Poonawalla Fincorp Limited (POONAWALLA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Poonawalla Fincorp Limited Q2 FY '22 Earnings Conference Call, hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities. Thank you, and over to you.

Thank you, and good day to everyone present on the call. This is Kunal Shah from ICICI Securities. We have with us senior management team of Poonawalla Fincorp, including Mr. Vijay Deshwal, our Group Chief Executive Officer; Mr. Sanjay Miranka, Group Chief Financial Officer; Mr. Manish Jaiswal, MD and CEO Poonawalla Housing Finance; Mr. Rajive Kumaraswami, MD and CEO, Magma HDI; and Mr. Mahender Bagrodia, Head Collections to discuss their Q2 and H1 FY '22 earnings as well as our business strategy going forward. So over to you, sir.

Thank you, Kunal, and good morning, everyone. I welcome you all, and thank you for joining the investor call of Poonawalla Fincorp Limited. As you are aware, this was the first full quarter for the new management team here, and we are excited to share the updates on our journey so far. We look forward to building a long-term and sustainable relationship with the capital market community, analysts and all our shareholders. We'll break this up into 2 parts. First, I'll talk about the progress we have made so far in our business transformation journey, highlighting some key developments since the last quarter. And then I'll hand it over to our group CFO, Sanjay, who will discuss the financial results for the quarter in more details. Let me begin with what we achieved during the quarter in terms of our business and our progress on the transformation journey. In terms of products, in our last call, we highlighted our focus lending segments being consumer and small businesses. Within this segment, we have further realigned our business mix towards highly scalable products, targeting formal credit-tested borrowers with increasing play on salaried and professional individuals. Previously, we talked about product segments we intend to operate in. We have continued to focus on preowned cars, affordable housing and business loans. During the quarter, we also rolled out SME LAP, personal loans and loans to professionals. We are also at an advanced stage of launching our products, which are medical equipment loan, small ticket LAP, co-lending a few fintech partnerships. As highlighted previously, our product offerings will be a healthy mix of secured and unsecured, giving us superior risk-adjusted return. In our previous call, I talked about 5 operating levers that will enable us to achieve the desired growth and risk-adjusted return on capital. Let me share where we are on each one of these and how they have started manifesting for us. The first 2 levers of brand and equity capital, coupled with our cost of funds, backing of a strong globally renowned group, along with sizable capital to support our growth ambition, at least for next 5 years, has already contributed to significant repricing of our existing debt and raising fresh debt at very fine rates of interest. The process started in Q1, as you are aware, and gained traction during quarter 2. The parentage and capital adequacy, along with a seasoned management team and revised business focus acted as a major factor for a two-notch rating upgrade received from care during the quarter. We now have a long-term rating of AA+ stable. We will endeavor to strengthen our liability mix with banks, debt capital markets, long-term finance institutions, including refinance institutions and continue to optimizing our costs. The third lever I spoke about was senior leadership team. We have put together a very strong senior management comprising leaders having relevant domain experience of on an average about 20 years and are fully capable of delivering the ambitious business plans we have envisaged. During the quarter, we further strengthened our leadership team and onboarded our group's Chief Operating Officer, Group Chief Technology Officer, Deputy CEO of our Housing Finance Company, Chief Risk Officer, and Head Treasury, all of whom come with significant industry experience, having worked at leading financial institutions in the country. With this, our leadership setup is largely complete. The fourth lever of distribution and collection infrastructure, we inherited a very well-established and established Pan-India branch Fincorp being complemented with strong digital capabilities. We continue the process of rationalizing our brand setup in alignment with our new product strategy. While we close or stemmed down some trend location, we have also identified 13 new locations. For the newly launched SME lab product, we identified 65 locations, of which 21 have already gone operational. Business potential, duradata and branch level profitability are the key factors that we decide any branch rationalization. The fifth lever we spoke about is our digital strategy, which is adopted on the basis of price, turnaround, convenience and service, where technology and analytics will speak to continued product innovation, digitization to help direct customer acquisition and provide data for analytics to further sell the customer better. We have already deployed end-to-end digital process for our products like personal loans, loans to professionals and business loans, where our entire customer journey from onboarding to disbursement is being handled digitally, which also includes our newly launched SME lab, which is a completely digital proposition where only the property, legal and technical happens in a physical comment. We are making rapid progress on digital transformation in all our other products also. We are also making progress on the digital integration of our channel partners so as to have to provide a seamless customer acquisition and onboarding experience. On the analytics front, we have developed tools for sourcing, credit underwriting and risk monitoring. Sourcing tools effectively aid in collection of customer segments and geographies, will generate preapproved offers and cross-sell opportunities for us. For underwriting, we have already adopted and deployed a channel scorecard for our preowned car finance business, for better channel management. I'm also pleased to share that we have rolled out BRE for the unsecured products and are calibrating the scorecard for our other products. We expect that all these initiatives are going to bring in cost efficiency, improved customer experience, make our policies consistent and collections more efficient in turn, enabling us to deliver superior risk-adjusted returns. Now last time also I spoke about that credit cost is the most important or the critical variable in lending. The previous quarter saw the impact of second wave of the pandemic hitting various businesses adversely in many pockets. While there were no blanket lockdowns as witnessed during first wave last year, the business activity was subdued due to many local restrictions during the second save of COVID, even as the resonation started to gather pace. However, signs of recovery from wave 2 started showing from June 2021. Our collection efficiency has been on an improving trend since the month of June, and the trend has continued through quarter 2. During the quarter, we have surpassed our pre-COVID levels. I'm pleased to share that we achieved 99.9% collection efficiency for the month of September. Borrower behavior during the wave 2 have also given us ample insights and has helped reinforce our underwriting policies as well as go about collections in a focused manner. The relentless efforts made by our collections team during the period has borne fruit during quarter 2, enabling us to bring down our Stage 2 and Stage 3 book, both year-on-year as well as quarter-on-quarter. We continue to make significant recoveries from the written-off pools and are adequately provided at this stage. In summary, we are well on our path towards achieving our strategic goals with right products backed by low-cost liability supported by digitization, cost rationalization and lower credit cost which will ensure that desired risk-adjusted return on the portfolio. Moving on to key highlights of Q2 performance. Our consolidated AUM grew by 6% quarter-on-quarter, aided by recovery and disbursements across all active product lines and improving macros. This is despite runoff of the discontinued products book. NIM improved by over 104 basis points year-on-year, aided by sharp reduction in our cost of borrowing. This covered with reduction in credit costs for the quarter actually led to a consolidated healthy in PPT, which now stands at INR 126 crores for the last quarter. To discuss the financial update in greater detail, now I will request Sanjay Miranka, our Group CFO. Thank you.

Thanks, Vijay. Good morning, everyone. I'm pleased to share the update on second quarter financial performance of Poonawalla Fincorp, which has been engaging to say the least, especially in the light of the transmission journey for the organization. Our consolidated assets under management grew by 6% quarter-on-quarter to INR 15,275 crores, with AUM of continued and focused products growing by 7% quarter-on-quarter, which is very encouraging. Quarterly NIM improved by 104 basis points Y-o-Y and netted 13 basis points quarter-on-quarter to 9.1%, aided by significant reduction in cost of funds. The engagement with banks gained correction resulting in aggressive repricing of the existing loans. Also, incremental borrowing is being raised at one of the finest trade in the industry. Since our last analyst call, till date, we have received fresh term loan sanctions of INR 2,000 crores at an average rate of 6.2%. On a quarter-on-quarter basis, our cost of borrowing -- average cost of borrowing declined by about 52 basis points, and we expect another significant decline in our cost of borrowing in Q3 as well. On the OpEx front, there was an increase to 4.8% compared to 4.3% of [indiscernible] in Q1, on account of capacity building done in line with our growth strategy. The OpEx is likely to normalize with growth in business over time. Talking about our ALM and update on liability management, we have an extremely comfortable liquidity of over INR 1,700 crore on book and surplus ALM across all the buckets as on September 30, 2021. Additionally, we have INR 1,760 crores of undrawn term loan tensions. The gross sale declined sharply by 100 basis points Y-o-Y and 127 basis points quarter-on-quarter to 4.1%. On similar lines, the net sales book declined by 122 basis points Y-o-Y and 70 basis points quarter-on-quarter to 2%. The credit cost stood at 1%, which is 240 basis points lower Y-o-Y and 50 basis points lower quarter-on-quarter. The pre-provision operating profit came in at 4.3% vis-a-vis 3.6% in Q1 FY '22 and 4.6% in Q2 FY '21. Our restructured portfolio at 5.9% of the AGM has remained at similar level as compared to June '21. As regards to collection efficiency, it continued to improve month-on-month from 93% in June to 98% in July and surplus the recorded levels achieved 99.9% for September '21. We at PFL adopted one of the most stringent and conservative provisioning and write-off policy in March '21. As on 30th September our provision coverage on Stage 3 book stands at over 52%. Moreover, we are carrying a provision cover of 16.5% on our Stage 2 book, which is one of the highest in the industry. As of 30th September '21, we are carrying about INR 147 crores of special COVID provisions, which is included in the above numbers. There has also been significant recovery from the write-off pool during the quarter. Our conservative provisioning basis device policy, steady improvement in the collection efficiency and further expected recovery from write-off pool provides enough cushion and help bring down the credit costs for the rest of the year. We would try to achieve net NPA of less than 1.5% by the end of financial year. Overall, our consolidated PBT in Q2 FY '22 is INR 826 crore against INR 50 crore achieved in Q2 FY '21 and INR 81 crore in Q1 FY '22, witnessing a significant 151% Y-o-Y growth and 56% quarter-on-quarter growth. The profit after tax has increased to INR 96 crore against INR 38 crore in Q2 FY '21 and INR 65 crore in Q1 FY '22. Our ROA more than doubled to 2.6% in on Y-o-Y basis. Thank you and seasons greetings. Happy Diwali to all of you. Over to Kunal.

[Operator Instructions] Mr. Shah in the meanwhile, the queue assembles, would you like to go ahead and ask a few questions from your end while the queue assembles.

So firstly, the way you have highlighted earlier in terms of the product sales. So we have already launched a personal loans, professional and SME net for this quarter, and even medical equipment, small ticketless and co-lending fintech partnerships are in the advanced stages of rollout. So if you can share the experience in terms of maybe the rollout of this new product, it's kind of acceptability in the market and incrementally in the disbursements, what is the kind of contribution we can see from these products over the next 18 to 24-odd months?

Thanks, Kunal. I think multiple questions in one, and I think that's your style. So I'll start with, yes, there have been immense learnings by the launch of our personal loan, loans and business loan product in the company and also the SME The first and foremost was that we decided or we will do everything end-to-end digital in these products. And where we upgraded our system, we created the capacity. We set up the systems upfront so that when we launch, there are no major issues. Of course, there will be teething issues, which we have gone through, but now the systems have stabilized, and we are on the right track to achieve the growth that we have envisaged for ourselves. A similar experience for our SME labs, which I mentioned, while it's a collateral heavy product. And I must say that the team over the last 3 months worked tirelessly to ensure that our first loan itself goes in an end-to-end digital format. There is a limitation in this product that we have to handle a physical collateral, where our physical search and legal and technical has to be done, which continues to operate in the same parameters, everything is paperless. In terms of volumes and in terms of scale, I would say that we exited September with a organic run rate of about INR 50 crores across all the products. And we continue to see that by end of this financial year, say, exit March, we'll be at a run rate of INR 800 crores plus with a very healthy mix of secured, unsecured. This year, the ratio will be almost 80% towards secured, which over a period of time as the opportunities arise will keep on changing. However, on a steady state also, eventually, it will be 65-35 in favor of secured and unsecured over the next 2 to 3 years.

Sure. And when you look at this organic growth, so there are still acquired portfolio, which is there, which was almost equivalent to the organically and originated AUM. So if we have to look at it over a period, no doubt it has come down from Q1. But if you have to look at it over a period, what would be the reliance on the acquired portfolio? And in terms of the profile of this acquired portfolio over the last 2 quarters, which has almost like INR 2,600-odd crores, how do we see this profile?

Yes. So Kunal, in terms of our ramp-up of organic disbursement, if you look at the trajectory, we did INR 1,295 crores this quarter, which was only INR 338 crores in the last quarter. And even if we go the last year same quarter, it used to be only INR 830 crores. So we have significantly ramped up our organic disbursement engine and which will continue to scale up at a tremendous pace. In meanwhile, we identified certain portfolios from the perspective of opportunity and deployed our surplus liquidity at that time at very, very profitable terms and which is value accretive for us. Going forward, our larger focus will only be on organic growth. However, if there are any opportunities, which offer us a great value accretive and profitable portfolio, we will consider it. But directionally, you may see and we also plan that we will grow largely organically and will not have much dependence on acquired goods.

Next question is from the line of Umang Shah from Kotak Mutual Fund.

And congratulations to the team for good quarter. Just continuing with Kunal's question, just wanted to understand that a more in detail about our portfolio strategy. So if you could just give a little medium-term sort of perspective. So currently, 40% of our loan book is sitting in defocused book. So let's say, as this book keeps on running down, over next 2 years or so, how should we look at the overall AUM mix in terms of the products? And second, what sort of growth are we envisaging in the overall book? So considering that the defocused book will probably run down over next 18 to 24 months?

Thanks, Umang, for your question. And you're right that we are -- our discontinued book is running down at a pace of almost about INR 1,000 crores every quarter and which will completely be over in the next 3 months odd. As we scale up our new product segments and the new focused business segments, you will see that over a period of time, say, over next 2 to 3 years, our personal loans, loans to professionals and the business loan segment, that will contribute close to about 20% of our total portfolio. Our SME LAP, which we have started and which is a hard secured product, will contribute almost about 25% of our total book. The new products that are on the like machine loans, the consumer loans and the other stuff, that will be about 5% to 7% and preowned cost will contribute almost about 10% to 15% in the overall portfolio. It will be directionally a secured to unsecured mix of, as I mentioned earlier, 65 to 35.

Okay. Sure. So -- and the balance will be mortgages in the portfolio, right?

Yes, balance will be the mortgage. It almost 28% to 30% will be our affordable housing and affordable lab.

Okay, sure. And what sort of growth are we envisaging, let's see, if I was to take a 2-year, 3-year outside of a view?

I think we have a very ambitious target, which we have stated in our vision statement also of 30% CAGR. So that is what you can take it. This year because our large part of our book is getting discontinued, so you might not see that kind of a growth in FY '22. But starting next year, you will see that is what we are directionally aiming at.

That's fairly clear. And just a clarification on, again, Kunal's question. So when you are talking about this 30% growth directly a large part of this incremental growth should come in organically, right? And inorganic probably will be just temporary or opportunistic. Is that a right understanding?

Absolutely.

Okay. Sure. Sir, last question from my end is in terms of management team build up, are there any positions or any businesses that we are probably -- where we are looking to add senior personnel or we are largely done in terms of hiring clients?

So if you look at the senior management team, Umang, I think pretty much the entire team is in place. What we are looking at strengthening is the middle management and also looking at augmenting the talent and also refilling, retraining at the zonal and at the branch level. So that will be our focus. That's how we take it forward.

And sorry, just one question if I would like to squeeze in Vijay. On your fintech tires, just wanted to understand if you could give some color what sort of loans, are we trying to originate via these fintech platforms? I mean, are these like ultra short tenor BNPL sort of loans or any specific product categories that we are trying

Umang, what we have discussed as a management team and what we have committed to our board also that ecosystem opportunity mining and partnerships will be one of the themes in our growth. Now partnerships could be with the fintech, which are operating in secured asset classes, the fintech, which are operating in unsecured asset classes, these could be medium tenure, this could be very short-term tenure also. Some of the partnerships where we have already onboarded are the of Cars24 and Ola, where we have already started in the last 1 week in terms of originating the assets. We are also looking at similar -- very strong counterparties, which help us. Our main reason is to keep the acquisition cost low as possible, and the portfolio, which is to our liking, which clears our credit engine, and that's how we are looking at building. So it will be one of the spikes of building the business. So that's how we are looking at it. .

Next question is from the line of Shreepal Doshi from Equirus Securities.

Sir, my question is further just an extension of what Kunal had asked. So on the digital, so we are focusing on digital sourcing. So if you could further highlight what are the other platforms because some of the products that we've launched during the quarter would need a completely differentiated platforms such as for personnel we have a completely different then SME LAP. So what are the if you can further give some color for medical equipment for small ticket left, what are the further addition revenue that we have in higher trying to

So there'll be multiple acquisition engines shippers, that digital acquisition, of course, we have started through our presence LinkedIn, Instagram, Facebook and Google Search. And we generated a reasonable number of customers with a total loan value of about roughly around INR 50 crores as of now, but that's a very initial stage of pilot that we have done. We are looking at online channel partners also, which I mentioned briefly about the preowned car business. Similar acquisition engines for our personal loans, also we are tying up with some of taxable names in the industry. At the same time, our physical infrastructure, which is very strong, will continue to provide us channel partnerships as well as direct sourcing. The major digital play in terms of intervention will come on the complete end-to-end journey, right from the login to disbursement. I think that's how we are looking at each one of the products. Digital acquisition will be one of the themes. However, digital transformation will be an ongoing theme across all the products.

Got it. Got it. And sir, what will be our BAU like business as usual OpEx upon AUM. Because if you look at now the business mix has will be changing completely. So what is it that we are looking at from OpEx upon AUM perspective over a [indiscernible] '23?

So right now, as we mentioned earlier, we are at about 4.8% in terms of our OpEx to AUM. As the chain goes up, you can fairly assume that over a period of time, we would want to travel toward a direction of 3.5% at a steady state. But it will take some time because we are in our capacity building mode. We are also ramping up our businesses. We are investing in technology. So over next 2 to 3 years, you will see a steady state 3.5% kind of OpEx to [indiscernible] '18.

Got it. Got it. So on the restructured book, if you can give some color as to what -- from what segment, how much would we have restructured like from the overall INR 900 crore of restructuring at the moment?

Yes. So see, the restructured book, okay, as a percentage has remained at 5.9%, which was our June number as well. The total book in June in absolute numbers, okay, was INR 854 crore, which has gone to INR 89 crore. Now this increase has been, okay, across both entities. So it will be on a preowned car segment, and then it would be on affordable alone. But numbers are very small, as you see. So I think -- and again, in terms of the behavior of the restructured book, I think that is a very important point. So if you look at the restructured book, 74%, yes, is Stage 1 from the data perspective. So that says that the quality of book, okay, even in the restructured segment is extremely healthy.

Just to add to what Sanjay mentioned, 74% is Stage 1, 58% of the borrowers remain absolutely current. And we are carrying highest provisions of almost 18% on the OTR pool. So we are in a good shape there.

Got it. But -- so from the segment perspective, from this INR 899 crores, what would be the restructuring Like what will it be coming if you can give maybe percentage terms color or from housing, how much have we restructured?

So I'll get -- Manish Jaiswal here. Just to give you an update in housing, we have total restructured assets as I would put in the 60-plus bucket of 2.2%. And in [ 1 to 60, ] we'll be proactive because there's no point making these customers who earn and pay chasing them for 20 years to pay 2 EMI. So I call it a soft restructuring. That is about 5%. Overall, we have seen a fairly good collection in our OTR pool in segment. In OTR 1, which is about INR 140 crore, we have seen 88.5% collection efficiency. In OTR 2, we are more than 100%, which means not only the current month due also past due that they recovered. So I would presume that we have and the structure looks post very shortly. I think we should drop with OTR and maybe give it a quarter everything gets there.

Got it. Got it. So then like -- I mean, so is it fair to assume that the actual slippage from this restructured book would -- so if you can give some change, what could that number be?

See, we would not want to predict things right now. All we can say is that this has been done on a very prudent measure only to put a temporary liquidity cushion to our borrowers. What you can safely assume is when we said 74% Stage 1 and 58% of the borrowers are current, and we are carrying a 18% provision OTR pool, so you can make your own safe estimates that we are not worried about the OTR.

Next question is from the line of Anand Bhavnani from White Oak.

Continuing on the OTR piece, September 30 of the last year, so there will be some pipeline of OTR, which is yet to be done. Can you give us some sense of how much it is?

So we don't expect, okay, any significant OTR. However, again, okay, it is very difficult to predict the environment. But otherwise, okay, we are pretty comfortable.

Okay. So there isn't much in the pipeline to move the needle from 5.9% significantly?

Yes. Yes.

Yes. Yes. And secondly, sir, in terms of our intent to kind of grow into consumer and keep -- 35% unsecured book. If you were to look at the broad competitive dynamics, as of today, this is like one of the most competitive environments when it comes to consumer loans like never in the history, if I were generalized in the history of India, have you seen so many existing banks, fintech and MDFC kind of chase consumer corporate loan is very weak. So consumer by default is seeing a lot of competition. And in an environment where there's a lot of competition, you have pretty aggressive growth targets. So what that rates are in place? And how do you kind of -- how are you confident that it wouldn't lead to any adverse credit quality outcomes for us given the combination -- a very important combination of excessive competition and very ambitious growth targets for us?

A fantastic question. And in fact, our own approach is that unless we are very certain of the credit costs that are going to -- we are going to incur in any business, we don't even consider that. So we have done a detailed analysis of the markets of the customer segments that we are going to be in, the confidence we have for this growth comes largely from 2 to 3 levers that we have. One is that our entire digital capabilities to handle end-to-end and process end-to-end without incurring a single peak of paper. So that's the biggest lever we have and that how we have been driving our unsecured business, whether it is personal loans, loans to professionals or the business loans. The second thing is we have absolutely strong credit policies. I mentioned that we have rolled out a DRE. We work in this business largely as a STP. We don't entertain much deviations. So this business is completely run on a -- just like a credit by invitation. That's the second lever. And the third thing, which gives us a lot of confidence that we'll be able to differentiate ourselves in this businesses is our on the ground collection machinery through our presence. So wherever we are disbursing, we have an accurate very sharp connection machinery, which has solved us well and we continue to sharpen that even more. So these are some of the reasons what provide us the confidence and ability to really scale up this business very, very efficiently.

And just to add to what Vijay alluded is see the opportunity is humongous in the market. While there is a competition at the same time, there has been space vacation by many players. And if you look at base on debt, if we talk about, okay, the targeted growth, yes, the absolute number is okay, not much. And being into 4 strong vertical and then adding more products, I think that puts us into a quite comparable situation to achieve the escalations.

Sure. Sure. And one last question, if I may. In terms of our originations, what percentage of our disbursal would be originated internally versus to, let say, partners and fintech partners and so on?

In which business, any specific business you're talking about?

Overall, So I said we had [ INR 1,295 crores ] of disposal in the quarter. So that INR 1,295 crores if you can give us a broad sense of how much would be originated internally versus through any partner that you would have to pay a fee?

Look at right now, looking at our -- there are 2 things happening with us. One is that we are undergoing a complete product and geography transformation. We had a particular model through which we were operating and largely in 2 specific product segments. As we transform the initial deals, the dependence will be largely on channels and that's how the industry also operates. As we keep on increasing the number of customers, as we keep on acquiring the number of customers, we'll focus more and more on which will mean that the customers we acquired, we will have more and more of cross-sell and upsell into the same set of customers. If I were to look at broadly give you a number, 70% as of now would be through the channels and about 30%, we would have a direct sourcing in our overall mix.

Got it. And in terms of collections, what would be the split, like how much would be through our own versus outsourced channels?

We have a complete in-house collections machinery, that's part. And therefore, we are confident of some of the rollouts because we are in a business of risk management. And the biggest confidence in risk management comes from the ability of collecting what we have disbursed. So that's what we are sort of leveraging on.

Next question is from the line of Prashanth Sridhar from SBI Funds.

I think in the past point in the call, but if you could just give us some update on how the ROA would look, maybe while down the line and maybe a bit longer to yield OpEx credit costs?

Yes. So Prashanth, as far as the yield is concerned, I think broadly, again, we are there. because we have to be mindful that we are going to add loan against property as one strong vertical, where obviously, we will have a adjusted superior ROA. However, yield would be lesser compared to the products. In terms of our NIM, okay, on steady state scenario, okay, we should see slightly more expansion, okay, happening on the NIM side, yes, over the next 2 to 3 years. In terms of ROI, so basically, see, what we are kind of looking at getting into about 3.5 plus ROI in a steady-state scenario. So you can see, say, by like 3 years, from here, okay, we actually getting to that situation.

To give more firmness on this, the average yield on the view on a long term, what we'd be aiming at will be about 13.5% to 14%. The NIM roughly stabilizing at around 8.5%. And what Sanjay mentioned that we'll aspire to deliver an ROE of 3%, 3.5% range.

Sure. Sure. That is helpful. And just one other aspect. As part of this transformation, there would be some onetime costs which you would have to incur right in terms of closing down old opening new places. What do you estimate that onetime transformation cost would be?

So I would answer it in a slightly different way instead of giving exact number of crores. If you look at our OpEx, which is, say, 4.8% of the AUM right now, so we see this remaining at this level for a few more quarters. And then as we scale up towards, say, FY '23 or by '24, we look at bringing it down to the numbers that we mentioned, steadily towards 4% and 3.5%.

Sure. Sure. That is helpful. And just lastly, what do we expect the normalized capital adequacy and leverage in that?

So CapEx, today, we are sitting at a capital adequacy, which is almost 50%. So what we can say is that we'll run our business on a steady-state leverage of under 5 and more somewhere around 4, 4.5 and which would translate into -- you can do the calculation on anywhere between 20%, 25%.

Yes. And just to add, see, we are -- our entire business segment, okay, is consumer and small business finance. And given that kind of asset mix, right, I think even if 5x level would be extremely comfortable and would also be ROE accretive at the same time.

Next question is from Ashutosh Mishra from Ashta Stock Broking.

Congratulations for the good set numbers. Sir, can you with your strategy on the mortgage and the lab portfolio, if we can So when do you see 2- to 3-year down the line, how you really want to take this business up from here?

If I have understood the question correctly, there was a little bit of disturbance in the You asked that how do we see the scale-up of the LAP business from here on?

Yes, lap and mortgage piece of the business, what are our strategy for that over the next 2 to 3 years?

So in terms of our scale up from here, we will grow these 2 businesses because these are 2 secured businesses for us, which is SME affordable housing plus affordable lap that we do. Our mix, which is today at somewhere around 31% in the total asset mix, it will move more towards almost 47%, 48% in the next 2 to 3 years, if that helps.

Okay. And which segment we will be targeting? And if you can help us know what is our current yield on the portfolio?

So in affordable home loans, our current yields are in the range of 13%, 13.5%. Our average ticket is in the range of INR 10 lakhs and we continue to focus on that. In our lab business, we will have a range of INR 25 lakhs to -- going up to INR 5 crores, but average ticket size to be anywhere between INR 75 lakhs to INR 1 crore. We are looking at TRG 65 locations, which we have identified by pan-India with a clear product and customer focus, with an average yield of around about 11.5% to 12%, we'll operate in that space.

And affordable housing. Our current portfolio is geographically coming from which geography housing segment

I request Mr. Manish Jaiswal, our MD, CEO for the Housing Company to take up this please.

So in line with the geography of being a national scale or finance company, I think we have been able to significantly on your standpoint, just to give you some sense of numbers, we operate in the 3 states of South India, which is Tamil Nadu, Karnataka, Andhra Pradesh, Telananga. This currently is giving us approximately about INR 40 crores of business per month. In the 3 states of west, We have almost equal balance. We are getting another INR 50 crores of business from the 3 states. In East, we are largely a West Bengal players, which is given about INR 15 crores of business. And in North, we are present in -- we are not present in Himachal, J&K but we are relatively well present in markets of NCR, Punjab, Haryana, UP, U.K. and parts Rajasthan, which is giving around INR 60 crores of business. So we expect to only keep it from here and we see potential of each of these locations, which we have grown over the last 3 years reporting a flavor of [ 30% ] that momentum to organically grow in the market by deepening and penetrating, and we are now wanting to expand with new geographies that approach by and large is finished because we have almost reached that we have to

Another question which I have is your cost of borrowing at on organization level. Currently, our cost of borrowing on all of the borrowing, which is profit [ 8.8% ] and our incremental cost is [ 6.3% ] and we have guided that next quarter also we are going to see the drop in the overall cost of revenue. So where you see this stabilizing around? It will be some down the line. Currently, where do you think those numbers will be now for us some

So see, I think there are 2 parts to reduction in cost of borrowing in part. One is the repricing of our existing debt and more than 2/3 of the repricing has already been consummated. The second part is about fresh loans coming at finance rate and we called out the amount which we have borrowed and at the rate at which we are borrowing incrementally. And the third question is in terms of the change in mix. From being okay, more PSU banks focused, we have already, okay, started kind of being diversified across PSU private and foreign banks. And then, becoming relative on the market side of borrowing. So on the whole, I think we should see definitely a 50, 60 basis points of reduction further in Q3. And the numbers which I'm giving you is on a steady rate basis, everything being because if the interest rates, the environment were to go up [indiscernible] credit debt. But having said that, we see 50 basis point plus reduction in Q3 as well. On the longer-term basis, it would be suffice to say that we could be one of the lowest cost fundraiser in the entire MGC space.

Next question is from the line of Vivek Kabra from Yes Bank.

With cost of borrowing going down, Would you continue to focus on affordable housing finance? Or would you enter normal housing loans?

So I'd like to just reiterate, we would want to only get deeper and significant in what we are good at. We do not want to try things where our core confidence is We would like to stick to that. But yes, there is a continuous play in the portal housing space per se. Again, given our higher cost of funds, we were not able to look at salary profile as we would. So therefore, that ability to deepen ourselves in the same space is much higher. So we would want to be significantly large in this space, and that's our ambition.

Okay. And I just wanted to understand one thing. What is the target asset mix for the housing finance entity?

So we would be a significant player. We would want to keep 70% as home loan assets and balance will be same affordable lab to similar customers who have bought similar and towards this asset. So if the this changes on one side, it's called home loan, other side is called lab. So our customer target market value costs remained exactly same, and we were just completely playing this model.

Okay. And just 1 last question I had. What kind of transformation is being done in particularly housing entity?

The transformation and housing is complete. It's now ramp-up, which has been happening for the last few years. We'll continue to do the ramp-up.

Just to add to what Manish said, as we are speaking more and more about digital transformation, so we have moved to a central processing kind of an approach right now. Also, we are looking at on the lines of what we have done in SME lab, end-to-end digital processing of the size of similar digital transformation, we will achieve in our housing finance company also in a very short period of time.

We'll take our last question, which is from the line of Shah.

Just a quick question. You have a joint venture in a Jaguar...

Mr. Shah, but your voice is slightly low. Can you speak a bit loud?

Is it audible now?

Yes, better. Please go ahead.

Tell me, what is this joint venture Jaguar Overseas Private Limited?

It's a significant investment, you may call it, and we can take it is not...

It is a nonoperating company, yes.

Nonoperating company, so immaterial.

Apart from holding and Magma, there are no in this company.

Okay. And just a quick bit on the Any updates on that?

On what?

On the inside trading case, the -- I believe that we have so any updates on that?

See, we would want to clarify that there is nothing against the company in that case, and the team is totally focused on delivering the business trends, which have been assigned in line with the Board's vision. And the individuals are taking up as per the process. So that is what our submission will be. Nothing more to comment on it.

Okay. And just last question. In the Poonawalla, I think in the last con, he said on his is that in the company?

We are not going to merge that company with with Poonawalla Fincorp and that company also will not continue into the business of lending or borrowing.

So the book -- so what all happened to the book?

There is a small book which is being the balance transferred into the Poonawalla Fincorp.

into our risk appetite Poonawalla Fincorp, part of the meeting criteria will is transferred. The rest will run down over a period of time. And thereafter, that entity will not enter into any lending business. And it has, in fact, even prospectively, it has stopped doing any lending activities.

Ladies and gentlemen, that was the last question due to time. I now hand over the conference to Mr. Shah for closing comments. Over to you.

Yes. Thanks to the entire senior management team of Poonawalla Fincorp sharing the insights on their strategic road map and execution. And thanks all the participants for being on the call. Thank you, everyone, and have a good day.

Thank you very much, members of management. Ladies and gentlemen, on behalf of ICICI Security, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.