Fusion Finance Limited (FUSION) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Fusion Micro Finance Q3 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Renish Bhuva from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you, Aria. Hi, good morning, everyone, and welcome to Fusion Micro Finance Q3 FY '24 Earnings Call. On behalf of ICICI Securities, I would like to thank the senior management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of Fusion Micro Finance represented by Mr. Devesh Sachdev, Managing Director and CEO; Mr. Gaurav Maheshwari, CFO; Mr. Tarun, CEO of Micro Finance Business; and Mr. Deepak Madan, Company Secretary and Chief Compliance Officer. I will now hand over the call to Mr. Devesh for his opening remarks, and then we'll open the floor for Q&A. Over to you, sir.

Thank you, Renish and ICICI Securities, for hosting us. Good morning, everyone, and thank you for joining Fusion's Q3 Financial Year '24 Results Conference Call. I am here along with my colleagues, Tarun, our CEO, MFI; Gaurav, my CFO; Deepak Madan, our Chief Compliance Officer and IR. We had a very strong Q3 in terms of disbursements, customer acquisition, improvement inflation efficiency, NIM expansion and network expansion, which will lead to healthy return ratios and robust capitalization. We had a slightly higher-than-guided credit cost, which I will cover in the detail during this call. Request you to keep the presentation which we uploaded handy as I take you through the key highlights of the quarter. I would like to start with Slide #5 and #6 of the executive summary. Our AUM has grown by 23.57% year-on-year and 6.65% quarter-on-quarter to INR 10,693 crores. This was supported by highest-ever disbursements of INR 2,713 crores in this quarter, which is approximately 16% growth over the previous quarter. We have achieved this growth despite calibrating our growth in a couple of geographies, maintaining one of the lowest ticket size in the industry. Our diversified presence allows us the levers to grow in a very balanced manner. As guided earlier, we are on track to deliver an AUM growth of mid-20s in financial year '24. Our network has expanded to 1,242 branches across 22 states after addition of 78 new branches in Q3 FY '24. 70% of the new branches added have been in non-top 5 states. We have added 1.83 lakh new customers in Q3 and 4.23 lakh customers YTD in this financial year. Our total customer base as of Q3 '24 is close to 3.8 million, having grown 11.2% year-on-year. This is in line with our stated 10% to 12%increase every year in the new customer acquisition. Another key highlight of this quarter was our credit rating upgrade also from ICRA and CARE to A+/Stable. Now we are A+/Stable from all 3 of our rating agencies, namely CRISIL, ICRA and CARE. Strengthened by our rating upgrade in early October and continuous engagement with our lending partners, our marginal cost of borrowing further reduced by 10 basis points quarter-on-quarter to 10.45%. In the coming years, we will look to further diversify our liability mix to reduce the share of bank lending. As we have been guiding that our NIM will expand to 11.2% to 11.5%, our NIM now has increased to 11.54%, registering a 42 bps increase over the last quarter. We have maintained healthy NIM while offering one of the lowest rates to our customers in the sector. We will be sharing a steady-state guidance on the NIM in the Q1 of financial year '25, as we have been saying this in the past. While we continue to build capacity, we have our focus on improving our cost-to-income, which for the first 9 months of financial year '24 stands at 36.5%, an improvement of 291 basis points year-on-year. There was a marginal quarter-on-quarter increase in cost-to-income on account of network expansion done in Q2 and Q3, which will add to the productivity in coming years. Last, but not the least, we have delivered a PAT of INR 126.45 crores for Q3 financial year '24, which is up by 23.4% over Q3 FY '23. And our 9 month FY '24 PAT of INR 372.6 crores registered a year-on-year increase of 36.67%. Now I would give an update on our collection efficiency and credit cost. Please look at Slide #8. Our collection efficiency has steadily improved over the last 6 quarters with Q3 collection efficiency inching up to 97.9% and -- to 98.4% if we exclude Punjab. In the Q2 call, we had mentioned about lower collections in 3 states, apart from Punjab, namely Rajasthan, Gujarat and Haryana. We are seeing improvement in collections in Rajasthan and Gujarat. Haryana collections have stabilized in Q3. In our Q1 and Q2 earnings calls, we were one of the first companies to flag off some of the challenges we're seeing in Punjab. Punjab and Haryana states have, unfortunately, been impacted by external events in succession over the last years. It started with COVID wave 1 and 2, followed by farmers' agitation in Punjab. That went on for more than a year, and recent rains and floods, what we have mentioned in Q1, created an adverse impact on our customers' ability to generate livelihood versus pre-COVID time. To add to the immense impact that these events stated on income-deficient activity of borrowers, last few months, there have been some mischievous campaigns in Punjab, misleading the innocent and our customers with illegal and unfounded claims of waivers. Due to the increased stress, which is visible now, we have specifically called out the share of Punjab portfolio in the overall AUM in Slide #9. As of December '23, the share of Punjab in our overall AUM stands at 3.257% (sic) [ 3.57%]. Collection efficiencies at 84.4%. Our January '24 Par 60+ in Punjab has increased to around 20%. Our collection efficiency and Par 60+ ex of Punjab remain within a healthy range. We are taking many steps, which has been mentioned in the slides, starting -- even the MFIN has met Finance Minister of Punjab and to appraise of all the issues which are coming in, especially some of the districts, we have stopped fresh disbursement in Punjab as we have mentioned in Slide 9. We will -- we are in a wait-and-watch mode. And whatever I think the drop in the collection efficiency, which was possible, which has already happened in January, now it has stabilized at a certain level. So moving to Slide #10. Our GNPA as of quarter 3 financial year '24 stands at 3.04%; net NPA at 0.77%, which has increased from Q2, majorly because of Punjab. Our credit cost net of recoveries for Q3 stands at 0.94%, and we expect to close the year with a net credit cost of up to 3.5%, which will take care of major impact of this state. We have progressively shifted INR 80.5 crores assets from Stage 1 to Stage 3 to take care of potential slippages. In our previous calls, we had guided that we are creating management overlay as a buffer for exceptional geographical issues. Accordingly, in Q3, we have released INR 20.18 crores from management overlay to normalize the impact of stress caused by Punjab. The management overlay, as of December end, stands at INR 41.5 crores. It is important to note that despite elevated net credit cost of 2.47% in 9 months financial year '24, our 9-month FY '24 ROA is 4.87% and ROE is 19.75%, remains healthy. This demonstrates robustness of our business model. Now I would like to update on our geographical diversification, branch mix, average ticket size, performance and key operation parameters and brief for our MSME business. Diversification has been one of our key strategies for growth since inception, which has helped us to grow our present 22 states across 1,242 branches as of Q3 financial year '24. We continue to remain committed to our diversification journey through expansion in newer states like Karnataka, Andhra and Telangana.

There are now more than 20 parties in the conference.

Over the last year, the concentration of our top 5 states have increased to 70.4%. This is an account of good traction and healthy portfolio we have seen in these states and even -- and being established players gives us better scalability and productivity. However, for the long term, we remain steadfast on our strategy of diversification, as shared earlier. As highlighted on Slide 19, we have opened 156 branches in 9 months financial year '24. We are targeting to reach approximately 200 branches in financial year '24. While on the point of branch network, I wish to take you to Slide 23, where you will see we have a very good mix of vintage and new branches, which is very strong operating lever for our future growth. 510, which is 44% of our branches, are less than 3 years old, which contribute to just 29% of our AUM. This will improve as the branches get seasoned and aid our AUM growth. Our average outstanding per borrower stood at INR 27,200 in December '23 as per recent data. This is one of the lowest in the industry. Slide 21 captures our key productivity metrics. Our GLP per branch has been following a consistent growth trajectory and now stands at INR 8.9 crores per branch as of Q3 financial year '24 versus INR 8.2 crore as of financial year -- as of Q2 financial year '24. GLP per RO at INR 1.3 crores, clients per branch of 3,260, remains one of the best in the sector. Moving to Slide 37, which gives an update on MSME vertical, which was started in December 2019 with the vision of building credit underwriting capabilities to tap into the potential missing middle, mapping adjacencies and serving MFI customers which are moving up the value chain. Happy to share that this book now has a portfolio of INR 461 crore, which is 4.3% of our overall AUM. 60% of this book, out of this INR 461 crores, is secured. We have been guiding that we would like to maintain portfolio mix of 65% to 70% secured and 35% to -- 30% to 35% unsecured in MSME to balance risk and return, and we are absolutely on track. We are confident of reaching this mix in the next 3 quarters. Would like to mention again that we'll share our broad growth strategy on both verticals in Q1 of financial year '25. Having shared the highlights of our Q3 financial year '24 performance with you, I would like to reiterate again, our goal, always, is to maintain a long-term view on building our businesses, setting a strong and consistent growth platform, transparency and sustainability. Thank you very much.

Good morning, everyone. I would like to give some key highlights on Q3 FY '24. Core interest income of the company has increased by 8.70% on a quarter-on-quarter basis. And on a year-on-year basis, it is a 28.50% growth. The total income has also increased to 7.35% on quarter-on-quarter basis and 31.45% on a year-on-year basis. Our marginal cost of fund has further reduced to 10 bps on a quarter-on-quarter basis and 75 bps on a year-on-year basis, aided by our focused approach on optimizing the cost of fund. Our endeavor would be continue to work on the optimizing our cost of fund. CARE and ICRA has also upgraded our long-term rating to A+ followed by CRISIL, who has done it in the month of November. This would help us tapping the capital market and ECB exposure to diversify our funding base. The NIM for the quarter has increased by 42 bps from Q2, and it has increased by 123 bps on a year-on-year basis. It is as per our guidance provided earlier. As on 31st December, the pre-provision PPOP is INR 260.26 crores, increased by 41.62% on a year-on-year basis and 7.64% on a quarter-on-quarter basis. The cost-to-income has marginally increased by 39 bps from 36.41% Q2 FY '24 to 36.80% Q3 FY '24. The operating cost increased by 24 bps on a quarter-on-quarter basis. This increase is due to opening of 78 branches in this quarter pan-India. Also, due to the addition of 1,155 additional manpower in this quarter, operating costs for MFI business is 5.85 -- 5.45% and MSME business contributed 0.48% for the quarter. Please refer Slide #10. The ECL as on December 31 is INR 311.85 crores, which includes management overlay of INR 41.50 crores. The overall coverage stands at 106%. The net credit cost for 9 months FY '24 stands at 2.47% on average on-book portfolio. For the quarter, the credit cost is 0.96% on a closing portfolio. We are confident for closing the FY '24 with a net credit cost of up to 3.5%. The company has done write-off of INR 81.31 crores in Q3, which is 0.84% on the closing portfolio. Due to this write-off, we have derecognized the interest amounting to INR 18.75 crores. The management overlay we have created till last quarter was INR 61.48 crores. As mentioned in our previous call, it was mainly created to mitigate the impact of any future risk. During this quarter, the company has decided to use the management overlay up to INR 20 crores to writing off 270-plus days DPD for -- largely pertaining to Punjab. We have provided, as Devesh has mentioned, from Stage 1 to Stage 3. There is a shift of a portfolio. By this shift, we have provided approximately 16% of the Punjab portfolio to the provisioning. The gross Phase 3 stands at 3.04%, which is the gross NPA, and the net stage is 0.77%. This is from the financial slide. Thank you.

Should I begin the question-and-answer session?

Yes, please.

[Operator Instructions] The first question is from the line of Piran Engineer from CLSA.

Congrats on the quarter. Am I audible?

Yes, Piran.

Just a couple of things. One is any further recognition left in -- for asset quality issues in Punjab or maybe the neighboring state of Haryana?

Yes. So Piran, one that's what -- one, we have front-loaded some of the pain. But if you see, our guidance is up to 3.5%. So our endeavor is that whatever the pain we take it in this quarter in the Q4, so that we can start a new financial year on a clean slate.

Okay. And this 3.5% credit cost, does it include any more drawdowns from the overlay buffer?

We are not hoping for that. We would like that -- whatever we have dipped into the management overlay, we would not like to use it now in the next quarter.

Got it. Okay. That's helpful. And just secondly, some of your competitors have passed on yield improvement -- sorry, have passed on yields to their customers by about 50, 60 bps. Any such thought process from our front on this?

Piran, we are very clear. We have been saying this that if we see that once the pivot happens, we are reaching a certain steady state of NIM, ROA and ROE. Once we see that there is some benefit, which is coming from the rate of interest -- cost of fund, we would definitely like to optimize customer sensitivity of the regulator and the shareholder value. Right now, I don't think we are, today, one of the lowest in terms of cost to the customer in the sector. So right now, there is no such plan. But once the pivot happens, we will look at it. And maybe in the Q1, we have mentioned that we'll give some guidance. But right now, there is no such plan.

Next question is from the line of Raghav Garg from AMBIT Capital.

Just I was listening that you are still expecting some type of slippages in 4Q from Punjab and Haryana. And if I look at the credit cost for the 9-month period, I think that comes through on an annualized basis somewhere around 3.5% or slightly more than that, as per my calculation at least. How is it that you're guiding for a 3.5% credit cost for the full year? Shouldn't it be slightly higher? Unless you're expecting that the credit costs will normalize to 3%, 3.1% in 4Q, is that the case?

No, sir. Raghav, what we need to see that how the situation is being developing at the state of Punjab. So if we see the last 10 to 12 days of collection patterns, so it is getting stabilized. So what we are hoping, as Devesh has mentioned in his earlier remarks, that we are engaging with the ministry level at the Punjab administration. So they have extended some help. So we are hoping that situation will not get deteriorated. If there is a deterioration, so because our Punjab portfolio is not that large enough to have a further major pain which is going to come in. So that's the way we are looking at the things. So situation is evolving, and January collections has stabilized now in last couple of days, as I have mentioned. So that is why we have given up to, credit cost of, 3.5% of the guidance.

Deepak, but the only question was that do you expect that your credit cost will be around 3% in 4Q because your full year guidance seems to imply so?

Sorry, come back again.

I'm asking whether your 4Q credit cost will be around 3% because your full year guidance of 3.5% seems to suggest so.

No. So Raghav, that's what we are saying, that the situation is evolving in Punjab. So it would be very difficult to say that it would be a 3% cost. But what we can assure you, the major of the pain is being taken care of in this quarter, if there is an incremental slippage of maybe some sort of portfolio. And second, if you see that the number which we have given is of December, when we see what is our -- because there is a rundown in January, which has already happened in Punjab portfolio. The number, which is INR 382 crores, it has run down to INR 362 crores already. So because we are not doing incremental disbursement and apart from that, the situation is getting stabilized, so that is why we are -- we have restricted to slightly on a higher side on the credit cost at FY '24.

Understood. And just one last very generic question. Any other pockets of stress that you would like to highlight outside of, say, north or anywhere else wherever?

No. No.

So next year should be a largely normalized credit cost year for you of around...

Absolutely. That will be our endeavor. We were actually moving on the right direction, though there was some hump. So we as a transparent company, we thought let's front-load this in this quarter. And if there is anything we can take in the Q4, we expect a normalized credit cost starting next year -- next financial year.

And also, can you give us your top 5 states breakup in terms of the loan book outstanding? Is that something that you can do?

Yes. So we are -- it's a 70.4% in the top 5 states.

No, what I meant is your top 5 states, can you give us the loan book breakup by each state of the top 5 states?

By percentage?

No, by absolute amounts.

Yes, we can give that. So UP is INR 2,326 crores. Bihar is INR 2,104 crores. Odisha is INR 1,217 crores. Madhya Pradesh is INR 969 crores. Tamil Nadu is INR 685 crores These are our top 5 states.

[Operator Instructions] Next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, I was away for some time. So, I mean, excuse me if you've already answered this. I can always listen to the recording. But just wanted to understand, have you explained already what exactly is the nature of problem today in Punjab and Haryana? Why I ask this is when we read about this on media, right, I mean we get to hear something else. When we kind of do some channel checks, try to understand that from entering, we get to hear something else. But given that you are going through this, right, if you could just elaborate on what exactly happening in Punjab and Haryana.

So look, Abhijit, we have already mentioned it, but again, no problem. I'll just again mention this. Look, post COVID 1 and COVID 2, Punjab, Haryana and Rajasthan, these states were slightly slowing coming back, okay? What happened was, after that, there was a big farmer agitation, we all know, which hit Punjab and some parts of Haryana. After that, once this was subsided, then floods, which we have highlighted in Q1. Now situation in Haryana is stabilized. We do not see any risk. Also, let me just tell you, our Haryana portfolio is INR 250-odd crores, which is less than -- around 2% of our book. Punjab is INR 382 crores, which has now come down to INR 362 crores. It's close to 3-point-something percent portfolio. Punjab, specifically, in some of the districts, after this flood issue, some mischievous elements started doing this whole loan waiver campaign, by which, people stopped -- actually our boys are not allowed to even enter some of the villages. Collection efficiency has come down to 84%, as we have mentioned in Slide #9 in Punjab. What we have also -- the steps we have -- so that's the situation. These are restricted. We have 55 branches. We actually had 42. 13 branches were split. To increase the monitoring, we actually calibrated our strategy of going slow in Punjab. And then we -- first, we stopped the disbursement in the impacted branches. Then finally, we took a call in end December to actually stop disbursement in every branch. Now we have strengthened our, as we mentioned, tele-calling overall in -- from our collection. We're reaching out to customers and MFIN. We have met the Finance Minister of Punjab, and saw the decision. Finance Minister is trying to help us. So I -- also, what we have seen is that whatever the collection dip was there, now that has got stabilized. So that is what gives us confidence that -- and that is the reason we front-loaded some of the pain. And we are confident that we will be able to manage the credit cost within the 3.5% -- up to 3.5% for this financial year.

Okay, sir. This is useful. And sir, have you also kind of shared -- I mean, sir, before I move to the next question, just wanted to kind of reconfirm, when you said some mischievous elements after the floods have started, this loan waiver campaign, fair to assume here that this loan waiver campaign does not have the support of the political machinery of Punjab then?

No, not at all. Not at all. Even the Finance Minister also was surprised to see. And let me also tell you, this loan waiver is not only for Micro Finance, for all loans. This is for all loans, all bank loans, every loan. So it is not specifically for Micro Finance. Micro Finance being a vulnerable, some of these customers get -- are misled. Otherwise, it's not only for this thing, and there is no political support, what we know, for any party for this kind of campaign.

Got you. This is useful answer. Then maybe one last question from my side is, have you also shared, I mean, the Stage 1, Stage 2, Stage 3 of the Punjab portfolio, which you said is around INR 360 crores now? Have you also given the split of the Stage 1, Stage 2, Stage 3 of Punjab portfolio?

So we have not given the split of Stage 1, Stage 2, Stage 3 for Punjab, but we can provide you if it is being required.

We'll provide you separately.

Next question is from the line of Shweta from Elara Capital.

Couple of questions. Sir, Tamil Nadu also forms one of your top state exposures and one of our largest peers have seen impact of floods there. So any such trouble for us in that particular state?

Yes. So see, Tamil Nadu, yes, there were rains and floods. There have been series of rains and floods. But actually, we have about 102 branches in Tamil Nadu and only about 90 to 20 of those branches were in the areas where we had experienced this. So for us, yes, there were very marginal phases of impact. But the Tamil Nadu portfolio has bounced back. And actually, we've seen that, not only has it stabilized, it started to also -- it affords to improve. So, really, for us, I think Tamil Nadu is behind us now in terms of whatever little impact that it had because it was a very small number of branches that we had impacted by rain.

Understood, sir. Sir, secondly, in terms of yields, so while you did mention that there will be recalibration of yields going forward, as you move towards optimization, but what is the on-book yields today? And what is the sort of IRR for the customers?

The average is around 23%.

Okay. Okay. And IRR would be?

So the IRR would be -- you can add 1.25% of LPs. So you can calculate that IRR that what would be the...

That is for 2 years, so you can say, yes.

Okay. Okay, noted sir. Sir, last question is, sir, you made a sweeping mention that 16% is Punjab provision, because there have been movements between Stage 1 to Stage 2. I sort of don't get that clearly. Can you just repeat?

So Shweta, as we move because in a Stage 1, you have a lesser provision requirement as far as the ECL model is concerned. So because of the situation, which is being demanding, so we have shifted certain portfolio from Stage 1 to Stage 3. So earlier, this provision was not as covering. It was as low as like maybe 4% of the total portfolio. By moving that INR 80 crores of portfolio to Stage 3, this number now increased on a closing portfolio to 16% because the largest was of Punjab portfolio and the larger share, because now sitting in the Stage 3, so that is why it has given us amount of 16% on the Punjab portfolio as a provision.

Right, sir. And one last question. Sir, what is your ROA target for next quarter given that you have already front-loaded this Punjab impact? Also, what are you looking at cross cycles ROEs over, say, next 3 to 5 years?

Shweta, we have been guiding this since we went to the Street first time, 4.25% to 4.5%, ROA guidance cross-cycle, an ROE of 18% to 20%. That is what we have been guiding consistently over the last 18 months.

Next question is from the line of Rajiv Mehta from Yes Securities.

Congrats on delivering good results despite the issues in Punjab. So the first question is, sir, what scenario of collection efficiency in Punjab will make us miss our credit cost guidance? So can you mention the level of collection efficiency below which we will miss our guidance of credit cost?

No. Look, we have already done some estimation. This all decision of front-loading was also taken looking at the January number. So I can tell you from 84 -- collection efficiency 84% in December, there was a 5, 6-percentage point drop in the first few days of January. After that, it has stabilized. So I think -- so that is why otherwise, we would have given -- so that's what we are trying to do as a transparent company that we have seen that. And I'm hoping that the situation will not go down from here. Also, Rajiv, the portfolio is -- overall, there's a runoff, which is happening on the portfolio. There's a INR 20 crore runoff that's already happened. As Gaurav has mentioned, 16% of the Punjab book has already been covered under this. So I don't see any challenge now.

Okay. Okay. And hypothetically, if the situation gets arrested at the current collection efficiency, then in that case, would any additional provision be required in that case, what you have budgeted for, already, the credit cost, but would that materialize?

I think let's wait for -- we'll look at this quarter and we'll see. But otherwise, whatever we could -- estimation on we could do, looking at the collection efficiency, customer behavior and the portfolio and the loss estimation, I think we have already factored in this quarter and the next quarter, Rajiv. So -- but yes, it's always a moving number. But we are hopeful and confident that this is -- I don't think we will go much beyond this number.

Okay. Clear, sir. And on this -- we have also mentioned in one of the slides that we have stopped customer addition in whole of Punjab, right? So would it have any impact on the momentum that we've seen in Q3? We have seen good momentum in customer addition disbursements. Would there be any impact of it? Or should we assume that the momentum in customer addition disbursements, which is revived, will keep on continuing?

It will keep on continuing because we were -- Rajiv, that's what I mentioned in my commentary. We actually had to calibrate our growth in 3 states. We went slow in 3 states. In spite of that, look at -- on our overall network of 1,100 branches in the -- in Q3, we could still grow. We have done overall disbursement of INR 2,700 crores. So that has already been factored in. Other branches will contribute. So the momentum will not break.

Understood. And just last thing, on the new customers being added, the profile in terms of we being the first or the second lender, that profile is intact in terms of the uniqueness -- the unique relationship with the borrower?

More or less similar. Rajiv, we have mentioned earlier also that every 6 months, we share the data. We shared the data in September. So we'll share again after the Q4 results. We'll take fresh, this thing. But more or less, there is not much change. But more granular data, which we have already provided after the September results, we'll provide again after Q4.

Next question is from the line of Pranav Gupta from Aionios Alpha Investment Managers.

Congratulations on a good set of numbers, despite the problems in Punjab. Just a couple of questions. So if you look at disbursement ticket size, you had mentioned last quarter as well that we've taken a change in stance and we have started to increase the cost cycle reimbursement ticket size slightly, albeit it's lower than the industry. But when I look at this increase over the last few quarters, is it a function of the changes that we made? Or is it a function of -- is it more a function of -- are customers moving from, say, first cycle to second cycle or second cycle to third cycle? How should one look at that?

One, we have not done any change in this quarter. Whatever change we have previously communicated stands. We have not incurred with any loan sizes on cycles after that. But you are right, this is a combination of both customer retention and some combination. It's a calibrated this thing, so that's it. It's a combination of both.

Right. Right. And just in continuation to that question. If we look at the expansion that we did -- that you've done over the last 9 months, you've added almost 150-odd branches. Two questions there. One is can you talk about any -- apart from, say, new states being added like Telangana and AP, have we looked at deepening presence in any specific states? And this quarter, you added almost 1,200-odd ROE [ on the original ]. So again, is it state specific? Is it deepening presence in any particular state? Or is it just a broad-based increase? And lastly, just, could you give us the breakup of -- out of these 156-odd branches added, how many of them were splitting and how many were new branches?

Yes. So just to answer the first question, the expansion, like Devesh had mentioned earlier, 70% of the expansion has come in non-top 5 states, right? So it tells you that we've also looked at deepening some of the states which were outside of top 5, but significantly, in our earlier distinct discussion in the previous quarters, we said about our [ tourist ] in AP and Telangana and also the fact that we had entered Karnataka, so 67 branches out of these 136 -- 156 came into these 3 states. And other than that, we looked at deepening some of the existing states. So that is really how our expansion combination has been. Now looking at this question of saying, the split state. So yes, in our overall portfolio, if we look at it today, close to about 130, 140 branches are what we had typically split more from a monitoring standpoint, and that is a strategy which Devesh had mentioned that consciously, we'd also done in Punjab in early part of this financial year, more from a monitoring standpoint. So 13 states, we had split just to be able to monitor more intensely, the portfolio. But overall, in the country, there are about 132 branches, which are split out of the total,1,155.

Because Pranav, you look at our branch per district, it's around 1.6. If you compare with the sector, it's more. So as we mentioned, we are now in the deepening strategy other than the new states which we have entered. We will keep on splitting the branches, which are -- which crossed to certain AUM size or a customer -- number of customers.

Right. Right. Sir, just one last question from my end. So, I mean, through COVID as well, we've continued our expansion in the new states, in the new geographies. And there had even branches that's aided us in acquiring new customers through the COVID period as well when the industry was sort of subdued. When we look at the last, say, 12 to 15 months, we will then continue with that journey of expansion, like you always mentioned, in trying to sort of diversify geographically. Is it fair to assume that with this expansion now and the launch, that they have, where 41% of branches are still contributing relatively, lower share into AUM. Should one assume that this should impact cost ratios positively going forward? As you know, operating leverage kicks in over the next -- or more longer term over the next 2, 3 years. How should one look at the cost ratios?

Absolutely. Absolutely. Pranav look, that's what we have been saying that there are 2, 3 things I would like to mention here. That, one, stand-alone micro finance, our operating expenses are -- you see cost-to-income, we are already very, very competitive. We will be -- if I take out the MSME piece, we will be around 32%, 33% cost to income, so that is one. Second is, as we are mentioning, we are trying to calibrate between the future and managing the cost. We are calibrating our overall strategy, even on the number of customers handled by the fleet officer to have a better control of the portfolio. So you are right, we will optimize this thing. But yes, over and next 2 to 3 years and also we keep on -- we are investing. We will keep on -- we will be adding good number of branches. Even in the coming year, in which we'll give some guidance in financial year -- in Q1 of '25. However, we will try to balance both cost to income and the growth and everything. And yes, over a period of time, you will see while these are getting stabilized and the branch expansion will put out that kind of percentage, that level, you will see the costs, definitely, operating levers playing out.

Good luck for future quarters.

[Operator Instructions] Next question is from the line of Umang Shah from Kotak Mutual Fund.

Just a couple of them. One, on the credit cost, right, I mean, let's say, on a more steady state basis, when you guide for a 425 to 450 basis points of ROA, then what are the credit costs that you are -- credit cost assumptions that you are taking in? And more closer for FY '25, would you like to guide for any credit cost number?

Yes. Umang, so we will guide for this in Q1 '25 that what is the kind of overall cross-cycle ROA, ROE, credit cost, we will, we will, we will. But yes, endeavor would be to really be more much better than what we have achieved. But you will see better numbers going forward, Umang. But we'll give some guidance. But we are very confident of having a better number. And they were slightly, in any journey, there are some bumps. But I think that is what the benefit we have. As a diversified company, we are able to even calibrate some of these things. We were able to -- we are able to calibrate even the issues in southern part of the state in a much better way and still grow. But coming to your point again, we would definitely like this to be better, credit cost to be much lower, but we'll give a guidance in Q1.

Sure. Right. I appreciate that, Devesh. I just was coming from the point of view that, clearly, in our earlier conversations, we have spoken about a 4.5% ROA. You guys are well above that. But clearly, at that point of time, the thought process was that, at the same time, we will be building some buffers on the balance sheet. Now I appreciate that, clearly, Punjab is a one-off sort of a situation. But given that we are widely diversified compared to our peers, right, I mean, there is -- I mean, given that Punjab is a classic example, right, I mean, there could be a possibility that maybe, at regular intervals, we might have a marginal stake which can cause some troubles to us and probably that can keep our credit costs elevated for a much longer period? Is that a possibility? I know it's difficult to kind of foresee at this point of time, but probably should we assume that, that is a cost of kind of diversification? And also, I mean, the second part of it is, I was just looking at the vintage curve of our branches, right? I mean, clearly, the share of younger branches within the overall mix continues to go down. But on the AUM, or the cost side, clearly, we are actually getting more concentrated in top 5 states, right? So I'm not too sure how to read this whole diversification thing, both from growth perspective as well as from an asset quality perspective.

One -- so coming to your point, look, we -- I understand that the top 5 states are 70%. But yes, because of this -- because I can tell you, Umang, there was a point where if I can talk about 2 years back, 1.5 to 18 months back, Punjab was top 5 state for us. So yes, there has been a -- so look, there's no straight answer. But in our experience, diversification always helps. If you are diversified, both from the growth, from the risk, I think -- and that's what we are seeing even then the thing -- even there's issue in one state, we are able to calibrate better. But I will still stick to this diversification strategy. Also, Umang, if you see, even in Punjab, it is basically more district -- some district, which have got impacted. So it's not the full, full state. So I think we have an overall district strategy of not being more than 4% in a district. Highest district today is 1.59%. So yes, I think we are very confident that this strategy will play out. Coming again to your point that some other states can, look -- definitely, nobody can predict it. However, I can talk about 2, 3 things. One is that, that's the reason we started making management overlay. And that is why -- because its exceptional situation, we dipped into management overlay. Whenever there's an opportunity, we will keep on building this management overlay. That is one. Second is RBI has now -- since '22, it's a risk-based pricing. So we are able to have certain different yields in the states where we see the risk is higher, which will make sure that we are able to deliver ROA and ROE, cross-cycle ROA/ROE, which we are promising.

Okay. And just one last question on this. In part, I think you already -- in some of the previous questions, you have already answered this, but just wanted to pick your brains again between this whole growth and margin dynamics, right? So I mean some of the other micro finance, NBFCs have started cutting fees. Now clearly, we -- to begin with, we are -- we were and we are kind of still competitive, even at our current yield level. But do you foresee that at some point in time, pressure on yields might start coming through? And assuming that if we exceed and don't kind of pass on the benefits of operating leverage, probably those might take a backseat? Or you are confident enough to kind of to maintain this whole growth and margin mix where we are today?

I've already ordered -- sorry, I've already answered this point earlier that we are going to optimize between shareholder, customer and the sensitivity of the regulator. We are -- right now, we did not burn the ocean when we -- when the pricing was deregulated. We are one of the lowest cost to the customer. We will optimize it whenever there is any period which happens. But it will -- we will be able to maintain this whole margin between growth, margin and ROAs. So we are very confident. I don't think, Umang, there is any question mark on this point.

Next question is from the line of from Himanshu Taluja from Aditya Birla Sun Life AMC Limited.

Just a few questions at my end. Sir, when we look at the collection efficiency, excluding Punjab of 98.4%, congratulations for that. This is what you were trying to signal in the previous quarters that you were going to deliver some improvement. That's the path's clearly visible. Sir, if I look at your net NPL addition, excluding the Punjab and the impact of INR 80 crores, it looks around INR 50 crores -- INR 50 crores, INR 55 crores, which means 2% to 2.5%, 2.2% of the slippage ratio. Do you think, with this collection efficiency of 98% -- above 98%, this is a more sustainable nature of the slippage ratio one should expect?

So Himanshu, to address this question is that there is still -- there is a pool which is available beyond 90 plus, which might get eligible for a write-off, but the range would be between 1.75% to 2% of gross NPA, which is sustainable. As we have mentioned previously that this business is having a steady-state gross NPA between 1.5% to 1.8%. It is going to be continuing.

Clear. Second question, I need to clarification on the Punjab. Have you completely sold the incremental disbursement to the entire state of Punjab? Or only to the few affected districts? And how do we -- one should see this INR 380 crore of portfolio -- Punjab portfolio? Is it going to slow -- will be a declining trend from here?

Yes. So Himanshu, we have stopped complete disbursement in December. As I mentioned earlier, the portfolio, which was INR 382 crores as of December, has already come down to INR 362 crores. We are, right now, in a wait-and-watch mode. If we see that there are customers which are -- which had been paying us well, they want to renew the relationship, we definitely would look at it. But for that, we have to be confident that the situation is improving. Otherwise, right now, it is a wait-and-watch mode. And the whole focus is only on engagement, working with administration and collection.

Sure. And sir, in this nature of the business, when you slow down or stop the disbursement, you generally tend to see slightly more slippages happening from here. Do you envisage any risk from the remaining INR 360 crores? And if I include this INR 80 crores of the Stage 3 of the remaining portfolio, do you envisage any risk of further slippages from there?

No, that's what I'm saying that we have taken this decision based on the -- looking at the last 10 days' collection efficiency in the month of January. So we do not see that -- the collection efficiency will go down from there. It has more or less stabilized at a certain level, which is 5%, 6% less than what we have mentioned in our slide. So -- but we are hoping. But you're right. I mean, it's -- you have to be very mindful. So we are -- situation's fluid, but we will -- we are keeping an eye on it. And -- but yes, that's the call we had to take because the situation was slightly exceptional. But yes, we will update if any -- there's any development.

Okay. And how, sir, lastly, this is the last question, how one should see -- what's your guidance on the growth from here of the entire portfolio? Do you still expect to deliver, for FY '25 as well, around 25% sort of a growth?

Yes. We are. That's what we have achieved. But mid-20s -- yes. Mid-20s is the growth which we have been guiding. And we will -- and how both the verticals, both MFI and MSME will grow. We will give a more clear granular information in Q1.

Next question is from the line of Renish Bhuva from ICICI Securities.

Sir, just one question from my side. This is more related to Punjab again. So let's say, do we understand the state, here, issue, and it's not company-specific issue. But as a company, what are the corrective measures we are taking to make sure that collection efficiency, at least, holds up at current level and it should not deterred from current level? I mean, as a company, what we are doing to sustain the collection efficiency?

So one, we have split the branches. We've increased the -- strengthened our field. We have -- tele-calling is happening. We are working. And through various methods, we are trying to reach out to the customers to actually educate them about this mysterious element. Dedicated collection is happening. So I think all -- whatever we could do, we are trying to even use some of our good customers to talk to the other customers that, look, I mean, this will actually impact their credit but bureau score. So we are doing -- all these steps are happening other than what is happening at the sector level. There has been some advertisement, which has come out from the sector from MFIN. We, as I mentioned to you, MFIN delegation has met finance minister. We could see some action soon. But yes, that's what -- yes, it is -- also, if you see, Renish, in Slide #9, we have mentioned all this.

Yes, yes. Yes, but so I just wanted to get a sense at the ground level. So let's say, what is the center attendance on, let's say -- do we have allocated any senior resources to look after only Punjab collection? So just wanted to have some granular details about it, if you can share.

Yes, Renish. So now there are 2 Fusion Micro Finance veterans of senior level who were looking at Punjab. So -- also, the fact that senior level AVP is regularly monitoring the situation at Punjab. To add to what Devesh just said, so the entire dedicated collections team as well as the business team is focused on, not only looking at daily collections, but also going across and meeting up with customers. We are also using local level people who have been with us over the last few years in terms of impressing upon the others about this mischievousness of this particular scheme and the impact it may have on their credit discipline and credit bureau scores and so on and so forth and future possibility of getting loans from any finance company or bank for that matter. So there is complete focus on ensuring that there is normal kind of discipline coming in. Like Devesh mentioned, last 10 days, we've seen decent stabilization. And we hope with all the efforts that along with them that we are making, that will start showing results in due course.

Yes. I mean, that was my last follow-up. So basically, what you were doing at the ground, do we see some sort of initial improvement in the collection or center of excellence level maybe in first half of February?

So like I said, so there has been stabilization. Now in such a situation, we expect there will be -- people will -- people had taken a decision, which they were misled. So coming back to normal, they will also come back a little bit more slowly and gradually. But the good part is that we've not seen deterioration in the last 10 days. That's what Gaurav also mentioned in his opening remarks about Punjab. So that has been a positive.

Next question is from the line of Rajiv Pathak from GeeCee Holdings.

Just one question on the vintage. So if you look at our branch vintages over the past 2 years, I'm taking a long-term point of view, the 2-years plus kind of branches have gone up by 40% in absolute numbers. Similar is the increase in the number of customers that we do. But the average ticket is going up by 20%. So -- and it is also evident from the fact that your branch contribution of the 2-years plus to the portfolio in terms of the number of branches would be around, say, 72%, whereas the contribution is 87% in terms of the AUM. So slightly, there has been some conservativeness on the ticket front and rightly so. What would it be attributed to? Would it be the shift in the mix of the top 5 states or you may consider a change of geographies? And that being the case, if things turn out to be normal in FY '25, will we have a case for a slightly higher ticket for your vintage customers and feeding into the cost efficiencies?

So I think, more than -- so if I look at the breakup, I think more or less, I think this is a -- if you see between 2 to 3 years, branches are 185, it contributed around 16%, more than 3 years are contributing 71%. More or less, that has been the ratio. But coming to your point, Rajiv, look, we are, right now, not -- we will -- we are calibrating our strategy in terms of how do we retain our customers, especially when customers are maturing. And so we will -- we are -- we will share some of these more details in Q1 of '25. But keeping in mind our broad philosophy of marrying risk and growth. I think that is what we will keep in mind. And anything which we'll do to make sure that we are -- portfolio quality definitely remains impeccable, so that will be our strategy.

Thank you. Ladies and gentlemen, that was the last question of the day. I now hand the conference over to management for closing comments.

Yes. Thank you, everyone. We remain committed for a long term. I think that's what we are -- the kind of building blocks we are building, so thank you.

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