Fedbank Financial Services Limited (FEDFINA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Fedbank Financial Services Limited Q4 FY '25 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions, and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Shreepal Doshi from Equirus Securities. Thank you, and over to you, sir.

Thank you, Manav. Good evening, everyone. We welcome you all to the earnings conference call of Fedbank Financial to discuss the Q4 performance of the company and the business update. We have with us Mr. Parvez Mulla, MD and CEO of the company, along with other senior management. I would now like to hand over the call to Mr. Parvez for his opening remarks, post which we can open the forum for question and answer. Over to you, sir.

Thank you, Shreepal. Good evening, everyone. I would like to extend a warm welcome to all of you for joining the quarter 4 FY '25 and the full year FY '25 post results earnings call. I'm joined by our CFO, Mr. C.V. Ganesh; our Chief Business Officer for Small Ticket Mortgage Business, Mr. Shardul Kadam; our CBO for Gold Business and CMO, Mr. Jagadeesh Rao; our CBO for Medium Ticket LAP and Business Loans, Mr. Sureshkumar. When we connected during our last quarter earnings discussion, I had briefed about our performance and highlighted certain challenges that required our immediate attention. Elevated delinquencies in the small mortgage portfolio, collection infrastructure lagging behind business growth. Furthermore, in the interactions, we had listed down our priorities that we will allocate capital to higher ROA and ROE businesses and slow down the BL business, and move to a more secured construct. We will double-down on our twin-engine strategy of Gold and LAP businesses. Within LAP, we will focus on mix of high-yield and low-risk businesses. To address the delinquencies, we would be investing in strengthening our collection infrastructure. We had then appointed new leadership to rebuild our ST LAP business. We will scale our MT LAP business with a focus on on-book and direct assignment, try and keep the credit cost sub 1% in Q4 FY '25, and we will get more core income and less RDA income. With respect to these priorities, we have the following updates in Q4 FY '25. Senior leadership has been put in place in collections. We have verticalized the collection structure to bring focus at product level. The middle layer and field level hiring is in progress, and we expect to complete it by Q1. We have added resources in call center to optimize the early bucket collections and pre-delinquency management and added resources in litigation team. On the small ticket LAP business side, as announced, we have a CBO in place. We are in the process of strengthening the middle management as well as the frontline team. We expect to complete substantial part of the exercise by Q1. As mentioned in Q3, the business has fully migrated to Salesforce and the new origination is happening through evolved BRE. Requisite changes have been carried out in the policies and operating guidelines. With the new processes in BRE, our small ticket LAP disbursals for Q4 touched INR 270 crores, a growth of about 58% quarter-on-quarter. We still have to reach our full potential here. We are in the rebuild phase in both ST LAP and collections, and you will find us updating you over the next few quarters. In these 2 verticals, you will see stability in the numbers post the rebuild phase. In the Gold business, we had a fantastic year and quarter with our AUM growing 48% Y-o-Y, aided by tonnage growth 18% Y-o-Y. Our LTVs on AUM stand at 66%. Our doorstep gold loan initiative has paid off really well. We have more than doubled our doorstep gold AUM in FY '25 and touched 15% of the total gold AUM. The MT LAP business, Medium Ticket LAP business scaled up handsomely while maintaining stable yields. Our credit cost for Q4 is at 1%. While we have taken focused corrective actions, we do expect some flows to come in, in the near term, but normalize by the year-end. With the continued strengthening of collection and focused execution, we believe we are well-positioned to manage these risks effectively. We expect normalization to set in by the year-end, paving the way for more stable and predictable credit performance going forward. While we are focusing on rebuilding our ST LAP business and collection, our Gold business and LAP business has scaled up on the back of productivity improvements and give us confidence as we enter the year. Some of the key business numbers for the quarter are as follows: Our AUM touched INR 15,812 crores and accretion of INR 889 crores in Q4, translating to a growth of 6% quarter-on-quarter and 29.7% year-on-year. Gold reached an AUM of INR 5,880 crores, a growth of 13% quarter-on-quarter, 48.1% Y-o-Y. Tonnage growth for the year came in at 18% Y-o-Y, reaching 11.3 tonnes. We have added 35,000 new customers in gold loans during the quarter. Mortgage AUM reached INR 8,062 crores, an AUM growth of 6.5% quarter-on-quarter, 29.7% Y-o-Y. Disbursals of INR 5,578 crores in Q4 FY '25, up 26.9% Q-on-Q and 28.6% Y-o-Y. On the profitability and asset quality side, our net interest income grew 34.6% Y-o-Y to INR 283.4 crores. Our operating profit grew by 20.9% Y-o-Y to INR 131.2 crores. Our Gross Stage III stands at 2% versus 1.8% quarter-on-quarter. Our credit cost for the quarter stood at 1% versus 0.7% last year. Our net profit stood at INR 71.7 crores in Q4 FY '25, up 5.9% Y-o-Y. I will now hand over to Mr. C.V. Ganesh to take you through the detailed numbers.

Thank you, Parvez. Thanks, everyone, for your participation in the call. While Parvez covered the quarterly metrics, let me share some highlights on the year gone by. Overall AUM was INR 15,812 crores as of March 31, '25. This is up from INR 12,191 crores as of April 1. So AUM has grown 30% in this fiscal, and this is in spite of the discontinuation of new originations in our unsecured business loans. Out of this growth in AUM, gold loans have grown 48% year-on-year from INR 3,969 crores as of March '24 to INR 5,881 crores (sic) [ INR 5,880 crores]. With this, Gold now constitutes 37% of our AUM. Our Medium Ticket LAP grew 44% year-on-year from INR 3,045 crores as of March '24 to INR 4,394 crores as of March '25. Medium ticket LAP now constitutes 28% of our AUM. Our Small Mortgage businesses had challenges during the year. However, it grew 16% year-on-year in spite of those challenges, up from INR 3,173 crores in March '24 to INR 3,668 crores in March '25. This business now constitutes 23% of our AUM. Our unsecured business loan AUM de-grew 9% year-on-year from INR 1,826 crores as of March '24 to INR 1,656 crores as of March '25 and now constitutes under 10% of our AUM. On the Gold side, the Gold AUM per branch increased from INR 9.1 crore per branch at the beginning of the year to INR 12.1 crore per branch at the end of March '25. This is a growth of 34% year-on-year. Also, overall tonnage grew 18% year-on-year from 9.5 tonnes as of March '24 to 11.3 tonnes as of March '25. We continue to realign our policy and processes around our ST LAP product. New originations gathered pace in Q4 and have grown to INR 270 crores, about INR 100 crores more than what we originated in Q3. We had mentioned in Q3 that as we pivot to an even more secured construct of the balance sheet, we are going slow on the unsecured business loans and have decelerated originations. Consequently, in Q4, we have not originated any material new business in unsecured loans. This compares to INR 220 crores in Q3. On the NIM and spreads, on a daily average basis, our yields have increased by 43 bps over the fiscal. While on an average, our cost of borrowings have gone up by 30 bps. Consequently, we have seen a pure spread expansion during the year of 13 bps. Our net interest income for the full year FY '25 was INR 1,071 crores and grew 32% year-on-year. Our net total income at INR 1,226 crores is up 30% year-on-year. OpEx grew 28% year-on-year. Consequently, our pre-provisioning operating profit for the year grew 32% year-on-year to INR 520 crores. Credit costs for the full year came to INR 216 crores at 1.8% of average total assets compared to 0.7% in the previous year. Consequently, our ROA has come in lower for the full year at 1.8% compared to 2.4% in the previous year. On the treasury side, we continue to have ample access to funds. On a quarter-on-quarter basis, our weighted average cost of borrowings has marginally gone up by 3 basis points from 8.69% to 8.72%, and this is primarily due to MCLR-linked interest resets on existing borrowings. Our incremental borrowing cost continues to be less than this. About 89% of our total borrowings are on floating rate. Of these, about 47% are linked to MCLR and the rest are external benchmark linked. During the quarter, we added 1 foreign lender to the relationship. This takes our total relationship to 42. Our debt-equity ratio has marginally increased from 3.98% in December to 4.03% as of March '25. On the capital conservation strategy, the company continues to move forward in its policy of deleveraging the balance sheet through co-lending and direct assignment of installment loans, and we have multiple partners for the same. During the quarter, our AUM grew by INR 900 crores, we moved INR 787 crores of loans off book, which constituted a DA of INR 531 crores across the mortgage book and a CLM of INR 256 crores on the gold loan book. Through this, in spite of growing AUM at a rapid pace, we were able to improve capital adequacy levels by 30 bps from 21.6% to 21.9%. Our off-balance sheet book as of March 31, '25, stands at INR 3,973 crores, up 75% year-on-year from INR 2,276 crores in the previous year. Of this, gold loans held in partner books accounted for INR 1,131 crores, unsecured business loans securitized stood at INR 440 crores and mortgage loans accounted for INR 2,408 crores. Our shareholders' equity as of March 31, '25 was INR 2,547 crores, up from INR 2,464 crores in December '24. Our book value per share rose to INR 68.31 as of March 31, '25, up from INR 66.1 in December 31, '24. With that, I hand it over to the operator for questions.

[Operator Instructions] We have our first question from the line of Renish from ICICI.

Congrats on good set of numbers. Sir, just two things, one on this strategy front. So we have always been sort of highlighting that small ticket LAP gold loan will be a growth driver and sort of rest of the products will be used as a cross-sell or enabler for customer acquisition. But when we look at 4Q, [ MT LAP ] has actually outpaced small ticket LAP growth. So just wanted to understand, is there any sort of change in strategy or this may be to offset the kind of -- we are going through a rebuilding phase in ST LAP and hence, we are just grabbing the opportunity wherever it is possible. How one should look at this?

Yes. Renish, thank you so much for that question. Renish, the strategy remains same. The strategy is to focus on the ST LAP business and the Gold business together. We've always articulated our twin strategy. And last time also, I reiterated that we will be focusing on our ST LAP business and Gold business. And our Gold business growth has come in on tonnage growth as well as price growth, and it is healthily growing. There is an opportunistic growth there. But our ST LAP business, if you see, we had mentioned that we are going through an injury there. And in Q3, I had mentioned about the challenges which we went through in disbursals. And from there, the disbursals have picked up. We are augmenting in terms of our resources also there. So you would have seen over the last quarter, the disbursals have picked up. Our objective is to keep on picking up the disbursals on ST LAP side. So the focus is completely there. In fact, I had also mentioned to you about synergizing between the ST LAP business and Gold business. We worked out a plan there, too, where in the next year, you will see us using both these branches or co-locating these branches and sourcing these businesses together from the same branch. So the strategy remains same. You will see us seeing -- the growth in the ST LAP business will be substantial there. Right now, while we are going through the rebuild phase, you are seeing those mixes going slightly differently. But overall, at the year-end and next year, you will see all these numbers falling in place.

Got it. This is very clear, sir. And secondly, again, on the asset quality front and of course, it is sort of in line with your expectation, given the flows largely came from the small ticket LAP. Now when we look at a 1% credit cost in FY sort of Q4 FY '25, how do you see this credit cost settling in FY '26? I mean, given, again, the rebuilding phase in small ticket LAP, do you expect those to increase or sort of it will remain where it is currently and then maybe even in second half '26 that will come down? I mean how one should look at this 1% credit cost moving in FY '26?

Yes, Renish, again, last time I had given you a broad idea about how I looked at that business. And that time, I had seen it through a shorter duration. I have had a longer duration to look at that business. And the way we see that business, we are very, very bullish on it. There is that elevated level of delinquency in 1 plus, which you've seen last time. The Stage 2 also, you will see elevated this time. So there are likely to be flows in the quarters coming, and we see those flows coming in the next 2 quarters. And thereafter, I'm seeing a plateau and then by year-end, we will normalize. But as far as the credit cost is concerned, I'm expecting it to stay around 1%, plus or minus 10 bps. So I'm seeing the credit cost hovering around that range.

[Operator Instructions] We have our next question from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Congratulations on a very strong comeback. Sir, my questions are as follows: I'll just ask them in sequence. First, on the -- you said that you're going to look at lower risk but higher-yielding assets, it almost seems too good to be true. So where is the big change that is happening in terms of those kind of products? And in business loans, would you face any challenges in collections given the fact that they've slowed down the business? That's question number one. Question number two is there's been a positive opening up of operating income being greater than operating expenses growth. And that's a very positive trend. So do you expect that to continue given the fact that you have to make investments in the next year also? Lastly, Ganesh, sorry, I know you have the same question, but is there any clarification on the RBI guidelines for bank on NBFCs? Those are my 3 questions.

Thank you so much, Vivek. Vivek, I'll just rephrase or -- in my opening statement, I said that within LAP, we will focus on a mix of high-yield and low-risk businesses. Our Small Ticket LAP business is a high-yield business and our Medium Ticket LAP business, which we do at a lower yield is the low-risk business. Both these businesses for us are important as a bouquet for LAP, loan against property. We are one of the few companies which does loan against property as a first proposition. There are many other players who do home loans as a first proposition and also do loan against properties. So that's why we double down on inside LAP, we do both these businesses. And our Small Ticket LAP business, we are picking up and the growth there is going to be substantially higher coming from where we were in Q3. We are picking that up. But in the next year and year after that, you will see growth there. Our Medium Ticket LAP business has seen many cycles, and it has gone through multiple weathers, and we believe that it has weathered those storms for the yield and the kind of underwriting practices that we do there. As far as the BL business is concerned, it is -- we mentioned that we are slowing it down. And we've factored in the apprehension that you said. And considering all that, we are still saying that we are expecting the credit cost to stay around 1%, plus or minus 10 bps. There is an expected rundown of the book that we have, and there are certain focused collection efforts that we are doing on the BL side. The reason why we did the BL decision was to move to a 100% secured construct. If you remember, we said that our BL business was not giving us the ROE that we were expecting. It was a DSA-run business. It was not fitting with our strategy. And we felt it was a strategic decision for us and the Board supported us. And we believe that's the right way to do it, and we will manage the credit cost within that range while doing this BL slowdown. Your third question was on the RBI guidelines. We had apprised regarding our stance on this. There is no change between Q3 and Q4. Our representation, which we had sent in Q3 still remains the same, and we are hoping that the regulator looks at it with a different eye because we are a listed entity. There has been a representation both from our parent and from our side. There are a few other companies which are in a similar boat like ours because we are a listed entity. And we are expecting the regulator to look at our representation and then come out with the draft guidelines further or change -- I mean, finalize those guidelines. So we stand at status quo. Third piece, C.V. Ji you want to pick that up? Operating income, I lost the question.

Yes. So Vivek, again, thank you for the question. See, on the OpEx side, right, we are confident that we'll be able to keep the core OpEx stable to reducing. But -- and again, this intertwines with another question of yours. On the gold loan side, where we see opportunities and fantastic tailwinds to grow a 19-plus percent yield business, with negligible credit cost. I think all hands are on the table there. So we are seizing every opportunity we can get. And it may mean lesser distractions in terms of something else we were doing, but that it makes sense there. So to add to that question, in terms of OpEx, if we see opportunities there to expand our coverage, we will not hesitate. The idea is to be agile and not choose any particular metric.

We have our next question from the line of Ajit Kabi from BNP Paribas.

I just want to ask you a few questions of provisioning expenses, which were reported in P&L. The number is around INR 32.5 crores, out of which standard Stage 3 ECL provision write-back has happened around INR 11 crores. So the right in this -- that pro forma calculation, I can find that there was around INR 40 crores of write-off was made. Can you explain about it? What the INR 40 crore write-off have done?

So Ajit, I'm sorry, I cannot relate to the numbers you are mentioning. Can you please...

I'm telling you. See, the total credit cost was around INR 32 crores, where in Stage 1 and Stage 2 ECL provision, there was something provision build-up of around INR 4 crores. And in ECL 3, I can find there was provision write-back has happened of around INR 11.4 crores because earlier, the ECL Stage 3 provision was around INR 106.9 crores, which came to INR 95.5 crores, did you get it, in Q4. So there was around INR 11.4 crores of write-off -- sorry, INR 11.4 crores of write-back has happened in ECL Stage 3.

Ajit, I'm sorry. I'm still unable to relate to the numbers. Why don't we...

Can you tell me about the write-off numbers of this quarter?

We have not done any write-off in Q4. So we have not done any write-off. And if at all, you have any questions on this particular point, please connect offline.

So, my second question is how you are seeing the net interest margin going forward?

So, Ajit, we expect the net interest margin to be stable. As I said, in the last call, we had highlighted that we will reduce the amount of DA income proportion in our earnings and focus more on core earnings growth. We will continue on that path. As I articulated, we have a large proportion of our borrowings, which are on floating rate, which gives us confidence to maintain stability in margins on a continued basis.

We have our next question from the line of [ Sneha Gantara ] from Star Union.

Just wanted to know what is the plan for the branch expansion, and the employee -- total count on the employees has declined on a quarter-on-quarter basis. And if you would like to share any ballpark number on the growth you're planning to achieve over the next 2 to 3 years, any just rough cut numbers also on the growth side? And what would be the expectations on the cost of funds considering we are under the declining interest rate scenarios? These are 4 questions from my side.

So Sneha, just to rephrase, you asked on cost of funds, employee count, and the first was on branch expansion, right?

Branch expansion and the loan growth, if any numbers you would like to share with us, just ballpark number.

Yes. So Sneha, thank you. On the branch expansion side, we will look at the opportunities going in quarter 1, and we should be able to update by quarter 1. And as far as the AUM growth is concerned, see, we already have business loans in our base. So if you take that in the base, then you will see around 12% to 15% growth. If you remove that from the base, you will see about 25% to 30% AUM growth is what we are targeting. On the employee count side, yes, there has been reduction, and we are working over the next year on the OpEx side. There are some things which I had articulated last time in my last call. There will be work which we will be doing on the manpower side, on the technology side, and on the premises side, trying to optimize and see what is the trajectory we can take there, and specific initiatives which we want to do. But as C.V. Ji said, we will be investing for growth, investing in for collections, and we will be opportunistically looking at branches. But if we do look at branches, you will see us trying to synergize between the MSE branches and our gold branches. So there will be an effort to synergize these two, not only in terms of cross-sell, but trying to co-locate them. So by quarter 1, I should be able to give you some specific updates in terms of what we are doing there and how we want to scale that up. And your question on cost -- C.V Ji, on the cost of funds?

Yes. So Sneha, on the cost of funds, as I said, we intend to reduce the proportion of DA income, contribution to the net interest income gradually. I think the reduction in cost of funds should help us cushion that journey and which is why we guided on a constant spread. So that's where I'll leave it.

One more question regarding the mention about the doorstep initiative, which has been forming around 15% of AUM. Any internal target we would like to achieve on that? Or just focusing more on this new initiative of the doorstep initiative. Can you just highlight further on that front?

Sneha, there is a disturbance. So I'll just rephrase the question. You are asking about our doorstep gold loan initiative, right?

Right, right.

So this doorstep gold loan initiative for us is a very, very important initiative. We've scaled it up this year and over last year. It's a very, very targeted scale-up. Today, it has touched about 15%. We want to -- our branch-led Gold business has grown handsomely, and the doorstep Gold business has grown more handsomely than the branch business. That is why you've seen the percentage increase. In the next 1 year to 2 years, we want to take it up by 3% or 4% points. That means you will see that 15% number going to about 18% to 22% in the next 1 year to 2 years. So you will see that business growing much faster than our branch business, and our branch business will equally grow faster. But as I'm saying, the percentage composition of doorstep will increase. So it's a focused effort from our side.

I want to add on to that, Sneha. See, the doorstep gold loan business in absolute grew by 500 basis points in terms of share from about 9.6% to about a little under 15% now. Now, what we are also cognizant of is the increasing amount of RBI circulars and draft circulars coming around gold loans in particular, which is why we will watch how this evolves. And then we will be able to give a better guidance.

[Operator Instructions] We have our next question from the line of Mayank Mistry from JM Financial.

Sir, my question is on the gold loan book. So you just highlighted that the gold loan growth is now currently driven by the rising prices of gold. So -- but even then, our LTV is so high at 72%, like we are running on the edge at 75% regulatory requirement. So I mean, how are you evaluating the LTV against -- such a high LTV against the gold loans? That is my question, sir.

Yes. So Mayank, a slight correction. Our gold loan growth has seen tonnage growth as well as price growth. We -- our tonnage growth is almost 15% to 18% growth Y-o-Y. And so if you see the 48% growth, out of that, almost 18% has come from tonnage and then the rest has come from price. So that is a very, very healthy growth on tonnage. We've also added 35,000 new customers. So that growth is coming from new customers. On the LTV side, see, our average LTV on the book is about 66%. In fact, when the new draft guidelines had come in, we had corrected all our processes and our sourcing LTV had dropped. And most of the growth in Q4 has come with the reduced instructions on LTV and complying with the guidelines. So we've seen growth in Q4 complying with the guidelines. And I will ask my Chief Business Officer, Jagadeesh, to add further on what I said. Jagadeesh, you want to add?

Yes. So just to add with this, on the LTV front, as Parvez articulated, we are -- our overall LTV at the [ cost ] level is at 66%. It is not 72%. 72% is our origination LTV. So just to add, we also have periodic stress test done. We have a robust stress test done here. Plus we have put in place a proper margin call mechanism at the LTV level, which is regulated by RBI at 75%. So there is no risk that we see because of the processes.

Yes, sir. But can you just, I mean, differentiate what is the difference between the average LTV that you are seeing at 66% versus the origination? So is this a daily average? I mean how is this calculated exactly?

Average LTV means as on 31st March 2025, the overall outstanding gold loan book, the tonnage of the outstanding gold loan book and its market value against the total outstanding of gold loan, which includes principal plus interest. So that...

This is for origination?

No, no. This is on the outstanding.

On book. Okay.

Origination means for the quarter, Q4, we have originated X amount of gold loan and 72% is the average origination LTV.

So if you go to Slide 22 of the investor deck, you will be able to see the trajectory we have brought it out in Slide 22.

[Operator Instructions] We have our next question from the line of Abhishek Agarwal from Lalit Agarwal & Company.

Am I audible?

Yes, Abhishek.

So my first question is on the gold loan origination yield. So I was going through the quarter 3 investor presentation as well, and there, the origination yield is at 15%. And this quarter, the yield is at 19.7%. So just wanted to understand, are these two numbers comparable and why the big jump? And the second part to the question would be, we've seen in gold loans a lot of competition coming in. So how confident are we that these origination yields are going to be maintained in the future?

So the first part is the correlation between the onboarding yield, which we have shown in the last quarter, right? That's basically an origination yield of the quarter. So we onboard a customer at a particular rate, and this is a weighted average rate of that rate. When we say 19.7%, that is the average -- that is the weighted average rate of the portfolio. So these are the two differences.

So just to add to what Jagadeesh said, yes, you are right. Those 2 numbers are not comparable, Abhishek. We were having a similar confusion like you had where people were mistaking our often quoted origination yield on gold loans with the portfolio yield. So we wanted to clarify that, which is why only for gold loans in that slide, we have put a mark there, asterisk there, and we have clarified that, that is a disbursement yield.

Portfolio yield.

Portfolio yield, sorry.

Understood. And the second part was on how confident are we of maintaining these yields given the competition in the gold loan business?

So we concentrate on the retail book, and we don't see much of a competition coming there from the customers' requirement or need. So we are confident to maintain these yields.

Understood. And just one more question on the cost-to-income ratio. So this quarter, we've had only one branch added, and we've seen a headcount decline as well, but the operating expenses have risen. Now you've talked about how we are going to be investing in manpower and technology. So that's understandable. And -- but I just wanted to get a sense of the cost-to-income ratio, which is now above 59% after a few quarters. So what -- directionally, what do you think in the next 1, 2 years? Do you think this is the highest level of cost-to-income that we've seen and it's only going to taper from here? Or do you going to think this is going to continue for the next 2, 3 quarters until our branches ramp up?

See, Abhishek, when we are looking at this business strategically, as I said, the priority is to allocate capital to high ROA, ROE businesses and look at businesses which are not doing well on the ROE metric to slow down. So that is priority number one. Revive the ST LAP business is priority number two, then scale up our LAP business and Gold business opportunistically is priority number three, and collections revival is priority number four. And giving you a guidance on the credit cost is priority number five or six. And so if you look at the number of priorities that we're looking at and to get a decent guidance on the ROA, these are the priorities that we've listed, and this is how we believe that step by step, we will be able to give an impetus to the businesses that we want to focus on. In that metrics, these are the metrics which will change. On the cost-to-income side, I will request you to look at us a year down the line, although there will be initiatives which we will be putting. And cost to income typically for our organization has remained sticky over the past 4, 5 years. There is a structural component which we are trying to change, and I don't want to give you guidance over the quarter because it will not be correct. But definitely, I'm telling you that directionally, there are a lot of things which we are doing and also investing in the growth side for the branches as well as investing in collections. But if you look at the cost to average total assets, there could be a dip there. But on the cost-to-income side, because we are investing, it could be a number which you can ask us in quarter 1 or quarter 2. But we will try and figure out how many reduction items we can do for the investment.

So I will just add to what Parvez said on that aspect. See, there is always going to be some amount of spend in the OpEx line, which is building muscle, and we will not shy away from that, right? What we are trying to tell on this call is that the part of the OpEx, which is BAU, which is maybe [ fat ] or just going on, kind of cost, that consciously, we are trying to put it on a downward trajectory. That being said, when we cite an opportunity, we will continue to have tactical investments in growth. This could be in terms of beefing up capacity, either in terms of people or branches. We are in it for the long run. So we will not be driven by short-term tactical goals. We will be driven by longer-term sustainable return-enhancing objectives.

We have a follow-up question from the line of Renish from ICICI.

Just two clarifications. So you have said that our AUM growth will remain at 12% to 15%, including BL, which means our LAP and gold loans will grow at 20%, 25%?

Yes, that's what I said. Without the BL base, they will grow at 25% to 30% on the AUM side.

Okay. So 25% to 30%, not 20% to 25% Okay. And again, on this gold loan yields, right? So when you say it's a portfolio yield means including penal interest and charges, right? I mean, versus origination yield of 15%. I mean that's the difference?

No. The structure of the loan is like you originate at a particular rate and the customer has the option to pay interest at different intervals, like monthly, quarterly, or half yearly. So it's up to the customer to serve the interest monthly and get an onboarding rate continued for the entire tenure or pay a higher rate if he's servicing quarterly or half half-yearly or monthly. So that's how the structure of the loan is. And that's the major difference between the onboarding yield and the portfolio yield.

Renish, just to specifically address the question, the penal charges does not come in the yield line. It comes in the fee line.

And penal interest?

No, there is no penal interest. RBI has discontinued penal interest.

Got it. Got it.

So basically, this is tenure premium. It's the kind of penal charges, which comes separate.

Okay. Got it. So basically, this is a tenure premium.

Yes. See, there are 2 elements here. One is the tenure premium. Also, whenever we do a CLM, there is a yield enhancement on the existing book, which happens, right? So that also you need to factor. So see, we are allocating capital very dynamically, right? So it's basically helping in the yield enhancement on gold loans on what is on the balance sheet.

We have our next question from the line of Aditya from Securities Investment Management.

Sir, my question is on credit cost. So our flows into Stage 2 and Stage 3 have increased, but we expect the credit cost to be in the range of 1%. So, should one expect the PCR to go down going forward?

Aditya, yes. The answer is yes because if you remember last time when we had done a discussion, our PCR had jumped, and the jump had happened because of a one-time provision that we had done. And we had directionally -- we had given a direction saying that our PCR won't go as low as what it was earlier, but won't remain as high as it was then. So it will stabilize somewhere in between, depending because see, the incremental flows will happen at an incremental different PCR like whatever the model suggests. So this was a one-time PCR, which we had done. And going forward, we will be looking at how our business is and what cycle we have reached to stabilize at a particular PCR.

Understood. Sir, next question was on small ticket LAP. So you mentioned that disbursement should keep on increasing from here. But if we look at your GNPA, that has increased majorly because of small ticket LAP. So I just wanted to understand what is -- and you also mentioned that you have to invest further in the collection infrastructure, so just wanted to understand what is giving us this confidence to increase the disbursement in small ticket LAP?

Again, if I would refer it to our previous quarter call, we had said that our assessment of our challenges were more in terms of investing manpower in collections. And this kind of a business, our affordable Small Ticket LAP business requires collection efforts at a grassroot level. And these are deep -- we are deeply invested there. And that investment is what is required. And if you see our customer, he is an average income of about INR 5 lakh. So you could sense he's about INR 40,000, INR 50,000 per month customer and you have a INR 20,000 EMI. So if there is a one EMI default, from the second EMI to third EMI, falling down to the NPA is slightly faster. That is why we require a collection infrastructure, which needs to meet the customer at a pre-delinquency stage or at a bound stage or an X bucket stage. And these are important timelines where the customer needs to be met by the collection infrastructure, which is the resources that we are putting in either through the call center or through our manpower. That's why we were -- our analysis told us that we have a localized problem and that localized problem needs to be addressed with localized resources. We are seeing some encouraging signs there. And wherever we are seeing flows, we are guiding you accordingly that there could be flows there. But we know that if we put the resources there, and you also understand putting resources in Q4. People don't move organizations in Q4. It's typically joining happens in Q1. That's why once we have the joinings happening at a grassroot level, we've already put the leadership in place. The middle is 50% done. And the grassroot level people also should join in. That's where we are saying it's a collection challenge which we need to address. And that's why we are growing our book because we believe we understand that business. We are going through its life cycle. We put leadership who understands that business in terms of competition as well as the market. And that's where the growth is. And we see an opportunity there, and we know how to run this business through the underwriting side and the growth side.

Understood, sir. So just to clarify, the current issue is majorly due to lack of collection infrastructure and not in the underwriting process.

Majorly that. See, obviously, it's not a very precise science to say that this is how it is. There will be some underwriting issues. There will be some sales issues, but the predominant issue is the collection side manpower.

Next question was on medium ticket LAP. So sir, if I'm not mistaken, the customer profile in this segment is organized and would have valid documents like an IT return, EST return. So just wanted to understand what is the edge for Fedfina in this business because there are smaller private banks and small finance banks also operating in this segment of such ticket size who might have lower cost of funds than us. So what is the edge for Fedfina in this business?

See, one is, as I said, we are looking at the Small Ticket LAP business and the Gold business along -- and we are saying that we want to be a company which is focused on LAP. It's a proposition for us that a customer at a various life cycle from a INR 5 lakh ticket size to a INR 30 lakh reaches out to us on the ST LAP side from a INR 30 lakh to INR 3 crores reaches us to a medium ticket LAP size. So that is one in terms of proposition. Two, in terms of the kind of yields that we are operating in and the kind of markets that we are operating in, along with the underwriting guidelines and the kind of delinquencies that we are seeing, we believe we are managing the book better than many other players in this, and that is why we have a healthy ROE here. Along with that, we have a good appetite when we start looking at DA income and when we look at the other organizations like NBFCs or banks who are interested in this kind of profile, and we have a healthy ROE coming from here. So these are our primary reasons we believe we have a proposition. This particular book will remain in the range of 20% to 25% of our AUM. It's a healthy book. It's a stable book for us. And that's why we believe it's a good asset in our composition. We have Suresh here, who is our CBO in this business. Suresh, do you want to add anything?

Yes. See arbitrage that we have is these customers, they understate their income, they inflate the expenses and all that. So what we do is we combine the declared and derived income and then make a fair assessment of the customer requirement. So that's where we have a play. So that is niche for us.

Understood. Sir, two questions here. Sir, what would be the share of DSAs for medium ticket LAP?

Share of what? I'm sorry.

DSA.

See, this will be run through DSAs or partners. This business across the industry runs in a similar fashion. There is -- there has been experimentation on a direct sales team model, but I don't think any organization has succeeded in building that model. We will also keep experimenting with it, but we today don't have any story there. It is run through a partner channel.

Got it. And in terms of ROAs, would this be making company level ROAs of around 1.7%, 1.8%?

We are doing better than that.

So we don't give out product-specific ROAs, but it is making, I think, reasonably more than the numbers you mentioned. See, we do this product on a collaboration basis through a collaboration with other financial institutions, including banks, right, which is why it is very light on the balance sheet.

We have our next question from the line of [indiscernible] from Chinta Govind Capital.

Can you hear me?

Yes, please go ahead with the questions.

So two questions from my side. One is on guidance for ROA for FY '26. Any light on that? And the second question is on impact of these draft guidelines on gold loans, right? Any impact for Fedfina in your view on growth or costs?

So as far as the guidelines are concerned, in fact, in Q3 also, we had a similar environment where I had answered that question on whatever draft guidelines had come and how would it impact us. And you've seen the growth in Q4 that has happened. These particular guidelines, I think, are very, very healthy in terms of the clarifying on the LTV side. Earlier, there was a lot of confusion on the interpretation of LTV. Now these draft guidelines are clarifying it and making it a level playing field for everyone, and that's very healthy. The other guidelines too, I think if at all, all the guidelines come through, there will be a transition period, which each organization will go through. But I think it will be a level playing field for everyone, especially for the gold side. It's just a transition period which each organization will go through. And I think it will be back to a new normal. And I don't see a major effect over the years. It will be just a short-term blip for the transition period. I'm sorry, I missed your first question.

ROA guidance for FY '26?

I think I've given credit cost guidance, and I have given you the cost-to-income guidance, and I have given you that the NIMs will hold. I think it's just a calculation.

I think one aspect which is remaining is the cost-to-income.

Yes. We guided on it in the sense of the rebuild phase and the investment in growth. So that's where I said on the average assets basis, you can look at a 5 to 10 basis points there.

Since there are no questions, I would now like to hand the conference over to Mr. Shreepal Doshi for closing comments. Over to you, sir.

Thank you, Manav, and special thanks to the management of the company for giving us the opportunity to host the call. And thanks to all participants for being there on the call. Thank you, and have a good day. Thank you, sir.

Thank you.

On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.