Poonawalla Fincorp Limited (POONAWALLA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Q2 FY '21 Results Conference Call of Magma Fincorp, hosted by Emkay Global Financial Services. We have with us today Mr. Sanjay Chamria, Managing Director and Vice Chairman; Mr. Kailash Baheti, Group Chief Financial Officer; Mr. Deepak Patkar, CEO, ABF Business; Mr. Manish Jaiswal, MD, Magma Housing Finance Limited and CEO, SME Business; and Mr. Rajive Kumaraswami, MD and CEO, Magma HDI General Insurance Company Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Jignesh Shial, Emkay Global. Thank you, and over to you, sir.

Yes. Thank you, Asha, and good morning, everyone. I would like to welcome the management of Magma Fincorp and thank them for giving us this opportunity. I would now hand over the call to Mr. Chamria for the opening remarks. Over to you, sir.

Thank you, Jignesh, and thank you all for taking time out to attend this call. Hope you are all safe and in good health. The Indian economy has witnessed huge swings during the last 6, 7 months and now seems to be emerging resilient from the shadows of COVID-related stress going by the latest trends in the bond tax collection, vehicle and housing sales. And it has been significantly helped by good monsoon, continuous support from the government and RBI to maintain sufficient liquidity and boost consumption. The companies in the NBFC sector seem to be cautiously optimistic. The current focus, however, remains on portfolio quality. Most of the NBFCs have seen lower NPAs due to moratorium first and now Supreme Court order, which will see an increase in Q3 due to the post-Morat behavior and once the Supreme Court order is lifted. To manage this uncertainty, significant provision buffers have been built by the company. The collections are gradually returning to normal with 85% to 90% collection efficiency in September, and it has seen further improvement in October. Our focus at Magma during the second quarter has been on swift implementation of government support programs of ECLGs to MSME customers. The gradual opening of the fresh business is therefore in the focused products, restoring collection efficiency post-Morat from September onwards, maintaining high liquidity and maintaining the lead in OpEx reduction and cost reduction. I will now share some of the highlights with you in this respect. Over 90% of Morat customers paid September EMI. Over 96% paid at least one EMI in September or October '20. We have made additional COVID provisions during the second quarter of INR 90 crores, and the cumulative provision on account of COVID now stands at INR 238 crores, which is 1.5% of AUM. Based on the portfolio behavior and the stress testing of the portfolio, we are confident that we are adequately provided for to deal with any increase in the NPA and the NCL post-Morat normalization of buckets in quarter 3 and quarter 4. We expect restructured accounts under the RBI OTR scheme to remain very well and unlikely to exceed 3% of AUM as against 0.5% as at September end. We have received excellent support from our bankers during this entire period and are quite comfortable with the liquidity position at INR 2,200 crores. And we have a strong pipeline of sanctions both in hand and expected. The current benign interest rate has also helped us bring down our cost of funds by 19 basis points during the quarter and 39 basis points during the first half. And we expect this trend to continue in the second half as well with the annual reset becoming due. We have achieved significant reduction in OpEx to the tune of 70 basis points during the first half and expect the sustainable savings to the tune of 40 bps while the balance, 30 bps, will gradually come back as business picks up and the variable costs will go up. As a result of the other initiatives, despite additional COVID provisions made, our profit after tax has gone up by 29% from INR 30 to INR 38 during Q2 and by 89% from INR 40 crores to INR 76 crores during H1. I can safely state that we have now returned to profitable path, and it will improve going forward. We expect disbursements to start growing from Q3 at 70% to 80% levels and 90% levels in Q4 and touching 100% by March and therefore exit the year in a normal state. In pursuit to realize the true intrinsic value of our 3 businesses, we had decided in our Board meeting held on 27th August '20 to undertake 3 strategic initiatives to unlock value for the shareholders. Now I'd like to give you a respective progress and update on these strategic initiatives. The first was a sharpened focus in MFL. So in line with our strategic decision to focus on the high-ROA products like used assets, tractor and the SME, we have stopped sourcing low-ROA products like new car, new CV and the new CE. The current non-focused AUM runoff is envisaged to release equity capital of INR 475 crores by March '22, which is INR 235 crores by March '21 and INR 240 crores by March '22. And this entire INR 475 crores will be deployed to grow the focused products. The resultant mix change will range MFL's NIM, ROA and the ROE. The second initiative was on the value unlocking in Magma Housing Finance. MHFL, the wholly owned subsidiary of MFL, continues to strengthen its presence in the specialized affordable housing finance. MHF has initiated actions for a capital raise process for growth. MFL shall keep investors' preference in mind while finalizing the reorganization structure for housing company. And the last one was the value unlocking in our insurance company Magma HDI. Given the huge opportunity potential in the general insurance and promising prospects of Magma HDI, the company has received strong investor interest for participation in the capital raise process. Currently, we are engaged with few interested parties and hope to receive some commitment in the foreseeable future. Deepak, our CEO for the ABF business, is caught up in some medical emergency today and could not join. And therefore, I will share with you the progress on the ABF business. Auto sector has outperformed by 15% in Q2 on a Y-o-Y basis and particularly in September and October. Used car segment has grown, shown a similar growth trajectory and is quickly scaling back to pre-COVID levels. This augers well for us given that preference for the preowned vehicles is higher versus the new vehicles in the customer segment and the rural is [ stronger than the urban ] space that we operate in. Commercial vehicle segment, including used, have suffered the most during lockdown owing to the poor freight availability and lack of drivers and helpers. This customer segment has seen the highest stress in the cash flows and liability, as also witnessed by the high moratorium percentage. And we believe that it will take another 2 quarters to stabilize through the company. We are looking actively towards resuming disbursement in this segment's basis to improve on ground cash flow situation. Tractor and the used cars are and will be the standout performers, thanks to -- due to the quicker revival in the rural economy and need for personal transport. Following our decision to exit the low-yielding new vehicle business, I'm glad to announce that our entire disbursal in second quarter are from the focused products, which will help us in building a higher-ROA portfolio. While we are yet to reach pre-COVID disbursal levels, month-on-month disbursals have seen an upswing. Used car disbursals are at 75% of pre-COVID levels, in line with the industry. Keeping in mind our strength in the rural space, we have structurally realigned our sales vertical into vehicle and agri finance to focus on the needs of our customers from the agri and [ aligned ] activity. While there was a drop in -- 5% in the overall AUM versus March, our AUM in focused product has remained largely stable. And the drop was mostly from the runoff in our new asset book, which is the non-focused products. Our investment in strengthening collection structure has paid off, and it has fully stabilized in second quarter. And we are confident that our standards are in good stead while navigating post-Morat scenario. We achieved more than 90% collection efficiency in October and have made COVID provisions of INR 186 crores as on 30th September, which is 1.9% of our AUM, which is sufficient to deal with any increase of the NPA during the third and the fourth quarter. For quarter 3, with the onset of the festival season, we expect the demand to pick up in our operating product segments, barring medium and heavy commercial vehicles. In this respect, our drive towards digitization of our processing as well as expansion and engagement with our channel partners should help us in growing our market share in our chosen products and territory. On collections, our focus would be towards managing the Morat portfolio especially in the standard assets. I now request Manish to take you through the Magma Housing Finance and the SME business. Over to you, Manish.

Thank you very much, Sanjay. Good morning, everybody. So I'll first talk about Magma Housing Finance followed by the SME business overview. At Magma Housing Finance Limited, we are a national-scale affordable housing finance company with focus on retail, granular assets, entailing fractional construction risks. The semi-urban and rural economy demand is showing sharper growth in Tier 2 and 3 towns when contrasted with Tier 1 and metro towns. Magma Housing Finance has demonstrated resilience and has been able to capitalize on the current opportunity presented by the pandemic when the home has become the most valuable asset. We have bounced back to 87% of our pre-COVID level disbursals and also 92% on collections. We disbursed INR 267 crores in the last quarter, comprising of 98% of ready and self-construction cases. And it's nearly 2% of properties are the builder construction properties. Our AUM has grown by 23% year-on-year and now stands at INR 3,554 crores. Our AUM on overall mortgages vertical, if we include the LAP assets, which are parked in Magma Fincorp, would cross INR 4,000 crore in the last quarter. Our bucket 0 collections appear on track to reach pre-COVID level efficiency from this quarter itself. Asset quality is stable. Stage 3 assets at a gross level stand at 1.6% with improvement of 0.6% year-on-year. Keeping about conservative stand, we have taken additional COVID provisions of INR 6.5 crore in this quarter but took in additional COVID provisions, which for the year now stand at INR 18.3 crores at 0.5% of our AUM. The profit after tax rose to -- rose by 30.6%. My apologies, I'll repeat. The profit after tax rose 30.6% excluding impact of COVID provision of INR 6.5 crore to INR 18.8 crore against INR 14.4 crore in Q2 FY '20. Customer centricity is a way of life in Magma Housing Finance. Our core values remain of Go Direct, Go HL and Go Digital. We are endeavoring to inculcate a culture of humility to serve our customers and have adopted PMAY in supporting our customers as a way of life. Over the last quarter, 60% of our freshly onboarded home loan customers are eligible for PMAY benefit. This has helped -- this has also helped our women empowerment, and the strata for women borrowers now constitute 96% of our loan origination. We have started making inroads in our digital journey. Our LOS end-to-end digital workflow is launched in the last quarter. Our relentless focus shall remain being customer-centric and building a strong national-scale franchise to serve customers with meager documentation in semi-urban and rural markets. I will now come to the SME business. The SME business took long strides in working with Ministry of MSME, SIDBI and NCTGC to give a fillip to the initiative of ECLGS, which Sanjay mentioned earlier, under the government's Atmanirbhar Bharat program to provide timely liquidity to support our micro, small and medium entrepreneurs. Deploying the best of fintech capabilities, the SME team digitally accessed and disbursed 3,000 loans to SMEs amounting to INR 100 crores in end-to-end paperless and seamless process and the backstop of 100% government guarantees. Almost 60% of eligible MSME who received revival capital has been beneficiaries of ECLGS under our Go Digital SME initiative. We are exploring such collaborative opportunities to deepen our contribution under this program. The pandemic times have provided the opportunity to transform the SME business towards the Go Direct and Go-Secured strategy. The product, process, policy and training activities in line with the strategy has been completed. And the Go-Secured business has gone live already in 2 states. The SME direct business model will undergo expansion and enable direct connection with customers through gradual disintermediation. In line with our agenda of supporting MSMEs to reboot their business model, the company entered into partnership with Wadhwani Foundation, a leading philanthropic institution, and has reached out to over 500 MSMEs. Under the Sahayata program, the MSMEs are being offered pro bono consulting to navigate businesses during the pandemic time with focused advisory on digital learning management, resource management, financial and revenue enhancement programs. In ensuing quarters, the company would focus on accelerating transformation over disbursals and further bolster the franchise through Go Direct and Go Digital MSME business. I would now request our colleague, Rajive, to update on Magma HDI's performance.

Thanks, Manish. Good morning, everyone. The general insurance industry registered a growth of 5.6% in quarter 2 on the back of a robust growth of 20.9% in the health segment and 16.6% in the commercial business. The motor segment, however, continued to register the degrowth in the second quarter also, a degrowth of 3.5% in quarter 2 vis-à-vis 23.6% in quarter 1. On an overall basis, the industry has grown marginally by 1.4% in H1 of the current fiscal over last year. As a company, Magma HDI has grown by 3.7% in the second quarter with a strong growth of 148.9% in the health and accident segment and a growth of 45.1% in the commercial segment. The degrowth in our motor segment has also tapered from 28.2% in quarter 1 to 6.6% in quarter 2 of FY '21. Our journey on impanelment and commencement of business with OEMs continued in this quarter as well. With an impressive spread of partners, the company is well poised to grow both in the motor segment and on an overall basis once the market rebounds on auto sales. Traction in the health business continued this quarter as well. The health and accident segment now contributes to 7.3% of our total portfolio. Motor is now contributing to 71% of our portfolio and the balance being the commercial segment. Our investment AUM stands at about INR 2,646 crore as at September 30, with the leverage being 6.1x of capital. Our profit after tax for H1 FY '21 stands at INR 20.7 crores as against INR 2.79 crores in H1 last year. Our solvency as at September 30 stands at 1.78x. Over to you, Sanjay.

Thanks, Manish and Rajive. And thank you all for patient listening. So now me and my entire team, we are ready to take any questions that you all may have.

[Operator Instructions] The first question is from the line of Umang Shah from HSBC Securities.

Yes. Congratulations on a good quarter. Sir, I have a couple of them. One is to begin with, if you could just throw some light on the strategic initiatives for creating value in the Housing Finance business, are we looking at inducting some sort of a strategic partner? Or would we hire it off as a separate business entity? If you could just throw some color on this, that would be really helpful.

So Umang, as you are aware that over the last several years, the affordable housing franchise has built pretty well in Magma, and it has been gaining strength to strength. And as of today, the total AUM in the company is about INR 3,500 crores, and the net worth is about INR 500 crores. So looking at the growth opportunity, now we have decided to raise further capital in the range of about INR 400 crores to INR 500 crores, which can serve the growth capital needs for the next 2 to 3 years. And the AUM is expected to then rise to about INR 6,000 crores to INR 7,000 crores. In this regard, now we are looking to raise capital from the independent financial investors. And so far as the separate company is concerned, we, in fact, would be quite open to look at the preference of the incoming investors in terms of how we should reorganize Magma Housing Finance going into the future. Right now, it is a 100% subsidiary. And the raising of capital is what we believe will lead to the price discovery because right now, all the capital has been provided by the parent company.

Understood, understood. Okay. All right. That's helpful. And okay. So in terms of the management, nothing really changes. The company continues to operate as a separate independent vertical. Whether we list it out separately, that is something that the management will take a call in the future.

Yes. So absolutely, as far as the business operations are concerned, these are being conducted on a stand-alone basis even now. And that will continue as it is, and the franchise will continue to serve towards the affordable segment in the tier down, which are the largely self-employed, 65%, 70%. So that will continue, I guess, with no change whatsoever.

Perfect. That's great. Sir, my second question is on the ABF business where in your opening comments, you indicated that the onetime restructuring is unlikely to be higher than about 3-odd percent of the overall AUM. If you could just provide some color, is there any particular geography or any particular asset class which is contributing to this? Or this would be broadly kind of widespread across our customer base?

So the 3% of the AUM which I put out as the outer limit for the restructuring also is across all the 3 business verticals. It is not ABF alone. And as at 30th of September, the total restructured account is 0.5% of the overall AUM. And in terms of the ABF business particularly, the -- as you know that we are into cars, trucks, construction equipment and tractors. And we have seen that the stress is more in the commercial vehicles, whereas in case of tractors and in case of construction equipment, it is fine. In case of cars, again, the cars which are used for the commercial transportation, like those who are associated with Uber and Ola, is where we see that there is a load issue, and therefore, they are not able to generate enough cash flow. In terms of geographies, we have seen that because of the intermittent lockdowns, some of the states in August and September, like whether it is Bihar, Eastern UP, parts of Chhattisgarh, Karnataka, some part of Maharashtra, they got impacted. And now in fact, all the states, and if I tell you, about 300 branches, and we get a report on a daily basis, hardly 2 or 3 branches are the ones which should be closed. Otherwise, all the branches are functioning for the last 1.5 months or so. In terms of the segment which I spoke to you about, I see particularly in Karnataka and NCR where we see that commercial use of the cars for the taxi purpose are being associated with independent providers. Aggregators like Uber and Ola is where we see a certain stress, which is more than the other geography. And in terms of commercial vehicle, it is more pronounced in the medium and heavy commercial vehicles, and it is more or less all over. It is not restricted to a particular geography.

Okay. Great. My next question is to Manish on the SME business. If you could just give a little more detailed color in terms of 2 things. One is, obviously, we keep on hearing about kind of increasing stress in the SME segment. Clearly, they are kind of most impacted. Particularly with your portfolio, is there any particular segment again within your overall portfolio which is impacted relatively higher? And second, in terms of fresh underwriting or new customer acquisition, how are we looking at underwriting new customers and what changes we would have made in our underwriting process, if at all?

Thank you for that question. I think I will just request you to focus on the Slide #35 and 36 of the investor deck. One very important strategy which we had really consciously imbibed in the SME business was to have ringfenced our portfolio, which today largely comprises of unsecured loans. And it is ringfenced to 80% under the government guarantee schemes. And I would say that we have done a good job of not only covering ourselves well, but apart from this, we have also been able to run this business basis, the industry cluster and segmentation, which has come very well. So there is approximately, I would say, a large 3, fourth quarter of our business, which is actually not so badly ravished by COVID, so to speak. We already see green shoots coming in from the SME customers. We -- for example, give you a data point, in our bucket 0 collection efficiency in the month we just went by, we are very much close, almost bouncing back to normal, probably could be shown by 2% odd. But we feel that SME business, perhaps now that the markets are coming back, if we stay focused on the revising sectors like the chems, grocery engineering, health care, pharma, agri, food, electronics and all of that, we feel that if we segment it well, there will be opportunity. There will be certain segments which will catch up later. But I think what will be very, very important, in the segment selection. And at the same time, I've also mentioned that we have taken strategic steps in the business to move from completely unsecured to secured, from completely franchise-based to going direct and going digital. Perhaps we can say SME business today in Magma is an NBFC tech organization. And we can actually do a loan end-to-end completely digitally. So I hope that answers your question.

All right. Sure. And just one data-keeping question. What would be the cumulative sanctions and disbursements under the ECLGS scheme that you would have done?

So I'll tell you, at a high level, we have 15,000 customers. 6,000 customers would overall qualify. We have already disbursed loans to over 3,000 customers, which means that we have truck efficiency of 50%, could be the highest or the best in the industry. Possibly, given that extension until October, we might see another 1,000 customers coming in the fold. But by and large, whoever had to be served and needed revival capital had been serviced.

Okay. So you were saying that roughly about 3 out of 15 have been served and maybe another 1,000 can potentially come...

I must qualify, those who were eligible were only 6,000 because government has also put condition. This is those conditions of ones which were eligible and are putting our filters where we felt they should be looked at but only 6,000 customers because there are also a lot of dos and don'ts on who to not offer ECLGS to. So the ones who could qualify are only 6,000 customers.

And I'm assuming that on value terms, the broader percentages would remain the same.

True.

[Operator Instructions] The next question is from the line of Bunty Chawla from IDBI Capital Markets.

From your provisioning part, as we have seen, there has been a COVID provision of approximately 1.5% of AUM by H1 FY '21. And if we go with the numbers which you have gone on your collection, at least 4% book has not paid a single EMI. So how should we see this provision going in H2 FY '21? Because you already declared that at least not more than 3% will go under restructuring. So how this provisioning will pan out in second half of the year? And secondly, on the provision part, we have seen that gross 3 Stage assets or you can say coverage ratio has increased from 35% to 38%. So how should we see this coverage ratio on a sustainable basis?

So Bunty, I think you have asked a number of questions. And this has been one of the most important areas, which is receiving attention by all the companies in the sector. So let me try and attempt in different parts. One is out of the total INR 15,500 crores AUM, about INR 600 crores, INR 595 crores to be precise, which is 3.8% of the AUM, where the customers haven't paid EMI after the moratorium has been lifted, which is an improvement in September and October. And we've seen that compared with the other players in the industry, it was a fairly good performance by Magma. Second, now opposite to this, we have given moratorium to -- we have given restructuring only 2.5% of the AUM. And we expect that it is unlikely to cross 3%. So maybe some part of these customers who haven't paid, if they are generally cash-strapped and if we find that the asset is there and the loan to value is not negatively impacted, we may grant some of these customers restructuring options. So therefore, some will get addressed on that. Then we have a COVID provisioning of about INR 238 crores. If you calculate on INR 600 crores worth of these customers who haven't paid EMIs in September and October, then we almost have 14%, which is covered under the COVID provision. This COVID provision of INR 238 crore is over and above the normal provisioning in Stage 1 to Stage 3 assets. So we, as a management team, also carried out a stress test scenario on our entire portfolio, that depending upon the position as on 30th of September, how will this pan out in the second half of the year. And then we found that even in the worst-case scenario, we are adequately provided in terms of the COVID provisions. And we therefore should not see undue spike in the NPLs in the second half, third or the fourth quarter. And the last point that you mentioned about the PCR, which has increased from 35% to 38%, I think it may stay there for even beyond March until the time the COVID [indiscernible] is fully removed. We don't want to be in a hurry to roll back some of these provisions. Even if you look at in Slide 18, the Stage 1 and 2 provisioning coverage, that also has actually improved by about 40% from 2.2% in March to 3% in September. Some of these provisions may get driven, this is Stage 1 and 2. And we have put certain enabling conditions that only on normalization of collections can we roll back some of these provisions. So all in all, we are following a cautious and a prudent policy with regard to the provisions that we have created, the utilization of the provision and the release of the provisions.

That was very helpful. Just one clarification, you said that COVID provision which is -- is this a part of ECL provisioning total? Is it part of ultimately different on the balance sheet?

So we have 3 kinds of provisioning. One, you have ECL, which is Stage 1 and 2. Then you have a PCR, which is a Stage 3. And then you have a special COVID provisioning, which has been done by all the companies in the last 6 months. The -- if you go to that slide, I think Slide #18 -- yes, Slide 18, there, you will see that we have also given the total provisioning, which is inclusive of Stage 1, Stage 2 and 3 and COVID. Then we are setting on 4.8% provisioning of the total assets and which we believe is, by far, one of the highest in the industry and going by our budgeting and the percentage of customers who haven't paid any installment, which is 3.8%, which is quite sufficient.

Okay. And sir, secondly, on the liquidity part, how we are spending and how much is -- we need to refinance the borrowing, how much liquidity needs for that requirement, if you can share that for Q3 as well as Q4?

Can I say...

Yes.

We do not have significant repayments in the next 2 quarters. Maybe both quarters taken together could be about INR 1,200-odd crores. So that's about all. And as you know, we have INR 2,200 crores piece of liquidity right now. INR 800 crores is of liquidity which is waiting to be drawn. And we actually have quite a lot of pressure from the banking system to withdraw on the lines which have been sanctioned to us. We are actually going slow on applying for new line. So that's the situation right now, pretty healthy situation as far as liquidity is concerned.

Okay, sir. Lastly, as you have written in the presentation, as the normalcy, of course, there will be a disbursement. How do you see October and November months? Are we picking -- are we seeing any normalcy starting or picking up in the disbursement?

So this question I will take up. The disbursement, we are seeing that so far as the affordable housing, so far as used assets are concerned, this is already reached between 80%, 85% levels pre COVID in the month of October also. And we feel that in the third quarter, they may reach at about 90%-plus. So far as the SME business is concerned and the commercial vehicle business is concerned, there, we feel that it will take a little more time. In case of SME, we are cautious, and vehicle business, also commercial vehicles business, we are cautious. And once we see that the cash flows have started improving and the customers have deployment. So that, as I mentioned in my opening comments, that we hope that overall disbursement in the third quarter could be between 70% to 80%. And in fourth quarter, it could overall reach 90%, with March touching 100%. So therefore, we exit the year with the normal disbursement situation compared to pre COVID.

So lastly, sir, can you share any AUM guidance, AUM growth guidance for FY '21 and, if possible, '22?

So we have seen that there's some degrowth, which has happened in the first half of the year. As we mentioned even earlier in our guidance, our focus was more on maintaining the portfolio quality and profitability by keeping the operating cash flow and reducing the cost of funds. So I think having put that behind now and our AUM has degrown by, I think, about INR 400 crores, INR 500 crores. So in third quarter also, there may be a slight degrowth in the AUM. But the fourth quarter is when we will start seeing the AUM flowing back and start growing again. So in that situation, what I said [indiscernible] between 70% to 80% disbursement in the third quarter and around 90% in the fourth quarter. We should probably end the year at the same AUM as we started the year. And then next year is when we will look at growth.

Mr. Chawla, we would request you to please come back in the question queue for any follow-up questions as we have several participants waiting for their turn. The next question is from the line of Pradeep Agrawal from PhillipCapital.

So I have a couple of questions. One is with respect to ABF business. So [indiscernible] have seen a significant improvement in disbursements almost as far as pre-COVID levels. We would like to understand any specific [indiscernible] which is driving growth? Or any -- or is it spread across vital categories? That's my first question.

So as I mentioned that used commercial vehicle, also the traction is less. And we are also more cautious there. Similarly, in the passenger cars in the vehicle segment, which is used for the commercial application, also we are very cautious because we are seeing that there is an excess supply. The offtake is lower. So the disbursements are largely happening in the passenger car for the personal transportation, in the used tractors and in the construction equipment. So while at an overall level in used, we have reached the pre-COVID levels, but to your question specifically, the growth that we are seeing is coming in from the cars for personal use, tractors and construction equipment. And the growth has tapered off. And we are also cautious in terms of commercial vehicles and in terms of the commercial use of the passenger cars.

Okay. Sir, what would be in your sense, in your interaction with customers, be the utilization level in commercial vehicles? Has it improved or has it declined versus pre COVID over the last 6 months? Any broad sense?

Sorry, can you repeat your question? I didn't get it.

So would like to understand the utilization level for your CV customers. Has it changed versus pre-COVID level significantly? Or is it broadly in line?

No, of course, it has changed pre COVID to now. And like we did 2 surveys, 1 in the month of April/May and the other in month of July/August. Now I think it's a time to do possibly a third survey. And we covered more than 3 lakh customers across different geographies. And then we found that in August, about 60% of the customers were the ones who had deployment, 40% customer did not have enough deployment. And even though 60% had a deployment in the range of 60% to 65%, I'm sure the scenario has improved thereafter because we also see the collection efficiency having improved in September and October. Like in October, in our vehicle finance business also, we crossed 90% collection efficiency and 84%, 85% in the month of September. So there is an improvement which has happened. And what I hear in the month of October, in the last 2, 3 weeks, there has been some traction in the light and the small commercial vehicle segment. But so far as the medium and heavy is concerned, I think it is still maybe 1 quarter or 2 quarters away. So I will not be highlighting, I guess, that whether the markets will revise immediately in the third quarter for the medium and heavy commercial business.

Okay. Another question on your insurance vertical. So while you have mentioned you have been working with the insurance subsidy in the presentation, so if you can just give your thought on that, how that value unlocking is happening and what's the stake we are offloading, so some broad sense on that.

Yes. So Rajive, would you like to take the...

So as we've been reporting over the last 18 to 24 months, building up a fairly strong franchise on the retail distribution side. And with 83% of our business coming in from retail, the objective of the capital raise is to now raise capital to make sure that we are adequately capitalized for the next phase of growth, which should be sufficient for the next 2 to 3 years. So as part of this process, the endeavor is to raise anything from INR 350 crores to INR 500 crores of capital, which directionally should help us reach about INR 3,000 crore [ DWP ] in the next, I would say, 2-year horizon. And there is also a regulatory requirement from a group perspective to bring down the stake. So we are open to any kind of constructs right now. The primary objective, obviously, is to make sure that the capital raise that we achieve is about INR 350 crores.

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

So firstly, on the ROA tree, if I look at some Q1 FY '21 to Q2 FY '21 pre COVID, there is a vast improvement in ROA from 1.5% to 2.7%. And if I see, it is largely driven by margin improvement from 6.8% to 8%. So what has drove that significant improvement in margin in just 1 quarter?

So you want to take that?

Yes. I would like to bring one fact to your attention, which is that from the month of March until August, we were under moratorium. And therefore, there was no roll-forward or backward, most of the customers who adopted the moratorium. So when there is no roll-forward or backward, we do not have credit loss. The credit loss still comes only because there may be some [indiscernible] some repositioned stock we had in our disposal or Magma followed a very aggressive write-off policy, where all the ABF contracts are 100% provided and also written off at 730 bps. And definitely, contracts are provided in the [indiscernible] at 460 bps. So these are the 4 reasons due to which we may have had credit loss. But that would be significantly lower than the loss we would have when everything is open and when there is roll-forward, roll-backwards happening. So this is the reason the profit before tax is higher in quarter 2 and quarter 1, significantly higher. We have made significant amount of COVID provisions because we do feel that the portfolio which has moved forward in the month of September, and we have given this color, this is shared detail in our presentation, INR 1,497 crores of the portfolio moving to being part of the portfolio where the customers take a moratorium and they don't take September and then it's coming down to INR 595 crores in the next month, which is October. So we have made significant amount of provision there. You could also say that the COVID provision [indiscernible] is not -- if the situation was normal, should have been in the same range. So we would encourage you to look at our performance post-COVID provision and not pre-COVID provision. We would also like to say, and Sanjay has already mentioned this, that we feel that we have adequately provided against the stress which has built up due to the COVID.

All right. Sir, I'm trying to understand what will be the steady-state ROA for us in a non-COVID environment. So in FY '22, should I look at a normalized ROA of 2.7%? Or should I look at normalized ROA at 1%? Or if you can guide there. And similarly, what could be the normalized credit cost and NIM, that would be helpful, sir.

So I would say that for the current year, you should be looking at the post-COVID results which we have given. That should give you a fair indication. And this is given in our Slide 13, the key financial metrics. And the normalized credit loss would be in the range of about 2% to 2.5% annualized.

Just to add on to what Kailash has mentioned, the increase in the [indiscernible] between Q1 of last year to the Q1 of this year is basically on account of the reduction in the cost of funds. As we mentioned also that our cost of funds has gone down by about 40 basis points. The second, [indiscernible] profits have come in basically from the reduction in the OpEx, which also has gone down by about 70 basis points. So between the OpEx and the cost of funds, the reduction in the saving is about 1.1%, which a 25% tax rate results in a post-tax improvement at an ROA level of about 70 to 75 basis points. We have also said that in my opening comment that out of the 70 bps improvement of the OpEx, about 40 bps is what we expect to be the sustainable structure in view of the structural changes that we have done and 30 bps is what will come back as the business normalizes and the variable cost [indiscernible]. On the other hand, we have also said that our cost of funds will further go down, looking at the benign interest rate environment and also the annual reset of the interest rates coming up in the third and the fourth quarter. So we would hope that the inching up of the cost of the OpEx by about 30 bps as situation normalizes may be offset by the further reduction in the cost of funds by about 30 bps, and therefore, the overall saving of about 1% to 1.1% that we have achieved should be here to stay. So therefore, right now, our focus is, one, to maintain further capital, ensure that we don't have any spike in the NCL on account of portfolio coming out of the morat in the third and the fourth quarter. And out of INR 238 crore of provisioning on account of COVID that we are carrying, we would like to carry some COVID provisioning even for FY '22. So that in FY '22, we don't have any scars of the COVID on the credit loss scenario. So that's what Kailash mentioned that it should be in the ballpark range of about 2% to 2.5% in terms of the NCL will stay within that. As regards the specific guidance for the ROA for FY '22, we would rather like to give it at the end of the year than to give it right now.

Sure. And sir, secondly, in the disbursement mix, the share of tractors has not changed. I don't know why this is versus what we understand that the tractor segment has shown very strong growth in Q1 and Q2. So any particular reason for us we have not seen that growth -- or shares on that sector?

No, it is just that we are resetting our focus on that. Used is where we set it up about a year ago. And there, we have seen that we have already returned to the pre-COVID levels. And so far the tractors are concerned from quarter 3, which is from this quarter onwards, we should be able to see good traction. And we have also done a lot of clean-up exercises. Because as you know, half of the tractors are used for commercial applications and the half of the tractors are used for agri application. And therefore, we are having a micro market strategy in terms of our focus coming in from the 6 largest states in India, where the tractors are sold and we have now created a separate agri team within the ABF team, which will focus only on the tractors such that they can intensify the relationships with the tractor dealers in the channels and we can get better count of share.

Sure, sir. On the housing front, sir, what is our aspiration ROA and ROE there, probably FY '22, or over the medium term?

So we believe that -- I don't know why I'm hearing my voice echoing. So we believe that housing ROAs currently are already in the range -- a range around 1.6%. And we see that our cost of funds has been relatively higher versus the other players. And it began to come down significantly. We see that in the long horizon, not very long, probably in about a year or a couple of years' time as things kind of reach a brief momentum, we should be able to improve our ROAs 100 basis points more.

Again, just to add on to what Manish has mentioned, we are looking to raise capital in Magma Housing. With that, the leverage would go down and it will improve the comfort of bankers and the cost of funds should come down, as Manish mentioned. But our cost of fund is higher. And so we expect at least about 40, 50 basis point improvement in the cost of funds next year. In terms of the OpEx, again in the housing business also, while we are operating efficiently, but with the increase in the size, we expect another 20, 25 bps reduction in the OpEx coming in next year. So between the cost of funds and the OpEx, about 60 to 70 bps reduction in the cost -- overall ROA that we should be expecting at a pretax level on account of these 2 things. And then over a period of time, it will only improve with the operating efficiencies kicking in and as the portfolio grows from the current INR 3,500 crores to about INR 6,000 crores, INR 7,000 crores in the next 2 to 3 years' time.

[Operator Instructions] The next question is from the line of Kunal Shah from ICICI Securities.

So firstly, in terms of the stance of talking to source any of these products, particularly on the non-focused segment, so how long are we expecting it to continue? And then how should we look at this non-focused AUM to behave? So will that rundown be continuing or this is just a near-term interim strategy which is there?

So thanks, Kunal, for the question, and hope you are doing well. And so far as the non-focused product is concerned, first of all, this strategy is a long-term strategy and not an interim strategy. And this, we have taken after evaluating last 5-year strength in terms of the NPAs, in terms of the margins, in terms of NIMs and, therefore, the ROA in respect of these products. So that is one. So it is not going to get reversed in the near future.

Sir, just to verify, so in terms of cars, CV and CE, we will not be sourcing the new loans out there. So now would it be fair to assume, so [indiscernible] disbursements are 0, and this is what we should anticipate it going forward as well?

That's right, absolutely right.

Okay. And so this 30% of AUM market which is there, that will keep on running down also with [indiscernible]?

That's right. So let me -- Kunal, let me try to give you a slightly detailed answer on this. So maybe some of the questions that you are having in your mind may be actually answered automatically on this and then you can ask me a follow-on question.

Sure.

So you see this portfolio is now under INR 5,000 crores. You can see in Slide #31 that it is at about INR 4,400 crores. And we have about INR 700 crores' worth of capital which is [indiscernible]. We have done an estimate that total, and we are giving the near-term outlook, which is by March '21, INR 230 crores of capital will get released. And by March '22, another INR 240 crores of capital will get released. That is in the next 18 months' time frame, total of INR 470 crores of capital will get released. And this portfolio will come down very significantly. And the second question is that the AUM, what happens to the AUM? So we are now building up growth on the focused products, which are giving us the higher yield and the higher ROA adjusted for the NCL. That is the used assets, tractors and the SME. And we have got our engine, which is now working on that, so therefore, any fall in the AUM due to the runoff of the non-focused products. In about a quarter to 2, we will start getting offset by the disbursements that we will be doing in the other products. So that overall, what we want to suggest with Magma Fincorp is as a micro and small enterprise lending outfit. So all the lending that we do should be to the MSEs or to the farmers and which are all absolutely the priority sectors defined by the government of India and by the RBI. And all the products that we do also would qualify for the priority sector so far as the banking system is concerned. This is what our strategy is.

Sure. So then whereas last time, we were doing this entire consolidation exercise, we have created the branches that may be according to, again, the overall pricing, the asset quality behavior. So was there anything that was indicated that currently we go into the strategy? Because even within the non-focused products, we were doing it from a better grade advantage. So what actually led to this decision? Because we have a strong [indiscernible] cars, CV and CE. So what actually led to this certain strategy?

Two things happened. In the last 18 months, if you see -- in fact, almost 2 years, from October 2018 until September 2020, in these 24 months, the commercial vehicle sales have fallen almost every single month. And this has happened due to the lower freight availability, lower load utilization. And it has created a lot of stress in the industry. As a result, what has happened, the financials, NBFCs and banks, which are completely CV-focused, the prices have dropped very significantly. So even for a first-time borrower or with a 1- or a 2-week [indiscernible], the pricing has dropped to about 11% to 11.5%, whereas we used to do the lending at about 13%-plus. Today, if you do a lending at 13%-plus, it results in an adverse selection of customers. So therefore, we found that while we did the branch trading, we also introduced the trigger system based on the early warning indicators that [indiscernible], remember all of those things. We found that you are either not able to do business, but if you do business, then you have adverse customer selection. And therefore, we find that this segment is best scattered by the banks or the companies which have lower cost of funds. Given our positioning, and over the last 2 years itself, we have been improving and growing our used assets franchise. And there, we found that the prices have held strong and we have also got a sufficient hold in the finance on the used car market and the used tractor market. And therefore, we are growing that franchise. So this is one reason. The second reason is in the COVID. While the other markets have revived, whether it is the tractors, whether it is used assets and even construction equipment, not in terms of sale of new but in terms of the deployment of the existing construction equipment. But in respect of commercial vehicles, we are finding that it is still going through a stress. And this, therefore, we feel that is not the segment, especially the new commercial vehicle, that we would like to operate. So these are the 2 reasons as to why that we decided to take this call. And we also then look back for the last 5 years, even when we did all of these things as [indiscernible] the best of the year, what was the ROA, what was the ROE that it was producing. And then we found in order [indiscernible] the ROE, these product segments we'd not like to cut up.

And how does the operating structure change because of this? Because maybe most of them are quite different in terms of the entire operational expected as well. So what is the kind of rationalization which we can see? Because doing car, CV, CE and doing tractors, [indiscernible] affordable housing, the operating structure would also [indiscernible] different. So then how are we bringing or how are we trying to rationalize this at the lower level and the middle level as well?

So this actually had been done even earlier. So you know that we have 2 CEOs who are managing the business. So we have Manish, who is managing the housing and the SME; and we have Deepak Patkar, who took over as the CEO in February '20 to manage the ABF business. Now within ABF business, we have the used assets and we have the agri, which is tractors and the allied agri combos. So in order to bring in back the desired focus on a deeper [indiscernible], within ABF, we have created the dedicated team for the agri business that is sourcing of the tractor and the allied agri combos. And so far as the used assets are concerned, which is -- whether it is passenger cars and trucks and construction equipment, is being done by wanting. And we also have now gotten a Chief Business Officer reporting into Deepak as the CEO; while Mahender Bagrodia, you might be aware, is the Chief Credit Officer. So these are the 2 people who are reporting to the CEO. So we are adequately capacitized. And even at the lower than the middle level, the next question that you put up, in housing and SME, we have a dedicated sales, credit and the collections team, which is taking care of the housing and the SME business. Similarly, in the vehicle and the tractor finance business, the credit and the collections team are separate. The sales team has been further segregated between the used assets and the tractors. So therefore -- and there are certain markets, like tractor, as I said, we proposed to do this in 6 leading states in the country. So therefore, that particular business will come in from the 6 states, whereas we are doing business in over 20 states so far as the balance of used assets are concerned. So the structure remains in that nature.

Sure. And that's why the [indiscernible] being particularly on Maharashtra, Gujarat, we have still like a lower number of branches. And the branch rationalization has been -- so this is a part of [indiscernible]?

Yes. About 12 to 15 branches, we actually meld them with the nearby branches to get the operating efficiency. So total now, we have about 290-plus branches as of the end of September. Because you see in COVID times, every company, what we saw, every institution has looked at every single item of cost to see as to what is it that is sustainable that we need to cut out and also cut out the businesses which are either loss-making or which are not adequately profitable in the normal, steady-state scenario. So based on that, we did a micro market-level analysis. And with that, which market, which product we want to remain present. One advantage, of course, that we have is, out of this close to 300 branches, the infrastructure is shared by the vehicle finance, the SME, housing and the insurance business. And the cost is also accordingly apportioned between all the businesses, depending upon who is utilizing proportionately how much.

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

I thank everyone for having joined this investor call that we have had in the morning during the market hours, and wish you all the best and stay healthy. And we look forward to connecting with you after the end of the third quarter. Until then, goodbye.

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