MAS Financial Services Limited (MASFIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to MAS Financial Services Limited Q3 FY '20 Earnings Conference Call, hosted by Prabhudas Lilladher Private Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Daptardar from Prabhudas Lilladher Private Limited. Thank you, and over to you, ma'am.

Thank you, Inba. Good evening, everybody. On behalf of Prabhudas Lilladher, I welcome you all to the Q3 FY '20 Earnings Conference Call for MAS Financial Services Limited. We have with us today, Mr. Kamlesh Gandhi, Chairman and Managing Director; Mr. Mukesh Gandhi, Whole-time Director and CFO; and entire senior management team of MAS Financial Services. I would now like to hand over the call to Mr. Kamlesh Gandhi. Over to you, sir.

Thank you, Shweta, and good evening to all of you. It is my pleasure to connect to you once again. And as we have mentioned in our presentation, we are delighted and excited to present this 99th quarter results. So the company is in its 25th year of operation. The next quarter, we'll be completing 100 quarters. And as we look back with pride that we -- what we have done over all these years and what comes out of it is consistent performance. So while these 99 quarters have been very exciting and consistent, we would once again like to reiterate that we would like to follow the same path. And we always think -- and that [ fulfilling ] a team MAS is anytime we reach a milestone, we feel we have just begun. So with this background, I would like to give a very brief on how we did in quarter 3, which will be followed by detailed number or explanation by Darshana and followed by Mukesh Bhai and Ankit. So as we all are aware that this is the most challenging times for NBFC, and this is a time where the strength and the weakness of the -- any NBFC will come to the fore. So I'm very happy to share with you that even during this challenging times, because of the fundamentals what we have followed over all these years and what we have understood over all these years in prioritizing quality and profitability of our growth, and not only chasing the growth but selecting the borrowers and creating a win-win situation has helped us to navigate this situation very successfully. In past, we have been meant to see that, but let me tell you that according to my experience, this is the most prolonged event of challenge. But nonetheless, I think complaint is the low mind of the weak. Let us focus on how we can strengthen ourselves and how we can prepare ourselves for our future tough challenges, if any -- [ what for ] tough challenges come, but if any. From the performance point of view, I shared with you our AUM grew by 20%, with our growth impact on the Y-o-Y quarter basis at 21.27% and profitability on a 9-month basis of 29% with stage 3 net assets, that is what we call it as NPA at 1.06% as compared to 1.13% during the corresponding quarter last year, and maintained at the same level of 1.06% which was last quarter, despite of the fact that this has been the most challenging time for not only NBFCs but also the customers who will be served that is the MSME segment. And if you talk about the capital adequacy, we are at a very comfortable capital adequacy of 28.79% being our business model of assigning growth to 30%, 35% of our assets that we originate. In our housing finance, also, we grew at a modest 12.75% and reported a profit of 57.84% on a quarter-to-quarter basis on a lower base. On a 9-month basis, it was 27.65%. And once again, the asset quality has been very pristine. In Housing Finance, we think that it takes time to build up growth. And that is why we ought to be courageous to be patient. So we have to raise the book gradually. But we take -- we were happy with the performance of the portfolio that had 0.24% of net 3 stage asset as compared to 0.34% in the corresponding quarter. So we've improved on the quality of the assets. Just to share with you, strategically, we have always concentrated that how we can extend credit where it is due overall this period and improve on quality of assets. We have done a presentation on understanding of MAS from the point of view of what we're billing, the business mission and bill it. What has made this journey of 99 quarters so exciting and so consistent, that is because of the team MAS. And the fundamentals what we have followed in terms of asset creation of extending credit where it is due, the product mix, adding value to our borrowers and a unit distribution model with around 3,500 centers and which are -- and working closely with close to 100 NBFCs of the country. On the liability side, we have a very unique model of a self-propelling model. Thereby, majority of the capital requirement is met through internal accruals. As you can see from our capital adequacy currently at around 28.79%, and over the journey of 99 quarters, including IPO, MAS has raised capital only 3 times. And if you ask me the future plans, the answer is, I don't know, in short, in medium term. Never say never, but in short to medium term, we don't feel that we'll need more infusion, the way we are growing at around close to 20%, 25% and fueling the growth through internal accruals. This makes this model a very robust model, according to me, with a very ALM. And currently the problem faced by NBFC was of ALM. And then somebody asked me that what about ALM, and we've never knew that ALM can be so distorted in the industry. So we've never had any sort of ALM during this period, and that is what has helped us during this time to navigate successfully. Right result mix, and once again, very important the cost efficiency that we have -- we are very confident at the rate at which we borrow. And very important thing in lending, which as a practitioner if I share with you, and I share with many of my colleagues and many of my [indiscernible] partners and with my team, that lending is not a business of capital and debt. Lending is a business of operational excellence. And that is where we have always endeavored to improve, to learn, to unlearn because this is a task we worked up on, timely worked out. So going forward, we will continue to capitalize on what we've learned over all this 99 quarters, carry it forward. We are at a very strategic inflection point now. If we continue doing what we've been doing during all these 99 quarters, we have a tremendous leverage of a large market size, a very robust liability management of a self-propelling capital mode accompanied by our experience of creating quality assets. So the journey looks very exciting. But once again, every opportunity is as good as it is executed and we are aware of the fact. And we are trying to work hard on that to still improve, learn and unlearn. So with this background, I'll ask Darshana to take you through the numbers in detail. As such, it is presented to you, but for the convenience to understand it once again, she will take you through the numbers in detail. Thank you.

Thank you, sir. Good evening, everybody. So I'll take you through the numbers quickly. As on December 20, our AUM is at INR 5,960 crores. Last year, it was INR 4,956 crores as on December. So that is 20.27% increase in AUM. Disbursement has increased by 14.17%. Last year, it was INR 3,882 crores, which is -- this year it is INR 3,882 crores. Last year, it was INR 3,400 crores. Total income as on December '19 is INR 510 crores, last year it was INR 417 crores, which is 22.36% rise in total income. PBT has increased by 9.81%. Last year it was INR 169 crores, this year it is INR 186 crores. PAT has increased by 28.98%. Last year it was INR 110 crores. This year it is INR 142 crores. And we have improved in our stage 3 assets. Last year it was -- gross stage 3 asset was 1.38%. This year it is at 1.29%. And net stage 3, last year it was 1.13%, this year it is 1.06%. And regarding the quarter performance, our total income has increased by 13.72%. PBT has increased by 6.59%, and profit after tax has increased by 21.27%. So this was regarding our parent company. Now if I take you through the numbers for our subsidiary, MAS Rural Housing & Mortgage Finance Limited. Performance for 9 months for MRHMFL. Asset under management has increased by 12.75%. Last year it was INR 251 crores, this year it is INR 284 crores. Total income has grown up by 29.46%. Last year it was INR 23 crores, this year it is INR 30 crores. Profit before tax has increased by 27.65%. Last year it was INR 3.26 crores, this year it is INR 4.17 crores. Profit after tax has grown by 18.70%. So last year it was INR 2.64 crores, this year it is INR 3.13 crores. And stage 3, last year it was point -- gross stage 3 has remained constant, and net stage 3 is now 0.25%, last year it was 0.24%. This is regarding 9 months. And for the quarter, total income is -- has grown by 21.85%. Profit before tax has increased by 57.84%, and profit after tax has gone up by 30.52%. So this was regarding the performance of both the companies. Now I request Mukesh sir to take you through the -- take you through our liability management.

Thank you, Darshana. So basically, if I talk about the liability, we have fundamentally strong liability management with capital adequacy of 30.11%, of which Tier 1 is 28.79% and Tier 2, 1.32%. We have been having the self-propelling business model, meaning thereby, the growth is achieved mainly through the internal accruals. We have a liability tied up for entire year and for next 6 months also of the next year. Cost of borrowing came down from 9.71% to 9.15% even in this tough period. And we have a healthy ALM with us, so we never understand what is the mismatch so far as the asset and liability is concerned. So these are the fundamentals on which we run our liability management, and it has paid off over a period of time. Even in the time of difficulty also, we could navigate successfully because of our fundamental approach for the liabilities. With that, I request Ankit to take you through the -- further details and numbers so far as the liability is concerned. Ankit?

Good evening, all. To further elaborate on the liability management. In this quarter, we did around INR 96 -- INR 956 crores [indiscernible] transaction from various banks, namely SBI, OBC and Indian bank. Going forward, we have more than around INR 1,500 crore sanctions in hand, which we'll be utilizing in the subsequent quarters. In this quarter, we used around INR 300 crore term loan, mainly from PSU banks like SBI, OBC, and also we refinanced from Mudra. Further, we have around -- about 15 -- INR 300 crore sanctions on hand, which we'll be utilizing again in the subsequent quarter. We have around INR 1,800 crore cash credit limit, which we utilize around 75% on a daily basis with WCL as a sub limit. During the quarter, we rolled over around INR 1,200 crores in this quarter. The PSL tag on TL -- on the term loan, government put under NBFC sector, along with our robust performance has been dealt -- has helped us to bring down the cost of the borrowing for the given quarter to 9.15% from last quarter of -- last quarter of the year -- of the corresponding year from 9.35%. We continue to work hard to further reduce the cost of borrowing by exploring new and cheaper source of funds. The debt to equity stands around 3x as of now. I'll hand over the call to Kamlesh sir.

Thank you, Ankit. So this is about the liability management and talking about how we create an asset during this year. As discussed with you, we grew our AUM by 20% year-on-year. And it is just to share with you that this was a very cautious decision on the part of the company to be very prudent and extend credit where it is due because it was a unique situation for us where we had sufficient liability and had very good traction on demand, but at the same time we had to be very circumspect on who qualifies for the loan, because when -- I personally believe that whenever you lend and extend credit where it is due, you are not only doing favor to the -- to your company, but also you are doing a favor to the borrower. So with this background in mind, we have continued to work with our borrowers. Thereby, I always -- I've always been advocating that we should not create borrowers, but we should create successful entrepreneurs. So this has been our fundamental on asset creation, the liabilities and the results are before you. So with that, we are okay to take questions from you regarding any of the queries you have.

[Operator Instructions] We have the first question from the line of Dhwanil Desai from Turtle Capital.

Good evening, sir, and congratulations for excellent credit quality in a very tough environment. Sir, 3 questions from my side. The first one is, as you mentioned, we were in a situation where we had ample funds available and [Technical Difficulty] also, but we are very selective and apprehensive in terms of lending. So in last 2, 3 months, at least, we are hearing a lot of data points where the economy is [Technical Difficulty] out and things seem to have picked up. So would you be slightly more or less circumspect going forward and you -- as you see situation on the ground?

See, first of all, I -- we were more circumspect in funding, as you rightly pointed out. And secondly, we are always not seeing so short term because if you see short term, you plan short term. So we never think about a quarter or half a year or year. If you would -- the right question to ask to us is what are we doing in the next decade because you can't frame your policies on a quarter. But having said this, just to answer your question, it will give you some heads up on that. That data point and ground level reality are not always in sync. It all depends upon what type of customers we get, what type of demand we get and individually how we can assess them in such a manner whereby they're eligible for credit. But having said that, even in this tough scenario, because of our network, because of our vintage, because of our customer base, we have the propensity to grow anywhere between 15% to 20%, which we demonstrated, and we think we will be in a position to grow.

Okay. Got it. And sir, second question is on our cost of funds. I think it has come down to 9.15%. And with liquidity situation improving, do you see any improvement on the cost of funds side going forward?

So as Ankit told, we are -- we constantly endeavor to reduce the cost of funds because I always interact with our bankers that you never lose money funding a good customer with a lower rate, but you lose money when you even charge higher and the customer is not good. So with our background and with the way what we demonstrated over all these years, it is our endeavor to get it further reduced. Let's see how much we can reduce it going forward. Difficult to give any number, but it has been a constant endeavor, and if this quarter is anything to take a clue about what we have done in this quarter, is it is sufficient to understand.

Okay. Got it. And last question on the housing finance. I think, as you rightly pointed out, we are kind of calibrating our business model around that space. I think one question that I have is that this is one space which is where there are many players and some of them have much lower cost of funds than us. So how do we profitably scale up this model? I mean your thoughts around that would be very useful.

So see, once again, as I told that lending is not only the business of debt and capital and the cost of fund. It is all about operational excellence. If this is a demand in the space where we are working, that is rural and affordable, it is huge design. And if you can understand the customer correctly and if you can satisfy the need honorably and on time, 100 or 150 basis points here or there doesn't make more difference to that. It's all about availability of the credit, understanding their income criteria and all. And having said that, the way we raise the liability, our cost of funds will not be that substantially high, even if you compare with the bigger HFCs or even the banks. So -- and whatever the cost they save, they are higher operational cost. So I don't think that is a substantial disadvantage on cost. Having said that, we'll be definitely higher on cost, but we do not have that substantial disadvantage on cost whereby it will be difficult to sustain given our customer's approach and given the large market space. So there also, the market space is not a problem, but the way we conduct ourselves on terms of identifying the customer and extending credit where it is due leads to a very calibrated growth in AUM.

Right. Sir, the question was from the perspective that we are earning a very, very healthy ROEs, generating very healthy ROEs at a -- on all other lines. Now in housing finance, can we replicate and -- towards 15%, 17%, 18%, not in near term, but in medium term as we scale up? And is that something which is in your business planning, your business model? Is that kind of number which is baked in or factored in?

Right. So we presume that housing finance ROE is on a critical mask, say, about close to INR 1,000 crores, and the way we have planned our activities and various asset class, we'll be in a position to generate close to 15% ROE. This is what we've planned internally.

[Operator Instructions] We will take the next question from the line of Kislay Upadhyay from Abakkus Asset Management.

Congratulations on another steady quarter. Could you help us -- help me understand AUM movement vis-a-vis the interest income movement quarter-on-quarter? AUM was slightly flattish, but interest incomes are significant...

See, what happens is that when we talk about AUM on a given day -- when I talk about AUM as on 30th September and AUM as on 31st December, you have to take everything into account in terms of interest earning. So the opening as on Q2 and the closing as on Q2, the average, and the average as on opening as on Q3 and the closing as on Q3. So to keep it simple, as the company will earn interest on the opening plus the increase abilities of it, if it has been steady, it has been around INR 5,900 crores for the whole quarter. The rest of Q2, INR 5,900 crores was as on the reporting date. So we have to take the average AUM. So this is how we calculate and share the average AUM.

Sir, average AUM on monthly basis for the 9 months is INR 5,500 crores.

We will get you those numbers, but it is -- it was on the average AUM for the quarter. The average AUM for the quarter will increase in Q3 as compared to Q2.

Okay. So the ending AUM that is reported is actually less than the average AUM for -- the difference should explain the interest income?

See, I didn't get your point. Can you come again?

Sir, did I get it right? The average AUM of Q2 was actually lower than the ending AUM of Q2, so the...

Exactly. It happens like that only because due -- the report -- the AUM what we report is closed -- on the reporting date, that the INR 5,900 crores something as on September, and as on June, there will be some number, so if you average it out. So the average AUM of Q2 was less than the average AUM of Q3. Yes, you understood it correct.

Okay, sir. Fair enough. Sir, second question, could you write on our plan to increase direct reach compared to lending to our lending partners, NBFC partners? How is that progress coming? And could you throw some color on that?

See, once again I will take you through the business model. The ultimate aim is to serve the MSME customers, that is lower income and the middle income group. Direct reach versus NBFC are the medium to sell them. So having said that, we -- our approach is not to fund the NBFC, but our approach is to fund to create the ultimate assets. Now it all depends upon the level of efficiencies at a particular region if I was direct to you or if I was to an NBFC. So with this business in mind, we've started this model. Having said that, I will always maintain that the number of NBFCs increasing and our operational centers increasing over a period of time, our operational centers increasing over a period of time will be more than the number of NBFCs increasing as it looks now. So over, say, around a 3-year basis or a 2-year basis, what looks like a 57-43 might close around, say, 50-50, and then it will improve on a direct basis only because our operational centers will increase. There's nothing wrong in distributing credit to the -- and having the last mile delivery of credit to the people who have the perfect demographic understanding, and with our granular approach with all these NBFCs, we have really created an efficient distribution channel. So going forward, it will strengthen.

Okay, sir. And finally, adding to this, could you mention the number of direct branches that we opened and NBFC partners that we added during the quarter?

During the quarter, I said, because...

3 branches, we've added.

We added 3 branches.

This year, we've added 27.

And in 9 months, we've added 27, and this quarter we've added 3 branches. And in terms of NBFC partners, I think we must have added around...

Around 7 to 8.

7 to 8 partners.

We'll take our next question from the line of Sneha Ganatra from Subhkam Ventures.

Sir, just wanted to know -- first question is on these channel partner. How -- what are the tie-ups and the [ fees ] on tractions which we are focusing?

See, the way we work on -- we time this is on an interest-sharing model whereby the -- where we have dedicated a 5-slide presentation on how we work with them. But even though to briefly take you through it, it's an interest-sharing model whereby they will originate as per our mutual agreed credit screen, which will -- and whatever they originate will be omitted and then we are deep diving them from time to time. And then there will be a rate of interest which will be decided between us and the NBFCs and the ultimate rate what they charge to the customer. And based on that, the interest-sharing model is devised. So it is an interest-sharing model with the NBFCs. And it depends from NBFC to NBFCs and the end customer discount too. Say for example, somebody is working at 19%, then the interest is shared accordingly. Somebody working at 24%, the interest is shared accordingly.

Okay. My second question is on the current, what is the status of the liquidity and the borrowing mix considering our -- some of the ALM are on the shorter tenure?

See, as far as our borrowing mix is concerned, around 40%, 45% to 50% is through assignment, the rest is through term loan and cash credit. And on terms of ALM, we have matching funds as far as assignment is concerned. Term loan, we have a liability, which is of a longer tenure of 36 to 48 months in -- as compared to our average maturity of around 24 months. So that is a positive liquidity position. And in terms of cash credit, whatever we enjoy that is renewed on every year, and that has been reviewed over all these years. So this is our liability profile as I talk to you. And in short, there is no ALM. There is always a positive ALM as far as ALM is concerned.

Okay. Sir, what is the outlook on the two-wheeler industry scenario overall? And what are the underwriting policies for our company on the two-wheelers and the mutual fund business also?

See, two-wheeler, as we are aware, it's now on 20%, 25%. We all hope that it picks up over next few quarters. And on underwriting policy, can't be share with you in detail, but to sum up, we extend credit where it is due based on the customer profile and the asset profile. So we decide the LTV according to the asset. And depending upon the customer profile, the loans are given to them. So in a nutshell, sufficient care is taken on the retail capacity and sufficient care is taken on what type of asset they purchase in terms of two-wheeler.

And which -- and going forward, how do you see the incremental growth? And which portfolio would you expect the growth could be picking up?

See, as evident from our asset profile, we are predominantly MSME funders and we have our niche expertise on -- in this segment over the last 2 decades. So obviously, the agility of the growth we are expecting it from this MSME products only.