Poonawalla Fincorp Limited analyst Q&A

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Chintan Shah from ICICI Securities. Please go ahead.

Thank you for the opportunity and congrats on the quarter. Firstly, on our MSME book, it is around one-third of the total book. Could you help me with the split into secured and unsecured for our MSME book which is 36% of the overall book? So, that was the first question.

So, if you ask for MSME book, around 65%-70% of my business is mortgages which is LAP of which 75 %-80% are all self -owned property. So, to that extent, the LAP book is behaving extremely well for us. So, it is secured if you ask me- overall, it is around 63%-70% is the range which I could give you.

But overall, MSME for us is going to be a very robust growth engine and I see a great opportunity both on the business side as well as I don't see any concerns on the risk on the portfolio. Even our new calibrations and the way 30 -60-90 is going, my assess ment is that it’s a fantastic opportunity in terms of well-calibrated risk. As a matter of fact, if you look at our GNPA on that, it is fairly low right now and it is not a small size, and we are very focused on it being very well calibrated. We are not in any hurry. So, we are following our philosophy that it should be good quality and that is what we are doing. So, in our case, MSME, whether it is this or we double on this, the quality will be well calibrated. You can be rest assured. The GNPA on that is really low right now.

So, on this 20% STPL book, entirely is the STPL book in erstwhile or is it new? And so, in what time is it expected to run down the erstwhile STPL book? By what time will it entirely run down?

So, our STPL book as I had said, it is around only 4%.

No, he is talking about if 4% is old STPL. He wanted a breakup. So, the old STPL is around 4%, the rest of it which you see is new, well calibrated and there it is almost really -really very good and solid business that we are growing in a conscious manner, and we see a huge upside there. That is what I said, in the whole construct, I deliberately had a very high proportion of secured businesses first, followed by unsecured businesses. That is the model. So, your old STPL is around 4% left, that is about it. Out of which also, I think you have a decent proportion at zero dpd and all that.

Yes, absolutely.

So, and just on the capital raise. So, now this Rs. 1,500 crores promoter of capital raise, so that would be it or would we also be looking to do any second round of current raise or any other capital raise?

So, this Rs. 1,500 crores which the promoter has put in, we welcome it as his confidence in growth capital. We have always maintained that on external raise, we would want to look at anything in the range of debt-to-equity of around 4.75 to 5 ballpark, that is what we have because I want to, with our ROA projections, I want to look at healthy ROE as we proceed ahead, three years down the line. I mean, that is the line of thinking.

And so, on a steady state basis, once the OPEX normalizes and credit costs, as you already mentioned, it would stabilize around 1.5% to 2% is what our guidance is. So, any ballpark steady state ROA which we could be looking at, probably from two years down the line?

See, we always have very stretched internal targets but let me stick to our guidance. Our guidance is June-2028, we have set 3%-3.5%. Internally, we always love to scramble to beat expectations as by now you have seen us over the last four quarters. So, I will leave it at that. I think it’s always better to be conservative and overachieve. We like to do that if we can.

Sure. I will join back in the queue for follow-up questions. Thank you.

Thank you. The next question comes from the line of Abhijit Tibrewal from Motilal Oswal Financial Services Ltd. Please go ahead.

Thank you for taking my question. So, Arvind, just two things for me is, NIMs for us continue to contract. So, if you could just explain what is resulting in this NIM contraction and somewhere during your opening remarks, I also heard that we spoke about getting to steady state margins of 9%. So, by when can we reach those 9% margins? And this margin compression that we have seen for the last two quarters, for how long is that going to sustain before we stabilize and the margin starts inching up towards 9%? That's my first question.

See, the environment when you are building blocks, understand the philosophy, I have given very clear guidance that within four quarters, in our internal assessments we have 9%. And to give you a sense, the compression is because the old ST PL book had to be reduced. We had to clean that up and the new ST PL book has started to rise. Our digital journeys on very healthy ROAs, they have started to rise. But as they start rising every quarter, they will start adding positive value to the NIM s. But the reason I've given you a four -quarter kind of outline is , so that allows us to very sensibly build the model. I am not so worried about NIM s. Please understand that as the company starts growing from here, we have launched multiple products, we will have a substantially increased customer franchise. So, as your cross-sell starts increasing next year, from April onwards as well, you will get not only the unsecured piece sensibly well - calibrated rising, but you will also have your cross -sell piece rising. But if you see in the first year of operation, cross -sell is very, very low. And as the company starts expanding on its customer franchise, we come with very strong experiences there. We also have digital journeys, which are one of its kind in the industry. So, both on new acquis ition as well as cross -sell, we could make significant progress, and both are extremely positive for the NIM s in terms of a structural construct. But when you build a business, it's more important to build solid business first rather than NIM s first. That's important to understand as a philosophy because we have taken a position of risk first, which is what we are walking right now. But I've given you a clear visibility to NIMs. So, I am not too worried about NIMs, by the way.

So, just to sum that up, sir, basically it will take four quarters thereabouts, is it? So, for the next few quarters, we might see a NIM compression before it stabilizes and then gradually starts --

See, hear me very clearly. I said four quarters, which is 12 months, you will hit an approximate figure of nine . So, that's exactly what I am saying. I am not saying it's going to compress till then. That's your assumption, not mine.

When you're building a business it's very important to bias towards solidity first. NIM is a much easier part from our perspective to achieve. Remember, we have launched two major digital journeys, STPL we have recalibrated it, things are positive and, on the rise, here. So, we have managed to get our costs down. We get our secured up. And we wanted the risk calibration of unsecured to get a little more time, which is what it's done, so that it's more seasoned before we start scaling it up at a much decent rate. And that's what we are entering now. So, things should only look up. But we have given you broad guidance in terms of so that you have that clarity. Over to you. Next question?

Got it. This is useful. The second thing was on credit costs. While you guided for steady state credit costs of 1.5% to 2%, what we have seen now remains significantly elevated. So, what will the trajectory be like? Again, as you explained, margins will get to 9% in the next four quarters, 12 months. Likewise, if you could just give out the trajectory on credit costs and how they could trend over the next four quarters?

We have said what we had to say. My limited point is, there are two figures that we have done this time. One is an additional disclosure. So, let me reiterate that for everybody's consumption. 3.14% has gone down to 2.61 % on an overall level. That's level one, 53 basis point reduction. That's not elevated if I see all the NBFCs, by the way, just for my academic knowledge. The second one is, if I remove STPL from there, we have done an additional disclosure that 12 of my businesses, which is approximately 80% of approximately Rs. 41,000 crores which might be what, 35,000-odd 32,000-33,000 crores, whatever it is. That is a decently sized book, which is a credit cost of 1.43 %, even if it goes up by 10 -20 basis point, hypothetically on a quarter -on- quarter basis, or you even vary that slightly and year-on-year, we have given a projection on both these figures will come down and are noteworthy in the next two, three years. So, this is important to absorb and understand what I am saying. If you look at 12 businesses and you compare it with, these are almost projections of 12 businesses out of my 13 businesses, which is very close to banking kind of NCL. I've not seen this in the NBFC world, by the way. So, these are not significantly elevated anymore. These figures, please get these figures absolutely clear what I am saying. These are precise disclosures, which should have no doubts what I am talking about. Thanks.

Got it, sir. And then last question, as you have acknowledged, MSME has been in the storms since yesterday. So, if you could just help us understand.

I never acknowledge. That's your statement.

No, sir. That's what I am saying. But what I am trying to understand is if you could help us understand our MSME business a little better, right? Because I got a little confused when we said that 60%-70% of our MSME is secured against property. I was under the impression our LAP book that we report separately, right? That is the loans that we give out against our property. So, MSME, I mean, is it secured, unsecured? I am just trying to understand that a little better. And also, within MSME unsecured that we do, I am assuming we also do business loans. So, what kind of ticket size do we do in business loans? What's the usual turnover of the micro enterprises that we cater to in our MSME business?

So, MSME for us, I think what Shriram was alluding to, and he can chip in if he likes, is 63% of whatever MSME we do happens to be secure. So, that's point, approximately ballpark what I heard him say. But more importantly, whether it's secured or it's unsecured, whether it's loans against property, whether it's business loans, or any of the other versions of MSME that we do, what I can assure yo u is, is extremely well calibrated on the risk side. Now, industry might be going through its various, I don't think there's anything too unusual about when I was handling, before my previous assignment, a very large portfolio as well. I think we have always had these situations of MSMEs - always have to be very well risk -calibrated. I don't see any storm in the industry in my assessment. These storms have always existed if you don't calibrate it well. So, to blame the industry is not something I see that way. I see that if you've got to be well risk- calibrated, and the industry is what it was, I don't think there's a deterioration in the industry level, and I am not a large enough size to comment on it. So, I don't see it that way. And so that's what I like to share with you. As far as the book is concerned, it's behaving really well right now. So, that's all I can share with you. Our new calibration will be extremely well calibrated because that's what we are here for. But I don't even think industry is at any concern level, to be honest with you. If you don't calibrate yourself well, it's very easy to blame the industry.

So, that's fair. And thank you for a detailed explanation. That's all from my side. Congratulations and best wishes to you.

Thanks.

Thank you. We take the next question from the line of Mohit Jain from Tara Capital Partners. Please go ahead.

Hello. Sir, this is regarding the STPL portfolio. I guess it was 8% in the last quarter, and right now I think it's down to 4%. And you have earlier said that 80% of this portfolio is well calibrated with zero DPD, and you don't expect any slippage from that. So, for the remaining 20% of the portfolio, right now I think you have said that the figure for the STPL provision is Rs. 67 crores. That seems to be a pretty high NPA we are having in that portfolio. Can you just clarify on this one, sir?

If you look at even the balance book, as I said, yeah, we have a substantial amount as I last time disclosed. It's a zero DPD book. Second is we are carrying sufficient provisioning. So, to that extent, I don't see any kind of an issue out there. Second is from a collection efficiency standpoint, we have significantly improved our collection efficiency. So, with a 4% with a zero DPD book, which is substantial enough, and we have sufficient provisioning around it, I don't see any issue. And if you ask me, the problem actually doesn't exist now anymore. It's just over next seven to eight months, it may kind of run off. And we have sufficient provisioning around that.

Just to clarify, sir, just to re-frame the question. So, right now the old STPL is around Rs. 1,700 crores, like 4% roughly. If you are saying 80% is well-calibrated, the remaining 20% is around Rs. 500 crores-Rs. 600 crores, on which we already had a quarterly provision of Rs. 60 crores- Rs. 70 crores. So, that number seems to be very high. So, is it fair to say that 80% of the book is completely clean and 20% is almost going to be written off sort of a book which is gradually, we don't expect much recovery there?

To be honest, better to be conservative on that and we like to believe the same, but it's better to be watchful till it's gone, alright?

Yes. Thank you, sir.

Thank you. The next question comes from the line of Kaitav Shah from Anand Rathi. Please go ahead.

Good evening, sir. Just one question on the MSME book. In terms of credit underwriting, we have always harped on stronger credit underwriting. If you can tell us a bit more about the book in terms of leverage, financial leverage of your customers, what proportion of the book would be to more than three or four lenders, something like that, at least at the start of it?

Kaitav, this is Shriram here. In fact, that's a great question and you actually answered my point. The biggest challenge today in the MSME book was the leverage part of it and that's where we look at the number of enquiries in those set of customers and the enquiries are more than two to three even enquiries. Forget about even having being a third or fourth lender, we don't even look at those kinds of transactions. That's one of our gatekeeping criteria and that's one of the reasons that our MSME book is fully under control.

That's a good question and actually it answers what probably we should have answered in the first time. So, it's a good question and that's why you see that our quality of the book always remains a little more risk-calibrated because some of these things we don't get very tempted to kind of walk something which we are not very comfortable with.

Sure, thank you. I think that was my only question.

Thank you. The next question comes from the line of Sanjay Chawla from Renaissance Investment Managers. Please go ahead.

Good evening. Thank you for the opportunity. My que stion is, you mentioned that STPL, on your core book excluding the STPL credit cost is 1.43%. Can you give a sense of what has been your credit cost experienced on the new STPL book so far, especially in this quarter?

On the new STPL book, I can say that my che que bounces have come down significantly by around 70% and my collection efficiency has significantly improved by 40%. We are still at a building block stage, the seasoning of those loans are yet to be seen, but it is by the che que bounces being down by 70% itself gives us, it's a very encouraging result for us and we don't see any challenge in terms of portfolio quality on that book.

As a matter of fact, after adequately seasoning and waiting for it patiently, last quarter we have started scaling it up and that's why I wanted the secured books to be of a certain size before we start scaling it up and I think it's, we are very excited about it, as a matter of fact, if I can use that word, because it's very decently well calibrated.

My question was, to quantify it, the credit cost on your new STPL book, would it be higher than the blended 2.61% this quarter?

Yes, because it's a high ROA and high, that's a different one. That's why I've given you details of, if I give you the rest of the book at 1.43 % and I give you this at 2.61 %, that answers your question, my friend. And that's a 25% yield, it is a very different business. That's the reason I said all other businesses being in a certain price range, we singled out one business. I have not singled out consumer durable, we have kept it as part of the regular retail chain, but all regular consumer businesses of 12, we have just put it together as an additional disclosure to give exactly the sense which you're asking.

Got it. So, the other question is, what kind of outlook do you have on the OPEX increase now, having completed one quarter for the rest of the year?

We expect that our OPEX as a percentage will go up, it hasn't gone up by the way. So, we have done some bit of hard work. But I think when you increase 80 branches, you increase around 1,000 plus people, we are building that up. While on one side, we are working a lot on AI projects, a lot of them will get commissioned in the third quarter and a lot of efficiencies will start building in the Quarter 4, which will obviously have annualized impacts. So, plus we have aggressive plans on growth as well, because our risk calibration is looking pretty good. Imagine 12 business at 1.43 % is almost like ban king levels. This is not what I get to see in the NBFC world. So, I think we will keep our options open. So, what's the best optimization ? I've given you enough guidance to get a sense, but I think we are in full control of the ship now. This looks like from here on, things look on a very good note, but we will obviously, this is a finance business, so we always have to keep ourselves grounded.

Okay, Got it. Thank you.

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

Hi, thanks for taking my question. Two questions, actually. If you could give some color in terms of the segmental yield for at least the key lines of businesses, and the other thing is, some sense in terms of sourcing mix that you're looking at, which is basically broken up into in-house versus a third party sort of a distributor, either digital or physical?

See, our bias is all our businesses have been designed keeping in mind 3%-3.5% ROAs. Now, I don't think on an earnings call, I can summarize all yields, but these are obviously healthy yields. Our cost of borrowing, my OPEX costs, if I have to make it 3%-3.5%, all six businesses that I've launched with a bias towards healthy ROAs, because that's what we have given a commitment we want to reach or exceed, whatever. So, with that, we also have STPL that we have managed to reduce our bounce rates, get the thing recalibrated. We have a lot of digital journeys that we even run on higher pricing than regular businesses that we run for price, for convenience, whether it's personal loans that we are surprised positively to see that our daily run rates seem moving on a healthy level at very decently high yields. Some of them are even at a 4% ROAs. So, I think that's how I normally like to answer these questions, is sort of giving a competing strength sort of what pricing each business I do. But it's all healthy pricing, we are in this business to make money. So, we are very clear, risk-calibrated and we want to make money on this. So, this has to be on healthy ROAs, which is why you see some of the businesses which are low ROAs have not launched only, because they're much easier to do.

It's essentially 5% pre-tax ROAs, what you're looking at?

I mean, we have given a post-tax kind of guidance of 3%-3.5%. I will probably maintain that at the right time. So, we will go with that. See, most of the guidance, we move to 30-35%, we beat it, we kind of exceeded that. We said, second year 35-40%, we have given you a guidance that it will be notches better. Our risk cost has come down. We have given you additional disclosure on credit basis. Investo rs have been asking . You need it greater, it was a fair point. I've given you 12 with a percentage that none of the NBFCs have right now. And this is a Rs. 33,000- 35,000 crores odd book, which is not like some Rs. 8,000 crores book. So, I think it's got enough on the table for you to do the math and figure out what's the post -tax ROA, pre-tax. But allow me to stick to the guidance we have so far given here, because I think quite a bit before I speak any different line. That's the reason I would like to stick to what I said.

Yes, fair. And if you could give some color on sourcing, in terms of how much of it could be in- house versus, where you could use some channel partners?

Fair point. It must have been a little complex, but I will give you a sense. I covered something called digital marketing. The reason I covered that was to give you a sense, while it sounded a little complex or it sounded theory, the real reality is we did Meta, Google and a whole lot of other channels that we are activating, this company never had direct digital business or PL Prime or business loans coming in closing end -to-end digitally. To create that m arket is what we are working on. And as you create the first level, the second level becomes much lower cost every year because the cross-sell goes up. The net impact starts getting positive and positive. So, what happens, the company acquires 100 customers next year, 20%-30% of them come in as cross - sell and your overall cost starts actually becoming extremely advantageous. So, if you see the whole model is fairly thought through. My sourcing is through DSAs. My sourcing is creating two industry-first digital journeys, which will both be for business loans, as well as white collar personal loans. We are going to price for convenience, and we have made it successful in the personal loan side already, by the way. We haven't disclosed the daily run rates, but it's on a healthy level already. And that’s the beauty is that keeps increasing. Even every two weeks, we find that the level is going up because that's how the word of mouth and that spreads. So, we are investing a fair amount of time and effort to develop that ecosystem. I think that will also give us a cutting edge in terms of first right to refusal. Look at it simplistically. Imagine a Fin tech who's giving business to your top banks today, why shouldn't it embed my journey and give me the business that we approve at my pricing? It doesn't have to do anything, but there's a huge amount of customers who want the loans at 5 in the morning, 11 or 11.30 sitting in their house. They don't mind if the EMI is what they can afford, and the profiles are right. Convenience, pricing for convenience is a very dumb thing in the world. And we get good customers; we get the first right to refuse. So, you have digital journeys sizing up in a big way. You've got physical journeys also we are investing. For example, on one side, we are coming up with industry first digital journeys. On the other side, I've said 400 gold branches. Why? Because if we had a break even in 13 months, and my team tell me we could be breaking even 11 months hypotheti cally, or earlier, let's see how it goes quarter and quarter. It could be early to co mment. But let's say then you can size up both opportunities and in a seasoned state gold could be a 4% RO A business. Why shouldn't we set that up? So, we are here to make money in terms of professionally on the company. It's very important that we build both on the franchise of physical and digital as long as it makes good ROAs. And like I said, we will raise external capital at 4.75- 5 and with our projections, why shouldn't we aspire for a 20% ROE in the third, fourth year.

Thank you. Ladies and gentlemen, we take that as the last que stion and conclude the question - and-answer session. I now hand the conference over to the management for their closing comments.

Thank you so much for such a large audience showing interest. We are truly honored. Thank you so much.

Thank you. On behalf of Poonawalla Fincorp Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.