Piramal Finance Limited analyst Q&A

Thank you very much, sir. Ladies and gentlemen, we will now begin with the question -and- answer session. The first question is from the line of Avinash Singh from Emkay Global Financial Services Limited. Please go ahead.

Yes, hi. Good evening. Thanks for the opportunity. A few questions . Jairam, if I look at Slide 17, the salaried personal loan and digital, I just wanted some more color here on salaried side. If I see there is a ticket size of INR 4.5 lakh and disbursement yield is nearly 17.5%. So, what kind of a sort of a salaried customer these are and how the sourcing is being done here at that kind of a yield? And are the yields for both the salaried and digital net to you or it is the kind of a yield to customer? I mean, is it kind of catered for that intermediary cost or it's like a gross yield? And why sort of digital yields are lower here than your salary? So, that's question one. Second question, more again on the medium-term perspective, I would say very-very confident guidance on growth and profitability being reaffirmed again. Now, if I were to look at the market, I would say Retail and SME, a number of your peers are now getting a lot of capital and some of the mid-sized bank also operate in this segment. Now, do you see that excess capital is now chasing the same growth pool or leading to some kind of compression in NIMs? So, these are my 2 questions. Thanks.

Thanks, Avinash for your questions. Both really good questions. Firstly, let me explain what PL is in our context and how it differs from digital loans. PL is for us definitionally branch- originated business. So, it's personal loans to salaried individuals. And the whole thing is originated in the branch. Digital loans could be both salaried and self-employed customers. They are originated digitally. The yields that you see here are all yields to us. These are not yield to customer s. The yield to us and yield to customer pretty much the same in branch here. So, that makes no difference. So, the 17 we get is the 17 the customer pays. In digital, however, it is different. The yield to customer is actually much higher than what you see here. What we show here is the yield to us, net of what we pay off to our originating partners. The reason this number is smaller at 14 .5% odd, compared to the peer is that on the right-hand side, in the digital loans, we are working right now almost exclusively in an FLDG construct. So, roughly 95% of our originations right now are FLDG backed, which essentially means that our credit cost is near zero. And of course, all acquisition costs belong to the originating partner as well. So, the economics to us are actually very comparable between the 2. In fact, one could argue that it's slightly better in digital. But the economies are very comparable between the 2, even though digital shows up as slightly lower yields. To your point on are such yields sustainable. You and I both know what has happened to the rate environment in the last 9 months. It has been tight. You see a lot of single-digit interest rates being offered for personal loans to top tier employees in the PL world. We have held on to 17% plus throughout this entire period. Will we be able to maintain 17% plus in Q4? It is not obvious to me, right? It is possible that in Q4 that number falls a little bit, but it's unlikely to do too much. So, I would not worry about it too much. On the margin, something will change, but it's generally a Q4 effect. I don't think anything structural has happened in that market. Moving on to your second question on growth targets and the fact that we have continued to reiterate our 25 % AUM growth goal for the year, we feel very confident of our ability to get there. As you have seen now, 9 months have gone. Our Growth book is growing at roughly 35% and Growth book is now 95 % of our entire book. So, if 95% of your book is growing at 35 %, achieving 25% doesn't seem like a really big ask. And since it's AUM we are talking about, most of that is already in the back. So, we are not betting on any big, huge thing happening in Q4 for us to actually achieve that goal. So, I will continue to reiterate that 25% is something that we will achieve at the end of the year as guided at the beginning of the year. You had a question on whether excess capital is going to make this segment overheated or there is a margin compression possibility. See, in general, we are seeing a declining rate environment. In declining rate environments, margins do compress. We have not seen enough of that margin compression yet. RBI has cut rates by what, 125 basis points. We have not seen much margin compression at all so far. So, it's already surprising that we have not seen margin compression. If there is a little bit more that happens from here on , in terms of RBI -led rate cut, yes, you should expect to see a bit of margin compression, but that's cyclical, not structural. I hope that was good, Avinash. Let's move to the next question.

Yes, yes. One more, just if you can allow. In what sort of, if I see, I mean, of course, branch opening plans around gold and all. So, the 2 areas where you have been kind of open to inorganic, gold and microfinance. Is that inorganic option still, you are kind of a lookout for these opportunities or right now, it is more that you have decided both to build kind of organically in- house.

Thanks for that question, Avinash, it's a good one. Let me first, make a small errata, as I was speaking, Vikas and Imtiaz messaged me offline, I misspoke a little bit with respect to the 100 branches, so let me correct what I said before. 100 branches in Q4, the mix is 25 of them full service, 20 gold , and 55 microfinance. I think it's a slight modification to what I said before . Imtiaz and Vikas tell me that this is what they are going after in Q4 . So, slight modification there, but yes, we are opening branches . Yes, we are interested in gold and microfinance . And yes, we do remain interested in organic as well. Good deals will come when they come, and you know what our multiples are on our stock, and gold companies are at a very different place right now. So, it might or might not be realistic for one to actually think about an acquisition at an appropriate price right now. But as an institution, Piramal has always had a DNA for M&A and has done it very successfully. Over the years, we continue to remain open in these 2 areas for any good, interesting opportunities. Nothing very specific to report though, like there is no transaction that I need to talk about right now.

Got it, got it. Thank you.

Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal . Please go ahead.

Yes, good evening, and thank you for taking my questions . Congratulations on a good quarter. Jairam sir, first things first, i f you could just help us understand, how does our mortgage book behave? Now, why I ask this is very often when we track monoline lenders in mortgages, they do talk about some PLR changes that are being passed on, given that they have seen some benefit in their cost of borrowings. And like you also mentioned earlier in your opening remarks that we have also benefited, maybe 40 to 50 basis points out of the 125-basis points repo rate cut that has happened. Have we made any PLR changes in our mortgage book in this rate-cut cycle? If yes, if not, what are your thoughts on this mortgage book going forward?

So, it's a good question, thank you, Abhijit for that. See, the way our book works is that we have one PLR across all products. So, we have a retail PLR, and we have a wholesale PLR. So, those are the 2 PLRs that we publish . So, retail PLR is applicable for all product categories in retail, whatever is variable rate linked, everything is linked to that. Its direct linkage is to overall cost of borrowing, as I said, and as you can see in our presentation, our cost of borrowing has fallen by about 24 bps to 25 bps so far in this rate cut cycle. We have not cut PLRs yet, so PLRs remain where they are. The overall benefit to us has not been enough for us to actually do a cut yet. My expectation is that there will probably be, if the trends continue and if we do get further enhancements in our cost of borrowing, and we continue to get more pass -through on MCLR cuts from banks, you might see us do something in the first quarter of the next financial year, but so far we have not cut PLRs yet, and we do not have repo -linked lending, unlike the banks , etc., so we don't see any direct pass-through of repo rate cuts, because obviously we do not borrow in the repo market.

Got it. And to that end, we are not even seeing any elevated BT-out pressure, because we have not really cut PLRs, I mean, even that is holding up well.

Yes. It's holding up really well. It surprised me a bit, to be honest. One would have expected that we would see a little bit more, BT-out, but we have not seen it. It has held actually quite steady at sub-10% levels.

Got it, sir. And then a related question here, you said we benefited by about 24 -25 basis points in this rate cut cycle, and the fact that we got a new credit rating of AA+ from CRISIL, I mean, is my understanding correct? We need one more AA+ credit rating from any of the credit rating agencies for us to really start benefiting from our cost of borrowings?

You are correct. So, we are now rated by 3 rating agencies, 2 of the ones that we had originally, which is ICRA and CARE, who currently have us at AA, and the new one, CRISIL, that now has us at AA+. We are speaking with all the other rating agencies in light of what happened with CRISIL, and I hope to have something to share with you in the next few weeks.

Got it. And then sir, LAP, used cars, you already gave out some color on your opening remarks, so if you could add some nuances to that, basically these are the 2 products that you have highlighted in the past as well . While LAP growth has been very strong across the industry, at the same time, there is some anxiety around, can LAP be the next product to exhibit some stress? Because I strongly feel, except maybe primary home loans, LAP and gold, practically every other retail asset class has shown something or the other over the last 2, 3 years.

Yes. So, see, on LAP, this quarter gave us less reason to be anxious than the previous quarter. You saw me talk a lot about it in the previous quarter, because if you look at our Page 22, which shows our risk trajectory over the last 3, 3.5 years, you will see what has been happening to LAP, that very, very slow and steady creep upwards in risk that has been happening. But this quarter, you will see that that creep did not happen too much. It almost kind of flattened out a tad. So, I do not know whether it is the beginning of something or what, but we did not see much more. We didn't see any improvements or anything, let me not kind of raise too many hopes there. But yes, this quarter was just a tad better than the previous quarter. Having said that, the low end of LAP continues to struggle, less than Rs. 10 lakh LAP is pretty much dead in terms of risk performance, it's in really bad shape. So, I don't think that's coming back anytime soon. But larger LAPs are still holding up. And right now, larger the better. So, the large ticket is actually doing really nicely. On used cars, the last 2 quarters have been kind of raising the alarm bell a little bit on what's happening here and how risk has really kind of ratcheted up. But this quarter was a little bit of an improvement. It kind of came down just a little bit. Nothing to celebrate yet. But when I see the horizontals, if you see on Page 23, the horizontals, you will see that the vintage risk has just started coming down in the second half of last year, which means that it will flow through in better risk in the future. So, small sign is that the Auto business, after having had somewhat poor credit risk in the first half of the year, is starting to actually get a little bit better.

Got it. And sir, did you just mention that micro-LAP, small ticket LAP, still continues to do very bad because you have shared the same thing in the last quarter as well. And we saw all through last quarters.

Yes. We have exited that market for now. So, we will have to see. So, in that business, there is no good news to report.

Got it. And gold loans, which all geographies are we going to target first?

I do not want to talk about it yet. We have a marketing plan, and I want to be ready from a PR perspective, etc. We are going to 2 states; I will tell you that. We are starting in exactly 2 states. But I do not want to talk about it yet, till we are ready with our local marketing plans , etc., and then you will hear it from us in the next few weeks. Vikas, who's on the call, is personally driving that under his leadership. We feel very good about our ability to go live. I know I have been talking about gold for a few quarters , and it has been a bit delayed in terms of launch, but this quarter we will get it done.

Got it. And sir, I just want to squeeze in one last question, because this has been coming from investors for the last week or so, just trying to understand . First things first, congratulations to Imtiaz and Vikas for taking over as C BO and COO, respectively. But with regards to Jagdeep and Sunit Madan, did we try to understand whether they are going to a peer or they are trying to start something of their own?

We know exactly where they are going, but it's up to them to tell you and their new employer to tell you. You will know soon enough, man. It will be very public very soon. So, it's not our place to talk about it. You know, you will see it. And we wish them well. They are going to a good place. It will all be good. And you will all know it very soon.

Sure, sir. This is useful. Thank you for patiently answering all my questions. And I wish you and your team the very best.

Thank you, Abhijit.

The next question is from the line of Kushagra Goel from CLSA. Please go ahead.

Hi, sir. Thank you for taking my question. So, just 2 questions. One was I wanted to understand this internal process seasonality, which you mentioned in your opening remarks. How should we think about it? Second was on the tenure of the Wholesale 2.0 portfolio. So, that seems to be coming down. What's the impact there? Is it just driven by the prepayments or how is that happening? So, yes, those are my 2 questions.

Okay. On the first one, I am not going to give a lot of detail on this. Pardon me on this. It's a little bit of a secret sauce of ours. There is something we like to do in the first half of the year, which we have been doing for the last 2 years with great success. And that's front loading a little bit of our growth in the year and is helping us from a profitability perspective for the full year. It is something a little bit different than what a lot of our peers do. I do not want to share too many details on it, honestly. But suffice to say that it is a choice that we make internally on how we run our business, and it has worked really well for us and I would like to continue that in the future. So, it's a very conscious thing. On tenure, you want to speak?

Well, the reduction in tenure is mainly driven by repayments, right? If you can actually look at the data on Page 25, about 66% of what we are disbursing is getting repaid , right, quarter on quarter. So, that really is how it works. But having said that, I think as we grow the book from here, I think we will soon see that number stabilize and probably go up.

Okay. Got it. Also, one more question if I can just squeeze in.

Carry on.

So, regarding your profitability guidance, right now, I believe in 9 months, we have already reached INR 960 odd crores. So, in 4th Quarter, are you also going to get some one -off gains. So, how are you thinking about that?

Okay. So, see, at a consol level, we are at a little over INR 1,000 crores, about INR 1,004 crores, I think in 9 months , and INR 1,066 crores at the Growth level. So, yes, we have come a very long way already. And your point is absolutely right. Our significant one-off gain that we have mentioned in the past is slated to come in Q4 as well. Our intent, we are not changing our guidance on profits. We will retain it as it is. You do see that we still have about INR 5,200 crores of legacy book. Any incremental gains we have, if we need to take some action to set off against future impairments on the legacy book, etc., we might end up kind of using on that. Our intent is going to be to strengthen the balance sheet as opposed to taking a lot more into P&L. Let me just leave it at that. Rest, for the wise, a hint is enough.

Sure. Thank you.

Thank you. We will take the next question from the line of Prithviraj Patil from Investec. Please go ahead.

Hi Prithvi.

Hi. Thanks for the opportunity. So, I just had one question. I see the stage GS1, GS2, GS3 disclosures, and I see that the legacy assets in the retail book has slipped into GS2. I just wanted to know what's the reason behind that, and is there anything to look through the numbers?

I did not understand the question. Which slide? Just tell me a little bit about which slide you are looking at.

I looked at the Stage-1 disclosures that are given, and I just calculated the GS2 numbers for the legacy assets. So, it appears that Stage-2 has increased in the legacy book and the retail book. So, I just wanted to know.

In retail book, in absolute terms book is growing so the number is increasing.

So, the Stage-2 Growth book number for Q2 is 1,525.

Actually, Growth assets was 1,525, Stage-2 in Q2. It has come down to 1,503 in Q3. So, it's kind of stable. If anything, it has come down a tad. As far as the legacy is concerned, it was ~INR 150. Now it is ~INR 200. There is nothing there. There is nothing to report, let me just say. There is no meaningful event here. There will be some small accounts go here and there. But there is really nothing to report. It's fine.

Okay, This was there in the data book that was shared.

Ravi and his team will connect with you offline and let's just make sure that we square off the numbers with you.

Yes, thanks.

Thank you.

Thank you. The next question is from the line of Harshit Toshniwal from Premji Invest. Please go ahead.

Hi Harshit.

Hi Jairam. Thanks for the result and allowing me to ask a question. Actually, I had 2 questions. One was a bit related to the last one itself that, as you pointed out, actually Stage-2 has reduced, but Stage-3 in Retail has seen some uptick from 1.8% to 2% sequentially. So, if you can throw some color, more on the recovery aspect of it, that is it a particular asset category or asset class where you have seen recovery to be slightly tricky and which is why that has fallen. And the second was one on the management transition itself. So, our understanding was that for the current setup, Jagdeep and Sunit had a very relevant role in terms of the sales reporting and one on for the credit and everything operations. Now, just want to get a sense that in terms of the bandwidth, in terms of capability, in terms of how you want to shuffle the roles, how should we expect as investors specifically from the Management stability point of view?

Sure. I will come to that. Let me take your first question on what's happening to stage. There is nothing happening in Stage-2, Stage-3. The delinquency numbers are the best numbers to look at if you are looking for Stage-3, because in retail, Stage-3 and delinquency are pretty much the same number, except that delinquency numbers cut off at 179, whereas gross Stage-3 continues on till infinity. So, if you are looking for recent trends on what is happening in terms of new additions to bad book, delinquency is a better metric than Stage-3, because Stage-3 will just keep retaining really old books in its numerator. And as you can see in the delinquency, delinquency rates at a portfolio level have been very, very stable. So, nothing really has happened. LGD, if anything, has improved, except in auto, where it has fallen a little bit. But in every other business, LGD has remained the same or improved. And PD numbers anyway are there in the delinquency numbers. As you can see, they are very, very stable. So, there is nothing really going on. The way to think about Stage-2 and Stage-3, etc., in retail is that asset classification is formulaic in retail. Nobody is sitting and thinking about whether to classify this asset as a Stage-1 or 2 or 3. Everything is in the system. It's a pure formula based on days past due. And automatically, accounts get classified as such. And similarly, the provisions also just happen automatically by the system. So, there is no judgment involved in any of that. And for you to get a sense of what the risk is in the stock that is open in the balance sheet, the delinquency metrics, I would argue, are the best metric. And that's why we show them with such a long duration timeline to give you a little bit of a sense of what's going on there. And while 1 or 2 businesses keep going up and down every quarter, on an overall basis, there has been a lot of stability. And that's what you should take away, that there is a lot of stability in the overall risk level. On your management structure point, yes, the way we were structured is that Jagdeep was responsible for the revenue side of things and growth side of things. And Sunith was responsible for the control side of things. That is exactly the structure that we are continuing. So, Imtiaz is responsible for the growth side of things, and Vikas is responsible for the control side. And so, nothing should change. They are both very familiar with the way these roles operate and how we have run our business over the last 6 years. And coming as insiders to the system, there is absolutely no ramp up time there. And they do have 2.5 months of full transition. So, I expect zero dislocation. As investors, you should not worry about it at all. And you will get to meet the new leadership team as and when we catch up. There is no reason for you to feel like there will be any disruption of any kind.

Got it. And one last thing, if I missed, is that while I think we have performed exceptionally well on the cost from where we were 2 years back. But if I look at our business construct, which is 60%-65% secured portfolio, home loan , LAP primarily. And even when I look at probably the kind of yields that it can generate because of its business construct itself. Even when I look at our long -term cost-to-asset guidance of 3.2 to 3.7, I actually am trying to sense that it will still be higher than probably what our 60-40 for home loan, LAP versus other product business mix will be able to gather. So, just want to understand that on cost-to-assets. I think what is internally, because obviously we have come across long way, but still, we are at a base where there remains a reasonable amount of scope for improving that in the DuPont. So, I want to get your sense on that.

Yes. So, my boss is sitting right in front of me , and he really wants to jump in and answer this question, but I really do not want him to.

You are sounding like me.

Yes, Anand is saying you are sounding like him. So, this is exactly what he tells me all the time. So, yes, there is some merit to what you are saying. Here's the way we have approached this, right? We have looked at a peer group of affordable housing players, of auto financiers, of unsecured lending financiers, and created a group. And based on that, we have done our benchmarking. Our understanding is that doing the weight average between these 3 businesses in the way they are set up in our book, we get to basically 3.2% for us to get to the 75th percentile on cost -to- assets. That's our analysis of the entire sector right now. And that's the reason why we have set up this 3.25% to 3.75% as our range. But as you have seen in the last 3 years, basically every quarter we have brought down opex to assets. We will continue to push that. We will see where we get to. I know as owners, it is absolutely your right to expect the best from us , and to push us, and I fully take that on board. And we will continue to push ourselves and do well. Right now, I am benchmarking to about the 75th percentile, which gets us to about 3.20%. So, we will see where we are at.

Got it. Perfect. Thanks a lot.

Well, no thanks to you for setting a target for me. All right, let's move on.

Thank you. We will take the next question from the line of Vikram Damani from Damani Family Office. Please go ahead.

Okay, I will just jump right into it. On Slide 15, I see that your retail disbursements have slowed down INR 500 crores quarter on quarter. Anything you want to call out?

Nothing. It will all come back. Do not worry about it. It will come back. The kind of growth you saw in Q3 to Q4 last year, you will see a similar kind of growth in Q3 to Q4 this year.

Okay, lovely. That's the only one that was left for me. Thank you. Have a good day.

Thank you, Vikram.

Thank you. We will take the next question from the line of Anusha Raheja from Dalal and Broacha. Please go ahead.

Yes, thanks for taking my question , and congratulations on great set of numbers. S ir, on the DHFL assets that we have acquired, so how much is the principal or the interest amount that we are supposed to pay, say, for example, any calculation there for the next 2-3 years?

See, DHFL assets are now fully integrated into our overall AUM books. So, we are not doing any separation on that. From the original book, we have about INR 7,000 crores left. About INR 7,000 crores in our AUM comes from DHFL, everything else is now Piramal originated. Basically on the liability side, we took on about INR 19,000 crores was our original issuance. What is left right now is about INR 15,000 crores. We will keep repaying it in tranches. I think the first big tranche comes due next year, where big principal repayments are coming. It is carried on our book at about 7 .25% effective yield. So, it will start going off in small tranches starting next year. And at 7.25%, since our incremental right now, as Anand mentioned in his opening remarks, is right now already around the 8 mark. And with a little bit of rating improvement, it will hopefully get a little bit better. So, our replacement cost is going to be something similar. So, it is going to have no meaningful effect on our overall cost of borrowing is our expectation.

No, we will not raise CPs. This is long -term borrowing, so we will not raise CPs. We will do NCDs to borrow against this. My expectation is by the time this comes due, we should be able to raise NCDs at roughly this price. So, replacement will not be meaningfully negative. So, you should not consider this as a big material event. There will be some impact, some small impact, but we should be able to absorb it in our overall cost of borrowing given our recent ratings action.

Okay, and just one last thing. So, the calculation that we are working on, that PAT of around INR 3,000 odd crores and INR 4,500 odd crores by FY '28, so this bakes in this NCD payment as well, right?

Yes.

Okay. Fine. Thank you so much.

Thank you.

Thank you. The next question is from the line of Vikram Damani from Damani Family Office. Please go ahead.

Hi, it's me again. Sorry, just wanted to check one more thing. What's the timeframe to set up the 100 new branches and additional Capex that you guys expect to spend?

This quarter, 100 is for this quarter. 25 full-service branches, about 20 gold loans branches and about 55 microfinance branches. Everything will happen in this quarter. And the Capex here is very, very small. As I said, our overall goal on opex to AUM remains the same. That trajectory you should continue to expect. We will calibrate our branch growth strategy to make sure that we are able to give you a good smooth trajectory on opex to assets.

Super. And then anything beyond the 100 branches or this is it?

Yes, yes, next year we will open some more, but I am not ready to talk about it yet. We are still thinking through it.

Okay. Super. Thank you so much.

Thank you.

Good evening, sir. Given this total AUM trajectory going ahead up till FY '28, so until we reach the journey, if you can sort of paint a picture about the ROA as well and the NIMs too, how does it function?

Yes. So, if you look at Page number 5, this is our kind of long-range goals, what we are targeting. Return on AUM, we want to target around the 3% mark , and you can see the progress we have made over the last 2 years. And similarly, on the right-hand side, from an AUM to equity standpoint, we want to be in the 4.5x to 5x kind of range, and we have come now to about 3.5x. So, you can see the trajectories. Both these trajectories are kind of self -evident in terms of how close we are to that long range goal. We remain confident that the business is well positioned to get to those outcomes over the next 2 to 3 years.

Okay. That's it from my side. Thank you so much.

Thank you.

Ladies and gentlemen, that was the last question for today. I now hand the conference over back to Mr. Jairam Sridharan for closing comments. Thank you and over to you, sir.

Yes, thanks. I will take it here. One quick erratum again, I mentioned that the NCDs of DHFL are carried on our books at 7 .25. Rupen tells me that it's 7 .37, so it's a little bit higher. So, as long as we are able to refinance at around those ranges, then the net impact on us will be marginal. So, that's on that point. Thank you very much for very engaged questions this time, ladies and gentlemen. I know it's a busy day for results. Thank you all for joining us and have a very good evening.

Thank you, members of the management. Ladies and gentlemen, on behalf of Piramal Finance Limited, that concludes this conference. We t hank you for joining us and you may now disconnect your lines. Thank you.