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

Ladies and gentlemen, good day, and welcome to the Spandana Sphoorty Financial Limited Q2 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 date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shalabh Saxena, MD and CEO. Thank you, and over to you, sir.

Thank you very much, Faizan. Good evening to all of you. Thank you for taking time out to join the call. Thank you for showing interest in our company. Friends, over the past 2 quarters, we've been trying to steer Spandana towards the path that we had articulated for the organization through the Vision 2025. Suffice to add, we are moving on the right path. We have received tremendous support from all of you, all our stakeholders, which is lenders, shareholders, employees and our customers, thus giving us the confidence of achieving what we set out to achieve by FY 2025. Friends, quarter 2 was a quarter of consolidation. 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 foundation. With this, let me move to the quarter 2 results. While the results have been uploaded -- and I know there are some technical challenges on the site, but BSE, it was uploaded, I think, slightly more than an hour back and NSE also it is more or less there. But I'll take you through the results and brief highlights and happy to take questions now or from tomorrow. So while the results have been uploaded, I would want briefly to take you through the same. So let me start with the first point, which is on ratings. Spandana's ratings were on watch until quarter 1, post the various developments in the operating environment. All the 3 agencies have dropped the rating watch. Our ratings now are, India Rating, it is A stable from Rating Watch with negative implications. CRISIL, we are A stable from Ratings Watch with developing implications. And ICRA, A minus stable from Ratings Watch with developing implications. This was one of the highlights of the quarter. The second highlight, and here, I would want to just build on this, which is the borrowing story. One of the key challenges that we as a management team had was to start the borrowing cycle from our existing and new lenders. Together as a team, that was a single important task that we had committed to ourselves, more so because this is the primary driver for fueling our growth plans. We have made the right start. We've onboarded 10 additional lenders and 2 new first-time lenders. We borrowed during the quarter INR 1,080 crores against INR 155 crores in quarter 1 and INR 308 crores in quarter 4 of FY '22. The marginal cost of borrowings has decreased from 14% in Q4 of FY '22 to 13.1% in Q1 of FY '23 to 12.64% in quarter 2 of FY '23, which is the last quarter. So 14% to 13.1% to 12.64% this quarter. Banks and capital mix market, the mix is 58% banks. We've, in our past, through various interactions with all of you, we've kind of articulated that we would want to take this number to a number starting with 7. So we are on track for that. Apart from this, our liquidity position was comfortable with INR 964 crores cash balance as on September 30. In the quarter, many lender doors opened for us. Quarter 3 holds equal promise. On the financial performance, our Q2 results are presented here with. Total income -- our total income this quarter was INR 311 crores. This is an increase of 20.1% compared to Q1, where it was INR 259 crores. On the net interest income, the net interest income is INR 219 crores, an increase of 35.2% compared to Q1 net interest income of INR 162 crores. Our yield in Q1 was 16.4%; in Q2, it is 19.5%, which is an increase of 310 bps compared to the previous quarter. Cost of borrowings in the quarter, we had -- our cost of borrowing was 11.2%, which was 11.8% in the previous quarter, which is a decrease of 60 bps compared to Q1. Profit after tax, we have declared is INR 55 crores. As you are aware, in the first quarter, we had declared INR 220 crores of loss. On the business side, let me start with the various elements, starting with member acquisition. All of you are aware, and we've repeatedly said that our focus or our growth strategy will be driven by the member acquisition story. We acquired 1.23 lakh customers during the quarter, which was a growth of 16% over the previous quarter. We've said that our growth story will be customer acquisition led, and hence, we are building the blocks both culturally and identifying pockets of growth to further our plans. On the disbursement side, we disbursed INR 1,391 crores as against INR 1,320 crores in the previous quarter, which is a growth of 5%. And if I look at Y-o-Y, which is quarter 2 of the previous year, it was INR 1,150 crores. So Y-o-Y, it's a growth of 21%. On the AUM, our book has increased by 5% from the previous quarter. This is a trend reversal since the past few quarters. We had a declining AUM trend. On the portfolio composition because this is very important. Our portfolio composition, all of you are aware, comprised of 2 books or rather 3 books post April '21 and pre March '21. Our book composition has changed from March of 2022. The post April '21 book, which was 48% and the reason why I'm mentioning the post April '21 book is that this is a new book post the COVID era. It has -- and -- while you would have seen the numbers, but we'll spell out the numbers, the portfolio is behaving well. It is a new book, so it is in line with what one would expect of a distribution house like Spandana. So the post April '21 book, which was 48% in March 2022, became 70% end of quarter 1 and is now 82% in quarter 2. So the post COVID sourced book is 82% of our total portfolio. The new portfolio, as I said, is exhibiting good collection efficiency and hence assumes criticality. By end of quarter 3, it will be upwards of 90% and onwards. We have a book of, as I said, now a INR 5,782 crores, of which INR 4,730 crores, which is 82%, is giving us a net collection efficiency of 97.5%. This is related to improve over the next couple of quarters. The pre March '21 book, which is INR 1,052 crores, which is 18% of the overall book, is giving us 88.7% net collection efficiency. This is excluding arrears. The residual book post write-off taken in Q1 is showing strong asset quality, we'll continue to pursue quality growth. Friends, you are aware, we've articulated in various forums, our desire to strengthen our rural portfolio. Happy to announce that we are at 88%. Our overall rural portfolio now has increased to 88%. We will continue this journey because that is where the Tier 3, 4, 5 or rather the Bharat of India, which we have already articulated, is very much a part of our Vision 2025, where we plan to grow. On the collection efficiency side, our total book, which is the entire book, irrespective of the splits, has or is delivering us a gross collection efficiency and gross, as you are aware, includes the arrears. Gross collection efficiency of 101.3% and net collection efficiency of 93.3%. The provisioning position. We are adequately provisioned. The potential recovery upside from the return of book is a plus. We've recovered INR 15 crores from the written-off portfolio in the quarter, in the previous quarter. We'll continue to pursue this for the next 2 quarters. We anticipate reasonable upsides in this, and we have clearly articulated plans on how to engage with these customers and bring them back into the mainstream. The consolidated GNPA is 7.47%. The net NPA is 3.96%. The total provision that exists on the book is INR 303 crores, which is 5.23% of the AUM. On the balance sheet, net worth of the company is INR 2,867 crores with a capital adequacy of 45.3%. Our liquidity position remains strong. As on 30th September, as I said earlier, we had a cash and bank balance of INR 964 crores, which was almost equal to 4x of the required monthly liability. We have a diversified borrowing profile and are further deepening our relationships with new and existing partners. So to summarize the results and the way forward. We are moving as per plan. The lenders' confidence, disbursement, member acquisition, portfolio quality are moving as per plan and in the right direction. We anticipate clear roles now for business. Spandana has a great distribution and a very good team of branch staff in the field and in HO. We are proud of them and, like in the past, we are confident that they will build a solid story on towards our Vision 2025. We are strengthening the team at HO at the senior and middle management. We have hired 5 CXO levels joining us over the quarter. I will give you more update on the people story in the next quarter. Similarly, we have enhanced the Board with addition of 2 more illustrious Board members, Mr. Animesh Chauhan, Former MD and CEO of Oriental Bank of Commerce; and Mr. Neeraj Swaroop, Former Regional CEO of Southeast Asia and Singapore Standard Chartered. So we are strengthening our Board also to ensure that we move towards a more professional setup. On strengthening the organization, we added 300 loan officers during the quarter. Given the trajectory of growth that is required, we are planning to add another 750 to 1,000 loan officers in the current quarter. We continue to make progress on various technology initiatives, which have been highlighted earlier. Our risk, audit and control teams are being strengthened as we speak. Thank you very much for the patient hearing. I will repeat very humbly what I said in the last call, we are playing a test match, and this is a cricketing parlance example. We are playing a test match and not a T20. We are building the organization. We have a task to deliver. We remain focused on our goal, which is Vision 2025. Thank you once again. I have the management team with me, and we are ready to take all the questions. Thank you very much, Faizan, over to you.

[Operator Instructions] First question is from the line of Jignesh Shial InCred Capital.

Am I audible.

Yes. Yes. Yes, Jignesh.

Yes. Good. Thanks for the opportunity and congrats on pretty decent set of numbers. Just a couple of questions I had. But firstly, I can see a pretty good improvement on the margin...

Sorry to interrupt you, Mr. Shial, the audio is not coming clear now. I request if you can use the handset.

Is it better now?

Yes, sir. Thank you.

Yes. So as I can see, there is a sequential jump or improvement on the margin trajectory side, which is from 9.9% to roughly around 13% plus. So what will -- how do you see planning out to be in the coming quarters? Because if I remember it correct, we have been guiding by somewhere around 10% sort of margins. So do we see that numbers to come down? Or this will be the new trajectory you're looking out for?

Jignesh, yes, I have Ashish with me.

Jignesh, Ashish here. Thanks for the question. So 13%, yes, is the present NIM. We have discussed this last quarter, and our guidance was that we are looking at NIMs to be north of 12.5% and this should continue.

Understood. So this is the new trajectory and considering that the borrowing mix has improved significantly and expecting it to continue, we should see similar kind of margins going ahead also, right?

That's right.

Yes. And just to give you a color, Jignesh, we moved to the new RBI framework on the 1st of July, where we increased our rates to 24% with the repo rates, which have been going up, and there is a further this thing, we will -- or rather, we have increased our rates by 1% more, and we intend to stay put now for the next couple of quarters. So this is more in line with the market. So the reduction in the borrowing rate has to be looked at in the context of what is happening in the market. And obviously, our reach out to the -- and the support that we are getting from the various lenders.

Understood. Understood. So basically, we have a dual advantage, whereby the cost of [ funds ] basically is coming down, whereas the rates have moved up, and that is basically flowing into the margins, correct?

Correct.

Yes. Okay. Secondly, obviously, there had been sequential surge on the Stage 3 as well as, if I see it on the overall book, net collection efficiency has also dipped a bit from 94% to 93.3%. So this is overall book, I'm saying about. Originally, I mean, post April '21 is pretty stronger. So how do you see that trend? And can you give some more color on it, on the Stage 3 as well as on this collection efficiency side?

So let me answer this more holistically, and we are ready to -- happy to take detailed questions. See there was a time when we were reaching out to the customers because there was some disruption on the data side. And hence, we had to go and we collected a lot of arrears. So the past results have to be looked at in context. The current result also, if you see the gross collection efficiency of the book, as I mentioned somewhere in my commentary, it is at 101%. The point you are making is correct. It has dipped a bit, but then it is a temporary phase because we have been kind of doing multiple -- we've been doing -- managing multiple priorities from a customer point of view and the quality of customer point of view, we are completely engaged with all the customers and a few bits here and there, including flows. If you remember the last time around, we had said that while we will -- we might have -- we might see a few flows here and there. But overall, the quality of the book is now reasonably under control more so with every quarter, when -- when we see the customers will attrite because they would have expired their contracts of 24 months with whatever tail is left. At 82% on the new book end of quarter next, it will be probably with a number starting at 9. I think we should continue to see both in percentage terms and in absolute terms improvement.

So is it fair to see or considering that overall, your pre '21 book -- April '21 book has been getting [ translated ] or gradually should see repayments and recoveries. Is it fair to assume that collection efficiency post April '21 would be a new benchmark to keep an eye on it?

So any benchmark, forget a pre or a post, a microfinance book has to or should deliver upwards of 98.5% minimum. So that's the number that we are targeting at a book stage. Any number that starts with the double [ 9 ] is what we aspire to. I think we should see those days very soon when we hit a quarter 4 or towards the end of quarter 4. So a microfinance book or quality book should deliver a 98.5%, 99%, 99.25% kind of a number.

So. This is pretty helpful. Secondly, also just quickly, if I can get how the movement has happened, though you've explained in your initial remark, but -- if I can just get a moment of how opening -- sequentially, how the opening disbursement and repayment has happened? And if there is any write-off during the quarter, if you can give me that kind of number, that will be really useful.

There has not been any write-off. So there is -- basically, we have monthly repayments. So the book and an average maturity of the book is roughly about 16 months or so. So that's how the book kind of runs down. Our disbursement for the quarter has been INR 1,391 crores. And most of it was towards the end of the quarter and has the relative impact, Jignesh.

So the balance would be your repayments only, since there is no write-off, correct?

Yes. That's correct.

Perfect. That's really useful. Thanks a lot and all the best.

The next question is from the line of Dhruv Shah from Ambika Fincap.

Congratulations on a good set of numbers. I just have one question. Sir, are you still maintaining your disbursement target for the current year of INR 8,100 crores?

Yes.

Because in just first half, we have delivered around about -- around INR 2,700-odd crores. So H2 has to be really good for...

So Dhruv, let me explain. I go back to what I said at that time, and I'm just repeating what I said. We said in the first quarter, we will disburse INR 1,200 crores to INR 1,300 crores. The second quarter will disburse INR 1,400 crores to INR 1,500 crores. Quarter 3 will be INR 2,500 crores. Quarter 3 will be INR 3,500 crores. This was the narrative. This was the quantification of the plan that we had, and we are sticking to the plan.

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

Two questions. Firstly, your margins have now reached normalized levels. Credit cost has also reached normalized levels. How should we think about ROA, what is the operating leverage we should build in over the next couple of years? And what will be the normalized ROA that you expect from this business?

Yes. So we would talk more from a perspective of the normalized BAU or maybe, and we are fully in a BAU. Maybe if you are talking about a couple of years down the line, we aspire to be in the range of 4% to 4.5% kind of ROA when the leverage and everything will play out. That's the kind of ROA we are looking at.

Hello?

Nidhesh, did I answer your question?

This is the operator. Nidhesh, your line is [indiscernible], please go ahead.

Yes, sorry. So just a follow-up on this. So the incremental kicker on ROA will come from which [indiscernible] because I think the only lever that we have left, which is left from this earning -- this quarterly performance is on the OpEx front, OpEx to AUM.

I think there are 2 other levers, which we have not talked about. One is we expect the cost of borrowings also to come down further, one. Two, we -- if you look at the yield, presently, the yield is at 19.5%, but on an ideal basis, if I have to look at the yield, it should improve at least another 100 to 150 basis points. Given that we are coming out of COVID, and there is a book which has some bit of overdues or whatever. As this book kind of winds out, your yield should start improving. Having said that, Shalabh kind of initially covered in his commentary that our new disbursement will be at a higher rate of interest. The H2 disbursement is going to be at a 25% rate of interest, and this should start playing out by Q4 and should have a positive impact on the yield, which will also drive your ROA.

Sure, sure. And second question is on the asset quality. Basically on the collection efficiency -- on the new book, the collection efficiency is around 97.5%. And I think on the old book, the collection efficiency has deteriorated quite sharply in this quarter versus last quarter because in the new book, the collection efficiency has remained stable and the share of new book has gone up. So how should we think about the incremental credit cost because we still have 4% net NPA and my belief is that may lead to higher incremental credit costs in coming quarters. How do we think about that number? And how should we also think about the 97.5% collection efficiency on the new book?

So Nidhesh, the way we're looking at it is, yes, there has been slippage, but this should not definitely result into losses. The engagement with the customer is there. Between 1 to 90 book if I look at, 95% of the customers have been engaged with us and have paid more than one installment during the quarter. So clearly -- and we -- earlier in the call, we have explained that we are bringing in more field force on the ground, which will help us do some focus drives on the ground to address the engagement issues, more to say. The customer has shown intent. It is just that we need to be a little more engaged with them for better outcome. And this should start playing out from this quarter onwards. So our strong belief is that we will be able to improve upon whatever the marginal slippages that have happened in this quarter. In Q3, you should start seeing a much better kind of outcome from the book.

Just to supplement, Nidhesh, if -- we presented it in our Slide 13, if you see all the stages, there has been a slip in the 90-plus of which the new book contribution in the fresh slippage is about 0.29%. Rest everything is old book. So I'm not saying there's a problem with the old book. The old book are the customers who are very well engaged, and that's the reason why we held on tight to that portfolio. If you see the other stacks, which is Stage 1, both in the current -- the [ 1 to 30 ] Stage 2, there we've seen some improvement. One can argue that there has been a slippage from there into a greater than 90, yes, sure. But from a pure play quality of the portfolio and the customer and the engagement levels of the customer, I think we are comfortable, and we hold on to the story that we kind of narrated when we were decided to take the write-off. We were clear that the set of customers who we thought was not worth pursuing is what we decided to write-off and the others are customers through our various analysis and our engagement and our filed report, they are fine. So these flows, here and there, we will still see them between quarter 3 and quarter 4. But from a real damage perspective, I don't think so. So we are -- we maintain what we said the first time around.

So incrementally, we should not expect any elevated credit cost from the current book?

No. So we had said that the new book on a standalone minus the COVID, if you remember the Q4 results that we presented, we said it's going to be under 2%. It is going to be half of that is my intelligent guess on the new book part. We are on the old book either way, it is attriting because we are seeing all those customers are seeing the end of their loans, number 2. Number 3 is, from a provisioning perspective, we are well covered in terms of, if at all, there were some slips were to happen. But overall, I -- we do not anticipate any -- anything which would happen or would lead to a deficiency in the judgment that we had when we kind of worked this part. So to that extent, I think we are good.

The slips?

The slips and the flows, given the nature, see, we have to consider that as a company, we have almost 98%, 99%, which is a monthly book, monthly repayment. So it is difficult for the customers to really move the reverse bucket once they really slip, and that's the challenge that we have. So that we are kind of at least Q2 was very, very critical. That new kind of reasonably managed to wait. I think Q3, Q4 with the decline in that book, plus the overall engagement levels, I think we should be fine.

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

Congrats on a good set of numbers. Ashish sir, just one question on this -- the 18% of AUM, which is INR 1,000-plus crores. And if I calculate the collection efficiency on this 18%, it is roughly around 75% to 80%. I mean, let's say, 82% of the book is having 97.5% collection, and when you have a blended collection of 93%, like 18% of the book should be around 75% to 80% of collection. And when I look at the Stage 3 assets, it is around INR 420 crores. So sir, what is happening with this INR 600 crore of the balance book because of that also restructured book is hardly anything. So if you can help me with some reconciliation on this INR 1,000 crore book, which is the pre March book -- pre April book, sorry.

Yes, Renish. Ashish, this side. The collection efficiency on the 18% book is 88.7%. This is the net -- this is the net collection efficiency. And so that's the number. I mean if that is what you were asking for, 88.7% will be the collection efficiency on the old book. The simple average is when you do the disbursement on the 4, I mean, this will not actually give you the right color because not all book would have had any dues in the current quarter, right? I mean so collection efficiency is what was due vis-a-vis against that, how it was collected. So as you go forward, you will see this number kind of improving in terms of -- because the book, which has been disbursed in this quarter was, like I said, was disbursed primarily towards the end of the quarter, we'll see its dues and recoveries in the coming quarter only.

Renish, just to give you some numbers on the question that you've asked. The net collection efficiency of the pre-March book is 88.7% and gross collection efficiency is 97.2%. So it has to be looked at in context of the narrative that we've been saying that these are the customers who are -- who are paying, but with a lag and with arrear. Obviously, given a monthly liability that they have, it is difficult for them to really clear off their 2 or 3 installments. Hence, the pace is slow, not what you or I would want, or not what we would definitely want. But I think with -- with a declining book and we are able to hold 97.2% on a gross, I think -- and net also, if I see at 88.7%, closer to 89%, I think we are there.

Okay. So again just a follow-up, okay. So in this INR 1,000 crores, okay, only INR 400 crores is Stage 3 and INR 100 crores is restructured. So balance INR 500 crores -- I mean, are you seeing this book as a stress book? Or do you see this will recover over a period of time?

This will repair and that's why I said -- so this the reason why it is here means obviously, it was not a regular book. Otherwise, it won't be here. Having said which, it is not something that we can sort of [ kiss ] goodbye. We have great engagement with each of these customers. It is just that there is no way they can jump from greater than 90% into standard, hence, they will take their time. Most of them will wait for their loan tenure to be over and then the extended tenure will kind of get them back into a loan termination. So that's how it is. So we'll have to buy it our time and see how their individual loans run out. In parallel, obviously, this is the new disbursements that we are doing. Our regular book, which is at 82%, will obviously keep on increasing. And by end of the year, I think the pre March '21 book should be lower single digit.

So just last question. So is it fair to assume that the Stage 3 assets in absolute terms, okay, which is [ INR 4.2 billion ], is picked out at current level? Or we feel that there will be some flow forward from this INR 1,000 crore book, and it should ideally [ pick ] out in Q3?

Renish, so there is a nuance to the question you are asking, and I will just attempt -- maybe I'm not able to communicate. I am saying the flows could be there. I'm not saying they will not be there. But the so-called bad customer have peaked out if that is -- I'm just answering your question slightly differently. The customers, will I be stressed or, as an institution, will we be stressed to take a write-off, et cetera, unlikely. Right now, the way they are and the way the story goes, they will drag themselves towards the end of the tenure, and that is how they will kind of [ exhaust ] themselves. That is how it is going to work.

The next question is from the line of Shweta Daptardar from Elara Capital.