Good Evening! Congratulations on the great results. I wanted to say that we partnered with you through a number of years, including some harrowing ones like during COVID, we have been in 4 different debt instruments. And I wanted to compliment you that you've always laid out in advance which you're going to do and you end up doing what you say. We invest all over the world and our experience with you is world-class. As far as questions, I'm happy to see that CRISIL appears to understand your new asset -light business model and did indeed affirm your rating. Let me know if there's anything you'd like to add around that? And then the second question is in local market liquidity. You've done a great job, especially vis -a-vis international investors like ourselves, in terms of paying down the financing. What are you seeing as far as local markets as a source to potentially drive your growth in the future? Thank you.
Sammaan Capital Limited analyst Q&A
Firstly, thank you, Craig, and thank you, the entire team at NWI and having -- to have really partnered with us through what has not been in 4 to 5 years, both for the company at a macro and a micro or the world with COVID raising, etc. And your words that our a pproach is world class is like a compli ment to the team on how we would aspire to continue to say what we do and do what we say. It's not always easy, but we will try and continue to keep on foot in front of the other entities and hope that we grow from now. CRISIL and Indiabulls have had a 19-year a long association. We have while perfectly understanding that rating agencies go through their own internal cycles as well as there also in that sense, influenced by what is happening externally. There would be divergent views coming from various rating agencies. We have historically in the past tried to work with all the relevant rating agencies in the country. And our goal is essentially not to try and do rating arbitrage and go and get the rating, which is suitable for us at the moment or not. The other big realization for the company is that much like other stakeholders, rating agencies can tend to be a littl e bit more pro -cyclical. And it's a big learning. And I'm not faulting the rating agencies. I believe that when you are on the path of growth, to see an event like what one saw in the IL &FS crisis or through COVID, etc . these are clearly black swan events, which if one starts building into a rating thesis, nobody will ever get to a very high credit rating level. These are all learnings for the company. So I'm grateful to the CRISIL team that they have appreciated the model. They have been extremely patient in giving us the necessary audience to explain our business case, and they continue to be one of the most mature rating counterparties that I have interacted with ov er the last two decades. There reaffirmation clearly helps us both domestically and internationally. Our current audience is the domestic pool of debt captive, largely focused on three pools. One is the co-lending pool, which is the most crucial, the second is the bank term loan pool, which is the second largest pool. And the third is a franchise which we are trying to create, which is raising bonds which are sort of quasi deposits in our case from retail and high net worth individuals and trying to granularize our liability prog ram to the extent that, the exta nt regulations allow us to do. On the co-lending pool of capital, rating agencies and their views are important. So what is even more important given the very long track record that we have with our counterparties on the co- lending and securitization side, is how our underlying pools are per forming. And I keep telling all stakeholders in one-on-one interactions or on calls such as these that the risk on the co-lending or the asset-light business model is not how much demand is there. There is 10x of the demand out there than what we can potentially produce quickly. The biggest risk and in ways -- in some ways, a moat that we have created for ourselves is the underlying asset quality of the loans that we've originated. The moat is that, we have done transactions of over INR 60,000 crores with a bout 25 parties, of thes e 25 parties, 8 of them are current co- lending partners. And over the next -- over the course of the next two to three quarters, this number will expand to 12. So after 25 , 12 would be our co-lending partners. And they will largely long term be guided by how our back, pool is performing. If our back pool continues to perform to what they bought from us last year or the year before that, continues to perform, there would be demand. They would obviously get impacted and influenced both positively and negatively by the rating. But the more influencing factor is going to be the performance of the back pool. The second pool of debt capital is bank term loans. There, again, given the almost a little over $7 billion of sorry -- almost $10 billion of net repayments that we have done with the equivalent. A large portion of that has gone to domestic banks. And that has built a lot of comfort. Obviously, they rely on external ratings to help them assess our current financial health. There also are organizations which are capable of doing their own internal credit appraisal, which they do. And as things stand s today, I think today they're more comfortable with our financial health as well as their understanding of what the company does, how does it work and all of that. Because of regulation, we've had a concurrent auditor appointed by these banks for over four years, auditing every rupee in and out that additionally gives them comfort. I believe today, as our lending counterparties, they've also matured in their practices. They are aided by much tighter and stronger both supervision and regulation of the RBI, and therefore, all of this as a combination provides them a great degree of comfor t that we are an upper layer NBFC. And there are all of 15 NBFCs in the country, which are in the upper layer. And RBI is indicating that the trend line for upper layer NBFCs would be a bank like approach to both supervision and regulation that additionally provides comfort to this pool of capital. The third pool of capital, which is the high net-worth individuals and retail individuals, which today as a percentage of our borrowings would be approximately 5%. But on an ongoing basis, we would like to see this pool contributing starting to contribute at least 20 - 25%. This would get swayed by our credit rating for this pool to continue to give us capital at a comparative cost, we would need to maintain our focus on credit rating and reaffirmation of credit rating coming from the country's premier rating agency is a huge boost in our endeavour to address this new pool of capital for us, which is a relatively virgin pool of capital for us. That's my perspective. All these three pools are providing us at adequate liquidity. So there is no issue as far as the free flow of capital is concerned. Now it's all up to us as a team to really prioritize what our approach has to be, operate within the guardrails that we have said and focus on the quality of the portfolio that we are creating versus the quantity. So when the mana gement team speaks to our feet on the street, we talk about periodically accessing the quality of our origination whether the cost, whether the turnaround time of our co- lending portfolio in terms of how long do we have to hold , the acceptance of what we're originating versus just the quantum of disbursals. So the quality of what we are disbursing is far more important for us. And while maintaining that quality of disbursals, there is adequate flow of capital, which is available to us. Sorry, I gave a very lon g answer to what was perhaps a very direct question, but I just wanted to use this opportunity to explain the model properly to everyone.
That's great detail. Thank you very much.
Thank you. We have a next question from the line o f Shabad Thadani from Arkkan Capital. Please go ahead. Mr. Thadani.
Thank you. Yes. Gagan thanks and congrats on a good set of numbers. I think testament to the work that you and the team have done over the last few years to get yourself in this position. Just one question from me. With regards to the wholesale portfolio, can you give us a sense of what the gross and the net exposure on that is at the moment? And what is the plan to, I guess, keep running that down? Or I think there was some discussion of some AIFs being set up previously and how these transfers are going?
Shabad, through quarter two we were fundamentally focused on ensuring that the lumpy sort of liquidity repayments that we had to make. Those were the primary sort of areas of focus for the company. We were also allowing the larger part of the organization to focus on stabilizing the retail distribution platforms. There's a lot of integration work that needs to happen, which we used quarter two for. We haven't really had the bandwidth through quarter two to focus on strategic initiatives as far as wholesale lending is concerned, whether we do it via credit platform or partially via credit platform and partially via an NBFC. It's an important decision to take and it's an important contributor to profitability medium to long term. In the short to medium term, our profits will get aided by the recoveries that we get from the wholesale book. But over the medium to long term, we do intend to do wholesale lending. I woul d request you to bear with me for another month and a half or so for me to really chalk out a very clear plan in terms of the scope of the credit platform, how much effect would be loaded on the NBFC. How much effect we do via third-party funds and all of that. Those are numbers. We clearly see approximately on a steady-state basis, a disbursement of opportunity of anywhere between $2 billion to $3 billion every year. But if we have to do $2 billion to $3 billion, we have to also ensure that we have the capacity to contribute to approximately 20% of that from our balance sheet directly on the NBFC or our – as our contribution to the credit fund. So we are working out all of those details. Please bear with us for the time that we declare quarter three results to be able to give you a more clearer picture as far as that is concerned. Till that time, we rundown of the past book continues. A large part of it in terms of new contributions that we needed to make towards construction, I would say, a large part of that has already happened. We would need to make another about INR 3,000-odd crores of fresh commitments to make sure that the entire pool comes back. These INR 3,000 crores would be disbursed over the next 12 months to 24 months and over the next 24 months to 36 months, we can get back the entire book. But that's not our goal to how to calibrate that, how to mesh it with new disbursals and thereby have a full game plan around that like we have a game plan around our retail business. We should be able to firm up over the next three months.
Okay, great. And so can you just give me a sense of what the size of that back book looks like both on a gross and a net basis?
It's only a gross basis, so gross would be about 20%.
Okay, great. Thanks a lot.
Thank you. We have our next question from the line of Amit Mahendale from Robo Capital. Please go ahead.
I appreciate the opportunity. My question is on AUM. What do you expect that AUM to b e by FY ‘26? And also, if you could indicate credit cost for the next couple of years, like FY ‘25 and FY ‘26.
Yeah, so our thought process is that quarter 3, which is the current quarter which is going on, the AUM will stop declining. Quarter 4 will ensure that on a year-on-year basis, which is March '23 to March '24, we would have grown somewhere around 7% to 8% on AUM. So that's the kind of increase that we see between now and March. Though this quarter would be more about stabilizing the AU M and the next quarter we'll see a pretty large net growth. And then from where we end up quarter 4 to fiscal '24, which is where we end up fiscal '24, we would imagine a steady compounding of AUM for the next three years at between 15% to 17%. So my sense is if we go by that number, we will be by fiscal '26 give or take at about a INR 1 lakh crores of AUM. Yeah. Then in terms of credit costs, on a normalized basis, we will run with credit costs of under 100 basis points annually, 70 basis points to 80 basi s points annually. We could see large provisions. We could also use those provision releases because of technical write -backs. We could also use those large provision releases to do some, to tip some guys over where we feel that recovery with hastened legal action can happen. So in normal course of business, you will continue to see credit costs of just under 100 basis points annualized.
Great. And just to follow -up on the credit cost, for this quarter, we have taken INR 257 crores of impairment. And now that we are already at a 12% kind of provision coverage, including the write-backs, etc. So that looks, at least from outside, looks like excessively conservative type of provisioning. So any comment on that would be helpful? Or the other way to look at it is, one may feel that there is some hit expected in some quarters. That's why we're building the war chest or something like that. So maybe some, why are we taking additional hits, if you could throw some light on that?
So what I've steadily maintained for the last three years is that at every opportunity that we get, we will use that opportunity to create larger provisions. We had a larger than expected gain this quarter outside of normal course of business. It was larger to the tune of approximately INR 200 crores. And our endeavor would be any such event. And that has been the case over the last eight - ten years that any gain that we will have, which is larger than what we had estimated on an operating basis, we will use that gain to kind of create additional provisions. All-in-all, if you look at it for the first half, in the first quarter, we had a write-back. In the second half, we've taken a slight amount of provision. For the full year, I would still imagine that we will, between write-backs and provisions, we will land up with give or take 100 basis points provision.
Okay, great. Thanks.
Thank you. We'll take the next question from the line of Bhavan Gala from Marine Capital. Please go ahead.
Hi, Gagan. Very good evening to our entire team and the festive greetings as we ll. I have been tracking Indiabulls Group for a decade now. And the way the Group has navigated the entire turbulent period is nothing less than commendable. I have o nly a few questions. One is on the recovery rate that you envisage. Why I could understand in H1, there was a recovery of INR550- odd crores. What are your recovery expectations for H2 and FY '26? And also, if you can guide on, what is the recoverable pool expected? So that is my first question.
So the recoverable pool is north of INR 13,000 crores. From that, the recovery would be anywhere between over a period of time would be 60% to 70%. Time value adjusted, it will be 40% to 50%. And therefore, those carried numbers go into the estimation when we say imputed provision stand at 3.5x of our current gross NPA. It's very difficult to say, how these provisions play out quarter-on-quarter. In the second half, my sense is that our recoveries would be similar to the first half. So for the first full year, this year, we will land up having recoveri es well north of INR 1,000 crores. If all goes well, that number could be closer to INR 1,500 crores. But some portion of this recovery is also or a large portion of this recovery is linked to the maturity of various legal proceedings. And we all know that while our judiciary always tends to provide the right sort of a decision, it tends to also sometimes take its own time, which is perhaps why the right decision eventually emerges because it listens to both parties carefully to arrive at a decision, which then is usually in favor of the lender. So as a lender, we typically have enjoyed the support of the judiciary, but both the judiciary as well as the regulator is also extremely mindful that it should not land up creating a one sided playfield where whatev er the lender is saying or claiming, the borrower who perhaps is a defaulter is not given even a chance to rebut that. So, given our reliance on the judicial process, we can' t really give you an exact time line, I can estimate that on a rolling basis, we should still continue to have credit costs of 100 basis points, which they can as part of the assumptions that we do that on an annualized basis, we should be at least every year over the next three years be able to get INR 1,200 crores to INR 1,500 crores kind of recoveries coming to us. So that's the broad math and I hope I have not very specifically but given you an estimate of how the credit costs and the recovery will play out.
Yeah, sure. So, the second question is on the scale of the business that we plan to ramp-up. While you have already guided on you achieving INR 1,200 crores for disbursement starting FY '25 first quarter. And you have also told that you have created adequate capacity in the system to target for 15% to 17% kind of an A UM growth year-on-year. Could you please give us a brief sense, a broad sense in terms of when our peak days of performance could return? I mean, we just want a fundamental view from you on this.
So we are targeting INR 1,200 crores of disbursal a month by March. So in the first quarter, we should be targeting anywhere between of next year, we should be targeting between INR 3,600 crores to INR 4,000 crores, which will be approximately 45% of what we used to do at the peak. It will take at least two years after that to go back to that number. The only way to expedite that is a large infusion of capital. If we do a large infusion of capital, we can clearly fast forward that number. We are calibrating this is two things. One is the free flow of capital and the other is the quality of the business that we are generating. We've set good ground rules for the credit side of it or the efficiency side of it, we have the right number of people. If we get clear flow of capital, then we can accelerate that. If we get the flow of capital like we're getting today, then it will take us two more years to get to roughly INR 3,000 crores odds of disbursal a month. As a management team, we are focusing more on the quality aspect of the business. And the quality, I mean, what is our cost to income ratio? What is our per person efficiency, going forward now, since we have a benign ALM, what is our relative cost of funds to G-Sec and everything else. So those are the quality parameters. How is our ALM looking like that we are more focused on rather than the gross disbursal number.
Sure. I'll ask my last question. Given the kind of valuation that you are quoting at, which is essentially point half the price to book, what are the strategic opportunity you are getting across? I mean, have you seen in recent past interest coming o n from reputed fund houses or private equity players or any financial investor to put in capital? If you could please give us a sense on the kind of discussions that are happening.
If you have to assess the company, the company has a diversifi ed ownership with no dominant shareholder. We have a very well diversified board, again, which is highly independent. Only two executives and the entire board is independent aside of one nominee of LIC, which is the largest shareholder of the company and the largest lender as well. And then on the management team side, we have a team which has been together, managed both the ups and downs together. So this is from a strategic level how we look like. From an operational level, this is a company which has est ablished expertise in management of both assets and liabilities and on assets, all types of mortgage assets we've done at scale, which is home loans, loans against properties, commercial developer loans, loans to corpo rate, commercial loans, etc. So, for such a franchise, for it to be quoting at some halftime book is essentially an outcome, I believe, of two things. One, that if the company is de -growing, how do you value it? And two, if the company continues to carry a wholesale book, then unless you get a very granular assessment of it, how do you assess the kind of hits that can potentially come on that book? And this contributes to the current valuation. The management team is per se more guided by RoA and a directional Ro E rather than any personal gain. Now, I'm amongst the management team, the largest shareholder, and my shareholding is 0.89%. So we are not really on a day -to- day basis very swayed by the market cap. What this provides is an opportunity for private equity funds, corporate houses, other NBFCs to talk to us to see whether there can be a larger platform that can get created to leverage on both our retail as well as wholesale opportunities. We are seized of these various options in front of us. We continue to remain engaged with them, and we will eventually take to our Board what we feel is in the best interests of all stakeholders. At this point in time, we are not committed to any option, but I would also not deny that we have not either been in discussion or progressed with any of these options that I highlighted. But let's just wait. Let's let the management team focus on the operational challenges. You may appreciate that, we had a big operational challenge in sorting out these chunky repayments, and we had to therefore de-prioritize a few of these strategic calls like what do we do on wholesale lending, what do we do about our capital and ownership structure and all of that. Now we have a little bit more of strategic bandwidth, so we should be able to report some progress to you guys on that also shortly.
Thank you, Gagan, for explaining it very, very elaboratively, and all the best to you and your entire team. Thank you very much.
Thank you. I'll just take one last question, please, if there is any.
Sure, sir. We'll take a last question from the line of Rishikesh Oza from RoboCapital. Please go ahead.
Hi, thank you for the opportunity. Sir, just one question from my side. Could you please give a sense on the NIM and th e OPEX trajectory going ahead in H2 and FY ‘25 going ahead? So basically we're aiming to do mid-team RoE by FY ‘26, so just wanted to get a sense how exactly are we looking to achieve it with our revenue growth would be surpassing the loan book growth of 15%- 17% and how do we go about it?
The biggest aid as far as our RoA and our profitability, so we are not targeting at revenue growth to exceed asset growth and do any of that. We do expect right backs to be aiding profit growth. So while I've been conservative in my credit cost assessment, I am being a li ttle bit more ambitious on my RoE assessment. And I said we should be able to get to about to get to about INR 3,000 crores of disbursals by FY ‘27. By ’28, we wi ll get to mid to high -teen of RoE and our current short-term goal is to take our RoA by fiscal ‘25 or first half of fiscal ‘26 to be past 2%. So, these are broadly the timelines that we have set for ourselves and on cost income basis, we will from fiscal ‘25 onwards start seeing a decline. First half of quarter-on-quarter in the first half our OPEX has been flattish. Quarter 3 and quarter 4 we will add more people and in order to prepare ourselves for next year and that w ill provide a little bit of uphit in our operating expenses. But on a cost income basis, fiscal ‘25 onwards we should start seeing a decline and the goal is that by fiscal ‘28 which is when we are looking at sort of an 18% RoE, we should be in the handle of a 20% cost to income from the current 30% odd that we are at. Those are broadly the numbers that we will be tracking.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Gagan Banga for closing comments. Over to you, sir.
So thank you everyone. Th anks for joining us as you do every quarter and again wishing your family and you a very, very happy Diwali and a happy new year. I hope to catch you in a new calendar year with the October to December results, hopefully by which time aside of giving you an update on the operational side, we would have also moved ahead on the various strategic initiatives which were discussed today and I'll have something to report to you on both of those as well. On that note, thanks again and bye.
Thank you, sir. On behalf of Indiabulls Housing Finance Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.