 lakhs to start with. And so we can better talk when we do a few accounts on that. And probably at the end of this quarter, a few of the accounts will be onboarded. And after that, but because most of those segments we are targeting, it's a niche segment where order based raw material requirement for those people is required. And where the -- I would say repayment fee will also happen within 60 to 90 days. So they are short term -- short tenure loans and which will be consistent in one place. We will take again because they have a continuous flow of orders. So we don't see too much risk and there will be certain -- we have certain credit parameters to do those loans. But as of now, I can't say too much, but they are far better as compared to giving PL loans of INR 50,000, INR 1 lakh to public at large, then targeting a particular segment based on where they have been doing business for last 3 to 5 years at least and have reasonable turnover. Sometimes the biggest risk from this segment comes and you have a credible data, but that will be a little advantage to us as we'll be having a credible data in terms of whatever they have been doing business in terms of business.

Okay. Okay. And along the same lines, can you just talk a little bit about the client profile of your SME retail borrowers? Like are they already in debt? What is their interest coverage? Is it the first time that they have access to formal lines of credit. Can you just give us a bit of information about them?

First, we have to understand the target audience of our SME division. Because SME is a very wise word from INR 5 lakhs to INR 5 crores people categorize as SME. Our target audience is Tier 2, Tier 3 cities, very small entrepreneurs like karyana merchants, like small walk shops, maybe kettle field having multiple small sources of income within their family, running candy shops, garment shops. So these small trading people in different segments, they are our primary customers in Tier 2, Tier 3 cities. And so -- to assess their interest coverage ratio, you will not get any audited or credible financial information in a qualitive format from them. And they do -- most of them or some of them are not new to us. They are already having some personal loans or maybe housing loans. So people and their credit history is one important parameter for us. Apart from that, what kind of turnovers and incomes they are generating based on their businesses, vintage is very, very important because these families are mostly -- families are least 4 to 6 people are living sometimes joint, brother with dad. We take them as 4 applicants and merge collective income into that. And secondly, this is where a huge under penetration is there. We have 50% 60% of India still live and where it has become very difficult for banks to penetrate these segments and to do collections from this segment. As the company, we focus that we have to build a knowledge around particular few segments. And if we are able to do that -- so then our presence and a little edge we will have as compared to targeting a very matured SME manufacturer. Either they will be relying on bill discounting mode, maybe CC mode from banks. So that is not the segment where we can build a niche or competitive -- some competitiveness will come. So as this segment is neither can be fully breached through the fintech mode also primarily being totally secured. Our 92% customers, we take the self-occupied residential property, and we are doing the complete 13-year chain [indiscernible] perfect kind of a mortgage. So these are fully collateralized and LTVs are less than 50% and where it's a little lower education, we are taking -- not going more than 35%. So first they are fully collateralized first. Secondly, they are -- they're still -- are not fully penetrated. Thirdly, they can't be penetrated by larger branch. The way they need to be assessed and way they need to be serviced. And so -- and that is why more and more branch are looking for co-lending with the NBFCs, which are focusing in these areas. And most of them are falling under MSME Udyam registration. So these are priority sector loan this comes into that. So your question that you can make the reasonable assessment on the interest coverage ratio and all those ratios based on some audited or unaudited financial parameters, that is not there. As Amit just told it varies algos and how to make this subjective and objective one based on their -- what kind of network they have, what kind of assets they have created, what kind of stock they are keeping, what kind of margins they maybe enjoying, what kind of living standard they have, what kind of children -- which kind of tools they are studying. So based on how they have grown in the last 10 years, when you pull in all those parameters and put into a proper format and run the algos and build a knowledge around that. I think creatively you can do it. Definitely, they can be 2% to 3% of NPA. Those are not NPAs because we are able to -- from our track record of recovery in last 18 months. Prior to that, there was an embargo of classifying as an NPA. We are -- because we are fully collateralized. We're able to recover and recovery from surface is faster, which is INR 20 lakh plus. And in other, even multiple ways of execution, arbitration [indiscernible] one also was good. So sometimes a few cases, we are tied up some few cases, we are getting a resolution. So having a large NPA, which can't be recovered, seems -- not that -- probability is little lesser.

Okay. Okay. I understand. Now I've been an investor with the company almost since 2015, and I've been very impressed with how the wholesale lending book has grown and how it withstood COVID. So my question is why go through the effort and the difficulty of building an SME retail book and building a sales force when you can focus more on the wholesale book and put the same effort there and you will expand much more, right?

You're absolutely right. But I think sometimes having a combination of both retail where we have to build a knowledge. The same way we have build in the wholesale. So wholesale, there are 2,3 limitations. Because of ticket size, there is lot of [writers] from the banks and the rating is [indiscernible] that exposure for customer first is too much. Sometimes because of the lumpiness in certain time, lot of accounts get taken over. And thirdly, it gives us a -- SME is a very regular, granular business where disbursements are very, very -- happening regularly at the gradual rate per month and collections are very, very predictable. Whereas wholesale where all those, they do make their repayment before the repayment schedule. So we wanted that, it gives a very good mix of both and we're able to utilize our capital to the max and may help us to bring more lenders into our profile and help us to bring visibility of a company as a whole also. So we think it was acquired and that was why we have added it. Otherwise, as a company, why would have we added if are able to get -- single whole sale business was fine So that was our though behind that.

Okay. Okay. And I final question is revenue forward guidance about loan book?

I'm not able to understand.

Do you have any forward guidance about loan book? Any targets?

We have, till date avoided giving full guidance, and -- but we have given a guidance on the product mix. Definitely, now we are on growth path from 4 lenders, which we were there for 3, 4 years during COVID and post [indiscernible]. Now we have focused a lot of building our liability side. Now we have 15 lenders and we hope that much more lender will come this year and the focus is on growth both the reasons, they now stabilized. Team has been stabilized, operating the platform and the policies. So the focus will all on the growth side and last 2 years have been reasonably good for the company. So putting numbers that definitely, we have a lot of scope to leverage ourselves. We are only [indiscernible] through the debt route and at opportune time and any other instrument. So yes, when we have made all those efforts in the last 18 months, so focus will be on the growth and definitely we achieving good numbers will be our focus.

The next question is from the line of Dhwanil Desai from Turtle Capital.

So my first question is -- so I think, if I look at the disbursement and loan book number. I think last year, we disbursed around INR 760 crores. And our loan book has grown by INR 216 crores. So can you give some flavor as to what are the typical repayments in the loan book that we are having? And going forward, as the SME proportion increases, is that going to change? And a question tied to that is that in terms of tenure for SME loans, are we looking at longer tenure SME loans? And if so, what is the current proportion and how do we see that going forward?

There are 2 questions one wholesale and one on the retail, I think. Chandan will give -- tell us about the wholesale on the tenures and the repayments and all this and Amit [indiscernible] the second part.

For wholesale loans, generally, the general tenure is range of between 36 to 48 months, which is proposed from our size and angle terms. But being, as Rohit sir told you earlier, that the cash flows are very lumpy. So the cash flow from the project has start coming within the first year itself once the project get loss. So as per our experience in last 5 years, we see that for general tenure, 48 months loan, it get closed within 24 to 25 -- 24 to 36 months within that period -- or grow positive for larger ticket sized loans, I'm telling you. And for small builder loans, that is wholesale small. Average tenure is around 36 months, 24 to 36 months where we can see cash flow starts coming with 12 months when the part of floor or part of the project gets sold. And within 24 months, most of the accounts get closed. So here, you can see the collection in wholesale is very much lumpy, and we used to collect much more in advance than scheduled repayment time. That is why like the disbursement numbers and the loan book increased is on the [indiscernible] side. Apart from that, you can see that there are -- in wholesale we do various kind opportunity-based business. But the tenure, the loan get close within the particular year. So that comes into the disbursement and well as the [indiscernible] part also, but it does not impact our loan book. That is going incremental value to the loan book. That's the vary kind of opportunity we have developed, were we issued into a particular financial year and get our exit into particular financial year later.

We are focused on one segment only. We're not going into too many areas because as we strongly believe that we should only focus where we have built knowledge. What Chandan said, I just like to add. There are certain accounts, which we bought at a much higher IRR. But as those cash flows become much more stronger and certain times those get taken over by much lower rates at so buy larger then. So that is -- we at the time of boarding also understand, this account will be for 6 to 9 months to 12 months. But -- and Chandan has categorized these accounts as opportunity base, but they are from the real estate segment only but at time of boarding, we sometimes able to perceive that the customer will not be there with us for a very long period. And sometimes when we get at a very attractive rate, it becomes very, very difficult to retain. But those customers have been very, very repetitive with us because the kind of understanding the feel that we have about this segment and what is going around within authorities and practically what is happening on the [indiscernible] and what kind of divisions required to be taken at opportune time and we just deal. So they do come back to us.

On the retail side, we have various products ranging from 4 years to 7 years maximum. We don't intend to increase the tenure in coming financial year also. So average like -- it is almost like in the wholesale also, the onboarding of the client happens here in SME, and we also see that the balance transfer happening within 24 to 36 months. And average tenure currently with our complete portfolio is around 56 to 60 [indiscernible]. So we don't have any issues in maintaining the same tenure in the coming financial year also. There are cases, which is around 5% to 4% where we think of giving a little bit higher tenure like 8 years or number there are only exceptional based. Primarily 95% to 97% of my book is less than 60 months on an average.

Even in those cases that they run down after 2, 3 years are either demanding top off or they get taken over by other institution.

So is it a fair understanding that as the SME proportion increases then the disbursement to loan book ratio will improve further? Because SME will have higher tenure.

I'm not able to...

Yes, definitely, what Dhwanil is asking that the loan book to disbursement ratio [Foreign Language]. So that will increase or not?

That will increase on SME if our wholesale, largely because it is very [ gradual ], last year we did around INR 145 crores, INR 150 crores on the retail and SME around INR 85 crores. And that is our SME. But definitely this will improve. Our disbursement on the wholesale will come down little bit.

And second question is on disbursement. Looking at this number, even if now considering that Q4 was an anomaly because we wanted to confirm liquidity. We're still in that INR 190 crores, INR 200 crores kind of a range. And we have intention of scaling up SME for branch AUM. So next year, do we see more than INR 200 crores quarterly run rate going forward? How do you look at that?

Quarterly run rate of the total disbursement?

Yes.

Hopefully, so definitely this should come. The SME is more granular and wholesale is more bigger and some lumpy. So on year-on-year, I think we should be able to do that.

Okay. And last question from what was earlier discussed at INR 7 crores number, generally, our branches become breakeven on an average. So currently, we are at INR 7.92 crores and [indiscernible] is it safe to say that at our portfolio level, SME is almost close to breakeven or slightly better than breakeven? And as we scale up the incremental profitability will flow to the bottom line, that is the right way to look at it?

Yes. We are profitable even right now. We only put -- so we just -- I don't know how industries do that when we assess our profitability internally, even our own equity we put a cost to that. So that is taking -- now the profitability has to come from that. Our rated cost of borrowing is the cost of borrowing for our equity part also. So if you don't put that cost to that for our internal profitability metric. Then even our retail is also profitable.

What I'm easing at is sir that next year or the year after that...

Definitely as Amit has already explained our OpEx will not increase too much in proportion to business which will be doing it. So definitely, now the additional business will give us more margins as compared to -- as we have told last quarter also now most of the manpower had to go at 1,000, we don't see too much addition except from the opening of the new branches or adding few more people to the existing branches.

And moreover, the platform is already ready. We have worked very hard for the last 18 months. And now it's time to scale up from those branches only. So like I said earlier also that we don't have to put more cost into building a branch or hiring a manpower or building on a technology front also. We need only have to go more into the market, making the branches average productivity move from INR 70 lakh to INR 1.25 crores. Similarly, then only we'll have profitability at all branches in much, much better way in coming financial year because with the platform, which is set right now, it's only what we have to do is to pump in business from the same set of branches, adding queue . And I don't see any reason why we cannot be profitable in all branches in coming financial year.

And last question on provision type. I think we are being far more provision than what is statutorily required. I will provision coverage ratio also is pretty high. So are we likely to continue or are we kind of trying to build a buffer for the rainy day? That is the thought process.

We have kept a benchmark that for the Stage 1 and Stage 2 assets, we will be having 1% provision coverage ratio minimum as compared to 0.4%, which is a statutory limit. And for the secured one, we are doing between 0.4% to 0.5%. So when we take cumulatively last year, our provision growth was higher. So our provision for standard asset was much higher. So around 60% has gone for the standard asset provisioning. So that is why the provisioning coverage ratio has increased. And I think these are -- yes, we are a little more conservative and so we intend to carry this policy. Because we have made a policy now we don't intend to change it, and we'd like to maintain the same policy going forward.

The next question is from the line of Nikhil from SiMPL.

Congrats on good set of numbers and what we had sensed prior to the year. This actually achieved it. So great. Congratulations to the team. My question is basically on Slide 33 where we have given a breakup of any SME retail. On the active accounts, if I have to ask, at the beginning of the year, we had around 1,450 accounts, which are around 2076 today. So of these accounts, which we started, with how many would we have been able to retain? And how would be completely new to the system?

We don't have upfront, but the number of accounts that we boarded was much higher, we have seen a lot of foreclosure in last financial year, but those numbers, what was the foreclosure. And -- so I think we will start putting even that in the future. But upfront, as of now, we need some time to give the data but in -- right now, we'll not be able to give exact numbers in terms of number of accounts. We boarded level 1140 accounts we boarded in last financial year. So the rest, opening plus 1,140 minus have been closed, either being foreclosed by the borrower or may have been taken over by the other brands.

Okay. Sir, where I'm coming from is, sir, if I look at the average ticket size, which was 7 lakh has moved to in 10 lakh. And if I also look at the average LTV, which was around 27%, there, we see a jump of 34%. So the newer accounts which have come up, it seems that the average ticket size is also larger and also the LTV ratios are much larger.

I will explain that, and Amit will also add. There have been a little strategy on that side because in COVID period, we have seen that prior to COVID, we were focusing more on the 5 lakh to 10 lakh kind of ticket size. What happened, those are purely rural, one would say. And secondly, those accounts, they were marginal borrowers. Whenever anything goes wrong, in their families in terms of medical, health, education or any dynamics in terms of businesses. So we found that they were coming a little bit under stress and the quality of the properties. When we started moving into Tier 2 cities, mostly within the municipal limits or on the borders of the municipal limit. We have the quality of the property is far better the vintage of the businesses and multiple business source we start getting. So the LTVs will definitely go into -- as we told, where low education areas, rural areas. We limit ourselves between 30%, 35%. But as you move to more semi-urban or little urban areas, their LTVs, we have to go at least 45% to 50% sometimes. So that is the 2 reasons. And thirdly, we have also found that [ HTC ] helps us a lot. And there was a structural strategic division also that a certain portion of our segment, we will start focusing those small borrowers, maybe 20 lakh, 30 lakh kind of a ticket and making the 25%, 30% of our portfolio. So it is not because of [indiscernible], but in terms of we are able to diversify ourselves. Thirdly, the quality of collateral is far better. The vintage of the business and multiple source of businesses are much more there. And we have found also those people have in terms when we have started taking their network and multiple properties also. And that helps when sometimes in stress, they are able to dispose of surplus property, which when you're targeting a very marginal borrower of INR 5 lakh, INR 7 lakh. The presence of those multiple properties are not there.

So to add to this -- Yes. To add to this, like on the strategic front also, we never wanted to go into the rural areas because of the quality of the property. These clients are basically very marginal. And we wanted to operate on a much more liquid market, wherein if something happens within the dynamism of the market, these people are able to have such kind of cash flows that at least 3 to 4 EMIs are at their disposal. So we wanted those type of client on our portfolio so that it becomes little bit moderate in terms of cash flows also in the quality of the property, which has to be in the market or urban area for the salability and easy accessibility of those property. So it's a much, much better way to operate in the SME segment by this way by protecting your interest as well as looking after client interest as well. And these kind of clients are basically small or medium type of business client who keeps on having multiple of business, multiple of properties. So it is easier to operate and communicate with them. They are a little bit much better educated also from a credit point of view.

Last year, in COVID time, when we were doing this less than 10 lakh, 5 lakh cases. So we came across that sometimes if the dynamics in COVID, the dynamics changed very fast. Certain businesses were closed. They were not able to come back. So being very -- being on the marginal side, sometimes to come back or cover from a little difficult stress period becomes difficult for those customers. So yes. Difficult to do -- and targeting INR 5 lakhs, 7 lakhs, doing in perfect collateral, taking large sale deals, these things are far faster.

Able to assess their eligibility also.

Strategically, we thought -- and because a lot of [indiscernible] went in the COVID period when we analyze each and every account. So it was -- that was the one reason because of which I would say LTVs have gone up. So far better collateral we are getting and in terms of the other also.

Ticket size also.

Yes. Second question is, now if we consider and one of the parameters you said is the ability to match that customer cash flows with his ability to resale. And if I attach it to the unsecured loan part, which you mentioned in that presentation, what gives you the edge that if you go into the unsecured loan products for MSME in Tier 2, Tier 3 cities, how much of our current leveling can be replicated? And when we are going into unsecured versus a secured set, is in secured based cash flow was INR 100 lakhs, and we were getting in a loan of INR 20 lakhs. In unsecured, what would that metric be which we would like to maintain?

First of all, we are targeting a particular segment. It is mostly they are getting order base. So when we are funding them, they are taking raw material based of some order. We will be only funding -- they will be discounting there, receive a not bill -- purchases. So we are not giving just personal loans or business loans. We'll be just discounting their purchases, which they will be making from the particular set of retailers. So it is a, I would say, the discounting of their purchases. And secondly, those are mostly order based raw material which is purchase and the tenure period for that segment is 60 months to -- 60 days to 90 months -- 90 days.

90 days.

So the -- secondly, whatever we have learned for the secured part, definitely, we are putting into that. We build a separate platform. Amit?

Yes, on this one, see how we are going to coexist together is -- we are not going out of any of the geographies. We are present there. Our team is present there. We are not making any special team out of It. we are having a data which is -- the data where we want to go. It is a vetted data in terms of these clients are already there and the bills are getting funded from us for INR 50,000 to INR 2.5 lakhs. It is a completely digital platform. That's the reason we are taking a little bit of time. We are just adding more credit analysis into that and the underwriting partly also there earlier, we wanted to fund them, and we wanted to take at least 2 to 3 days, but we wanted -- now we have an idea, and we are targeting that we should give them a loan within 24 hours with the details which we have. The team is there, the credit underwriting -- It is a centralized credit underwriting team, which will be built out of [ HO ]. The sourcing will happen from the same branches where we are operating from the SME. Yes, the ticket size will be a lower size, and it will be a mix to start with 10% of the portfolio in the coming financial year, 10% to 15% of unsecured and remaining will be 85%, 90% will be a secured one.

Okay. And last question. The yield on these loans would be accretive to the average yield for the company? And secondly, on the credit cost side, if we have to consider the credit cost and because we have both wholesale and SME book, would the credit cost or the provision which we have carrying for the SME book be higher than the wholesale book?

Yes, definitely. So most of the -- because there is not a single account into DPD on the wholesale. so you can say, yes definitely. But if you see in last 18 months, our gross NPAs in spite of our book increasing by INR 200 crores in the last 18 months have come down from INR 10 crores to INR 4 crores, even if on the amount which we have returned -- we have written off , we have recovered roughly INR 5.5 crores in last 18 months, post-January '22, I would say. So on the granular level on the SME side also, it was during COVID, when our gross NPAs have crossed INR 2.92 crores and morely coming out of SME. So from that situation, we are -- at that time 290 accounts in schools were out of that 65% to 70% have become NPAs with most of them, we have made some regular or we have resolved barring 1,520 accounts, which were less than 5 lakh mostly on the total secured, which we started in that period, which are totally closed in the last 3 years. So in terms of the credit cost, which has come, and it was more with the COVID period and in the last 18 months, we have reduced to a very large extent.

Okay. And the yields would be accretive for the unsecured to the total company average yield as of today?

Secured.

Unsecured. Secured, we'll definitely target a little higher yield. 20-plus times and what we are saying again and again, we don't know the dynamics. We have to see the dynamic and somewhat, if you find that the segment is extremely fine and we are -- our operating cost and repetitive customers and the credit cost is seen as a much lower percentage. We may reduce it. So the dynamics of the business will ultimately determine the IRR, but we will price a 20% plus to start with.

The next question is from the line of Rupesh Tatia from Intelsense Capital.

I have 3 or 4 questions. So first, a question is on the SME side, would we 1 to 30, 30 to 60, 60 to 90 and 90-plus DCDs.

Yes.

DCDs.

DCDs. It is already in there, our balance sheet. I think it will get uploaded in 1 day or 2. So where those accounts have a complete details of that 0-30, 30-60, 60-90. But I would like to add a little point on that. In our segment, sometimes bouncing percentage is between 12% to 14%. Where out of that 84%, 85% gets collected directly when we go through a NACH at the time of presentation in the first week of the month and 98% to 99% gets collected. And certain people if they fail in a particular month, they pay 2 EMIs next one, they become regular. So certain new customers come because sometimes certain businesses are seasonal. When you are targeting a Tier 2, Tier 3 city and small businesses, all businesses are not the same velocity every month. And because of some seasonality, some encountering any health issue, some go having any marriage and all those certain sometimes one can see a customer missing one or at the max EMIs, getting regularized. And sometimes, a new customer comes and because of that, there are a few customers you will find since we were 30, to 30-60. But if you see that track record, they are coming back, some new maybe adding. So it is because of certain peculiarity of this segment, where we are.

Yes, yes. Understood that but the reason I'm asking this question is in SME, our collection efficiency is 98% for most of the quarter. In Q3, I think it was 99% and [indiscernible].

When we say this collection efficiencies 0 to 90. So if a customer flips in a particular month, the other customer is being substituted by that, which has been [indiscernible]. So the efficiency for that [spend] can remain between that, 90% to 99%.

Okay.

If you're still not able to understand, Amit, you can explain.

Yes. So the percentage which we are seeing 98%, what rightly said by Rohit sir is that in this kind of segment, sometimes the customer flips from 0-30, 30-60 DPD because of unprecedented reason may be medical, maybe some kind of unforeseen expenses are there. So it flips from one bucket to a different bucket, but in the next month, he gives all the EMIs when the situation is better. So that is the reason. Sometimes it overlaps the payment done by one client. And if he misses then he pays in the next month. Some few of other client misses in that particular month, and then the pays. It's which keeps on going from month-on-month. But we have a target of doing collection of 100%, but we end up doing 98% to 99%. So that's the reason it has been given 98%. Nevertheless, the collection piece, which you are seeing, if you see on an average, it is almost in 0 to 90, we cover all the cases by the month end.

Few of the few branches do 100%. Some branches do 94%, 95%. So their average comes out to 98%.

Understood, sir. Understood. My next question, sir, can you give me what is midsize large book, actually large book as of March '23?

Not able to understand, sir.

Are you asking SME large book or the overall book?

I'm asking SME large book.

So on the book side. If you have...

I have understood. So he's talking about our high ticket retail one, SME large book around INR 85 crores. These are small, I would say, small to midsize borrower and more into the NCR, far better collateral and where LTVs are lesser than 40%, 45%. And mostly, they are in the NCR region as of now. They are far better and the predictability of cash flows are far better. And it is a little lower -- as compared to that, they are being average done at 16%, 16.5% as compared to that.

Okay. And what is kind of a growth outlook, sir, on this book for let's say FY '24? Would it be higher than company -- I mean company area on going forward will it be lower?

I would say the maximum in terms of percentage going forward, year-on-year, you will see the growth on the SME side followed by a little bit dependent on the dynamics between the 2 SME and the wholesale, but definitely going forward, year-on-year growth will be higher on the SME side.

Okay, okay. Understood, sir. So next question sir is you said credit rating review will happen on FY '24. So can you maybe list 2 or 3 major requirements for that credit rating upgrade?

Sometimes [indiscernible] INR 1,000 crores -- we have already said, but I don't know whether it's an official guideline or not. And the other -- mostly what we encounter is the top 20 customer and geographical presentation of our wholesale. So that is 2 basic things. Despite of that, we're telling them we have been doing for last 11 years. So our track record and all those. But whatever that is -- we're minimum, I think, exposure we could have by taking the complete control over the project and the cash flows. And these are competitors. They do a much high ticket size. But still, that has been 1, 2 major concern. And we say we are a small company going into newer areas without much -- much more, I would say, a funds. Doesn't make sense to do small businesses in new profits, especially on the wholesale. I'm talking about -- this is only about the wholesale. So as and when we are growing, we will expand to other areas. We targeted Chandigarh Saba which is a kind of mini-NCR across Panchkula, Mohali, Derabassi [indiscernible] But we found that still market is not mature the way we want to look at things though there is a lot of boom in the real estate in that area, the kind of developers or small time builders, which are there. They were not to the -- our parameters, which we have laid ourselves doing certain things, which are not properly getting vetted from the authorities and all those. So we don't want to go beyond our parameters and in spite of keeping a reasonable team, they are missing a lot of potential borrowers. We found that still market maturity is not there at this time, and we will wait out for 6 months to 1 year, to see it again. And now we want to look at some part of [ Dhutanchal ] because it's coming up in a big way, especially Dehradun, Rishikesh and Haridwar side and little bit maybe on the Lukhnow. But these are only on the radars and we do extensive 6 to 9 months research by keeping up on team and meeting potential borrowers and then take up -- taking up plans.

Okay. Okay, sir. Understood. Next question, sir, is we have 19% on the SME book. I saw your presentation that 99% of the collection happens digitally. Based on experience in some of the other segments, I mean at this kind of 19% yield and that small a ticket size, this kind of business is a human touch steady business, it is what my understanding is. So how often your loan officer or whoever collection person meet the actual customer? How do you balance that?

I see, basically, you are right. You are right, absolutely right that the human touch is required in SME. And to update you, it's a 100%, 110% touches we are doing. You will not believe that when the customer is onboarded -- I will start from onboarding. So right from the RM to branch manager to credit manager up to regional credit managers then general credit manager and if anybody from any of us in the leadership team is also traveling also meets the clients irrespective of the loan amount. So the human touch is there, right on the onboarding. But turning to that, post disbursement also, we have an exclusive audit team, which visit the client before check hand over also in most of the cases, just to check whether the customer has been informed about the company's policies, parameters or not and whether the businesses which has been seen by credit team is it at par with the audit team also or not. This is onboarding and post-disbursement process. Coming on to the collection, we are 99% digitally, we are collecting all the payments either through NACH or through our Amcollect app and that's the reason we have written 99% digital because instantly, we give a receipt to our customer once he pays the cash, and the cash is deposited immediately into the branch.

I will explain here little bit what happens digitally. When we put our NACH 85% collection come through the NACH digital mode. And now I will give our more granular data. In Rajasthan, we are -- for the collection side, we are collecting 80% through digital, 20% through cash mode. And in Punjab, Hariana and Gujrat and Uttaranchal, it is 50-50. So if we take that more than, I would say, 90% to 93% is through digital mode. 7%, what Amit is saying, we are doing 100%. Our collection team is on our digital platform. They are not giving any physical receipt. The movement he gives the cash in certain cases, the receipt, e-mail, WhatsApp simultaneously get triggered. So that is the journey. Otherwise...

Yes, that's through app only.

That's through app only. And 93% to 94% is coming from the digital way, maybe through NACH, UPI and other way of payments and 7% is overall cash collection, which is happening digital.

Okay. Okay, sir. Okay. Another related question to this is in your SME, how do you see risk of balance transfer. And the reason I'm saying this is that your cost of funds is high, it will remain high compared to, let's say, banks and from small finance banks and all of other guys. Cost of funds will continue to remain high. And you are kind of creating a digital trail for your customer. And you say that a lot of your customers are new to credit customers, but after 1 year or 2 years, they will have a pretty decent record -- digital record. And then what is the risk of balance transfer?

The risk of balance transfer, like you said that these particular clients are new to bank or new to us. Average, what we have seen and what I have seen in the past 20 -- 18 months that we only have around 10 loans, which has been balanced on from us to different financial institutions. And the major reason was their requirement of the top of amount, which is beyond our ticket size. Generally, these kind of customers try to remain with us [indiscernible] because we give fixed rate of interest to them until the entire tenure. And average, they remain with us for around -- like I said earlier, 24 to 36 months. So I don't see in coming years that there will be much of a balance transfer happening from us.

Balance transfer is happening in every industry everywhere, larger even one going for -- corporates going for lesser to new banks 4.5%. So those things will always be there. The focus is that we work within our domain knowledge, our target audience and keep on doing business. And still, I would say again and again. This is the only segment which is under penetrated. The other one, more else the metros and all those have been penetrated where, I would say, sometimes service your pricing plays a larger role or the amount which you can give. But -- and more of that of late, especially the PSU banks have realized that it is better to work with the NBFCs on co-lending format, the segment which we are.

The next question is from the line of Vishal Prasad from VP Capital.

Rohit sir, I have one request, if you could. We do ideal end of the cycle probably between 26 to 30th of September. And past few years, we are very open with our communication. So is it possible for you to -- take a look at signal the AGM update a bit earlier because last week, there's a lot of rush and we keep on missing a lot of AGM.

Yes, yes. We will take your valuable insight and try to do that. What happened as we always target these annual reports and fine-tuning it and sometimes all those. So yes, we will pull then give our earlier deadline and all those, and we will not bunch up during last 10 days, and we will try that from this year onwards. It is being -- Secondly, the on the second reason sometimes was when it used to happen physically. A lot of those people, which have no interest, especially in North India, they come in such a huge number, 300 to 500 people will come and create such a huge new sense we have to call police, and there only is to demand, small money and all those things. [Foreign Language] To seek to and who wants genuine any answers or want to listen it . The whole purpose get defeated even those small number of people who come for that purpose, they are also not able to participate. [Foreign Language] Things were far better. The genuine people were coming, and I don't know, Mumbai [Foreign Language] In North where there is a special being which are doing this way.

I was about to ask specifically at physical AGM or [indiscernible]. Hearing to what you have said, it is okay. Two more questions, sir. Usually, if a branch does good, how much time it takes to breakeven and to reach INR 10 crore of AUM?

So Vishal, it depends on the market also. And we have categorized our branches into A, B and C also that -- so suppose a branch in Jaipur will definitely reach to a INR 10 crore AUM faster than the branch, which is built out of a smaller place maybe like Bal Samand or Motigar. But ideally, if you average out, INR 10 crores -- reaching a INR 10 crores will be after a year, at least 13, 14 months is required because the first 3 months branch takes -- if the branch is new. It takes their own sweet time to come up to the market challenges and everything. But we have kept an average target of around INR 80 lakhs to INR 90 lakhs per branch. So looking into that, by the end of this one financial year, we target to do at least INR 10 crores per branch. In this financial year also, at least it takes 12 to 13 months to reach INR 10 crores with this pace, particularly.

Okay. And in our wholesale lending, we have mentioned that we usually -- not usually but sometimes we partnered with some of the co-lenders, but we haven't mentioned the names earlier. So is it possible for you to name our co-lenders?

Primarily, we were working with one co-lender MTFC. And so the -- now from this year onwards, we have started doing down selling. We have done one transaction with quota, one with TFCI. Now the focus this year will not be reducing our business, but we're doing the same or much higher amount of business. But then bringing them through co-lending mode and assigning down selling them, assigning them. So this has been -- that will add to our gross IRR and still our presence in the market will be there that nobody will be able to say that we are not doing lesser business. At the same time, on our book, the percentage rise will not be that much. So that has been the core target for next year to do higher business but still remain within the limits on our books, which we have thought and to name an NBFC, yes I have no issues, Rajasthan Global Securities, which is around INR 1,500 crores to INR 1,800 crores kind of NBFC and which have been doing it for the last 4 years. We only board where we see that our ticket size is going beyond INR 15 crores to INR 20 crores, but we need the total control. We are complete onboarding and assessment and monitoring on a daily basis is done by us.

Okay. And sir, last question since [indiscernible].

Sorry to interrupt. That would be our last question for today, sir. I would now like to hand the conference over to Mr. Rohit Gupta for his closing comments. Over to you, sir.

Well, thank you very much. I think we had a reasonable discussions otherwise to people who were not able to participate. But from the question that we have already taken, you must have got a reasonable overview and most of them question must have been resolved. And still, you can speak to our IR team, secretarial team if somebody has any specific questions. And so again, thank you, everyone, for participating in the call. The questions are important to us, and we'll strive to be transparent in our investor communications. So thank you. Thank you very much again.

Thank you.

On behalf of TIL Advisors Private Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.