Mahindra & Mahindra Financial Services Limited (MMFIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mahindra Finance Q1 FY '21 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. Abhijit Tibrewal. Thank you, and over to you, sir.

Yes. Thanks, Aisha. Good morning, everyone. I take great pleasure in having with us here today the senior leadership team of Mahindra Finance. We have with us Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. V. Ravi, Executive Director and CFO; Mr. Rajnish Agarwal, EVP, Operations; Mr. Dinesh Prajapati, SVP, Treasury and Corporate Affairs; and Mr. Rajesh Vasudevan, SVP Accounts. They are here to discuss the company's performance in Q1 FY '21 and the business outlook going forward. We will have a Q&A session post this discussion. Let me now hand the floor over to our honored guests from Mahindra Finance. Over to you, Mr. Iyer, to share your opening remarks on the results. Thank you.

Thank you. Good morning, everybody, and welcome to this call. So let me first begin by saying we are very excited with what we are seeing in the rural market. And I have been saying this for a while now that we definitely see the rural turnaround story to be much, much better, much faster than what we see in the urban markets. And we are fortunate that we are a very rural-focused company with a very deeper penetration. It's also very exciting for us to look at almost all our branches are up and working. We have close to about 1,100-plus branches, where we already are seeing where our employees definitely are in action, but we also see a lot of footfalls from the consumer. The dealerships are all open and operating, and we have smart branches, about 300-plus smart branches operating, our dealerships are all in action, and we see a lot of footfall even at the dealerships. So I would think that the rural buoyancy is very clearly visible. If I look at what we saw between April, May and June, I think sometime we had a call in May, and I'd said that April was a disaster from an overall collection and business perspective because it was the first time that the lockdown was announced, nobody knew next what, all branches were shut, no dealerships open. And therefore, there were absolutely no business volumes and there was hardly any collection. We had about INR 500-odd crore collections in the month of April. As we marched into May and we closed May, we saw that volume of collections doubling, and we also saw some marginal improvement to business volumes. But June was a great month and therefore my request for everyone would be to look at the total disbursements or collection as a 1-month action and not a 3-month action. And in the month of June, we saw about 30,000 vehicles is what we transacted. And we collected about INR 2,200-plus crores from various consumers. Again, a very important feature of this is, while you recall I said about 75% plus consumers have taken moratoriums, but 40% of the customers have actually repaid installment during this period, which is a great sign, and it's an indicator of how the rural cash flow is panning out. The harvest was good. The overall yield was phenomenal. The support price was good and very interestingly, the cash flows also came in on time, and we see buoyancy continuing even in July out of the farm cash flow. So definitely, we see things changing for good from rural perspective, both from business and collection point of view. What we have though decided for sure is these are times to really watch them very closely, to have a very close look on a month-to-month basis and not really forecast for 3 months down and decide only that way we will go. So we would look at it very closely. Both in the fourth quarter and in the first quarter, we did make some aggressive provision, and that comes from our analysis of area, certain locations, certain products, certain profile of consumers. And we think that we have taken that position of wanting to provide on the basis of these parameters so that we are adequately covered for any exigencies that may come through if there was another lockdown to happen in some of these locations. I think from a product perspective, tractor is something that definitely reflected phenomenal buoyancy, and followed by the pickup kind of vehicles, small cars, preowned vehicle, small LCVs are the segment where we saw good traction, but heavy commercial vehicle, in our opinion, could kind of take much longer than the other products, for sure. And the taxi aggregators, while they are returning back to activity, but obviously, the volume of business for them is insufficient, and therefore, they could take a little longer than expected. So these are the 2 segments which may take a little longer, and we are taking a stance to cover them up sufficiently in our provisioning when it comes to providing for these segments of consumers. I think one of the constraints that we see surely out there is the production constraints of OEM, their ability to make sufficient vehicles available or tractors available. If enough of supply was made available to the dealers in the month of June, our numbers actually could have looked even better. And therefore, production constraint has been one of the reasons, even for preowned vehicle. While, the demand is definitely high, but because of not too much of exchange program that's happening, not so much of repositions by finance companies, so therefore, the supply side for preowned vehicle is a little subdued. And until that picks up, converting the demand into a real credit could take a little longer. But having said all of this, I think the July-September quarter, if you look at on a very short-term basis, may not show reflections of all changes already. But clearly, the direction would be towards the positive trends that we are continuing to see in the rural market. But post October, that's the festival season onset, through March, as we move towards March, we would very strongly believe that you can see a lot of buoyancy, of course, with the caveat that this COVID with vengeance should not be repeating and entering into the rural market. Rural is definitely well insulated from what we see in the urban markets. And even if there are pockets where you have these problems, they are a little widespread and not concentrated. And therefore, we see activity levels continuing to happen. From the liquidity perspective, I think we are extremely comfortable. Our ALM is perfect match on an every-bucket basis. Also that whensoever we have reached out to for resourcing for ourselves, whether it's a bank, the mutual fund or our bonds, all of that has received a lot of positive traction, and we are sufficient with our fund position to be able to meet all our liabilities and meet the interest servicing requirement as well as fixed cost necessities. If you recall, I had also talked about our cost rationalization approach. And my request would be, don't look at the cost drop that you saw in this quarter to be something of a permanent in nature all-time going forward to this extent. Definitely, there are one-timers in this, like, for example, because of the lockdown situation the traveling have been much lower, so the traveling cost, obviously, has been much lower, but as markets open up, as the business starts to happen and collection starts to improve, I'm sure people will need to travel, et cetera, and there will be some cost that would come back from that direction. But nevertheless, we are confident and very confident about at least a 15%, 20% drop in the overall cost that we have taken very, very strong and specific initiatives, like whether in the branch rationalization, with the rent renegotiation, whether the security services, whether the BPO services, whether the branding and advertising cost and even using technology more efficiently and bringing down the people cost in terms of traveling, et cetera, will lead to that. When I talk of this, I am not yet talking about the people cost reduction. Definitely, one decision that we have taken is that we are not recruiting as we were in the previous years until things completely normalize. And therefore, you would also see some saving arising out of no major addition happening. We have moved about 5% of our fixed cost into variable; that would bring about some change for sure. And we have taken a view on the increments to be deferred for the first quarter or second quarter and then a view would be taken only post thing starts to happen. So those could be some additional benefit that could flow this year, but they would -- over a period of time, possibly will catch up. But I'm reasonably confident and sure that from our cost level that we were, 2.85%, 3% kind of a situation, as I said last time as well, we have taken a very aggressive stand to bring it to 2% level. Not in a hurry, will that reach to 2% level, but we will move towards 2.6%, 2.4% before we reach the 2% level, and we have very clear visibility of all of this. So net-net, if I have to kind of summarize what we see in the marketplace, I think we are very, very comfortably poised to get the benefit of what's happening in the rural market. I just want to draw reference to one point-of-time activity. The rural completely depends on 2 cash flow, which is the farm cash flow and the intra cash flow. The farm cash flow for the first harvest was very good. Monsoon is on time. Widespread sowing is very high, and therefore, every indication that the second crop will end up to be very buoyant. So the farm cash flow is a fixed situation from improvement very clearly visible. So far as the infra cash flow is concerned, all of us are exposed to this ranging of the government focus in the rural market. We are seeing in many pockets, the mining opening up. We are seeing very clearly coal auctions beginning to happen. We are seeing road projects once again beginning to happen. Put all of this together as well as from the state level various projects, the 2 together will drive the infra cash flow. Therefore, if you go back to 2010-2014 kind of a period and look at the rural market, when both the farm and rural cash flows were doing well, rural was absolutely buoyant and we got all the benefit. Our hope and belief clearly is in that direction, that between 2021 to '24, you would see most of these infrastructure projects on a state-by-state basis opening up. That would be one source of employment generation and labor absorption and asset absorption. So therefore, we do think very strongly that the asset volumes will start to pick up, and we are betting on post October things will start showing up. And the labor absorption would be better. And overall, therefore, we see the cash flow improvement happening from the rural market. Having said all of this is the reason why we want to be ready with capital. While our capital adequacy is appropriate and adequate at this stage, we do believe that if all that we are forecasting do turn out to be a reality out there, then our consuming of capital would be at a much faster pace. And therefore, we think we need to raise adequate capital and be ready to embark on that opportunity that emerges from the rural market. Now if we, therefore, decide that we want to go through this capital raise, the thought was to do it the best way possible in this situation, and therefore, the right issue was the program that was decided upon. My request to all of you would be, when you look at the price at which we have calling the rights issue, it has absolutely no relevance and logic to explain as to why 76% discount. So don't look at it from a discount to the market perspective. Look at it from why at INR 50. This is our 25th year, this is our Silver Jubilee year, and we were contemplating on what is the best way to compensate all our shareholders. And the only way that we thought was, since we are coming out with the right issue, if we were to make it attractive for the shareholders, we would be able to allow every shareholder to be able to participate. All of you have been our great friends. In the most difficult time to the most good time, everyone has participated and help us to be where we are. And this is our most simplest and the sincere way of thanking the shareholders to having a great partner with us. And that's the only reason why we thought that we must price it extremely attractive for everybody to be able to participate and not look at it from a discount-to-the-market perspective. And therefore, the logic for raising capital is very clearly growth-oriented, and the purpose of pricing is to be extremely shareholder-friendly and compensating. Having put all of this together, we very strongly feel and are very, very energetic and positive about the trends that we see in the rural market. I think with our penetration, with our large employee local base, with a very large customer base and relationship with every OEM, and with absolute readiness with both capital and debt, I think we are in the right space, in the right position, at the right time [Technical Difficulty]

We would request the participants to please stay connected as the line for Mr. Iyer got disconnected. Thank you for patiently waiting. We have Mr. Iyer connected. Sir, you can go ahead, please.

No, but can somebody tell me where we were cut off, otherwise -- okay, no problem. So I was just saying that with the kind of buoyancy we see at the rural market and with our readiness with capital, with our readiness, with [Technical Difficulty]

We would request the participants to please stay connected while we connect Mr. Iyer back. His line has got disconnected. Sir, you can go ahead, please.

Yes. So I'm saying with our readiness of capital, with our readiness of debt, with our penetration strategy, with our people on ground there, with our relationship with all the OEMs and with our funds being all in place, we do believe that we are in the right space at the right time to be able to embark on this journey of growth. And we are very, very confident that this is how things are likely to pan out in that marketplace given what we see on the ground there. And with that, I would actually stop here on what we see and why the capital raise, and why we have priced it for every shareholder to be able to participate, being our Silver Jubilee year. So thank you very much for the participation, and I will now open it up for the Q&A.

[Operator Instructions] The first question is from the line of [ Laru Patajani ] from Elara Capital.

Sir, when you said that 40% of the moratorium customers have paid, this would be part payments? Or how do we view the moratorium now?

No, no. So as I said, April-May was a very weak collection month. So when I said 40%, in June, 40% of the customers have paid their full installment.

Okay. So you would tag the moratorium as...

And in tractor, it's even much lower. It's just about 52% or 56% of the customer actually took moratorium. And there also 40% of them have paid. So effectively, just about 30% of the customers are now enjoying or wanting to enjoy the moratorium.

Okay. All customers?

Sorry?

So the moratorium is now 30%?

That's for tractors. That's right.

For tractors. And for overall?

Overall, it would be around 48% or so.

48%.

And that would, according to me, will further go down as we see July, August because that's the trend we have already seen in the first quarter. Given we see the visibility of cash flow, we will start this decline being seen also in this 2 months.

Got it. But this -- the payment would be full installment?

Yes, yes, yes.

Okay. Not part, right?

No. I'm saying full.

That is as in the month of June?

That's right.

Got it. Got it, sir. Sir, and in terms of liquidity, now you've built up enough debt buffers, so does it peak here or you'll continue to maintain a high liquidity buffer? And what percentage of liabilities or what percentage of total assets would you want to keep your liquidity buffer at going ahead?

I think as far as actual drawing is concerned, I think we have done sufficient to be able to meet the liability for the next 3, 4 months very easily. We have enough signed-up limits that we can draw any time as we require. Then as you know, the rights issue money will come in, and our own collections have been pretty good. So I don't think we need to draw more and store more, but we have very clear tie-up that even up to March, we can meet all liability and be able to meet all service -- I mean, service all interest and meet the fixed cost requirement. Dinesh, anyone wants to add, please chip in.

Yes. I think what you have said is holding true. We are sitting on more than INR 8,500 crore of liquid investment pool, so that should -- plus the sanction line and the collection trend what we are experiencing. Given the drop in the business volume at the marketplace, we should be good enough from the point of view of the current liquidity position.

The next question is from the line of Subrat Dwibedy from SBI Life.

Sir, on the moratorium front, you mentioned that 75% was the moratorium earlier and out of that pool, 40% have paid up. So somebody gets out of moratorium, I guess, only when he clears the existing EMI of the month plus the whatever accrued EMIs and overdues were there of previous months. So just wanted to know what is the percentage of that number, where people have cleared all EMIs outstanding, including June EMIs and are completely out of moratorium?

No, no. So whether they pay or not, they will all be out of moratorium at the end of August, okay? So I think -- don't link that they are getting out of moratorium to their payment. I think what I'm trying to explain is that the trend of they repaying the installment in spite of they being in the moratorium is the only point that I'm trying to make. I'm not, for one, saying that all of them are absolutely current and 0 outstanding and they have paid for April and May, June, and they'll continue to pay full in August and September. So that's not the comment. I think the comment very clearly is from June, we have started seeing people repaying even if they have taken moratorium. It is completely understandable that in April when they have not done any work, it is not possible for them. So when we close the moratorium in August, let us say, and if people pay between June, July, August, then they would still have 1 or 2 delinquency based on where they were at that stage, and that would be paid over a period of time. So please understand the comment from June, some of them from May, but let's take June as the start point, that 40% of the customers have started repaying their monthly installments from June, and that's a trend we see, and we see that to be an improving trend. And therefore, the pressure when moratorium ends for us to be able to collect from the customer is not going to be high as against everyone's original thought process of will it bunch up into a large overdues, will people not pay during moratorium, will NPA zoom up after the moratorium ends, I think those things are getting proved against.

Understood. And segment-wise, if you could give any color on how the moratorium has been or how the collections have been? You mentioned the tractors is one of the best; what about other segments?

No, no. So I think it's important to understand, and we have said this many times in the past. For us, product reliance is a little low, geography reliance is very high. Because whether they are a small car operator or whether they are a tractor operator, one of their source of income will be farm when it comes to rural. So since the farm cash flow has done well, we have seen uniform collection percentages in all segments. And when we offer moratorium also, we didn't pick and choose to say, we'll give it to A and we will not give it to B, right? That's why the percentage was very high when we started, right? So the trend has been pretty similar in almost all product ranges. But geographically, it could be different. Like MP was the best because I think the farm cash flow in MP was phenomenal, right? So therefore, you will see, by geography, there could be some trend change. But clearly, on a product basis, every product has behaved similar except, of course, heavy commercial vehicle, where though the collection was good, but the fleet operators and all of them have to start earning, so that they can pay their sub-operator. And we don't finance large fleet operators. We have people with 1 vehicle, 3 vehicle, and they could take a little longer.

Okay. And sir, one last thing. In the car segment, what percentage would be the taxi aggregators, like Ola, Uber, which will take longer to...

No, no. Very small percentage. Out of our total 20 lakh customer, the total aggregator volume is, I think, about 80-odd thousand...

80,000. 80,000.

Sorry?

80,000, sir.

That's what I said. 80,000 is what we have. And of that, we are seeing at least about 30%, 40% of them again are on the street. But yes, are they earning like before? The clear answer is no. So even if you were to consider it is about 80,000 customers to whom we have financed these kind of vehicles, and we are in touch with all of them. And they were all very current until the lockdown really happened. And we do believe that as September lockdown opens up, they may not be in a position to start paying immediately from September. But post festival from October-November, we can start seeing some return of these products able to service their loans. They may possibly require lowering of the EMI and therefore, we may have to consider some longer periods for repayment for them.

Okay. And the balance -- the non-Ola/Uber segment, that would be largely rural transportation based? Or how...

Only, only. All our customers 20 lakh, when I talked, there's about 80,000, 1 lakh-odd customer would be in the peripherals of urban. But otherwise, everything is into the rural transportation, whether they are carrying small essential goods like fruits, vegetables, trading activities, local contracting activity, right, local people carrying. There is no major public transport system out there, right? So people do use these vehicles for going from point to point. So all of them are in these kind of activities only and mostly all rural.

The next question is from the line of Alpesh Mehta from Motilal Oswal Financial Services.

Congrats for the good set of numbers. Sir, first question is, right now at the ECL level, we are at around 5.5% of the overall portfolio. What would be your comfort level? Because since last 2 quarters, obviously, management overlay is playing a big role in terms of provisioning expenses. So any sense on that front?

So if you look at our historic working, we need to have a loss provisioning of about 30%, which we have moved to upward of 40% and in some product maybe even higher, right? So therefore, I personally think, if you look at, we have about 130,000 accounts in NPL and the kind of provisions that we have made, and if we want to be able to take back all the vehicle and transact them at the marketplace, we are sufficiently covered according to me. So if you are at 5.6-odd percentage, I think the comfort level would be even at below 5% level because these are all earn and pay customers and they don't end up not paying ever. So the delay will definitely be there, but nonpayment situations are limited, right? So which is why we feel comfortable. But given the current market condition, given that we will not be repossessing vehicles and settling with consumers on that basis, we have taken a forward-looking view on certain location, certain product, certain application and done some additional provisioning. I think when things starts to improve, we may see this to be possibly slightly on the higher side.

Sir, but -- sir, this current provisioning, what you are mentioning is for the existing spreads that you have on the portfolio, but post the moratorium ending, there would be some -- there is expectation of some rise in the NPL, so would this...

I'm not willing to buy that theory actually. I've been repeatedly saying, if you look at the individual customer who have put in 25% of their own money and they have repaid their loan for the last 12 months, 14 months, 16 months, 100% there would be delay and there would be -- their ability to earn right from 1st September is not going to be there. But today, even though we are on a moratorium, these consumers are earning, right? That's why 40% of them are unable to [ study ] their loan. So I don't think that we must extend this theory to say, oh, well there is going to be a boom of NPA coming because of this. I personally don't think so at all. Definitely, there will be a delay. Customer may not pay every month on time and they may not be able to pay every month also. But clearly, you will not see bunching up happening with a lot of them fall in the wayside. So I would very strongly urge to think if the underlying cash flows of these consumers return back to average, not even saying original normal, we would not see that happen. But let's take a position to say that the COVID returns big time, it moves into rural market, then I think even the regulator intervention will be there to further extend the moratorium or allow a reschedulement. So in the changing scenario of the rural market cash flow improving and in the changing scenario of the consumers back on the street earning their money, we see already that the customers are willing to repay, and we don't see the situation deteriorate substantially from here.

[Operator Instructions] The next question is from the line of Amit Nanavati from Nomura.

Just 2 questions. Firstly, again, on collections. Basically, at least to the extent of 48% of your customers is not paying, any sense you can give around what percentage of customers are already up and running in terms of business activity that will take longer to -- will take some time to recover, and hence, you'll see a 1-month, 2-month delay? Or at least some percentage of customers where you've seen it will take much longer to recover who still impacted as things stands today? Secondly, on OpEx side, I just want -- if you can give further more clarity around what percentage of the OpEx reduction, especially overhead, is more volume linked in terms of dealer commissions, incentives, et cetera? What part would be more business activity linked, where travel, conveyance, et cetera, which may bounce back once you start resuming all your business activities? Yes, these are the 2 questions.

Yes. So first on the cost, traveling conveyance and dealer commissions are direct variables in the sense that if the business volume increases, the commission will proportionately increase. And likewise, the traveling and conveyance is a direct relationship to activity level on the ground. And therefore, once things absolutely normalize and business volumes and collections volume starts to pick up, you will see the traveling cost also moving up in that direction. Except that both of that are not likely to substantially increase like before we are renegotiated for some of the approach that we have also relooked at some of our processes to approach that accordingly. Like for example, the digital repayments have increased from a normal 35%, 40% to a 50%-type level, which would -- automatically would mean little less travel required for collections and whatever. But those 2 are direct variable linked to the business volumes and collection volumes. As otherwise, if you look at any other item that I talked of, rent -- what you call your branch rent renegotiated, the security services that we have engaged, the BPO services that we are using, the advertising and branding costs that we were otherwise incurring, these are all direct corrections. So which is why I said that if you have seen a 40% drop, I think what we are comfortable to believe is at least 20% is definitely sustainable out of this, which means 50% of the current cost reduction that has happened is sustainable from these line items. The other contributors are definitely traveling and the dealer commission, et cetera. The other area where we are seeing a definite reduction that is sustainable is the legal cost. We were using arbitration. We were using notices to be sent and all kinds of stuff, and all of that has also been renegotiated in this current scenario for the new price going forward. So I would think that if you save INR 100 during this period, INR 50 of that is variable, INR 50 is definitely sustainable. So far as the percentage of the customer who have taken moratorium and at this stage are not paying, a larger percentage of that is from the tractor portfolio, who will get their money maybe in July and you will see corrections to that, which is why I said this to the earlier question, but you would see improvement to this percentage happening. The 2 segments where we think people who have taken moratorium and not pay and will take longer is surely the commercial vehicle segment and the aggregator taxi operator segment. And therefore, out of the 75% of the customers taken, we would think about 20% of the portfolio would require a longer time for them to be able to start servicing. But they, again, post October would start servicing their contract, but their ability to kind of pay for the past which has been built may not be there. They will all go to the rear end having used the moratorium. So surely, they will be able to service their loan of a monthly installment. But will they be able to pay for what has happened between April and August? I think those bunch of customers will actually use the moratorium and will be able to pay on the extended period. The other 50% of them would definitely actually clear their past dues and their moratorium will actually get adjusted between September going into March.

[Operator Instructions] The next question is from the line of Sanket Chheda from B&K Securities.

Sir, as we believe that the rural economy will revive much faster than urban economy, my question was more towards that normally what recoveries we see in the second half of the year. We didn't see that in FY '20 and hence, we exited FY '20 with already high stock of NPA. Also in first quarter, there is an increase in delinquencies. How do you see panning out in second half of FY '21? And what credit cost guidance would you like to spell out, if any? Yes, that's it.

Yes. So like you said, we already saw the increase in NPA in the previous year. And then if you see the first quarter, it has not gone up as much as one would have normally seen in the rural market for 2 reason. One, of course, is because of the consumers were under moratorium, not everybody got exposed to that kind of a movement forward. And even within other 25%, 30% who did not take moratorium, it's only about 10,000 consumers who moved into the moratorium space during this period. Definitely, we don't see a substantial increase, and I'm repeating myself from what I said earlier, we don't see a bunching up and increasing of NPA happening post lockdown and as things open up between October and March because this year, the farm cash flow for sure would be again much, much better than what we have seen in the past, and that would help the recovery of dues from this customer. My understanding is that if we hold on to where we are at this stage, we could actually start seeing improvement to these numbers as we move into March. But definitely, increase is not something that is forecasted by us, or that's not the visibility that we are talking of.

The next question is from the line of Udit Kariwala from AMBIT Capital.

Hello, sir. Am I audible?

Yes, you are.

Yes. Sir, I just have 2 questions. First is that, sir, you mentioned about -- you were discussing on the call about the price of rights issue, and we appreciate that if that's this year. Then why not -- because indirectly when the price is so low, it kind of forces an existing investor to pump in more money, why can't a rights issue be followed by a, let's take, bonus or something wherein the reward...

Why can't rights issue be followed by?

A bonus later on. Maybe that could have been rights issue, which is at the higher price. I'm just thinking that could also be one way to look at it, right? I mean you would end up...

I will definitely communicate your sentiments to my Board, but it will be unreasonable for me to make any comment on this as a management, yes? But I would definitely say this is one of the questions.

But Ramesh, hello, if you do the -- mathematically if you look at it, right issue at a market discount to the market price, say, 15%, 20% and then followed with a bonus, bonus you have to take it as 0, the average works out to close to what we have given. See, mathematically, if you look at it, we didn't do this kind of economic mathematics to arrive at that at the INR 50. But if you look at very roughly, that is what will come, one at 0, one at, say, 20% discount to the market price, more or less what you'll arrive around INR 50.

It's right, sir, but it's just that, as an investor, I have a choice. In the second option, I have a better choice, whether I need to invest or not, that was the only concern. The second point, which I had was on the quantum, sir, why such a large capital raise quantum? I mean is it -- I mean, are you expecting such high growth? Or is it some part is that you're anticipating that it couldn't be required from the asset quality perspective? So some sense around that because it could be ROE dilutive?

Yes, it is. But if you look at every time in the past, I think whenever we have raised capital, we have taken a view for at least 2 or 3 years requirement. And that's the only view we have taken because you should also understand, we have our rural housing subsidiary, and we have seen a lot of traction there as well as. Their asset quality is definitely beginning to improve. And they will also embark onto some growth story surely. And if we continue to support and invest in that business, that will need some support for sure. But more importantly, we are definitely seeing rural turnaround and the growth story returning, and it will absorb a substantial portion of this capital. But yes, I mean, would you require 3,000, could it have been 2,200, 2,500, is anybody's discussion and debate. But we think that this is an adequate size with which we are comfortable to meet all requirements for the next 2 to 3 years for sure. And we want to remain a little high on the capital side in the current scenario whether the rating agency, whether the lender, everybody would feel comfortable about adequately being capitalized in this round, instead of having just about the level that you need.

[Operator Instructions] The next question is from the line of Anitha Rangan from HSBC Asset Management.

I just wanted to understand, like this quarter, your employee cost and your other expenses have come down, like, substantially. So is this like driven by COVID and a sustainable trend? Or, like, if you can break down what's the structural component and the variable component in this?

No. So I thought in the earlier questions, this got answered. But nevertheless, the structural changes from the overhead perspective is other than traveling and the dealer commission. I would think other reductions are all structural in nature, and they would hold up for sure. So far as traveling and dealer commissions are concerned, they have linkage to the overall volume that we transacted the marketplace, both from business and collection point of view. So far as the employee or their checks, et cetera, is concerned, as I said, we have moved about 5% of our cost from fixed to variable and therefore, they are sustainable. Yes, if the overall productivity improves, if the overall performance improves, that 5% comes into a variable route. Otherwise, that's something that on a fixed basis has been reduced. Definitely, no additions have been made. Very small percentage of people would have left and not been replaced, but that would continue to be a very small percentage. There is other variable component in the employee side, which is the field executive incentive program, which is again linked to performance on collections and disbursements. And if that was to return to the overall growth perspective, then some of that would come back. But as otherwise, that is something again on a variable basis have been same. So if you look at the overall, let's say, if you have -- during this quarter, if you have saved INR 100, I said that going forward, one can expect about 50% of this to remain sustained, 50% of it is variable, which will come back if the volumes went overall buoyant.

Okay. And if I may just ask one more question? You said, among the geographies, like, for you, MP was the best. Can you say like which geographies had more impact relatively and which were bad also?

Look, so I think south has been not doing as well as we would have expected it to do. And that's been for some time, nothing to do with COVID, particular given otherwise, the activities have been lower. And therefore, I singled out MP because the crop was very, very good, and the overall cash flow in MP, Chhattisgarh was phenomenal. As otherwise, most of the other states have been around the average amongst -- between each other. South has been a little low performing. And within south, I would think Karnataka, which is also again very mining dependent and all that, and they could see some traction post October as mining begins to open up.

[Operator Instructions] The next question is from the line of Rikin Shah from Crédit Suisse.

I have 2 questions. The first one, in this quarter, you saw that the outstanding disbursements were up sharply in absolute terms. So volume driven only by the MSME scheme or was there any other factor into it? That's my first. And the second question was the average ticket size, if you can compute it. It seems to be up almost 30% year-on-year. So what explains this increase in the average ticket price?

Sorry, can you be a little more clearer? What is 30% up?

Average ticket size for the stand-alone book. So if we compute it based on the value of assets finance and the number of contracts, then it comes out to be up 30% year-on-year.

No, no, no. There's something wrong. It cannot be. I mean our retail LTVs have not changed at all. So maybe Dinesh or somebody can take it off-line and explain to you, but there seems to be some computation issue there. Because we have done 30,000 vehicles and the asset value that we have financed for any asset is not more than -- I guess, more than INR 4 lakhs to INR 5 lakhs, which is as much as what it was in the past. So...

I think probably you could remove the SME piece there and then see it and then compare this year.

I don't know, Vishal, can you take this question and explain off-line? And even SME growth of some percentage you said is -- I think SME is a business that we completely stopped. Actually, that might be -- we did some Mahindra supplier bill discounting which must have come there as onetime transaction of some INR 200-odd crore, I think. So both of this, Vishal can explain to you in detail. But I want to say assured that the LTV for retail assets have not moved at all. And especially if the truck financing has come down, I would expect that the LTV would remain stable or go down, but definitely not go up.

Okay. Okay. Sure. I'll follow-up with Vishal later. Secondly, regarding the RWA to total assets ratio, so in FY '19, it used to be 87%; in FY '20, it has come off to 76%, so does then RBI regulation back from earlier this year explain this decline?

Sorry, Dinesh, you want to explain?

Hello? Can you just -- yes.

Yes. So I was mentioning that in FY '19, the RWA intensity, which is RWA to total asset ratio, was 87%, and it declined to 76% in FY '20. So was the RBI regulation earlier in this year solely responsible? Or was there any change in the mix and that resulted in lower ratio?

No. So this is the outcome of the liquidity pool. So if you see the total asset, there is a liquid investment would have gone up, given that what we have created a liquidity buffer of more than INR 8,500 crore. And all the investment which is parked in the fixed deposits of the bank and this kind of an investment pool, do not carry a risk weight and which is the reason why the RWA will come down.

Okay. Okay. So we should expect that as the liquidity drag unfolds, this ratio can gradually inch up again?

Yes. Because there has been no regulatory exchange for the risk weightage. There is no regulatory change on that front.

The next question is from the line of Umang Shah from HSBC Securities.

I've got 2 questions. One is, in this quarter, if you could just throw some color as to where the slippages have come from, given the fact that a large part of our book was already under moratorium and therefore, the DPD freezing? And second, on the data point, if you could share 2 data points. What is the moratorium by value? Would it be similar to the proportion of customers? And what proportion of morat customers would not have made any payments so far?

No. So value to moratorium, the number, I think is more or less same. They are not very different from each other, maybe 2%, 3% lower or it will be around that. So there is nothing. And on people who have not paid, as I said, out of 70-odd percent who took moratorium, 40% have paid, right? It's the balance who have not paid, that 59%, 60% of them, are the ones who have not serviced their loan during this period. And that is where the expectation that some of them would start paying in this round that is between July and September. And what was your first question? You had another question...

Yes. Yes. So that was, sir, on slippages, given that a large part of book was already under moratorium and DPD freeze, any particular segment, which has contributed to NPL this quarter?

No. So many of the tractor customer did not want moratorium because they were expecting their cash flows to come in. And wherever there would have been a shift from June to July cash, right, they would have moved into an NPA. That's why about 8,000, 10,000 contracts would have moved there. And I'm very hopeful that I think out of that 11,000, 8,000 was tractor. And this would reverse itself in this round because the money has now come in and our collections are good as we see even in July.

The next question is from the line of Nidhesh Jain from Investec Asset Management.

Sir, what will be the credit cost estimate or guidance or expiration for FY '21? Given we have now a decent amount of information about moratorium and how the customers are behaving, what will be your estimate of credit cost for FY '21?

No. So our endeavor is to work hard to take the net NPA levels to 4%, okay? And I think, definitely, we will see improvement through collections. And as market opens up, we would also have an opportunity to repossess and negotiate with customer and close. So that by itself will help us move in that direction. But if there was any gap which we think over a period of time is necessary based on product lines, like I said, commercial vehicle and taxi aggregator, we may take an aggressive stand and make little additional provision and we'll try and reach that number in the next 9 months, 12 months type of a situation. And we think that, that opportunity is opening up in rural. So clearly, one should forecast a downward trend to the gross and net NPA through the market actions and if necessary, with some little addition provision from our side to make that happen.

The next question is from the line of Nikhil Dawda from Motilal Oswal Financial Services.

Congratulations on 25 years. Just one quick clarification question I had here which was on the moratorium. The percentages that you mentioned is the value, right, and not the number, right?

No. So somebody asked that question. So we have seen both value and number-wise, the percentages are almost same.

No. So 48% overall when you say customers, that's the number or value?

That's what I'm saying. Both number and value is almost same. So they are not very different.

The next question is from the line of Piran Engineer from Motilal Oswal Financial Services.

Sir, congrats on the quarter. I had one clarification on Umang's question. You said 60% of your 75% morat customers have not paid a single installment since April. Is that -- is my understanding correct?

Not a single -- you've got cut in between, not a...

So out of your morat pool of customers, 60% have not paid a single installment since April, not even part payment. Is that correct?

Part payment could be there, but you're right, 60 -- 59% of them have not serviced their loan. I have not checked for has someone paid part payment there. But it is right that 59% of them have not serviced their loan between April and June, April and May -- April, May -- no, sorry, March, April, May, as we gave them the moratorium, you're right.

No. I'm guessing that continues in phase 2 also, even in June, July, they have not paid?

No, no. June, they would have paid some part -- I've not checked on part, maybe Vishal can somebody check and let you know. But it is correct that if 40% of them have serviced, the other 59% have not paid. You're right.

Okay. Okay. And sir, according to you in the month of June, since we saw -- or the auto industry saw good volume, how much of that would be pent-up versus a structural in your assessment?

Auto didn't see a very big jump.

No. I meant month-on-month.

Yes. Month-on-month, yes, but overall volume compared to any time in the past was much lower. And I don't know, there was not too much of pent-up and all that, I mean, because there was not too many inquiry waiting to convert. So these are month trend things that we have seen like -- unlike in the past where people bought vehicle even as an investor and put it to use. In this round, we have seen actual user buying the vehicle. So actual user buying, I don't know, they may not be pent-up. They just decided, okay, now things are opening up, I'll buy a vehicle.

[Operator Instructions] The next question is from the line of Subramanian Iyer from Morgan Stanley.

Just a follow-up question on collections. So I mean, you mentioned in terms of moratorium, but previously, you had mentioned that the collection efficiency in April was 15%, which had improved about 50% in May. So what is it in value terms for the month of June? And if you have any early number for July?

Yes. So June, as I said, we collected upward of INR 2,200 crore, which turned out to be roughly around 72%, 73% or 77% around that percentage. So far as July is concerned, the early signs are it is better than June for the first 10, 15 days that we saw in June.

The next question is from the line of Abhishek Murarka from IIFL.

So sir, when you applied this management overlay in both your stand-alone business and the rural housing, can you share some of the thought process that brought you to that number? It's a very specific number, so you would have obviously done some calculation. I just wanted to understand the thought process.

No. So as I explained, there are 2 or 3 things that we looked at. One is, we looked at all accounts that were frozen, let's say, on 29th February or 1st March, and we looked at them by age. How many of them are more than 2-year-old account, how many of them are more than 12 months old and how many of them are less than 12 months old, right? And if somebody who was less than 12 months and was already having the 2 EMI outstanding, we believe that they may take a little longer than normal to repay. So therefore, that was one set that we looked at to say, okay, how do we make higher provision for these accounts because someone who's being more than 2 years with us or more than 12, 18 months with us and have paid for that number of months, and they had only one overdue and also have initially invested 20%, 25%, then the asset has substantial ability to protect the principal debt, right, if they were to become default. The second that we looked at was which are the products which are going through some stress, and which is where we came to the commercial vehicle and then the taxi operator as the others segment where we looked at what to do. The third that we looked at was by geography as to, which are the geographies where because of the COVID situation, the stress is higher, especially in April, May, they were in red zones, activity levels was just not there, et cetera, et cetera. And the fourth element that we looked for, people who have been in the outstanding for much longer, maybe 30 months, 36 months, then we said, why continue them further because we are not going to repossess very urgently. And therefore, we increase the provision and fully forward them, having 40, 42 months something of that cutoff and fully provided further. So these are the various methodologies that were applied to the overall portfolio and then arrived at both in March as well as in June.

The next question is from the line of Aditya Jain from Citigroup.

On the additional provisions that have been made in this quarter, could you just talk about which stage they are allocated to between stage 1, 2 and 3?

No. So I think most of it would have gone to stage 3 because, as I explained, we looked at what is their outstanding and what is the balance remaining, what is the repositions to be done, et cetera. But as -- I think around INR 130 crores, INR 140 crores would have gone to stage 1 and 2. Rajesh, you are in the call?

Yes, yes. Yes. Correct.

So around INR 470-odd crore would have gone to stage 3, INR 140-odd crore would have gone to stage 1 and 2, and there were some dealer outstanding of trade advances, so INR 30 crores, INR 40 crores would have gone to that -- against the trade advance are the large 3 buckets? Anything else, Rajesh? Am I right, this number?

So overlay was for INR 476 crores that is largely 2, 3. And we reset our forward-looking parameters during the quarter also, so that has a large impact on stage 1 and 2. Our PDs/LGDs also got reset and then the TA, what Mr. Iyer said, a small amount of TA which we provided.

The last question is from the line of Nischint Chawathe from Kotak Securities.

Just a couple of numbers. If you could share what was the actual collection in April and May? I believe you said it was INR 2,200 crores in June.

Yes. About INR 500 crores -- close to around INR 500 crores in April and around 1,000 -- I think close to INR 1,000 crore in April -- sorry, May, and it went to upward of INR 2,200 crores in June.

And what was the monthly demand for June?

Monthly demand for June would have been 3,000...

Around INR 2,900 crores.

2,000?

900, sir.

Okay.

Sure. And just one last question, if I can. If you have any outlook for disbursement growth for the next 9 months?

See, the disbursement growth is -- one is, of course, we are very sure that we will maintain our market share and there may be even some improvement to market share. But the OEMs themselves are very unsure in terms of their volumes. Like when we talk to different OEMs, they are very buoyant about the production commencing and they will be able to supply large numbers, et cetera, et cetera. If we were to go by all their numbers and if we were to maintain our market share, forget increase in market share, I think we would end up doing 50,000, 60,000 vehicles, which would mean close to INR 3,000 crore-plus. I'm not too sure that we want to go by what the numbers they are putting out because we are not yet seeing their ability to supply with that kind of a speed. So I don't know how to put that number out. But as I said, 30,000 vehicles we did in the month of June, has an ability even in the subdued supply situation, we can touch 45,000, 50,000 vehicle-type numbers. But if the OEMs meet their targets and they are truly able to supply volumes, like when we talk to Maruti, they are talking of very high inquiry levels at dealerships, and that's what the dealers tell us also. And we have a good market share. So the best disbursement could be 60,000, 65,000 vehicle, which would mean INR 3,000 crores, INR 3,500 crores. The worst could be 30,000 vehicle, which means INR 1,500 crores. And we would believe that somewhere in the average, one could look at because I'm not too sure that everyone will be able to supply sufficient quantity, at least, for the next couple of months. But post October, I think we can expect volumes to stabilize and disbursements to keep growing.

I would now like to hand the conference over to Mr. Abhijit Tibrewal for closing comments.

Yes. Thanks, Aisha. Many thanks to Mahindra Finance management team and all the other participants for a very vibrant discussion today. Have a good day. Thank you all.

Thank you.

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.