Sammaan Capital Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session.

Yes. I would just like to clarify. I believe the team, by mistake, had sent a work -in-progress version of the earnings update and another mail was sent. Please refer to the second mail while looking at the data points and kindly ignore the first mail. We've also uploaded the corrected version on our website and have also sent it to the exchange in Bloomberg.

Thank you. We have the first question from the line of Sumit Bhalotia from MK Ventures.

Hi, Gagan. I think this time around you've shared a lot of detailed disclosure of the legacy book. So that's very helpful. Two questions from my side, one on the legacy book and second on the new book that we intend to grow. So on the legacy book, while you've have spoken a lot on the provision that you have done. just to get it right, so this is a one-time provisioning and now we are back to business as usual when our credit costs will dip to a much lower level than what we have seen for the last, say, 8 to 10 quarters. That is one. Secondly, this transfer of assets that we did from SFL to the parent. Did that led to this INR4,050 crores of provision or is it in general provision for the entire INR3,000 crores of book that we hold?

Okay. Thank you, Sumit, for the question. I would like to emphatically state, put this on record. There is no tail whatsoever to any sort of a scrub that we did. We've done a very, very detailed scrub, line by line, as I mentioned, looked at cash flows which are expected from borrowers for the next 12 quarters. T his is indeed a one-time sort of an exercise that we did. The credit costs would be normalized at 80 to 100 basis points going forward. It's a growing business going forward. So the growth would reflect in the credit cost. From the legacy book, we expect no further credit costs whatsoever. As far as -- I would also like to highlight that we got listed in September 2004. In 20 years, we have made close to about INR29,000 crores of profit. In these 20 years, we have distributed over INR12,000 crores of dividends. And there has not been a quarter where we've had to declare a loss. This is unprecedented. And if you do unprecedented things as management which is responsible, we obviously have done a very detailed DD. It's also not that I wanted to spring a surprise on anyone. And these are not exercises which are done in a month or 2. If you -- with the investors with whom I had a chance to meet one-on-one during the capital raise as well as with a wider audience during the last 3 earnings calls, I have been talking about using our capital tactically to ensure that it is facilitating th e rundown. At the same point in time, I have also been referring to the fact that we have stakeholders such as banks and rating agencies, which are sensitive to our credit ratios and our balance sheet ratios. So it's an exercise which has been done very p rudently to make sure that the ratios improve. But at the same time, the management is tooled with being able to accelerate on whatever rundown of the legacy book we have to achieve. As far as the transfer is concerned, the transfer came along with a general provision pool which can be utilized by the parent. On a stand-alone basis, on a consolidated basis, there is flexibility to do that. As I mentioned, whatever write-down of provisions had to be done were done first at the Sammaan Finserve level. And now the rest of the provisions which came up of approximately INR2,500 crores acted as a general provision cover. I hope I answered your question.

Yes, that's very helpful. The second thing is on the reduction of the legacy book. So we've reduced INR8,000 crores, almost INR8,000 crores of the book in the last 6 months. And so over and of the regular collection that we are having from say, Stage 1 of 92.5%, it is the recovery of the cash collection, which has helped reduce this book by that amount. Going forward -- so 2 things, 1 is going forward this INR10,000 crores of reduction in the next 12 months that you have projected, what part of it are we looking at from offloading our assets to a third party? And similarly, in the last recent transaction, list of transactions that you have said, have you taken any kind of haircut which is already baked in the provision that you've been taking?

So if we've taken haircuts, it has been -- they were already provided for, and therefore, as I mentioned, there were no -- right at the start, there were no incremental slippages of any consequential size. If you transfer loan assets to ARC, it's in the most rare of rare situations that they part with cash. So it's typically SR. So any sale to an ARC would not result in cash collections. When we are talking about cash collection and cash recoveries, that is real cash which comes in and hits the bank account. And that can only come when either the loan is repaid voluntarily or the loan is repaid via a sale of asset voluntarily or by a forced sale through the recovery process. Only these 3 situations result in a cash collection and the reference that we make of approximately INR10,000 crores and INR1,600 crores of recoveries, etcetera, these are all cash collections and cash recoveries that we are talking about.

Okay. Lastly is on the new retail book that we intend to grow and you've given targets also the growth AUM will move up almost from INR32,000 to 3x to INR1 lakh crores plus by '27 plus. So if you can just elaborate a little on what is the infrastructure that we have, how are you so confident that we'll be able to increase our disbursement 2,000, 3,000 a month? If you can throw some light on that, what kind of strength a ddition that you have done in terms of sales team overall structure? And also, what kind of liability side support you'll be needing, so what kind of capex you need to achieve that INR1 lakh crores, what would be the off-book on that? And how much -- whether the legacy book rundown capital release will be more than sufficient to achieve these targets that you've have given.

Thank you. So we are now staffed at approximately 5,700 people. Back in 2018, when we used to do INR3,500 crores of disbursals a month, we were at a similar staff strength. So that's the kind of capacity that we are choosing to carry. As we build out the Sammaan Finserve platform, we will need to invest in the top deck of the management team. That manage ment team has to be completely independent of Sammaan Capital Limited management's team. And we are fairly confident based on our interactions with professionals, that we should be having the management team in place before the end of the financial year. The boots on the ground, they're already in place and will continue to keep moving up as that specific book numbers ramp up, those numbers we have detailed and I ran you through those numbers as well. So as we look to increase disbursals at Sammaan Finserv e to about INR500 crores a month through the course of the next financial year, that company on a stand-alone basis will have -- will be employing approximately 2,000 people. To facilitate that INR500 crores disbursal. Most of that 2,000 people are already in play. The guys at the very, very top, who will also then help in bringing a partner -- a strategic partner in quick time. Those folks should be in place by the end of the fiscal year. Now on a consolidated basis, including the INR15,000-odd crores AUM, which will get built up in Sammaan Finserve, the balance AUM is getting built up in Sammaan Capital. Sammaan Capital is running now at approximately INR1,000 crores of disbursements a month. In this financial year, we have done co-lending and assignment transactions of approximately INR4,500 crores. So our capital requirement on balance sheet is minimal. I don't visualize Sammaan Capital debt equity going beyond -- significantly beyond 2x in the future. And Sammaan Finserve Capital -- sorry, gearing also by fiscal '27 should be in the same ballpark of about 2x. So we have capital requirement, debt capital requirement for our -- the portion that stays on balance sheet. But within what is being collected on a cash basis, as well as now a stabilized debt capital flow, which I highlighted that in the last few months, we've already borrowed close to about INR14,000 crores on and off balance sheet. I think we are well placed to think about the kind of disbursals that we are -- we'll have to do to take us to a INR1 lakh crores of AUM in the next 2 financial years, 2.5 financial years.

The next question is from the line of Prithvi from VicAsset.

Hi, Gagan and team. Thanks for this presentation. Just to follow up further on the discussion on Sammaan Finserve. Can you please shed some light on how you're thinking about monetization plans for the subsidiary?

So before I respond, I'd like to thank Oaktree for all the support that it gave us through our -- through the really tough time, and you guys have been brilliant partners, and I hope we can take this partnership and explore various other avenues as we go forward. Now that -- especially now that the firm is in growth mode. As far as the monetization plan is concerned, we are extremely mindful of the fact that there is RBI forbearance, which is there where an NBFC is owning an NBFC. And we will have to work with the regulator to make sure that at an appropriate time, we desub sidize this. At the same point in time, we have enough capital out there to grow this business and take it up to a certain size. As I mentioned, we are in the process of putting the top leadership in place for this so that the company can be run independently. I believe somewhere once the leadership team is in play and the scale has been achieved in guidance with the regulator, we w ill decide on the appropriate time for monetization. What we are very clear is that we will -- we are in the process of building a vehicle which is very valuable and can get quickly monetized. The due diligence on such a type of an organization is practically a 2-day job since the loans are just so granular. I can't put an exact time line. All I can let you know is that it's on our agenda, but we have to do it in a manner that we are also able to maximize the return for Sammaan Capital shareholders while making sure that we are fully compliant. I, earlier in the call, have spoken about the compliance culture, which is facilitating a healthy interaction with the regulator, which is always very, very important and has become even more important in the current context of whatever is happening in the regulated entity universe. So bearing all of these in mind, I think we will move forward in the course of the next few quarters.

The next question is from the line of Siddharth Dahiya from Aberdeen.

We are holders of your bonds, as you may know. Just wanted to check, have you had any discussion -- recent discussions with rating agencies around this? Anything that you can share, any feedback from them? Would there be any pressure on your ratings, on your international ratings?

Thanks, Siddharth. Thanks to the Aberdeen Group for always supporting us. I think of the $3.5 billion that we've raised over a period of time overseas, you must have taken 10% of that. So thanks so much of that -- for your support, which is continuing. We have obviously proactively reached out to all the critical stakeholders with whom we could have less unpublished price -sensitive information. Rating agencies are such partners, which anyways have a much deeper look into our numbers as compared to the wi der market. The interactions have been healthy. The transaction has been structured in a manner where the various credit ratios, balance sheet ratios have only gotten stronger. If we look at Sammaan Capital Limited on a stand-alone basis, the net worth has increased since the start of the year by INR3,000 crores. If you look at it on a consolidated basis, it's gone up. Sammaan Finserve has practically no external borrowings. As I mentioned, 95% of our borrowings are housed in Sammaan Capital. So that's the balance sheet, which is of relevance. In that balance sheet, on an operating basis, it has reported INR115-odd crores profit. For the full year, it will have a profitability in the handle of INR450 crores. Given that, the LD capital, the very moderate debt equity, I feel that the conversations with the rating agencies have been on the lines that we are creating buffers for the future. And this will also enable growth to come by. Our recovery performance and our Stage 2 numbers, Stage 1 numbers, if you offer just 1 minute to refer to -- yes, if you were to refer to Slide 14 of the presentation, you would notice that the Stage 2 assets plus the gross NPA assets, which, as of June st ood at INR4,415 crores, have declined to below INR3,000 crores. The gross NPA, which was 2.7% has declined to 2.4%. And the net NPA has also declined. So all of the provisions have been used for specifically improving the provision coverage of any asset which was overdue as of June versus trying to cover for any fresh slippages , which has been and shall be explained at length to the rating agencies. In this context, I'm quite optimistic that we will continue to work positively with the rating agencies. I'll take 1 last question, please.

The next question is from the line of Abhiram Iyer from Deutsche Bank.

This has been really helpful to us in the investor community and in the stakeholder community. I just had sort of a bit of clarification needed. Now when we transferred the INR7,200 crores out of the regular track record INR5,500 crores, you mentioned that the fair value, call it, give or take, about $0.50 cents, what was sort of achieved and we're obviously doing it at an arm's length. Could you just make it clearer on why this sort of estimation would not be required on, say, the remaining 20,000 -- INR28,000 crores, sorry, which are already -- were already present on -- in Sammaan Capital before -- outside of this transfer in terms of the legacy book?

Sure. That's a very, very relevant question. And I tried to explain, but I think more explanation will only make it clearer. The approach that we took while transferring Sammaan Finserve was one of making sure that it is completely at arm's length, and we achieved fair market value. If we look at the typical cost of capital, if anyone's looking at acquisition of certain assets, they will be looking at a cost of capital of around 20%. And they would also be looking at the time value in which that 20% would get realized, but the discounting rate would be down 20%. They would look at the basis bit of interest. And then they would arrive at a value, presuming that the expected credit losses have already been baked into the provisions. So the first job was that the expected estimated credit losses were provided for. So we ran that book number down. So we went with approximately INR5,500 crores of assets, on which a discounting exercise of 20% was done and some adjustments surveyed basis the net present value and so on to arrive at the number of approximately INR2,500 crores. Now if you look at Sammaan Finserve Limited, Sammaan Finserve Limited is a loaning company. It has given out loans which will come out -- come due over a period of time and will get paid down over a period of time. Typically, these loans have contracted te nures of 7 years, they would have a residual -- actuarial life for 5 years and so on. There is also, therefore, in liquidity sort of a discount which comes in. So between a discounting factor and liquidity factor and other basis points risk, etcetera, the fair market value discount was built in. This is also all detailed in Slide 11. The important point and just to answer your question more directly, is that from a provisioning perspective, the provisioning on the entire book had already been done by the time that this exercise of fair market valuing happened. Now Sammaan -- now think of it from a Sammaan Capital perspective, Sammaan Capital is fully capitalized from an equity point of view. Its incremental debt capital, comes at a cost of, give or take, 9.5%. So if we think about discounting this, we would do at a discount rate of 9.5 %. We would actually land up paying a premium, because we are going to be getting a spread on this book. So our outlook versus the outlook of, let's say, any credit fund which would be buying this is completely different. Which is also reflected in the fact that when credit funds give out money - - and we've done business with the likes of Oaktree, who we were speaking to a short while ago, Davidson Kempner, PAG, etcetera, then we would -- when we were doing business with them, we would get like $0.40 to $1. Today, if you talk to most of these guys, the monies have gone back to them. Some of these credit funds are in touch with me to partner with me for putting money to work in AI structures, etcetera. I didn't want to complicate our conversation further in this quarter. So we did not bring that topic up. But that's what's happening. So their approach is very different to a prime lenders' approach like Sammaan Capital. Since it has to be done at a fair market value, it has to be done as if Sammaan Capital is also a credit fund, and therefore, the discount. The other advantage to us was that the discount, which came with the book came as a general provision, which then becomes a provision buffer for us. So again, in no way, remotely also does that INR2,500 crores have anything whatsoever to do with the credit cost requirement of the book at Sammaan Capital Limited. Sammaan Capital Limited has, through this entire transfer, built up imputed provision buffer, which is anyway, 30% of the legacy book. So if I look at any which way, left, right, up, down, it does not reflect on the credit quality. B, there is no risk what soever since we've created big, fat provisions. I hope I answered your question.

Yes, perfectly, perfectly. Just 1 follow -up, if I may. Sorry, I'm mindful of time, but in case of the INR63,000 crores AUM, if I recall the last time around in terms of split about 50 -odd was retail mortgage loans. What's the split now, especially considering we've run down a bit of the legacy book and written down some of the -- via provisions as well? So a very broad, obviously, not exact numbers, but a very broad split of, say, retail loans, LAP loans and the larger ticket type loans?

If you're talking about the legacy book, the legacy book consists of loans to real estate developers, larger home loans, larger LAP loans, loans to corporates, etcetera. And the rundown which is happening in loans is primarily on account of what they're pa ying on a monthly basis as is their repayment schedule. These loans don't run on a moratorium of any sort. So there is a little bit of principal which comes back every month, every quarter, etcetera. So the rundown would typically be of the overall book. There is no 1 subtype of the legacy book which will typically run down faster than the other. It will -- since most of the rundown is happening, basis regular repayment. There is some portion of the book which is NPA, where we will do sales, which is a small portion of around 4.2%. There is some portion of recovery which would come from asset sales. Where I shared with you, there is a pool of INR10,000 crores which we continue to work with. The good book of the legacy book, which is roughly 96%, is all running down in pretty much a similar ratio. All subparts are running now in pretty much the same ratio. Thank you so much for patiently listening to us. In some parts of the world, it's already pretty late. It's a Friday evening. So please, I wish you all a very happy weekend. It's also the holy occasion of Gurpurab here. So I wish all of you a very Happy Gu rpurab and may God bless us all. Thank you.

Thank you. On behalf of Investec, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.