Muthoot Capital Services Limited (511766) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '22 Earnings Conference Call of Muthoot Capital, hosted by Antique Stock Broking Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Vidhi Shah from Antique Stock Broking Limited. Thank you, and over to you, ma'am.

Thanks, Margaret. Good afternoon to all of you, and thank you for participating in the call. We have with us management of Muthoot Capital, Mr. Madhu Alexiouse, our Chief Operating Officer; and Mr. Vinod Panicker, Chief Financial Officer. I shall now hand over to Madhu sir, for opening remarks. Over to you, sir.

Good afternoon, all of you. This is Vinod Panicker speaking to all of you. Hope all of you are -- and your family members are keeping good health. Yesterday, our Board had approved the financials for the first quarter of the current year, and I'm presenting the same to you. Regret to present a negative bottom line, my first in 31 quarters since I've been presenting financials here in Muthoot Capital Services. Needless to say, all of us are upset and the immediate concern is to see how we can convert a negative to positive in the quarters to come. We have seen this coming, even when we met last time with the disbursement dropping significantly in the last few quarters, leading to a very low revenue. And then in Q1, the pandemic taking toll of us ensuring that we don't -- we can't move out, our customers come to us for disbursements of payments, all of which led to higher delinquencies, thereby higher provisioning. For the quarter ended June '21, the issue started price from the middle of April '21, and business and operations came to a standstill until about mid-June. After that, when it started, it was, I would say, pretty slow in the month of June at least, which ensures that there would be very negligible disbursement in the month of May and June. The disbursements for the quarter was at about INR 136 crores versus about INR 291 crores in the immediately preceding quarter, which itself was very low. We are aware that it was a low figure because it was lower than the immediately preceding quarter of, which was about INR 330-odd cores. This led to the AUM going down to the INR 1,978 crores versus the INR 2,088 crores. The INR 1,978 crores is possibly because of the collections being lower, otherwise it could have gone down further. And same quarter last year, we had a AUM of about INR 2,475 crores. For the quarter ended June '22 -- June '21, we had a revenue of about INR 98 crores, possibly the lowest in the last 15 quarters, which we crossed some time in Q2 FY '18. But that time, it was a climb, now it's a decline, and therefore, we are definitely concerned. This is against a revenue of about INR 110 crores that we did in the immediately preceding quarter and about INR 131 crores that we did in the same quarter last year. The issue with the revenue was that there was approximately a reversal of roughly INR 9 crores, which was on account of unrealized income and also the AUM going down, as I mentioned above. Here I just want to say that we have been following whatever we did under -- I guess in terms of income reversal. While there are a lot of other NBFCs who don't actually reverse. We -- against every NPA, every rupee of income, we do reverse. I have mentioned it some quarters back when we first time got into India. What steps are we taking for improvement and sure will be a query from all of you. And when that comes up, we will address the same to your satisfaction. The finance expenses was at about INR 40 crores, which is lower than the immediately preceding quarter, which was INR 41.9 crores or INR 42 crores. And the same quarter last year, it was about INR 53 crores. So the -- in terms of the interest rate or the cost of funds, it has come down to about 8.98 and it was up to about 9.12 in the last quarter and about 9.92 in the same quarter last year. We -- our belief is that this rate will hold for at least a couple of more quarters before we see some spike. The lower interest cost was based on both reduced utilization of funds of about INR 376 crores for the same quarter last year and INR 75 crores in the immediately preceding quarter and definitely the lower interest rate, which I mentioned above. The OpEx versus the last quarter, immediately preceding quarter, also saw a dip, mainly because most of our team members were at home, and therefore, collection was not actually handed over to the outsourced agencies and the in-house team was following up on all the collection, not necessarily the collection and sales team, but even the back-office guys were actually following up for that. And therefore, that was -- it was more or less in line with the same quarter last year, when similar situation prevailed. The provisioning was on account of high delinquency that we saw in this quarter, from about INR 179 crores, the overall provisioning went up to about INR 228 crores, which is about close to INR 50 crores of provisioning, which was accounted in the current quarter. The bucket-wise movement into the next level also impacted the provisioning, well, the NPA did go up. But at the same time, bucket-wise movement also impacted us a lot. This is after we actually had restructured about 37,000 odd accounts with a value of about INR 130 crores. A positive side out of this is out of the INR 130 crores, close to INR 65-odd crores worth of accounts are guys who have actually paid up in the month of July, which is a positive sign, and we are fairly confident that this will continue as we go forward. Maybe August will be even better. September could get better than August and so on and so forth. In fact, in the first 9 days of August also, we are seeing that we have collected about 55% of the monthly billing already. Last month, month of July, we collected about 92% while we had actually collected only 58% in May and 68% in June. So we are seeing the trends improving, and we are fairly confident that this would be -- the positive things will come as we go forward in the current quarter and the next couple of quarters. The bad collection and therefore, the impact on the NPA led to a provisioning of INR 50 crores, just as I mentioned, which unfortunately amounts to about 52% of income that we have reported. This led to a loss of about INR 19.9 crores before tax and about INR 14.7 crores after tax. Our single point agenda is how to come out of it? We have drawn up a detailed plan, and we are working towards meeting that one point agenda. I'm sure all of you will have queries on that, but I would request all of you to hear Madhu first. before you have your queries addressed. Over to you, Madhu.

Thank you very much, Vinod, and good noon to all of you. First of all, I hope all of you are safe. I think wave 2 had its own impact and all of us were really worried as far as wave 2 is concerned compared to wave 1. And from that perspective, I think we should see Q1 results and market from the context of 2 or 3 critical events, which I'll list out right now. This time, the pandemic spread besides urban, it went deep into rural areas, and it really crippled across the country, every kind of business, every kind of operations. So the impact was much significant compared to what it was earlier. And it happened at a time when we traversed in Q3 and Q4, we thought we are back to normal and business as usual. And then we saw Q1 pandemic and everything kind of coming to a standstill. Second was the result of pandemic impacting two-wheeler industry, where on an average, 45 lakh to 50 lakh vehicles were sold in a quarter. In Q1, the overall sales that two-wheeler industry could do at about 22 lakhs. A normal month, the sale would be 16 lakh to 17 lakh. And for the quarter, Q1, it happened only 22 lakhs. So there has been an impact in the industry as a whole. At the same time, I would not mince words in telling that customers' cash flow also got impacted significantly in Q1 compared to last year, this time, we saw customers really facing the problem because most of the businesses were closed and these are the customers who are either dependent on the daily activities or they are small business operators. So these are the few events that we should keep in mind while we assess the results across the industry. But MCSL, as an organization, and arising out of experience that we had during the first lockdown and the way we addressed it, we were really geared up to take this very systematically and in a focused manner. We ensured business continuity across the country, we were able to support operations pan-India. There were severe lockdown in Kerala despite that across the country, operations had been functioning normally, wherever states were open or dealerships were open, we were able to continue our business without impacting any of our turnaround time. All dealers across the country, and if MFL, that is Muthoot Fincorp branches were open, we continued our disbursement, we continued our operations. We continued our collections. So that was a good sign that as an organization, we learnt how to face these lockdowns and wherever we have opportunity, we did not miss it out. We also ensured that there's a continuous engagement with the customer. Last time, I had mentioned about customer connect programs that we have which we have built internally where the entire organization, if there's a lockdown and where we cannot operate out in the field, the team focuses on connecting with customers in a very systematic way, we connected with customers and facilitated in terms of whatever support they need, and especially from a collection perspective, all the customers have reached out despite the lockdown. And that should really help us as we go forward when the markets open. Of course, ensuring safety of our staff was most important thing. We focused on promoting vaccination as a group. We are giving financial assistance to all of our employees for both their vaccination. There is no cost to employees, but company would bear that cost. And we had seen that a majority of our team is getting vaccinated speedily. And as we go forward, I think we'll have a fully vaccinated workforce working in our organization. Vinod mentioned, so all these things resulted in muted disbursement. I think Vinod covered it in much detail. And while Q1 was bad, definitely, we saw uptick in July, we saw -- we are seeing much uptick in August, and I really hope that things should come back to normal as we enter into Q2. We are keeping a very tight vigil on that portfolio in light of the cash flow impact I mentioned about the customers, how they have got impacted. We are keeping a very tight focus on the portfolio. And we have reasons to believe that this asset related -- asset quality-related issue is more of a situational impact, and it is transitional in nature. We believe that this should improve as we go forward. And as the cash flow of customer improves, I think there is a sound reason to bounce back [Technical Difficulty] default in terms of intention of the customer default in terms of customer absconding, that is not visible as of now. If we see even the first lockdown also, we did not see that, and customers kind of came back and paid their installments. So from that perspective, we are monitoring the portfolio very closely. From a futuristic perspective, I think I'll give a slight flavor and then we'll get into Q&A. We are seeing green shoots in terms of two-wheeler demand. We are also seeing, I mentioned about improvement in customers' cash flow, which is resulting in much, much better collections. It reminds me how we closed Q4. I think we are somewhere heading towards that in terms of improvement versus Q1. As I speak to you, I think about our internal assessment is that about 90% dealerships were operational in July. And we hope -- and as of, we believe that about 100% dealerships are functioning in the month of August. two-wheeler sales has actually picked up in July. two-wheeler industries sold about 12.4 lakh units of two-wheelers. We expect this momentum to go up as we go forward. We see some pain in terms of production at OEM levels, supply levels, but that is easing out, that was in the month of July, but we see it lot easing -- these things are easing out. We see a very big uptick in [ Onam ] in terms of the stock that is available from dealer and the initial demand that we are seeing. We have put a lot of marketing effort for Onam in terms of marketing campaign through radios and digital mediums. So we are seeing that numbers are moving up in terms of -- from dealer point itself, sales are good. And as we enter into September and after September, let's say, Puja, Ganesh Chaturthi and things like that. And then as we enter into Diwali time, I think things should be absolutely normal from an OEM perspective, I'm saying, from the manufacturing and supply perspective, I'm saying. And once that happens, I think we should be back to the business as usual. From our perspective, just a flavor, that we are in around 234 districts, of which about 150 districts is where we are very strongly present. We are very [ gung-ho ] about those areas. And from our present area itself, we are able to get our country share. So I think that should give us a good flip in Q2. We have identified growth districts, which I have mentioned in my earlier call as well when we were into a budgeting piece. So very clearly, we have identified which are the districts we'll grow, which are the districts we will consolidate our counter share or market share. And I mentioned about the festive season, we are going aggressive in terms of our marketing and sales campaigns. For us, we are back to business as usual as far as our business is concerned. Q1, I mentioned it was one-off for the entire country, entire world. But for us, now we are back to business. Over to the audience for Q&A. If Vidhi, if I can request, you can open the Q&A session.

Sure, sir.

[Operator Instructions] The first question is from the line of Akhil Hazari from RoboCapital.

Am I audible?

Yes, Akhil.

So my first question is regarding the 3,500 branches that were mentioned in the previous con call. So what are the figures that you're expecting, the sourcing numbers that you're expecting from these branches?

So we have drawn up -- in fact in the past, we were dealing with some of the branches only in the South. Most is roughly about 17%, 18% or 19% of our reserve [Technical Difficulty] from these branches. But over a period of time, these numbers as a percentage have gone down. This year, we are aggressively looking at sourcing through those branches. And we are targeting about 40,000 disbursements from these branches, which could be close to INR 300 crores of disbursement in the current financial year.

INR 300 crores of disbursements?

Akhil, was that okay? Could you hear me? Or should I repeat?

I just -- the 40,000 disbursements I got. And so that is valued at INR 300 crores.

Roughly INR 300 crores. So have to say about 60 to [Technical Difficulty] per vehicle for disbursement. I just calculated that.

Okay. And my second question is regarding the S1 and S2. Can you give me the bifurcation? So in the presentation, it's given together. So what is the S1 numbers and what are the S2 numbers?

Just a minute. Give me a second.

No problem, sir.

This is S1, right?

Yes.

Roughly about [Technical Difficulty] AUM is in S1. 26% in S2 and 17% in S3. So that 1,978, you can -- 1,978 is the overall number, which was said. You can split it that way. 57, 26 and 17.

[Operator Instructions]

In the meantime, sir, I'd like to ask a question. Sir, I think I heard you correctly the collection efficiency for July was at 92%. Is that right?

That's right, ma'am.

Okay. And sir, do we see any more restructuring happening in Q2 as well. This quarter, we did some INR 128 crores of restructuring. Do we see the -- any more restructuring in Q2?

Some of it could happen -- in fact that we don't have a number with us, but then some of it would happen may not be to the same extent as what we did in Q1. But if people come and they genuinely come with a...

Request.

Request, and then they actually exhibit that they are actually suffering because of COVID, then we would need to take cognizance of that. So people on the ground, our collection team and everybody else they are speaking to customers and if they are suffering, they still come back to us, they inform that no, this and this needs to be taken care of. We try to dissuade it, but there are tensions, you can't do it.

Sure, sir. And sir, any color on which particular segment do these customers belong to? Like any category of customers where you're seeing more stress or any regions where you have been more restructuring?

We -- actually, we cater to possibly the bottom of the pyramid and maybe it could be a shopkeeper, it could be a fisherman, it could be a rickshaw driver. It could be anything of those categories. We are not trying to identify those. We finally thought that, no, this is -- it's global issue or I would say, countrywide issue. So all are suffering, may not -- I didn't want to try and to see what is this profession actually.

Okay. No, I meant any particular region, so whether these restructuring accounts are coming mainly from North or Western region or South or is it a mix of all?

It's broadly built in the same basis as the AUM because let us say, roughly 50% of our -- 55% of our AUM is from South. So give me a second. Roughly about -- I'm sorry, 65% is from South, about 7-odd-percent is from West. 12-odd-percent from North and 13% from East. So the broad split is around the same percentage, maybe more closer to the NPA percentage, which is that 55%, 14%, 20% and 11%. So that's the broad split, maybe offline, I can actually give you the breakup of the 37,000.

Okay. Okay. No problem, sir. And sir, the restructuring assets, they sit on Stage 1 or Stage 2?

See we have our -- while we had an option of covering everybody who was somewhere 90 days, we -- what we did was internally we said that the people who are maximum H2 -- no not H2 actually. Up to 60 days DPD would only be considered because as of 31 March, if we were 60 days DPD, those guys will only be considered. So [ Tanu ] was already close to 90 days and not exactly crossing 90 days, we felt that no, we had reasons beyond the current wave to actually not pay. So we didn't consider them right now.

Okay. Okay. No, sir, I mean are these restructured assets, they are currently sitting in Stage 1 portfolio or they're in the Stage 2? They're under which category?

Yes. So whatever they were as of 31st of March, they have gone to that same stage.

Okay. Fine. Got it. Okay. And sir, we have increased our provision coverage pretty high. It's gone up to 66%. And sir, when we say that the collections have improved. So any understanding on why we are increasing our PCR so much? Like we have already increased from 40% to 60%, and we are going further upwards. So any reason behind that until what level will we be comfortable on the PCR?

No, actually, our provision coverage ratio is around -- how do I put it? It is for our -- for provision loans, it's about 45. And for our other loans, we have kept it close to 100, 99.5. So on an overall basis, our -- so this is the S3 accounts. On an overall basis, our provisioning is about 11.6% of our total book.

Okay. Okay. And sir, how much do we have the COVID-related provisions, do we carry in our book?

Currently, we have not carried anything extra, but we are fairly confident that a lot of it basis, whatever we have seen in July, whatever we are now seeing for the first time, yesterday was the 10th day, okay? My records are up to the 9th, 9th day of August. We are fairly confident that a lot of it would either get moved to COVID-related provisioning, and we don't reverse it or it would get reversed. Either of the 2 will happen.

Okay. Fine. Got it. Sir, and lastly I'm asking on the asset quality. So yes, continuing -- we are seeing increase in stress in North and West side. I know we have asked this before also that North and West, we are seeing more stress and so how -- if you can just explain what measures are we taking? And whether or -- because of the COVID situation deteriorated and if you can give some sense on that?

Vidhi, Madhu here. I think the delinquency perspective, it has impacted across the country uniformly. But whatever measures we had taken in West, North or any other area where we have delinquency related problems. I think that area -- those areas, we should see a lot of improvement as areas are opening or people are able to travel, the collection team is able to visit the customer and collect the money. So because of pandemic -- so to answer your question because of pandemic, has the portfolio further deteriorated? No, the deterioration is normal across the country. So what happens next? The way forward is, whatever steps you are taking, it should improve and bring you back to business as usual as you continue your tight collection campaigns. North and West -- especially West was very badly affected, Maharashtra. Maharashtra was the area which was by affected by pandemic and more because people were not able to travel. It is not that many customers were affected much severely, but lockdowns were much stricter, people were not able to go out, move. And once that physical movement restrictions were removed, now people are able to move around. So it's -- the business model is simple. See if customer is there, if people can go and meet and a reasonable amount of pressure also has to be given in collections where customer is not paying. If that is happening, then the money comes. So it's a very simple business model as far as two-wheeler collection is concerned.

Okay. Okay. No because -- so there are another companies like Bajaj, and Bajaj also has seen a very high deterioration asset quality, their two-wheeler, three-wheeler is mainly 19% and that's actually because the three-wheeler was not being good. Whereas [ Kaff ] has also mentioned the same. And also Bajaj product, having different kind of customers and deterioration seen much higher. Whereas Kaff, if you see relatively has done better in terms of asset quality in the two-wheeler segment. So I was just wondering where do we stand and what is our strategy going ahead or because I guess we also are present mainly in Hero and Honda two-wheelers. The majority of portfolio is that, but still we are seeing some -- quite significant deterioration compared to our peers. So any reason behind that or any thoughts on the same?

No, I don't think so. We can attribute this to any other reason than the lockdown or people not able to move around. Of course, I mentioned about customers' cash flow getting impacted. That is a fact that is truth. And if the customer segment is more of salaried class and if people are -- the customer segment is employed in a reputed organization, then the problem is not much. But if people are self-employed and they are into their daily business. They're having small shops, which they open in the morning and evening they earn some money and then go home. If that is the segment, then it is impacted. I mean it is known to everyone. So it's more about that. And a lot of captive financials who do business, they have their model of dealer collections as well. So if the dealerships were closed, then probably their relation would have got impacted. So it is about physical presence. It is about distribution working in your favor, that is important. If that is there, then I think it is about the effort, the value of the effort that you put and that is proportional to kind of collections that you get.

Okay. Okay. Sir, what is the proportion for us, salaried and self-employed? I guess largely self-employed but if you can give in percentage terms?

Self-employed would be around 70%. The balance would be salaried.

Okay. Okay. And sir, how much hope is there for further reduction in the borrowing costs because we are seeing the yields also have dropped because I guess of interest reversal and -- but...

That's because of interest reversal. So that is the reason why the gap has reduced between yield and cost. The cost has gone down if you see. And maybe personally -- we believe that no, a couple of quarters, the cost may remain at the same level. The reversals would need to stop, which is our duty to reverse or stop it. And therefore, the overall gap will go up.

[Operator Instructions] The next question is from the line of Ashish Sood from InCred.

You have mentioned Stage 2 assets are 26% as on June end. Can you give us a number for July end [ first stage ] assets?

I don't have readily available with me, Ashish, maybe if we can get on a call, maybe post this call, maybe we can talk about it. I would need to take it, but I've not kept it with me. I'm sorry about it.

Okay. Okay. No issue, sir. And any target number you have in mind for disbursement for FY '22?

We hope to go to the -- at least FY '20 levels, which we did about INR 1,900-odd crores.

Okay. Okay. And are you sure capital adequacy is high? So are you planning to raise capital in FY '22? Or you are deferring to FY '23?

We are hoping and praying that the disbursement that we are planning comes along. And if the disbursement comes the way we are planning, we would need to look at something possibly in the fourth quarter because currently, the car has been going up. It's more to do with the reduction in the AUM. So -- and this quarter was an unfortunate negative figure, which reduced the net worth a little bit, but otherwise, it's more because of the drop in AUM that the car was going up over the last few quarters. But obviously, when the AUM starts going up, there would be a need to bring in capital. To some extent, we'll take care of -- by using the PTC and DA route. But beyond that, we will definitely need to look at raising capital.

[Operator Instructions] The next question is from the line of Akhil Hazari from RoboCapital.

I just wanted to ask you regarding in the previous con call, maybe in Q2 FY '21, you had mentioned market share of around 4.5% to 4.75%. So in this FY '22, are we expecting a similar market share? Do we see any reduction in market share?

Akhil, Madhu here. I think on an ongoing basis, from the finance portfolio, that is a vehicle that is financed in the market, we are aiming at around 4.5% to 5% market share. And from overall industry perspective, it comes to around 1.65% to 1.7%. That is the target that we look at every time. I mentioned about the areas that we are operational and where we want to grow and things like that. And when we look at those areas, 4.5% to 4.75% is the minimum market share of the financed vehicle that we aim at. And that's how the viability comes, that's how the counters are decided account, the deployment of manpower happens. So it is a part of the business model. So we should -- as an organization, we are committed to reaching those market shares.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

We are thankful to all the participants who have joined on the call with us and wanted to understand about the financials. We have tried our best to articulate most of the things that we felt was necessary. We have also put up a detailed presentation on the website and also on the websites of both BSE and MSE. We believe that, that is very dated and it covers all the aspects that one would want to know about the organization and the financials for the quarter. In spite of seeing that if you still feel that there's some more information needed, we are available on a call and/or on -- whatever is sort of convenient to all of you. We are thankful for all the support that we have got from you in the past and till date, it is our duty now to deliver and ensure that we keep you in high spirits, we ensure that the confidence that you have shown in the company over the last several quarters is not betrayed and you actually see a positive -- the company doing positively. And therefore, I would say, being beneficial for all the shareholders. We thank you once again. I would now hand over the mic to Madhu Alexiouse.

Thank you, all of you for being with us in this call. As I mentioned that we are looking at this Q1 as one-off. And it was something which was unavoidable as it has impacted across the country, a lot of organizations have got impacted. And I also mentioned that we have all the reasons to believe and we see the green shoots that is there, our distribution network, our -- especially our Muthoot Fincorp branches had been active even during Q1 and even now we are very confident that the distribution network is now fully in action, fully into the market, into the areas where we could not reach in Q1. So from -- both from sales and collections perspective, I think we are all set. We hope that around Q2, definitely, there would be a significant improvement from Q1 and Q3 as well, and that is assurance we have given to our Board and that Q3 is where we'll be back to business as usual. And I think then it is normal business for us. So as we go forward, I hope that all of us remain safe and with the hope that markets also respond in terms of coming back to normal and then OEMs start functioning normally, I think we should be back to normal as we close H2. So thank you very much once again. Over to you, Vidhi.

Yes. Thank you, and we can conclude the call, Margaret.

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