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 '21 Earnings Conference Call. This conference call will contain forward-looking statements about the company, which are based on the beliefs, opinions and expectation of the company as on 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]. I would now like to hand the conference over to Mr. Shalabh Saxena, CEO and Managing Director. Thank you, and over to you, sir.

Thank you very much. Good evening to all of you. Thank you for taking time out to attend our earnings call. This is the fifth quarter of the new management in Spandana and I am satisfied to state that we've come a long way from a year back when in July 2022, we had presented our Vision 2025. Since then, we've received a lot of valuable feedback, suggestions and advice from all the stakeholders for which we are very grateful. Please have the suggestions and advice flowing our rate, we need them. As you are aware, we had identified 5 priorities for us as a management team when we presented Vision 25. We have made significant progress on each of the 5 priorities, and I would start by providing an update on those. Number 1 and most important people reinforcing senior and middle management teams have announced. As announced in our last earnings call, we now have all the 13 key positions filled and all the minus 1 levels are also adequately staffed. Thus, our senior leadership hiring agenda now stands complete with a strong management team in place. Our focus now is on setting up employee centric people practices with the aim to make Spandana a preferred employer. We have started work on this already. And in the next 2 to 3 quarters, we intend to make progress on this key agenda item. The second point was concerned governance risk and control with added focus on refining processes. A lot of our efforts in the previous year were dedicated in refining and further strengthening governance risk and control. We have been calibrating our exposure norms, tweaking policies where necessary to add strength to our governance framework. Streamlining processes was also a major focus area during the last 5 quarters. This is a continuous process, and we will keep working on it consistently. Number three, focus on customer acquisition-led business growth while ensuring retention of good existing customers. We continue to drive growth through member acquisition. We had added 8.8 lakh new borrowers during FY '23, which is last year. In the current quarter as well, we've added 2.6 lakh new borrowers. As we expand the new geographies, our new borrower additions will continue to trend higher. By end of the year, we intend acquiring more than 1 million new customers, thus taking our customer base upwards of 3 million or thereabouts. Technology scale up to deliver -- point number four, technology scale up to deliver an end-to-end paperless process for customers. We are continuously scouting for and investing in technology to make our systems robust and process, simple for our employees and customers. Our focus has been an agile LOS and LMS and most importantly, a safe and secure back end. We believe that technology will drive the next wave of growth. Point number five, customer-focused initiatives with emphasis on products and service. We had envisaged a non-micro finance loan book of over INR 2,000 crores by FY '25 and are taking concrete steps in that direction. We have introduced loan against property in the new geography of Rajasthan. We will soon be launching the Nano enterprise loans in select markets. We look forward to scaling up these product offerings in multiple markets in the coming quarters. This is apart from the INR 15,000 crore of book in micro finance, which we have planned end of FY '25. Apart from the 5 priorities, we are well possessed of the fact that there is a large scope for building efficiencies in our distribution network. We are taking a number of steps to ensure right utilization of resources. We anticipate a 15% to 20% improvement in efficiencies in the current distribution metrics that we operate. And over the next 2 to 3 quarters, we will see the benefits play out. Our focus on growing in the 7 states of Rajasthan -- our focus on growing in the 7 states, which were Rajasthan, UP, Bihar, Haryana, Tamil Nadu, West Bengal and Gujarat where we have a very low market share continues to be in ground. Over the past 2 quarters, we opened a net 188 branches, most of which are in these focus states. We want Spandana to have a meaningful share of microfinance portfolio in these states. A large portion of our loan book and borrower addition growth is expected to come out of these 7 states. As is there in the presentation, about 26% of new borrowers added during the quarter were from these 7 focus states. While some of our initiatives result in immediate impact during the quarter, many others will take a quarter or 2 to translate into tangible results. But I can say this with reasonable surety that we are on the right track. Having said that, let me present the results of Q1 FY '24. The results and the investor presentation have already uploaded on the NSE/BSE websites. I'm sure you would have gone through, but I'll quickly go through the results. Disbursements, as you are aware, Q1 is usually a seasonally low quarter for the microfinance industry. We disbursed INR 1,664 crores during the quarter, up 26% Y-o-Y. On AUM, we ended the quarter at an AUM of INR 8848 crores, an all-time high for Spandana. This was 60% growth Y-o-Y and a growth of 4% over the previous quarter. Customer acquisition, one of the strong pillars of our Vision 2025 is customer acquisition-led growth strategy. During the quarter, we added close to 2.6 lakh new borrowers, which is 144% higher than the same quarter previous year. On the borrowing side, you are aware this is the key component of any NBFC and its functioning. The quarter saw a total borrowing of INR 1,540 crores, up INR 894 crores from last year quarter 1. Our marginal cost of borrowings was slightly lower at 12.3% as against 12.6% in Q4 of FY '23. Weighted average cost of borrowing was largely stable at 12.5%, up by 9 bps over quarter 4 FY '23. We continue to strengthen relationships with our borrowers while continuously having dialogue with our lender partners. On the portfolio quality, our portfolio quality continues to improve over the quarters. the standard, which is the current book is at 97.1%, an improvement from 96.6% over the previous quarter and a mild improvement from 68.4% in Q4 of FY '22. The 1 to 90 bucket is 1.36% now, which was 1.54% in Q4 of FY '23. Of the 1 to 90 book, 40%, that is 0.55% is in 1 to 30 bucket. The GNPA end of Q1 FY '24 now stands at 1.63% and the NNPA is 0.49% on the back of improved quality and higher provision. Of the GNPA pool, about 42% is contributed by pre-April '21 book, which itself is 1.2% of the loan book now. On the collection efficiency front, net collection efficiency for the period was 98.1% as against 97.6% in quarter 4. We continue to see improvements in net collection efficiency, which is a very healthy sign. Gross collection efficiency for the quarter was 101.5%. Our focus at the distribution level is net because that is the timely repayment and that is what we are driving as a team. Financials for Q4. We continue to maintain a provision coverage of 70.1% on the consolidated book in the current quarter, and NNPA has reduced to 0.49% and GNPA improved to 1.63%. The number for the previous quarter were 2.07 and 0.64%. Our yield on the portfolio has improved to 24% from normalized yield of 22.8% in quarter 4 and 16.4% in quarter 1 of FY '23. NIM was 14.2%. That is up 38 basis points over normalized NIM of last quarter and 434 bps over quarter 1 of FY '23. Total income for the quarter increased 104% to INR 527 crores versus INR 259 crores in Q1 of FY '23. Net interest income was up 102% to INR 328 crores for the quarter was INR 162 crores in quarter 1 FY '23. PPOP for the quarter was INR 189 crores, up to 73% over INR 51 crores reported for the same quarter previous year. PBT for the quarter was INR 161 crores [at] INR 119, which is an increase of 13% sequentially over the past quarter. We had reported a loss of INR 220 crores during the same quarter of previous year, owing to a write-off of the INR 702 crores that we have done as all of you are aware. So to summarize, we have the building blocks in place and now are completely focused on execution and delivery of our vision to 2025 targets. This year is all about efficiencies, productivity and refining processes. Our plans for having 1,500 operational branches by end of FY '25 is on track. And over the past 6 months, we've opened, as I said earlier, 188 branches. We continue to build the distribution where we feel there are opportunities obviously, quality of the specific geography drives our decision making. We continue to experience strong economic tailwinds in our markets, driving demand for micro loans. We continue to be cautiously optimistic about the growth potential of the microfinance industry in India. 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 offices, branch managers and the entire field staff who work hard day in and day out to deliver the results that collectively all of us have envisaged. Thank you very much to all of you on the call. You have 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 the future. We have the entire management team with us and are ready to take questions from you. Thank you very much.

We will now begin the question-and-answer session. [Operator Instructions]. We take the first question from the line of Shreepal Doshi from Equirus.

Sir, congrats on a good set of numbers. Had the first question on the collection efficiency. So we see that collection efficiency for MFI lenders are ranging between 98% to 99%. So is it fair to assume that this is the new normal for the sector post Covid now. And therefore, the credit cost would also broadly be increasing today 1% to 2%.

See, for the -- so there are 2 questions that you asked in that 1 question. The first is net collection efficiency is a timely repayment and sometimes the payment comes with a lag. The payment comes with a lag for various reasons. It is sometimes a company-driven thing also, the employee might be on leave, et cetera. So there are various layers in this whole thing. The credit cost if you have to look at -- you have to look at it in the context of whether you're receiving the payment or not and that is where you should look at gross collection efficiency. On the -- on the timely repayment, which is the fundamental discipline of micro finance, the net collection efficiency is what we are driving amongst our teams. To answer your question, Shreepal, our 99% is what we are targeting in the short term. Is it a new norm, maybe at this point in time, a credit cost of -- while we built in all our financial credit cost of 2%, we anticipate the number to be lower, a 1%, 1.25% any company and not just any company, good company. And if it runs it's model well should not deliver a number -- a loss -- credit loss of, say, 1.5% or maybe 1.6%, that's it. So that's the -- that's our take on this whole thing. We obviously have done some conservative estimates on the credit loss valuations, and that's where we are.

Got it, sir. Thank you. The second question was, you highlighted about tech initiatives. So what is the CapEx or expense that we are likely to incurred over the next one year for these initiatives? And then on the OpEx, even during quarter, the employee cost was significantly higher a sequential basis. So what explains that?

Employee cost.

Hi Shreepal, this is Ashish, this side. The employee costs are higher because we had gone through our annual increment cycle, and there is also a head count increase, which has happened between last quarter, around March and then again in this quarter as well for the branches that we have rolled out. So those are the 2 parameters which have kind of had. But as you see, as we go along, the employee cost change on a sequential quarter basis should normalize because this was more of an annual increment exercise. You are seeing a jump between previous quarter and this quarter.

On the second question, which is the year -- this year, our IT cost is about INR 75 crores of split into a CapEx of -- split into our CapEx of about INR 20 crores and the balance is OpEx. We have budgeted this adequately until FY '25, and we will do another 3 years excise next year when we'll kind of bet the future years as well into this.

Got it. Got it. Sir, just last question. With respect to the income revaluation that we have to do as per the RBA norms, So if there is any household which has got household income of more than INR 3 lakh. Firstly, what is the process that we have deployed for evaluating the household income, and secondly if there is any household income who is making more than INR 3 lakh then do we have a product for that customer.

At this point in time, Shreepal, and in our various commentaries, we've been stressing the fact that we are very basic bread-and-butter people. We don't want to deviate and hence, the right answer to this question is that we will put them under the non-TFL nonqualifying assets and book them. But as of now, we are not approaching them. I mean, if it doesn't fall then ladies out. We don't source that case because this year, as I said, last year and this year, we are just sticking to the fundamentals of fundamentals of business. And given the fact that we are doing the JLG model of micro finance, that is what we are foreseeing.

We take the next question from the line of Manuj Oberoi from -- Securities.

Sir, this is Rajiv. Congratulations on very strong set of numbers. My first question is on growth. So sir, were there any specific operational changes still implemented in this fourth quarter because when I look at disbursement, there seem to be lower even a distance of seasonality. So that is one. And another related question is, is there any change in duration of the portfolio over the last 2 quarters because I see portfolio ran of in this quarter being slightly slower than usual?

So the second part of your question I understood. Can you just repeat the first part? Sorry, I didn't understand.

Yes. So were there any specific operational changes on the brand which also made a lower disbursement in this quarter, besides [indiscernible].

So Manoj. we have a defined -- we have a defined goal in mind. Rajiv.

Yes, yes, yes.

So Rajiv, we have a defined goal in mind on FY '24 and FY '25. As you've seen in the presentation, we are already at INR 8848 crores. We are very close to about the 9,000 mark just about INR 50 crores. We are in no hurry to report. Microfinance is all about pacing your earnings. Microfinance is not a T20. Microfinance is a test match. And the test match has to last a full 5 days. don't have to end the test in 3 days or 4 days. We know exactly what we are doing just because there is an opportunity. where you cannot or should not change or alter your plan. The -- we are cognizant that -- and I will repeat this Microfinance is a risk management business. It is not our asset business. It is important that the teams on the ground are culturally aligned to the sense of responsibility that you do not as an institution deviate on the quality that you're foreseeing. Hence, I heard your question or rather your observation, my view is that we know exactly where we have to end and we've given the last call also, there was a point on this. We are in no hurry to end the match in 3 days. Our goal defined this year and next year, which is INR 15,000 crores in FY '25 is fixed. It could be a few hundred crores here and there. In all likelihood, it will be over. But very difficult to kind of stick our neck out and say instead of 15, we'll do 17. There is no need. So past is enough history that if you are not cautious, you end up burning your fingers, hands and everything. So that is very clear. We'll pace our earnings to ensure that the quality is delivered and that is what that is how we are doing. So we are -- there is -- we had said in the last call that we as an institution has to very, very clearly deliver quality apart from the top line as well. And that is what we've been -- if you would have followed our numbers over the past 4 quarters that we've been coming here. You will kind of -- that's a testimony of the fact. So we are very cautious of cautious lending is the right approach in my quarter 1 either way, this is what was the plan and we are just about there. So in our view, we are -- that's where that's the.

Okay. Got that. And now the question is on NIM outlook because -- so what is the space for the portfolio yield are moving up because it has moved pretty significantly in the last 2 quarters. And secondly, the other variable for them will be the cost of funds and I see margin cost of funds coming down and we also retain terms of money at lower cost. So basis the expected movement in cost of funds over the next few quarters and maybe more [indiscernible] size of portfolio, where do you think [indiscernible] ?

Hi Rajiv. Yes, there is a quarter or 2 more for our NIM's to see at least around the same number or small expansion as well, primarily on account of yield probably stepping -- inching up a little bit more. given that we've been lending at 25%, there is a little headroom there. We are presently at 24%. You would never hit the 25%, but there is still a little bit of headroom there. right? So a quarter or 2, you may continue to see some inching up. On the cost of fund side, I think we've seen a drop last quarter. We hope to see a little more drop given that as an institution, we have been having a consistent performance for the last 5 quarters now. I think there is a scope of improvement in terms of how or what kind of pricing that we are borrowing at. So yes, we are positively inclined to maintain the NIMs at the current levels.

Now Ashish, can I just ask one more question before I move back?

Sure.

It is on the provisioning line. So there's a INR 26 crore provision made against receive receivables from assignment portfolio. It can be against that intersegment portfolio, right? So what is it pertaining to?

So there is -- this is a direct assignment only. So there were certain customers where the collections did not go through. And we -- during the period -- earlier period, we have -- when we did not have the IT or whatever information we kind of have paid in advance to the banks. We are still trying to collect it from the customers. As a prudence, we have kind of provided against that portfolio just to have a clean set of works.

Yes. So any more hit likely, yes, or we are done with this?

We still have about INR 24 crores of portfolio, which is there, which we will have to see and calibrate as we go up.

[Operator Instructions]. The next question is from the line of Sagar Tanna from Alcami Ventures.

If I heard you correctly, you expect credit cost to be 1.5%, 1.6% for the year. Is that correct?

Yes.

But what is the outlook because we still keep getting mix on entries with respect to rural recovery, et cetera, what is your outlook in terms of how the economy is shifting up on that side of the country.

So look, the credit demand is very strong, and we have seen a lot of turnaround from a quality point of view. So that is the heartening effect in this whole micro finance story. So micro finance over a period of time has been -- has seen lots of ups and downs. And post-COVID, a year now a year, 1.5 years, that it has seen strong tailwinds, both from the economy point of view and the heavy investment that the government is doing infrastructure in all the -- in the Bharat of India. So my -- from a quality point of view, I think if you run the operations, the number that I said should hold that unless there are some unforeseen unknown issues, which might not be -- which might not kind of favor the industry. As far as the industry is concerned, concentration risk is very, very important. And as an enterprise, we are ensuring that we walk the steps to ensure the concentrations are moderated across the states where you see the -- there are elevated levels on the market share and the contribution that a specific state does give to us. So that is what we are working at, and we have -- until FY '25, right now, we have a couple of states that 14%, 15% contribution. We have a clear plan to get them down to 11%, 12%. So in our estimate, combination of concentration plus good execution of the field -- good execution of the model. Relying on JLG to ensure that there's a safety net are the critical components of this model. And I have reasonable -- I can say this is a reasonable surety that if all of these are done well. There's a good chance that as an enterprise, we will stand to gain on this.

The next question is from the line of in Jignesh Shial from InCred Capital.

I have 2 questions. One, has there any write-off in the quarter? And any recoveries from the previous within of quarter? any number on that you have.

Yes. So write-off for the quarter is based on the policy that we have taken up last quarter, which is any loans, which move into 455 plus days. We will kind of take it to technical write-offs. The number was INR 21 crores. The impact of this was around INR 5.8 crores in the P&L. In terms of recovery, the total recovery that we had was INR 23 crores across the write-off.

So of the INR 700 crores and other write-offs that we have done, we've collected all put together about INR 90 crores is the specific question that you asked from the time we started this journey.

That's very helpful. And secondly, you've been doing pretty good on the MFI other side. And as you rightly pointed out earlier that more and more focus would be interim branches and states I asked the same question last time as well. But if you can brief out a little bit more in detail about other than MFI businesses, how we are shaping up and how we are seeing that things are opening over next 2 years. But at least how are the beginning has been there, if you can give some idea on it that could be really helpful other than your MFI business.

So Jignesh, we will -- it's early for us to -- I mean, we started booking loans on the lab side. We will launch the Nano enterprise, which is the small ticket loans to retailers. A 60,000 ticket size is the number that we will start with it is a non-JLG business. That should start in the -- in this quarter. These 2 businesses this year is testing the waters and seeing how it goes. These are pretty fast moving. There is an opportunity, a lot of opportunity, and we'll continue to focus on the lower ticket sizes. I mean, we are not intending to give loans of INR 20 lakhs, INR 25 lakhs on the lab, for example -- INR 5 lakh to INR 7 lakhs. And on the Nano enterprise, I said we will -- our loans will be at INR 60,000 to 1 lakh. So those -- there is tremendous demand for these loans. -- because this is the missing segment. The banks don't go after them and their business mostly survive on boardings from friends and relatives. Once again being unsecured in nature, at least an annual enterprise, we have to be cautious and that is what we will. On the lab side, it obviously is a secured business. And that -- we will -- we are focusing on productivity. There's a slightly longish gestation period business MFI, which towns are all very fast. But we -- it holds tremendous from us for the profile of customers and the segments that we are -- we have identified. And maybe next quarter, when we come, we will have more color on this because we'll have some volumes backing whatever we speak right now it is in significant volume to kind of give any commentary on.

Understood. But just one thing that this will be all focused on the new customer base together, right? Not to the existing ones [indiscernible].

Yes. So absolutely. And what we have done is that we have opened a separate set of branches -- we have -- this is -- I mean, we are not cutting corners by putting them into MFI branches because ultimately, it is the same institution. But we are very clear. We are not making the model funds we are not cutting corners. We are -- the places are -- we were to open a branch is a factor of the geography and the potential and has nothing to do with whether it's command around or not. I mean MFI is around at all. It is a completely new set from a Chief Business Officer down to the loan officer. It is a complete separate team it works differently. It works and the hirings have been done from the industry so that they have a fair color of how this is this played out. It's a new business for us, but it holds a lot of promise. The new business that we have launched in the state of Rajasthan -- aware or not, but when we took over this book, this is not a new business for Spandana because this was being done in Andhra and Telangana. We had a book of about INR 117 crores when I had taken over. And now it is -- it is around INR 51 crores, INR 52 crores. So it has run down because we did not -- we were looking for a good LMS and LOS. We wanted to do business properly and just because the opportunity was good. We really did not -- we really did not hurry into launching this business. we were servicing our existing book. We stopped our disbursements for a year. That has had a book run down from INR 117 crores to INR 51 crores. Now we have started in a different state, which is Rajasthan, which is supposed that we are fertile geography for this kind of a setup because the customers are involved there. And we see a lot of demand in this we see a lot of demand -- available demand and untapped demand in this market in this segment, and that is what we will continue to progress on.

Understood. And is it fair to assume that the yield on this new segment would be lower than your typical MFI portfolio, but the tenure would be longer run. So the EMI will become more stickier?

That's correct. Yes, that's correct.