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

Ladies and gentlemen, good day, and welcome to the Five-Star Business Finance Q2 FY '26 Earnings Conference Call hosted by DAM Capital Advisors. [Operator Instructions] Please note, this conference is being recorded. I now hand over the conference to Mr. Sanket Chheda. Thank you, and over to you, sir.

Thanks, and very good evening to all of you. We have with us the management of Five-Star to discuss their Q2 results and outlook thereafter. We have with us Mr. Lakshmipathy Deenadayalan, who is the Chairman and Managing Director; and Mr. Srikanth Gopalakrishnan, who is Joint MD and CFO. Without further ado, I'll hand the call over to Mr. Lakshmipathy for their opening remarks, and then maybe follow up by question and answers. So over to you, sir, Lakshmi sir and Srikanth sir.

Yes. Thank you, Sanket. Good evening. We welcome all to the Q2 earnings call. As we have updated in the last quarter, we have given a stable performance in the current quarter across various metrics. The downtrend that we witnessed in Q1 has been arrested in the current quarter. And from here onwards, we believe that we would see some green shoots emerging in Q3 and a much stronger performance in Q4. We have taken several strategies and actions towards this across sourcing, credit underwriting, collections and risk oversight. These are marked out as focus areas for us in the quarters to come. And we believe this will pave the way for building a bigger and stronger portfolio in coming quarters. While our asset quality and credit costs have seen marginal impact in the current quarter as compared to the previous quarter, these still stack up better than many of our peers operating in the small ticket secured and unsecured loan space. As I had said in the past also, we believe that a trend reversal is likely on the horizon and is expected to play out over the next couple of quarters. Our investment in physical infrastructure and people continues, as can be seen from the addition of 33 branches and 769 business and collection officers during Q2. During this quarter, we disbursed INR 1,196 crores of loans as against INR 1,290 crores in Q1. And the drop in disbursement can be attributed to the additional controls that have been implemented for the first time during this quarter towards onboarding the right customers. With our system getting attuned to these changes, we should start seeing increase in disbursements and increased AUM growth in quarters to come. Our collections from unique customers and overall collections have remained stable compared to the previous quarter. Collections from unique customers stood at 95.1%, the same as last quarter. And we have seen an improvement in the overall collection efficiency, which went up from 96.3% in Q1 to 96.7% in Q2. These metrics show early signs of revival, though in a gradual manner. During this quarter, we availed incremental debt of INR 1,068 crores, and the cost of incremental debt came in at 8.56%, which is marginally lower than the cost of incremental debt borrowed during previous quarter. Cost of the funds on the book has dropped by about 25 -- 27 bps. And given our cost of incremental debt, we should see improvement in the cost of funds for the full year. With incremental yields on assets coming in lower than the book yields, since we have lowered our yields in last November, we expect to bridge a good portion of the yields drop through drop in cost of funds. We continue to have a robust liquidity on the balance sheet of INR 2,360 crores. For the quarter, we achieved a PAT of INR 286 crores, 7% higher as compared to the previous quarter. Even during these extremely challenging times, we have been able to achieve healthy return ratios as can be evidenced in the increase in return on assets from 7.24% in Q1 to 7.49% in current quarter, an increase in return on equity from 16.57% in previous quarter to 16.91% in the current quarter. I'm also happy to inform all of you that we have commenced our housing loan product during this month. The first few logins have come in and in various stages of processing. While this may not have a significant impact on growth for this financial year, this would be a lever of growth for the coming years. We expect to deliver on the guidance for this financial year that we have given you and look forward to a much better and stronger second half of this financial year. Now let me invite Srikanth to take you through more on other numbers.

Good evening to all of you. After a difficult quarter in Q1, when we had met you all post our Q1 results, we had very clearly guided that we expect the second quarter to be a quarter of stabilization. And as we speak, we stand vindicated in our belief. The second quarter has been a stable quarter across various metrics, as Mr. Pathy has pointed out. He has touched upon many of the operational metrics. Let me quickly delve into a few of the financial metrics and then open out for any questions that any of you may have. Our yields continue to be around 23.2%. We have had a good drop in the cost of funds, which has come down to about 9.27%. So the spreads have fairly remained constant on a sequential basis at around 13.9%. The NIM, again, has been consistent on a sequential basis. But obviously, NIMs have an impact of leverage getting built up, so it will continue to drop as we go forward and have a good portfolio growth. Our cost-to-income ex-credit cost is largely stable at around 31%. The credit cost guidance that we revised last quarter, we have been able to maintain the credit cost at around 1.34%, which is very marginally higher than what we had in Q1. So even across asset quality, collections efficiencies and in the credit cost, we have remained stable. This has resulted in an attractive ROA of close to 7.5% and an ROE close to 17%, which are very good numbers given the trying times that we are all in. From a debt perspective, lenders continue to see us as a very strong borrower. So we did avail more than INR 1,000 crores during this quarter. And during the quarter, we also onboarded JPMorgan, one of the largest banks in the world. And this was for a very sizable investment into our PTCs of close to about INR 650 crores, about $75 million and at fairly attractive rates. So not just any lenders, but even pedigreed lenders are looking at Five-Star as an attractive destination to lend their monies to. So we should be able to build on this foundation and which will also aid in our asset growth in the quarters to come. Our collection efficiencies have been largely stable. Unique collection efficiency stood at 95.1%, and we saw an improvement in the overall collection efficiency by about 40 basis points. We believe we should see improvements coming in Q3 and hopefully a much stronger quarter in Q4. On the provision coverage ratio, we continue to hold close to 1.9% of provisions on the overall book. While our PCR on the Stage 3 assets dropped a little bit, this is purely on account of the write-offs that we have taken. So if you would understand, whenever we take a write-off, these are typically deep delinquent assets on which we carry a much larger provision. So there will be a drop in the provision coverage. But we are still having a very healthy provision coverage on Stage 3 at over 45%. And when you compare this with peers in the industry, this still stacks up as one of the high numbers. On the profitability side, we had a good quarter. So our profits grew 7% year-on-year and on a sequential basis. We clocked a profit of about INR 286 crores during this quarter and which resulted in a net worth of about INR 6,800-plus crores as of September 30. So on various metrics, this has been a calm and a stable quarter. Our belief is that we should start seeing improvements coming through in Q3, which will pave the way for a stronger Q4 and thereafter. With these opening remarks, we are happy to take any questions that any of you have. Over to all of you for any questions.

[Operator Instructions] First question is from the line of Renish from ICICI.

So sir, 2, 3 questions from my side. So one on this early bucket pool. So 30 plus has again gone up to sort of more than 12%, the highest since COVID. So how do you see the early bucket moving going ahead? I mean, obviously, you did mention about tightening credit filters, et cetera. But do you see any green shoots in October or, I mean, any early sign of early bucket pool softening down going ahead?

Renish, our thought process is, going forward, at least for the next 3 to 6 months, we don't want any buckets to bulge up. So we want to bring in a stable performance across all buckets. So that's our prime focus. If you see unique customers at 95.1%, that means there will be some slippages from current to arrears. So that is inevitable. We are trying to arrest that in this quarter. Hopefully, I'm seeing this quarter, the focus will be more on current customers, not much slippages from current customers. Eventually, this 30 bucket will start stabilizing and coming down.

Okay. So basically what you're trying to say is the current focus is continuing flow forwards in the already delinquent pool, and the early bucket pool might start improving after a couple of quarters. Is that what you are trying to highlight?

From this quarter onwards is what I'm trying to say. What you said is right, from this quarter onwards.

Okay, okay. And sir, my second question is around this disbursement run rate. I mean, last year or so, we have added almost 140 branches, added more than 2,500 people, but disbursement has been a little curtailed. I understand that we have been very guarded when it comes to sourcing new customers, et cetera. But when do you see the disbursement run rate start picking up meaningfully? I mean, when do you see the infrastructure writes, which we added in the last year or so, start generating business?

See, as I said in my opening remarks, we have brought in the underwriting tightness and risk oversight by creating layers before a file even gets into the login stage. So this kind of controls is very new for our system. We have done it in last quarter. So close to 5,000 officers are there, close to 1,000 BMs are there. To get attuned to this new system, it will take some time. So that is why we said in Q3, you will see a better performance and a very stronger performance in Q4.

Okay, okay. So basically, this quarter, most of the operating parameters are sort of bottomed out. I mean, disbursement as well as the sort of credit cost has peaked out. Is that the fair assumption?

Yes, that's our belief.

The next question is from the line of Viral Shah from IIFL Capital.

I would say congratulations on a good set of numbers. Mr. Pathy, if you can elaborate on 2 things. One is the changes that you have highlighted and mentioned also in the press release with regards to, say, the sourcing, underwriting, if you can just elaborate and try to give us a flavor of what are the things that you have changed? And consequently, because of that, do you think -- like how much time do you think we will take to go back to, say, an INR 1,400 crores kind of a quarterly disbursement run rate? That is my first question. And the second is on the asset quality front. While I look at the unique collection efficiency remaining stable Q-o-Q, but the overall collection efficiency has started improving. And this has been actually accompanied by your net slippages improving both on Stage 2 and 3. First of all, do you see now the recovery starting to come back even from delinquent customers? And secondly, more importantly, while you're talking of we are on the cusp of it, how strong this improvement could be? Can we start seeing a 30-plus DPD reducing from, say, 3Q onwards? Those are my two questions. Probably I'll come back in the queue for further questions.

So I'll start with the second question. I think as I said in the first one, we want to stabilize one more quarter from each DPD bucket's perspective. So we are not here to say that reversal will start to happen in this quarter. We wanted to stabilize in this quarter and we will see the reversals happening to the extent possible in Q4. That is our plan of action as we move forward. On this, we are putting in collections effort and legal recovery team. As I mentioned in last call also, a good chunk of legal recovery team is being put in place where they are starting to yield good results. That is why you see whenever an NPA gets closed, you get a lot of arrears coming back to us. That is where you see the collection efficiency has gone up. So the legal recovery team is doing extremely good work and you'll see a lot of reversal happening going forward. On the first question, on the disbursement side, I think the levels that what we have increased from a supervisory perspective is giving us a good result. Just to share some data, in Q1, we had a 25% rejection ratio, whereas in Q2, we had a 41% rejection ratio compared to login files getting in. So that is how I measure. The strength of layers that we have put in from a quality files perspective is showing good results from the system perspective. But as I said, 5,000 people of sourcing and 1,000 branch managers of sourcing attuned to this system is new for them. So it will take some more time and some more months to get attuned. So this quarter, we will see better disbursement comparing to Q2 and a stronger disbursement coming in Q4.

So, Viral, I think Mr. Pathy has clearly articulated the changes that we have done. One other thing that we have been highlighting to you even in the past also is the slight shift in focus on customer profile. So while the branches have been a little more attuned towards focusing on sub-INR 5 lakhs ticket size, today, we are moving the focus slightly towards the INR 3 lakh to INR lakhs and 5 lakhs to INR 10 lakhs. So that also takes a little bit of time. So the changes that we actually made is in terms of going behind the right customers and ensuring that these are underwritten in a stronger manner by stronger people. So we have added more layers in terms of doing the underwriting checks, which has caused a little bit of an impact in this quarter. But I would say that most of that have been ironed out. If you look at September standalone, the numbers have been very good. In fact, we have crossed more than INR 500 crores of disbursals in the month of September. And we should start seeing a good run rate coming in Q3 and Q4.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

The first one is, I mean, if you could give some geographic color around what is it that we have seen during this quarter? Which are those geographies where we have seen NPAs inch up? And likewise, given that we are expecting Q2 -- Q3 to be a quarter of stabilization and improvement from 3Q onwards, I mean, which are those geographies in particular which will contribute to that? The second question, sir, that I had was on the guidance front. Now that we are looking at 3Q stabilizing, it's much stronger improvement from 4Q onwards. How is it that we are looking at the rest -- remainder of this year in terms of growth, in terms of credit costs, as well as if you could speak a little bit on FY '27 in terms of guidance? And lastly, while I acknowledge that both the MFI and the micro LAP product that we do are very different, I mean, for at least the last couple of quarters, right, at least in MFI business, we have seen the goalpost has just kept moving after every quarter. In other words, what I mean is we are still seeing some of the NBFC MFIs increasing their credit cost guidance for the coming quarters and the next full year. So how would you kind of look at that given that in the past we have acknowledged that we also have maybe 40%, 45% of the customers where there's an overlap of microfinance loans. So just those couple of questions, if you can help me with that.

So Abhijit, the first point, you're talking about the geographic color. Like we said, I think we have seen a good amount of stabilization across the various geographies. So there is no specific geography where we can point out a more than normalized improvement or a more than normalized worsening. The one geography which continues to be a little bit of a concern is Karnataka, where the numbers are still a little higher. But given that our portfolio in Karnataka is only about 5% to 6%, this is not going to have a very significant impact on our overall AUM. But otherwise, we have seen improvements even in the other bit of a problematic geography that we had, which is Andhra Pradesh. Even there, we have seen some bit of improvement happening in this quarter. So largely, the 18 basis points increase in NPA has been, I would say, uniformly contributed across the geographies. There is no specific geography which has seen significant improvement or significant worsening, which is also giving us a good hope and belief that overall, at a macro level also things are getting settled in. And from here onwards, we should start seeing things improving. So there's no specific concern on any geography at this point of time. The concern, again, is on the ticket size. So if you look at across our portfolio where we see higher delinquencies or higher NPAs is still in the sub-INR 3 lakh ticket size. So if there is a geography with a little more pronounced proportion of sub-INR 3 lakhs, that geography is probably showing up a little bit of a higher number in terms of delinquencies and NPAs. Otherwise, we are not seeing any geographical differences in any of the states. Coming to your question on guidance, Abhijit, at this point of time, we would like to say that whatever guidance we have given you in the past, we are not changing the goalpost at this point of time. We still hope and believe that we should be able to deliver on our guidance. Mr. Pathy also talked about this in his opening remarks. We still believe that we should be able to deliver on the guidance that we have given you. So at this point of time, there is no change in guidance either on growth, profitability or asset quality or credit cost. Sorry, could you please remind on the third question?

Third question was around this micro LAP and MFI, where I acknowledge that while these products are very different, if you could just elaborate.

Abhijit, this is a point that we have anyway clearly told you. While there is an overlap from an MFI borrower perspective, the behavior of the borrower is very different when it comes to different products. So while the borrower definitely tries or is hopeful that he may be able to get benefits from a secured LAP lender also similar -- Abhijit, is that your line where we are seeing quite a bit of disturbance?

No, sir. I was on mute.

Now it's okay. Sorry. So what we are saying is while there is an overlap and we saw a temporary issue because there was a little bit of a behavioral issue from the borrower side when they saw that microfinance had written off their loans, the collection efforts had reduced, and there was a hope that secured lenders also will follow that path. But when they see secured lenders coming to them, following up more frequently, taking necessary legal actions, the behavior definitely changes. And that is what we are seeing in this quarter. While it is still happening in a very gradual manner, we still believe that just because a borrower has taken a microfinance loan, which could have been written off, while his belief might be there, the question is, depending on the actions that the lender takes, the borrowers' behavior will also shift. So we are still confident that even those borrowers who slipped in Q1, we will be able to collect the entire money back from them. But the question is you may not be able to do it through, let's say, a regularization kind of a route, like collecting multiple installments from them. But you need to bring them back towards the behavior of paying 1 installment every month. And then it's just a question of maybe 1 or 2 months extension in tenor, by which time they will pay up their entire loan. So we don't really see any impact in our eventual losses or in our eventual ability to recover from these borrowers.

Got it, sir. This is useful. I just wanted to squeeze in one follow-up question. While you said that there is no change in guidance, I just wanted to understand, from next fiscal year onwards, what should be the steady state credit cost?

Abhijit, we have told you in the last call itself, the credit cost guidance change, what we said in last call, from 0.75% to now it's 1.25% to 1.35% range. We'll hold it for a shorter period of time, right? I don't think next year we are going to change the guidance on credit costs. This product -- this customer needs this kind of credit cost is what we have concluded, and we have told that guidance. This will hold on for at least next 18, 24 months.

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

I just have two questions. One, your business officers' count is up some 35% versus last year. Obviously, the focus has been mostly on collections. But when you decide to press for growth, will you continue to hire with the same intensity or will it be lower? Because even the current capacity that you are creating can be utilized for growth. So I just wanted to understand what are your thoughts on this.

Yes, Raghav, you're right on that. Building the infrastructure should not stop unless until your business runway looks very dull. But our business runway looks very bright, because today, the biggest opportunity is small business loans and small secured loans. So we are continuously creating the infrastructure. And if we see the stabilization continuing and no more damages happening to the repayments, I think then the business pedal has to be moved up. So that is what we are expecting in Q3 a little bit and Q4 more strongly.

Raghav, just giving you a breakup, the 700-odd officers that Mr. Pathy alluded to in his thing, that also had collection officers. So it's almost like 500 business officers and about 200 collection officers. So we are strengthening both sides of the operations such that we have the necessary infrastructure when we want to press the pedal of growth. At the same time, we are building a good collection support to ensure that there is no slippages.

Understood. And the stability in collection, unique collections that we have seen in Q2 over Q1 is a result of that. Is that understanding correct, because of the investments that you've done in hiring collection officers over the last 1 year?

That's right, Raghav.

Understood. And one more related question is that you said that 1.25%, 1.3% is something that should be a steady state number on credit cost. Does that translate into, say, 4.5% to 5% kind of static NPAs, right? If we were to look at NPAs on a static pool, does it translate into that kind of a number, around 4.5%, 5%? I'm just asking for my modeling purposes.

Raghav, we'll take it offline. We've not really looked at that. The number seems a little high what you're talking about. But obviously, then on a static pool, whatever we used to guide about 3%-odd -- 3%, 3.5% on a static pool will go up. But I'm not sure if it will go all the way up to 5% and all that, let's take it offline.

Sure. Just last question. The write-offs were quite high this quarter. How much more do you expect to write-off in the second half? And how should one think about the Stage 3 coverage? Will you take it back to 50% over time?

See, this write-off, the way you should look at, Raghav, is, it is done for the first half of the year. So while we have done it in 1 quarter, but it's for the first half of the year. So we are talking about, let's say, INR 50 crores write-off that we have done. So it's broadly, I would say, INR 25 crores, INR 25 crores. But then the next 2 quarters, the write-off will be a little higher, because we would want -- the financials allow that and we would want to take benefit of technical write-offs. So the write-offs will be a little elevated compared to the run rate that you saw in the first half of the year. So maybe from your modeling perspective, you need to bake in a little higher write-offs for the rest of the year. And from a provision coverage perspective, see, as we take more write-offs, mathematically, the coverage will come down. And the current regulatory climate is also that they are not really pushing for any specified coverage number on Stage 3. So it will largely be guided by our ECL model and our LGDs, which probably should be somewhere around the 40% to 45% kind of a range. So it is not like we are working with a specified number in mind. It will be coming out of our ECL model. At this point, we don't envisage taking it back to 50% just from a number perspective. But if the model throws 50%, let us say, for whatever reason at a later point of time, that's the number it will be. If the model throws, let's say, 42%, it will be 42%.

Understood. How much write-offs can we build for second half?

Raghav, any numbers, why don't we just take it offline?

Sure. Yes. Fair enough.

The next question is from the line of Amit Khetan from Laburnum Capital.

So my first question is on OpEx. So if I look at the last couple of years, our OpEx to total assets -- average assets has been in the 5% to 5.5% range. Now that was a fairly benign credit environment. Going forward, as you're guiding to higher credit cost as well as beefing up the collection and legal recovery team, how do you expect this ratio to evolve on a steady-state basis?

Amit, this is again something that we've been talking in the past also. So generally, at least for the short to medium term, the guidance continues to stand at about 5% to 5.5%. While we will definitely get some benefit of scale, we will also be upfronting certain investments in terms of collection support, in terms of technological investments and all that, which will continue to keep the OpEx a little elevated than where we would like to be. So I think you should build in about 5% to 5.5% of OpEx for the short to medium term.

Understood, understood. Second question was on the housing product. Can you throw some more color in terms of what is the customer profile you're targeting? What are the yields, ticket size and geographies that you're currently looking at?

So see, housing product has actually been introduced in some of the safest and the strongest branches of the company, so in about 175 to 200 branches. We are expecting to lend to the same profile of customers, slightly maybe people whose expectations are a little higher, average ticket size of about INR 6 lakhs to INR 8 lakhs, because these are people whose expectations are higher, but maybe the incomes from a LAP tenure perspective don't match up. But given that they are going to be using this money for housing, we are expecting a yield somewhere around 16% to 18% and lending for up to 15 years or so, or maybe beyond that depending on the requirement of the customer, which will make the customer qualify for, let's say, INR 7 lakhs, INR 8 lakhs kind of a loan. So that's the profile and the product characteristics that we are targeting.

Got it. Got it. And do you intend to apply for a separate housing license, or how should we think about that?

Currently, not now.

Got it. Got it. But we would be disadvantaged, right, because we can't access NHB housing finance?

I think Srikanth has told you, from a debt perspective and the pricing perspective, Five-Star is very attractive and we are able to get the current debt at around 8%. And for the housing, which is a priority sector, we may even target lesser than that percentage, which will argue (sic) [ augur ] well for us. So debt and pricing will not be a problem.

The next question is from the line of Kunal Shah from Citigroup.

So firstly, when we look at in terms of the number of people maybe on a quarter-on-quarter basis, there's almost like 1,000 which has got added, particularly in the business and collections. And that too, I would say like maybe more on the business side. So is it the confidence with respect to preparing ourselves for the growth? Is that the right observation?

Yes, Kunal, you're right. Close to 800 officers have been recruited in last quarter. Out of that, if you see, 600 has gone to business and 200 has gone to collections, a rough figure, right? So this clearly indicates the focus is back on business. When the collection gets stabilized, as I've been saying in the call, you see the pedal pressing for the business, which will happen in Q3 and Q4. Yes, we are preparing for a good business.

Got it. And secondly, on account side, is there some rejigging which has happened, or maybe have they been moved to some other place, because almost like 180, 190 people moving out of accounts? So is it something like maybe they are getting towards the business side of it? Has there been any rejigging?

No, no. So Kunal, what we have done is, you would see that number a little more in the operations side. So earlier, we used to have an operations officer and cashier. So the number, if you see, the drop will be in the cashier side. So we used to have a cashier and an operations officer in a particular branch. Given that the cash proportion has significantly dropped and the newer branches, the digital adoption has been extremely high, what we are now doing is we are only having 1 person. So not having 2 persons for cashier and operations officer separately. They're having a branch support officer. So those have been mapped under operations. So none of the accounts or cashier people have actually moved to business and all that. They'll be doing both cash receipting in the branches and also doing the operational support for the branches by acting as a branch support officer.

Okay. So it's almost like 190 of cashiers coming off and operations officer going up by almost 150 or so.

That's right. Yes, that's right, Kunal. As you see in our presentation, our digital penetration is moving up from 81% to 82%. Slowly, gradually, we intend to take it to 85%. So the work of cashiers is going to come down as we go forward. So we are deploying them in the operational work.

The next question is from the line of Ajit Kumar from JM Financial.

Sir, just 2 to 3 questions from my side. First, coming to FY '26 AUM growth guidance again, which is roughly 25% versus 18% growth currently, the ask rate in terms of disbursement has become very steep, almost around INR 1,800 crores to INR 1,900 crores of disbursement per quarter is needed in next 2 quarters versus INR 1,200 crores to INR 1,300 crores disbursement that we are doing currently for the last 8 to 9 quarters. Do you think this kind of acceleration in disbursement in second half is possible?

Ajit, if you look at disbursals in Q4 of last year, we were almost at about INR 1,400 crores to INR 1,500 crores of disbursals. So if not for the issues that we probably faced in Q1 and some consequent changes that we have done because of that, we would have been disbursing more around, let's say, INR 1,500 crores, INR 1,600 crores kind of disbursal run rate in the first half of the year. So to move towards, let's say, INR 1,600 crores to INR 1,800 crores is not difficult in the second half of the year. Obviously, the company will keep the necessary caution in mind before stepping up the disbursals. But our point is, it is not something that is not doable. We have done it in the past. And based on our run rate, we should be able to do that. So it's not an unachievable number, but we'll definitely keep various aspects in mind before pushing the pedal of disbursal. At this point of time, we are not revisiting our guidance on our growth.

Sure, sir. And on credit cost, I just wanted to confirm again, FY '26 guidance is 1.25% to 1.35%, right, as you highlighted just now? Because in last quarter call, credit cost guidance was 1.2% to 1.25%. So just wanted to reconfirm credit cost guidance for FY '26.

So Ajit, even last quarter, we said 1.25% to 1.3%, 1.35% only. So the guidance stands. So we have not changed our credit cost guidance. It will be about around 1.25% to 1.3%.

And this is as a percentage of AUM, right, not as a percentage of assets?

No, no. This is as a percentage of total assets. When you compute on AUM, this number will be more around 1.5% to 1.6%.

Okay, okay. And just last one, AUM growth in Tamil Nadu has been lagging from last few quarters and has come down to only 10%-odd in this quarter. Any issue in Tamil Nadu in terms of growth or asset quality as it is your home state?

No, nothing. Tamil Nadu is gearing up very well. And the collections also is very good. So you see a good amount of rundown is also happening in Tamil Nadu, and the collections are stacking up very well. So I don't see anything coming down, and you see improvement in this in next 6 months also. So slowly, that state will move towards 30% of our overall AUM.

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

So the yield drop, since you've instituted the disbursement cut, has almost been 100 bps on the book. Now typically in one particular year, you have about 40%, 45% is that which has been originated in that year. Now this year, obviously, a lesser portion has been originated because disbursements have been slower. So how could there be a 100 bps drop in book yields when only 35% has been originated during that year? Have you all done some differential pricing of some people even below 22% yields?

No, Chandra, this is a little bit of a function of the delinquencies as well. If you look at accounting methodology or interest accrual methodology, that follows an ideal schedule. Whereas as per the Indian accounting standards, the unpaid interest gets added back to the principal. So let us say, if a customer does not pay, you are accruing or you are charging a penal interest which does not get accrued on books. But what happens is the interest as per the original schedule is the one which is in the numerator, while the denominator, the interest also gets added. So whenever there is a little bit of a delinquency that gets built up on the portfolio, you will see a little bit of yield drop. If you want to look at the overall number, you should probably add the penal interest to this and compute the yields. But even that will be slightly lower, because generally the collections itself has been a little muted, right? So it's a function of accounting rather than any further drops that we have done.

Understood. But there's been no change. I mean, otherwise, you've broadly...

At about 22%, yes. 22%, 22.5%.

Understood, understood. Then just employee cost growth has been 15%, but then count is up actually 25%. So like what's happening here? How is there such a substantial difference? That's the second one.

A lot of the growth has actually come in towards the end of the second quarter, because collections, we were putting people, but when we saw that things are stabilizing, like Mr. Pathy said, the business officers have been added more towards the end of the quarter, so you're not seeing their costs fully absorbed yet. So that is why I would say, don't look at an OpEx of 5.07% as compared to 5.47% on a sequential basis. You should probably build somewhere between 5% to 5.5% for the full year. 5.1% is not the indicative number that you'll probably see for the full year.

And the last question is, obviously, you are saying that your recovery, legal teams are able to recover from the assets better. My understanding for this business is that the threat of recovery works more than the actual recovery. It is very tough to actually recover. And given the ticket sizes, you can't even use SARFAESI. So has there been some change that you are able to recover more now than in the past?

Yes, Chandra, I think I've been articulating these things since beginning. This is a myth that you people think that smaller ticket size loans, properties cannot be sold or brought in for auction. That was a conscious decision that company has taken for last 20 years not to go into auction route rather than negotiate with the customer and collect your dues. That is how we contained our NPA. But having said that, in last 2 years, since listing, we started to focus on bringing the properties of NPA customers to auction and taking them to the legal proceedings. So we have put in a chief legal officer 24 months down the line and today we have close to 150 legal people who are working on legal recovery. So that is why I said in last conference call also -- earnings call also, close to INR 75 crores to INR 80 crores of NPA will be recovered for the full year. Just to give you the number, last quarter, July, August, September, close to INR 20 crores of NPA got resolved in a single quarter. So that again shows, even though small ticket size, the properties are genuine, the legal documents are very clear and buyers are there, so that we are able to recover close to INR 20 crores of resolutions happening from deep delinquent NPAs. And this will continue.

The next question is from the line of Aravind Ravichandran from Sundaram Alternates.

Congratulations on the good set of numbers despite a tough environment. So I just want some clarification in terms of credit cost guidance. Like we mentioned 125 to 135 bps. Is it on total AUM, average AUM or like an average total bps taken on balance sheet?

Aravind, it's average balance sheet assets, total assets.

Okay. Because generally in market, like we talk about when we say credit cost, it's usually on average AUM. So that's why there was like -- okay, so if you can make clarity on like if it is an average advances or average AUM, it will be better, so that everyone would have a clear idea of what we are referring to. That is my request.

Aravind, we'll take a look. Generally, we have all our ratios on total assets. So we don't want to think this as a separate number. But we can give you a guidance depending on how the trend was in the past in terms of how it will look on an average AUM, but we can take it separately.

Yes. And I would like to understand the new housing loan, which you are introducing, how are we looking to scale it up? Is it like, are we looking to make it like a 5% or 10%, something like that over the next few years? How are we looking to scale up as a percentage of the overall AUM mix over the next few years? If you can give some color on that?

It's a little early to speak about going forward. But now as we have introduced in October month, we have picked up close to 125 to 150 safe locations of Five-Star across India and we have introduced only for those branches. So the logins are coming in. The processing is going up. Maybe in this financial year, we may build up close to INR 100 crores, INR 150 crores of pure housing loan portfolio, translates to 1%, 1.5% of our AUM. Going forward, let me give you a good color after 6 months of being in this product, maybe after the March quarter.

Okay. Also, can you just share what were the actual write-offs in this quarter?

It's about INR 49 crores, Aravind.

The next question is from the line of Rehan Saiyyed from Trinetra Asset Managers.

Just I wanted to confirm that my all questions have been answered. So like could you please give me the economics of new branch that you have added in FY '25-'26? Specifically, time to breakeven and productivity curve relative to earlier vintage?

So Rehan, this is similar to what we have been doing in the past also. So every branch typically takes anywhere between 6 to 9 months for achieving a complete breakeven, because they are able to login -- we start with about 5 officers and each officer logs in about 4-odd files out of which 3 gets converted. So which means it's about 15 files that get logged in on a monthly basis, which will roughly work out anywhere from about INR 50 lakhs to INR 60 lakhs. And then when the portfolio reaches about INR 2.5 crores to INR 3 crores, we are able to breakeven. There are branches which do this in 6 months. There are branches which do this in 9 months. So if you look at it, I think historically, we have seen that almost 98% of our branches reach this breakeven between 6 to 9 months. There could be some very few outlier branches. Nothing has changed for the newer branches also.

The next question is from the line of Sanjay Ladha from Bastion Research.

Sir, I just wanted to know that we are focusing on housing ticket size loan book. And what we have observed and listening to various other players, most of the players are entering into the secured segment. So my two questions. How do you see competition in that space? And most importantly, are you seeing NIM will maintain at this level given the competition will increase? And of course, you already had highlighted that this is going to drop down going forward as you start taking leverages on that side. But if you can highlight more on to that, where we see the stabilization taking place?

Thank you, Sanjay, for patiently waiting on the line. So we understood your question. The housing product what Five-Star intends to come in, I think, is not comparable with other affordable housing players, because we are not going to be in the ticket size of INR 10 lakh, INR 15 lakh, INR 20 lakh space. As Srikanth explained in the earlier question, the profile of customers whom we have dealt for the last 20 years, for those profile of customers, we find there is a huge space for the house to be built. So our average ticket size for the housing product what we have built will be around INR 7 lakhs to INR 8 lakhs. So that is the ticket size and the profile of customers whom we are focusing. We believe the competition is not as intense as it is if you cross above INR 10 lakhs or INR 15 lakhs. So we will be able to maintain the pricing what we said. That's our commentary as of now.

Sir, just wanted to take a follow-up on that side. As you rightly said, there will be a yield of 16% to 18%, as you alluded. And if my thinking is correct on 16% to 18% and on lower of the interest expense on that side, we will see some NIM moderation on that side and that number on ROA will drop out as well. Is my understanding right on that side, or as a company you are thinking on a different line?

So Sanjay, obviously, housing is not going to give you the ROA that our current product is giving. This is something that we have been talking about in the earlier calls as well. Housing, we are doing it from a product diversification and from the market being available where there are customers who are currently being excluded from our lending. So we will tap into those customers. It will be a stickier product. It will help us on the balance sheet side. So combined ROA will definitely drop because on the housing side we are not expecting an ROA which will be like 7%, 7.5% and all that. Even the current product ROA will compress given the increase in leverage. But put together, we should be able to deliver you 6%, 6.5% ROA. And at a good leverage, if we are able to push it, that should be an attractive ROE for the investors. So yes, combined basis, there will be a compression in ROA, but it will also give a kicker from an ROE perspective.

Sir, my another question would be, as we are very much focused on secured loan book side. And as I see, we have a very low LTV as well. So we are very much a secured portfolio as we speak. So the Stage 1 and Stage 2 increasing, and as you rightly alluded in your previous comment that you will see higher recovery going forward. And in the past also, I have checked your numbers. So at times, there is a Stage 1 going towards 10, 11 at FY '22, but that's not reflected into GNPA level. But this time, the scenario is something different. So just wanted to know more clarity on that side, what is happening? I understand the dynamic is such where the numbers are going up, but the previous cycle does not support me and showed me that your numbers are different. So therefore, I wanted to understand your viewpoint on that side.

Sanjay, that is the advantage of a secured product. In an unsecured product, let us say, a loan flowing into Stage 1, 1 DPD or a Stage 2, typically, you will see it free flowing into Stage 3 and the recovery will be very low, because the ability to recover on an unsecured loan is very less. Whereas in a secured loan, while the customer may slip one installment for justifiable reasons, there may be a good event happening in the family or a bad event happening in the family. Given that this is a strong and an emotionally attached asset, the customer will not continuously keep slipping into further buckets. So which would mean that you are able to control a lot of flows into NPA. So that is why we have always been saying that our softer buckets will be a little elevated, whereas our harder buckets will be a lot controlled. And that is an experience that the company has been seeing for the last not 1, 2 years, but maybe for the last 2 decades. And that's the nature of the secured loan. Given the nature of the security, you won't see free flows into NPAs.

Sir, just a follow-up and it would be last from my end. Sir, just wanted to understand, in the con call also, in the previous conversations, you have alluded that the asset quality on the GNPA side from 2% to you are expecting some 3%, 3.5%, and credit cost side has also increased. But in the past, never has been that happened. So just wanted to understand why this discrepancy now. Is the model something getting different? So just wanted to understand more clarity on that side.

Yes. Sanjay, our guidance what we gave, credit cost of 1.25% to 1.35%, and the NPA level around 2.25% to 2.5% takes into account -- because this is the first time we see an overleverage crisis from a small ticket borrower segment. So the earlier crisis was not done by the lenders. It was being done by the environment and from a government perspective, from de-mon and COVID. So we were able to come out of that because the cash flows were safer and clearer. Even current scenario, the cash flows are there, but the overleverage has made a big dent in the repaying capability of the sub INR 3 lakh segment. So that is why we have revised our guidance from 0.75% credit cost to 1.25% to 1.35%, and our NPA is sub 2% to around 2.25% to 2.5% at least for the shorter term. And clearly, with this kind of yields, you cannot operate for a longer period of time at the credit cost and the NPAs where Five-Star was handling in the last 10, 15 years. Because the competition is also going up in the segment, people lend more. And so you have to be adjustable according to the environment. That's why we changed our guidance in credit cost and NPA from last quarter onwards.

The next question is from the line of Bunty Chawla from ASK Wealth.

Congrats on a good set of numbers. Just one clarity. FY '26 AUM growth still stands at 25% for full year, right?

Yes. We expect to deliver that.

Okay. Secondly, on the spreads per se, as you have said now we are focusing more on higher ticket size customers, where the yields are a bit low. So going forward, yields as we have seen in the last 5, 6 quarters, it has come down to 13.9% kind of a thing. What should be the sustainable run rate when we are focusing on higher ticket size loans?

You're talking about spread, not on yields?

Yes, yes, spreads.

Yes. Spreads will be about 13% to 13.5% on a steady state.

Okay. 13% to 13.5%. Although we are still having a chance to decrease the cost of borrowings? We have a space for that?

But there will be a little more compression in yield also as the loans keep building up, because today we are onboarding loans at 22.5%. So it will come down more to around 22.5% to 23%, and whatever cost of funds, so I think 13% to 13.5% should be a good number to work around this.

Okay, okay. And any similar guidance for FY '27, if you can share like AUM credit cost, which you have shared for '26?

Similar numbers. Yes, I think for FY '26-'27, on the spreads side, we should be at about 13% to 13.5%.

And AUM growth and credit cost for FY '27?

We will come back to you. So at this point of time, given the kind of environment that we are living with, we would like to deliver the FY '26 numbers. But generally, we'll come back to you towards the end of the year with guidance for the next year. I think please hold till then. We'll come back to you with our guidance.

The next question is from the line of Abhishek Gulati from AG Wealth.

Actually, I was observing the numbers of other lenders in the same region that are doing asset-backed lending. How are they reporting a bit of a strong asset quality and loan book growth? Is it the case with us or as we are also doing asset-backed lending, so in that, don't we add that thing that the person is having more MFI exposure, we should be lending less to them? So have we added these checks now or we were missing them previously?

So we have always had these checks. So when we are lending the loan, we look at all the borrowings that he has taken. We look at his leverage. We knock off all those obligations and go with a conservative debt burden ratio of 50%. But what has happened is, post taking our loan, if he has gone and leveraged himself more by taking more from MFIs, for whatever reason, they have been giving the loan to him. Now how do you control that? So the question is not about us not having those checks. The checks have been existent for the last 10, 15 years when we have been operating in this. It is just that post taking our loan, there have been more leverages that the customer has borrowed. Today, that is something that you can't do anything, right? But we ensure that through the security, we have the priority on the customer repayment. So he will typically pay us rather than paying a microfinance customer.

Understood. Now in the quarter to FY '26, 2, 3 microfinance companies, those who have come up with the results, they are highlighting in their conference calls as well that the asset quality is improving and in future it will keep on improving from here on. So also, are you witnessing the same trend in the MFI borrowers as your borrowers are having that loan as well? So witnessing that the things are gradually improving in the MFI category as well?

We are seeing this across the board. So it is not like an MFI category is improving or a non-MFI category is deteriorating. The good part is, yes, on the MFI category, maybe the over-leverage is not getting built up. On the non-MFI category also, things are looking up, which is why we have been able to deliver a stable quarter in Q2. And you will see improvements happening from here onwards.

The next question is from the line of Mahrukh Adajania from Nuvama.

My first question is on credit cost again. So in terms of your guidance, the credit cost guidance will stay here as in at 1.25% to 1.35% for 18 months. That's because of the below INR 3 lakh segment or just because of the earlier strong growth which leads to the seasoning of the book?

So on account of 2 reasons, Mahrukh. One is because of the sub INR 3 lakh segment, which is still undergoing some bit of a stress. So it's not going to come out in a hurry. The second reason, I think a few minutes back, Mr. Pathy was also taking that you cannot keep putting undue stress on these borrowers or on our staff to ensure that there will be no flow forwards or the unique customer collections will be at a very, very healthy level. So we need to have a little bit of a flexibility, which is why we are saying that our earlier guidance of 100 basis points is a little bit of a stretch target and we have moved this to about 1.25% to 1.35%, which will give a little bit of a breather in terms of -- for our staff and we have the yields and the spreads to absorb this. So it's a combination of these 2 reasons.

Got it. And just in terms of growth accelerating in the second half and then even more in FY '26, do you see any green shoots for growth, or was there some growth that you were earlier avoiding and now you feel more comfortable doing? And of course, I heard you on the bit of housing growth that -- or affordable housing that you would be looking at.

So the first point is, which I think all of you are aware, the over-leverage is certainly coming down. And even MFI lenders have been talking about the proportion of greater than 3 loans coming down in their portfolio. So which means the strength of the borrowers is that much better. The second reason is we have now put additional filters and additional controls to ensure that the right borrower is being onboarded. So with these 2 filters, once our branches and our staff get attuned to onboarding the right customer and our underwriting norms being able to filter the borrowers a lot better, we should be able to build a stronger portfolio. With the attunement getting better, the ability to onboard more customers will also increase, which will mean better growth.

The next question is from the line of Siraj Khan from Ascendancy Capital.

What I wanted to know with respect to the growth breakdown, I know you have said that we'll look at the guidance for FY '27 later. But say, assuming it's at 25% or whatever number, I believe, because we are moving to a higher ticket size, the large part of the growth will come from the higher ticket size and because of housing, again, technically a move to a product which is of a much higher ticket size. So a large part of the growth will be driven by ticket size improvement. Will that be correct understanding?

Yes. The ticket size increase is right, because last earning call itself we said our focus will be INR 3 lakhs to INR 5 lakhs, which is our core, and INR 5 lakhs to INR 10 lakhs is where our exposure will go up. So yes, a combination of these 2 will result in increase in ticket size. But housing loan, as I said in open commentary, I mean, opening remarks itself, we have just launched it. A few files have come in and the process is on. So we don't expect more than INR 100 crores, INR 150 crores of AUM getting built in housing. So that will not contribute much of that. Increase in ticket size and increase in officers count will definitely give us a good result in Q3 and Q4.

So I was also looking at from a longer-term perspective, say, FY '28 or FY '30 perspective, by that time, the ticket size will materially increase because of both us moving to higher ticket size on our core business and also on account of affordable housing. So let's say, approximately like 50% of the growth would come from the ticket size is what I was getting at. I got that.

Siraj, I agree to this. But at current moment, let's not more talk about next financial year going forward. We can talk much about after this financial year.

Got it. Got it. And just a couple of clarifications. Of the INR 49 crore write-off, how much is the technical write-off overall and the total write-off, the breakup of that, if that could be sir?

Siraj, for us, all of the loans are only technical write-off, because we do have the properties and we'll be able to get good recoveries out of it. It's only a question of time.

Okay, okay. Next, on the fee income. So what I can see, our fee income has improved a good bit during the quarter. What is the fee income that we are tapping into that it is increasing? And will this be also like a kind of a cushion that we are adding to our spreads and the overall yields? And where do you see this piece with respect to the fee income moving ahead?

See, on the fee income, this is on account of 2 things, or technically one thing, which is legal and an inspection fee that we take from the customers for logging in the loan and for processing the loan, which is about INR 4,000, INR 2,000 taken upfront and INR 2,000 taken later. So as the logins increase and as the disbursements increase, this number will look up. So it has just gone up from about INR 9.6 crores to INR 11.2 crores, which is primarily improvement in logins that have happened during the quarter. So there's no big aberration. So depending on whatever disbursements you are modeling, you'll have to take a similar increase in the fee income.

Okay. Actually, I was looking on a Y-o-Y basis. So it was 6.7% to 11.2%, but that is fine. So there is no insurance, anything of that sort in the fee income? We just have this legal inspection. No insurance fee income, anything of that sort?

So we don't take any insurance commission, whatever it is. This is just legal inspection and we take INR 500 for storage cost. So nothing beyond that.

Got it. Got it. And with respect to the credit cost, just to clarify, what I wanted to understand was, out of the 1.35%, a big part of it will be our PCR, the provisions that we do. So do we intend -- because we want to maybe, say, bring our overall GNPAs also and NPAs down, so will we take a conscious call to have a management overlay or something of that sort to push in -- beef up our provisions, so that the asset quality kind of remains stabilized kind of a liquid kind of a buffer created?

See, most of our ECL provisioning comes from the model, because we have a very robust ECL model, which has been working for the last about 7, 8 years without any major tweaks that we have done. So most of it will be from the model. Obviously, there will be some overlays that we'll build in for specific event-based occurrences. Like if there is a little bit of stress in Karnataka that we are seeing because of the ordinance, we will maintain a little bit of a higher provision there. But most of it will be coming in from the model itself.

Understood. And final couple of ones. We are seeing a trend in the securitization moving a bit higher. This quarter, it's 20% of the total borrowing profile. How do you see this moving? And because this will also impact our P&L, there will be a good impact on the P&L on the positive side because of the upfronting and reversal. So where do you see that going?

Siraj, firstly, please understand these are PTC transactions. There is no upfronting of income. There is no off-book treatment. So these are treated as on-book assets. These are treated as borrowings. So that is why we do this. These are not assignment transactions where we upfront the income. So from that perspective, this is treated like any borrowing. So if a borrower is comfortable doing a term loan, we are happy. If they are comfortable doing an NCD or a PTC or a bond or whatever it is, we are agnostic about that.

And finally, with respect to the states in which this affordable housing that we have started, which states or any specific state or group of states that we have started this?

It's not specific states. Across 6 states, we have chosen the most safest and vintage location and we introduced the product in those locations.

Understood, understood. And finally on the other locations, I mean, Maharashtra and other states that have been there, how do we see the plan going ahead? I mean, do we still look to consolidate, or do we go to growth in the coming quarters?

Siraj, if you're specifically asking about Maharashtra, yes, that is a turnaround state for us. We'll definitely grow the state in the coming quarters. But there are a few other states which will continue to be in an experimental mode. We are trying to understand the geography, understand the borrower behavior, and these are Gujarat, Rajasthan, Uttar Pradesh. So there will always be a combination of mature states, which will be growth drivers for us, and early states, which will be experimental areas, and then which will help us the growth in the future years. Siraj, if there are any further questions, I think we are happy to connect with you offline. Can we take last call or last 2 calls?

This will be the last question from the line of Shubhranshu Mishra from PhillipCapital.

So the first question is with respect to the penal interest. While I see the 30 plus and the GNPA moving, however, I don't see the change in penal interest by a huge margin. Second is, if we can speak about the concentration of disbursement in the top 50 branches, top 100 branches and the top 200 branches. These are my two questions.

Shubhranshu, first of all, penal interest is accounted on receipt basis and not on accrual. So irrespective of the GNPA moving up or moving down, it depends on the collection. And just because the GNPAs move up, you're not going to get as much of penal interest collections. But this number will keep moving out depending on arrears in the coming quarters. See, on your second question, let's connect offline because at this point of time, we don't have readymade answers on the top 50, 100, 200 branches, but we can connect offline and give you the details.

Due to time constraint, that was the last question. I now hand over the conference over to the management for the closing comments.

Yes. Thank you. Thank you all for attending this call. As we said, this quarter has been very stable. And going forward, Q3 and Q4, we expect that growth will come back, and we will meet you soon after the Q3 numbers. Thank you.

On behalf of DAM Capital Advisors Limited, thank you for joining us. You may now disconnect your lines.