Aditya Birla Capital Limited analyst Q&A

Your PCR has declined while the credit costs have also declined. PCR has declined and especially when I look at secured segments they are like close to 30% now. So, what's the reason, any guidance here like we are comfortable with these levels? And second is on earlier Stage-2 assets yes, they have declined. But has your Stage-2 coverage also declined based on that? That's it from my side.

So, Puneet if you look at, our secured book has grown from 67% to 74%. So now of the total loan book 74% of our loans are secured by real estate collateral or listed securities. So that is the reason why the PCR because this follows a ECL model and that is the reason why the PCR has dropped marginally because of the change in the product mix and there is no decline in terms of stage two provisioning.

So, we can expect these levels to continue, as you are growing the secure book as well? So, we can expect the PCR levels around these to continue.

Yes, depending on the product mix and the ECL model is what our provisioning will be.

We'll take the next question from the line of Avinash Singh from Emkay Capital.

So again, on PCR, I mean if you see the movement, again in the two businesses, the Housing Finance and Aditya Birla Finance. On the one hand Aditya Birla Finance Stage -3 PCR has been taken down to 46%, with a particularly sharp drop in secured where of course there is no government guarantee. But on the Housing Finance side you are taking it higher to close to 40%. Again, that's secured. So, what is the sort of change that your ECL model is showing just in the quarter ? There are kind of a divergent move s particularly if we compare secured with secured. So, I mean housing going to 40% whereas I mean in the secured piece of your NBFC, is going to 31%. And NBFC also disclosed that loan book acquired in the quarter still remains reasonably close to 11 billion or so. So, whe n you are tightening your credit filter, I mean what kind of a comfort do you have if I understand the SME LAP book has a kind of a 12 month or so holding period. So, what's the comfort you have on this acquired book?

So, Avinash your first question was on the provision cover in the NBFC. I will address that and maybe Pankaj can add on the housing one. The reason in NBFC what happens is what is the security. We have EAD, exposure at default into LGD loss given default which is basis the over last 5-10 years of our recovery rates on the security. So, it depends on what is the security cover I have and that is the basis on which the provision is created. So, if my security ABCL – Q2 FY25 Earnings Call Page 13/19 cover is 2x or 2.25x, the provision will be lower because the LGD will be lower. So that's the logic with which yes, both of the businesses are secured but on one side in the housing the LTV might be different for different customer segments, Pankaj can add there. But in the NBFC one it all depends on what is the security cover which we have. So that's the reason why the PCR or the ECL will change. Your second question was on the acquired portfolio. So, on the acquired portfolio if you look at in the last quarter, we have acquired securitization closer to Rs. 1,107 crores. That's what if you look at, out of the 19,000 crores of the disbursement which we would have done for the quarter 1,107 crores is buyout and if you look at sequentially it has come down significantly from Quarter 1, it's almost 50%.

Avinash, Pankaj here. I think the question is on the higher provisioning coverage ratio on housing which has gone to 40.94% from 34.55% which was there in Quarter 1. So here first I would want to say that if you look at Stage-2, Stage-3, it is true reflection of the portfolio and in Stage-3, you would have seen from 315 crores you would come down to 288 crores here. So that is one side of the story. The second side of the story is that while we use the ECL methodology, obviously we keep looking at each and every account and we also look at the ageing of the account and also the probabilities of recovery from time to time. And when we looked at specific accounts, we felt that in some of the accounts that we have, the probabilities of loss could be slightly higher there and that is where we have taken that higher coverage. That is the philosophy there. I think it is very range bound. If you look at the entire HFC industry, the PCRs range from between 35% to 50% as well. So, I think it is very range bound. We are at 40% and it's not only Stage-3, but we keep looking at the accounts also individually to look at the provision coverage ratio.

I can just have one more question. That on life insurance I mean first half VNB margin 7%. You are hoping the margin uplift of 10% odd by the year end. Now if I see this kind of a margin uplift had happened in FY2 3 and then the situation was different that you had a kind of a strong sales of that non-par product in the month of March ‘23. But here if you look big time, ULIP continue to remain flavour of the season and in H2 the new surrender regulation also comes into picture. Now what is it that you are still hopeful of taking a margin from 7 to 17 because it has not happened last year, it has not happened earlier in FY22. It only happened in FY23 and there was a particular reason. This time the reason is just the other way. But if at all there could be some negative impact on the surrender regulation. So, what is giving you the confidence that the margin can actually go up by 10% in the second half?

If you look at the last 2- or 3-years’ time, I think you validly raised the point saying that in one year there was an upt ick also on account of the new regulations setting in. But prior to that you would have instances of ABSLI would be in the rangebound margin of 7% to 8% and we have gone even actually to 23% in that year. But a fair point made that ULIP is on the growth angle. But like I said all the new products that are getting launched in the second half of the year are non ULIP products. Protection, we have launched a suite of two new products which actually happened in the month of September. So that will flow into the second half of the ABCL – Q2 FY25 Earnings Call Page 14/19 year significantly better. Typically, the margins which accrue from our agency business is significantly higher and between the first half of the year and the second half of the year, the investment in capacity that we have done in the agency business has been about 40%-50% more. It takes time for that to fructify which we think will happen in the second half of the year. So, all of this would combine and of course like you rightly said the ULIP business will need to get moderated as compared to the ULIP bu siness that happened in the second quarter. And we actually did that as part of a strategy because in some of our large bank counters we wanted to garner additional mind share. Normally when you get additional mind share in a bank counter when you substitute your products your mind share typically remains the same. But you get your combination of suite of products and that's the strategy that we have played and that's the reason why you see significantly larger growth rate in the second quarter. We want to use whatever we have created with the combination of products that we will launch in the second half of the year. And like I said in agency which will see traction in the second half of the year more than in the first half is where the upt ick of the margin is expected from 7.5% levels to about 17%-18% that we are projecting for the end of the year.

The next question is from the line of Subramanian Iyer from Morgan Stanley. Subramanian Iyer: Just had one data keeping question. Can I get the total ECL for the NBFC for both the quarters?

Subbu, we can share that. I don't have readily available. I can share that offline.

We'll take the next question from the line of Mayank Mistry from JM Finance.

My question is on the housing business, actually when we see from the March quarter, we have grown at 26%. So, what is our AUM guidance for over there and second also there had been concerns on aggressive lending in the housing space by RBI recently. So has t here been any communication with the regulators?

I think the growth has been very consistent if you see over the last six quarters and like you rightly said the growth is now 51% y-o-y, 14% q-o-q. So, like we have said earlier, the focus is on doubling the book in the next 18 to 24 months. That has been the guidance that we have been giving because this is coming on the back of the huge opportunity that the industry has and I think the investments that we have made on digital platfor ms and also distribution and also the ABG ecosystem we have seen, the contribution of the business coming in from the ABG ecosystem, also helping us in garnering shares. The growth is coming across all the segments which is the affordable, informal , prime business as well as the CF business. So, ABCL – Q2 FY25 Earnings Call Page 15/19 guidance is on that side. Particularly we have not received any such indication from the regulator on aggressive housing loan growth, etc. But they have been in the past, of course regulator has opined and just to also mention that this growth that we have done over the last six quarters, we would be one of the very few companies which also speaks about our onboarding quality consistently. And you would have noticed that 95% of our sourcing today which is happening is in the top quartile bureau and also new to credit. And that is clearly showing also in the Stage -2 and Stage -3. So, both in absolute numbers as well as in percentages at all points of time, we have been speaking about the portfolio quality in consonance with the growth that we have actually had.

But do we have any number on the growth that we are targeting?

I just mentioned that I just said that we have been speaking about growing the book and doubling the book in the next 18 to 24 months and that kind of stays on course and like I mentioned in the transcript also, we keep looking at the risk reward opportunity which exists in the sector and appropriately we look at leveraging the sector in the best possible way.

We'll take the next question from the line of Chintan Shah from ICICI Securities.

So firstly, on the capital allocation, when we have after the latest fundraiser for roughly 3,000 crores which we have completed also how much of that has been allocated to NBFC and HFC?

Chintan out of the total, we raised about 3,000 crores of capital in June ‘23 and after that we also got about 570 crores of capital from the AMC -OFS during March and June of this calendar year and about 167 crores recently from the ABIBL stake sale. So fa r, we have invested close to about 2,100 crores in the NBFC and about 600 crores in the Housing Finance business.

How much of this would have gone into the digital arm, digital company?

As we had mentioned during March that till March, we had spent about 100 crores and we would have additionally spent about 50 to 75 during the year in the digital proposition. ABCL – Q2 FY25 Earnings Call Page 16/19

And so, under the unsecured piece, I think in this quarter we have seen some growth coming up in the QOQ disbursements. So, I think last quarter we had mentioned that we would be changing. We are working on better sourcing it via internally and refraining from any external sourcing. So how does it go now? Is it entirely internal sourcing for the unsecured and have we tightened the filters or how is it given that in current environment unsecured probably is not the flavor of the town right now?

So, I covered this in my opening script and covered that we have tightened underwriting whatever cohorts which was showing any performance which was not in line. So, we have tightened it across in terms of underwriting in different cohorts. So that has bee n done. We have built our acquisition channel now. So, if you see majority of our loans are coming through our direct acquisition channel which is the digital journeys which we have built internally. Also, the branches which we have built over the last 2-3 years have started yielding results. So that also is helping us. So majority of our disbursements in personal and consumer loan is coming through. Yes, some bit will be coming through DSA which is part of our branch network.

I just wanted to understand this because in the last quarter also we had seen a steep decline in the disbursement and this quarter despite the environment, disbursements have been quite strong. So, anything which has changed very much the cohorts and the tightening of the filter that has happened in this quarter itself or how is it?

The tightening has been happening over the last three-four quarters and that's the reason the disbursement has been coming down from —we used to do close to —5,000-5,500 crores of disbursement that came down to 2,000. So it's been coming down. We have been tightening our underwriting norms over the last three to four quarters and all the branch led disbursements and our own digital journey the ABCD app through which we acquire customers, those are the things which is growing at this point in time.

Just a last question if I may ask. On the Housing Finance we have seen certain accounts where probably there are some signs of stress and that's why we have increased the higher provisions. So, under what segments these accounts would cater into affordable or prime? And given that we already have the security then probably why would we be so I would probably say concerned on the asset quality other on front for these accounts?

See the quantum is very minimal. We're talking about 8 -9 crores. That's how the PCR has changed broadly. We keep doing at all points of time, all those securities are there, LGDs we keep measuring, what could be the LGDs that you will be getting on some of these assets. ABCL – Q2 FY25 Earnings Call Page 17/19 And I would just mention that it is spread across all three segments. But the quantum itself is very small.

So, if we could just give the total provision on the HFC book for this quarter and the last quarter, I think that data is not handy, so you can share that with me as well. That would be helpful.

The credit cost was 6 crores earlier, this is now 12 for this quarter, that is the incremental which is there and on PCR anyways if you want to know on the PCR as well, then we can share that with you subsequently.

Basically, entire ECL provisions on the book for the AB HFL business, how much has that increased probably QOQ?

6 and 12, 6 was the credit cost for Quarter 1 and 12 crores the credit cost for Quarter 4.

We'll take the next question from the line of Kishore Agarwal from Bajaj Finserv AMC

I have two questions. One on the margins on the NBFC side, we have seen the second quarter of sequential decline in margins. So, is it primarily because of the increase in secured mix and where do you see the margins settling? And my second question is on asset quality. Do you think that this improvement in asset quality can continue even in the second half?

So, margins if you look at that's on the backdrop of change in the product mix. Our secured business going up from 67% to 74%. And also, on the other side unsecured business has declined 20% odd to 14%. So that's the reason , because of the change in the product mix why the margins have come down. As I mentioned in the earlier reply, we are building our own acquisition channels and we want to build up the personal consumer segment through our own channels and also the MSME, sma ll ticket MSME loans, the business loans which we call it. I think these two things should be able to offset the yield compression which is happening on account of the secured business growth. But it might take a quar ter or two because I think the shift will happen . In terms of also looking at the environment, the small ticket loans in unsecured we have completely stopped doing it, less than Rs. 50,000 unsecured loans we are not doing it. We have tightened our all-underwriting norms. So that's the reason why the margin s hav e declined. B ut once that starts picking up and also our business loans picks up on our B2B Udyog Plus platform, we should be able to mitigate the ABCL – Q2 FY25 Earnings Call Page 18/19 decline in margin. And to your second question in terms of whether we will be able to sustain the asset quality and the ECL, yes it will be range bound. Our guidance has been that the credit cost will be around 1.5%. We have come down to 1.25%. We expect it to be in the same range and we don't see this going up.

Thank you. Ladies and gentlemen, I would now like to hand the conference over to Ms. Vishakha Mulye for closing comments. Over to you.

Thank you so much for all of you to join us today evening and very Happy Diwali to all of you and your family.

Thank you. On behalf of Aditya Birla Capital, that concludes this conference. Thank you for joining us and you may now disconnect your lines.

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