Aditya Birla Capital Limited analyst Q&A

Thank you. Good evening everyone so the first question I have is on the personal and the consumer segment with the average ticket size of Rs. 33000. Now we get a lot of queries on the bureau data which shows stress in the less than Rs. 50,000 category but when I look at our earnings the GS3 has been stable Q -o-Q. So there does not seem to be any kind of stress in our portfolio, so can you talk about the early delinquency trends in this quarter and any action we have taken on the customer cohorts for the new sourcing in this segment?

So if you look at it Anuj, our unsecured and personal consumer loans with ticket size less than Rs 50,000 and tenure less than 30 days is only 1% of our total loan book and unsecured personal and consumer loans with ticket size less than Rs. 50,000 and tenure less than 30 days which comprises BNPL through partners is only 2% of our overall loan book. So clearly I think the portfolio is very small for both these segments and in terms of what as you rightly mentioned our portfolio looks very stable but we have been monitoring this portfolio closely in terms of taking decisions, the tightening we are doing in our underwriting and we are tightening the scorecards. So all the indicators are looking fine at this point in time and we have no cause of concern but we have started tracking the leverage of these customers . So to give an example, of customers who are onboarded nine months back, 12% have now leverage which is one-and-a-half times of what they had nine months back. So clearly we are tracking the leverage of these customers also and keeping a very close watch on this portfolio. So very calibrated growth or business is what we are looking at in this segment.

Got it Rakesh. Thank you very much and the second question is on the sourcing from the digital ecosystem partners . Now one of the peers today commented that the delinquencies in this portfolio sourced through the digital ecosystem of the fintech partners are higher versus traditional partners . Can you talk about your experience here in your portfolio and secondly there is a slide here as well where you mentioned that you are using the customers acquired through the digital ecosystem for cross-sell. So can you talk about the cross-sell rate what have we achieved till now?

ABCL – Q2 FY24 Earnings Call So, I think the cross -sell is almost 40%+ of the new personal loans which comes through these consumer loans, so that is our cross-sell conversion. Your first question in terms of what we are seeing through the digital partners so again we are not seeing any deterioration in terms of credit quality. Yes we have calibrated. If you look at our personal and consumer loans, in Q4 was growing at 21% Q-o-Q which came down to 15% Q -o-Q and then in last quarter it has come down to 9% Q -o-Q. So we are calibrating and we are really tightening wherever we need to take proactive measures we are doing it. At this point i n time we do not see any deterioration and the portfolio looks quite stable but we are being very proactive in terms of through the door analysis, looking at the boun ces, looking at the resolutions and in terms of the leverage as I mentioned earlier we are looking at it very closely and taking calibrated calls in terms of doing business.

Anuj one more point is that I am not sure what the others are doing but as far as we are concerned as we said in our remarks that we follow an ‘Omni channel approach’ So irrespective of the fact which channel the customer approaches, as far as our credit standards and underwriting standards are concerned they are identical . So that is a very important point which is there . So even though they come through the digital channel for us, we treat them like any other channel and our underwriting standards are same across our channels so that also kind of helps us to manage. So it is not that because it is coming from one particular channel that our asset quality is not as good as it is from our own channel or through a DSA channel or through a direct channel and of course as Rakesh said that we are very proactively managing th is portfolio wherever required we are also tightening it out.

So Vishakha would it be fair to assume that the delinquency trends irrespective of the challenge will be quite similar so, not exactly it will be similar across channels?

Yes, for the similar customer segment it is identical.

Got it and the last question is on the capital. So while we injected capital in the NBFC in this quarter like Vijay mentioned, the Tier-1 is still 13.8 & capital adequacy is 16.3 and this business has been growing impressively and I think the trajectory also remains strong so how should we look at the capital requirements of this business maybe over the next two years? ABCL – Q2 FY24 Earnings Call

So, Anuj we raised Rs. 3000 Crores of capital if you recollect during the month of June which at a franchise level we are confident that it will suffice us for two years which is closure of FY25 and within that a large part of the allocation will continue to go towards our lending businesses so we see the trajectory clear and for next two years we are sufficiently funded.

Got it. Thank very much

Thank you. We have our next question from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.

Good evening, everyone and congratulations on a good quarter. Just wanted to understand though we have already spoken about personal loans, consumer loans and business loans what we are doing aside that we are calibrating I just wanted to understand given that we have a fairly good tie -up with some of the Fintechs digital players, we have good number of partnerships in the digital ecosystem through which you source personal loans, so have you had a chance to check what proportion of your personal, consumer or unsecured business loans is being originated through this Fintech ecosystem and likewise what is the average ticket size of these loans and currently as on September what was your gross stage 3 in this portfolio?

A total of Rs. 19200 Crores which is our personal and consumer. The consumer which is around Rs. 4200 odd Crores which is 22% of our retail and consumer business that is where the digital partnership really plays out and I also mentioned about the proportion and the percentage of less than 50,000 ticket sizes in our overall portfolio which is less than 50,000 and more than 30 days is only 1% of our overall portfolio so that is how it is Abhijit.

If you look at the asset quality slide which is there, slide number 15 if you look at both at our Stage 2 and Stage 3 is quite stable including Stage 2 and Stage 3 last quarter was 4.1% and this quarter also it is 4.1% and if you look at 2.1% was the Stage 2 and 2% Stage 3 so it has been very, very stable now.

Got it so essentially this entire consumer portfolio that you are talking about is it fair to assume large part of it is originated through digital partnerships?

Consumer business and apart from that some ecosystem and internal ecosystem and all also but yes these are small ticket loans.

Got it and just one last question just trying to understand because our asset quality is still holding up very well and the fact that you have already shared that you have already calibrated your underwriting are you not seeing any Fintech partners where you are evaluating whether we should continue that partnership or whether you should not in other words what I am trying to understand when there is so much that is being discussed at the industry level there are no early warning indicators that you are seeing in your consumer portfolio at this point in time?

We review these portfolios on a regular basis and on a weekly basis, we have a monthly cadence with our partners . We review the portfolio, whichever cohort partnerships or segments which are not looking good we close it and tighten it then and there. So it is not about that so we would have taken a call maybe 12 months back or 15 months back with few of the partners quite a few partners so this is an ongoing process we keep reviewing this, so you are right there are certain partners where the portfolio quality might not be good but we do not wait for long. We take a decision then and there and we just tighten it or stop that partnership and there are lot of examples where we have stopped doing any business with them.

Thank you. Our next question is from the line of Parag Thakkar from Anvil Wealth. Please go ahead.

Basically my question is what kind of margin picture you see and RoA picture you see on the NBFC side as well as housing finance side because generally we are seeing this new moderation across the sector in the lending space and the other point is that as everybody is alluding to the asset quality which is related to Fintech or digital partnerships so what kind of red flags are there in your system for example bounce check rate or whatever if you can highlight will give us comfort that on the consumer side especially in the digital partnerships and Fintech our asset quality will remain robust?

So Parag I will just address the NBFC and then I will ask Pankaj to add for the housing but in terms of the margins I think first point was the margin so if you look at our cost of funds went up by 14 basis points sequentially, though our yields improved f or the quarter but because cost of funds went up that is the reason why the margin is in the same range and we are quite confident that with the change in the product mix we will be back to the normal margins which we have delivered previous quarter and whatever we have committed going forward so with the change in the product mix we should be able to. Also, we believe that we are at the fag end of the increase in cost of fund and once that stabilizes the change in the product mix will start really deliveri ng the improvement in the margins so that was your first question.

Sir our guided range is about 6.5% to 7% NIM and 2.5% to 3% RoA?

Yes so 2.5% RoA is what the last quarter also we delivered 2.54% and this quarter also is in the same range 2.51% very similar range so I think we will continue and deliver these RoAs and continue to as our commitment is we will continue to improve the RoA over the next couple of years.

ABCL – Q2 FY24 Earnings Call Great and what was your loan book based on the economy and based on the economic momentum what kind of loan book growth you envisage in the NBFC will come to housing later on your NBFC PAT what kind of loan for example this quarter I think you have grown about 44% right?

Yes Parag.

So, what kind of sustainable growth we can assume with improvement in RoA trajectory as you rightly said in the coming two years I would say?

So Parag again if you look at we invested in our distribution, we increased our branch footprint, if you look at our branch two years back was 119 branches that has gone to 375, we are looking at 500 odd branches, we have increased our headcount in terms of manpower, so we have built in the capacity and which is what is playing out but yes going forward the growth will be slightly moderated if you compare to what we have delivered last quarter. Our guidance which we have always given is that we will double our book in the next three years and that is what we are really working to deliver.

With this improvement in RoA from 2.5% to say what level in next two years, I am just asking about the approx numbers not necessarily I will hold on to that, RoA improvement as you are saying from 2.5% so what kind of RoA we are targeting in next two years, we are doubling our two and three years RoA?

So, Parag our committed guidance on this front is that we will double our book in the next three years and we will improve our RoA to 3% in the next three years with the change in the product mix and improvement of margins.

Correct perfect and second question was on the red flag how do you see for example if there is a loan given through a digital channel how do you see that there is a red flag, and this zone can turn bad so what is the first check, it is the bounce rate right?

ABCL – Q2 FY24 Earnings Call So, Parag I mentioned earlier I think we are tracking the leverage. See when we give the loan we know what is the kind of debt the customer has because you have access to the credit bureau score and everything but post that how many more loans a customer takes and increases the leverage and debt I think that is what we are really watching very closely and I mentioned that 12% of our customers over the last nine months we have seen that their leverage has gone up by one -and-a-half time so we are tracking these customers this 12% of the customers we are tracking it very closely and we will continue to track the customers where leverage is going up. Also, we track the vintage delinquency very closely and as I said the first indicator is the bounce rate and our bounce rate is still improving and it is quite stable so I think that is the first indicator, things are looking stable and we will continue to monitor very closely the leverage, the vintage delinquency and all these parameters we will continue to look at very closely.

Thank you. Our next question is from the line of Shloka from Carnelian Capital. Please go ahead.

This is Kunal here. I had two questions. One was on this corporate and mid -market book we have had a very good growth of about 37% on year-on-year basis and 8% on quarter-on-quarter basis so within this construction finance from about Rs. 4000 odd Crores it has gone up to like Rs. 5500 odd Crores right so two questions to this part one was specifically on construction finance what kind of lending is this and to help understand the growth that is coming here and second on the overall corporate and mid-market how do we see the growth in this particular segment is the competitive intensity out there which will kind of impact the NIMs going ahead, some highlight on this particular segment of the overall book growth would be really helpful?

If I can address that, then maybe you can ask the second question so if you look at the developer finance Rs. 4200 Crores which went to Rs. 5300 Crores to Rs. 5400 odd Crores we had growth of Rs. 1000 odd Crores in that portfolio. This is a very, very stable portfolio for us. See the drawdown in this business is dependent in terms of how the project is moving and when the requirement is so that is the reason I think the drawdown in this quarter has been slightly higher and majority of our exposure in this portfolio is to category A developers across the country primarily focused on Mumbai, Pune, and Bengaluru. So these are the three markets where our prime exposures are and it is a very stable and well performing portfolio for us . On the mid -market and corporate see again corporate book is looking very good at this point in time. The ABCL – Q2 FY24 Earnings Call corporate portfolio and the leverage with the corporate businesses are looking very good. We are looking at a very calibrated growth in this business, our growth drivers will remain retail and SME and, in this business, we will not miss an opportunity but clearly the growth drivers will be retail and SME.

Got it and in the construction finance is there a concentration and again it is kind of spread out about Rs. 1000 Crores increase and if I compare it from last year so from Rs. 3,000 to almost doubling of the book to about Rs. 5500 so is there concentration here or it is fairly diversified between the lenders and between the projects or how is it?

These are very well diversified. See last year’s comparison, it was coming out of COVID, and a lot of projects were slow at that point in time. If you look at just before COVID also our portfolio used to be Rs. 4000 crore+ so from that point of view there is no significant over the two to three years because the construction activity was slow that is reason the portfolio has come down. But now the real estate has picked up and construction activity has picked up so that is the reason you see a uptick in this and it is quite well diversified as I mentioned category A developers primarily focused on Mumbai, Pune and Bengaluru, yes some amount of Hyderabad but primarily these are the markets which we really cater to.

Got it interesting. The other question that I had was again in the NBFC that the active customers number for the last four quarters has been more or less hovering around the same number but we have had robust growth when it comes to the unsecured piece, the personal and consumer loan piece, so how should one read this while active customers number more or less remain the same in the last four quarters if I read the numbers correctly but then we have had robust growth on the asset side so how should one read these two data points together?

We mentioned this we are looking at a very well calibrated business with our digital partners so small ticket loans you have been that has come down I mentioned it to you that in Q4 it is 21% and 15% then 9%, so it has been coming down. We are really looking at mining the existing customer base and cross -selling on to the existing customer base, the customers who are performing well, so our clear focus is that we cross-sell to the existing customers and we are churning the small ticket wherever very ABCL – Q2 FY24 Earnings Call calibrated in terms of so that is the reason why you see though customers in terms of customer acquisition would be higher but active customers has been slightly and because that is a very, very strategic call which we have taken in terms of calibrated growth in this segment.

No but if I understand correctly cross -selling would be of different products the other businesses that we have that would be something which we will be cross -selling particularly about the NBFC customer base growth and the loan book growth?

Again, I think cross -sell is maybe not the right term. Upsell is the correct term. So a consumer loan customer who comes and once we see and track the performance of these customers then we upsell a personal loan so a consumer loan customer moving to a personal loan, but the number of customers is not increasing.

Basically average ticket size for one customer is going up there could be different segments of loan for that particular customer and therefore the active customer base is not going up but the loan book growth would be right to understand average outstanding for one customer going up in the last few quarters is one of the reasons which is driving growth is that the fair understanding then?

Yes, that is a fair understanding.

Fair enough. I will join back in the queue. Thank you.

Thank you. Our next question is from the line of Bhaskar Basu from Jefferies. Please go ahead.

Prior quarter was Rs. 419 Crores and this quarter is Rs. 369 Crores.

Which of the segments is the write-offs coming from?

Primarily it will come in the small ticket unsecured loan.

My second question was basically within the Rs. 19000 Crores of personal and consumer loan book what percentage is basically Fintech originated I think you answered to it in the earlier question but especially in the cases where the loan is originated at the Fintech and you subsequently also kind of up sell them to PL that would also part of Fintech originated loan so what proportion of the total book would be Fintech originated?

So, Bhaskar we mentioned this most of the Fintech origination comes in the consumer segment where we acquire customers which is the small ticket loans in the consumer segment.

Because my understanding is a lot of this upsell loan effectively again goes back to the Fintech in a way right so that is where I am coming from?

So, Bhaskar that is I think we have an analytics team, and which builds the score card and all. The majority of the customers the upsell is done by us, in certain cases if it is done by the partner there is fee to it with a commercial arrangement which is ther e with them. That is how the arrangement is.

So, do you kind of approach the customer directly or through Fintech?

ABCL – Q2 FY24 Earnings Call Again see the score card and I think Vishakha also mentioned this we have a clear Omni channel in terms of our score card which is very, very similar even we acquired for the same customer segment and for the same ticket size will be acquired through direct or through the digital partners so all of the score cards and BREs are built on our system and by us.

Where do you kind of reflect the FLDG or the performance guarantee, etc., for some of these Fintech arrangements where in the P&L does it come in?

We have two partners where we have signed FLDG. We are factoring in others. It’s very early days but yes.

No FLDG on your arrangements is that a fair understanding?

So, the way it happens is like recovery so if the FLDG is recovered it will be shown as a recovery.

So Bhaskar as you know there were various eras of digital lending so there was a FLDG era after that the digital new guideline of RBI came where we moved to that lending where FLDG were not allowed but as we had explained before it gets adjusted in the lending rate and the fees that we pay to our digital partner. Recently RBI has again come up with a guideline according to which 5% we can have FLDG. We are engaging with our partners. In terms of two of our partners we have kind of concluded and moved to an FLDG kind of an arrange ment. In terms of accounting the way it happens is FLDG is recovered in cash from the partners and therefore that is considered as a recovery. It is actual cash that you collect on FLDG, and it is considered as recovery and therefore is booked in the provision item as a write back. We do it on a cash basis when it is never accrued. You receive it and only then it gets booked as a write back so that is how it happens, but it is not since the guideline is quite new and just six to nine months back the whole system has moved from an FLDG era to a normal lending era. Again, going back, it involves a discussion, it involves a negotiation and actually implementation on the ground which is what is happening right now. ABCL – Q2 FY24 Earnings Call

Understood thanks.

Thank you. Our next question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.

Thanks for taking my question. The first one for Pankaj and if I look at the housing business yields, the yields have been sort of flattish or in fact have gone down a little bit sequentially how should one read this and some of the players have been kind of talking about increasing competition in the space so maybe if you could share some thoughts on that and even f or that matter any slowdown in demand that you will be seeing in the prime segment?

So the question is around the Effective interest rates so like you rightly said I think the rates that you are having in Q1 was 11.56% EIR which is now about 11.37% EIR that is where the year is so here like you know is obviously will come down because of compression of the margin, because we had the ability of passing on the rate that was increased on the repo side into our customers last year so to a point that you had increase of repo rates obviously they were passed on but on our side of it the banks which lend to us obviously there is a lag in terms of they are passing on the increase in rates to us. Now I see that cycle is almost kind of come to an end so in my assessment one compression has happened because of the cost of funds which has gone up but like you would have seen that amongst all the housing finance companies our cost of borrowing will be amongst the top of all time, clearly because of our ability to borrow being AAA as well as our NHB contribution you would have also seen which has gone up to about 21% versus 16% so that is one side of the story. The other side that is there is that how this will play out is that while the yields are getting a bit compressed on that side for us really the RoA tree has two other functions which is of course the credit cost and also the cost to income ratios and I think you would have observed that the credit cost have significantly come down which is coming at the back of very smart positions and I would say a very smart recovery we have seen in Stage 2 and St age 3 also shown so sequentially also the Stage 2 and Stage 3 had come down and of course Y-o-Y it has come down very handsomely so that is really helping us on the credit cost. It is coming at the back of good quality of sourcing. We speak about the 96% s ourcing that we have which is 700+ and also NTC. It is also the reflection of the pre-delinquency management that we do and of course the in -house ABCL – Q2 FY24 Earnings Call collections, so on that count I think in my assessment of course they have slightly come down over Q1, but I think it should be broadly stabilized here. Yes, the market is very competitive. It is of course eating up but I think efficiencies are entire stac k on the digital which has gone like is also going to bring in more operational efficiencies which would help us in recalibrating the cost and that should ensure that the Ro A is within the range that we are today at and will remain rangebound in that zone of between to 2% to 2.10% that is where we are.

Sir you mentioned the borrowing cost in the upper quartile but what was is the marginal cost of borrowing for the quarter I am not sure if I could see it anywhere in the presentation?

So, when I said among the best so it is not among the highest, I just want to reconfirm that so that is among the best so broadly the cost of funds will be in the range of about 6.5% for the company. Anyways on the background of our ability to borrow at be st rates on the market being a AAA consistently in the last five years and also as you will know we have a decent contribution of affordable refinance so that helps you to improve the overall cost of funds.

Thanks for that is helpful. Just quickly moving on to the life insurance business I am just trying to understand most of the players have at this point of time reported a compression in margins while you have reported a fairly healthy 200 basis point sort of expansion what kind of explains that and if it is just a product mix then what kind of an optimal product mix are you looking at?

So, our product margins if you look at through the year actually go up so the buildup happens through the year. If you look at last year’s same point of time, we would have been at about 12.5% range and ended the year at about 23% and that is the pattern that you will see in the first half of this year. The expansion is essentially on account of maintaining our traditional book mix. We have seen some uptake on the business that we are doing on the protection side but also because we still continue to reap the benefits of higher productivity as compared to what we got last year largely in our proprietary channels and direct channels we are seeing the uptake. As I said we aim to maintain our guidance for the end of the year to be like last year, when we were a t ABCL – Q2 FY24 Earnings Call 23%, we will be around that range of 23% to 24% margins given by the end of this year.

But is it that margins in proprietary channel are higher than that of partnership and that will grow faster?

It depends on what state and what size you are building on the proprietary. I think in general the answer to that question should be a yes but even in partnerships depending on different cohorts, depending on what bank relationships you have, and depending on what size some of them contribute, a lot of them functions in respect of what kind of investment that you have put in, so some of the small banks would have as value lucrative margins as what I am seeing on the proprietary side. It depends on if it achieves scale, it could be a combination of your volume as well as margin game but yes proprietary would have a tendency of bringing significantl y larger value lucrative margins in the business.

Thanks, and my final question to Mayank what explains the increase in combined ratio?

Yes, as I said that is the seasonality of the growth because last year our group business grew more in the first half of the year. It will start normalizing from Q3 because individual components are all trending well. Our retail loss ratio is going down, our corporate loss ratio is in line with what we have quoted and therefore i t is a profitable segment. Our expense ratio is just so because of the N/2, so if I look at N/365 each component is going very well.

Towards the end of the year probably improve a bit, is what you are saying?

Perfect. Thank you very much and all the best.

Thank you. Our next question is from the line of Shubhranshu Mishra from Phillip Capital. Please go ahead.

Thank you for the opportunity so I think there have been quite a few questions around the personal loan and the consumer loan part I just want to know what is the outstanding number of loan accounts in that and what was this a year ago and how many of these customers have two or more trade lines when you onboard them?

We will get back to you on this Shubhranshu.

Sure, and also if we can have some sort of a zero plus or roll back rates for this because the average ticket size is too low to be adjusted in gross Stage 3 and those kinds of numbers so if we can probably publish that as well?

Thanks. We will consider Shubhranshu.

Sure, and just because you did not answer any of my questions you mentioned that you are going to do something like FLDG what does like FLDG mean, you either do FLDG or you do not do FLDG?

No. We will have to do FLDG. As I said there were different guidelines of Reserve Bank of India where there was FLDG before. Then they came with a digital lending guideline where they prohibited FLDG and now they have again allowed FLDG up to 5% of the total things so what I said is that we will engage or we are engaging with our digital partners to see whether we can get into the old arrangement which is in line ABCL – Q2 FY24 Earnings Call with the Reserve Bank of India guidelines so if we do FLDG it will be exactly according to the Reserve Bank of India guidelines.

Right and these Fintech partners includes Paytm where we will do FLDG?

Paytm is one of the partners

Sure. Thanks

On your question number of customers, it is 59,37,141 customers.

That is in the personal loans?

You want personal loans?

Yes, only personal loans.

I will give you that as well. I will share that with you. I think separately I can share that.

Sure. Thanks

Thank you everybody for joining us today evening and Happy Diwali to all of you and your families. Look forward to be in touch. Thank you.

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

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The Company, its shareholders, representatives and advisors and their respective affiliates also reserves the right, without advance notice, to change the procedure or to terminate negotiations at any time prior to the entry into of any binding contract for any potential transaction. This transcript contains statements of future expectations and other forward -looking statements which involve risks and uncertainties. These statements include descriptions regarding the intent, belief or current expectations of the Company or its officers with respect t o the consolidated results of operations and financial condition, and future events and plans of the Company. These statements can be recognised by the use of words such as “expects,” “plans,” “will,” “estimates,” or words of similar meaning. 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You are cautioned not to place undue reliance on these forward looking statements, which are based on the current view of the management of the Company on future events. This transcript also contains certain financial and operational information relating to the Group that is based on management estimates. These estimates are based on management's past experience and subjective judgment, and the manner in which such estimates are determined may vary from that used for the preparation and transcript of similar information provided by other companies engaged in the similar industry in India and globally. The Company does not assume any responsibility to amend, modify or revise any forward -looking statements, on the basis of any subsequent developments, information or events, or otherwise. These materials are not an offer for sale within the United States of any equity shares or any other security of the Company. Securities of the Company, including its equity shares, may not be offered or sold in the United States absent registration under U.S. securities laws or unless exempt from registration under such laws