Arman Financial Services Limited (531179) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Results Conference Call of Arman Financial Services, hosted by Emkay Global Financial Services. We have with us today on the call, Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Aalok Patel, Joint Managing Director; and Mr. Vivek Modi, Group CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jignesh Shial of Emkay Global. Thank you, and over to you, sir.

Yes. Thanks, Steven, and good afternoon, everybody. On behalf of Emkay Global, I would like to thank the management of Arman Financial for allowing us to hosting this call and also would like to thank everybody for participating. And now I'll hand over to Aalok for opening comments. Over to you, Aalokbhai.

Yes. Thanks a lot, Jignesh, and good afternoon to everybody. Thanks to everyone for joining and taking the time out of the day for our first quarter results discussion. As you might have seen, we have already issued a detailed press release and investor presentation for the past quarter. Hopefully, all of you have had a chance to review it. At the outset, I hope you and all your loved ones are healthy and doing well in these unprecedented times. Since we last spoke, the economic scenario has much improved. More importantly, our overall collection efficiency has picked up well from 66% in June to 80% by August. And with that, our liquidity position has also improved considerably. I will first begin by giving a brief overview of our financial performance for the first quarter and post that, touch upon collections, liquidity and disbursements in more detail. At the end of first quarter, our consolidated loan book stood at INR 823 crores, higher by INR 14 crores year -- over the last year. This is led by the traction seen in the MSME and the Microfinance segments. Our Microfinance portfolio grew by 18% Y-o-Y to INR 605 crores, while our MSME portfolio increased by 22% to INR 136 crores. Growth in both of these segments were primarily driven by customer additions. Active customer base for Microfinance and MSME grew by 23% and 36%, respectively in Y-o-Y Q1. In the urban Two-Wheeler segment, our performance was impacted by the decline in 2-wheeler sales in the preceding fiscal year and the drastic drop in 2-wheeler sales during the first quarter, during the lockdowns. However, our newly launched rural 2-wheeler products saw some good traction up to February last -- recording a year-on-year AUM growth of 51% to INR 11 crores by the end of June. The rural Two-Wheeler book now constitutes approximately 13% of the total Two-Wheeler portfolio. Given the countrywide lockdown and the economic uncertainty caused by the pandemic, we prudently chose to halt disbursements in the first quarter. This, combined with the pickup in June repayments, led to a rundown in our loan book on a sequential basis. Our net total income was lower by 8% year-on-year at INR 27 crores in Q1. This decline is mainly attributable to: number one, softer yields in the Microfinance and MSME segments; and number two, no booking of processing fees in the absence of disbursements in the first quarter. Furthermore, as a prudent measure, we chose to maintain an ample liquidity buffer and also applied for a moratorium on loan repayments in April and May. This adversely impacted our net total income owing to this negative carry cost. The company took several measures to reduce operating cost. While there were no layoffs or salary cuts, there were reductions in other operating expenses like incentives, sales and marketing expenses, traveling expenses and other administrative costs. As a result, our operating expense came down by 14% as compared to last year, enabling us to improve our cost-to-income ratio by nearly 250 basis points to 37.5% (sic) [ 37.6% ] in this quarter versus 40% (sic) [ 40.1% ] last year. In keeping with our conservative approach, we strengthened our provisioning coverage by recognizing additional provisions of INR 10 crores during the quarter. With this, the cumulative provisions at the end of June 2020 stood at about INR 30 crores, covering approximately 3.9% of our on-book AUM. They should help us deal with any impairments on account of COVID in the future. Our asset quality has continued to remain unchanged sequentially due to the RBI-announced moratorium. Further, we remain adequately capitalized with a consolidated debt-to-equity ratio of 4x. Now moving on to our operations and collections. We have been successful in getting our operations back on track post the lockdown. All our branches are operational now with few of them operating from alternate locations, as they were originally located in containment zones. There are ongoing intermittent lockdowns in several areas of operations, which is being managed by the field team to the best of its abilities. On the collection front, as I highlighted earlier, there have been continued improvement since June. In Microfinance, repayment rates were 76% in July and 75% in August versus 59% in June. That's in Microfinance. At the stand-alone level, which is MSME and Two-Wheeler, the collections were much better, with both the Two-Wheeler and MSME segments recording repayment rates of more than 90%. In MSME, the repayment rates were 75% in July -- I'm sorry, excuse me, 95% in July and 92% in August versus 85% in June. And in the Two-Wheeler segment, the repayment rates were 97% in both July and August versus 95% in June. So let me just say that, again, I think I twisted my tongue there a little bit. The MSME repayment rate was 95% in July and 92% in August. It was 85% in June. In the Two-Wheeler segment, both July and August recorded a repayment rate of 97% versus 95% in June. Furthermore, cumulative provisions at the stand-alone level stood at INR 10.5 crores at the end of Q1, covering almost 70% of the stand-alone moratorium book at the end of August. One minor blip with respect to collections was the overall repayment rate showed a very minor decline in August compared to July. This was mainly because of 3 reasons. Number one, there were many festivals and consequent holidays falling in the month of August, which created a lot of logistical issues, both with the customers and the employee level side; number two, there were heavy rains in numerous areas of our operations, creating logistical issues, especially in places like Gujarat and Madhya Pradesh; and number three, continued intermittent lockdowns in several areas of operations. Going forward, over the next few months, we expect the overall repayment rates to improve significantly as the unlocking of the economy gains pace and restrictions are further relaxed with announcements of Unlock 4 guidelines by the government from September onwards. On the disbursement funds, we have gradually resumed disbursements from August onwards. In Microfinance, to begin with, we are only focusing on renewing loans of existing customers who have finished the repayments on time and completed their tenure. We are not making any top-off loans or anything similar to that. And I guess I can answer about what that exactly means during the Q&A session. In the MSME and the Two-Wheeler segments, we are open to lending to new customers, but we have tightened our underwriting standards further. In terms of liquidity, we are very comfortable -- in a very comfortable position right now. We have cash reserves of approximately INR 141 crores, including the undrawn CC limits. We have repaid all the debt obligations that were due from June onwards as well as all the loan moratoriums that we had availed in April and May as well. Moreover, we have raised INR 75 crores at very attractive rates in the start of the fiscal year to bolster our liquidity position even further. So finally, to conclude, I would like to express my continued gratitude to all of our stakeholders for their continued support during these difficult times. A special note of appreciation to my field staff, whose perseverance and untiring efforts have helped us report better repayment rates in July and August. On a whole, we remain quite confident that our high-touch rural-focused business model can withstand this ongoing COVID storm and hopefully emerge even stronger and more resilient than before with the learnings gained during this period. On that positive note, I would request the operator to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Amit Mantri from 2Point2 Capital.

Aalok, Amit here. Can you talk about the divergence that is there between -- in collections across different states or urban versus rural? Because in the last quarter, there was a fair bit of divergence. Gujarat had done quite well. And especially some parts of Gujarat have done phenomenally well. So do we continue to see a wide divergence across states even now? Or has that now reduced significantly?

No, it's still there. So I think lot of these things are luck of draw. So if -- I was just joking the other day that during DeMon, 80% of our portfolio was in Gujarat, and I wish that was the case today. Because Gujarat, we are seeing about 85% repayments even in the month of August, which actually went down a little bit, due to the rains, from 87% in July. So Gujarat is doing quite well. MP, we had seen somewhere around 75%. Rajasthan is doing quite well at 85%. UP is average at about 75%. The most affected one, honestly, is Maharashtra, which is 53% and 59%, respectively. So that's improving overall I think. But it's going to take a little bit longer to make improvements in Maharashtra compared to a lot of the other states.

Okay. And on -- what is the average cost of funds and the incremental cost of debt that you're currently raising now?

So average cost of funds, actually I haven't calculated in a while. It was -- in March, it was about 14.5%. That has come down to about probably around 12.5%, 13%-odd so.

13%-odd-so.

We raised money from MUDRA, SIDBI and NABARD at about 7%. And the total amount we raised was about INR 100 crores -- INR 90 crores. Yes, sorry. So about INR 90 crores. So that would have made the weighted average cost go down a little bit. But the funds are available at a cheap cost right now, especially from the DFIs. But still -- the market is still not very liquid right now. I think most of the banks and everybody are holding on to liquidity. We sort of have a reverse problem. So we are not looking to raise funds since we already have so much excess liquidity. So until the disbursements pick back up again, I don't think we'll be going into the market to raise any more debt funds, at least.

Okay. And in Q1, while there has been some rundown in the loan book, but because collections had only started in -- a little bit in May and a little bit more in June, so the rundown is still not significant. But in July and August, with a fair bit of collections happening and various disbursements happening, now the portfolio is beginning to run down probably quite rapidly. So where do you see the AUM kind of stabilizing before, again, you start growing over the next few quarters?

So we are anticipating about a 15-odd percent decline in the AUM until it stabilizes and then picks up back again. So the decline will be partially offset by the interest accruals for the moratorium. So otherwise, the drop would have been much more significant right now.

Yes, yes. Okay. Okay. And so in terms of cost to income, that would have a probably a negative bearing of I think a 15% drop in income. So how would the PPOP get managed in that scenario?

No. Our costs have already come down. We have a natural sort of a turnover that takes place, although the turnover has gone down quite a bit. But we do have a hiring freeze in place. So the number of employees are reducing on a month-to-month basis, the incentives have sort of come down, the administrative cost and things like that have come down, traveling has significantly come down. So already, the cost efficiencies are in place. And of course, we are trying our best to reduce them further. But there's only so much you can do, to be honest, because you still need people on the ground level to collect the money, whether you have a disbursement or don't have a disbursement. So those are the key people that you need. So on a field level, there's very little cost efficiencies you can do from an employee-level perspective. But even on the interest income or the interest expense side, I think you should see a drop in that as well, thanks to the cheaper funds that we have recently raised.

There will be interest resets with the PSU banks.

And there will be some resets with the PSU banks as the repo rate continue to go down. So hopefully, that is enough to offset any decline in the income side.

Okay. And lastly, on the -- in terms of the provisions that have been made on the -- and on the stand-alone entity level, I think now you almost have 5% kind of provisions. And while your collections there are actually almost 95%, close to 95%, and that's -- so the moratorium has ended. So on the stand-alone level, you're probably quite well covered in terms of provisions. But on Microfinance entity level, do you expect to keep making more provisions? Where do you expect the credit costs to eventually stabilize? It would be in the high single-digit percentages or low single-digit percentages kind of?

Amit, to be honest with you, I'll answer your first question as saying, yes, we expect to continue making provisions. The write-offs will be -- are a little bit far away at this point because the moratorium just ended. Let's see what the repayment rates look like. I think the month of September and October will be more critical to assess what kind of loan losses that you wind up actually looking at. For numerous reasons, I would rather not venture a guess of where we might wind up at. But that being said, my expectation is that whatever provisions that we have right now, we'll probably have to continue making some more provisions in the coming quarters -- in the -- at least on the MFI book.

Okay. And good luck with the post-moratorium phase.

Yes, thank you. We need it.

[Operator Instructions] The next question is from the line of Abhishek Murarka from IIFL.

So I have 2 questions. One for MFI, how will the restructuring work? I'm not quite sure if restructuring is allowed in the first place. But what I had heard is that some part of the MFI loans are allowed to be restructured. So what is the dispensation there? And how are you able to use it?

I am as confused as you are about the entire restructuring. So [indiscernible], which is our industry body, it has written letters to the RBI, and we are awaiting that. But that being said, it will be unlikely that there will be significant restructure that is being allowed on the MFI book. And if you look at it from a practical standpoint, the entire moratorium exercise was one big restructure anyway. So that is allowed or not, hopefully, it doesn't come to that place where we actually have to use it. I would rather not use it, if at all...

But the default option will be. So for example, in August, if 75% have paid and 25% have not, the default approach for you would be that for those who have not paid, you will push the EMI to the end of tenure?

Correct.

So that will also entail some restructuring, right, because it won't be like-for-like, right? It won't be 1 month to 1 month. It will be a little more than 1 month because of the interest and the compounding.

So that's already done. So that's already -- so that is -- the moratorium "restructure" is already done. So that's already in place. So let's say a customer has not paid in April and May, their repayment schedule has already been adjusted, recalculated and extended by 2-plus installments, right, contract only. So whatever accrued interest has gone into further installments. So in a lot of cases, if it's early loan that was given in January or February, and the customer took 5 months of moratorium, then that might add more than even 2 installments of interest accruals towards the end of the loan.

Got it. So by when do you think you'll get to, let's say, 95%-plus collection efficiency in MFI? Going by the rate of improvement that you are seeing, what is your gut feel?

I was expecting these questions will not -- in numerous, different forms. I'll tell you the same thing I told Amit is that I'm not sure. I would rather not venture a guess at this point, except to say as soon as possible. I don't know where it will reach, whether it will reach on a static-pool basis, reach 95% or 98% or 90% or whatever it is, I would rather not put in guess. But I remain cautiously optimistic every month, there is sequential improvements. Customers who have not paid continue to pay. I think over 87% of our customer -- or 88%, rather, have made at least 1 installment over the moratorium period, in the last one. So I mean let's see how many of -- more of those 12% we can convert now that the moratorium is over. But I mean there is distress here. The rural people are not impacted as much as urban, but that's not to say that they have not been impacted at all. How many people in rural circle do you know who have SMEs and MSMEs and restaurants or have not been able to pay rent or not been able to open or in complete -- their businesses are in shambles? So you have to be very cautious. You cannot do hard recovery right now because that's going to backfire on you. You have to be sympathetic to your customers and just give them time if they need it. So you have to create a nice balance on the field.

[indiscernible]

No, no. I think majority of our customers are asking for time.

Right. Okay.

Earlier, it was moratorium time. Now that the moratorium is over, our collection effort will change, right? Earlier on, our customer said that "Give me moratorium," we could try and convince him, "Well, you'll have to pay higher interest. If you have the money, pay us," all that stuff. But if he insists, we have to grant the moratorium. Now we have to say that the moratorium is over, right? I mean now you have to start paying your installments. So we'll have to switch our gears a little bit from our -- whatever we explained to our customers.

Sure. And in July, August, what has been the disbursement for MFI, specifically?

In July, we had no disbursement. So we started disbursements in August. It was about INR 12 crores in the MFI books. And MSME, it was, I think, about INR 2 crores, so -- excuse me, INR 4 crores. INR 4 crores in MSME and about INR 12 crores in MFI. Two-Wheeler, urban, we have not restarted yet, but we'll start it from this month. So it's not a very large numbers, but it's starting. And I think it should increase more and more as time goes on. So the major -- our major concentration was towards repayments, at least during the collection side.

Right, right. And just one more question on this interest accruals -- sorry, interest capitalization. So when I look at your AUM, and we will have some collections and there is no disbursement, so whatever collections are there. So the difference between that is the amount of interest that is classified -- capitalized, right?

No, I don't think so. So the amount of interest -- you are talking about the moratorium interest accruals?

No. Okay, sorry. So just to be clearer. Your Microfinance AUM, let's say, starts at INR 620 crores as of 4Q and then falls to INR 605 crores. There would be some collection in this month, in Q1. And there would be a difference between your INR 620 crores minus the collections, and the INR 605 crores. So the difference between these 2 numbers would be your interest capitalized?

Let's table that question for now because I'm still a little confused. But maybe if I visualize it on a piece of paper, it might have it. I kind of know what you're trying to say. Overall, the collections have come in. You are -- if it wasn't for the interest accrual, the portfolio would have declined much more than INR 605 crore, so if that makes sense only.

Right. So your 1Q collections were how much in MFI? You've given June, which was around INR 40 crores, but...

The Q1 is June only, right? So April, it was 0%. May, I believe, it was 12%.

Okay. So it's pretty close to the whole quarter's number?

It was 60 -- May -- April and May, there were hardly any collections because of the lockdown. So we expect that -- what the -- 90% of actual collection really...

The next question is from the line of Viraj Mehta from Equirus PMS.

Most of my questions have been answered. Just one thing. Right now, if you look at the -- your debt-to-equity is pretty not that high. And growth also seems like a slightly distant possibility at least for next couple of quarters. But you did mention that we will not raise money through debt. But in last quarter also, and if I read between the lines, this quarter also, it seems you're pretty open to raising money through equity. Is that the correct understanding?

Yes, I'm open to it. If it's available, I'm open to consider it. It's not something that is absolutely required at this point. For future growth, it will be required. But if I'm going to raise it in the future anyway, I might as well have the -- tie the blanket. I think there's an echo. Somebody's on speakerphone. But what I was saying, if it's available today versus in the future, I rather take it today just to have that safety factor of additional equity. But it's not something that I'm absolutely desperate for at this point.

The next question is from the line of Avinash Tanawade from Dalal & Broacha.

So in Microfinance portfolio, how many -- which percentage of our customer are unique to us?

What percent of customers are unique to us, that's your question?

Yes, sir.

It's very difficult to -- we run the credit [ scores ] when we disburse the loans. [ Between ] 25% to 35%. Earlier, it was 40%. But in the -- in January and February, somewhere around 30%, 35% are no hits. But if borrowed from somebody else after they took my loan, all of a sudden, they are [indiscernible] to me. So it's quite difficult to answer. On a static [indiscernible], typically, 25%, 30% is a good estimate of that would be unique to me, that would be first-time borrowers from me.

Okay. And what percentage of the people are income-generating -- doing income-generating activity in MFI loans?

100%. So we only loan money for income-generating activities. That said, sometimes you lend for income-generating activities, and it gets put into discretionary use. [indiscernible] possible. But otherwise, it's very difficult to track sometimes, whether the money has gone -- yes, there are LUCs in place, what we call loan utilization checks, in place. But if it's something that they bought, like cattle, it might be easy to verify. If it's a working capital loan for a kirana store, it's hard to tell whether the money actually went into income-generating activities. But when you talk in a micro level, the way I like to explain it is that these guys don't have different pockets for home use, personal use or business use, right? They have some quantity of money. And whether it's for an education or food or for business, it's coming out of the same pocket. So on a micro level, it's not like they are keeping balance sheets and stuff like that in place and keeping absolute difference, this is for business use and this is for home use. So it just kind of gets mixed in.

And how many percentage of customers are having a 3 or more cycles with us?

Three or more cycles of customers, so that would be about 20% percent. Yes, 20%.

20%. And in terms of MSME loans, so most of the reading what I've done, there was -- many rural debt, there is a seasonal impact on MSME customers. So what kind of customer base do you have? Because we have a very good collection efficiency in MSME. Can you just throw some light on that? That will be very helpful.

Okay. MSME is -- yes, yes. So MSME is a pretty broad term. So urban, rural, INR 5 crore loan, INR 1 lakh loans all falls under an MSME umbrella. It depends on what flavor of MSME you are doing. For us, our MSME is basically microfinance plus. So these are customers who are running businesses that would need sort of larger ticket sizes than what you would get in a typical microloan. But they are still rather small to approach banks or they don't have the necessary paperwork to approach banks. So our target is those rural customers. And yes, it was a very pleasant surprise, our repayment rates worked out to be so well. I think the month of July was exceptionally well. And we saw a lot of clawback as well in that from the previous months or retrospective moratorium cancellations. We didn't see that much in the month of August, so there was a little bit of a reduction in the MSME repayment rate. But it's -- thankfully, that's doing quite well. So I think we can concentrate a lot on MSME in the future.

So these MSME loans which you have given, are we keeping any kind of security? Or they are purely unsecured loans?

No, these are unsecured loans. I mean the average ticket size is INR 70,000, INR 75,000 type loans. Very difficult to get security for such a small loan. And the OpEx you would have to do to actually secure those assets would be incredibly high for such a small loan quantum. So it doesn't make sense, right? To mortgage something would cost INR 8,000 to INR 10,000 at a minimum. So -- and that aside, even if the customer is willing to pay for it, nobody is going to give a mortgage or anything like that on a INR 75,000 or INR 1 lakh loan. We do take PDCs in case of a default. We do have an option of filing 138 under Negotiable Instruments Act.

Okay. And in MSME loan, how much percentage of our portfolio is in rural and urban?

It's all rural. 100% rural.

100 -- come again, sorry?

It's all rural. Some of it might be in semi-rural or semi-urban areas, like in Indore, in places like that, where we are working in the outskirts. But that will be a very small portfolio. 97%-plus will be in rural areas.

Okay. And in Two-Wheeler, the disbursement was -- mainly happen in rural areas, not in urban areas. Any specific reason for that?

Which one? Which -- Two-Wheeler, you are saying?

Yes, yes.

Two-Wheeler, we have an urban book, which is the largest. So that is all urban portfolio. And we started a rural Two-Wheeler portfolio, for which we have about only a INR 11 crore portfolio. So that started as a pilot. And thanks to COVID, that has been kind of on hold right now. But we are ready to pick it up whenever things improve.

And about our cost-to-income ratio. So where do you see that stabilizing going forward? There is some lower cost-to-income ratio this time. So how do you see that pan out in the next few quarters?

Very difficult to predict, sir. I mean it's -- these are very difficult times. There's nothing ordinary about these times. As I told the first question-answer that we have taken a lot of steps to reduce cost. But as disbursements and stuff starts picking up, it's very difficult to judge, but we'll try to keep it as stable as possible.

Okay. And how many percentage of our employee get back on our workforce?

Sir, this -- will -- I'll answer the last question. But otherwise, I request to get back on the queue. What was the last question you had?

So in terms of employee base, how many percentage of employees have resumed their work?

They have either -- I mean, all of them have resumed or they are off the payroll. So if they have not resumed, then they are not on the payroll.

The next question is from the line of [ Avadhut Joshi ] from New Berry Capitals.

Hello?

Yes.

My question was about the rural Two-Wheeler loans. In the opening remarks, you mentioned that it has grown to 13% of the Two-Wheeler loan book, right?

Yes.