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

Ladies and gentlemen, good day, and welcome to the Spandana Sphoorty Financial Limited Q1 FY '23 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 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, sir.

Thank you very much, Aman. Good evening to all of you. Thank you for taking time out to join. Thank you for showing interest in our company. We, as a management team, addressed all of you about 3 weeks back when we had presented the Q4 results. Quarter 1 of FY '23 was the first full quarter for the new management since we spent only 11 days in Q4, which is the month of March in Spandana. Needless to say, it has been an exciting journey. Last time around, we presented the Vision 2025 for Spandana and had clearly articulated the way forward for the next 3 years. We did receive encouraging support from all of you and the other stakeholders post the last call and the various meetings we've had. While we are enthused, I just wanted to add a word of caution. We are playing, as they say, in cricket, "we are playing a test match, and not a T20". Hence, we are measuring our steps and taking prudent calls to ensure that the next level of growth for the organization is built on a robust formulation. With this, let me move to the quarter 1 results. Friends, post COVID and internal disruptions, which the company witnessed, there was an impact which the portfolio had to bear. While approaching the results for the quarter, we evaluated the portfolio, drilled it at a customer level, approached the customers to check on the financial help and then made a choice so as to ensure that the path we laid towards the Vision 25 is strong, definitive and robust. So we took our time. However, we wanted to do a thorough and detailed job. While the results have been uploaded, I would want to briefly take you through the same. Disbursements, in quarter 1, we disbursed INR 1,320 crores as against INR 216 crores in Q1 of FY '22. This is -- the INR 1,320 crores is almost the same as what we disbursed in Q4 of last year. So sequentially, there was a dip. It was about INR 1,480 crores last, INR 1,320 crores now. But as all of you are aware, Quarter 1 is always a muted quarter and then slowly the pace picks up. Point #2, member acquisition. Our focus on customer acquisition continued. We acquired 106,000 customers during the quarter. For the year, we have a target to take the base to 2.8 million, which will be 4.5 lakhs for the year. As highlighted earlier, our growth story in Spandana will be a customer's acquisition-led growth story. Point #3, portfolio composition. With respect to the collection efficiency and the write-offs that we have taken. All of you have seen the results. However, we will get into the details of both the pre and the post so that it is amply clear to all of you. We had a book of INR 6,214 crores. What we have done is we have split or rather leased. When we took this decision to write off, we divided the book into 3 parts. Book 1 was the post April '21 sourcing. Book 2 was pre March '21 sourcing, however, non-restructured. And book 3 was pre March '21 restructured. The split was as follows. Post April '21 was 62% of our portfolio. This was giving us a 107% collection efficiency. So just to repeat, of the INR 6,214 crores, this is a pre write-off book. And the reason why I'm kind of stressing this is so that all of you are able to appreciate the excise that has been done and where we stand at this point in time. So INR 6,214 crores pre write-off. 62% of the portfolio, which was -- which is the entire portfolio post April '21, was giving us 107% or is giving us 107% collection efficiency. Pre-March 21, we split into non-restructured and restructured. The-non-restructured book is 25%. This is giving us a 99.6% collection efficiency. The third book, which is the pre March '21 restructured book is 13% or was 13%, which was giving us a 62.5% collection efficiency. With this, what clearly comes out is 96% of the NPA was the pre-March portfolio. Post April sourcing, which is the book 1, as I've said, has shown very strong asset quality [ traits ]. So what did we do? We did a detailed analysis of the portfolio on the customers who are intermittent and non-payers. We reached out to them to understand the financial health and engagement levels with the company. Post our drill and evaluating the opportunity we have, the management decided to clean up the book. We have hence decided to write off INR 702 [indiscernible] crores in the quarter, which is predominantly the pre-March '21 book. I will repeat, we have written off INR 702 crores in the quarter, which is the pre-March '21 book. The residual book or the retained book, as I have earlier highlighted, is showing a very strong asset quality. And we do not, as management, anticipate any material incremental written-off -- write-off from this portfolio in the current financial year. As I said, this is a step which we have taken to ensure that the foundation and the future that we build for Spandana for the next 3 quarters and onwards in the subsequent years is built on a quality, which is good and which will continue to deliver us good results over the quarters. So hence, after the write-off, the recomposition of the book, we now have an AUM of INR 5,513 crores. This now is split into a post April '21 now because of the write-off, the share goes to 70%. So now we have -- the current book is 70% of the costs or the portfolio is at 107%. Pre-March '21 nonrestructured is now 24% at 106%. And 6% of the cost, which is pre-March restructured book, is also giving us 104.6%. So as you would have seen, all the 3 books are giving us a collection efficiency of upwards of 104 -- the average is about 105%, 105.5%. So with this, we believe in our wisdom, and this is the experience that we have in terms of dealing with this profile and the portfolio that we've done whatever we have to do in one go. The book that we have now, we are reasonably confident that we have a book which will deliver us quality now. Whatever we had to do, is now past us. We have a book now, which will now continue to grow, and we will continue to now build on this in the subsequent quarters and years. Come to provision. Post write-off also, we are adequately provisioned. The potential recovery upside from the written off book will be a plus. It's important for all of us to know that while this is a balance sheet item, which has been done, the field -- the team will continue to engage with these customers. We will continue to pursue the portfolio where we are confident of recoveries. All of you are aware that a microfinance customer needs a long runway. And if given a long runway with the right level of engagement, there is a lot of potential upside on the write-backs, so which we will continue to do. The consolidated GNPA thus, after this exercise is 6.7%. The net NPA comes to 3.4%. Last but very important, the total provision that exists on the book after this exercise is INR 275 crores, which is 75% of the NPA book now. The last time around, I recollect very rapidly. For Spandana, it is not a balance sheet issue. The issue that really existed is what we have resolved. The balance sheet, as we speak, even after this exercise, the company has a net worth of INR 2,817 crores with a capital adequacy of 47.9%. Our liquidity position remains strong. As on 30th June, we had a cash and bank balance of INR 657 crores, which was 3x of the required monthly liability. Our Q1 results, hence, are -- while the results are uploaded, our income -- total income is INR 259 crores. Because of the write-off, the profit after tax is INR 220 crores of loss. To summarize, we have moved to the new regime of lending as per RBI beginning July. For all new lending is now -- all the new lending, which will happen, will happen or is happening in the new regime, which is the income assessment, et cetera. I will repeat once again, and the investor deck we've uploaded has all the details that one would look for. And if there is more, we'll be happy to engage with you and give you more. One of the things that we promise is utmost transparency in terms of detailing out the portfolio and the split. Any questions, we will be happy to take. But we -- post this exercise, and the Stage 1, 2, 3, which we will elaborate as we move on, we are -- from what we were in Q4, we are in a very comfortable position. The balance sheet remains strong. I will repeat a CRAR of almost 48%. We anticipate clear roles now for business. Spandana has a great distribution and a very good team of brand staff in the field and in head office. We are proud of them. And like in the past, we are confident they will build a solid growth story towards our Vision 2025. We are strengthening the team at the head office at the senior management and the middle management level. This quarter, we were joined by the new Chief Risk Officer, Mr. Amit Anand, who joins us from Shinhan Bank, and he has his earlier experience with Bank of India, Bank of Baroda. In the future quarters, you will see recruitments in the middle management, and the -- a couple of them in the senior management, which I have been highlighting in the past as well. I will reiterate the top 5 priorities that we had articulated at the right time. They haven't changed and will not for at least 2 more quarters. Number one, people. We have to reinforce the right people at the right place. Spandana has to move to a system and process-driven company and not people-dependent companies. So we will -- we are taking all the steps to do that. Number two, strengthen the governance, risk and control with added focus on refining processes. Number three, focus on customer acquisition led business growth, while ensuring retention of existing customers. Number four, technology scale up to deliver an end-to-end paperless customer experience. Number five, customer-led initiatives with emphasis on product, service and meeting their life cycle needs. Friends, we remain focused on our goal. We have a task to deliver, and we are taking incremental steps to reach the destination. Thank you very much for the patient hearing. I have the entire management team with me, and we are ready to take questions now. Thank you very much. Over to you, Aman.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Shreepal Doshi from Equirus Securities.

The question was with respect to our interaction during the last quarter wherein -- I mean, as you highlighted, it was 20 days back. So wherein you had highlighted on the credit cost and also in the presentation this time also around there is a FY'23 growth aspiration. . So what really changed in the 20 days that we are revising our credit cost guidance with a lumpy provisioning during this quarter? And is there still an area where we are still evaluating the loan book [ cautiously ] looking at the quality of the book, which could further derail our FY '23 guidance?

Shreepal, this is Ashish. Let me take this question. Yes. What we have guided was 2%, but that was for the steady state. We continue to maintain that on a steady-state basis, the credit cost for the company should not be more than 2%. And that by end of this financial year, we should achieve on a quarterly basis the steady state credit cost for sure. In terms of the book, Shalabh kind of covered it in the opening remarks. We are very confident that the retail book, which is a book left over after the write-off, is giving us very strong collection efficiency numbers across the cuts, right? Whether we look at the restructured book, whether we look at the book, which is originated prior to March '21, or for that matter, post March '21 and non-restructured, right? So we are seeing the collection efficiency north of 105% across this book. So people are not just repaying their current month amounts, but they are paying slightly more than whatever the dues in the current month and kind of covering their overdue position as well. That's why we feel that the rest of the book, there is no further need to do any kind of this thing. It will mature with slight delays, wherever there are in, let's say, Stage 2 or Stage 3. But there is no reason for us to believe that this will go into loss.

So Shreepal, let me answer this question and address the point that you have raised. I covered it twice in my commentary. Our write-off is a big decision. And hence, it is extremely important that we are very sure of the path that we are planning to take. We engaged the first step was we drilled the customer-level portfolio. We did a lot of analytics in terms of the past behavior of the customer with us. There are other reference points that one can refer to if you want to find out the profile of the customer with and outside of your -- the behavior that is being displayed. And most importantly, there was a level of engagement that had to be done with the customers before we walk this step. We -- in Q4, it was 11-day stint that we had because we joined on the 19th of March, we wanted to be very, very sure of the path that we are taking. And hence, we took our time. We were aware about the fact that we have to come out with our Q1 results. And hence, we said even if it takes time, even if it gets a bit pushed, we have to be sure and we have to be very sure that there's nothing coming now, which is the point you asked. If you see our Stage 1, 2, 3 post the write-off, our Stage 2 is now 3.5%. The Stage 3 is 6.7%. So there isn't -- we are very sure of this portfolio. Otherwise, if we had that chance, we could have done it now. From now onwards, and that is the reason why I'm emphasizing, the foundation that we stand today and the tomorrow that we look at, we are very sure that this is a portfolio. And I made this statement today itself in the commentary that from this portfolio, there isn't any incremental material incremental just any material incremental write-off that would come this year. And once we keep, there's a profile of these customers that we've engaged with, we are pretty sure that we are done with whatever had to be done.

Got it, sir. Just one data keeping question. So of the restructure, what is the outstanding restructured book? And how is it split in Stage 2 and Stage 3? And what is the specific coverage on the same?

Sure. So INR 406 crores is the total book that we have in the restructured book. Of that, what is in stage, what is current is INR 318 crores. If I take it at a Stage 1 level, then it is INR 349 crores. What is in Stage 2 is INR 20 crores and INR 38 crores is in Stage 3.

Okay. so okay, so most of these customers -- majority of the restructured customers have become current in nature in that repayment cycle is what is coming out from these numbers?

So let me give you the numbers again. Sorry, what we are seeing is that while these customers are in, let's say, Stage 3, they're still engaged with us, and they have paid us a good number of installments. If I have to look at the collection efficiency of the restructured book as a whole, 104.6% is the collection efficiency for Q1. Even if I look at it at a net basis, it is 80%. So these customers are paying their current month installments for sure, right? That is the most important thing in microfinance, that whether these customers are engaged with you or not, whether they are making payments for their monthly dues or not. So that is the reason why we are kind of confident here, Shreepal. And moreover, the book has come down to INR 406 crores now, so from the earlier position.

Earlier, it was INR 995 crores. So the write-off from here would be close to INR 567 crores or INR 590 crores, right?

Write-off of INR 702 crores, the breakup I'll give you. Basically, INR 460 crores was written off from the restructured book and INR 241 crores was written off from the book, which was originated prior to March '21, but was not restructured.

So Shreepal, I would also draw your attention to Slide 6 and Slide 8 of the investor deck that we presented. That has all the splits, might not have staging, but that kind of very clearly articulates the movement of the book pre and post. That will give you a clear sense of which way we are, which is the 3 types of books that I mentioned.

That's very, very helpful, actually. Those slides are very helpful actually.. Also, what's this last question with respect to our FY '23 guidance and Vision FY '25. So are we sticking to our loan book guidance for FY '23, which is close to INR 9,200 crores? Because from year on, we're talking about almost 60% growth for the next 9 months, or we would be revisiting that for FY '23?

So if you go back to the last time when we presented this, it was a back-ended growth of Q3 and Q4. The number that you've quoted is an AUM growth. And in a monthly model, when you back end your disbursements, that's the number that you will arrive at. We are reasonably confident that we will deliver the numbers, not just FY '23, but which is our FY '25 vision of a INR 15,000 crores microfinance book.

The next question is from the line of Parag Jariwala from White Oak India.

Yes. And we'll just continue one of the questions of the earlier participant. Yes, I understand, or maybe at least in my mind or in a lot of the analysts mind, we were working with 2% as a credit cost for FY '23. Now Ashish, I understand you are now seeing that basically, it is on the closing book or probably the stable book. But even if you look at the profitability guidance, which was given for FY '23, like 4% to 4.75% is the ROA bank? So, what happens to that?

So thanks for the question. The profitability guidelines that we have given. If you can see, we have said that it is without taking into account the credit cost coming out of -- I mean, basically, credit costs needed to be added. It was a normalized profit that we talked about in the guidance. If we knock off the credit cost, then these are the numbers that we'll work out and probably we will deliver that. There is a clear probability that we'll report the numbers minus the credit costs that we are looking at, at this point in time.

So Ashish, I mean, what you are trying to say that basically, the FY '23 book or numbers that you're putting in the last PPT given the normal price basis [ that could end, you know one of the number ].

Sorry. What I was saying was there are 2 guidance that we've given, '23 and '25. '25, there is no issues. We -- in a steady state, we should achieve 4% to 5% ROA. There is no problem with that. I was referring more towards FY '23, if that is what you were asking.

Yes. So yes. So see, very honestly, Shalabh and team, I mean, actually, we are fine with the way you have articulated about pre-book being, you know, coming on a clean slate right now and look forward for a 3-year growth. It is extremely encouraging. And maybe we were expecting this in the last quarter. But something changes in 20 days is something which we are worried about, right? And I know you've answered that, but one disclaimer in the last quarter that probably we are still assessing the book could have been better for us.

Right. So point noted, however, I did give you the reasons because you have to be very, very sure when you are walking that path, but we have heard you.

Okay. And, Shalabh, if you can just briefly highlight, what exactly is the profile of the customer where you -- I mean so what were the issues? Have you taken a call that since these guys are not paying on time or probably not clearing the installment, even the COVID is now settled for more than a year? Are there any specific issue with the category of customer or the process might be what we have -what Spandana could have followed earlier? Is there any pattern? Is there any way in which we can look at it?

The start point of the answer that you seek for the question, type of question you asked starts at a quantitative and then slowly graduates into a subjective from customer meeting. It is not just a data which gets prone and you take a decision. A data is the start point and then you reach out to the customer. When you reach out to the customer, you gauge and plus you also study the profile of the customer in terms of repayment behavior across other financials, not just Spandana. A combination of what you learn from the market, which is both primary and secondary source of data is what converges into your final decision point, which is you have 2 options. You keep on pursuing the customer and wait for whatever 1 quarter, 2 quarters, or there is an opportunity time and opportunity costs. The same field force, you can employ by creating a new business, which is of a much, much cleaner profile. If you clearly see the post April '21 book, which is now 70%, delivering up 107% of collection efficiency. I would rather ask my person. And by no state of imagination, I'm saying we are going to abandon the book, which has been written off. Look written off or a write-off is a balance sheet item. It has limited -- it has not much to do with the effort on the ground. We will continue to engage with these customers, and we will continue to get the money for the reasons that I have specified earlier. However, when you have to take a point in time decision, what you decide is do you churn the book and get fresh customers who are of a much cleaner profile while still continuing to pursue with the others, who you find on the balance sheet, you've written off, but you can go and kind of still pursue them and get them to pay because these are not customers, who are a cycle 1 or cycle 2 because -- while that is predominant, but there are some customers in the cycle 3, 4, 5 or in a vintage of about 3 to 5 years with us. But in order of priority, and it is a choice, there is no right answer. It is a point of view. In order of priority, I would want to churn the book and get fresh set of 4 lakh, 4.5 lakh customers this year so that my profile improves, while still continue to pursue the older customers. So there was a chase choice. We've taken the choice. We picked the choice and the choice is get fresh customers in or the customers you've written off. Not, you don't pursue everyone. You pick and choose and work where you're confident that you will get the money and regularize them. Rest, obviously, you kind of move on because there's an opportunity cost to the time and the effort that is being made. So it's a much more detailed level of thought that goes into taking these decisions as you will appreciate, and which is what we've taken and that's the reason why we took some bit of time.

The next question is from the line of Renish Bhuva from ICICI Securities.

And congrats on a good set of numbers. So just the first one is on the clarification side. On Slide #9, we have said that our collection [indiscernible] arrears is 94%. So this is including the demand or restructured and gross NPA book? Or this is excluding that book?

The gray one, I think the legends, if you read, it explains the question that you're asking. There is -- the gray bar is including arrears and the green bar is excluding arrears. This is the post write-off book, which is the title, and the INR 5,513 crore is the AUM that we are talking about.

Sir, my question is that excluding arrears collection efficiency is including the demand for restructured and gross NPA book or this is excluding the demand for restructured and gross NPA book?

Yes, entire book, Renish.

Okay. entire book. Got it. And sir, the second bit on the strategy front, okay? So of course, we do understand that we have cut the AUM in March post April. But even when we, let's say, look at the April '21 originated book, this is again sort of originated under the erstwhile MD. So what is the clear difference, which when you have sort of analyzed this book, why the pre-March book has done so bad and the book, which is originated post March '21 or April '21, again, under the same management has led to the better collection efficiencies?

Look, we can do analysis paralysis on this, Renish, but the data is what drives us to this decision-making. There is a pre-COVID, post-COVID element in the periods that you have mentioned, which has to be -- we have to be cognizant of, #2. #3, if our data gives you such a one-sided view. I mean, to be very honest, I don't think we really would deliberate too much except obviously touching base with the customer because there were some disruptions at a company level, so which we just wanted to be doubly sure of that those disruptions did not trigger this behavior. Once we were sure that, that is not the case. And if the data plus the subjective personal meetings, et cetera, kind of give a one-sided view that this kind of is good for the book and right for the book and for the company. I think there was a little -- there was just one way that we could have gone, and that's the way we've chosen to go.

Got it, sir. And sir, lastly, if you can just broadly highlight, let's say, our top 2, 3, 4, let's say, underwriting mechanism, you have changed, which sort of reinforces your view that the incremental book, which will be of the much better quality.

Okay. So here is my thing. There is nothing dramatic you can do when you run a microfinance operations overnight. You have to calibrate and move the ship in such a way that there is minimum disruption because the stakeholders here are not just your customers. There is an employee as well. That's the most critical, #1. #2, and which is why I would have given a choice. I was led by your question. But if you were to ask me how you run a process in microfinance is extremely important. Microfinance is command and control. Microfinance is a process that you make. And how well you execute the process, how well you review the process, how well you monitor the outliers and what do you do after -- with those outliers. That is the fundamental of a microfinance distribution. The industry today has moved away from just a product-led industry to a distribution-led industry. Product is incidental. And once we are able to through technology once again. Because when you run a distribution, which is 70,000 villages, [ 6,700, 7,000 ] people, there is little that you can do on a line-to-line or individual-to-individual basis. So technology plays an extremely important part. We've made significant investments in Q4 and Q1 on technology. In a quarter from now and also, between Q2 and Q3, this company will move to a paperless organization with all escalations on risk metrics, on control, on audit, the triggers will be technology. So it will be a IT-led initiative company where we will supervise all execution of processes through tech and also for vision will be -- the primary driver will be tech. That is the most important thing. Once we are able -- we have a good handle on that, there is absolutely no chance that you will -- because if a person or an individual or a customer, for that matter, deviates on a process, if you don't correct it at that point in time, the game is lost. You in this business -- and sorry, I'm just sort of dragging this. In this business, it's important to do right things and not things right. That's the important thing, and that is what it is. So we are -- it will take in nothing.. And as I said, this is not T20. We are building this organization, which will be more robust and strong. It will take about 2 to 3 quarters because one is there are 2 elements to this. There is a people part and the process part. And the second is cultural orientations to align with these initiatives which we are taking. Culture, obviously, we will take about 2 quarters to internalize this amongst the people. From an initiative perspective, we'll kind of do it by the quarter.

Our next question is from the line of Nidhesh from Investec.

Personally, can you share the trends in terms of PAR given, PAR [ 30 ] in absolute amount as of March, June and July end?

Nidhesh, just give us a second. I'll give you the numbers.

It would be useful if you can incorporate that in PPT, how the PAR 0, PAR 30, PAR 60, PAR 90 trends are playing out. Those trends are pretty useful in microfinance.

Yes, yes. We will do that from next time onwards. So in the meantime, we'll reel out the numbers. Yes. So I'll just slightly change this, Nidhesh. I'll just give you a stage-wise numbers so that it can be tracked easily. Stage 1 numbers for March was INR 4,777 crores. Stage 2 was INR 399 crores, and Stage 3 was INR 912 crores. Now as it stands right now, post the write-off. Stage 1 is INR 4,953 crores. Stage 2 is INR 192 crores, and Stage 3 is INR 367 crores. This is what we have as of June after the write-off. 90% of the book is in Stage 1 and churning more than 107% collection efficiency.

So overall -- sorry, Nidhesh. I'm just interjecting. Overall, at this point in time, post write-off, our entire book is delivering 105%, north of 105% collection efficiency. That was one of the reasons we said what I said. I don't want to repeat the whole thing again. But now we are reasonably confident that the past is behind us, whatever we had to do. We didn't really want to stretch this beyond a quarter which we have done. Why was it not done 20 days back and now I kind of in 2 answers have detailed it enough.

Sorry, I'll just add, earlier also this question was asked by Shreepal, I think. In terms of stage-wise restructured book, I will repeat the numbers. I think there was one number that was incorrect when I was saying it earlier. So Stage 1 restructured book is INR 228 crores. Stage 2 is INR 61 crores. Stage 3, INR 117 crores out of the numbers that I've given just now on the overall book basis.

And can you share trends in terms of July, July and if the Stage 2, Stage 3 book has in absolute amount that is...

Apologies, Nidhesh, but July is a different quarter. At an appropriate time, we will kind of engage with you and give it. But broadly speaking, we are in line with the expectations that we had when we've conducted this exercise.

Sure. Secondly, in terms of the restructured book, just to clarify, the entire restructured book, we have not provided the moratorium and that restructured book has been building for almost last 8, 9 months or 10 months probably. Is that right understanding?

Correct. So restructuring was just a restructuring in true sense without a moratorium or a payment holiday. So when the 30th of September, the event happened. 1st of October, the unpaid installments are added to the tail of the loan. The demand started again from the month of October onwards. So from that event date until now, we are 3 quarters past. This is the 10th month. So whatever -- and that's one more reason why whatever had to happen has happened. We have a decent future ahead.

And there is no ballooning of repayment in restructuring, it's level repayment structure?

Ballooning, wallooning. I don't know [Foreign Language] it is as simple as straightforward. No ballooning.