CSL Finance Limited ($530067)

Ladies and gentlemen, good day, and welcome to the CSL Finance Limited Q4 FY '26 Earnings Conference Call hosted by TIL Advisors Private Limited. [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, Sagar. Good evening, everyone, and thank you for joining us today for the Q4 and FY '26 earnings conference call of CSL Finance Limited. The investor presentation for quarter 4 has already been uploaded on the stock exchange and on the company website. In case you should be added to our mailing list please feel free to reach out to us. To take us through today's results, we have with us from the management team, Mr. Rohit Gupta, Managing Director; Mr. Naresh Chandra Varshney, Chief Financial Officer; Mr. Chandan Kumar, Head, Strategy and Business; Mr. Rachita Gupta, Full-time Director; Mr. Atul Agarwal, President, Finance and Treasury; Mr. Chirag Gupta, Credit Wholesale segment. We will begin with a brief overview of the quarter and of the financial year from Mr. Rachita Gupta, followed by a Q&A session. Please note that any forward-looking statements made during this call should be considered in conjunction with the risk and uncertainties that we face. These risks and uncertainties have been outlined in our annual report. With that, I would now like to hand over the call to Ms. Gupta. Over to you. .

Thank you, Sayam. Good evening, everyone, and thank you for joining us today. In addition to the management team mentioned by Mr. Sayam, we have [indiscernible], CEO as well from our I'm pleased to share the highlights of CSL Financial performance for the fourth quarter and FY '26. FY '26 has seen varied performance across CSL's 2 business verticals. While wholesale has continued to grow from strength to strength, supported by AUM growth, asset quality and profitability, SME retail performance has been underwhelming. The reason for industry-wide consolidation and our cautious approach have been discussed in the past calls in communications. So far in FY' 26 barring green shoots visible in Q2 -- we have not seen a material improvement in the external operating environment for the SME retail business. Concerns such as overleverage border profile, stagnant income growth across the MSME ecosystem and an increase in competitive intensity continue to affect the growth in SME retail vertical. . Further, there is an influx of new competition from previously MFI heavy lenders who are now lending aggressively in the secured SME portfolio, predominantly under the 10 lakh ticket size segment. As you all know, last year, we pivoted ticket size and are focusing more on a better quality demographic with higher ticket sizes between INR 7 lakhs to INR 15 lakhs who have better quality collateral to offer. Nonetheless, we maintain a cautiously optimistic stance on the SME retail segment. Growth is expected the SME retail book in FY '27 and we expect to do better as the operating environment becomes more conducive. With that overview, let me come to our financial performance. Let me begin with our AUM performance. Our AUM as of Q4 FY '26 stood at INR 1,448 crores which is up by 21% year-on-year from INR 1,195 crores at the start of the year. Our loan book has reached to INR 1,395 crores in FY '26, which is also up by 21% year-on-year. On account of aforementioned factors and strong growth in wholesale, our AUM mix has tilted further towards wholesale now at 69% of wholesale and 31% of SME retail. The total disbursements during the quarter stood at INR 301 crores, which was up by 5% year-on-year with a sequential decline of 15% Q3 level, that was driven by stronger wholesale activity. We have always maintained that disbursements and wholesales are also a function of collections. And over the last 2 quarters, we are seeing strong collections on the wholesale front. For the full year, cumulative disbursement stood at INR 1,255 crores, which was up by 12% over FY '25. Collection efficiency remained consistent at 98% across all quarters of the year reflect the underlying quality of our portfolio. I would now also like to highlight our increased focus on off book AUM in the wholesale segment, where we have started actively pursuing joint lending structures with select industry partners. We closed a few deals during Q4, and I anticipate more activity in the coming quarters, which should strengthen our fee-based income in FY '27 and beyond. Coming to our asset quality. We recorded higher impairments -- so partly due to lower NPA resolutions during the half year of FY '26. Gross NPA stood at 1.1% in Q4 FY '26 compared to 2.46% in Q4 FY '25 and 1% in Q3 FY '26. The net NPA stood at 0.81% vis-a-vis 0.34% in Q4 FY '25. I would like to provide some context here. First, over 2/3 books of ration planned. Hence, we expect faster resolution in the coming quarters as legal proceedings progress. Second, in line with the RBI directors, we revised our standing provisioning norms on project financing from Q3 onwards to an average of 0.9% from 0.8% earlier, which has on reported numbers. Third and importantly, we are not seeing any material delinquencies in the SME retail book. That has been over the past 12 months which gives us confidence in the quality of a fresh underwriting. The Board has also approved the new ECL policy this quarter aligned with our current business composition, which will provide a more appropriate provisioning framework going forward. Now moving to our fee account for Q4 FY '26 stood at INR 45.4 crores, up a healthy 21% year-on-year and 10% sequentially, driven by higher average AUM during the quarter. For the full year, NII grew 15% to -- grew by 15% to INR 168 crores. The PAT for the quarter 4 FY '26 was reported at INR 19.4 crore, which was up by 2% year-on-year though down 7% sequentially, reflecting higher total ECL provisions and writers during the quarter. The full year PAT came in INR 86 crores which was up by 19% over the previous financial year. ROE for FY '26 improved to 14.81% from 13.31% in FY '25, which reflects the improving return profile of our equity base. Profit before tax for Q4 stood at INR 30.18 crores, up 21% year-on-year and 18% sequentially. On the operational front, our branch network stands at 44 branches across 7 states. We have continued to add spoke locations with on-ground teams, some of which eventually convert into full-fledged branches consistent with our hub-and-spoke model that allows us to expand efficiently while managing costs and maintaining quality. We have not seen any increase in net branch additions during the year as we have reshuffled and relocated many of the branches to better locations. We also onboarded a major PSU bank, Bank of Baroda, as a new lender during Q4 and received repeat sanctions from several existing lenders. A notable milestone was also achieved this quarter was the conclusion of the term sheet of our INR 30 crore NCD issue, which further diversifies our funding pool and increases access to debt capital markets. Our lender base now stands at 36, comprising a well-diversified mix of public sector banks, private banks, small finance banks and NBFCs. Our liquidity position remains healthy with INR 110.4 crores of balance sheet liquidity, and our leverage ratio stands at a comfortable 1.39x as of March 31, '26 well within our conservative thresholds and leaving meaningful headroom to increase leverage for growth in FY '27. Our credit rating has also been reaffirmed at A minus stable by equity ratings and research, enabling continued access to capital on competitive terms. To conclude, FY '26 has been a year of good financial performance even as we navigated real headwinds in the SME retail segment. Revenue grew 19%, NNI grew 15%. PAT grew 19% and our net worth has crossed INR 115 crores with a book value per share of INR 270. Looking ahead to FY '27, we remain cautiously optimistic. The Wholesale segment is expected to remain strong and will remain a key growth driver. We expect SME retail, which fell short of our growth ambitions in FY '26 to return to normalcy in the coming year as the operating environment gradually improves, and our strengthened underwriting and team structures begin to yield results. We will continue to pursue disciplined growth in both the business verticals. Thank you, and we can now open the floor for any question and answers you may all have. Thank you.

[Operator Instructions] Your first question comes from the line of Tejus Khandelwal with [indiscernible] equity.

I wanted to ask is, did the investment for quarter 4 has grown 16% quarter-on-quarter. So how should we look at FY '27 in terms of divestment, any growth guidance or any absolute number you can give?

I think largely, we have told that our wholesale business is a little lumpy. Sometimes, certain quarters are disbursements are higher. And it is better to see is more on a yearly basis rather than quarterly and we have already highlighted that our SME performance was a little lower as compared to our last quarter. So -- but largely, the disbursement has being because the last quarter was higher on the wholesale side, and this quarter was a little lower. And it's sometimes a factor of collection, sometimes more prepayments are coming than the disbursement increases. So -- it has nothing to do. Otherwise, our overall disbursements were in line with what we expected in terms of wholesale. .

Okay. And any guidance on the AUM front on to give for FY '27, because our grew in quarter 4?

The next year guidance will be in line between anything between 15% to 25% that we have been doing it for the last 3, 4 years. .

15% to 25% AUM growth.

Yes, yes.

Okay. And you just said that you have implemented new DCL framework in this quarter. So what is that framework can you throw some light or...

I think it is largely for a retail segment where earlier our positioning were very, very high. So that the earlier regional rising as we have given in our balance sheet and notes to account for that. So -- but now we have made it a little more objective based on the performance of our SME portfolio the last 4, 5 years and how that portfolio performs. And based on that, we have built a more objective model. And so the -- and we will be that will be constantly -- we have to keep on reviewing it and improving it. So it will -- that first, the RB also wanted that we have a little more objective method. And this year, we will be following that. But if we really go by that because we couldn't provide numbers because with the new ACL policy, but if we have gone through with the new ESL model, it would have been a little lower as compared to what we are following now. So even in now our ECL provisioning is higher, what is given any of the ECL model will ship being on the conservative side, we have been doing it. Now we have started -- we started following more object methods from the -- in the coming year forward. So the impact will not be there. Our existing ECL is providing much more than what the new ECL method will provide for that. .

Okay. And sir, you have paid higher taxes in Q4. So what kind of tax rate we should look at in FY '27?

Tax percentage goes up because of the amortization of those fees as per India, we amortize those fees for the get deferred. But as for income tax, we have to follow the Indian accounting method to determine the tax. So our tax percentage is always higher than the normal tax, which is 25.17%. And I think weighted average will be around 27%. .

Your next question comes from Sanjay Ladha with Bastion Research. .

So my question would be on -- as you said that are focusing on a good balance sheet in the wholesale book. Can you throw some light on that? How is the strategy what we are doing on less would be a fee income recent what kind of strategies we are planning to do that on that side?

So in last 1 or 2 quarters -- we have 1 or 2 years, we have built more relationship with the banks and NBFCs to do co-lending. So it is not where we had down sell it, but we do co-lending where some element of processing fees and some management fees comes to us. So we want to build more relationship with the larger NBFCs as we have created a niche in the wholesale in our region and the other NBFCs believe in our way of lending and the way we are able to acquired our customer and manage the account. And the basis that we have been building relationships and we hope that will be build more relationship with other NBFCs and maybe some private sector banks and that will help us to generate some fee income. .

Sir, eventually, what we are trying to do is we are trying to be these cover balance sheet and asset quality risk some sort of debt to the co-lending method. Is that understanding largely right?

No, we don't say that sometimes we want to do because of the co-lending because now in wholesale, sometimes the ticket size have increased, and to have a complete control over the project and cash flows. We need to have some co-lender with us. And we only do those accounts where we are fully confident. And yes, definitely, when we onboard the risk also get mitigated because there is no sharing of risk in either DA or the co-lending model. So both it increases our -- you say, increases of fee income reduces our risk. At the same time, it helps us to acquire more customers and increase our footage in the region where we are present. .

Any AUM by position between them that below INR 50 crores, we will do that and about INR 50 crores, we will do lending. Is there any kind of thing which we are keeping in mind?

Absolutely, you have been right. So less than INR 30 crores, INR 40 crores, we are the only sole lenders, and only cases where the requirement is higher than that, we onboard the co-lenders. .

Sir, my another question would be on SME side of the book since for the last 3, 4 quarters or for the last 1 year, we are quite rapidly building the SME book in terms of employed on going in terms of branches expansion. And suddenly, the things get blurry on that side because of the uncertainty regarding the market going forward? How should we convention to that, how should we think on that side? Because at some point in time, we are 60% of the AUM in the SME side, now it's below 30%, 30% -- closer to 30%. So -- and the guidance is also...

So first, we were advantage, we had only 48% was the maximum that SME was in '23, '24. That was the maximum percentage that SME had. It has come down from debt level to the current 31% and largely because SME has not grown in the last 12 to 15 months. And whatever disbursement we have done. It has been nullified by the aggressive rundown and takeover of our existing good cases. So yes, there have been changes. There have been changes as a senior team that resulted in some attrition, I would say, a little higher attrition in our branches, and there were certain changes in the policies and with the spillover of the MFI business. . And we are seeing that in the lowest rate of the population, 30%, 40% population, they have overleveraged themselves a little bit, and the income has not grown in proportion to their leverage and we have a little bit tightened our policies. And at the same time, in the last 3, 4 months, we were a little cautious on what was happening geopolitically also. And because the segment we are in, they are directly and immediately affected by that part. And so we were a little cautious. And so that has been the reason for slower growth. And yes, we did efforts on increasing our branches and the team additions have been there on the retail. But now the focus is to consolidate those branches where productivity was very low and to focus in last 3 months on our existing branches and focus on improving the productivity and to do a good quality business. So the next three months will be to improve our productivity on the existing branches and rather than opening new branches that will start in the third quarter. And this is what we achieve in our next 3 months. And so a little bit the expenses, operating expenses will also go down because of the I would say, the consolidation of the branches and rationalization of the team.

Sir, for the last 1 year, the SME side, our experience on the SME side would -- is not great. But of course, the learning will be much higher compared to the group perspective. But going forward, what are the changes you are likely to do on SME side, if you could share? And how we are planning to scale that model going forward? If you can elaborate on that side, it would be really great.

Chandan this side. Sanjay, the primary strategy that we are currently following, that we are just going back to our metallic basics itself. And we are seeing that we are trying to source only those customers who are having a very good profiling or the stability. Till date what we have built out that -- look, as for your last question, is the macro that has been -- we are observing in the country from last 4 to 5 months itself, it's not that good. And the segment in which we are operating is not metallic supporting that segment itself in terms of SME growth. So -- as of now, for the coming 2, 3 months, we are very much cautious. We would be just reobserving our policies, redefining our parameters. On the employee side, we have added some of the good employees from the metallic at a higher level from the various organizations bullish, but let's see how the macro plays on how the things are settling down, and we would be better to comment on any projections and the numbers and the expansion strategy in the coming quarters itself.

[Operator Instructions] Your next question comes from the line of [ Tejas Khandelwal with Prudent Equity. ]

Yes. So I wanted to ask that anything on the credit cost side for FY '27? And where should we look at our NPLs going forward?

I think whatever little bit increase we have seen that has come from the SME and largely from large ticket, which we used to do 15, 18 months back between INR 50 lakhs to INR 1.5 crores, which we have already stopped. And we are seeing -- we will be seeing the resolution from that side from those NPAs and the through surface and other modes. And going forward, we don't expect that the absolute gross and net NPA should increase in the next financial year. And the credit cost, which has been around 0.4, 5 -- it's our existing credit cost is around 0.5%. I think we should be stabilizing between that credit cost only. And the recovery should take care of whatever fresh NPAs that we may see. .

[Operator Instructions] we have a follow-up question coming from the line of Mr. Sanjay Ladha with Bastion Research. .

Sir, just wanted to know that since we are focusing on wholesale lending of the AUM side, how the market there as well because that part of that segment will also be impacted or we are not seeing that part of that segment is impacted and we see growth on that side?

Sanjay, Chandan this side. Sanjay, the thing is that we believe that the cement, which we are into in wholesale segment itself, it's a very sane market, where we are playing. We are primarily focusing on the daily NCR market, and we are currently not finding any stress on the accounts that we are boarding as of now. And we are -- and the rate of interest or the segment in which we are operating, there is ample opportunity in them, we are seeing ample of opportunity in the coming year itself. So we ought be like very much bullish on that part that we would be continued doing to perform into that segment itself and the growth would be kind of consistent in the last quarter or the year itself.

And sir, as in the past, the wholesale segment has not seen asset quality is in the past as well. Do we continue to see that way onward? Or is the provision that has changed side or something sort of we will be planning on some sort of provision we will make on that side? Why I'm asking this because in the past, we have not done that side. So I just wanted to know the how would be the going-forward scenario?

Sanjay, we are providing provisions which is required as per the ECL policy. And at the same time, we have not seen any kind of delinquencies in the last 4, 5 years. And we work with the same intent and thought that there should not be any delinquencies. But even if any count goes NPA, does way we do our diligence we never see that there should be any challenge on recovering our principal and interest. So the way we onboard the customer, the borrower very much focused on the cash flows and predictability of those cash flows. And yes, if nobody can rule out that there can't be any NPA in any case. But definitely, we work with that our assessment and all our based on that, there should not be any delinquency on the wholesale side.

And just to add on 1 point, Sanjay, that's a recent RBI directive has will come. That is a standard provisioning for the wholesale account on the project has been increased or revised from 0.8 to 0.98 -- average of 0.98, that's on our book as self. So that would be like done as per nonself. But as of now, we are not facing any kind of challenges into our wholesale book. And we believe that the quality or processes, which we are following in the holding of wholesale account system, we would not be facing any kind of a stress in the coming years itself.

Okay. Sir, just I know I would be not the right person to say that way. But in the past as well, I said that we the segment depends on the wholesale side. We are doing very much a fantastically good job but we try to do on the SME side and we face some issues. I'm not sure I'm the right person or not but just wanted to understand that why we are not following that model into the other part of the geographies in India as well because we understand that model really well. So why you are not doing that if you can. I just wanted your thoughts on that, sir. .

Yes, focus has been on SME in the last 2, 3 years. And just going forward, definitely, we will look for other regions and market. But in the immediate next 12 months, we would like to focus in our existing region. And so a lot of our bandwidth was going towards SME also. And -- so you are absolutely right. And at the same -- we see a lot of opportunities in our existing region. And so the market share we have in terms of total size of the reason we have present, our share is still very less keeping in view of the relative size. So it is better to remain in your region where you have much better strength and knowledge and we're able to do a constant, I would say, monitoring. And yes, in the future, we will look at it, but in the immediate term, we don't see any need to go out of our region in immediate next 12 to 15 months, and we -- it is better to focus on our existing region. We have limited by funds. And so unnecessary going into new regions without any -- we will either be able to create any kind of visibility there. So it is better to remain where you are able to do far, far better.

But in co-lending model said we can do that, right? Because in that model, we are not bound to capital problem on that side. So in co-lending, we can do that model is pan India side? .

Co-lending, we have to put on -- we are in all those co-lending transactions. We have our own element of that taken to that transaction from 10%, 15% to 40%. So co-lender only comes when we put our own stake into that transaction. So the -- and so when we see that we need to go other regions we will definitely go.

We are very much open for that...

As our size increase, and we see that now we need to go to in a new region, we will go. .

As there are no further questions from the participants. I now hand the conference over to the management for closing comments.

Thank you, everyone, for joining us today. And if there are any more further questions, you feel free to reach out to Mr. Sayam Pokharna and his team who are -- and the team. Thank you.

Thank you. On behalf of CSL Finance Limited, that concludes this conference. Thank you, everyone, for joining us, and you may now disconnect your lines.