Repco Home Finance Limited (REPCOHOME) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Repco Home Finance Q3 FY '22 Earnings Conference Call hosted by Elara Securities (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Daptardar from Elara Securities. Thank you, and over to you, ma'am.

Thank you, Jay. Good afternoon, everyone. On behalf of Elara Capital, we welcome you all to the earnings conference call of Repco Home Finance Limited to discuss the Q3 FY '22 performance. From the management, we have with us today, Mr. T. Karunakaran, COO; Mr. N. Balasubramanian, CDO; Mrs. Poonam Sen, CGM; Mrs. K Lakshmi, CFO; Mr. Subramanian Balaganapathy, DGM Finance. Without taking much of the time, I now hand over the call to Mr. Karunakaran for his opening comments, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Yes. Thank you. Good afternoon, everyone, and very warm welcome to Repco Home Finance Earnings Conference Call for the quarter ended December 2021. During the quarter, we witnessed the third wave of COVID-19, the Omicron variant caused temporary restrictions in some parts of our country. In addition, the third wave also caused some of our potential customers to put their plans to construct their house on the [indiscernible]. However, the situation has since normalized, and we expect business activities to strengthen going forward. Disbursements declined 9% sequentially, [ lower loan ] disbursement at INR 443 crores during the quarter and elevated repayment at 18.4% of the [indiscernible] at the rate of annualized caused the loan book to decline about 1% sequentially. On the profitability side, we reported strong loan spreads and margins at 3.8% and 5.0%, which are significantly above our guided levels of 3% and 4.3%, respectively. [indiscernible] the same to our superior risk-based pricing. The profit before the provision line declined 7% year-on-year to INR 119.2 crores in Q3. Despite the higher-than-average provision charge of INR 46.5 crores to the P&L, we reported a profit of INR 31.5 crores. We believe that the provisioning [indiscernible] has peaked and will normalize starting the next financial year. We reported an ROA of 1.1% in Q3 of current financial year as against 2.63% in the corresponding stage of -- in the last year. And an ROE of 6.2% as against 7.3% in last -- Q3 of FY '21. We believe it's an [indiscernible], and we will go back to above 2.2% ROA and above 15% ROE soon. [indiscernible] provision coverage ratio before considering the [indiscernible] improved to 45%. Overall, ECL provision now stands at 3.5% of the loan book. The balance between our exposure to the self-employed and the [ savvy ] segment stood at about [ 61.3% ] and 48.7% respectively. The share of nonhousing loan that is lapped in the loan book to about 18.8%. Cost-to-income ratio stood at about 19% in the first 9 months of current financial year. The total capital efficacy ratio remained comfortable at 31.3%, which is provisional. Our retail network is comprised of 155 branches and 22 satellite centers. Liquidity continues to remain robust for us as we carried over INR 400 crores of cash and cash equivalents at the end of December 2021. In addition, we had around INR 2,000 crores of unutilized line of credit from banks. Now I will summarize the key financial highlights for the 9 months ended December 2021 before the -- opening the floor to [indiscernible]. Total income declined 7% and stood at about INR 982.3 crores. PAT declined 33% [indiscernible] to higher credit costs and stood at about INR 149.5 crores. ROA and ROE stood at 1.7% and 10.1%, respectively. Loan book stood at INR 11,785.7 crores. Core profitability remains strong with strong spreads and margins of [ 3.8% ] and 5%. NPA before considering the RBI circular stood at 4.6%, having risen marginally from 4.3% in September 2021. I'm happy to announce that Ms. K Lakshmi has joined the leadership team of the company as CFO. In addition, our new MD and CEO is expected to join us later this month. Thanks all of you for joining the call. Happy to answer your questions now.

[Operator Instructions] First question is from the line of [ Akash Jain from MoneyCurves ].

I have a couple of questions and please pardon the frustration of some of our investors because I think there has been a lot of disappointment on the growth front over the last many quarters. Like every quarter in the con call, you have been guiding for INR 600-plus crores of disbursement in the quarter and every quarter, subsequently, we have had disappointments. So I'm just trying to understand where has the [ GAAP deal ], whether it has been in the problem with the assessment of what is on the ground from the management team or problems arise if you have not anticipated because every quarter in the last few quarters, you have guided for growth in the subsequent quarters that has not come. So I'm a little -- not really able to understand what is happening. Why the actual numbers were different from guidance every quarter after quarter on growth? So that is one part, sir. The second part is on provisions. So there has been obviously an RBI-mandated change, which obviously today, they have come back and said that you have more time to implement it. But how much of that provision has impacted provision for this quarter? When I -- the reason I'm asking for this is because currently, now the provision is based on ECL, right? So even if the headline GNPA number is higher, has it translated into higher provision because of the change in RBI norms? And if the RBI norms would not have changed for this quarter, would our provisions have been lower? And just a corrected question to this is, given the fact that this is going to any way be implemented in a few quarters from now, are we making changes in terms of our collection process in terms of educate our clients in terms of trying to change the whole process of collection so that the headline number doesn't look so high when it's finally implemented.

See, I'll answer the second question first. On a Stage 3 to Stage 2 basis, our incremental increase has been around INR 45 crores. So assuming a coverage ratio of 45%, the provision would have been around INR [indiscernible] crores and not [ INR 76 crores ] to answer your second question. Of course, the incremental provision would have been [indiscernible] And to answer your first question, see, given the sale of transitioning, we tightened the credit norms. And we're doing less risky loans when this COVID pandemic hit us. So we are at the stage where we're not able to go back, not able to move forward as well. So which is why our disbursements have been subdued. But we hope with the management change, the disbursements will come back to pre-COVID levels from Q2 of next financial year.

Yes, we have seen some positive signals from our field, [ lodgings ] are improved, and we are expecting sizeable disbursement in current quarter.

So did we take a more risk averse approach in the last few quarters? Because we have been one of the few HFCs, which have had challenge on growth. A lot of other NBFCs and HFCs are also talking about the balance transfer out to banks and are suffering because of that part. But to us, at least our company has suffered a lot more than the other HFCs that I follow. So I don't know whether that's particularly an issue with our kind of customers and the fact that our rates for our customers are higher, so they are more [indiscernible] by lower rates of banks because other rates are certainly on the higher side than other HFCs that I follow.

It has more to do with our assessment of the situation. We do not expect things to normalize so soon. So -- which is why we are cautious to cherry-picking loans to put it to play.

On the -- because of this deferment of the [indiscernible] for a few more quarters, are we going to write back the provisions we have made in this quarter -- in subsequent quarters? Or the incremental provision will then adjust accordingly?

No, we are not going to make any reversal in provision in current financial. We will review the situation in next financial year in Q1. Based on that, we will take a call. Right now, we don't have any plan to reverse the provision.

And you didn't answer my question in terms of the process so that when it gets implemented after a few quarters, do you see the elevated levels of GNPA to be there? Or the collection process will be tightened such that the GNPA doesn't go up when the norms get implemented?

The collection process will be tightened, but it will be hard to say now where the number will land up. But in terms of [indiscernible] 7% is the outer limit [indiscernible].

[Operator Instructions] Next question is from the line of Sarvesh Gupta from Maximal Capital.

Sir, this is with regard to your statement that you have been...

Mr. Gupta, sorry to interrupt but your voice is slightly low, sir. Can you speak a bit louder?

Is it better now?

Yes.

Okay. So sir, as you just said that you have been cherry-picking the loans. But last quarter, when the call was held in the middle of last quarter, we were told that Q3, the disbursements are going to be around INR 1,000 crores, not just for Q3, but also for Q4. And that was when half of the quarter had already passed. And now you have posted a number which is like 45% of the guidance for the full quarter. So how do you read that sort of a statement coming out of your company, wherein when 50% of the quarter is gone, you are guiding for a number, which you are not even able to achieve 45%. So you were behind by a large margin. So obviously, I don't think that you were in a mood to cherry-pick when you said that. Second is, you had also said that 3.5% is going to be the gross NPAs for the end of this year. Again, this was a guidance made in the last con call itself. And you are saying that the economy has normalized much faster than your expectation. Still even if you look at your non-RBI gross NPA numbers, they have actually gone up. So how do you make sense of your statement that the economy has normalized, but your gross NPAs have gone up significantly in the matter of 1 quarter.

This is a seasonal color to our asset quality, which is why the NPAs ramped up slightly to 4.6%. However, we expect the pre-RBI numbers to come back below 4% in Q4. And regarding your first question, that was an internal target [indiscernible] Mr. Gupta spelled out. Our guided target was not INR 1,000 crores. It was more around INR 600 crores. [indiscernible].

Sir, but what are the reasons behind it? Why we are consistently falling short of our guidance? Is it because on the ground, we are not able to capture the customers? Or is it because we feel that our strategy is wrong because earlier also in one of the calls, it was said that now we will be focusing more on growth and margins. But still, we see the NIMs are inching up, but your growth is lagging behind massively. So is it a result of a wrong strategy? Or is it because of lack of execution on the ground? Or is it because something else? Because ultimately, the numbers are telling that the performance is very, very, very poor. So if that is the case, and if we are cherry-picking and we are not growing, then at least our gross NPA number should be looking good. But I don't think in the last 2, 3 years, you have seen any benefit even in -- even from last year to now, there is no benefit on the gross NPA number. So even gross -- if you're cherry-picking, then gross NPA number should improve, that is also not happening. If you're not cherry-picking, then gross number should improve, that is also not happening. So what is happening, sir?

Asset quality performance of the book built after 2018 is excellent. The NPAs are lower than [ 2% ]. It is the book built before that, that is creating temporary problems. As we have demonstrated again and again, we don't lose money. We have not lost much money in our business. We lost around [ INR 9.5 crores ] till date. So we are -- the content of recovering our money, but with a time line. And sorry, we lost the first question. Can you please repeat?

My question is, basically, is it a lack of execution on the ground or a wrong strategy, which you...

Even in the space of transition when this COVID pandemic hit us, we have tightened our credit norms, trade policies as well as we were cherry-picking our loans. And now we are at a juncture where we are not able to go back nor move forward. So we hope that this phase will be over in the next couple of quarters. And you will start seeing improvement from Q1 of next year.

Sir, when you have hired a new top management in terms of both CFO and CEO, you obviously would have had some discussions to understand how the strategy should be going forward. So if you can elaborate a little bit on what is the thought process of growth and margins? And how do you plan to grow? Is it because of more branches? Is it because of something else, it needs to be changed? I think previously, we were also trying to change a lot of internal processes. I don't know what happened to that and where do we stand there. So if you can at least give some thoughts on how you are going to do things differently, which will lead to different results because, obviously, nothing has changed in the last many quarters.

One reason that we have found out is our ticket size has not grown at all, even though loan accounts have grown. One thing that we are looking to do is increase the ticket size slightly by 4% to 5% per annum. Second is, we will -- we hope to [indiscernible]. Today, we are focusing -- we're working with smaller [indiscernible] will access to better accounts and the large number of proposals. We hope to tap that. But the new MD will have -- will bring own ideas, which we will implement.

[Operator Instructions] Next question is from the line of Saurabh Dhole from Trivantage Capital.

A couple of questions from my end. I think in the previous call, you had guided that by March '22, you would be around at [indiscernible]. So I'm assuming you'll miss that target. Is that the right assumption?

Yes, I might. Yes.

Okay. Perfect. And sir, second question is on Slide #13 of your presentation, were you talking about the provisions for Stage 3?

Yes.

Yes. So what I'm unable to understand is how is it that the Stage 3 provisions, both post as well as before RBI circular is same.

The total provision is the same.

But that doesn't seem right. So what you're saying is that the assets that have come under NPA under the new circular, you had absolutely no provisions on that.

Sorry?

So what I'm trying to understand is that the assets that have come into Stage 3 under the circular, which is INR 823 crores which is, of course, higher than INR 547 crores. So those additional assets that have flown into the broad Stage 3?

Right.

So could also change the provision figure also, right? Stage 3 ECL provision?

No, but we will have to account the provision in safety [indiscernible] because we are reporting [indiscernible] in IFRS. We have to find a way to accommodate that also.

What I'm trying to understand -- what I'm trying to get to is the net Stage 3 number, which is gross Stage 3 minus the provisions. So what I'm...

As a matter of prudence, we provided more as per ECL -- yes.

But sir, the point is that if your flowing -- new assets are flowing under gross Stage 3, the provisions that you carry on these new assets should also get added to the ECL provision Stage 3 figure, right?

This is safety as per the RBI.

Okay. So why hasn't the provision figure changed?

See, the provision is the same. What we're trying to highlight is provision as per the new circular is this -- and covering this [ 20% ] had there been no circular by the RBI, have we increased the provisioning, our coverage would have been 45%. That's what we're trying to highlight. That's it. It's not [indiscernible]...

Next question is from the line of Anuja Dighe from Elara Capital. Participants, it seems we have lost the line of the current participant. [Operator Instructions] Next question is from M. Agarwalla from PhillipCapital.

A couple of questions, gentlemen. One is about your borrowing cost. How should we look at your borrowing cost going ahead given the fact that in this quarter, we have seen an increase in cost of fund sequentially, whereas most of the peers have continued to show decline in cost of fund. And this is against the backdrop that your total borrowing continues to come down. So can you try to enlighten us?

Yes. Right now, borrowing cost stood at [ 7.10% ]. We are not expecting significant increase in current quarter.

So incrementally, if you were to go to the market today and borrow, what would be that cost, sir?

It will vary from bank to bank. Right now, on an average, we are borrowing close to 6.9%.

Okay. My next question is about can you quantify your Stage 2 asset and corresponding provision?

Yes. We are not disclosing that, Manish.

Fine. Other query is about in the slide where you have given segment-wise GNPA, which is based on pre-RBI circular. Can you give the same number based on current status?

Yes. That is post-RBI, right?

Yes, post-RBI.

For housing, it will be 4.1%. Okay. I'm sorry. For housing, it will be 6.3%. And for home equity, 10.2%. For [ salaried ], 3.8%. And for [indiscernible] 10%. Total being the 7%.

And in your OpEx, is there any one-off there in this quarter?

[indiscernible] spend of INR 1.8 crores this quarter. So [indiscernible] back ended, not throughout the year that is responsible, plus we have seen some increase in traveling costs. Last year because of pandemic, there is no much travel. This year, we started traveling. We are visiting branches. We are conducting a lot of our training programs. So traveling cost is slightly compared with the previous period of [indiscernible], COVID also, we made a substantial provision this 9-month period to comply with CSR guidelines. These are the 2 items which caused slight increase in administrative cost compared with the previous year.

And finally, from my side, has there been any interest -- impact on interest income because of this NPA recognition because your interest income has come down on a sequential basis. So just trying to understand if there is any adjustment there.

So we are following Indian accounting standard. There is no impact on calculation of net interest margin. We are not reversing interest income. And to the extent we have provided INR 76 crores, we're not [indiscernible] any income on that.

Next question is from the line of Kunal Shah from ICICI Securities.

Yes. So with respect to the appointment of CEO, so if you can just let us know the process and what -- maybe what Board would have really looked into at the time of appointing. And maybe between the internal as well as the external, how should we expect as it's going to come very soon as early as the next month here.

Sir, we will discuss this one offline, sir.

Okay, sure. Now sir, the overall thing was maybe in terms of the growth. So when do we see -- obviously, most of the questions are around growth. So just wanted to get a sense in terms of where would -- maybe under the new management, would there be any change with respect to the growth strategy? And in fact, even on the growth, okay, what -- maybe would there be any differentiation between the way we used to approach the salaried versus the nonsalaried, would that tend to change or maybe in terms of slightly lowering the rates and getting equally competitive? So what could ideally be the strategy out there?

Kunal, we feel [indiscernible] the new MD talks about these things. It's a question of maybe about 3, 4 weeks more, and we'll organize the call hopefully. Very difficult to answer on his behalf.

Yes. No, but I think maybe Board's perspective would also be helpful when they were selecting the candidate, okay? And maybe not sure if it's coming from outside, then would it be more from private entity or a public entity. That would also help a bit, okay, if that can be explained here.

None of us [indiscernible].

Okay. So that won't do. Okay, sure. Yes. So that's helpful. And secondly, in terms of -- so now with RBI clarifying this and we have made 25% provisioning on the incremental pool. So ideally, what would be the stance going forward for next 2, 3 quarters? I don't know if I missed that, but would we look at maintaining that provisions would likely reverse it? What's going to happen with that pool which has got created? And one last question is, any pool wherein there could be further write-offs, which can be expected over and above what we had seen it in Q3?

Well, right now, we don't have any plan to reverse the provision whatever we made till date. We will review the situation in Q1 based on the next financial year Q1. Based on the developments, we will take a call on the reversal of provision. Right now, I'm not in the position to make any comments.

Okay. No, sir, what would be the overall pool? Maybe there was some stress which was there in the earlier net book. We always highlighted that the focus is on the recovery in working the [indiscernible] and maybe getting the money back. But there are still some write-offs, which have been happening. So is there scope for further write-off or maybe we should see the recovery coming through? What would be the stance on that entire stress pool?

Which is, I think, largely provided...

Yes, it's largely provided, but the only thing now is maybe whether it will be a write-off or a recovery over a period, yes.

See, this quarter, we have been a technical write-off of about INR 40 crores. It's only a technical write-off. If you look at the actual principal write off last 20 years, we have done to the extent of only INR 10 crores of total disbursement of [ INR 26,000 crores ], INR 10 crores is nothing. We have made sizable recoveries in technical as well as this financial write off. Yes. We are having a set of full, consist of about INR 10 crores to INR 12 crores we identified already for technical write-off. Depending upon the numbers going forward, we will decide.

Yes. But maybe not -- nothing as high as INR 40-odd crores, which was done this quarter, it would be like INR 10 crores, INR 12 crores or so. Nothing major left out there, yes.

Definitely not.

[Operator Instructions] Next question is a follow-up from the line of Sarvesh Gupta from Maximal Capital.

Sir, just one clarification. So on provisions and write-offs for quarter 3, so you are saying against INR 17 crores that we had last quarter. If RBI circular would not have come, you would have given a number of around INR 20 crores here. Is that right?

Correct, thereabouts.

So INR 56 crores is the addition because of the RBI circular?

Correct.

Okay. And what would be the interest reversal because of the RBI circular?

So under IFRS, we are allowed to book interest on [indiscernible] So the incremental is made around INR 76 crores of provision. So we will not have to recognize any income on that.

No, no. You haven't recognized the income on the incremental NPA pool, right?

Not on the incremental income pool. I'm talking about the internal provision pool.

Okay. But what would be the impact on the revenue line because of this RBI proposal -- RBI circular for quarter 3?

See, under IFRS, under the previous year, yes, we were not supposed to recognize income on nonperforming assets. But under IFRS, this is a concept of nonperforming assets. So we recognize income on all assets, but just a net up provision, yes.

So the total impact, just to understand, if RBI circular was not there, the total impact on your PBT is INR 56-odd crores?

Yes. Correct.

Correct.

Next question is from the line of Anuja Dighe from Elara Capital.

Sir, I just have 2 questions. First is about the customers, which have led to the asset quality deterioration. So what is the profile of this customer? Are there any geographies or -- specific concern? And second question is actually about the overall loan book. So what is the share of fixed rate loan book in the book? And can you give us some guidance about the lending? What do you think -- from where we will be going forward?

So NPA, it's a mix [indiscernible] salaried as well as nonsalaried. If you want in terms of the percentage, I will give you. As of 31st December end, out of 7% of gross NPA after effecting RBI circular, salaried class accounted for 3.8% and non-salaried class accounted for 10%.

Okay. Okay. And so I asked -- and second question is about the fixed rate loan book in overall AUM. What is the percentage of fixed rate loan book and floating rate loan book?

We don't have any fixed rate loan book as of now. Our entire loan book is linked to floating benchmark, taking off floating interest rates.

Okay. Okay, fine. And also about the margin improvement. We are seeing a marginal improvement in our NIM. So how sustainable is this improvement?

NIM -- right now, our NIM is at 5%. It's not sustainable. Going forward, see, the annual average NIM, if you look at last 8 or 6 quarters, it's about close to about 4.2% to 4.6%. Our NIM going forward, we will number NIM in the range of 4.2% to 4.5%. The existing 5% NIM is not sustainable, but it will not happen immediately.

Long-term target [indiscernible] NIM is 4.3% to 4.5%.

Okay. Okay. That's helpful. And the last question is about the ticket size. You have mentioned that the average ticket size has not grown in the loan book. But what is the exact average ticket size at the moment?

I'll tell you. It's around 15 lakhs on the book.

Okay. Okay. And what was this last year, same quarter?

It was [indiscernible] 14.6 lakhs, same.

As there are no further questions, I now hand the conference over to the management speakers for closing remarks. Over to you.

Thank you for joining, everyone. We look forward to interacting with you again. Have a good day.

Ladies and gentlemen, on behalf of Elara Securities [indiscernible] that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.