JM Financial Limited (523405) Earnings Call Transcript & Summary

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Kampani. Thank you, and over to you, sir.

Thank you. On behalf of JM Financial, we extend a very warm welcome to all of you to the conference call of JM Financial Limited to discuss our financial results, both for the second quarter and half year ended FY '22. We have uploaded our IR presentation, our press release and results on the website and stock exchanges, and I hope you all have had a chance to go through the same. Today, we have with us our entire senior management team. And before they delve into the details of our various businesses and performance, I will briefly speak on the new segments that we have created and take you through how we are looking at the business structure going forward. These segments were realigned to ensure a sharper focus on our clients as well as increase the bandwidth and achieve desired client focus to be able to deliver value to our stakeholders. We've classified our segments into 4 different divisions -- into a 4 different segments, and we are looking at it completely from a client perspective. The first segment is our Investment Bank segment. The Investment Bank focuses on all of our institutional, corporate, government and ultra-high net worth clients. It includes our investment banking business, our institutional equities business, our fixed income business, our balance sheet as well as international operations. Within investment banking, it includes the equity capital markets, private equity, debt capital markets as well as the advisory business. The second segment is the Mortgage Lending, which includes our wholesale and retail mortgage businesses. Wholesale includes construction, finance, project loans, loan against lands as well as structured finance and real estate, and retail mortgages include affordable home loans, small ticket loans against property as well as education institution loans. Our third segment is now a combination of our distressed credit business as well as our alternative credit business. This includes our ARC business. The fourth segment is Platform AWS. We have spun this business out of our Investment Bank, and it is completely focused on providing an integrated investment platform for all the individual clients of the company. It comprises of asset management, wealth management and securities, which we call AWS. This platform will be extremely debt and Internet-enabled and digitally focused, and our endeavor would be to be one of the leading players in each of these subsections over the next decade. With this brief overview, I will now hand it over to Shashwat. Shashwat will provide us an update on the performance of our businesses, followed by all our CEOs presenting the performance of their individual businesses. Shashwat, over to you.

Thank you, Vishal. Good afternoon, all. Before we start, I would like to bring your notice that any forward-looking statements made on this call are based on the management's current expectations. However, the actual results may vary significantly. And therefore, the accuracy or completeness of this expectation cannot be guaranteed. Our consolidated revenue for the half year ended FY '22 stood at INR 1,962 crores, an increase of 31.3% Y-o-Y. For the same period, our PAT stood at INR 378 crores, an increase of 62.3% Y-o-Y, which represents an EPS of INR 3.96 versus INR 2.56 for the same period last year. Given the uncertainties around COVID-19, we have taken additional provisions across the group to the tune of INR 208 crores for the half year ended FY '22. Our adjusted PAT, including the pre-COVID impact after noncontrolling interest, was at INR 460 crores for the half year ended FY '22. In quarter 2 FY '22, our revenue increased by 20.7% to INR 969 crores. The quarter 2 FY '22 PBT is at INR 317 crores, which is an increase of 32.5% Y-o-Y. Our quarter 2 FY '22 PAT increased by 25.4% Y-o-Y from INR 139 crores to INR 174 crores. As of September 30, '21, the net worth is at INR 7,281 crores, which translates into a book value of INR 76.35 per share. Loan book details. Our consolidated loan book stood at INR 11,072 crores, down by 2.8% Y-o-Y. The breakup of the loan book is as a follows: wholesale mortgages continue -- constitute 59.4% of the loan book, which is approximately INR 6,577 crores. The wholesale mortgage book registered a Y-o-Y decline of 21.8%. The capital market loan book constitutes 7.2% of loan book, which is approximately INR 800 crores. The capital markets book has registered a Y-o-Y growth of 18.1%. Bespoke financing loan book, which includes corporate and financing loan book constitutes -- almost 65% of our loan book, which is at INR 2,737 crores. The corporate and promoter financing book has registered a Y-o-Y growth of 70.7%. The retail mortgages loan book constitutes 4.6% of our loan book, which is at INR 507 crores. This loan book has registered a Y-o-Y growth of 59.3%. The financial institutions loan book, which is the last part of the loan book, constitutes 4.1% of the loan book, which is INR 451 crores. This book has registered a Y-o-Y growth of 19.8%. This loan book comprises of funding to fund institutional clients and portfolio purchases. Overall, our retail loan book stood at around 16% of the total loan book. Asset quality. We grew up NPA ratio of the lending businesses is at 2.3% net NPA -- sorry, the gross NPA ratio of the business at 2.3%, net NPA at 1.4% and SMA 2 stood at 4.5% as of end of September. The loan book under the relative framework for COVID-19 as announced the RBI stood at 0.87% as of 8th September. This was 0.62% as of the June 30. Leverage and liabilities. On a consolidated basis, our gross debt-to-equity stood at 1.1% -- 1.1x as of September 30. And on a net basis, it was at 0.7x. During the half year ended FY '22, we raised INR 1,369 crores through long-term borrowings. We also recently successfully concluded the public issue of secured NCDs of -- by JM Financial products amounted to INR 500 crores in October '21. We were now able to -- we were just able to diversify our investor base to include the insurance companies, pension and sovereign funds. Our borrowing mix comprised roughly of 77% from long-term sources and 23% from short term as compared to 83% and 17% as of September 30, 2020. Now I will request Atul Mehra and Anish Damania to take us through the performances and steadily update for the Investment Bank segment.

Thank you, Shashwat. A very good afternoon to all of you. Anish and myself will provide a quick update on the Investment Bank business. The Investment Bank, which is one of the key segments at JM Financial franchise, has a vintage of 4 decades. Let me first share quickly the financial highlights of this segment. For the half yearly ended September 2021, we reported a gross -- sorry, we reported a revenue of INR 628 crores, PBT of INR 208 crores and a PAT of INR 156 crores, which is an increase of 21.1% Y-o-Y. Annualized ROE and ROA from these segments were at 13.3% and 5.3%, respectively. Now let me share some insights on the business. On the investment banking business, as the market continues to be in a pink of health, we have executed several primary and secondary trades. The depth and the breadth of the market is increasing, which is led by tech and e-commerce companies and several niche companies planning to hit the market. We have a very robust pipeline, which is approximately 100 mandates across the product in investment banking business. This is one of the strongest that I have seen in my limited career of 30 years. The pipeline is true and broad-based across the 3 products, which is capital markets, private equity and M&A advisory. Long list the markets, we hope to execute and monetize this pipeline of transaction in the shortest possible window. Coming to our institutional fixed income business, the youngest business within Investment Bank. This has progressed very, very well. We have onboarded several new parties and have significantly expanded our reach in the origination and distribution capability. Within a short period of time, we are quickly now amongst the top 3 in the public issue of bonds, and we enjoy a very high disproportionate market share in the debt ETF trading. We use our balance sheet, as I highlighted earlier, very effectively and selectively for our investment banking business. Our balance sheet acts and generate significant value to the franchise, and it is built on 3 pillars: one, superior and comprehensive structuring; two, diligent risk management; and three, strong institutional partnership, which helps us in syndicating our transaction. Our bespoke loan book, which is essentially to our investment banking plan, stood at almost INR 2,087 crores as on September 30, 2021. On the private equity business, again, I'm happy to report that our private equity Fund III raise is currently underway, and we are targeting to raise INR 1,000 crores. The Fund II, which was a INR 500 crore fund, is almost fully deployed. Just to summarize, overall, we feel we are staring at a multi-decade opportunity in front of us. Hence, we continue to operate from a position of strength with a clear focus on expanding the depth and breadth of our reach, client base, capturing market share; and two, very high-quality execution. We are expanding our teams across the segment wherever it is needed, as is reflected in the financials also. And we continue to believe and maintain that Investment Bank will be consistently generating a lot of free cash flow, which we bought the group. Thank you. Over to you, Anish.

Thanks, Atul. I'm Anish Damania, and a very good afternoon to all of you. So within the Institutional Equities business segment, institutional research is our pillar of excellence. We are positioned as a thought leader and have been expanding our coverage on stocks and sectors. At present, we cover about 215-odd stocks, but we plan to take it up to 300 stocks over the next 12 to 18 months. Looking into account, the fact that institutional clients are increasing the number of companies which they own. We are also briefing up our research coverage. Specifically, on the digital side over the last 9 to 12 months, we have added 3 people on to this segment, and we feel that this will be one segment where we'll continue to deploy more resources. We have to capture other streams of working revenue. We have also strengthened our derivatives desk as we envisage substantial growth opportunities in that space. I would now like to hand it over to Manish Sheth and Shashwat Belapurkar to provide an update on the Mortgage Lending business.

Thank you, Anish. I'm Manish Sheth. Good afternoon, all. For the half year ended September 2021, the Mortgage Lending segment had net revenues of INR 367 crores with a pre-provision profit of INR 315 crores. PBT and PAT for this segment stood at INR 167 crores and INR 55 crores, respectively. Annualized ROE and ROA for the segment were 6.5% and 2.7%, respectively. In quarter 2 FY '22, our net revenue and pre-provision profit stood at INR 191 crore and INR 162 crore, respectively. The PBT and PAT stood at INR 96 crore and INR 50 crore, respectively. The overall loan book stood at INR 7,102 crores, which is down by 5.6% year-on-year. Coming to the retail mortgage businesses. The JM Financial home loan is the youngest business of JM Financial Group, built over the last 3.5 years. As any retail business would need over the period, we have invested heavily in building right talent, technology, policies and processes. During the inception phase of our venture, we have emerged strongly from both asset side as well as liability prices crises in the form of witnessing events like demonetization to IL&FS crises to COVID-19 pandemic. Our 3 key philosophy has helped us a lot, which is our centralized credit underwriting model, stringent collateral policies and sharp collection focus. Our go-to-market strategy is very micro, meaning we have a micro market level credit profiling and collateral policies. We follow hub and spoke strategy, penetrate our presence in Tier 2 and Tier 3 cities. We have very granular retail mortgage book of INR 507 crores across 4,700 customers with an average ticket size of 11 lakhs, carrying average yield of 13.3% and an LTV of 55%. Our book is well spread across 8 states and 3 products, namely home loan, which is 75%, smaller ticket loan against property of 18%, and educational institution loans of 8%. Post COVID wave 2, our gross NPA is less than 1%, and we have a collection efficiency of around 99%. We have put all the building blocks in place. And after investing more than 1,000 days in retail lending business, we are all well positioned for our next growth phase in our journey. We have used the opportunity provided by the pandemic to hire right talent, expand branches and implement technology-led origination and underwriting capabilities. We have now present at 51 branches with 500-plus people. Our targeted quarterly disbursement is around INR 150 crores for next 2 quarters, and our endeavor is to deliver more than INR 200 crore quarterly disbursement from next year. All in all, we are looking out for doubling our book at the end of next financial year by keeping our asset quality in check and reduced cost of funds. I would now hand over to Shashwat Belapurkar for the Wholesale Mortgage business update.

Thank you, Manish. On the Wholesale Mortgages, the loan book has reduced from INR 7,166 crores as on June '21 to INR 6,595 crores as of September '21. The GNPA and NPA have reduced to 2.5% and 1.7%, respectively, as against 4% and 2.3%, respectively, 2Q '21. Our approach continues to focus on handholding our COVID impacted borrowers to help them through this difficult time, focusing on them completing the projects and putting down the completed inventory. We are also watchful for a potential wave 3. Despite giving some of our borrowers, COVID relief, the escrow collections continue to be healthy and are nearly at pre-pandemic levels. We are sitting on a reasonable amount of cash, which allows us to grow quickly and capitalize on opportunities as they present themselves. Our existing lenders are looking to increase exposures while new lenders are looking to start relationships. We are actively trying to negotiate existing rates down. Given the strong tailwinds in the sector on account of high affordability and various incentives by multiple state governments, we continue to focus on strong cash flow-based project financing transactions from our stable of loan borrowers and selectively add new clients. Moving on to the next segment, which is Alternative and Distress segment. On the Alternative and Distress segment, we are in the midst of launching new AIF, focusing on performing credit, ITs and distress credit and real estate. I would now like to hand over to Anil Bhatia to update on the distressed credit segment -- business.

Thank you, Shashwat. Good afternoon. I'm Anil Bhatia and I'll be talking about distressed credit business for JM Financial ARC. On the distressed credit business, our AUM reduced by 6.5% year-on-year to INR 10,687 crores. This AUM is well diversified into multiple sectors. For the half year ended September '21, a segment had net revenues of INR 232 crores, with a PBT of INR 196 crores. PAT from this segment -- PAT from this segment grew to INR 89 crores. The gross debt to equity stood at 1.1x with annualized return on equity and return on assets at 17% and 7.6%, respectively. In quarter 2, our net revenue stood at INR 68 crores. The PBT and PAT stood at INR 53 crores and INR 24 crores, respectively. JM Financial ARC is positioned as a key player in the industry with over 12 years of experience. And currently, in terms of AUMs, we are at #3. For the past 2.5 to 3 years, the focus remains on recovery and resolutions, which will continue until the end of this financial year. The business has a strong track record of resolution. Total recoveries have been INR 11,125 crores till date. And the recoveries in part 3.5 years have been INR 7,615 crore. In spite of challenges of COVID, including the ferocity of the second wave and that the courts were shut for a long time, we have seen very healthy recoveries. Recoveries from April '20 till September '21 were INR 2,578 crores and recovery in the last 12 months from October '20 to September '21 have been at INR 2,377 crores. The key focus over the years for us has been the acquisition of assets at the right price under the right structure. One of the key differentiator for us is that almost all of our deals have a unique structure to protect our investments and maximize returns. The business is expected to grow from Q1 of FY '20 to '23, and we will be pursuing the co-investment model with strategic investors, financial investors, including the AIF fund from the JM Financial Group. We are seeing significant interest from these strategic and financial investors. This co-investment model with third-party investors will ensure more efficient use of ARC balance sheet by reducing the ARC exposure and focusing on annuity revenue streams. From our existing portfolio, we -- there are some key accounts where the resolution process is in very advanced stages and completion of the same continues to be one of the key priorities. We have a couple of accounts where we are facing some headwinds and challenges, namely Unitech Limited and SevenHills. In the Unitech account, the challenge is primarily on the legal front as a matter is an honorable Supreme Court. And the new Board and management appointed by Government of India has submitted a resolution plan in the Supreme Court, which is detrimental to the interest of the lenders. However, we have made advocate representations and the honorable Supreme Court has directed the new Board to arrive at an amicable solution with lenders, and we are hopeful that an acceptable solution will be arrived at shortly. In the case of SevenHills the challenge is primarily due to outbreak of COVID-19 and the hospital has been used by BMC as a key facility to treat COVID patients. This is the largest facility ex-China in Asia for COVID treatment. The resolution process under NCLT, thanks to COVID, is currently at a standstill. Okay. We will be activating the NCLT process once the COVID situation is normalized and the hospital is no longer required to be treated as a dedicated COVID facility. Thank you all. I would like to hand over now to my colleagues, Subodh Shinkar and Amitabh Mohanty, to take you through the AWS business platform.

Thanks, Anil. I'm Subodh Shinkar. Very good afternoon to all of you. For the half year ended September 21, the platform AWS business segment at revenues of INR 323 crores with a profit before tax of INR 57 crores. Profit after tax for this segment stood at INR 42 crores. The annualized ROE and ROA for this segment were 11.3% and 2.9%, respectively. In Q2 FY '22, our revenue stood at INR 180 crores, the PBT and PAT stood at INR 44 crores and INR 34 crores, respectively. On the securities business of Platform AWS, which is a research-based equity advisory to high-net-worth and retail customers, we operate through our own branches and franchises. We have been growing the franchisee network to almost INR 601 crores -- 601 franchisees to 181 cities. The first 6 months has been particularly good for this business, where our average daily brokerage has grown by almost 50% compared to the last year average daily brokerage. Market last 12 months have witnessed a significant growth in digital account opening and online trading, and this is going to be the focus area for us. Our online trading app, BlinkTrade, is gaining steady traction and we are continuously upgrading it to improve customer experience. We have been able to increase our online transaction percentage to 55% compared to 39% last year. The majority of our online clients are trading through mobile trading app and 80% of our accounts opened through digital mode. We have demonstrated INR 15,000 crores-plus peak volume through online platform, demonstrating scalability of the platform. So we will now focus much more on acquiring clients digitally and give them seamless DIY journey through our online trading platform. On wealth management business, our Private Wealth segment caters to high net worth individuals with a AUM of INR 63,760 crores, which is an increase of 18% Y-o-Y. This includes 44% equity assets. As all of you know that we had started our Elite Wealth business in 2019, catering to affluent clients. We have quickly ramped up to 56 advisers across 8 locations with a AUM of INR 793 crores. This is demonstrating 200% growth Y-o-Y, and this business is likely to grow much rapidly. Our retail wealth business, which is predominantly deals with retail customers of 14 lakh customers through a network of 7,000-plus active independent financial distributors. It recorded a steady growth of 20% Y-o-Y, and its AUM stands at INR 18,841 crores. We are focusing here much more on online and digital capabilities. We have seen a surge in online transactions over here. Almost 90% of our new SIP registered are through online platform. We also received corporate agency license for insurance distribution. On PMS side, we have grown our AUMs to INR 811 crore, which is 46% Y-o-Y growth. And we are also strengthening our team. Mr. Vinay Jaising, having a fund management experience and equity research background, has joined us to co-head with Rakesh Parekh, and we are also strengthening our research team and marketing team to grow this business further. So just to summarize, we have been growing in all the business segments. And our going forward, focus is going to be much more on the digital trading businesses, and we will gear up for digital marketing, online transactions and also enhance the customer experience. I would like to hand it over to Amitabh to provide an update on asset management business.

Thanks a lot, Subodh. Good afternoon, everyone. A quick run-through of the initiatives we are taking in the AMC business. From the number's perspective, our average quarterly AUM of the mutual funds stood at INR 2,089 crores, comprising INR 551 crores in equity and INR 1,538 crores in debt. The AUM of our PMS business, as Subodh mentioned a bit earlier stood at INR 811 crores. In the AMC, we are now embarking on a journey of growth. In the initial phase of the next couple of years, the following initiatives are been taken. We're strengthening our investor team. Senior professionals like Prashant [ Shinde ] joining us as CIO that now we have accomplished senior professionals and CIOs for both fixed income and equity. We'll also be adding to our in-house research capabilities on both equity and fixed income. Our branch network sales teams are all been boost up. We're also looking to hire senior industry professionals in the sales vertical. That's at an advantage. Product marketing and communication teams are also being strengthened with seniors hires already in place. While we are strengthening our branches, we do believe that an important vehicle of the future growth will be the digital ecosystem. We are committed to building this up. You can expect our digital offerings in the form of our website, investor and distributor portals, social media, et cetera, to give the enhanced user experience going forward. We intend to have products across both -- across categories and asset classes. Hence, going forward we'll be offering products both in the passive as well as in the active space across the fixed income of the ECB asset class. We intend to set up a dedicated passive team in the future to drive the passive strategy. We want to position our AMC as a solution-oriented AMC. So over a period of time, we will move from a product focus to a solution focus. So we intend to bring a lot of innovation to our offering's to point wrappers, like thunder points, et cetera, which intend to address needs of our investors in the form of solutions. We are going to be focused on our brand visibility and presence, not only in the digital space, but also in enhanced engagements with our investors and partners. We'll be creating a distinct brand image, which while building on the group brand will also highlight the mutual fund entity. While we build out over the next few years and lay a strong foundation? We would request patience as the growth in the next couple of years will continue to be muted accompanied by capital burn. The initial phase of rebuilding should be followed by an extended period of growth. That's it from me. Thanks, everyone. With this, I would like to conclude, and we are happy to take any questions. Over to the moderator. Thank you.

[Operator Instructions] The first question is from the line of Shalini Vasanta from DSP Mutual Fund.

This is Vivek Ramakrishnan here. Sir, I just wanted to consider the wholesale mortgage book, In terms of -- you've given a couple of pages where you talked about resolutions and how long it'll take. Given the positive momentum in real estate, how hopeful are you that you'll be able to bring down the NPA as well as the Stage 2 assets by March '22, which is the deadline again for many of the resolutions?

Yes. I'll take that question. The resolution, I think our confidence on meeting the time lines on resolution was pretty high in sort of the last quarter of last financial year, but there has very clearly been a COVID wave 2 impact on some of the accounts and some of the assets where clearly, the resolution will be delayed. Some of our additional provisioning that you have seen has been actually on accounts which have been further severely impacted because of the COVID wave 2. And therefore, there is a delay on some of the resolutions on those accounts. The delay, I mean, it's hard to give you a number. But if I were to put a number, you can add around 6 months more to our previously assumed time line of 12 months to 18 months. So that's my answer on the time line for resolutions.

Okay. Okay, sir. So in any of these tough projects are -- projects which are in a bit of difficulty, are you seeing momentum in sales, is construction happening? Or a lot of them is going to be resolved outside by a new developer coming in or a selling of other collateral, et cetera?

Yes. So I think it's a mixed approach. I wouldn't say it is -- we are not looking at outside developers taking some of these projects over. But by and large, I would imagine almost 70% to 80% of the resolutions is through further construction activity, through some DCCO restructuring, which we had done during the Phase 1 of COVID. And on Phase 2, we've given them slightly more extensions of around 2 to 3 months in a few cases, purely because sales have slowed down for 3, 4 months during March all the way till July. But generally, on the sales side, we are seeing a very, very strong momentum. One of the reasons why the book has actually run down despite us working hard on growing the book is because the sales cycle in real estate is very strong. And therefore, our repayments and as mentioned earlier, that our escrows are running higher than now pre-COVID levels and also projects which are coming sort of towards the end stage of sales are getting refinanced by some of the other lenders. But on the resolution, we have a mixed-bag approach. There is no single approach. But as I said, that 70%, 80% would be pushing construction and pushing sales.

The next question is from the line of Kunal Shah from ICICI Securities.

Yes. So a couple of questions. Firstly, in terms of the wholesale mortgage book. So, in fact, that has also run down. Last time, we highlighted that we will be cautiously evaluating the opportunities, and there are strong tailwinds in the sector as well. So what would be the outlook of -- outlook there in terms of the growth? And now were there any maybe some key repayments during the quarter, which led to the decline in the wholesale book?

Yes, yes. So we had -- we did have -- Kunal. We did have some chunky repayments. We had 1 or 2 large loans which we have got prepaid. The focus on searching for growth now continues. I mean there is no question we want to grow. But as I said, that our escrows are running very, very strong. There's almost INR 400 crores to INR 500 crores of collection every quarter. And if you look at developers today, they are very focused on sales. Even if you see new project activity, or new land acquisitions, right, they've just about begun. So we are looking at transactions. But as you know, we will be very strict on the risk return criteria and the pricing criteria. And hopefully, I think over the next 3 to 6 months, barring no wave 3, I think the book will see very, very strong growth. We're sitting with a huge amount of cash surplus. It's only a matter of time where internally we are very confident of clearing underwriting and allowing the teams to undertake more transactions.

And any pipeline in terms of the proposals, which are there currently?

See, the pipeline is huge. I mean if we were to sort of a manner of speaking, losing the tap, real estate is not a problem, right, to be able to grow is not a problem. One more thing, Kunal, is important to understand is that a lot of the origination team also is very focused on resolving some of the assets which are under tail, right? We are assisting our recovery team along with the originator who have the relationships with the developers to be able to make sure that our asset quality remains pristine and the collections from our assets which are suffering are very, very strong. And therefore, there is some time involvement of our entire origination team, which is also going on the collection side. I mean you would be pleased to know that despite our assets going down overall Q-on-Q, we still reduced our NPA as well as our SMA 2 numbers. And this is a very good reflection of how we are actually managing the business. And we are fully out there looking for transactions. But yes, it's the ratio in approval in terms of going to committee and getting approvals was, say, 1 out of 4 transactions. The ratio today probably is 1 out of 6 or 1 out of 7. As soon as that ratio improves over the next 6 to 9 months, I think the book will grow pretty fast. But I must say that at least for the next 3 to 6 months, I'm still going to be cautious. I'm still concerned about a third wave. I think a lot of the world is taking COVID for granted, assuming vaccination has taken care of all our problems. I think one has to be watchful at least for the next 3 to 6 months and then take a final call on how one grows the book here.

Sure. And secondly, on Investment Bank. So overall, revenues have been flattish quarter-on-quarter. But when we look at in terms of the profitability, in fact, that's down quite significantly. So what has actually led to this? Is it like more of a cost to income or a provisioning?

No, no, it's got nothing to do with the Investment Bank profitability. We have a real estate book, which is sitting in our Investment Bank from the past before the transfer of the book to JM Financial Credit Solutions, which is the mortgage business. We've taken some provisions in that mortgage book, which is a onetime event. And that is the reason why the investment banking profitability was slightly -- Investment Bank profitability was slightly subdued for last quarter.

Okay. So would that be quite high in the range of INR 35 crores, INR 40-odd crores of the overall provisioning of...

Yes. It's around INR 30 crores. INR 30 crores of total provision. Yes.

Okay. And the size of the book out there? Because when we look at the overall book that is INR 7,100 on wholesale, it is already INR 6,600. So it doesn't seem that is more than INR 4,000 crore, INR 5,000 crores. What would be the kind of book which is there on which we have created this?

INR 750 crores odd. It includes real estate and hotel assets.

Yes. So the 17% of this INR 3,800 crores?

Yes, that's right.

The next question is from the line of Manoj Dua from Geometric Securities.

I have one question on the wholesale mortgage, and it's been partially answered. So we are more watchful of the third COVID wave for the lending purpose in wholesale mortgage. Any other global or domestic macro trend, we are which worried about -- which we're keeping watchful for apart from third COVID wave? And then what I'm assuming from the commentary the third wave COVID wave doesn't come, we will be able to scale this book very fast?

Yes. No, that is absolutely right. So see, in general commentary, I think I'm sure you would have read about concerns about interest rates being higher next year, supply-side shocks further increasing inflation. You've seen oil prices almost $85. People are talking about oil crossing $100 very soon. So there are a reasonable number of shocks, which can actually hit various economies over the next 1 year. It's hard to predict which will hit when. But specifically, for real estate, I think COVID is very important because the lockdowns, the shutdowns, the stopping of construction activity, the blocking of sales, this creates a lot of issues over multiple weeks, and therefore, one has to be careful. But having said that, I don't think we are not growing. We're looking to grow. We are constantly looking for assets. It's just about being careful when you're underwriting. We have this COVID overlay in terms of our risk metrics where we are trying to understand that if you're underwriting a certain collateral covers, if there is a COVID wave, which is bad, third wave, which is bad, what happens to those covers, right? How do we manage after that? So when you put those overlays, suddenly, the risk pricing completely changes, the collateral requirements that you want to -- for approval of that loan completely changed. So that's just a process. It's not about not wanting to grow. So I think you're right in saying that, yes, if things are completely normal this quarter, next quarter, I think the growth will be very strong. There is no reason why the book can't double in 18 months. I mean we have the capacity internally, both from a capital as well as a people perspective to actually double the book in 18 months. Otherwise, I think general sense, I think -- my personal feeling is that next year same time, we'll be looking at a very different world, a very different market. There are excesses all over the world, which have been created, and there's no 2 ways about it. Certain sectors, valuations are absolutely crazy and absurd, but there is liquidity driving a lot of that. Look at the IPO rush, whenever a bunch of smart promoters want to IPO, the seller is always smarter than the buyer and you're seeing that phenomenon today. While our Investment Bank is completely enjoying the ride, and they're hoping -- as Atul said earlier, hoping to complete their extremely strong pipeline of 100 transactions. We are also working to make sure that our fixed income, our bespoke financing, our financial institution financing, all of the fixed income products are strong and ready. So when the equity cycle sort of abate it becomes a little slow, we will be able to still grow and maintain our earnings and margins going through fixed income next year and next to next year. So our entire diversified model that we've built right from Investment Bank to Platform AWS with distressed credit as well as wholesale mortgages will keep our earnings strong, keep our earnings defensive and at the right time, when all engines fire show a tremendous growth.

Okay. So let me come in to that where you said there are global macro sectors, which like interest rate, shortage of things. And this COVID thing is a little unusual as a shock because when you do a lockdown, and you are not allowing someone to sell. So that's a different kind of headwind which were never earlier heard of. But every year, there is a different problem globally or domestically, these papers are for 20 years, but what I have seen in the last 20 years of investing. So how to create a -- on lending is a concavity, you cannot have a much return if the bad things -- good things happen. So lending has to be prudent. But how to think in terms of every year, there are different problems leaving this COVID thing? So what I'm assuming is that the COVID doesn't come, how we are able to -- how we'll be sort of growing even with the problem challenges thrown by all the factors?

No. So I think those are macro cyclical factors, right, which we've also seen in the last 20, 30 years of our operations have been able to grow. That is a challenge. I think the matter that I was talking about is specific to how we are evaluating real estate projects looking at a COVID lens, right? So we've seen in wave 1 and wave 2, the real estate assets at significantly impaired. That is a very different question. As I said, for example, we feel that fixed income will have a very strong play over the next 2, 3 years, right? And we are completely geared up for that, and therefore, we'll be able to grow. Like for example, on Platform AWS, we're investing massively in technology and digital, right? And that's going to be the way we can acquire our customers. And that we have a decade-long plan to build a very big business over there. In mortgages, you're building retail home loans, right? And we've done a phenomenal business built over the last 3.5 years, very granular business, INR 10 lakh, INR 11 lakh, INR 12 lakh loans, right? 4,000, 5,000 customers with 50 branches. In the next 2, 3 years, we'll be at probably 100 to 150 branches, right? Deep distribution, direct origination. So it is a -- we are building on each of those verticals for growth in India. So that -- where we face cyclicality largely is going to be in the Investment Bank segment and that we will manage. And we've done that in the last decade or so. When equity slows down, we have enough of advisory, enough of financing and fixed income that will take over the growth there. Also, if you see our peak-to-peak profitability, if you look at our P&L from a 10-year or a 12-year or 15-year perspective, in the Investment Bank segment also every 4 years, we more than doubled up of it. So what happens is we do go through a down cycle, but you should be well prepared for it to come out stronger every time.

So can we double our loan book in 2 years and the COVID third wave even happen, it could be a passing shower, it won't be a permanent thing...

Yes. That is very easy to do today because the loan book today is quite small, right? I mean it's degrown. Our fixed loan book in real estate was INR 11,500 crores, it's down to INR 6,500 crores. So today, it is very easy. See, the point is our firm should be able to deliver a very handsome earnings growth this year versus last year without really taking any additional risk. And I've always maintained that real estate is the sector will always need debt capital, whether it is land finance, construction finance or write-down to mortgages, all loan against properties, right? If you look at world over, the biggest leverage market in the world is real estate. Any country in the world, you pick any country in the world, the biggest market for debt borrowing has always been real estate. And that will continue to be. So the point is today, when we are seeing uncertainties, when we are bouncing back from COVID-19, but we are still seeing supply side disruptions, we've seen cost of construction go up by 16% to 17%. I mean steel is up. Cement is up. Ceramics is up, right? We have to model things properly when we are underwriting and giving all these developers loans from 4 to 5 years' perspective. Yes. So it's just -- it's about our detailed processes. We're evaluating transactions. It's just that we're asking for more collateral and probably asking for higher rates. Nothing else. I don't think the challenge is in really doubling the book here. I don't see any challenges because our debt equity, for example, our net debt to equity is 0.7%, right? And looking at our ROA profile. Our ROA profile is just fantastic. I mean we generate 4% ROA continuously. So for us to be able to just -- we are 1.5 turns of -- 2 turns of debt over the next 2, 3 years, it will be an 18% ROE business.

As shareholder, we are waiting for further growth in the wholesale mortgage for a longer time and hope we will get a longer period of growth from this -- after 6 months.

Not to worry, you'll get it.

[Operator Instructions] The next question is from the line of Anurag Mantry from East Bridge Advisors.

Just had couple of questions on the real estate space.

See, I can't hear you clearly. Can you speak up a bit, please?

Am I audible now?

There is some noise and disturbance when you're speaking.

Okay. Just -- is it better now?

Now it's better, now it's better. Go ahead.

Yes. So just on the real estate part, just had a couple of questions. Firstly, I just wanted to understand if there's an overlap in the [indiscernible] book that we had with the NPA or the [indiscernible] that you disclosed -- then any sales to [indiscernible] is there any overlap research over there? That's one. The other -- I think you alluded to that in your previous answer. Just wanted to understand sort of the eventual hiccups that you're looking or given some of the security covers that you have in the disposals that you mentioned, assuming that there is no third wave? In that scenario, do you see that these covers are -- the provisions that you created are much higher than required or they were still be quite to that extent? And the last one is basically on the longer-term profitability. I think you mentioned that the Q2 get sort of higher even more cover. But I think going forward, the market is also consolidating a lot more, and the quality of developers is also lot better that you would probably be able to SMA 2. So what sort of impact in that had on the [ EVs ] and the overall profitability, that's from my side?

Yes. Let me just start with your third and second question. I was not clear on your first question. So your third question, yes, there is a big market share shift which is happening to the larger developers. I would say medium-sized and larger developers and also developers who traditionally have enjoyed the benefit of stronger balance sheet and lower leverage and have been able to complete their projects. And -- but having said that, if I look at -- just if I look around me simply in the city of Mumbai, specifically in the last 2 to 3 months, a lot of the smaller developer projects have restarted, right? So once you see sales visibility, a lot of the projects that are stuck, a lot of the projects that were underwritten by smaller developers, they have also restarted, and I think that will add to the sales momentum. It may not add the sales momentum in a very large way, but that will add to the sales momentum. Now we do not bank or we do not work with these smaller developers. We actually work with the midsize and the large size developers. And therefore, our pipeline will remain pretty robust. But having said that, we are working on a strategy to see if there are low levered, high-quality projects with even the smaller developers, which we are able to underwrite and create a team to underwrite the same, where we will be able to get higher returns and as well as higher collateral from some of these names. So we are working on a strategy to see if we can work with the smaller developers, and we will be clear on the same in the next 6 months to 9 months. But yes, the demand from our set of clients, the midsize and the large developers, continues to be very strong. I think your first question was around DCC. I couldn't get that properly. Your second was around security cover. Security covers have eroded in the wave 2 further to where they were in wave 1. But in some of the projects, which are under DCCO also in the SMA 2 category, the sales have been very good and very strong. Also because we completed construction of many of our projects and kept the spending on for construction, hopefully, we are going to see a stronger sales cycle in the next 6 months to 9 months, and therefore, the cash flow recovery will be very strong. For example, as I mentioned earlier, even the September quarter, the cash flow has been very strong from sales. So I feel that if there is no wave 3, I think we are more than adequately covered. We may have to make certain small provisions in some of the accounts on a delayed DCCO basis, which have been impacted by wave 2. But I don't see that being a meaningful number, and we'll evaluate that in the December and March quarter. But barring any COVID wave 3, I think we are more than adequately provided. And we are anyway very prudent. So we always take a little bit of more provision compared to what I would imagine would be considered a normal provision. On DCCO, I couldn't get your question. If you could just repeat the question?

Yes. I was just referring to, is there any overlap between the DCCO accounts and the SMA that you disclosed or the NPL?

No. There's no overlap because see DCCO is there is a principal extension. And the reason the principal extension was given is purely because of COVID. And so there could be maybe 1 or 2 accounts at max, but as far as I remember, in the June quarter, they were purely 0. There was nothing which is overlapping.

Right. And I think that number was about INR 1,300 crores in the past, right?

Yes, it's roughly 22% of our book.

The next question is from the line of Shubhranshu Mishra from Systematix.

First off, this was being one of the debt explorations in terms of wholesale mortgages, there's a great understanding of the business. My compliments for that. What I wanted to understand in the wholesale business is that why is the cost of funds not coming off, it's still at 9.8%? And what was the previous for the quarter which was at around ballpark 10%? And how do we go about reducing the cost of funds? What is the structure of the liabilities here in this business?

Yes, sure. Shashwat will take the question on why the cost of funds is, where it is, coming down, going up, how do we see it and touch up on liabilities.

So the cost of funds has been slightly higher because as we're coming off the high credit costs for -- especially for non-AAA clients, one of our important tasks this quarter is to ensure that the existing credit spreads, especially on the banking side are reduced. So if you see previously, we used to borrow at slightly elevated credit costs -- credit spreads over MCLRs, which are now reducing, number one. Our capital markets cost of funds is definitely lower for sure in the term side as well as significantly lower on the shorter side. So that's one thing. Second thing is just on a specific -- ask specific on the positive mortgage side business, a large portion of the wholesale mortgages book is funded by the -- by long-term liabilities. So we've actually paid that term spread. And you see that as the -- if and when the rates go up, it will work in our favor.

Okay. So a fair assumption that the cost of fund ballpark would remain at around 10%, is that a fair assumption?

10% or probably lower, probably lower. We are actively working towards reducing it, but that would have to be fair.

Okay, sure. And if I can squeeze in one more question given a form that we have such a great understanding of how wholesale mortgage work and's how we go about selecting the developers. It is a putting a comparing to a lot of marquee housing finance companies for the home loans. So the also enter the REITs market by any time? Are we evaluating there?

Not really, no. No.

Ladies and gentlemen, this was the last question for today. I would now like to hand over the conference over to Mr. Shashwat Belapurkar for closing comments.

I thank for the participants for taking time to attend this call. And in case there are any clarifications needed, please feel free to reach out to our Investor Relations team. Stay safe and wish you all a very happy Diwali and prosperous New Year. Thank you.

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