CSL Finance Limited (CSLFINANCE.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CSL Finance Limited Q2 and H1 FY '26 Earnings Conference Call hosted by TIL Advisors Private Limited. [Operator Instructions] Please note that this call 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, Shruthi. Good afternoon, everyone, and thank you for joining us today for the Q2 and H1 FY '26 Earnings Conference Call of CSL Finance Limited. The investor presentation has already been uploaded on the stock exchange and on the company website. In case you wish to add yourself to our mailing list, please feel free to write 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; Ms. Rachita Gupta, Whole-Time Director; Mr. Atul Agrawal, President, Finance and Treasury; Mr. Chirag Gupta, Credit Head of Wholesale segment. We will begin with a brief overview of the quarter and of the half year from Ms. 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 risks and uncertainties that we face. These risks and uncertainties have been outlined in our annual reports. With that, I would now like to hand over the call to Ms. Gupta. Over to you.

Thank you, Sayam. Good afternoon, everyone, and thank you for joining us today. I'm pleased to share the highlights of CSL Finance's performance for the second quarter and first half of FY '26. After a year of consolidation in FY '25, particularly in our SME retail business, we are happy to report visible progress in the first half of this year with a stronger performance in Q2 compared to Q1. At the same time, our wholesale vertical has continued to grow steadily even during the consolidation phase, demonstrating the resilience of our business model. Now let me begin with our AUM performance. Our AUM as of quarter 2 FY '26 stood at INR 1,397 crores compared to INR 1,157 crores at the start of the year. This represents a healthy 29% year-on-year growth and an 8% sequential increase over the previous quarter. More importantly, while our growth in quarter 1 was largely driven by wholesale vertical, the momentum in Q2 was more balanced, supported by healthy contribution from both SME retail and wholesale segments. Disbursements during Q2 remained broadly in line with the previous quarter, showing a stable trend with no change on a year-on-year basis and a moderate 4% sequential decline. However, within disbursements, SME retail disbursements have shown a notable upturn growing by 93% year-on-year and 61% sequentially, although on a relatively smaller base. This reflects early success from the corrective measures we have implemented over the past few quarters in the SME retail segment, particularly around refining our credit policies, optimizing our product portfolio, strengthening our underwriting processes and restructuring teams and equities. We view this performance as an early sign that our efforts towards growing the SME retail vertical are starting to yield tangible results. Having said that, while the improvement in Q2 has been encouraging, the broader industry still faces a lot of headwinds. Challenges such as overleveraged borrower profiles, muted income growth in the MSME ecosystem and cautious lending practices across the sector continues to persist. Hence, our approach remains cautiously optimistic. We aim to drive growth responsibly, ensuring that the expansion in our SME retail book does not come at the expense of asset quality. Notably, while our AUM mix last year had tilted meaningfully towards the wholesale side, Q2 has seen a marginal positive shift in favor of SME retail. We intend to build on this momentum in the second half, targeting an overall AUM in the range of INR 1,500 crores to INR 1,600 crores by year-end. We also expect the growing contribution from SME retail to support improvement in profitability metrics such as return on equity. Coming to asset quality, we are pleased to report a steady improvement. Write-offs have moderated from the elevated levels seen in the previous quarter and recoveries have picked up. While some level of write-offs is expected to continue in the latter half of the year, we believe that by the end of FY '26, most of the cycle will be behind us. We are not witnessing any significant delinquencies in the fresh SME retail book disbursed over the past 12 months, while -- which reinforces confidence in the underlying credit quality. As of quarter 2 FY '26, gross NPA stood at 0.51% compared to 0.56% in quarter 1 of this financial year and 0.54% in quarter 2 FY '25, while net NPA stood at 0.39% compared to 0.42% in quarter 1 FY '26 and 0.32% in quarter 2 FY '25. Moving on to financial performance. Net interest income for quarter 2 FY '26 was INR 40.9 crores, up 10% year-on-year and 2% sequentially. PAT came in at INR 24.5 crores, registering a robust 37% year-on-year and 15% quarter-on-quarter increase. It is important to note, however, that higher PAT growth is partly attributable to deferred tax adjustments. To that extent, PBT provides a clearer view of underlying performance coming in at INR 28.85 crores, up 17% year-on-year and 5% sequentially for the quarter. On the operational front, we have continued to strengthen our distribution and funding base. Two new branches were added during quarter 2 and several spoke locations were rolled out with active ground teams, many of which will transition into full-fledged branches in the coming quarters. This expansion follows our hub-and-spoke model, allowing us to scale efficiently, manage costs and ensure higher success rates for new branches as they mature. Our lender base expanded further with the onboarding of 2 new partners, City Union Bank and Paul Merchants, taking the total to 34 lenders. This includes a balanced mix of leading public sector banks, private banks, small finance banks and NBFCs, giving us a well diverse and stable funding profile. Our liquidity position remains strong with INR 111.5 crores of on balance sheet liquidity and undrawn credit lines of around INR 35 crores. We've also started to see the benefits of recent rate cuts in our borrowing profile with the cost of fresh borrowings reducing by approximately 60 to 70 basis points since the start of the year. This should gradually reflect in our weighted average cost of capital in the coming quarters as our borrowing is repriced. On the human capital side, we have undertaken targeted hiring, particularly at mid-management level to strengthen credit operations and business teams. While this has led to some increase in employee expenses in the short run, it strengthens the foundation for sustained growth in the SME retail business. More importantly, on the attrition front, which was a key challenge for broader NBFC sector last year has been brought under control now. To conclude, we maintain a cautiously optimistic outlook for the remainder of FY '26. Our focus remains on driving disciplined growth, particularly through the SME retail segment, while maintaining a robust asset quality and liquidity, continuing to improve profitability. With the cost correction over the past year starting to bear fruit, we believe we are all well placed to achieve our AUM target of INR 1,500 crores to INR 1,600 crores by year-end. With that, we can now move on to the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Pankaj from Molecule Ventures.

Sir, my first question is, I would like to take some guidance on the MSME disbursement growth side. It looks like we are back on the growth in disbursement side. So can you just give me a clear idea how sustainable this is? And can we improve the disbursement in the MSME business going forward in H2 maybe or next year guidance?

Yes, Pankaj, it's Chandan, this side. Pankaj, we are -- told in our transcript itself that we are very much looking after growing our SME book. And the numbers have grown considerably, and we have been able to achieve per branch disbursement from like INR 25 lakhs -- which was earlier INR 25 lakh to INR 35 lakh average disbursal per branch, and we are targeting to increase up to INR 50 lakh per branch disbursal. And the number that propose that in the coming quarters, we are going to increase our branch network also, that is currently at 45, we are planning to increase it to 50 in coming quarters itself, and by year-end, it would be around 60 odd numbers. So you can expect a good growth into SME and MSME disbursement segment.

Can we expect INR 1,500 crores or INR 1,600 crores kind of AUM by year -- this year-end, in this segment.

[Foreign Language] that has been already [Foreign Language] like included into our transcript itself that we would be targeting around -- closing our AUM by this year-end in between INR 1,500 crores to INR 1,600 crores kind of structure.

And sir, my next question is towards the next year growth. We are currently 25% of the growth for the next year. And what would be the part of the SME AUM for the whole '27 or '26 guidance?

Yes. From roughly around 35%, 36%, we are targeting by end of FY '27, we should be able to do 45% of the SME at least.

Okay. And sir, my last question...

Of a growth -- AUM. Yes.

And sir, my last question is on what kind of benefit are we looking for the -- from the rate cuts and the impact on our cost of borrowing? Just would like to know the impact on NIMs and will be able to pass on -- are we planning to pass on the benefits to the customer immediately or not?

Yes, in -- if you say year-on-year in last 12 months, roughly around 70 to 80 bps have been -- the benefit that we have seen, and going forward, another 25, 30 bps if provided no repo rate cut happens, so our effective cost, which was 10.9%, 6, 9 months back, as reset also happens from the existing borrowings, it may come down to around 10.3%, yes, around that target only. So with respect to retail, there is no such demand to pass on. Yes, but we have reduced -- introduced one product at a little lower rate. Earlier, we were used targeting between 18% to 22%. And now we have also started one product, which is priced around 16%. So overall, our weighted average of retail will not come down. And a certain -- some portion of what we have -- may be passed on for our wholesale customers. So on wholesale, on totality, our NIMs will improve on the basis as we see the reduction in our cost of borrowing.

And sir, last question, if I may squeeze in. Can I ask last question?

Yes, yes, please.

Yes. So other aspect, just I wanted to understand on the SME retail front, so we have some realignment of our disbursement side or disbursement process. So just if you could give me a breakup that what were our previous disbursement, customer profile, ticket size or rates? And what is the change that we have bring to the table right now?

Yes, I would take that question, Pankaj. What earlier was -- what we have found that the processes and the procedures were a little hectic, a little bit jumbled. We have simplified the processes and made SOPs and made everything very much purpose driven. That's why this much growth has been very much evident into the numbers part itself. Apart from that, the range and the ticket size that the target size of our customer has been increased. Earlier, we were not -- we are very much stringent to board only kind of 18% or ever bad customers only, which are very much marginal profile. But with this decrease in or getting benefit of lowering of that 8.70 or 80 bps of ROI, we have got an opportunity to increase our benchmark -- target customer benchmark from 16% to kind of 22% ROI customers. So we would be able to get good customers at lower ROI, and we would be able to place ourselves into competition to the other bench -- peer lenders also.

And sir, what would be the impact of the changes on the operating cost of our business?

Operating cost, as we told in our transcript also, a little employee cost has gone up. That too that we have strengthened our regional teams. So in all regions -- and we have certain regions need to be split up. So like a state of Gujarat, we have 2 regional -- regions. Earlier we -- South and West and the same goes with Rajasthan. Earlier, we used to have 1 regional team. So that had added up our cost, but it has strengthened our team at the middle level, strengthened our processes. And as the disbursement picked up, this cost will get a portion at a higher numbers. And so this in 1 or 2 quarters, a little higher employee cost will be there. But in the next 2 quarters, our projections are -- internal projections are reasonably good, and it will get absorbed.

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

So my question is that -- so you talked about increasing the branches to 50 and then 60 by year-end. And next year, our SME mix can go to 45%. So even if I assume 25%, 30% growth on overall AUM from, let's say, INR 1,500 crores, INR 1,600 crores, that means that our SME retail will end up somewhere around INR 800-odd crores. So from current level to going there, what's the pathway in terms of number of branches, AUM per branch and how would such fast scale-up happen given in the past, we have faced challenges on the SME side?

Yes. So as a company, we always remain cautious. But now we have worked a lot on our processes and building our middle level team and the numbers have started picking up unless until something goes abnormally bad in the industry as a whole in the segment we are in, we are much more confident that this time, we should be able to achieve. The focus of the company is largely on now building a good quality SME portfolio. And with already 15 spoke locations we have already opened in last 3 months, those spoke locations are where we have few salespeople and as well we started doing business and we see the market in those newly opened branches, it's a full-fledged team and the branch gets start -- with that be in operation, and that will happen in the next 5 months. So achieving this target of INR 800 crores, the way we have planned ourselves, we think that we should be able to do it with the mix of -- we have added one product, a little lower IRR also. And now our focus is to -- we are not targeting less than INR 10 lakh kind of a space too much, which is, I would say, a little -- the security comes only as a deterrent and the borrow is marginal. And a lot of focus is there from every NBFC to go into that segment. And our the target size is INR 10 lakh to INR 40 lakh, INR 50 lakh and so we see that we will be able to generate good business. And so the only -- now the SOPs have been made, the processes have been put into system, the attrition has come down, which was also a huge, I would say, negative for the industry as a whole. And whenever the attrition is higher, your productivity and quality goes down. So with the attrition coming -- has drastically come down and I would say, what has happened in MFI and unsecured portfolio, a little caution has also come in the industry as a whole as a large. So -- and our company being totally into secured segment, now our 100% portfolio, both in wholesale and retail is 100% secured. So we stand better placed as compared to peers in our size in the geography we are in.

Okay. So do we need to add -- how many branches we need to add next year to kind of get to this INR 800 crores, INR 850 crore number?

Sunil. Sunil, Swapnil...

Dhwanil...

Dhwanil...

My name is Dhwanil, yes.

Dhwanil, look, if we go by simple math also, we are targeting to increase our per branch targeting per branch disbursal to INR 50 lakh, and we are targeting to increase our branch numbers to 60-odd numbers by this FY in itself. So with this growth rate only, if we are targeting to open 10 to 15 branches in next financial year itself, I think that gives a pathway to achieve that AUM that we are projecting or that we are committing on that is INR 750 crores to INR 800-odd crores of SME kind of AUM. So considering that, if we are able to achieve these numbers itself, the pathway will be very clear, and we would be able to deliver that what we are projecting.

And apart from this expansion that we are carrying out, there are a lot of opportunities also coming, inorganic opportunities also coming in the market. And so that can be another way, but we are more focused on organic growth rather than inorganic growth. And so with the processes and the team in place, achieving that target should not be an issue as the numbers in last quarter was decently good, and we have picked up and the momentum is back among the team and to achieve those numbers.

Okay. Got it. Sir, second question, so is it a fair assumption to make that when we move the productivity of branch from INR 20 lakhs, INR 30 lakhs to INR 50 lakhs. And even though we open new branches, there will be some kind of operating leverage going through the P&L. Is that how we should look at for FY '27?

Look, Dhwanil, the thing is that there is a life cycle of each and every branches. So this is an average of disbursals. The branches which have covered their 3 years or more life cycle, that approx 23 or 24-odd branches have achieved disbursal targets of around INR 70 crores, INR 75-odd crores -- INR 70 lakhs, INR 75-odd lakhs, the approx 10 to 15 branches are that is and less than 2 years of life cycle, they have achieved -- they are approx INR 30 lakhs -- they have achieved around INR 30 lakhs of business. And the rest branches which are less than 1 year or have completed a period of around 6 to 7 months, what we believe that at least 18 to 24 months are required for any branch to fulfill or to give it full potential, that is a disbursal of around INR 50 lakhs in average. So we are targeting that the way which we are projecting that 60 branches will be able to achieve their INR 50 lakh disbursal by first quarter of next financial year itself. So we would be able to achieve that -- those numbers very easily.

Okay. Understood. And last question on the credit cost side. So I think our write-offs have come down. You indicated that write-off cycle may get over by end of this year. And this quarter, our write-backs have been higher than the write-off. So should we continue to see similar kind of a situation for the rest of the year?

So if you see our history, what we written off in '21, '22, we have recovered 95% of that. What we written off in '22, '23, we have recovered 75% of that. And what we written off in '23, '24, we have recovered again more than 90%. So our portfolio being secured, so our recovery is good, but sometimes because in SARFAESI cases, certain legal things that happens in 1 quarter, we can see a higher performance in certain quarter can be, but on an average, when we average out, yes, our recoveries will be good. And we don't foresee that any of our account will not get recovered. So -- and that is why our focus is to do to INR 10 lakh to INR 40 lakh, INR 50 lakh kind of ticket size, where the SARFAESI also -- because the segment which we are in, whatever the company may be, the NPAs will come and the chances of recovery if your processes and credit and the valuations of the property are right, the chances of recovery are far better through SARFAESI than any other mode. And so in the category we are in with the secured business, the recovery do happen. Sometimes it is that lag -- time lag that only sometimes is unpredictable. In certain times, the courts are closed, they go for holidays in summer that happens from June to -- May, June. So in certain states, certain things happen. But on an average, our recovery historically from SARFAESI cases has been very strong. And we are very, very active on that collection and the legal recovery. And we are very proactive in settling those accounts. So that will be there in the future also.

The next question is from the line of Nirvana from Badrinath Holdings.

Sir, this quarter, Y-o-Y, your NIMs seem to be compressed. Your interest income has increased by 19%, but interest costs have increased much faster, about 34%. So why did that happen?

So sometimes -- I would say one problem which we are facing and to some extent, I would say, the whole mid and small size companies is most of the disbursement happened in the last week of the quarter. And we have to carry -- a negative carry happen when we -- that surplus liquidity has to be parked and we get a negative carry. That also takes about 0.25% to 0.4% of our overall earnings for that quarter. And that is -- has been happening for last 2, 3 quarters, but we are now more proactive that the bunching of disbursement doesn't happen in the last month of the quarter. And as on this month -- of this first month, our sanctions and disbursements from our lenders has been far better. It has been an unusual month where we have seen that in first month, we have been able to take reasonably good disbursements. So the focus with our treasury team is to that we should not be working or we should be much more proactive that our disbursements are much more on the -- during the whole quarter itself.

Okay, sir. Sir, what is your outlook on NIM going forward? Because -- and if you can break up fixed versus floating for our loans and borrowings.

For SME, it's totally fixed because the segment which we are in, change of tenure or change of interest rates will be very difficult to make them understand. And so we -- and most of the companies, and we are working on a total fixed interest rate. And in case of wholesale, where we are getting a reasonably good IRR as compared to our median average rate, we are doing at fixed. And certain, I would say, not more than 15% to 20% of our total portfolio will be on floating [Foreign Language]

1% of the portfolio...

So you can say most of our portfolio is...

Fixed IRR.

Fixed IRR only.

Okay. And what about your borrowing, sir? How much of the borrowing is fixed versus floating and how much of that...

Borrowing was totally floating. Totally floating, I would say only 5% to 10%, 1 or 2 borrowers have given on a fixed rate. And sometimes are -- those resets in certain cases are linked with the T-bill, certain are linked with repo rates, certain are linked with their MCLR. And MCLR do take time to change. Repo has been the best where the reset happens very fast. Sometimes which are linked with T-bills, the reset is after 6 months to 12 months. So now our focus is to get the fresh borrowings linked with repo and T-bill rather than the MCLR. And where even, I would say, PSU banks -- certain PSU banks have not changed their MCLR even after the 100 bps of repo rate cut. So we have -- from the learnings what we have made from last 2, 3 years, we have found that, yes, it works. Otherwise also when the interest rates start rising, then the repo rate linked start get repricing faster as compared to the MCLR linked.

Sir, -- got it. What percentage of your borrowings have been repriced and how much are yet to be repriced percentage-wise?

What Atul...

Almost more than 50% borrowings have been repriced.

50% has been repriced, 50% are still there.

Sir, then going forward, your NIM should expand, right? Because on your lending side, you will hold rates whereas your borrowing rates will come down, right? So that's why I was surprised...

Yes, we've said that -- yes, we have introduced one a little lower IRR product. I don't have -- we don't know that, we estimate that it will give -- only 10% to 15% of our SME portfolio will come from that product. And a little bit on the wholesale, I would say the total NIM benefit, the reduction in cost of borrowing for the wholesale, I would say, around 50% on an average may get passed to our wholesale customers.

Got it, sir. But this kind of NIM compression, what we have seen in this quarter, hopefully, we will not see that, right, going forward, we'll at least maintain...

Yes, the other element of NIM compression was the negative rate we were carrying and the focus will be to reduce that. And thirdly, I think NIMs, we are also including that...