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 '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] Please note that this conference is being recorded. I now hand the conference over to Mr. Shalabh Saxena, MD and CEO of Spandana Sphoorty Financial Limited. Thank you, and over to you, sir.

Thank you, Darwin. Good evening to all of you. Thank you for taking time out to attend our call. This is the fifth result, which we're presenting post the management transition. Our journey in Spandana has been professionally exciting and challenging. Over the past 4 quarters, we've got very good support, advice and suggestions from all the stakeholders, including you all. We, as a management team, are indeed extremely thankful and grateful for that. Ever since taking over, I have been highlighting the need to strengthen the company at the senior and middle management levels in the areas of governance, risk management, control, compliance, audit, distribution and technology. We had identified 13 key positions at CXO and CXO minus 1, to which had to be filled when we started our journey. As we speak, I'm happy to inform that the positions have been filled. All the team members have taken charge and have been working diligently towards the Vision 2025 that we had articulated on the 11th of July 2022. The people priority, hence, has been successfully completed. The wisdom and experience of the team will take the company forward. Now to present the results of quarter 4 of financial year '23. The challenge during the year for all of our was to work on multiple priorities of business, that is people, disbursement, portfolio quality, distribution, process, customer proposition and technology. We have made progress in each of the areas. This is a journey, and we will continue the march towards the goal. Now to present the financial results of quarter 4. The results were uploaded about a couple of hours back. I'm sure you would have had the opportunity to go through it. Nevertheless, I'll just give a very high-level summary. On the disbursement side, we disbursed it during the quarter, INR 3,054 crores, which was a growth of about 30% over the previous quarter. The disbursement for the year was INR 8,125 crores, which was 141% higher than INR 3,373 crores which was disbursed in the last financial year FY '22. The numbers have to be looked at in context and there's a base effect in the place. So 141% has to be looked at in that context. On the AUM side, we ended the year at an AUM of INR 8,511 crores, an all-time high for Spandana. This was a growth of 24.2% over the previous quarter and 29% growth over INR 6,581 crores that was reported for March 2022, which was last year. We've been highlighting ever since we presented the Vision 2025 that our growth will be led by customer acquisition. We're happy to report that in the quarter, our customer acquisition was 4.3 lakh new customers, which was a 95% growth over the previous quarter. Overall, for the year, we have acquired 8.8 lakh new customers, which is a growth of 166% over 3.3 lakh new customers acquired in the previous year. Once again, the similar caveat applies on the 166%. A very key element of the company that all of us run is the borrowing side. The quarter has seen a total borrowing of INR 2,402 crores, which is up 12% from the previous quarter. During the year, we borrowed in total about INR 5,775 crores from our lenders, which is up 208% over the previous year of INR 1,875 crores. Our marginal cost of borrowing was 12.55%. We added 8 new lenders during the quarter, thus taking our total lender relationship base to 48. We opened our account with a public sector bank with a DA transaction of INR 500 crores during the quarter. Our focus for this year on the borrowing side will be threefold: continue to reach out to like-minded vendors who are still not associated with us; increase the relationship depth with the existing lenders; and most importantly, to work on decreasing the cost for incremental borrowings. On the write-backs, all of you are aware that we had written off about INR 700 crores in the quarter 1 of last financial year. So this question keeps on getting asked to us during the year. During the year, we made a total recovery of about INR 70 crores from the write-offs and the ARC pool. We will continue to reach out to our borrowers and educate them on the benefits of repayment of their outstanding deals. This is a journey, and we'll keep moving on this. On the portfolio quality, which is one of the key element of any lending business, our portfolio quality continues to improve over the quarters. The standard, which is the current book, is at 96.6%, an improvement of upwards of 4.5% over the previous quarter and a marked improvement from 68.4%, which it was in Q4 of last financial year. So our journey has been 68.4% to 96.6%. We are not done yet. And we're still pushing it for a higher limit and higher levels. The 1 to 90 bucket. I will repeat the 1 to 90 bucket is 1.5% now in totality. This was 2.6% in the previous quarter. Of the 1 to 90 book, about 40% is in 1 to 30 bucket. So this is the one installment outstanding. The old book, all of you remember when we came -- when we presented the first result, we had compartmentalized the book into a pre-April '21 sourcing and post. So the old book is what I'm referring to is now only 2%, thus practically ensuring that this was the COVID sourcing. So the 2% is what is left of it, practically ensuring that the slightly stressed book source during COVID times has run off now. This book constitutes about 45% of our GNPA, this is just to give you a context. The GNPA end of quarter 4 now is 2.07% and the NNPA is 0.64% on the back of improved quality and higher provisioning, which I'll cover in a bit. A very important element of looking at how the portfolio is behaving is to see the flows. Our flows over the quarters have improved decently. Our flows into SME 0 have moderated to 0.58% in absolute terms, about INR 47 crores in Q4 FY '23, which is this quarter as against 8.3% in the last year, which is the Q4 of FY '22. So this journey, which was a total and absolute terms of INR 509 crores. So the journey has been from INR 8.3 crores -- 8.3% to 0.58% over the past 4 quarters. On the collection efficiency, the gross collection efficiency for the quarter has been stable at around 102.45%. The net collection efficiency, and this is what we track as an organization, and these collection efficiencies are not caveat ready. It's very important for all of us to know. So that we are presenting as is the net collection efficiency for the period was 97.57%, which is 3.05% up from Q3, which was the previous quarter, thus reinforcing the statement made earlier on improving portfolio quality. More and more customers are paying on time, which is a healthy sign. This is a factor of the general macroeconomic environment and the way it is evolving, plus the efforts put on ground by the teams. On financials for quarter 4, I forgot an important point, which was the PCR. So this quarter, we've taken our PCR at 70%. We were 55%, as you would know. The last quarter when we presented, we were at 55%. We had taken the 50%, which was the PCR in Q2 to 55% in Q3. From a 55%, we've taken it up to 70% on the unsecured portfolio. All of you are aware, we have a book on the secured side as well. It is a small book, but nevertheless, the provisioning criteria are slightly different and hence, at a consolidated level, we are -- our PCR at 69.1%. So be it the disbursement story, be it the flows, be it the collection efficiency, be it the member acquisition, be it the provisioning, we've tried to address each of these issues, which would normally anyone would when you run a NBFC or you are into a lending business. Coming back to the financials. In continuation of our narrative over the quarters of increasing provisions when required, I've already covered this. Our NNPA, while I did give the high level number. NNPA, because of the provisioning has hence reduced to 0.64%. The numbers for the previous quarter was 2.52%. The GNPA is 2.07% against 5.31%, which was there in the Q3 of the financial year. Our normalized yield on the portfolio has improved to 22.8% from 21.2% in quarter 3. Normalized NIM has improved to 13.86%. That is up 38 basis points over last quarter. The reason why I'm repeating the normalized is, there are transactions which were done like DA, et cetera, we've tried to normalize it and not include it while calculating the various ratios so that all of us are clear in terms of what is a steady state number that we are looking at. Total income for the quarter increased 42% to INR 533 crores versus INR 375 crores in quarter 3. Net interest income was up 51% to INR 384 crores for the quarter versus INR 254 crores in quarter 3. PPOP, which is an important metric to track, for the quarter was INR 261 crores, up 85% over INR 141 crores reported for previous quarter. Profit before tax for the quarter was INR 139 crores, after tax of INR 106 crores, which is an increase of about 48%. Financials for FY '23, which is the full year. The total income from operations during the year was INR 1,477 crores, which is almost flat compared to the previous year of INR 1,480 crores. Given the INR 702 crores write-off that was taken in Q1 of FY '23 and all of us are aware that Q1 was when we had done that write-off, the total income for the year was muted. The annual PAT for the year, hence, is INR 12 crores. This is a decrease of 82% over the previous year. However, as I said in the previous point, I'm repeating, this was more to do with the onetime write-off that we took of INR 702 crores. The quarter 4 numbers, we've gone into the details. To summarize, ladies and gentlemen, the year FY '23 or financial year '23 has been enriching period for the new management. We presented the Vision 2025 document on the 11th of July, where we had articulated the path for the company for the next 3 years. Over the year FY '23, we've taken all the steps to ensure we lay a strong foundation and then progress on the key fundamental blocks. During the quarter 3 earnings call, I had informed that we are now stepping up expansion of business as most of the building blocks were in place. Happy to announce now that during the quarter, and if you remember, I had said that we are going to or we are planning to open about 100 branches. We have preponed the growth story from a Q1 of FY '24 to Q4 of FY '23. So happy to announce now that during the quarter, we have opened about 112 branches. Our target now is to have about 1,500 operational branches by the end of this year. Although if you recall, in our Vision '25, we had very clearly said that by end of FY '25, we'll have 1,500 branches, but we will open all those branches this year so that the next year, we have a runway of the full 12 months for the 1,500 branches to perform. We plan to end the next year, which is FY '20 -- this year -- sorry, FY '24 with an AUM of about INR 11,500 crores, which will once again be slightly backloaded because there are a few agendas that we have to do in quarter 1 and quarter 2, either which was quarter 1 and quarter 2. We paced the innings the last time around, and we kind of delivered. There are things that need to be done a few distribution initiatives, et cetera, to be done, which we will in this quarter and the next. JLG, and this is very, very critical. JLG is the mainstay of our model, and we are taking steps to ensure that we drive the execution of the model in an effective manner. We've already relaunched the Home Improvement/LAP business. During the year, we will be launching the Nano Enterprise or the bottom of the pyramid MSME loan product as well. FY '24, ladies and gentlemen, is all about optimization and bringing in efficiencies in our operations. The building blocks were laid last year. FY '24 will be about refinement and continuous improvement. Our focus on people, which is both retention and acquisition, will continue focusing on their benefits, welfare, upskilling and well-being was and will remain the core of our approach. The opportunities for growth that microfinance provides has us quite optimistic about the future of our company. Our endeavor is to be a technology-led micro-financier, delivering loans that fulfill aspirations of an emerging rural India. FY '23 marked the beginning of this growth pivot and there is more to follow. Lastly, I thank all the stakeholders of Spandana, the Board, our lenders and our colleagues in Spandana who pulled in their energies during the year. A special note of thanks to all the brand staff, our loan officers, branch managers and the entire field staff and the head office staff who's loved the hard to deliver the results as we envisage at the beginning of the year. Thank you very much to all of you on the call. You've been a constant source of encouragement by giving us positive advice, feedback and, of course, support during the year. We look forward to receiving similar encouragement in future. With this, I now end the update. We have the entire management team, all the 13 people that I spoke about at the beginning of the commentary with us, and we are ready to take questions. Thank you very much.

[Operator Instructions] The first question is from the line of Shreepal Doshi from Equirus.

Congratulations to you and the entire team for a great quarter. So my first question was related to your new product launches. So what is the thought process with respect to the kind of mix that you see in FY '24 -- by FY '24 and during FY '25 with respect to, say, the others like except for JLG-based lending at?

So Shreepal, thank you very much for that question. If you go back to our Vision 2025 document, we had articulated a total INR 18,000 crore AUM for our company by end of FY '25, of which the mix would be JLG INR 15,000 crores and about INR 2,000 crores to INR 3,000 crores is what we had indicated on the 2 businesses, one is the loan against property and the second one was the Nano MSME enterprise business that I spoke about. The first one is obviously a secured line, which should be in the range of about INR 1,500 crores to INR 1,700 crores. The Nano MSME, it is unsecured loan. Non-JLG business, it will be in the range of about -- similar about INR 1,500 crores, INR 1,600 crores to about INR 1,800 crores. So that's the mix that we are looking at. We have -- as we speak, we have come up -- we've launched the LAP -- the new LAP business, as I may say, on a completely new LMS and LOS. We were waiting for the entire system to kind of be tested fully. So all of that is done now. So we will start -- you will start seeing the numbers from now. As I said, we will be very cautious in the first 2 quarters on the LAP business. And in parallel, end of quarter 2 or beginning of quarter 3, we will launch the MSME business. This is apart from JLG and for the benefit of everyone, the 2 businesses, I mean, the LAP business and Nano MSME business will -- is completely separate from the JLG. People are separate, branches are separate, hierarchy is different, and this is led by a completely different Chief Business Officer. This is -- that is how we are to kind of...

But this is the branch -- the operations from the -- it would be from the same branch, right, with respect to operations? Or do they have a separate branch network also?

No. So that's exactly what I said. Separate branch, separate geography, separate people, separate business, separate credit, everything is separate. We don't want to mix up the 2. There's no question of fungibility. We are absolutely clear that JLG in its -- our purest form of implementation has to be delivered as a model to the industry and to the company, and that is why we will not kind of build any bridge between the 2.

Got it. Secondly, the question was with respect to new customer acquisition. So commendable job during the quarter. Wanted to understand what is the first cycle and second cycle disbursement ticket size that we really have as a strategy?

So the first cycle -- so 2 answers to your question, and good that you asked Shreepal. This whole debate about ticket size, in my view, has to be looked at in a slide with a different colored lens. What one should look at is the average indebtedness at a customer level rather than the ticket size. I can do a ticket size of INR 40,000 and not give a loan to the customer for 2 years vis-a-vis offering a ticket size of INR 20,000 and give a loan once in 6 months. So average indebtedness level is what we track. And our indebtedness level is roughly about 90%, 95% of the industry, we are at about INR 31,000, INR 32,000 type of number at a customer level. Now to your specific answer to the question that you asked, the customers that we are onboarding in the weekly model, our ticket size is in INR 35,000 and that is where -- so we muted the ticket sizes typically in an existing branch, which has been running for some time. We, as an organization, were offering INR 42,000 as a ticket size for the first loan. But in the new branches that we have started, we are offering the INR 35,000 and slowly we'll kind of spread this around. So as a philosophy and direction, we will slide downwards on the ticket sizes. We are more bullish about getting more customers rather than playing the dollar game.

So what is the indebtedness that we are comfortable with at the customer level?

We would be comfortable with a sub 90% of the industry, which is -- we are currently at about INR 32,000 anywhere with the inflationary rate of about 6% to 7%, INR 32,000 to INR 35,000 is a good enough number. And it will -- by design, it will come down, Shreepal, because we are opening in the 7 states that we had clearly identified where we are going to grow. We will be low on ticket sizes. So either way is going to come down. So we are comfortable to answer your question between 32 to 34, 34.5. So at every given point in time, we are very watchful of the ticket size, and we'll continue to monitor it.

Got it. Last question with respect to the pricing. So what is the rate range that or what is the yield range that we have for our customers currently?

So the yield for -- just a second. So we are -- we have a normalized yield of 22.8%.

Presently, it is 22.8% in terms of the yield, Shreepal. However, if you would have recalled, we have changed to 25% as our interest rate starting October, which are 25% interest rate, plus 1% as processing fee. That's the product pricing. As we have a refresh in terms of the loan cycle, the yield should start getting closer to that number. So there has been an improvement in the last quarter. We'll continue to see this improvement as the new loans kind of become higher in terms of percentage on the balance sheet.

Shreepal, I don't know if you got the chance to read the presentation. Slide #13 has both the yield and the NIMs clearly articulated. What I said in my commentary, I'm just repeating, we've normalized the yield to take out the onetime bp spikes so that it's a reasonable and a balanced, calibrated approach. We are comfortable in the range that we are operating. And as Ashish mentioned, as the portfolio shifts more towards the recency because these are all short-tenured loans, you will see the yields going up by virtue of the change in the framework and design of the portfolio, which is moving towards higher interest rates.

I just wanted to understand that part only, the yield that we are charging to our customers. Got it. Good luck for the next quarter.

Thanks, Shreepal.

We have the next question from the line of Renish from ICICI.

Congrats on a good set of numbers. So just 2 questions. So one is on the our ECL methodology. So we have mentioned that we have changed some I think still policy, which has sort of like to this higher PCR this quarter. So essentially, what we have changed in ECL model?

Renish, this is Ashish this side. Basically, we have looked at the model a little differently. We wanted to increase the PCR in any case. So -- and this is continuing from the thought process or the approach which we laid out in the last quarter. If you recall, we have moved from 50% to 55% last quarter. This quarter, again, we have tweaked the model to ensure that 70% kind of coverage is there. So we have increased the PDs as well as the flows, the LGD consideration in the model itself, whereby the 70% has started kind of playing out on the portfolio.

Got it. So [Technical Difficulty]

I'm so sorry to interrupt. The line for you is going bad in between. If you could please repeat your question, it was not audible.

Okay. Am I audible now?

Yes.

So Ashish, so if we go by the current ECL methodology, what should be the [indiscernible] cost because [indiscernible] guidance [indiscernible] at that, your ECL methodology would have been different versus now. So any comment on that?

Yes, sure. Renish, we have talked about and again, going back to what we have said. In a BAU, we have budgeted for a 2% kind of a credit cost. However, if I have to look at the flows from the new book, the flows would be in the range of 1.2% to 1.3% only, including the delinquent portfolio. So this 2% is a very well -- I mean, sufficient in my mind from a credit cost standpoint.

It's a cushioned number, Renish. But as a prudent financier, it is appropriate that we kind of take this position because it's early days yet, and it's always good to kind of measure yourself maybe after 3 or 4 quarters. So after 4 quarters, we'd relook at this 2% assumption. But as of now, we go by it.

Got it. And the change in ECL methodology will not impact our steady-state credit cost of 2% is what I wanted to reconfirm.

Yes. So the ECL methodology will deal with, anyways, the flows. I think what we have -- the team has been done a splendid job on is curtailing the flows inside of the nation and that's what we're pressing on. I think with that playing out, we -- ECL should not be a challenge in terms of the credit cost.

Got it. And my next question is to Shalabh. So if you look at the total outstanding borrower base, which sort of remain plateaued around INR 2.26 million. And when we arrive at our ticket size, it's actually up by 23% sequentially from INR 30,000 to INR 37,000 this quarter. Of course, I mean, this is adjusted -- not adjusted for the write-off borrower. But practically, if we look at the current borrower base, the outstanding AUM per borrower is at 37.5%. So how one should read this data? I mean, can you just explain whatever we are missing here?

So this was a onetime impact, Renish. And while it is good to kind of monitor and keep the eyes on the ball every quarter, I am giving directionally a view on what the position the end of FY '25. When we take a position and if you go back to the commentary that I made when we began our stent, I had said that we will look at reducing the ticket sizes, which is what we've already started doing in the weekly branches that we started. We have about 100 of them now. Over a period of time, we will start getting these down. What is my comfort on our indebtedness level, I gave the number 32 to 35. That is what it is going to be. Nothing wrong in kind of evaluating at this point in time, what is the number, but then you to normalize it over 3, 4 quarters, you will see the number that I have quoted. We are comfortable not playing the ticket size game. We are comfortable in playing the customer acquisitions game. The INR 2.2 million is post the write-offs that we've taken. I mean, the INR 700 crores was about 2.85 lakh customers that we wrote off. And this quarter, another 2.4, 2.5 that we've written off. So if we add all of that, it comes to some 2.8 million. But not -- but anyway, the point I'm trying to make is, directionally, this is where we are going. 4 quarters back, we directionally told you which way we will go. Another -- we have 8 quarters to go, but you will start seeing the downward slide starting third quarter, fourth quarter. Because we run -- Renish, we run an enterprise where a customer is used to a particular way of how the company behaves in terms of the ticket sizes. We have to calibrate this whole thing overnight. We can't really and hence, the 35,000 on the first loan we started in branches, which were absolutely new. So somebody who has -- who is used to a particular level, you can't really crash that level. So we're just moderating it so as to not kind of give any knee-jerk reaction. But directionally, that is where -- that is how we are going to play -- that is how the game is going to be played.

Got it. So maybe in other words, this outstanding per borrower at current level is sort of picked out at least in near term?

No, 100%. That is what we are going to do, and that is what we are doing. So directionally, we had a job to do, which we did. Obviously, we have to take -- we didn't want to do anything which was knee-jerk. We are moderating this whole thing. I'm repeating what I said, but we are moderating it. We -- the last 4 quarters, we've calibrated multiple things, not just this. And it has kind of given us the results. You need a customer line, you need an employee buying for the kind of initiatives that I've been talking about. And that is what I think we'll be kind of pursuing.

The next question is from the line of Manuj Oberoi from YES Securities. [Operator Instructions]

Congrats on very strong performance. So first question is on the ECL coverage on the current portfolio, that has gone up in percentage terms. So what is the thought process behind that? And also a related question is on building a countercyclical buffer because when you look at the required credit costs in the coming quarters, so that credit cost, if you go by the flows from the current bucket right now, which are negligible or marginal and even when you look at the State 1, Stage 3 buckets, which have significantly come down and significantly provided for and the required credit costs going into FY '24 will be much lower. So what is the overall view on building a countercyclical perform?

So I think your question 1 and question 2 are interlinked. I mean, the thought process have -- is to have some kind of a buffer. So increasing the provisioning on the current is an effort to address that conservatism in the entire provisioning. That is how we have ensured that higher provisioning even on the current bucket is maintained. If the flows and the performance continues to be in line with what we are seeing, probably, we may look at reducing this percentages that we are holding on the current portfolio. But as of now, I think we feel very comfortable with this kind of levels or the percentage is being maintained.

Yes. So when you guide for a 2% credit cost, Ashish, that seems to be having some more conservatism being building given the current portfolio construct and given the current flow rates.

Yes. The point we are trying to drive here is 2% is what is budgeted. However, if you have to go by the current numbers, it should be stabilizing around 1.2%, 1.3% around, right. So -- but 2% should be kept because there are always pockets in microfinance, where in a particular period or in a particular geography, there may be elevated credit cost in a short term, which you need to address. But over a long term, I think we believe that 2% is sufficiently conservative, and we should be doing something below 1.5% for sure.

Either way, I will repeat what I said, we are comfortable with this. We'll continue with this because we don't know what we don't know. Another 4 quarters, 6 quarters, there's a lot of fluidity in the macro, so macroeconomic environment, either it was as Ashish mentioned, the specific pockets you never know. It's always good to hear on the right side. So that's what we'll continue to do, and then we'll evaluate or relook at our position maybe 4 quarters from now.

Got it. And now with this very strong profitability delivered in fourth quarter and you ending the year with significantly moderated NPAs and buckets, how would this position influence your funding cost of the future? Because I already see your marginal cost of borrowing flatting out at 12.5. What kind of funding cost benefits irrespective of the rate cycle, can we get from the current performance?

Yes, Manuj. So if you really look at the -- some of the benefits have already translated even during the interest rate right cycle, if you see for Spandana, the rates or the premium that we were paying has been coming down quarter-after-quarter. Now it has largely stabilized at 12.5. We still have a little way to go to bring down the credit cost -- I mean the borrowing costs further. As the banks start playing out, the public sector primarily, our costs are likely to start rationalizing further. We have seen the participation start in the last quarter, but it has to be a dominant kind of play out from the public sector, which will help us rationalize the costs further. I think in 2 quarters from now, you should see more benefits accruing from this particular vector.

So if I may just add, we borrowed about INR 5,775-odd crores last year. We -- what we were missing were the big public sector banks. Obviously, each one had their own position, which I presume now we are sufficiently engaged or we were sufficiently engaged with them for the past 2 quarters. Once that line comes -- keeps coming in, obviously, it will open a new line -- a new -- I mean, it will be a completely new area for all of us. So that is what -- in my commentary, I have said that what we have to or what we will be looking at is to work on decreasing the cost one. But however, most importantly, ensure that we get an entry into all these public sector banks so that, that is where our supply or our demand will kind of be addressed from a supply from their side. So that is one area, which I think, as Ashish mentioned, 2 to 3 quarters, I think that should start flowing in.

Got it. And Ashish, with regards to provision on the ARC sale that you have done in Q3 and Q4, there is no pending provision, right? Whatever was required has been fully taken in respective quarters. There is nothing which will come and retain the future on that.