Fusion Finance Limited (FUSION) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of Fusion MicroFinance Limited, hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Bhise from JM Financial. Thank you, and over to you, sir.

Thank you, Michel. Good morning, everyone, and welcome to the 2Q '23 Earnings Conference Call of Fusion MicroFinance Limited. Firstly, I would like to thank the management of Fusion MicroFinance for giving us the opportunity to host this call. Today from the management team, we have Mr. Devesh Sachdev, Managing Director and CEO of Fusion Micro Finance; Mr. Gaurav Maheshwari, Chief Financial Officer; Mr. Tarun Mehndiratta, Chief Operating Officer of Micro Finance business; and Mr. Deepak Madaan, Company Secretary and Compliance Officer. Without much ado, I would want to hand over this call to Mr. Devesh Sachdev for his opening comments and overview on the quarter, post which we'll open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Sameer, and I'd also like to thank JM Financial for hosting us. Good morning, everyone, and thanks for joining Fusion's first conference call to really discuss our H1 results for financial year '23. I am here along with my colleagues, Tarun Mehndiratta, Chief Operating Officer for MFI; Gaurav Maheshwari, my CFO; Deepak Madaan, Compliance Officer. At the outset, I would like to thank all the investors who have reported at Fusion by making IPO successful. I would also request you to keep the presentation, which we have uploaded handy, because I may refer to some slides. We had a strong Q2 and first half. The company continued to make good progress. In the backdrop of robust and consistent credit demand in our client segment, we have delivered good portfolio growth and client acquisition with strong profitability, return ratios, operating metrics. In the midst of interest rate environment, consistent inflation, tightening liquidity and global uncertainty, we had very nominal impact on cost of funds due to robust stability management and confident of similar trend in future now that our trade rating has been upgraded by CRESIL to A stable. We are confident of a strong financial year '23, subject to market conditions. What you see today is an outcome of all the work we have done over the last few years in putting the right building blocks. We set up close to 400 branches in the last 3 years, invested in people, strengthened our processes with focus on digitization and very consistent and focused approach even during COVID times with an eye on the future. Now I will take you through our quarterly and H1 performance, which you will see clearly reflects our strong focus on Fusion's building block which having our key strength across the years. If I can take you to Slide #17 in the PPT, which has been uploaded. Diversification is one of our key strengths. We have grown from 12 states in 2017 to 19 states in 2022. The top states Bihar, UP, Odisha and Tamilnadu having a concentration of around 66.8% as of September '22 versus 74% as of financial year 2017. You can see that we are a rural-focused MFI and our composition of rural is around 93% over the last few years. It could be pertinent to add here that under the new harmonized regulations, then we have to look at household level indebtedness, our client household level little overlap is only around 12% to 14% against semi and urban overlap closer to 30% to 35%. Staying on the same page, I would also like to take you through how we built a solid distribution network of branches, in all these 19 states across the last few years. If you can see in H1 '23, we have now 1,031 branches versus 934 as of financial year '22, which is a growth of around 10%. We have opened 430 branches in the last 3 years with a CAGR of around 29%. If you see the overall our branches, which were there in financial year '22, 934. Around 400 branches, which we talked about, where -- which have come up in the last 3 to 4 years, their contribution to our portfolio is around 25%. 75% portfolio, the contribution is coming from the branches, which are mature, which have a vintage of more than 3 years. Now going forward, our strategy is that one, we may add 1 or 2 more states. Otherwise, now we are well diversified. Our -- we have a -- distribution is more or less complete. We would now focus on one, mining deeper in the existing states. We have opened 170 branches. Overall, we have planned to open 170 branches in financial year '23, out of which 97 have been opened. I would also like to mention here that if you look at our branches per district is still very low, it is around 2.5. So we have a scope to really mine deeper in the geographies where we are present. You will also see that the -- as continuing to Slide 18, it depicts the resulting outcome wherever AUM as of H1 '23 is INR 8,047 crores registering a year-on-year growth of 54% and 18% in H1 over financial year 2022. You can also see consistency in disbursement over the last 3 years, including Q2 financial year 2023. We disbursed 1,900 and 83 crores in Q1, and we have disbursed INR 2,051 crores in Q2. This was made possible by early implementation and execution of the new harmonized guidelines helping us achieve consistent disbursement numbers in both quarters in the financial year 2023. Also, I would wish to add here that if you look at our portfolio source prior to pre-April '21 and post-April '21, around INR 7,347 crores portfolio of the MFI book, which is around 93.5% of the total MFI book is sourced post-April 2021. Pre-April portfolio is now outstanding is INR 508 crores, which is 6.5% of the total MFI book. If I can take you now to the Slide #20, it clearly highlights that while maintaining a consistent growth, we have not gone away from our fundamental prudent. Let me briefly cover the key metrics. If you can see the borrower addition. So in Q2 financial year 2023, we ended September at 3.2 million borrowers versus 2.9 million in Q1 financial year 2022. And year-on-year, it is a 42% growth. Quarter-on-quarter, it is 10% growth and a 5-year CAGR is around 30%. If you can see, I think one of the key things, which Fusion has been very focused since the beginning is a team modernization where we are very focused towards a very broad basing our coverage and leveraging the diversified network by adding new customers to the portfolio. If I can talk about our new to credit customers in the Fusion book, this is hovering around 25% to 26%. The customers who had no formal financial -- any loan from any lender. But if I also add, there are around 16% customers which are unique to us because they have closed their loans from other lenders so that it comes -- the unique customer comes to around 41%. Now if you can see our -- while -- keeping a very high focus on we are growing. But if you just also, if you look at how we have been very calibrated in our average ticket size, on our average disbursement. Over the last -- year-on-year, our last average growth over the last 4 years in the average ticket size in the Micro Finance has been ranging between [ 8% ] to 11%. Even you can see from financial year 2021, we are 32,113 ,was the average ticket price. It moved to 35,668 in financial year 2022, and we ended '23 at 36,158. This also reflects in the outstanding per borrower and our portfolio across the years. So year-on-year, our outstanding average growth in our outstanding per borrower is in the range of 12% to 13%. So from 21,713 in financial year 2021, we moved to 24,451 in financial year 2022. And now as of September 2023, it's 24,650. So you can see that we are growing, we are diversifying, we are adding new customers but this addition is very calibrated and it is one of our key strengths, which is that we actually marry risk and growth. Other aspect, which I want to talk about to you, if I can take you to the Slide #19. In spite of being present in 19 states, well spread, we have now more than 1,000 branches. We have not lost sight on productivity numbers. If you can see, the GLP per branch has been consistently growing from -- now if you see, it is around INR 7.95 crore, the GSM, the portfolio or branch. And similarly, if you see the gross loan portfolio per RO has been also growing. It is now at INR 1.25 crore as of 2023, which was INR 1.14 crores in Q4 of 2022. We also are optimizing in terms of our reach and customer coverage. Our borrowers per RO, if you can see very consistent growth, it was in 2022, Q2 of 2022, it was 501, move to 505 in Q3, in 488 in Q4. And now in Q1, 2023, it is 502 and 534 as of 2023. So if I can -- yes, so the borrowers per branch was -- in 2022 was 3,020. Now it is 3,220 for 2023. So the point we want to try here is that we are keeping a very key eye on all these metrics. Now coming to our collection efficiency. As I mentioned earlier, our portfolio, which is 93.5% portfolio is sourced post-April 2021. And the portfolio post before April 2021 is only 6.5%, which is INR 508 crores. And if you look at Slide #7, it clearly reflects the portfolio which has been post-April 2021, it is mirroring more or less the performance pre-COVID, where our collection efficiency is hovering anywhere between 98.5% to 99%. Similarly, if you look at our portfolio, which has been sourced before -- pre April '21, it has been now -- we are still seeing some kind of stability in the collection numbers. But overall, if I include pre-prepayment collections, this is hovering more than 100%. I also want to really touch upon the slide on our credit ECL and our provisioning policy, there we are very clear that I can take you to Slide #8. As our policy -- provisioning policy as with the client enters 90-plus, we do 100% provisioning. If you can see that now in this particular slide, out of the total provisioning which we have done, we have done around 174.74 million as a management overlay. The strategic hot-band this is that we want to build some extra buffer in the quarters, we will have a good profitability. So that in any quarter or any time when there is any pressure on the profitability, because of the credit cost, we can begin to this buffer. So that's the thought behind building, but that isn't outlay. I guess I would like to now take you to Slide #24 and #25 on our -- so very quickly, I will talk about our tech. Our tech strategy is very clear. We very strongly believe because of the customer which we serve, we believe in such intent strategy. How we have early adopters of cloud, what we have done is, I think, we have kept 2 things in mind. One, customer segment, the interface, which is used to onboard the customer is very, very simple today. And then the second thing, which we kept in mind that every technology has to make a business sense -- if you can see from a customer experience now 100% onboarding is happening digitally, our cashless disbursements have gone up to around 97%. Our efficiency level in terms of reduction of the turnaround time, which was early around 13 days in 2016 has moved by has now come down to 4 days. We have -- and similarly, we are now able to handle the scale. We have been also very, very focused on building a very safe and secure IT platform. That is reflecting in the fact that we have been -- whether you look at email security, device encryption, data classification, we were awarded ISO 27001 very recently. So we are wanting to -- as a company, we are very focused on building for future. And you will see that we will continue to invest and build for future so that we are able to grow in a very sustainable manner. Thank you very much.

Thank you, Devesh. This is Gaurav. Good morning, all. Now I would like to give you some key highlights on Q2 for financial year '23 and H1 financial year '23. So interest income has increased to 74% on a Q-on-Q basis. And on a half yearly, it has an increase of 52%. The total income has also increased to 69% on a Q-on-Q basis. And on a half yearly basis, it has seen an increase of 53%. On the OpEx side, if you see that there is an increase of 4 bps from H1 of last year to this year. But on a quarter-on-quarter basis, there is an increase of 10 bps from Q1 to Q2 of FY '23. And that is largely because in Q1, we have increased -- we have just opened 28 branches. And in the Q2 quarter, we have opened 65 branches. The cost-to-income ratio of the company has declined from 49.2% of the H1 of last year to 40% this year. As far as the company has done direct segment of some more than INR 400 crores in Q2, and we are going to continue with the same spirit and same range. The company has seen an increase in NIM from Q2 -- from Q1 to Q2. Q1, we have seen a 10.1% of NIM in comparison of Q1 at 9.38%. Now I would like to highlight certain portion on our liability mix. So we are going to continue with the liability mix, which we are continuing. As of today, more than 80% of the money is coming from the banking system. Nearly about 10% is coming from nonbanking financial companies rest is from a foreign portfolio investor and ECB. Going forward, maybe not down the line, year or 2, we are going to explore some capital market exposures, external commercial borrowings and certain set of bond issuance, whether internationally or a domestic market. Apart from that, we have got a sanction from U.S. DFC for $25 million transaction data at which is a A-Tier money at a cost of 9.65 fixed price loan. So on the -- as far as -- on the financial issues the write-offs which we have done in the Q2, which is amounting to INR 20 crores. In totality in H1, we have done a write-up of INR 156 crores. On the strategic thought, we would like to wait for FY '23 for a strategy to come into picture where the interest rates are on the rising scenario. We will see after FY '23, what kind of international environment of interest rate rising -- or the interest rate scenario built up. And we will see and develop the strategy accordingly to that.

Thank you, everyone.

Shall we open the floor for the Q&A session?

Please.

[Operator Instructions]We have the first question from the line of Saravanan from Unifi Capital.

Congrats on good set of numbers. What is the -- I mean, there has been money, fresh inflow equity infusion into the company via IPO. So what is the current debt equity ratio?

The current debt equity ratio is near about 3x.

3x. And the capital adequacy, the reported number for the first half is close to 20%. So it would have also gone up, Right?

Yes. So the capital, it was the infusion of the company -- the infusion of the capital has come in November. So obviously, the November numbers are still to be finalized. But it would be in the range of between 28% to 30%.

In terms of -- in the debt equity, I wanted some strategic parts from your side. See, in micro finance, over the last 10 years, every 2 to 3 years, there is some force major event that is impacting the sector. From that perspective, we are comfortable with companies which always maintain high capital adequacy. If you see the market later also, like typically, they have not -- they don't cross beyond 3, 3.2 or max 3.5x debt equity. So from that perspective, does Fusion also have any strategic thought on the debt equity cost?

Yes. We -- if you look at our earlier history, we have never gone less than 20% capital adequacy. We would like to maintain the similar strategy going forward of maintaining capital adequacy though RBI despite 15% would like to maintain a 20% cap rate.

So you would be -- I mean, and on debt equity terms, you would even go up to 4, 4.5 then?

Yes. Yes. We may go up to that level, but I think we are more focused on maintaining a capital adequacy of 20%.

We have the next question from the line of Aditya Bhandari from Incofin Investment Management.

My congratulations, Devesh and team for the wonderful achievement. Just wanted to ask about the AUM to equity so in line with the previous question. We are close to INR 8,000 crores and our network is close to 2,100 crores. So on our AUM to equity, we are close to almost 4x. So what would be the time line for the company to raise fresh equity in the coming quarters.

So thank you, Aditya. So we -- as I mentioned, we -- before this capital infusion, we ended September at around 20.89% of -- 97% of -- 20.97% of capital adequacy, after this infusion, capital adequacy will move anywhere between 27% to 30%. So I will, again, reemphasize the same thing that we would like to maintain a capital adequacy of 20%. Whenever we feel that we are reaching that level, we will -- we'll come to the market for relief funds.

We have the next question from the line of Nikhil Rungta from a from Nippon Mutual Fund.

Two questions from my side. Starting with the previous question itself, in terms of growth rate, I mean, you mentioned that at the current capital adequacy, we would be in the range of 27% to 30-odd-percent. So what type of growth rate are we planning for the next, say, couple of years? And given that growth rate, by when do you think we'll be going towards this 20% and coming back to the market?

Nikhil, If you see over the last 3 years, we've grown around 36%, 37% CAGR in H1, we've already grown by around 18%. I think we would like to maintain a similar kind of growth rate. So once the base actually increases, the rate of growth cannot be in the same multiple but we are looking at -- because of the fact that we are very well diversified, we are there as a pent-up demand. And we have many levers in place, as I mentioned, whether it is a ticket size, whether it is the productivity, the number of branches, which have come very recently, so we have many levers because of the geography where we are present, states like UP, Bihar have huge potential. So we are very confident that we'll be able to grow at a very consistent level. And again, coming back to the fact that whenever we feel that we need capital now, the capital adequacy is reaching at 20%, we may have to come to the market for raising capital.

So this can take care of next 2.5 to 3 years?

It's some internal also build up, but it's difficult to really give a guidance now. I think let's go step by step. That's what I have been -- we are very focused on. So -- and then let's see. We have focused on saying that we give a more consistent performance and see how we take it from there.

Perfect. Sir, my second question is, if I look at our cost of funds on a Q-on-Q basis, there have been increased but if I look post-September events, there have been an IPO, we are listed now that is a CRISIL update from A minus to A. So going forward, what type of guidance on the cost of fund should we take from your side?

Yes. So Nikhil, as you have rightly said that we have been upgraded to -- from A minus to A by CRISIL, and we are anticipating that our cost of fund from a marginal cost of perspective that it is going to be stabilized, and there would not be -- obviously, the money which we have borrowed, it has an incremental impact on in Q3. But largely, there would not be any incremental marginal cost of borrowing, which we are going to raise from Q3, Q4 perspective. So more or less, it will get stabilized. So that's the way we are looking at.

And full impact of rising is still pending. Right, because of the RBI norms?

Yes. So basically, what has happened, the new regime has come in the month of -- we have started in the month of May with the new guidelines. So the full impact would be seen from a Q1 FY '24 perspective, the main would be at that level, we would see at a stabilized level.

Okay. Okay. So there is further scope for margin expansion?

Yes.

Okay. And sir, last question from my side. Do we -- I mean, -- right now, we are close with capital and there are a lot of smaller MFIs which are struggling with capital. Do you see any plans for any inorganic thing or no thoughts on that particular side.

Nikhil, we are very, very focused on growing organically. We have no such thoughts on people. We do not -- are not for any inorganic growth. Right now, there's no discussion on the team.

We have the next question from the line of Arun Kejriwal from Kejriwal Research.

Mr. Devesh congrats on the stellar set of results. I just wanted to understand that in COVID, you had taken a very conscious decision of pushing the pedal and growing the business significantly. Now that you have done your IPO, you unlisted, you have plenty of money to grow. Could this be taken as an opportunity to press the pedal all over again?

So thank you, Aruj Ji. Let me go back to your question that during the COVID, Arun Ji, this was not that we actually placed the pedal. So it was a calibrated approach. Keeping in mind 2, 3 things. One, a fundamental belief on our customer, especially during the crisis time, you have to stand with the customer. That was one. Second, if you see, even the government, the policymakers are very, very focused that the liquidity should flow to this segment. And there was a special carve-out for Microfinance sector in various liquidity initiatives which were during the COVID. Third thing, our network, our risk management, we were very calibrated, we cribbed our credit policy. And we have followed the similar strategy in the year 2016, '17, also Arun Ji, post events after 2016, policy initiative by the government of India. So I will say that it was a combination of some of these things of very clear focus on -- and on our core mission and vision, are keeping the customers in mind. And also if you could see, we have been growing very -- as I mentioned in one of my slides, that it was -- consistency is one of our key features. If you see even the last 2 -- these 2 quarters, Q1 and Q2, from 1983 to 2,047 is the total disbursement we've done. So let me tell you that going forward also, we do not look at that as trying to take a market share or something. I think we will be more calibrated, we -- whenever we will see opportunity. But yes, as I mentioned, we are a company which will be where we have managed the risk and growth. So we'll keep all that thing in mind. We will not go very aggressive in just going for market share I think so that is the strategy we are going to follow, and that is with the core strategy of Fusion since beginning.

No, no. Davesh, I fully get what you are saying, and I was never trying to suggest that you were taking any sort of an additional risk. Having seen what you can do with your strategy, with your systems in place, now that you have done so much more, you have so much more in the treaty. Could this be another effort to try and now get all rolling for us and more -- I won't even use the word aggressive, but in a more positive manner. You have everything going for you, nothing left out.

Yes. No, Arun ji, you're right. So look, again, I will say that if you see the overall average disbursement now which we are doing is around INR 650 crores to INR 675 crores. So we are opening new branches, as I covered in my commentary. Some branches have come up in these 2 quarters. We have another engine, which is an MSME engine, where we are now calibrating more towards secured loan. Yes. So again, -- we will be -- I will only say that wherever there is an opportunity, we will look at that opportunity, but in a very calibrated manner. We are not going very aggressive on the ticket size and all. We're not going very aggressive on the borrower pressure on the field officers. We will be calibrated, and that's how we want to grow.

One more question. With COVID now literally behind us, things back from normal, what's the ground reality here? Of course, numbers are very positive in terms of demand from this segment. Do you see any pockets of strength as far as lending is concerned, which would really comfort you?

Yes. So on the 3 things which are very comforting, Arun Ji, One is the fact that this asset class has shown huge resilience. If you see -- look at the asset cluster and kind of write-offs even which are happening, I think it is very commendable. That is one which gives a huge confidence that this customer has ability, expiration to really service loans. The second thing, which is comforting is the fact that, as I mentioned in my commentary, 93.5% of my portfolio has been sourced post-April 2021 Arun Ji, where my collection efficiency is more or less mirroring the pre-COVID. So that also is a very comforting thing. The third comforting thing is that the client behavior. When we look at the attendance, strength and meeting attendance, joint liability, it is -- every month, we are seeing an improvement. Just to give you some sense here, if I talk about 2, 3 quarters, 4 quarters back. And if I look at now between the center tenders, center tenders now is around 75%, which was -- which went down to as low as 50%. So -- and with a consistent effort of the team top telling the customer. So I think all these things are showing good -- are giving us the confidence and the fact that as you rightly mentioned, we have all the levers and we have shown resilience in various cycles Arun Ji, which also gives us the confidence that we are at a vantage point to really not only grow, but grow in a very calibrated manner.

We have the next question from the line of Renish Hareshbhai Bhuva from ICICI Securities Limited.

Sir, 2 questions. So one is on the ticket size. So when we look at the other industry player who are having much high ticket size. So are we experiencing any exact customer drop out because of our ticket size and customer would want, let's say, high ticket size, which are available from the other lenders. What is your experience on the ground, sir?

This is Tarun. Yes. So good question, Renish. But I think just kind of picking up from what Devesh had mentioned earlier, as the fact that a, we are in the process over the last few quarters and years, mining deeper into geographies that we've set for ourselves earlier. Also the fact that new customer acquisition, including new to credit acquisition has been a very, very focused strategy and the numbers that we shared with you earlier. What are domain understanding and our on-the-ground experience tells us is that we -- when we kind of go and meet these customers, the customers also help us decide what's the right size of product offering that they're looking at first a, at the entry level and then more as they graduate to next cycle. So we collect a lot of inputs from our field offices. And based on that, as we mentioned to you also earlier during the call, that our ticket sizes on average also have grown in the range of, let's say, 8% to 11% to 12% over the last 3 to 4 years. So that is how we try and kind of fix the product offering. It also goes by the fact that where we are in this geography in terms of how vintage the customers and how seasoned they are. To the question that you asked on saying that is there an opportunity loss, I think very clearly, about prudence in financing, when we do all these ground level coverage and when we bring those inputs on the table, we see that there is a good balance that we've struck over the years and that the numbers which we have on the table speak for themselves. There has been a good direction taken when it comes to even having ticket sizes in the subsequent cycles after the first cycle. From a standpoint of the fact that higher cycles customers require a little higher ticket size, as we had probably shared in the past that when our customers reach cycles of let's say level 4 or level 5, the ticket sizes are fairly leveled out about 7,000 to about 80,000 and thereabouts. So I would tend to say that I think we are currently in a place where I think we have a good balance between growth, either in terms of ticket size and about how we manage our risk there.

Got it. Got it. just 2 follow-ups on that. So what is the -- our current divestment ticket size for the first cycle customer?

So Renish, our post-cycle customer, the entry-level ticket size is INR 30,000. What we've also done, like I just mentioned to you. So there are customers who are seasoned with other financers who may be new to Fusion but not new really to micro financing. So there, we have put a differential level of about 40,000. So in first, I think, we have 2 levels of entry-level ticket sizes, 30,000 and 40,000.

Muted credit, 30,000, and muted vision will be 40,000.

Muted vision will be 40,000, but a certain level of experience with some other financials.

Also will also depend on the geography. So there are geographies where we even do a 25,000. So we look at it for the -- so this is something I'll just take a minute to really talk about this at infusion. Some of these aspects are decided by risk and audit because when we open a branch, when we have to -- as we set up our product in a particular branch, the huge input came from -- comes from audit and risk to which when they look at various data, look at the geography, look at the economic activity and look at the customer segment and decide whether we should start with a 25,000 loan or should start a 50,000 loans or we started at 35,000 or 40,000 loans. So I think it depends on geography, area, districts or all these parameters.

Got it. Got it, sir. And sir, what is our top of loan quality internal?

So Renish, the top-up loan policy internally is giving to existing customers with a decent level of track record. And of course, we all know that the fact that last few years have been fairly eventful. However, our overall top-ups in our entire portfolio, so our portfolio is about 3.2 billion our top-up accounts are only about 48,000, 49,000 , right? So I think the number speaks for it that we look at very, very carefully and also assess a customer for on top up need right at the branch level. And then it suggests if the criteria are met more on track record and customer behavior and existing customer is offered a top up product.

But additional top-ups are very, very low. I think since the beginning, we have never been very aggressive on top-ups out of 3,200,000 customers ,there's only 48,000 customers that top-ups and those customers, which really need money. So we do not do life cycle management. We don't do some of these things.

We have the next question from the line of Piran Engineer from CLSA.

Congrats on the quarters and on the successful IPO. Yes. Sir, just a couple of questions. Firstly, a clarification on one of the earlier questions on when will we see the full impact of the increase in interest rates due to the new regulation and first quarter of FY '24. Shouldn't it be like first quarter of FY '25 because our loans are typically 2 years. So something that was disbursed in end of FY '22 will get refinanced only in the end of FY '24 or beginning FY '25.

So in -- so there are 2 effects to see that how my portfolio is being built up and what is the average maturity of my book, the average maturity of my loan book is between 18 to 20 months. And if you see that the loan which we have disbursed from May onwards, they have a near about 40% to 45% of the book by March. And whatever we are going to disburse new that would be replenished the order book which we have created in the month of -- in the year of FY '21, '22. So that impact because you have also started witnessing from Q1 to Q2, it has already expanded by 9.3 to 10.21. So we are in line with that, that it is going to start from Q1 FY '24 onwards.

Got it. Got it. Okay. And just in terms of expense ratio, which is around 5.6% this quarter. How should we think about how that trends over the next 2 years? And typically, how long does the branch take to scale up to the average of INR 8 crores, INR 9 crore loans per branch?

So Piran, on the OpEx ratio, as Gaurav mentioned is currently that in spite of opening branches, it as OpEx has really increased very marginally. We are -- and also if you look at our cost-to-income ratio is now less than a 40. So we are very confident that we will -- even though we will be opening branches, there will be an impact of the -- also the portfolio going increasing. So we are very confident that this will be hovering around this or coming down. It will not be going up in the next 2 quarters. And coming to your second point on...

This is Tarun, so average when we start a new branch, we see that the ramp-up on productivity levels come in phases, like we pushed on to earlier. So the first year of a brand typically sees an average sourcing of anywhere between, let's say, 140 to 160 customers. So at an average ticket size of probably say, INR 30,000, INR 35,000, we're looking at disbursements close to about give or take, about 4 crores in a year. So 45 lakhs, 50 lakhs, 4.5 crores to 6 crores in a year. So my sense is that at a cost level of about INR 8 to INR 9 crores, 2, 2.5 years is typically what it typically takes a branch to these debt level. Given the productivity levels will go up as we go along over the months of 140, 150 will look like 170,180 and so on and so forth. The second cycle ticket size only start sitting after, let's say, 20-odd months, 18 to 20-odd months of our branches existence.

Just to add here, Piran, that our branch breakeven depends on where the geographies, what is the overall population so we have seen that the branch breakeven happens anywhere between 6 to 9 months. 6 to 10 months where a branch is at breakeven.

we have the next question from the line of Samir Rachh from Nippon India AMC.

So like 3 questions from my side. One, since IPO thing is over now and now we are well funded for the next couple of years, what are the top 3, 4 priorities, which you have to make companies on the newer stronger than we are so that we can sustain the growth rate?

Yes, very good question, a very strategic question for me, so you're right. So I think I'll say 3 things, Samir. There are one is the fact that, as I mentioned in one of the slides, which is on the IT, Slide #25, that we -- how are we building for future. There are certain trends on digitization whether we understand our customer well, how are we making sure that we serve our customer well, I think -- and then the opportunity which is available, especially in the rural areas and the ruler itself is coming out as an asset class. So how we are better equipped to really move with our customers, grow with our customer. I think that's 1 big item we are very focused on. The second Samir, is the fact that it's a people business. If you see today, the key strengths, Fusion brings the table is a very stable core team and a very -- even the middle management team is very stable and it has some of the later. So investing on people is another aspect of where we are very focused because as we go along. The third thing is the data. So Samir, we have now 3.2 million customers. How do we look at data to -- so as I mentioned in one of the slides that we are looking at data analytics, how analytics will be used both for business decisions and also for risk. So if I can do, I think there are -- these are the 3 buckets. There are other some buckets under these 3 items, but we are very focused on these 3 buckets, Samir.

Sure. Very interesting. My second question was on our like states breakup. So out of that top 5, what will the share of UP and Bihar if you can say that?

Yes. UP and Bihar is around 19.75, 19.8, each this time. So we are -- let me tell you, in Up and Bihar, there is a huge potential, especially in UP because 20 crore population overall micro finance penetration is hovering between 16% to 20% if you compare this with other states in Southern India or Eastern states, which is already at a 30%, 35%. So we will see that this will be hovering anywhere between 19% to 22%, but we would like over the period of trying to maintain less than 20%, even though there is a potential for other states will come up.

Yes. So I think we'll have a very big tailwind because this 2, 3 states are but as long as the faster growing states in India and maybe a long growth runway, I guess.

Right.

Last question is on this MSME engine, which you touched upon. So can you just elaborate more on also long term strategy to make that engine bigger and faster.

Yes. So Samir, I think I'll -- so there are 2, 3 strategic thoughts, which were there when we started MSME vertical. One was very clearly, we wanted to build operating trade assessment. We understood that MicroFinance is more of the operating model in order to build a credit assessment model, so that was one. The second was we were wanting to remain adjacent to our asset class. So the third was the fact that as there was a question earlier that there are customers which are needing a larger loans. And how do we stop that customer. Because we are very prudent, we don't want to give very high ticket loans in the MicroFinance vertical. So what we have done is that and also we run a 3-year pilot. We have now close to around 43 branches. So all these branches have go in areas where we're very strong as the MicroFinance. So MSME right now is a stand-alone doing a business. We are also now looking at some of the customers elite which are now going to the MSME team for the MicroFinance customers which need a larger loan and can provide some kind of security. So the idea is that, I can already tell you that we are more focused on building it very organically, it's a 200 crore portfolio as of now. But we are satisfied with our 3-year pilot and we are now going to the next stage. But I will resist from giving any guidance on numbers and all, I think we will be very, very focused on growing it as a strong asset class, because it -- and you will see that's the history of Fusion. You can see the history of Fusion from 2010 to 2015, '16, we were building the right blocks and then the growth came. I think we are looking at it in a similar manner. Right now, we are also recalibrating more towards the secured loan and that's how we want to build this MSME vertical.

Ladies and gentlemen, in order to ensure that the management will be able to address questions from all participants. Please limit your questions to 2 per participants. [Operator Instructions] We have the next question from the line of [ Gaurav Gucher ] from Mirae Asset Management.

Congratulations on the quarter. A few questions. Firstly, if I look at the assignment income this quarter was some INR 31-odd crores so how should we look at this income going forward? And right now, if I look at it, the off-book AUM is around 1,000 crores. Your on-book is around 7,000 crores, and overall AUM is 8,000 crores. So which is around 12%, 13% of overall yield. So going forward also, can we expect the off-book AUM to be in the similar range of 12%, 13%?

So Gaurav one, assignment book is as of today, approximately 730 crores to 750 crores. It is not 1,000 crores. What we are looking at it is net of ECL allowance. So maybe you can add up and then you can work out on the math because that number comes to near about 7,300 something crores to the AUM as a [ GLT ]. So second, as far as the direct assignment is concerned, so we are going to continue with the same pace because in Q1, we have seen slightly more less attractive rate what we are looking at. And in Q2, we would -- we have got some larger sanctions from the bigger banks, with the pricing that we are looking at. Obviously, there should be a an -- you can say, advantage to do a direct assignment in comparison to a term loan. And if that opportunity comes into, we are continuing to maintain the same level going forward in Q3 and Q4 also.

Okay. Okay. Understood. And sir, how should we model this? So is this, let's say, of the 750 crores, you earned around 31 crores in this quarter. Going forward also, can you assume that for a similar quantum on a percentage basis, this seems like a 4% kind of income. Can we model that 4% of total off book assignment?

Yes. So you can assume because it totally depends upon the market condition, that's how it pans out to. So you can assume between 2.5% to 4%, 4.5% of the range.

Understood. So my next question is with regards to -- if I look at the disbursement run rate and borrower per branch, both these numbers are broadly stable in the last, let's say, last 2, 3 quarters. If I look at the branch number of branches have gone up. So going forward, I think second half, because MicroFinance is more a back ended business in terms of growth. Can we assume that the disbursement, which is around 2,000 crore per quarter, that runrate improves in the second half of this year. And as a result, the metric of AUM per branch, borrower per branch et cetera, that also improves in the second half. Is that the assumption?

Yes. So out of 2 points here. One, if you see the overall stability in terms of the productivity levels is one of the factor is that we have opened new branches and in the last 450 branches, as I mentioned in earlier in my commentary in the last 3 years, and we continue to open more branches, that's why you see it is productive levels not moving at that level, but still we are able to maintain a very decent productivity levels. Second is that if you see -- look at the disbursement I don't think , we have already done close to INR 4,000 crores in the first -- in the 2 quarters, H1. We will see 5%, 10% here and there, but more or less we will -- because we are more consistent. If you see that historically also, more off, we are very consistent. It's not lopsided to the last quarter. That has not been our strategy in the last many years. If you can -- if you look at our disbursement numbers Q-on-Q. So more or less, you will find the consistency there.

Understood. Understood. Sure. And sir, my last question is with regards to the pre FY '21 portfolio. Right now, it's only 6.5% of overall AUM. But if I look at the collections, including the prepayments, et cetera, the collection seems to be 107%, 108% for this quarter. So going ahead, let's say, given that you have a 2-year sort of average duration of the loan, can we expect this portfolio to completely run down by 4Q. And if that's the case, I mean, what are the, I mean, write-off or any sort of stress that you foresee in this remaining 6.5% of the book?

So Gaurav, if you look at -- we have -- one, we are fully provisioned. So on whatever we need -- so wherever a customer is at 90 plus, it is fully provisioned. And as I mentioned, we have already now creating extra buffer. We -- yes, I mean, we do not see some very any big slippages in the portfolio, which is sold to a pre-April '21. So we are not very worried about it. And there is a team which is working on that portfolio separately. So -- and so we -- I don't think that we have front-loaded everything in the last 2 years in terms of provisioning. So we are not very concerned that there could be any shock because of the portfolio, which has been sourced pre-April 21.

Okay. So the first half credit cost is broadly where you should be in the second half as well nothing more to that?

Yes. Yes, please.

Sure. Sure. And sir, the net worth after the capital during IPO, that stands at 2,100 crores?

Yes. It should be in that range. We have to, Gaurav, there would be an additional profitability, which is going to come for October, November.

So and anything on that 600 crores, of the medium term perspective, what would be the guidance now that the equity base will also go up on the ROE, ROA, ROE front, any medium-term guidance, let's say FY '24 or FY '25 that you'd like to call out?

I think Gaurav, we would like to maintain. I mean we will be more consistent in maintaining the numbers which we have given, especially on the ROA. Sorry, that is -- after the equity infusion, the ROE, definitely will come down. But on the NIM, on the ROA, you will gain a very consistent numbers subject to market conditions, but yes.

Sure. So -- sorry, did you mean 5% kind of ROE, if that's what you meant? sorry.

So I think we will not stop. We not say that 5%, I think anywhere between to 4.5% to 4.75%. And as I mentioned that whenever we have a good quarter, we would rather put some -- process the money in the management overlay, rather than talking compound saying they're talking about a 5%. We will be more concerned about a consistent ROA, and I think we are more focused on this bracket of 4.5 to 4.75 as the consistent ROA.

We have the next question from the line of Alpesh from IIFL Securities Limited.

Thank you and congratulation to the team for great set of numbers. The first question is on all the yield side, we have discussed alot on that, Just getting some sense that what will be the expansion possible over the next 4 quarters after the entire repricing is done based on this new base to private mechanism?

So if you have understood quietly, you're talking about NIM, right?

No, I'm not talking about the margin because, obviously, the cost of that is on the [indiscernible] but just on the yield on loan. The number that we have reported in this quarter, which is around 20.3%. So what would be like a [indiscernible].

So yield, you are talking about. Yield, which I am assuming is without configuring the processing fees, we are targeting between 21.5 to 21.75 and plus, obviously, there would be a processing fees, which we are charging at like 1.25%. So that it was it is to be.

So it would be around 150 basis points as an expansion over the next 4 quarters to come?

N Yes. Yes.

So Gaurav over here, my question is why we are not expecting the significant increase in the cost of considering our rating upgrade plus diversification and the capital raise et cetera . So we will have a further expansion in margins from around 10.2% to 11.2%, 11.5%, as far as the margins are described. So is it fair to assume that we should be sensing somewhere around 11.2% to 11.5% kind of -- on a steady state business?

Yes, yes.

So now again, now a related question here, going back to borrows cache, if we are going to settle a 100 basis point higher margin from the there will be some operating leverage playing out, and the assignment in cost contribution is also increasing. So and if you are planning to have a 4.5%, 4.75% of ROE. Are we talking about lifting our credit cost number at around 2 points, even though fundamentally it does not require but the management overlay of almost a percent every year.

Yes. So Alpesh, you're right. I think anywhere between 1.5% to 2%, we would like to, overall, including the provisioning around 90%, we would like to maintain. We would like to build.

Okay. And the last question on the growth side since we are on a 2,000 crores kind of disbursements on a quarterly basis. Is it -- and mostly next year, our repayment rate should come down considering the -- considering that there has been some backlog related to the COVID and [indiscernible] of the portfolio is also slightly increasing. Is it trying to assume that next year around 28% to 30% kind of an even growth possible? In FY '24?

Yes, I think we would like to -- because the base will be much larger from where we are now. Yes, I think anywhere between mid-20s is where we will focus on, on a more consistent basis.

We have the next question from the line of Jigar Jani from Edelweiss Wealth Management.

One question, sir, on an absolute basis, we have seen some increase in our GNPA by about 30 crores, on a Q-on-Q basis, plus we had about the 20 crores write-off in this quarter. But if you look at the 30 to 90 number that hasn't come down significantly. So I just want to understand what is costing increase in absolute GNPA, [indiscernible] from the 0 to 30%, or how -- I mean, just trying to re correct the numbers

It's Tarun. So like we had explained earlier. So in our portfolio, when we do the slicing from a quality or a portfolio assessment standpoint, we still have about 6.5% of the portfolio, which is pre-April '21 source portfolio. And the fact that we have gone through the event over the last few years. There are 2, 3 things that we look at here. a, is the characteristic of the overall book. So there is this new book which is 93.5% which we have, as shown to you, there is a very, very good demonstration of behavior like it was in pre-COVID. So the collection efficiency there now in the loans of 98.5% to 99.2% to 99.3%, month-on-month, and this we've seen across all the states. What we've also seen is this is as the phasing out or let's say, the impact of the events has started to slow down a bit or get redeemed a bit. We have seen the uptick in the customer and of behavior towards also resolving their early delinquencies or so on and so forth. And this we've seen across geographies. And that is how we see better collection number than what we've seen in the past. The other part is that some of the other pockets, like we mentioned earlier, who are probably largely or more significantly factored in COVID-2 and after that, some of the other natural events have taken a while to come back to the normalization curve, which we've seen over the last 3 to 4 months. So we continue to maintain our focus on engaging with our customers who had been hit. So we -- like Devesh mentioned earlier, there is a dedicated set of loan, our officers on the field, who engage with them and we continue to resolve their past delinquencies more progressively as we go along. So these 4, 5 factors give us comfort that we will and we are also going to see some more progressive slowdown of increase in the early buckets, which will help the flow to the 90-plus bucket. And we will see consistency of levels in terms of how the GNPA will look like as we go along over the next 2 quarters.

Is it possible to share your 1-plus [ BPD ] this quarter and in June quarter?

So we can always do that. We will come back to you. We can probably take that separately and address that for you

We have the next question from the line Bhuvnesh Garg from Investec Capital.

I have 3 questions. Firstly, on your loan yield. So if I heard it correctly, you said you implemented loan yield is 21.5% to 21.75%. Is it correct?

Yes. Is without -- talking about without the processing fees.

And secondly, on geographic data, you mentioned that the share of UP and Bihar is about 19% each. Is also what the complete other states from you drive your end AUM?

Odisha will be closer to 11%, 11.5%. Madhya Pradesh should be closer to 9.7%, 9.6%. Followed by Tamilnadu, which will be closer to 6.5%, 7%, 7.2%.

Okay. Fine. And thirdly, sir, what would be our customer retention rate?

So our customer retention today is in the range of 70%, 72%. Yes and as we go along, what we want to do is that the balance of our new customers to existing customers, especially in the branches that we've been there for a while specially the vintage branches. So we are focusing more on looking at how we can -- meet the growing needs of our existing customers. And that is also really one of the key metrics that we assess ourselves on very closely. So we are always, so this retention rate, 3 years ago was about 48%. For 3 and half or 4 years ago, was 48%. So with focused interventions and orientation of the teams and engaging more with the customers, offering the right kind of products that they were looking at, we've been able to bring this up from 48% to about 70% to 72%. And we are looking at how we can improve this more.

A request to all the participants to limit their questions to 2 per participant. We have the next question, a follow-up question from the line of Renish Hareshbhai Bhuva from ICICI Securities Limited.

Yes, once again, sorry to circle back to the ROA journey. So Q2, our credit cost is more than 3.5% on an annualized basis. And going ahead, we sort of, we are expecting a market expansion and, of course, these credit costs will normalize to steady state 1.5% to 2%. So cumulatively, there will be a 50 basis point additional P&L benefit is likely to come. So I'm just trying to reconcile why we're expecting ourselves to 4.5% to 4.75% ROA when there is a probable 250 basis point of ticker exaclty of come.

No, no. So as what Devesh has said in the initial statement also that we are trying -- we will try to create a buffer for any unforeseen event which are going to come in the future or if it is not to be. Then obviously, the benefit is going to be for all the company and all the shareholders on that perspective. So it is something which we are working on to have a consistency on our return ratio. So that is what we are going forward with.

Got it. Got it. So we are not going to, let's say, increase the management overly materially is what I want to get at?

So, I think -- so Renish, we -- as we -- as we mentioned, I think we overall want to maintain overall, being around 1 point extra with a buffer of around anywhere between 0.5% to 0.75%, right now, but it will change every quarter. And just looking at the environment, looking at the customer behavior and then we may rethink next year. But right now, any quarter, good quarter, we would like to really put and then bridge some buffers of 2.5%, 3% over the next 2 to 3 years. So to add what Devesh is saying that in the last 2 years, we have already provided like we have front-loaded all the provisioning. So obviously, this year would not be an ideal year to look at a credit cost in that perspective. I think from the next year onward, it would be very clearly visible that what would be the potential credit cost, what we are talking about.

That's very helpful. In fact, we are among the ones, who are having this routine, provisioning policy, at least amongst [indiscernible].

We have the next question from the line of Darpin Shah from Haitong India.

So my question was, in the opening comments, you had mentioned about taking some credit policies. So if you can highlight more about it, what's the headwind what are the outcomes of it?

So what I talked about was that during the COVID time, when we decided to continue disbursing. So we had some small tweaks here and there. That was what I was talking about. So those tweaks were, one, understanding areas there, there was a continuous lockdown, not going and where the impact of COVID was more not disbursing their -- looking at some of the geographies like UP and Bihar did very well even during COVID, focusing on some of these geographies. The second was that looking at the client behavior. So when we were sourcing, when we were welcoming new customers which had trade lines with the other lenders, we actually look at whether the customer has ever gone in certain buckets, whether the customer is under resolution of 1.0 or 2.0, whether the customer look at the migration of this thing. So some of these things we looked at and what has in the customer behavior over the like, normally, if you look at the customer even over the last 1 or 2 years. But there, we said, okay, let's look at the customer behavior over the last 5, 6 years, if it's the customer is already existing customer of micro finance. Some of these things we actually tweaked to make sure that when we decided to go in the uncertain environment, it is a very calibrated and thoughtful growth.

And sir data [indiscernible] question, if you can help us with the vintage of your customers -- what I mean is all of this 2.2 million customers, how much will be in bucket -- sorry not in bucket, but cycle 1, cycle 2, if you can just help us with that?

Yes. So currently, in terms of number of customers, the breakup is that cycle 1 on an average is anywhere between 51% to 53%. And the remaining is our existing customers. So it's about 46%, 47% will be existing customers, 51% to 53% would be cycle 1 customers.

Any further breakup in this question, the cycle 3, cycle 4 type of the customer?

Yes. So the bulk of this existing customers about 46%, 47% is made up by 32 customers, followed by 3 and 4 like that. So that is how the breakup is.

Thank you. Ladies and gentlemen, as that was the last question for today that the management could answer.I would now like to hand the conference over to Mr. Sameer Bhise for closing remarks. Over to you, sir.

Thank you, everyone, for joining us for this call today. Also, I would like to again thank the management of Fusion Micro Finance for giving us the opportunity to host the conference call. Thank you. That ends the conference call.

Thank you, Sameer. Thank you, everyone.

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