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

Ladies and gentlemen, good day, and welcome to MAS Financial Services Limited Q2 FY '25 Earnings Conference Call hosted by InCred Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Shial from InCred Equities. Thank you, and over to you, sir.

Yes. Thank you, Nikita, and good evening, everyone. On behalf of InCred Equities, I welcome all to MAS Financial Services Limited 2Q FY '25 Earnings Conference Call. We have along with us Mr. Kamlesh Gandhi, Chairman and Managing Director; Ms. Darshana Pandya, Director and CEO; Mr. Dhvanil Gandhi, Executive Director; Mr. Ankit Jain, Chief Financial Officer [indiscernible]. We are thankful to the management for allowing us to [indiscernible]. I would now like to hand it over to Kamlesh Gandhi, Chairman and Managing Director of MAS Financial Services Limited for his opening remarks. Over to you, sir.

So thank you, Jignesh, and good evening, everyone. I'm very happy to connect to all of you once again to apprise you for the working of this quarter, that is Q2 '25. I'll take you through the brief working of the company, followed by my colleagues taking this in detail, and then we'll be open for question and answers. Friends, just to start with, we had once again a very stable and a consistent performance for this quarter, growing our assets at the rate of 22.35% on a consolidated basis. Profitability at almost 25% -- more than 25% on a consolidated basis. And on a stand-alone basis, in MSSL, we grew our AUM at 21.71% (sic) [ 21.78% ] and profitability by 27% on the back of the recent capital raise that we did in June last quarter. And even in the housing finance company, that registered a very robust performance with around 33% rise in AUM and 25% rise in profitability. In consistence to working, the quality of the assets were maintained at 1.57% net Stage 3 asset and [ 0.65% ] net Stage 3 asset in the parent and the housing, respectively. So we were circumspect and we saw that the quality of the asset is maintained even during this challenging period. If I take you through the products, we continue our focus on MSME, wheels and to an extent personal loans, whereas 80% of our contribution to the asset comes from the MSME sector and the rest, 20%, comes from wheels and PL at the rate of 15% approximately and 5% approximately, respectively. So we will continue to focus on diversified asset mix. Going forward, as I said earlier also, that we would like wheels to contribute around 25%, housing to contribute around 10% going forward and the rest to be contributed by SME and then the MEL that is the small enterprise with the small business loan portfolio. And this will be on the back of a very strong distribution. Currently, we have 198 branches, which has led it to be anywhere between 215 to 220 branches by the year end. The center's reach has increased to 13,000. As you know that we work in a hub-and-spoke model -- on a hub-and-spoke model. Every branch will cover around 40- to 60-kilometer radius. So that enables us to extend our financial services at all the centers within that radius. We'll continue to pursue that model. And so far, it has yielded very satisfactory result in terms of quality and efficient distribution. In terms of our distribution through NBFC, that also remains very robust. The contribution of our NBFC, the distribution contributes around 34%, then 66% is through direct distribution. And as you all know that we are progressively increasing our direct distribution because of the fact that the speed of direct distribution outpaces the speed at what we do through our NBFC channel partners. So within next 3 to 4 years, we see this to be cycling anywhere around 70%, 75% in favor of our direct distribution. In terms of liability, well-diversified liability, I'm very happy to share that we have been in a position to raise the liability at will, but we have taken up the challenge of raising it at competitive rates to the maximum extent possible and also go for diversification. Currently, we have around close to 12% as capital market model, which over a period of time, and as you know, that our rating has been upgraded to AA- now since March. So progressively, we will have more exposure through capital markets. And within the next 3 years, we intend that to take to 20% as a mark of our diversification with some contribution from -- coming from ECB also. That will give us a very well-diversified liability mix, irrespective of the fact that we are very strong supporting domestically right now within our conventional means of funding, namely the private banks, public sector banks and the DIIs like SEBI, NABARD, Mudra and all. So we are well then placed on liability front, which Ankit, our CFO, will take you through when he takes you through -- on through the details. Very important part which I'd like to discuss here is on the HR front. We are -- on a consolidated basis, we are close to now 4,000 persons working in the group. We continue to focus on getting higher efficiencies from them. And at the same time, the optimal use of technologies should increase the productivity of all the employees, reflective from the fact that we are in a position to maintain our operational cost by and large on the stated objective lines. So as far as HR is concerned, we understand that it's a task to be worked upon and can be worked out. We are constantly endeavoring maybe recruitment, maybe upscaling, training, engagement and creating an atmosphere whereby people get an opportunity to demonstrate their skills. And as we have been doing since long, we value dedication and honestly above anything. And that has paid a good dividend for us with more than around 500 people working with us for more than 5 years and a very strong core team, which forms a very formidable second line. As I shared earlier, the technology will play a very important role as an enabler for efficiency enhancement. We have an in-house team of close to 100 people working. We have opted a build and operate model rather than a SaaS-based model. And I'm very happy to share that we have loan origination system and LMS at place and loan origination system is right place for all our -- across all our products. And as a next step of development, we are trying to make it BI-enabled. And we -- that process has started from April. Happy to share that within this quarter, we'll be in a position to launch BI-enabled LOS across our products, while currently, we have -- it is on a trial run, but that will help us to increase our efficiencies tremendously because of the fact that the clients [indiscernible] the disbursement to log-in ratio is really quite low. So if we have VRE in place, that will improve efficiencies at all levels, be it at the originator and be it at the credit decisioning levels. Talking about the current scenario. I think all of us hear a lot of news, and we have so much of information on our desk from time to time on -- especially on the credit quality on the overleveraged borrowers, and at the same time, the commentary is that still a few more quarters will look challenging. While I would agree to all those facts at the ground level, but we are very confident to navigate through this situation given our fundamentals. If you see that we are a 28 years old company, we have navigated through such situation in the past. Having going through such cycles in landing business is very -- is normal for over a period of some years, and we have seen this and navigated in the past very successfully on the back of our right approach to asset creation. Our approach to asset creation always remain on the dictum of extending credit where it is due. While we are confident of a 20% to 25% growth and as we have demonstrated over 118 long quarters and that too the growth, mainly through internal accruals, demonstrates our capabilities to navigate through cycles and the operational efficiencies and the control on the credit cost. But I would like to share here that while we have a medium- to long-term objective of 20% to 25%, we would not mind a slightly lower growth in favor of a better asset quality or a sustained asset quality and sustained profitability, while it can always pick up in medium to long term, that's not deviating from our medium to long term objective. We continue to be vigilant on the latest development at the marketplace. But as I said, that these fundamentals that place, lending can be a very complicated or an easy business, depending upon how you take it. And we have always followed the dictum of extending credit where it is due, discovering growth rather than just targeting growth at any cost and that has really helped us. And we all know that there is a lot of supervisory oversight in order to bring with an intention of the regulator to bring an orderly growth in the system. While it is a short-term pain, in the long term, it will bring about a more orderly growth, more importantly, because of the increasing role that is being played by NBFCs and even fintechs also entering this segment, which have a potentiality to grow big. But with a caveat that the regulator thinks that they should grow big with a balanced approach on asset quality customer services. So with an increased supervisory attention, we all NBFCs are should be cognizant of the fact that all the operations should be more compliant, and we are also working on the same lines that how the operations are progressively more compliant and how we are more sensitive towards the letter and spirit of the regulation. Over the years, we have added to that. We see no reason why we should not be in a position to do it, the -- withstanding the fact that it is continuously adjusting your operations and at times even the business models if required will be the order of the day going forward. So all in all, it was a good quarter for us. We continue to have confidence in the coming quarters as we go ahead, as we have done over all these years across our product lines and across all areas of operations on all the aspects of the business. I would like to hand over to Darshana to take you through the numbers increase. Darshana?

Yes. Thank you so much. Good evening, everyone. So to start with the numbers on performance. I'll be first briefing you about consolidated numbers and then we'll take the stand-alone numbers. So as shared that it was a good quarter for us. There is a growth of 22.35% in AUM on a consolidated basis. That is from INR 9,547 crores to INR 11,682 crores. And as far as PAT is concerned, there is a growth of 25.31% from INR 62 crores to INR 77.62 crores. Coming to the stand-alone numbers. Total income on -- if we compare the quarters, total income grew by 23.75% from INR 296 crores to INR 367 crores. Profit before tax, there is a growth of 27.56% from INR 80 crores to INR 102 crores. Profit after tax, it has increased by 27.60% from INR 60 crores to INR 76.57 crores. If we compare the half yearly results, total in the -- it is in similarity with the quarterly numbers. The total income grew by 23.73% from INR 577 crores to INR 713 crores. Profit before tax grew by 26% from INR 156 crores to INR 196 crores. Profit after tax grew by around 25% from INR 117 crores to INR 147 crores. If we look at the configuration of the portfolio, our micro enterprise loans grew by 11.39% from INR 4,260 crores to INR 4,745 crores. SME loans grew by 23% from INR 3,232 crores to INR 3,974 crores. There is a growth of 14% in 2-wheeler loan from INR 624 crores to INR 712 crores. Commercial vehicle loan growth is 62%, around INR 556 crores to INR 900 crores. And salary personal loans has a growth of 83%, INR 372 crores to INR 685 crores. So you can see that in the overall growth percentage, MSME segment contributed around 62% on -- if we compare the Y-on-Y AUM growth. Talking to you about portfolio quality, we could -- it remained stable. That is INR 2.36 crores gross Stage 3 asset as compared to INR 2.29 crores gross Stage 3 asset in June quarter. And the net Stage 3 asset is 1.57% as compared to 1.52% as on June 2024. Now coming to the housing numbers. The AUM stands at INR 665 crores. That is a growth of 32.67% from INR 500 crores to INR 665 crores. On quarterly numbers, the total income, there is a growth of around 35% from INR 15 crores to INR 20 crores. Profit before tax grew by around 23% from INR 2.47 crores to INR 3 crores. Profit after tax, there is a growth of 24 -- 4.63%, INR 1.90 crores to INR 2.37 crores. And half yearly numbers, total income grew by around 35.83% from INR 28 crores to INR 38 crores. Profit before tax, there is a growth of 30.23% from INR 4.48 crores to INR 5.84 crores, and profit after tax grew by 30%, INR 3.49 crores to INR 4.54 crores. Here also, the quality of the portfolio remains stable. That is gross Stage 3 asset is 0.93% as compared to 0.90% in June quarter and net Stage 3 asset is 0.68% as compared to 0.65% in June quarter. So this was about the performance for both the companies. Now I'll request Ankit to take us through liability and capital management.

Yes. Thank you, ma'am. So good evening to all. To elaborate on the liability management, we, through our efficient liability management was able to maintain average cash and cash equivalent of around INR 950 crores even after this period, and unutilized cash credit facility of around INR 300 crores. In addition to this, we have pension on hand to the tune of more than INR 2,000 crores in the form of term loan direct assignment and co-lending. In the September quarter we did around INR 600 crores direct assignment and co-lending transactions. We further have more than INR 1,200 crores sanction on hand, which will be utilized during the year. We recently entered into a core lending partnership with UCO Bank. This partnership will help us to further expand our clientele and provide credit to the sizable and underserved and unserved MSME customer at affordable cost. The company aims to maintain around 85% of AUM as our booked to direct assignment and co-lending partnerships. We have available capital facility of around INR 1,500 crores, out of which utilizations remains at around 70%, 75%, and rest percent is kept as a liquidity buffer. And during the quarter, we raised around INR 660 crore term loan which has available liquidity of 3 to 5 years. Further, we have around INR 800 crore term loan sanction on hand. Further, we raised INR 150 crores NCD to prior payment during the quarter. In terms of asset liability, maturity pattern are well placed here by the liquidity adequate and the cash flow in all the cumulative buckets is positive. The capital adequacy remains strong at 26.52% with Tier 1 capital at 23.76% and debt equity of 3.2%. The cost of borrowing for June quarter was 9.83%. The incremental borrowing which we did during the quarter is at around 9.75%. The cost of borrowing remains stable, and we expect to remain at the same level in the coming quarter also. So that's on the liability management. And now we open for the Q&A round. Thank you.

[Operator Instructions] The first question is from the line of Ankit Gupta from Bamboo Capital.

Congratulations for a strong set of numbers in this challenging environment. So sir, my first question is on the asset quality. Now if you can talk about, are you seeing some signs of stress across your geographies and all the assets? Any signs of some stresses across, let's say, if you look at all our product categories from SMEs to 2-wheelers and micro enterprises loan? So if you can talk about any signs of stress that you're seeing across all these product categories. And how do we see growth in these challenging times?

See, as subjected our gross 3-stage asset has increased slightly. So you can say that we have seen a slight stress across our product categories which we opt for, including MEL, 2-wheeler and commercial vehicle. SME had been benign for us. The marginal increase in the 90 DPD has happened, so that has taken from 2.27% to 2.36% despite of utmost caution exercised. This is a slight increase in the delinquencies. And going forward, we don't see any additional stress because what -- because the way we have examined our portfolio and the way we do it from time to time, we don't see that increasing substantially, while it might be range bound anywhere between 2.25% to 2.5% as we have always been maintaining. If you remember, we always talk about range bound gross Stage 3 asset from 2.25% to 2.5%. That is because of the very reason that each of the businesses they saw go through cycle and then can be certain situations what we are going through right now. So on the stress, we would be happy if we can be in a position to manage anywhere between 2.25% to 2.5% on GNPAs and net NPAs, anywhere between 1.5% to 1.75%. That is our stated objective. In terms of growth, our medium-term to long-term growth guidance remains intact, anywhere between 20% to 25%. We have always shared that we are not a quarter-to-quarter company. We don't mind a quarter of a lower growth in favor of a better quality and a sustained profitability. So we will take a call as we -- as this quarter crosses. And then we'll discover the right rate of growth. But it won't be substantially lower than what our long-term objective is.

That's good to hear. Sir, on the macro enterprises loan side, on MFIs, we have been hearing quite a bit of stress. The results, which also have been reported in the segments for a lot of macro finance companies as well as the SLVs do reflect the pain in the segment. So for us, now some of our -- our companies where we lend to the micro enterprise line loans doing, so if you can comment on that, sir?

See since last 6 quarters or so, we have been progressively tapering our exposures on micro finance companies. As I talk to you currently, they form less than 5% of our total exposure on AUM for the -- on loans given to MFI NBFCs. And we have been very selective onto whom they land. And they are the ones who have gone through a rigorous test of liquidity and solvency and the -- accompanied by our strong on-site diligence, so we continue to be very vigilant on those front as far as they were working with our MFI and BC partners are concerned.

Sure. Just last question on the SME front. Like MFI, it seems pretty clear that from the statements from the RBI as well as the companies that there has been some issues on overleveraging and the sector itself going through a tough time. On SME side, sir, any signs that you are saying, of course, our numbers have been pretty good. But for the sector, on SME lending, if you can comment, are there any signs of stress in this area?

Dhvanil here. So on the SME side, as you rightly mentioned, and we also listed that the overall numbers have been stable. At the ground level, yes, we are seeing some over leverage in some of the pockets. One parameter which helps us to look at this is that our rejection percentage has slightly gone up. So our policies have been kept slightly tighter since some time. So over leverage, I mean we look at -- we use parameters to come to that conclusion. But we are seeing that some of these SMEs have borrowed at a much faster pace. They are also growing. It's not that the growth is not coming. We are also growing equally fast, but on the back of additional borrowings. So this has to be monitored carefully. It doesn't mean that they will go bad. But because these are smaller enterprises, they have to be monitored carefully that the growth for them is sustained for them to service this debt continuously. So yes, slight stress on the overleverage front is being seen. Our rejections have gone up, but for the amount of business that we want to do, we are confident that we'll be able to read out the good borrower. We'll be able to bring out the good borrowers and continue our growth on them.

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

So 2 questions. The first one is around our NBFC partners. So have we changed any of our credit loss arrangements with any of our partners in the recent past? And if yes, what would be the number? And how do we look at the proportion being sourced from NBFC partners in the next 3 to 4 years? What would that proportion be? The second question was around assignment. Assignment and securitization markets are scaling new highs. Is there any pricing issue that is coming because of the supply, because there's a lot of bank portfolio also coming into the assignment securitization market now? Are we facing any issues in terms of pricing there?

So in terms of -- as I said earlier, in terms of our NBFC partners, we have been quite circumspect. And the loss, even because of the losses in our partnership business with NBFCs is understated like, it has not increased substantially. And it is within the FLDGs provided to us, and they are in a position to sell the portfolio as per their obligations. So that is not creating any stress as far as our book is concerned. On the second question on the configuration. As I have shared that over the next 3 to 4 years, there's approximately 70/30 in favor of our retail distribution only because of the fact that the retail distribution will grow faster as compared to our NBFC distribution. And in terms of assignment, I think how we -- if I understood your question correctly, how we work as far as assignment is concerned that we have a steady line of sanctions from the banks given our past track record, they take our seasoned portfolio and then an ECL is worked out and basis that the pricing is done. And this is the quality of our portfolio, we are in a position to raise the assignment limits well within our acceptable interest rates, that is sub-10%. And as far as assignment is concerned, it is in par with any other source of funds that we raised through term loans or through capital markets. And currently, we have a very healthy line of sanctions on hand as far as assignment is concerned. Ankit, if you would like to add something?

So this quarter, I think you are coming from the point where the 21% of off book is -- off book is DA. But because we did QIP last quarter, therefore, we had a higher liquidity on hand. And therefore, we raised -- our total borrowing this quarter was lesser as compared to last quarter. And some part was also because we did a lesser deal. And this resulting into a 21%, 22% output. As we told, we have been inclined to have a 25% of off book going forward.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, just one question. While you have articulated what the current scenario is like and how we are not seeing as much stress as some of our peers are seeing. So one thing that I was trying to understand is where the past cycles that we've seen and successfully navigated, back then, the proportion of loans which are sourced from NBFC partners and to that extent, the FLDGs that we had in our portfolio were maybe higher or significantly different versus our loan mix today where a large part of the loan book today is sourced through your retail distribution, where you might not necessarily have FLDGs in place. So in what we are seeing today in terms of the asset quality environment, how would that impact the scheme of things? So to be more precise, how could credit costs be different this time around versus what we have seen in the prior stress cycles?

So in this scenario, what happens is that when we are going to directly through a direct distribution, the loss, whether we talk about the manageable stress, we talk about the risk-adjusted returns, that is the loss that were anticipated, they are within those lines. So the numbers might look more as we progressively increase towards our direct distribution, but that will be offsetted by the higher yields, and that is well within our yield metrics. So whenever we were doing through our partners also, let me share here that what we were doing with our partners also, we are very circumspect on the fact that the mirror image of the portfolio should also be maintained, and we had an idea -- we always had an idea that we don't want to benefit at the cost of the partners' losses. So the conduct as far as the credit screening is concerned and as far as the approach to asset creation is concerned, has always been as if it is on our books only. So we are not finding anything new to adapt to the change in configuration when we talk about direct being increased as compared to indirect. And when we talk about the anticipated losses, I think that will be well within the risk-adjusted return anticipation as we see right now, and we are confident that it will be within that parameter given our credit underwriting. And that is why I shared that we won't mind. We would like to discover growth rather than just determine growth. And depending upon the market situation, we will be growing. And that will give us a lot of comfort in terms of asset quality.

Got it, sir. Sir, the second one is more of a clarification question. You did articulate that our medium-term loan growth guidance or long-term growth guidance is 20% to 25%. And in the short term, right, I mean you will not shy away from taking decisions because of which maybe growth could remain a little lower than the long-term guidance? Then, I mean fair to conclude that maybe this year, we are potentially looking at somewhere between 15% to 20%?

Difficult to assign any number, but it will not be that wide in range. And we will see quarter-to-quarter. It will be difficult for me to assign any numbers right now, but suffice to say that priority will be asset quality, profitability and growth, while our endeavor will be to maintain anywhere between 20% to 25% as demonstrated. But what I was sharing was that we would not mind a slightly lower growth in favor of better quality and profitability. So I could not assign a 15% to 20% range, but maybe a few percentage here or there.

Got it. Got it. And sir, just one last question, if I may ask. I mean during COVID, you really demonstrated that you indeed do not shy away from slowing down when need be, at least at this point in time, looking at the current environment, I mean you're not seeing anything like that, right, which will prompt you to really start going slow on business growth?

If we -- as you very rightly pointed out, we will not shy away anytime, be it COVID or be it a situation where there are other triggers causing quality issues where lenders have to be cautious. So in past also, we have maintained that we will not shy away from our stated objective of quality, profitability and growth. So we will take that call as and when the time comes and on a quarter-to-quarter basis. But as I say right now, as you say, in Q2, we could see a decent growth of 22% in Q3, maybe from a range of 20% to 25%, a few percentage here or there, if needed.

Congratulations on a good quarter.

The next question is from the line of Shreepal Doshi from Equirus.

My first question was on the NBFC MFI portfolio that we had, which constitutes closer to 5%, 6% of the total AUM. So how is that book shaping in terms of asset quality? And then have there been any slippages there? Or how is the asset quality trend there, particularly?

Just having 5% to 6% mix of our stringent quality parameters that we apply by onboarding or any of the NBFC MFIs, and the stringent quality parameters has resulted into a satisfactory performance of all those MFIs. So we are very confident on all the few MFIs whom we are working with and the natural risk hedges as a percentage of the portfolio constituting by lending to MF -- NBFC MFIs at reduced significantly to less than 5%. And we think those because of the stringent checks we are quite satisfied with the way they are doing.

Okay. Okay, got it. And sir, since you highlighted in your comment that you see that there are some -- there is some stress in the on-ground conversations or aspects that you track. So just wanted to understand, what are the key indicators that you are tracking at company level which is leading to the conclusion that you were coming to?

Yes. When I told one of the striking parameters is that our logging to disbursement ratios, our rejection ratio. And based on that, we come to know about the ground level situation of the borrower. And depending upon the information that we collect through various sources, through our local credit through credit scrubs from time to time, through the behavior of our portfolio, the early delinquency signals, we decide our credit parameters from time to time. And that is what leads us to believe in what we believe that for a particular product, we need to tighten the screens of a particular product, that things are benign. And depending upon the region, depending upon the product, that is the decision taken on a very continuous basis, by credit risk origination and collection in tender, and those are very dynamic processes.

Got it. And then you also indicated BRE-enabled LOS would be implemented across all products. So is it already getting implemented? Or is it still pilot level?

We are doing the side box of the thing. And the results are quite satisfactory. And I think by this quarter end we'll be in a position to implement a maturity of the product. But when any new application is adopted, it takes its own time for full-fledged results. So I think within this quarter, it will be implemented. And within the next quarter, it will be yielding full-fledged results. And on BRE, as I told earlier, also that we are using -- will be using BRE for no growth in order to reduce stress on the system, be it the originators or be it the credit decision takers.

[Operator Instructions] The next question is from the line of Hardik Doshi from White Whale Partners.

In terms of the constituents within the loan book, right, I mean we've always been growing the micro enterprises loan slower than the rest for a few quarters now. So when you talk about a potential deterioration, I assume that would mainly be coming from this segment, while the other ones will continue to grow at the current trajectory?

See, we have stated this earlier also that as we grow our balance sheet size, we would like to move more towards SME and more towards higher ticket size rather than just sticking to the lower ticket size. If you see our annual average ticket size is around INR 60,000 for individual loans, which are banking-based assessment and banking-based disbursement and banking-based collections only. But this has been our strategy since last 6 to 8 quarters. If you see since last 2 years, our SME book is growing at a faster pace as compared to our MEL space despite of the fact that there was no evidence stress in the system as far as MEL is concerned. So this is more out of our strategic intent to move towards a little higher ticket size, grow along with the borrower. And while MEL will play an important role, but its growth on a larger base will be lesser, not because of the credit quality issues alone, but because of our strategic intent to move towards higher ticket size.

Got it. But is it fair to say that the incremental stress that you're talking about in the system, is it mainly in the micro-enterprise loan? Or are you seeing it in other segments as well?

It's evident in the other segments also. The slight increase what we saw this time is evident from MEL, 2-wheeler, commercial vehicle, across segments because more or less, we serve to the informal and the middle income and the lower income group of the society. And whatever they are affected by various factors, that plays across board. So it is across board whatever the slight increase is across our products.

Okay. Okay. The other question I had is, while on the micro-enterprise loan, I know that the small subsegment of that is MFI and that is also through your partners. But if you look at the total number of customers or the profile of the customers that you have, how many of them would be in the same category where you would have given them an individual loan, but they would pretty much be also participating in the MFI loans?