Spandana Sphoorty Financial Limited (SPANDANA.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Spandana Sphoorty Financial Limited Q4 FY '22 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shalabh Saxena, Managing Director and CEO of Spandana Sphoorty Financial Limited. Thank you, and over to you, Mr. Saxena.

Thank you very much. Good evening to all of you. Thank you for taking time out to join the conference call of Spandana Sphoorty Financial Limited. Thank you for showing interest in our company. Friends, it's now slightly more than 3 months that I have joined Spandana Sphoorty. Suffice to add, that the initial period has been very exciting and absorbant. The support that has been received from the team members, shareholders and all the stakeholders have been very, very encouraging. I am happy to announce that the transition to the new management is now complete, which includes all the past issues that existed. We hence have our path clear in terms of going forward with an short support from all promoters and board. The Q4 results have been uploaded. However, I would want to briefly take you through the same. Our quarter 4 disbursements were INR 1,385 crores, I'll repeat INR 1,385 crores. The full year disbursements were INR 3,374 crores, INR 3,374 crores. With this, our total AUM end of the year was INR 6,581 crores. Of the above, FY '22 disbursements contribute about [ 44% ] of the book. The book is very, very healthy, and it has given a collection efficiency of 107% for the quarter 4. The restructured book, which is about INR 995 crores, 15% of the total book, that also has delivered a collection efficiency of 64% for the quarter. While all of you are aware that we are discussing and we are detailing the results for quarter 4, however, wherever possible and wherever appropriate, I'll give some color on the Q1 numbers as well. So on the restructured book, our trend or positive trend continues. It is in line with the Q4 collection efficiency. So Q1 restructure book collection efficiency is at 63%. The nonrestructured book has delivered a 100.3% in quarter 4, with a positive trend in June quarter, the collection efficiency, efficiency is 103% for the June quarter. Now I'll give you some details of the balance sheet. The balance sheet continues to be very strong. I'll highlight certain ratios and information so that you'll be able to appreciate this better. In quarter 4, an equity inclusion of [ INR 290 crores ] was done with an additional INR 10 crores coming in early part of Q1. Thus, we've had INR 300 crores of inclusion between Q4 and Q1 beginning. Our network currently stands -- or rather our network at the end of March was INR 3,088 crores, INR 3,088 crores. The CIR is at a very healthy 51.09%. The debt equity ratio of the gearing was at 1.2%. The provision coverage, which is once again one of the critical factors, is at 10.6% of the total portfolio. The normalized ROA and ROE figures are 6.9% and 16.6%. I must add here that this does not include the COVID impact and the onetime settlement expenses. The gross NPA for the quarter was 15% and net NPA was 6%. On liquidity, our company -- the position of our company is very strong, was very strong end of March and continues to be very strong at any point in time. As a thumb rule, we hold a minimum of 2 months of repayment, which works out to about INR 500 crores. However, end of March '22, the company maintained a liquidity of INR 728 crores cash and cash equivalents of INR 475 crores of bank deposits. The macros for the industry, I would want to now touch upon where the industry is going and how is Spandana in the right position to capitalize on the opportunity that presents itself. Spandana as on date is upwards of 81% in rural distribution. As a company, our distribution is heavily skewed to the [ hinder ] line, to the rural India. As all of us are aware, the rural India has a high entry barrier, and hence, we do believe that we are in a very good position from a pure distribution point of view. We strongly believe that rural India will lead the economic growth for the country since a lot of money is moving to the [ hinder ] line. With the economy thriving, the micro finance industry is slated to grow on an estimated basis anywhere between 16% to 18% for the next 6 to 8 years. And with this in the background, we do feel, and there is a right reason for the optimism, that we are in the best position to -- one of the best positions to capitalize on the opportunity. All of you are aware, Reserve Bank of India has come out with a revised guideline for MFIs, which are a huge positive for the industry. The enablers on pricing, customer indebtedness, qualifying asset criteria are welcome. It, however, puts a lot of responsibility on financials to act prudently. We intend to follow both in letter and spirit the regulation and we do believe that this is one of the good things that has happened for the industry. At Spandana, we are very positive on what the future holds for us and are readying ourselves for what lays ahead. With successful transition of management, a reasonably good quarter 4 on key business parameters and various efforts undertaken to strengthen the fundamentals of business, we feel confident of charting a quality growth path for Spandana in the coming years. As a team, we have articulated our Vision 2025 for Spandana, where we are planning to scale up our business to an AUM of INR 15,000 crore levels, which is upwards of 2x from the present in the next 3 years. Our immediate 5 priorities, which we have articulated and the entire company, the management team, the folks here in the head office and in the fleet are working towards, there are 5 priorities which we are working on. The first is people, people-related. We are moving towards reinforcing the middle and senior management team. We do feel that a strong team with a good bench strength will auger well for the company both in the present and in the future. Point number two, strengthen governance, risk and control with added focus on refining processes. The micro finance industry is a 2-decade old industry. A lot of alignment needs to be done to the processes, the way they existed earlier and the way they exist now. It's very important to have processes which are forward-looking, aligned to technology. And that's where it's very important, the second point of refining processes apart from the most important thing, which is strengthening the governance risk and control measures. Point number three, we, as a company, are very clear. Our growth path will be customer -- new customer acquisition. While we will continue and make all efforts to retain the existing customers, our focus will be on new customer acquisition. At any given point in time, we are very clear, our ticket sizes will at best be muted, if not lower than the industry. However, we will always press the accelerator when it comes to acquiring new customers. And that's the way forward for us as a team. Point number four, technology, very, very critical for the distribution that we handle. At this point in time, we reach out to -- we are spread across 1,100 branches. We cover almost upwards of 80,000 villages and a field force of about 6,500. Without technology, this cannot be, and hence, over the past 3 months and going forward, we have our charter ready for the next 4 quarters. We are going to scale up to deliver an end-to-end paperless customer experience. The last, but not the least, point number 5, customer-led initiatives with emphasis on products, service and meeting their life cycle needs. We want to be the financial of choice when it comes to rural India, and that's where we intend to strengthen our dominance. We will continue to grow in those areas and we'll continue to strengthen our market share there. So while these are the 5 priorities, obviously, the list is much longer, but these are the core areas that we as a team are working. So friends, with a clear focus on rural India, we are confident of increasing our market share by riding on the significant anticipated growth in these markets. The entire organization is taking incremental steps each day to converge on achieving the articulated objectives defined in the Vision 2025 for the company. With this, I would want to end my commentary. I am joined by the management team here, Mr. Ashish Damani, President and CFO; the CBO, Company Secretary, CTO, other senior members of the team are with me. We are happy to take any questions that you would have. Over to you, Peter.

[Operator Instructions] Our first question is from the line of Aakash Bhavsar from Equirus Securities. .

Sir, this is Shreepal. So just a few questions with respect to your focus for the next 3 to 6 months. So I just wanted to understand, are we going to change this Spandana model which was, say, more focused on having a monthly collection meeting, which was trying to focus on having a lower OpEx. So what would -- what changes have we brought in, in this model that you are planning to have?

So see, Aakash (sic) [ Shreepal ], we are -- do not want to do any -- we don't want to take any major reaction. There is nothing which is going to happen overnight. Having said this, over the years, Spandana has delivered quality growth, and hence, we do not want to do anything which is completely new. Having said which, there are things -- there are refinements, as I said. And hence, in my commentary, I used the word refinement. I did not use the word change. We will do refinements, be it about a process or whether it is related to a product. For now, there is a team which is set and used to a particular thing. These changes require a lot of research, a lot of customer insight, et cetera. If at all, we walk that path, it will be a calibrated move, not immediate, number one. Number two, in the next one, even if we were to take it we will not disturb the existing model. We will start in probably a geography which is untouched by Spandana, and there is a lot. So we will consolidate on what we already have, which is good. If at all, we think there is a merit in kind of something new to be a different geography, we don't want to mix up and it will be a calibrated approach. There are enough opportunities in various pockets that you mentioned, both in terms of the geography and in terms of be it a product or even a repayment cycle, as you mentioned. But then it will be a very, very calibrated approach.

Okay. Sir, we -- as you highlighted in your opening remarks that we are targeting FY '24 AUM of almost INR 15,000 crores -- that is on book rather. So the spend [ efficiency ] is going to be INR 18,000. So -- and we've also highlighted some of the newer geographies. There are 7 new states that we've identified. So what are [indiscernible] of identifying these 7 states?

Right. So once again, thank you for the question. It's a very, very good question. So I think what you've asked is why these 7 states have been targeted. That's your question, right?

Right.

Right. So okay, so if I were to take a step back and I were to analyze the contribution of these 7 states to the industry as a whole, micro finance is at INR 2,70,000, INR 2,80,000 crore industry. These 7 states contribute upwards of 42%, 43% of the industry. When it comes to Spandana, it is a much, much, much, much lower number. So that's an obvious one for us, that we will reach out, we will open branches in these areas so that we get an incremental growth from the states where we already are. That's point number one. Point number two is we have plans to grow in the states we are present already. But that will be an organic growth, which is a regular growth. We do not want to step the accelerator to an extent where we really grow more than what is desired. The states that we've identified, we do see and pockets for our appetite. There is enough and more need in these 7 states. We will -- given a chance to branch out, we do feel that the incremental disbursement that we are seeking to get will come out of these 7 states. This also is in line with the earlier philosophy that I articulated, that we will acquire more customers. We will not increase the ticket size beyond what is -- what we think in our mind is the right number. At any given point in time, we will be lower than the industry. I understand there are pitfalls to this particular approach, but then we are fine with it. And hence, if I were to holistically take a view on where does Spandana grow in the next 3 years, FY '25 Vision is INR 15,000 crores from the current INR [ 6,600 ] crores, I think we will be able to balance our growth in both the new geographies and the old geography. The focus will obviously be getting distribution out of new branches that we opened predominantly in these states identified and obviously in a few areas where we already are present. I hope I've answered your question.

Yes, sir. Yes. But see, like -- okay. So do you feel that these states are -- while they contribute significantly, as you highlighted. So but then there are just a few states, which contribute maybe higher, such as Bihar or, for that matter, UP now, which is ramping up. But if you look at states like MP or Gujarat, which is also part of your strategy, so there, there are other issues which are also there. So what -- have we sort of lifted down some of the aspects that you probably looked at apart from the state's contribution to the overall landscape?

So Aakash (sic) [ Shreepal ], the states that we've identified are Gujarat, Rajasthan, Haryana, Uttar Pradesh, Bihar, West Bengal. We are looking from the current state, even if we were to get a market share of about 2.5%, 3%, we will get to an AUM of -- incremental AUM of about INR 6,000, INR 6,500, number one. Number two, I know what you are saying that these states have presence of other micro finance companies also. However, micro finance as an industry is highly under-penetrated when it comes to the national seal. So there are various referred studies which are available where it's very evident that the penetration levels are just about 50%, 55% to the addressable population. So reaching out into new geographies is one of the obvious strategies or approach that anybody would have. We are very confident -- and we are not pursuing growth only. We are pursuing quality growth, pursuing quality growth in these 7 states for the INR 6,000 to INR 7,000 incremental AUM that we are talking about is, I'm not saying easy, but I'm saying we will be able to sort of pick and choose and get to the quality growth that we are desiring to. So there is, as I told you, we are in these 7 states, single-digit contribution. The industry is at 43%, 44% overall contribution. I do feel we are reasonably confident that we should be able to get what we want in these states without compromising on any of the quality parameters.

Got it. Got it. Sir, just some data keeping questions. So what was the -- I mean, you highlighted that the GNPA is 15%. I wanted to understand -- I wanted to get some sense on what is Stage 1, Stage 2, Stage 3 percentage? What is the coverage that we are having right now? And what is the ECL requirement for the same, like for Stage 1, 2 and 3? And so yes, if you could give this detail.

Sure. I'll request Ashish Damani, President and the CFO, to kind of take this question.

Thanks a lot. Just give me a second. I'm pulling up the numbers for you. So in terms of percentages, and I'm looking at the portfolio, which is on our book, we have 77% of the portfolio, 70% -- 69.5% of the portfolio in the current bucket itself. So that will form part of Stage 1, which if I had to include even 1 to 30, then we're talking about 75% of the portfolio is in Stage 1. Stage 2 would be INR 426 crores, which is 6.5%. And we have 18.8% of the portfolio which is in Stage 3 of this. Like we have mentioned, we have provided a significant amount of portfolio. What will be NPA -- net NPA would be 6% of the portfolio, which is still sitting at a net NPA rest of all the portfolio we have coverage for that.

Sir, you said the Stage 3 is 18.8%.

So this includes our balance sheet. If I have to really look at only on balance sheet, then we are talking about 15.9%, so 16% roughly.

Okay. So sir, basically, just like looking at the numbers, by calculating it, so basically, we have close to INR 1,050 crores of Stage 3, of which INR 520 crores would have slipped from the restructured pool and the remaining INR 525 crore, INR 530 crores would be from the other standard asset [ keeping ] that would have been there?

Yes. Restructure would be INR 512 crores and the rest will be from the -- INR 368, roughly 368 crores will be from non-restructured.

Right, right. So the number is right, INR 1,050 crores is the total Stage 3 basically?

No, it's roughly INR 912 crores, INR 9-1-2 crores.

Okay. Got it. And sir, what is the stage-wise provisioning that we have?

So we will have -- this is driven by the ECL. So we will have a 50% coverage for Stage 3. And standard assets, we carry 0.25%.

Okay. So overall, Stage 1, 2 coverage is 0.25%?

No, roughly about 28% on book, which will be in Stage 2.

Okay. Okay. Got it. And sir, like I think in the presentation also it is mentioned that close to 15% of the portfolio is NPA. That only constitutes the non-DA and non-securitization, so how has our DA and securitization portfolio behave with respect to the delinquency?

No, so the DA numbers, I will have to come back to you. But largely, the pool more or less behaves in line. There is no specific suppression. That field is given in terms of whether DA or non-DA as a pool. They don't really differentiate between the pool that has been hived off from the books. So I don't see any reason there will be a different experience for DA pool per se.

Our next question is from line of Renish Bhuva from ICICI Securities. .

Congrats. So 2, 3 questions from my side. So first, sort of a clarification on the FY '23 outlook, which you are sharing the PPT. So in that PPT, we are saying our branches will remain flat at 1,123 kind of a number. But in your opening remarks, you did mention about incremental growth, either it should come from the new customer acquisition. So if we just try to assume that the existing branch network has a lot of room for improvement. And hence, we are sort of having this flattish kind of branch in FY '23.

Yes. So I'll answer this in 2 parts. The number of branches we are projecting an increase from 1,120 to 1,500. So that's about 380 more branches. That is part one. Part number -- the second element to the answer is the question or the point on customer acquisition. Our estimate is that we will scale up our customer strength or customer number from the current 2.3 million to 4 million. And yes, what you said is right. There is a significant opportunity for improving the productivity at the branch and at the loan officer level, which we intend to leverage on 2 counts. The first was the technology commentary that I gave and the second one, and I'm just sort of informing everyone, you are aware in the month of -- towards the later part of last year, Reserve Bank of India allowed the e-KYC through the KUA move for NBFC -- MFIs and NBFCs. We have applied for a license, and I think another 2 months, we should be getting that license. What this does or what this helps us is from the current physical sourcing, which is clicking pictures of KYC documents sending it to the back office, which then does a data entry, so on and so forth. At the press of a thumbprint, we will be able to give a decision to the customer post a CV check. We will be able to conclude and complete the e-KYC of the customer there and then on the spot. So the current -- the current process of a loan which takes about 3 to 5 days as -- and we are not new, all the companies which do not have this facility have to go through this. It comes down from 3 to 5 days currently to maybe 60 seconds or 90 seconds. That, to our mind, is a big transformation when it comes to focusing on the efficiencies or efficiency metrics. And yes, at a process level also, we do -- we have identified a few processes which is refined. We'll add a lot of delta to the already existing delta to our efficiency story. So customer acquisition-led, yes. Branch network will be increased, but yes, predominantly focusing on improving efficiencies.

Got it. Got it. And sir, the second question again is sort of related to this. So where do we stand as of June in terms of implementing the revised MFI process as per the new guidelines?

We have already moved to the new process. And as we -- every loan that we are disbursing this month -- starting this month from the first phase on the new -- under the new regime.

Okay. So entire 1,000-plus branch network are now on the new process?

Yes, all new customers acquired, we'll have to go through the new guidelines.

Got it. And sir, just last question from my side, again, sort of a clarification. So when we are projecting a 2% kind of a credit cost for FY '23, okay, and when we look at the gross NPA pool of 15%, par 0 to 90, again, at 6.5%. So what is the, let's say, rationale behind having such a low credit cost in FY '23?

So 2 answers to your question. The cost is, all of us are aware, without getting into the details, the field was limited in terms of detailed customer data in quarter 4. This -- the data -- post the settlement, we now have access to all the data. We had access to data earlier also. We have constructed the data, but obviously, there were some limitations, not really cent percent, which now all of that is behind us. This is about the historical data. Another data point is, and all of us are aware, that a micro finance customer needs a slightly longer runway to regularize. We as an institution did not give any -- when I say did not give any moratorium, we did not give any payment holiday to the customer. So the moratorium, when it was proclaimed on the 30th of September, starting on the 1st of October, the repayment -- I mean, there was no holiday which was given to the customer, number. So if you combine -- if you join the dots, all I can say is we are doing a catch-up. The 64%, 65% restructured book delivering [indiscernible], 64%, 65% is a testimony to the fact the point that I made that has given a longer runway. The customers come back and they start repaying, which is what we are already evidencing. This quarter and the next quarter, we'll be regularizing these customers, and hence, our optimism that all the numbers that read out in terms of 2% loss for FY '23 in the background of the greater than 90 NP, et cetera, I think we'll be able to substantially bring down the numbers over the next 2, 3 quarters.

Got it. Got it. So basically, you do expect...