Five-Star Business Finance Limited (FIVESTAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Five-Star Business Finance Limited Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Renish Bhuva from ICICI Securities. Thank you and over to you, sir.

Thanks, Steve. Good afternoon, everyone. Welcome to Five-Star Business Finance Q4 FY '24 Earnings Conference Call. On behalf of ICICI Securities, I would like to thank Five-Star management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of Five-Star represented by Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director; Mr. Rangarajan Krishnan, CEO; and Mr. Srikanth, CFO. I will now hand over the call to Mr. Pathy for his opening remarks, and then we'll open the floor for Q&A. Over to you, sir.

Yes. Thank you, Renish. Welcome all for this Five-Star's earnings call for the full year and for the quarter ending financial '24. We are happy and very satisfactory the way in which we came in -- we brought in the growth, combined with the quality and the profitability. Let me go -- as usual, let me start with the branch opening and employee addition. We have opened close to 147 branches for the full year and 40 branches in the Q4. As we have been saying in last few quarters about the cluster branch approach, where a branch becomes bigger in size, say above 2,500 accounts, close to INR 50 crores of AUM, we bring in a cluster approach where we split the branch into 2 or 3 depending upon the area, and this has been done purely derisking the branches, having more number of accounts and a bigger team. So equally, the account gets split and the team also gets split to the newer location. Out of 147, 1/3 will be on the cluster approach basis and 2/3 will be on the new branches basis, which we have guided close to 80 to 100 branches will be opening year-on-year from a new branch cluster basis. We have had close to 975 employees in business and collection comparing to 825 employees in business and collection last year. Last year, we opened 73 branches. So employee addition is not much. It is related to that 80 to 100 branches, which we have opened new. And interestingly, our OpEx has kept intact. In fact, it has reduced both for the full year and for the quarter. So this shows keeping the productivity at the top and derisking the bigger branches is the right model and right structure for Five-Star going forward. We'll be repeating this for this year also. Now taking you to the disbursement, branch opening and addition of business employees has contributed to the increase in disbursement. We have done INR 1,336 crores of disbursement in last quarter. This is a 20% growth year-on-year and 11% growth Q-on-Q. And for the full year, we have done a disbursement of close to INR 4,881 crores, which is 44% growth in disbursement. That has resulted in robust AUM, which has moved to INR 9,640 crores, registering a 39% year-on-year and 8% Q-on-Q. And for the full year, we have grown close to 39% for the financial year '24. Now let me take you towards the quality, which is a very important metric. The collection efficiency was good and stable. We stayed at 99% between last quarter and this quarter. And unique customer collection was also at good levels. We were at 97.5%, same as last quarter, a bit of improvement, but broadly at 97.5%. Due to our good collection efforts and strategy what we have adopted, our 30-plus has shown a good drop. From 10.5% in the March of last year, it has dropped down to 7.9% for the March of this year. This is a good drop comparing to 30-plus accounts. We will be in the same range of close to 7.5% to 8% for this financial year. And additional branches increase in AUM and in good quality that has brought in a good profitability for your company. Our profitability for the quarter has rose to INR 236 crores, which is a 40% year-on-year and 9% Q-on-Q. And for the full year, it has moved to INR 835 crores from INR 603 crores, giving a 30% jump in PAT. From the liability side, Srikanth will deal it in depth. The cost was -- the incremental cost was at 9.58% comparing to 9.57% last quarter. And the cost on the book stands at 9.71%. With this kind of branch addition, disbursement and growth will continue for this financial year, too. As we have moved from the COVID, we have been giving a 30% above growth year-on-year. That will be continued for this year, too. So with this, let me hand over to Srikanth to go in-depth.

So very good afternoon to all of you. As Mr. Pathy had outlined in his remarks, Q4 was another -- yet another strong quarter for us. Across the various operational and financial parameters, we had fared very well. As of March 24, we had a borrower base of about 3.9 lakhs, the loans. So this has grown by about 31% on a year-on-year basis. So the portfolio continues to be well diversified and not concentrated in pockets. From a branch count of 373, we ended with 520, this is a combination of new branches and branches opened under the cluster strategy. Disbursements, again, we have already touched upon. It grew 20% year-on-year and 8% quarter-on-quarter. AUM growth for the year was about 39% from around INR 6,019 crores, we have touched INR 9,641 crores. On the financial metrics, our yields continue to remain consistent at around 24% to 24.25%. Our cost of funds for the quarter dropped to about 9.64%. So this has resulted in a spread of 14.55% as against a spread of about 14.1% for Q4 FY '23. With increasing leverage, there is a drop in NIM. It has dropped from 18.47% in Q4 of last year to 17.19%, like I said, primarily on account of increased leverage. For the full year, we had a net interest margin of 17.4% as against 18% for the last financial year. Our cost-to-income continues to remain very stable. For the quarter, it was at about 35.06% as compared to a little over 38% for Q4 FY '23. We expect our cost-to-income to remain stable at around 35% to 37% level even in the steady state. All this has resulted in an ROA of 8.43% for the quarter. And for the quarter, the ROE for the first time has gone beyond 18%, we were at about 18.65%. But if you look at the full year, we had registered an ROA of 8.42%, which is a drop of 20 basis points comparing to last year and an ROE of 17.6%, which is almost 2.6% higher as compared to last financial year. From a borrowing perspective, we continue to be attractive in -- from our lender's side. We have about 45 lenders who have lent to us. While the bank loans continue to be the major portion of our debt, I think one of the very important cases that we have guided you last quarter and what we have done during this quarter is the effort to diversify our liability franchise. We have made quite good progress on that front. In March, we received a sanction of INR 450 crores from NABARD, one of the largest developmental institutions in the country. And the other news, which is also public information is IFC has subscribed to our NCDs for INR 500 crores. All these are at very attractive pricing. So in Q4, we had received sanctions for about INR 900 crores. We availed about INR 950 crores, some of it coming from the past sanctions. The average continues to be -- the weighted average rate continued to be very, very attractive at 9.58%. For the full year, we had drawn slightly less than INR 4,000 crores, though our sanctions were at about INR 4,350 crores. At a non-inclusive cost of about 9.54%. We continue to maintain a good liquidity buffer at about close to INR 1,880 crores and an additional INR 425 crores of sanction lines, which were yet to be drawn. We have already touched upon the collection efficiency, but I think very impressive numbers across 1+, 30+ and the Stage 3 assets. We are a maintaining very good provision coverage ratio, both on the overall AUM and on the Stage 3 assets. Our provision coverage on Stage 3 continues to be at about 54.27%. And on an overall basis, we are at about 1.64%. Restructured book is almost at an immaterial level as we speak. It is at 0.52% of our overall AUM. But even there, we maintained a provision coverage of about 55%. So all of this has given us a very good profitability of INR 236 crores for the quarter and INR 836 crores for the year, which is roughly 39% to 40% growth, both for the quarter as well as for the full year. Our net worth is slightly shy of INR 5,200 crores as of March. So the last couple of years, after the COVID has been a very good year for us, very strong in terms of quality, profitability and growth and we expect that this momentum will be carried forward in the current financial year as well. On that note, we will open up for any questions that any of you may have. Thank you.

[Operator Instructions] The first question is from the line of Viral Shah from IIFL Securities.

Congratulations on good set of numbers. My first 2 questions are for you, Mr. Pathy, and the third one would be for Srikanth. So sir, basically, if you look at the business model that you have successfully scaled up, it is a process-intensive model, right? And this is demonstrated by even your better asset quality outcomes ultimately on your write-offs, et cetera. But I wanted to check how are you able to scale up this business model successfully in the new geographies where you are growing in a noncontiguous manner, because it requires your employees on the ground, you recruiting right from the ground level up. So if you can throw more light over there.

Yes. Yes, this is a very niche business model. As I've been saying, these customers for the business needs and for any other housing or personal needs, they have to depend on the local money-lending market. That is where Five-Star goes and caters and move them from informal to formal. This demand is always robust, what I've seen in last 20 years, and it continues to be robust. From a South perspective, we are South players. If you see in the 4 bigger states in South, we have a good presence, but we don't have a deep presence in the South. So for a foreseeable future, if I'm going to focus more on South, that will deliver the growth that we have been guiding to the market very comfortably. Having said that, we have also said that we want to have a reasonable presence in the rest of the country. That's where the new states have been put in place. We have a strong presence in MP, and we have a very lighter presence in other 4, 5 states that we have in the rest of the country. So for a sustainable loan growth, I think today, South contributes close to 93% of our entire disbursement in AUM. Even in 3 years down the line, South will continue to contribute close to 85% of the growth and disbursement. So I think our business model on the growth what we have created is purely based on the South and whatever it comes in the rest of the country is going to be addition to our growth.

So sorry for a follow-up. So right now, if I look at it, we have a INR 10,000 crores of AUM and the employee base was around INR 9,000. So basically when we scale up, right, I understand from a geographical perspective, it will be still South-heavy. But I think directionally, we are also going to expand our presence in the newer states, the Gujarat, the Maharashtra, Rajasthan of the world. And in those geographies, because for example, we have to build a loan book of, say, INR 5,000 crores, right, over the next few years, it will also require 5,000 employees. That is like 50% of the current employee base. So how are we able to manage because that's one thing that I think comes up in terms of the ability to scale the business.

Yes. Since it's a small ticket, close to 3 lakhs to 5 lakhs ticket size per file and operationally intense business, it needs more manpower than a bigger ticket-size product. A few things here is we put up our -- when we put up our branches in the existing locality, we recruit the officers from the locality. So we don't have any constraint that officers who is coming from other NBFCs has to be in the similar space. As long as they are from NBFC space, we are happy to take them. And the business head who's the in-charge of the branch is really matters for moving our business and collections. Having said that, that's our business model. We have to scale up with the people. We will -- as we have been doing in the past, we'll be doing it very successfully in the future also. That's not a constraint from Five-Star perspective.

Got it, sir. Sri, the second question was from the perspective of the cash collections component. So I see that, that number has actually now reduced dramatically from 62% to 47% now. Can you explain like what is, of course, driving this on the ground? And is there any intention of further bringing this down?

Yes. As we have been saying in the past, there's no push from the company side that customer has to pay in noncash. But having said that, in last few quarters, maybe in 2 years, gradually, when the UPI transaction is gaining momentum across Tier 3 to Tier 6 towns, our customers have also started to repay their EMIs through NACH and UPI mode. That is why if you see our noncash portion has crossed 50% and it's close to 55% in the month of March -- March month alone. And if this trend continues, maybe we'll be close to 70% or 65% to 70% by this financial year-end.

Okay. And does this -- will this mean any savings in terms of OpEx, cash handling charges, et cetera, or no?

Not much in place.

Viral, if at all, it has to only be better, Viral, and at this point of time, we are not guiding you for any betterment that will come in terms of OpEx. We will take it as it comes along. The intention is to get the customers move from cash to noncash, which is obviously perceived to be a lot more risk-free. So for now, we are not guiding on any OpEx increases or sales to come in because of this.

Right. And the last question, Srikanth, for you is, right now, we have 14 basis points of spread between the incremental cost of funds and the back book. And now that we have 2 quarters of track record in terms of tapping the capital markets, can we say that there is scope for the spreads to expand from here on by anywhere between 5, 10 basis points, not material, but in FY'25?

Viral, you are looking at the full-year number, but if I look at Q4 number alone, the difference between incremental costs and the book cost is just 6 basis points. And while we have tapped in the capital markets, we've not really gone deep there, especially in terms of getting the mutual funds and all that, where we believe that there could be some premium that we'll have to end up paying. So I would probably say -- the ability to get the spread expansion is not there at this point of time, we will not guide you for any of the spread expansion. In fact, what we have been saying is there can be a slight increase in the cost of funds as well. It depends on what kind of rates we are able to get from banks, what kind of rates -- what kind of proportion we are raising from mutual funds where the cost could be slightly higher, could be offset a little bit of it with some priority sector lending from banks. So at this point of time, don't factor in any spread increase to come in. We will see over the next couple of quarters in terms of where the spread sort of normalizes once we get more into the mutual funds side of things.

The next question is from the line of Sameer Bhise from JM Financial.

Congrats on a very strong set of numbers. My question is for disbursal growth for FY '25 and maybe a couple of years down the road. Because if we look at Q4, it's at, say, 20% on a Y-o-Y basis. How does one think about disbursements and the AUM over the next couple of years?

So Sameer, I think the way you probably have to look at it is, see, these are long-term loans. So while you look at above 30% growth that we are looking at for -- on the portfolio, the disbursal will not see a 30% growth. It can even come in a little lesser. So our point is, so for example, this year, we have done close to INR 4,500 crores, INR 4,600 crores of disbursals. That number next year probably would be around INR 6,300 crores to 6,500 crores. So roughly, the disbursal growth we are talking about will be more like a 25% kind of a growth that we are looking at for 25% to 27% growth. It will be slightly lower than the AUM growth that we are projecting, given that we do a little bit of a long-term lending. So I would say maybe about 3 to 5 percentage points lower than the AUM growth is where the disbursement growth would be.

And secondly, Srikanth, the coverage has been going up gradually, which is a good thing. Where do you see this stabilizing?

Yes. I think where we are is a stable number. I would not really give too much of an emphasis on 1, 2 basis points this way that way, like last quarter, we were at 1.62%. We are at 1.64% as we speak. So I think broadly anywhere between 1.5% to 1.6%, 1.65% is where we would like this to settle at least in the short term. When I mean short term, at least the next 1 to 2 years kind of a scenario. And thereafter, depending on how the portfolio performs, how our PDs and LGDs stack up, this number may even come down given that we are fully secured and secured against one of the strongest assets, we don't really see the need to create anything beyond 1.6%, 1.65%.

The next question is from the line of Chandrasekar from Fidelity.

A few questions. Maybe please help us on the cost of the IFC money on a fully hedged basis. And given that I think raising extra money at this point in time, is it a little cheaper? How do you just think in terms of funding between domestic and externally, the share sort of changes?

So Chandra, the money that we took from IFC is rupee loan. So we did not take it in dollars. So there's no question of hedging there.

9.40%.

Yes, 9.40 -- so the 9.40% is the rupee NCD that we issued to IFC. They did not bring in dollars. So there's no hedging part. The cost is at about what we took at was about 9.40%, including a little bit of a fee that we paid to them. So it's a per month basis of 9.41% as against 9.58% cost that we raised money in Q4.

Right. Second, maybe given that by the end of the June quarter, we would cross about INR 10,000 crores, I mean just typically at a point where you start looking, approaching rating agencies for an upgrade. Just I don't have a sense on the conversations and if there's possibility of a ratings upgrade sometime this year?

Yes. Surely, we are optimistic on that, Chandra. As you rightly said, we are moving from a 4-digit to 5-digit company very soon in this quarter. We will keep approaching them. We'll see how does they see, especially the regulatory environment that has been kicked in for the last 3 quarters for the banks and NBFCs. We have to see how they're poised. From our performance onwards, we are improving on a quarter-over-quarter basis. So we have to wait and watch.

Chandra, again, I just want to add, while Mr. Pathy has guided that we will reach out to them, I would still think that Q1 of this financial may be a little early because our first rating update came in December of 2022. So that's just like about 15 months, 15 to 18 months when you go back to then while the INR 10,000 crores is definitely a good metric to go back. But I don't know from a vintage perspective, whether they would like to look at it in Q1. I would probably think it's maybe 2 to 3 quarters down the line rather than June. But having said that, we'll keep making our efforts.

Great. And then lastly, just on the disbursement ticket size, it's more up to about INR 3.5 lakhs. I think directionally, this eventually heads towards INR 4 lakhs to INR 5 lakhs, INR 4.5 lakhs by the end of this year? Or how should you think of that?

Chandra, we have been saying that we are -- our sweet spot is between INR 3 lakhs to INR 5 lakhs. That's where we come in, neither a small ticket or a microfinance nor affordable of INR 10 lakhs and above. So we want to be in the range of INR 3 lakhs to INR 5 lakhs. That's our endeavor. But taking this inflation into account, be from INR 3.5 lakhs, we'll probably be around INR 4 lakhs for this financial year. You're right.

The next question is from the line of [ Dinesh Kulkarni from RDST ].

First of all, congrats on a good set of numbers. I have a very straightforward simple question here. I see we have added close to 2,000 employees in the previous fiscal ending FY '24. What sort of number do you expect going forward especially for FY '25? Can we expect it in the same range or it will be lower than what we have seen in the last 2 years?

Thumb rule, what we have been guiding is for every employee, the AUM will be around INR 1.25 crores. That's our thumb rule. We will be -- we are now more than INR 1 crore per employee. So we'll be in the same range, around INR 1.25 crores per employee. That's our range. So depending on our growth, what we have guided is above 30%. Keeping that in mind, we'll be adding that much of employees. Predominantly, more employees will be added in the business and collection purpose.

Okay. Just one more question. I was -- I think I missed out on the loan disbursal. Can you just explain more why it will be lower -- you would expect it to be lower than the previous year. I mean, I think it was 25% or something you said?

Dinesh, the question is not about amount being lower. What I meant was if the AUM grows by, let's say, 32%, which is above 30% that we're talking about 32%, 33%, you don't need 33% growth in disbursals to come in because there is also the portfolio effect that will kick in. So the disbursal of growth would probably be more like 27%, 28% rather than being at 32%, 33%. So that's the number that I was talking about. It will definitely be more than 20% that we grew year-on-year.

I got it. Just I think the last question from my end. What kind of expenses, in terms of operating expenses, we would expect going forward, they were lower as a percentage of AUM or assets or they would remain in the same range?

See, for the coming year, for this year, the number is at about 5.6%. This came down from about 6.2%, which was in FY '23. So there has been a sharp drop of about 60 basis points. This is also on account of the productivity increases, the efficiencies that we have brought in, technology improvements and all that. So I would probably think the ability to reduce this further would be a lot more gradual than what will stop between FY '23 and '24. So like we had even guided in a steady state also, we will probably be at about closer to 5% of OpEx ex credit costs. So we are talking about another 60 basis points of benefit to come in over the next 3 years. So don't expect a very sharp increase, but you will see some benefits coming through.

The next question is from the line of [ Aditya ] from MSA Capital Partners.

Am I audible?

Yes, Please go ahead.

Congratulations on the great set of numbers. So just wanted to quickly understand from the management that how are we looking for the next 3 years, what would be our strategy. I understand that the strategy, the growth strategy that we're looking at will be completely in South India. But I wanted to get a color on what is the AUM for branch and disbursement for branch that we're looking at. And now moving close to 3 years, there'll be more 3- to 5-year branches -- vintage branches that we'll be having. So if you can just quickly explain that to me.

So Aditya, I'll just explain a couple of points. Firstly, I think we are targeting a CAGR of at least 30% plus growth, which means conservatively on a 3-year basis, we'll be able to double our balance sheet. So we'll be close to INR 20,000 crores in 3 years. That's the first point. Now of this, what constitutes this INR 20,000 crores, it will largely be from South. So today, South contributes 94% of the portfolio roughly. We believe the composition of Central India and North India will at least keep improving over the next 3 years. But I think still probably about 90% of the portfolio will continue to be contributed by South. Now from a branch expansion perspective, we are already at about 520 branches at this point of time. We will very easily be able to double the points of presence in about the next 3 years, which means we will have close to 1,000 branches in a period of 3 years from now. Like Mr. Pathy explained in the beginning of the call, this will be through a combination of new branches that we are opening, stand-alone new branches that we're opening and a split branch that sort of emanates from larger branches. The split branch is part of the core strategy, which means we don't want any single branch to become too big and become too risky for any reason, whether it is business, whether it is collections or whether it is people dependencies, we wanted to make sure that the risks and the operational metrics are contained at a reasonable level. We can also clearly say that I think over the next 3 years, we are not deviating from the core business focus, which is we will continue to be targeting small businesses and self-employed individuals at this point of time. From a core perspective, we don't have any new product additions. The ticket sizes will be guided more in the nature of inflationary increases. So maybe in about a 3-year period, we will be close to INR 5 lakhs at this point of time from about INR 3.5 lakhs. We have been very consistent with respect to both profitability and quality that will continue to drive whatever that we are doing. So the growth is definitely not going to come at the cost of either profitability or quality.

Understood, sir. Understood. Sir, just a couple of questions. Also in the previous participant's question where he had highlighted -- where he had asked you about disbursement. So just looking this and doing simple math, we should be doing easily a 30%, 32% disbursement growth even if we take INR 13.5 crores of disbursement per branch what we did this year and we've added close to 147 branches. Is my understanding correct?

So there will also be newer branches that will come in, which may not do the INR 13 crores, INR 14 crores disbursal that we are talking about. So you will always have a little bit of a lag there. The second point...

If you can help me understand, say, for example, like how you show vintage while AUM, what would be the vintage-wise disbursement track record of less than 1 year, 1 to 3, 3 to 5 and more than 7 years?

No, I think from a branch perspective, it's driven by vintage. It's driven by the number of people at the branch. So there could be branches where we have only about 4 offices when we are starting, but there also could be branches where we have close to 10 offices. So it's not really dependent on vintage, it's dependent on number of people because what we are talking about is incremental business during a month and that's not dependent by vintage. That's more based on how many log-ins each officer is doing and how many offices are there in a particular branch.

Understood sir. Understood. And in our presentation, we are showing that we want to come down to 8 to 9 days of TAT compared to what we are at 10 today. So this reduction that we are planning to do will it be more tech-oriented that we are expecting our productivity per employee to go up or we are planning to add more employees to reach this TAT?

No, I think this will be through a combination of tech plus some process optimizations that we will do. The 8 to 9 is also today driven largely by many external factors because we are dealing with properties, we take an external legal opinion for every property. And that's like a pre-disbursement or a pre-sanctioned condition. So there are dependencies so I don't think it can come down by compromising on something which is core to the company but we still have some tech initiatives. We went live with Salesforce only last year, and we have a lot of optimizations to do on the Salesforce. In addition, we will also be able to do some process optimizations that should get us the 15% to 20% reduction in overall TAT.

Understood sir. Understood. Just one last question I would like to squeeze in. So when we talk about the market size of being INR 22 trillion, at our ROI, what would be the market size that you would estimate because you would have a much better on the ground and understanding of how the market size looks like?

Sorry, can you repeat your question?

So in the presentation, we highlight that the market size is INR 22 trillion. I wanted to get a color on at our ROI of 23%, 24%, what would be the market -- what would be the actual market because you would have a clear understanding of how on the ground the picture looks like?

See, what we have given the INR 22 lakh crore market opportunity is being study done by CRISIL based on Five-Star's business model. This is not based on generic point, it was based on Five-Star's business model. Those people who have shops who are self-employed and who are afford to give a property as a security. So that's where this number has been brought in. So it's not a broad number. It's a specific number. If you are going to be in a pan-India player, this is a market that it is available to go and pick it up. So it is a Five-Star specific.

But Aditya, just to add another angle to this whole thing, we have always sort of maintained that this segment, which is graduating from informal to formal, they are not that sensitive to pricing. I think what they are more sensitive is whether they are able to get a loan and what's the quantum of loan that they're able to get. And this quantum help them stand on their own legs, whether it is setting up a business or whether it is putting up a new asset in their family. So with this, we believe that it's not about more of interest rate sensitivities in this segment. It's more about pulling people from informal to formal into the game.

The next question is from the line of Ajit Kumar from Nomura.

Congrats for the quarter. My first question would be, what is the need to keep 55% provision of your restructured book? Because I guess most of the restructured book would be classified under Stage 2 and now we already have 55% provision on GS3, so what is the requirement of keeping this 55% provision on the restructured book?

So, Ajit, about 20%, 25% of our restructured book is in Stage 3, so which automatically has a 55% provision that we are holding. The other part is also that see, in the restructured book, what has also happened is there has been a capitalization of interest that we did during the 6 months when the customers did not pay when we had given a moratorium period to the customer. Now that gets continued to -- that accrues interest on a month-on-month basis. Now if at all, there is a request from the customer towards the rear end of this loan in terms of any discount that you may need on a settlement, there may be some haircuts that we'll have to take on this accrued interest, not on the original principal. So from that perspective, our belief is that we want to carry given that the portfolio is also accruing interest and growing because of the accrued interest on a month-on-month and a quarter-on-quarter basis, we believe that having a slightly higher provision on this book will be a little more prudent as compared to because it's also finding its way to the top line every month. So that's the intent of keeping a slightly higher provision.

Okay, okay. Okay. And second question would be how is balance transfer out trending as of now versus historical level, BT out today?

So nothing in material, Ajit, like what we keep telling. Very few of our customers actually graduate to the next level. So even if you look at BT outs today, I think it's more like 2%, 3% that we are talking about. So nothing to be really worried about or alarmed about. It's a very, very immaterial number, pretty much in line with historical averages.

Okay. Okay. And lastly, if you can give a sense on balance transfer in rate, I mean people who are coming from other lenders to Five-Star. I remember it used to be roughly 6% to 8%, 1 to 1.5 years back. So what is this number right now?

Formerly, what you are saying, it is about -- it is right, it's about 5% or so. But these are from formal lenders. Our basic business model is to graduate these customers from unorganized financial institutions or money lenders to institutions like Five-Star. There the number can be significantly higher, which obviously, we don't track straight also because you don't really lend money to the money lender and it does not give you the ability to track as we can track a BT loan from a formal lender. BT income from formal lenders continue to be around the 5%, 6% levels.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand something on the ROE and ROA profile. I mean, over the next 2, 3 years because we do intend to increase our leverage, right? Currently, it is at 1.1, 1.2x odd. And as we -- as you increase your leverage, ROA would tend to go down and ROE would tend to go up, right? So we have to see next 2 to 3 years, how do we see the trajectory of ROE and ROA profile for us over the next 3 years?

Yes. So as you said, 1.25% is debt to equity. The leverage is at close to 2.2%. What we have been guiding to the market is we never -- we don't -- we will not come to the market for the next 5 years. So the game plan is to increase our leverage to close to 3.5% in the next 3 years or so. As we -- as you keep increasing your leverage, your ROA will come down because you borrow more money and you pay interest on it. So our guidance for the next 3 years, our ROA will be around 6.5% to 7%. And if you multiply that with leverage of 3.5%, our guidance for next 3 years or on so, ROE will be around 20% plus. Good thing is we have made a good progress in both increasing our leverage and profitability. So that is -- you have seen that in this year and especially in this quarter, our ROE has moved up 18% less for the quarter. And for the full year, we are at 17.6%. So that shows a very strong momentum that's been coupled with the leverage and the profitability.

Absolutely. And this 3 years that we have seen, we would see a steady increase and a steady decrease in both and ROA and ROE, right? Over next 3 years, as we increase...

That's the game plan. We'll be constantly focusing to increase our leverage under the same business model. So that will bring down our ROA slightly on a quarterly and yearly basis and increase our ROE to that extent.

Fair enough. Fair enough. And 100% of our loan book is secured, right?

Yes, 100%. No doubt about it. Out of 100%, 95% of self-occupied residential property and 5% is the either shop or the vacant lands.

Okay. So 95% is self-occupied residential property.

Yes. And balance 5% is also secured, secured by shops or vacant lands.

Absolutely. I understand. Yes. I think you guys are doing a fantastic job, sir. I mean, Kudos to that.

The next question is from the line of Raghav Garg from Ambit Capital.

I just have one question. So I think at some point in time in the past, you mentioned that 1 business officer can handle about 120 accounts. And when I look at that ratio today, that's about 81, implying that a typical business office is handling about 80 accounts. So what stops us from increasing the workload on a business officer rather than actually going for newer employees as that would help improve efficiency for you? That's my only question.

So rather it's a combination of having some cushion because of attrition potentially. So let us say, if every officer is full up on his capacity, and there is some attrition which occurs, let's say, in the middle of the month or during the quarter, it's very difficult for you to rearrange even that officer's account to the others because they are already full up on their capacity. So you can't really optimally operate at exact full capacity in every officer. So that's the first part. And second, when you're opening a new branch, it always takes time for the buildup to happen. So it's not going to happen on day 1. So when you're starting each officer, let's say, locked in about 5 files and about 4 files gets approved. It typically takes at least 2 years for that officer to accumulate close to 100 accounts. So because of the time line and because of operational reasons, such as attrition, you can't really fully load it up. I think there will always be some lag and cushion, which is there in the model.

Okay. So say we were to look at this number on a 2-year lag basis a number of accounts per day on a base of employee base, say, 1 year ago or 2 years ago, this number would be higher. Is that the correct way to look at it? What would be...

That's why I said, that number, if you look at 1 year lag that number is more like about 100 accounts per officer, 3.8, 3.9 on about 4,000 employees. So yes, that's probably the -- one of the wish to look at it. I wouldn't say that's the most ideal way. The most ideal way would probably when we get to a lot more steady-state scenario where we are not opening so many branches or we are not growing at very high levels. I think that is when you would probably reach about 120 or so. Till that point of time, if you look at a 1 year lag, you're right, where they're operating at about 100 to 110, that would be an appropriate number.

Understood. And one more thing. I think you had mentioned at some point that you would double the branches from here on, right? I think the base is about 590 -- is it the right number which I'm looking at and then you will take it to 100 -- sorry, sorry, 520 going to 1,000 in the next 3 years. Is that right? And this would be because of new branches as well as the splitting of some of the existing large branches, correct?

Yes. Raghav, you're right. There was a question from an investor. For that, we gave a reply that in next 3 to 4 years, how does this business look like? So we have said we'll be doubling our branches from 500 to 1,000. This includes 2 things. We'll be opening 80 to 100 branches year-on-year. That's the guidance that we have been saying to the market. Even last year, we said we'll be opening 80 to 100. We have done more than 100 branches, balance is a split, 2/3 is the new branches and 1/3 is a split. So that will get continued. And the split branches will take it's away this year and maybe next year, too. So that can be even added. So both put together is what we have said will be close to 1,000 branches in next 3 to 4 years.

So just a follow-up on that. When I looked at historically your business, what you seem to have done is that while the branch expansion has been there, you've deployed more people in the same branch, and that is why your number of people per branch has almost doubled in the last, I think, 5, 6 years. Will that continue? Will you continue to deploy more people in the same branch? Or will you cap it at, say, 18, 20, which is the current run rate right now?

Raghav, that is the strategy that what we have been adopting in the last 6 to 9 months, which is a cluster strategy. We don't want any branch to cross more than 2,000 accounts. It is INR 50 crores of AUM. And we want that to be split into 2 to 3 branches. So ideally, going forward, Five-Star will operate in the smaller branches where accounts are around 1,000 accounts per branch that is INR 25 crores per branch. That's the ideal. If a brand crosses 1,000 accounts, a split will be made and a new branch around 5 to 10 kilometers vicinity will be put in, and we'll be transferring some accounts there so that both the branches keep growing. So that is the strategy of cluster -- if you -- just to recall, there is one unforeseen incident which has happened in other NBFC, where huge amount of fraud has been done in a single branch. So I think keeping too much of accounts and too much of AUM in a single branch really is a risk from a retail perspective. That is where we thought ahead and we started to put in this cluster approach and spitting branches within the bigger branches. So going forward, we will ideally want to be 8 to 10 number of branches -- 8 to 10 members in a branch looking after close to less than 1,000 accounts, that will be ideal. That has proven in Five-Star in last 6 to 9 months, the smaller branches are productive, effective and their collections and attrition levels and coaching levels are far, far lesser.

Understood. Sir, the 8 to 10 -- sorry, yes, 8 to 10 number that you're referring to employees, those are just the business officers, right, business and collections...

It's a combination of business collection and the support team. We give 3 supporting teams for every branch, which is one guy will be credit, one will be cashier and one will be operations. All put together, I said 10.

10. Okay. Understood. Understood. And you'll have the branch capacity handling capacity 1,000 accounts, right? Is that the number which I...

Yes. That is ideal. That is what 800 to 1,000 is ideal that what we are thinking right now.

The next question is from the line of [ Arvind ] from Sundaram Alternatives.

Congratulations on the great set of numbers. So like our growth continues to be very strong. But when I selected into geographies, I can see that AP and Telangana is very much strong and that is -- these are the 2 regions have primarily contributed to the AUM growth in FY '24. And there are some moderation in growth in Tamil Nadu and Karnataka regions. Any particular reasons the growth has slowed down a bit in comparison to like even the overall growth? Can it improve like in the subsequent years? That's my first question. And branch additions when we talk about like will it be like -- is it safer to assume that it will be again in the Southern region, whereas other regions would be minimum 80/20, something like that.

Yes. On the first point, Tamil Nadu and Karnataka has not slowed down, whereas Andhra and Telangana has moved up. So Telangana, Tamil Nadu and Karnataka, if you see stand-alone comparing to last year, they have also grown pretty very well. And one more point to add, I've been guiding to you people that the Karnataka was a little lower after when the state was coming out of COVID. For last few quarters, their performance has done extremely very well. The collection efficiency and the quality of asset that we are able to demonstrate in that state. So that state will also be looking up for this financial year. So if you look at this financial year, we will invest a lot in Tamil Nadu and Karnataka together that puts both the states competing with AP and Telangana, which is really doing well. From the second question, on the branch addition, we have been always guiding 80 to 100 new branches will be put up for Five-Star, excluding the split concept, what I said. Out of that, close to 80% will be in South. As I said, Karnataka and Tamil Nadu will take a lion's share in this financial year with Andhra and Telangana doing really well. So out of 80% put in South and balance 20% will be in rest of the country that to predominantly will be in MP and Maharashtra where we have -- MP, we have very strong presence and Maharashtra, we have a very reasonable presence, and both the states are been with us for the last 5 years. So we have a reasonable experience in that state. So the 20% predominantly will go to these 2 states.

Sure, sir. And then my next question is on cost of funds -- incremental cost of funds is lower than the book. It's safe to assume that I know like the cost of funds would be unlikely to move further from this quarter, the great quarter? And like also to get the PSL benefit in terms of bank borrowings, like we needed to do this Udyam registrations of our customers? Has it been done? That's my second question.

Yes. So I think on the first point, I think one of the others had a similar question, and I clarified. Today, there is no big delta between our cost of funds on the book and the cost of incremental debt. And given that we are looking to diversify our borrowing resources, Hopefully, we'll have some more mutual funds and all getting into this, where we may have to pay a little bit of a premium. We will not see any big benefit coming through in terms of increasing spreads and all that. If at all, there could be a slight compression that may come through because we may want to pay a little higher to onboard the right kind of lenders to the company. So there is not much scope for reduction going forward, both on the funds on the book as well as costs on incremental debt. In terms of the PSL, yes, what we guided, yes, we have made significant strides in terms of getting Udyam registration -- Udyam assess registration for our customers. Almost about 8,000 to 10,000 customers have already been registered on the portal. So during this year, we are confident that we will be able to onboard lenders who will be lending against PSL assets. So our belief is that out of the overall disbursals of let's say INR 6,000 crores INR 6,500 crores that we are exercising for the next year, at least about 25% to 30% of that would be PSL-compliant assets, and we should be able to get benefit on those assets from lenders' perspective. The quantum of benefit requires to be seen whether it's going to be translating into a benefit on the cost of funds or people are going to be newer lenders who have been a little reticent to the company would come in to lend to us and all that. But definitely, we will see at least about INR 1,000 crores INR 1,500 crores of incremental debt that will be onboard using the PSL assets.

Understood, sir, understood. And we talk about borrowings like in fixed rate is 31%. So remaining should it be like in repo linked or EMCLR linked or any mix on that? And then another question is on credit cost. Credit cost in this quarter is slightly higher than the previous quarters. Despite our improving Stage 2 and Stage 3 ratios. Is it to fortify the PCR? Any other like indicators, which is showing like...

So, Arvind, first question, yes, these will primarily be [indiscernible] or external benchmark earning facilities because some of the banks there 1 year MCLR, 6-month MCLR or even 3-month MCLRs are higher than the overall cost that we are willing to give to those banks. So if we had to borrow from them, we have to go with an external benchmark rate. So the 29%, 30% will be external benchmarking, primarily around repo rate. See, the credit cost increase for this quarter is primarily on account of a technical write-off that we have taken. So the last couple of quarters, we have not taken any write-off. And given that we do get some tax arbitrage because of the write-offs. This quarter, we did take about INR 6 crores of write-off. So some -- if you really break up the credit cost of 69 basis points, it is roughly 39 basis points on account of ECL provisions and about 29 to 30 basis points because of the write-off. So if you remove that write-off, the provision is in line with last quarter. And last quarter, we did not have any write-offs. So broadly, there is no increase in the credit cost as such. It is more on account of the technical write-off that we took during this quarter.

The next question is from the line of Chirag Fialoke from RatnaTraya Capital.

Just one question, sir, on the liquidity side or just the cash in hand, could you just help us understand how do you guys think of that? Is it just in terms of number of months of disbursement and OpEx? And even from a future perspective, when you do increase the debt, what kind of cash in hand you want to be? That's my only question.

Chirag, broadly, our liquidity policy is to maintain 3 months of operational expenses, 3 months of projected lender repayments and 1 month of projected disbursements in the form of cash. This number will work anywhere around INR 1,500 crores to INR 1,600 crores given that our disbursements are also fairly strong. We are slightly higher as we think. We are at about INR 1,875 crores. I think we want to continue this policy as we go forward, at least for the next financial year. We will try and see how we can align a lot more closer to the policy than keep more money beyond the policy. But in terms of being a prudent lender and to ensure that we don't take any hiccups from a liquidity perspective, we would like to continue it. I think another thumb rule that you could probably look at it is we will probably have around 15% to 18% of our AUM in the form of liquidity even in a steady-state scenario.

Sorry, could you just repeat the last number 15, how much it is?

15% to 18% of our AUM will be in the form of liquidity.

The next question is from the line of Nischint from Kotak Mutual Funds.

This is Nischint from Kotak Securities. Just one clarification. You mentioned that your write-off is a technical write-off, but it's actually in the P&L, right? So it can't be a technical write-off.

No, no, no. So Nischint, what we mean as technical write-off is not in the strict legal sense of the term. It has more to do with the fact that these are places which are recoverable, where we have the property with us necessarily legal actions can be instituted in the name of the borrowers. But more -- but because these are little [indiscernible] cases, and we don't want to continue showing our 90-plus assets we have written off. So there -- what I meant by technical write-off is, there is not too much of doubt on the recoverability of these assets, but it will take time to get the money back from these customers. So that's the difference between practical and technical write-off that we make.

And in terms of credit cost, would you be -- because there's something which probably can pick up, right? So in terms of credit cost as per year, your math, would you be closer to where we are at this quarter, which is sort of around 80 basis points or probably the last 2 quarters, we were closer to 50 basis points.

I think we'll be more closer to where we are this quarter, Nischint. I think we have been in even in the past for about 75 to 100 basis points of credit cost. So I think it will be a lot more closer to where we are this quarter rather than what we either last year or in the last couple of quarters. So yes, about 70 to 80 basis points is probably the number that we would like to carry on our P&L.

Got it. And just a clarification in the same point that you mentioned earlier, you will probably need to kind of keep something like 20% of your balance sheet in cash and liquid investments. Is it or and there a scope of reducing it?

We will reduce it. So as we speak, it is at about roughly around a little less than 20% of our AUM, not the balance sheet. But we believe that the right number would be more around 15% to 17%. So there is definitely scope for reduction. But March during the quarter where a lot of people also want to lend money to you and especially the fact that we got big sanctions from institutions like NABARD, we were okay to maintain a little higher liquidity, but our ideal number will be somewhere around 15% to 17% of AUM in the form of liquidity.

So there was actually an improvement, right? Between December and March. So if we look at it this quarter, you kind of benefited from maybe lower average cash for the quarter?

We will keep bringing it down. So most likely, March will always be a little bit of an aberration, but the focus is to be closer to 15% to 17%, but not 20%.

The next question is from the line of [ Dinesh Kulkarni from RDST ].

My question is you mentioned that most of our branch growth or the growth would come from the South, right, with 90% focus on the South. The question is, why are we not focusing much on the North or Northwest part of India. Are we experiencing any competitive pressures there from MFIs or any other competitors?

Not like that. We have been here in South for the last 20 years. So we know this market. We know these customers, their behavioral aspect. Everything we can able to read it very well. And we are happy to stay as a regional player. We don't want to be seen as a pan-India player right now. That's why our focus are more towards South and South is more stable and especially in collections, South is more stable in collections. And the 4 big states where we have been present, we have not even made a 25% reach in their respective states. So it's a lot to be done in the South itself. That's point number one. So we don't want to leave opportunity in a known market and go on search opportunity in an unknown market. So that's the logic #1. Second is, having said that, we don't want to see as a North unknown market 3 years down the line. That's why we have been putting our branches in safer zones like MP, where we have close to 60 plus branches there. We have been investing the 60-plus branches in MP for the last 5 years. So we are doing it very well. Since we are breaking MP very well, we are now getting into the Rajasthan, maybe probably Gujarat, later part of this year, and we have gone into Maharashtra, and we have been in Chhattisgarh. So these are the states where we are learning our experience slowly, steadily. So it will be very useful. When we look back ourselves 3 years down the line, where our predominant growth will come from even in rest of the country. That's our strategy.

The next question is from the line of [ Sagar Dua ], an individual investor.

Sir, I'm an individual investor. Sir, I want to know that as we are earning consistently why we are not paying dividends to shareholders?

Yes, that's a good point. We are in the consideration mode. Board will be taking a call at appropriate time, and that will be announced more or less soon.

Sir, why is we not paying dividend to our shareholders?

I just replied to you. I'm replying it again. That's a good point that Board is considering it. We'll be coming out with the dividend thought process very soon. You'll be hearing this good news from Five-Star very soon.

Thank you. As there are no further questions, I would like to hand the conference over to Mr. Lakshmipathy for closing comments.

Thank you all. As we have been saying, we are very robust and very optimistic in the product and the profile of customers whom we lend and this optimism will continue and see you very soon. Thank you.

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