Arman Financial Services Limited (531179) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 Earnings Call of Arman Financial Services, hosted by Equirus Securities. [Operator Instructions]. I now hand the conference over to Mr. Shreepal Doshi from Equirus Securities. Thank you, and over to you, sir.

Thank you, Sumit. Good evening, everyone. I welcome you all to the earnings conference call of Arman Financial Services to discuss the Q1 FY '27 financial performance and business update. Today, we have Mr. Aalok Patel, Vice Chairman and Managing Director; Mr. Vivek Modi, Executive Director and Group CFO. I will now hand over the call to Mr. Aalok Patel for his opening remarks, post which we can open the forum for question-and-answer. Over to you, sir.

Yes. Thank you, Shreepal, and a very good afternoon to everybody, and thanks to everyone for joining us today for the Arman Financial Services Q1 FY '27 Earnings Conference Call. As Shreepal mentioned, I'm joined on the call by Mr. Vivek Modi, our ED and Group CFO, along with the Investor Relationship team. I hope all of you have had an opportunity to review our financial results, the investor presentation and also the press release. Let me start first with the operating environment. Q1 of FY '27 has been an encouraging start to the year and more importantly, the improvement that we started seeing during the second half of FY '26 has continued into this quarter. Collection trends have remained stable, fresh delinquencies have moderated and borrower behavior has continued to improve across most of our operating geographies. That said, I would still hesitate to say that the sector has completely normalized. We are clearly operating from a much stronger footing than we were a year ago, but there continues to be uncertainties in the broader economy, and we remain watchful. Volumes have been a bit lower than expected in Q1, but that is not unusual in the first quarter of the fiscal year, particularly given our continued emphasis on quality over quantity. I made a point on our previous call, which I think continues to remain relevant. The improvement that we are seeing should not necessarily be interpreted to mean that the ground level environment has suddenly become easy. A meaningful part of the improvement is because we are selecting better, monitoring better and also collecting better. That is obviously encouraging, but the macroeconomic environment continues to remain complicated. For us, the important thing is not to conclude that the cycle is behind us and simply go back to business as usual. At the same time, let me also say that cycles come and go, and they are part of the business that we have chosen. The important thing is to learn, monitor, adapt and to move forward. Against this backdrop, I am pleased to share that our consolidated AUM reached a record high of INR 2,925 crores as of June '26, representing a growth of 36% year-on-year. Consolidated disbursements during the quarter were INR 686 crores, up 76% year-on-year and represented our highest ever first quarter disbursements. Despite the strong AUM, I want to make it clear that it does not represent a change in our risk posture. Our rejection rates continue to remain relatively high, and we are comfortable with that. We continue to see healthy traction in our individual loan portfolio, which now accounts for 33% of our overall book and is becoming an increasingly important part of our microfinance business. The objective here is not simply to increase ticket size or move away from traditional JLG-based group lending. The objective is to move progressively towards more individualized credit assessment where we understand the customers' household cash flow, credit behavior and repayment capacity more closely and structure the loan accordingly. As this portfolio scales, the underwriting architecture becomes even more important. Wherever applicable, we are increasingly relying on, of course, credit history and bureau behavior, but also customer level cash flow assessment and digital repayment mechanisms such as UPI mandates and e-NACH. We believe that gives us a much better understanding of the individual borrower than relying purely on group behaviors or standardized one-size-fits-all credit filters. Overall collection efficiency for Q1 stood at 96.6%, and we saw a steady improvement throughout the quarter. By June, overall collection efficiency had improved further, which gives us comfort on the behavior of the more recently originated portfolio. Our asset quality has continued to improve over the past four quarters with consolidated GNPA now at 2.76% and NNPA improving to 0.84%. Early-stage delinquencies have also remained largely stable at approximately 99.5% zero DPD forward. One of the biggest changes that we have made over the last few quarters have been to bring greater independence and accountability into our credit and collection processes. We have strengthened the credit function at the point of origination and separately built dedicated collection teams. This has helped us become more disciplined in borrower selection and bring greater focus to collections. When we introduced these changes, they came with a meaningful increase in operating cost. We had said at the time that the asset quality had to take priority over near-term operating expenses. I think we are now beginning to see the other side of that investment. The new structure is now pretty well embedded across the organization, and we are seeing better accountability, sharper credit decisions and more focused collection execution. At the same time, as the portfolio has started growing again, our operating cost ratios are beginning to improve as well. Apart from improving asset quality, the independent credit structure has also given us greater confidence to scale the individual loan portfolios. Our consolidated pre-provisioning operating profit increased to INR 77 crores during the quarter from INR 59 crores in Q4 FY '26. Cost to income improved meaningfully to 44.3% from 51.7% in the previous quarter. Of course, there is still considerable work to be done on operating efficiency. We are not exactly where we ultimately want to be, particularly in the microfinance business, but the direction is, of course, encouraging. Our objective remains to bring operating costs down through a combination of portfolio scale, productivity improvements and technology without reversing the credit and recovery controls that have helped improve the quality of the book. We have also continued to strengthen portfolio protection through CGFMU scheme. As of 30, June 2026, approximately 94% of the eligible microfinance portfolio was covered under the scheme. That said, I also want to mention that we do not view CGFMU as a substitute for underwriting. The first line of defense always remains customer selection and collections. The guarantee provides an additional layer of protection against tail events and over time, should make credit losses more manageable and more predictable through cycles. On the consolidated financial performance, gross total income for the quarter stood at INR 202 crores, up 34% year-on-year and 15% sequentially. Net total income increased to INR 138 crores and PPOP, as I mentioned earlier, was INR 77 crores. Provisions and write-offs for the quarter were INR 20 crores Profit after tax stood at -- excuse me, INR 45 crores compared with a loss of INR 15 crores in Q1 FY '26 and INR 41 crores in Q4 FY '26. Apart from the profit numbers, it is encouraging to see that profitability has improved alongside AUM growth, better collections, low fresh delinquencies, improving asset quality and some early improvements in operating efficiency. That combination is much healthier than a recovery driven only by lower provisioning. Our consolidated NIM remained healthy at 17.4%, while annualized return on average AUM was 6.4%. Return on equity was 18.9% for the quarter, annualized, of course. On capital and liquidity, we remain comfortably positioned. Capital adequacy stood at 33.6% for Arman stand-alone and 38.8% for Namra Finance. As of June 2026, our consolidated shareholders' equity was INR 979 crores. We also maintained a healthy liquidity position with INR 286 crores across cash and bank balances, liquid investments and undrawn CC limits. In addition, we have INR 335 crores of undrawn sanctions from existing lenders, providing us with sufficient headroom to support our funding requirement and growth plans. Moving on to the key financial and operational performance of Namra stand-alone. AUM for the quarter stood at INR 758 crores for Arman register a 26% year-on-year and 4% sequential growth. Disbursements during the quarter improved to INR 156 crores with MSME segment driving the growth. Gross total income for the quarter stood at INR 66 crores, up 30% year-on-year, while PPOP stood at INR 24 crores. Profitability also improved with PAT at INR 15 crores, up 17% year-on-year and 48% quarter-on-quarter. Moving on to the key financial and operational performance of Namra Finance, our microfinance subsidiary. Namra AUM grew 39% year-on-year and 8% sequentially to INR 2,167 crores as of June 2026. Disbursements during the quarter stood at INR 530 crores. This growth also reflected in operating performance. Gross total income for the quarter stood at INR 138 crores compared with INR 101 crores in Q1 FY '26, registering a 35% year-on-year growth. PPOP increased INR 52 crores, up 64% year-on-year and 26% quarter-on-quarter. The improvement in operating performance along with lower provisions translated into a meaningful improvement in profitability PAT at INR 30 crores compared to a loss of INR 28 crores in Q1 FY '26. We also saw an improvement in the underlying economies of the portfolio. [NIM] improved to 15.37% during the quarter, supported by better yields and growing share of individual loans in the portfolio mix. Our asset quality, GNPA has -- excuse me, on the asset quality, GNPA has improved significantly from its peak of 3.8% to 2.59% currently. This is encouraging and reflects the steady improvement we are seeing in collection and repayment behavior across the portfolio. Overall performance across both businesses remain healthy with stable growth, improving profitability and continued improvement in the portfolio quality. Looking ahead to the remainder of FY '27, our approach remains largely unchanged. We want to grow, but we want that growth to be careful, calibrated and supported by quality of the underlying portfolio. We will continue to recalibrate growth based on what we see in collections, early delinquency trends, borrower cash flows and, of course, overall macroeconomic conditions. There have been geopolitical uncertainties, some of which we discussed last quarter, disruptions arising from the situation in West Asia and weather-related uncertainties during the quarter. Given this operating environment, I had actually expected to see some marginal softening in the repayment behavior. Thankfully, so far, this has not shown up materially in our numbers. Of course, I would not conclude from this that there will be no impact because macro events can sometimes affect our customer segments with a lag. But at this stage, the portfolio has held up better than I had expected, and we will continue to monitor the situation very closely over the coming quarters. Overall, I believe we have entered FY '27 from a considerable stronger position than we were 12 months ago. Importantly, that strength is not just reflected in asset quality or profitability. We have also come through this cycle with a more disciplined underwriting framework, a stronger collections architecture and better understanding of where we need to continue improving as an organization. Our priorities, therefore, remain very straightforward: protect asset quality, maintain underwriting discipline, improve operating efficiency, grow responsibly and continue building a sustainable lending franchise. With that, thank you, and I would like to open the floor for questions.

[Operator Instructions]. The first question is from the line of Ronak Chheda from Awriga Capital Advisors LLP. Please go ahead.

Firstly, congrats to the team on the results. Aalok, in your opening remarks, you mentioned that things are not really behind us in terms of the cycle. But if I were to take a devil advocate position here, actually it's not reflecting in the data which we presented or even your listed peers have published on the collection side, on the bucket numbers, on the par numbers. What is it that is making you still cautious? Is it the scar of the last cycle? Or is there some data points which keeps you worried at night. Just wanted to pick up your thoughts on this one first.

No, surprisingly, all the data points are favorable. Perhaps it is a little bit of PTSD. But the macros on the ground level just don't seem to be as -- I mean, I have no data to back it, just my own observations on level that as far as income growth, which you would expect to see in the rural has not been happening for a while. Inflation is increasing. jobs are there, but not the jobs that people want. So those kinds of factors kind of, I don't know, judgmentally, I wouldn't say scare me, but of course, concern me slightly. But apart from that, I mean, the data is favorable, the numbers are favorable. Everything is good. So I have no reason to be pessimistic at all. But this is just something that we have to keep in the back of our head and be careful. That's all.

Fair. Just on the asset quality again. You said asset quality will take precedence over the near-term investments in OpEx. You're also talking about recalibrated growth. You want to focus on the quality of the growth rather than the volumes, the recession rates continue to be high. Just in this backdrop, how do you envisage this all plays out over the next two years to three years? I mean what is the kind of expectation from a credit cost performance, which you would expect saying that this was all worth it in the end. What is that goal on the credit cost, which you expect out of the entire shift of focus towards better quality book? If you could just comment.

I have commented on things like that, and I have always really been wrong on it because when cycles shift, it's never like, oh, you go from 2% credit cost to 3% and you're like, okay, another 1%, who cares, right? I mean my balance sheet supports it and why should I sacrifice growth today in exchange for maybe a 1% better credit cost a year down the road. Unfortunately, it does not work like that. When things go out of control, they go out of control very, very quickly. And so that is -- we made a lot of mistakes, but we are quick learners in that sense. Again, I don't want to -- maybe I sounded more pessimistic than I should have in hindsight in my opening remarks. I am not talking about growth opportunities being there, but being scared. I'm not scared. I'm still confident. It's just -- I don't want the same euphoria that happened post-COVID, where everyone, including myself, went little crazy and just started dispersing left and right. That's all I was trying to communicate.

Last question I come back in the queue is on the stand-alone book on the MSME side. Now that most of these MFI players are also talking about individual loans, talking about cash flow-based underwriting, do you see segment become crowded over time and probably people will start losing their credit filters to chase growth? Just how are you seeing the competitive intensity on that side of the business?

I mean, there are good players doing good business right now. I don't think anybody is going crazy in terms of sacrificing quality in exchange for growth, at least not yet. Of course, people have short memories, six months, 12 months down the road, some pressure, investor, promoter pressure, whatever it may be, will take over and people will start saying that, well, that was a year ago, that was two years ago, things have changed. Let's just tweak this filter, are we being -- let's reduce the scoring here. What do we gain, what do we lose? Those kinds of decisions are very common, and I'm not immune to it myself. Yes, I think it's basic human behavior that life goes on sometimes and you forget the bad stuff and then you start becoming slightly more optimistic. And by the time the next cycle hits, hopefully, you are not in a bad shape.

[Operator Instructions]. The next question is from the line of Karthik from UNIFI Mutual Fund. Please go ahead.

Congratulations on a good set of numbers. I just had one question. Just on the recovery on write-offs and bad debt. So how are we seeing that trending because most of the listed peers have also recorded good recoveries in their portfolio. I just wanted to understand how is it for us and how is it going forward?

Bad debts recovery, Vivek, you have.

Karthik, bad debt recovery, it's been pretty encouraging here as well. But kind of give you a slightly detailed answer. The recent write-off that we've seen in the last, let's say, 24 months include about INR 185 crores of write-off pool that we've done an ARC transaction on. We sold about INR 185 crores of pool under an ARC in March '25. There this year, we've seen a recovery, which is almost close to about 10%. And the overall recoveries in the write-off has been about 3% to 4%, which is on a comparative basis seems to be a good recovery, and we're still not over with it. There is a growth period of another at least 12 months to 18 months left before these accounts kind of completely go sale.

Got it, sir. Sir, my second question is on the liquidity. So sir, post the -- so since last year, we have been a little high on liquidity because for obvious reasons. We just wanted to understand when will this go -- I mean, when will you start having lower liquidity and moving into a more disbursement phase? Are you eyeing that phase now or you still want to understand the -- I mean, dynamics better and then before you move to that zone?

I think our liquidity is already sufficiently low. I would not necessarily call our liquidity high. I mean probably on average, we are maintaining what we make, about INR 300 crores.

About 1.5 months of repayment requirements, repayment obligations and we maintaining one month's disbursement requirement so to say, which is, I think, a standard that we've been following. I would not necessarily call our current liquidity position as high. I would say it is probably not low either. It's probably Goldilocks, that's right.

The next question is from the line of Rohan Mehta from Ficom Family office. Please go ahead.

Before I ask the question, I'll just give some context on three points. On yield, one of the larger peers, they are being about a 50 basis point cut in the lending rate this particular year. And another peer, they have stopped raising rates and they may pass those gains back to the customers. This is on yield. On funding, your current incremental borrowing cost is at 11.7%, and that has been coming down from the 12%-odd levels, but purely on the level at which you borrow is higher versus the peers. Of course, it also depends on the size of the book. The third point is your OpEx. If I annualize your OpEx, it comes to about 8.5% versus the target that you are aiming at about 7% for FY '27. So with that context in mind at about 25% to 30% AUM growth that you have guided, what is the FY '27 outlook on each of those three points, which I earlier mentioned, which will yield, your funding cost and your OpEx? And according to you, which is the one that will contribute the most towards profitability? Right now, which one do you see has the most lever? And just one more thing on the cost front, are you focusing more on...

Wait. Stop. I've already forgotten the first two-thirds of your question. Let's go one step at a time. What was your first question?

Do we envisage reducing the ROI in the coming [indiscernible] contention is that some of the larger ones have kind of hinted that they might bring down.

If I understood your question, listen, there are largely four components in doing this business. There is interest income, interest expense, you have your OpEx and your credit cost, right? So I think you are asking about all four at this point. Specifically on the yields, I think the only thing that really protects you is your top line when all -- when everything hits the fan. Already, we are being watched by as many people as possible to keep the rates reasonable, specifically, RBI and we are always justifying what rates we are charging and how much we are charging. Now the other side of the coin is as far as the customers, are we losing customers because we are charging too high? Is it affordable to the customers? So these are all kind of questions that we have to consider. If we reach a point where we are making too much money, I'm okay with reducing rates, but I've not given it much thought at this point. So that's, I think, the first line item. The second, I think you were talking about interest expense, the debt cost. Yes, that has been marginally coming down. I think if you are comparing to the peers, a lot of it has a function of size as well. But that being said, it's a constant endeavor. Obviously, we possibly could do better in reducing it even further. I believe we are approaching rating agencies and stuff at this point also for upgrades. Hopefully, that should meaningfully reduce it by, I don't know, Vivek, 20 bps, 30 bps. On the plate. The important thing is that while everybody in the industry, minus like, let's say, the top 10 players who are facing issues related to liquidity, I cannot recall the last time that we needed money and we couldn't find it, right? Reducing interest cost obviously becomes the biggest endeavor. As far as OpEx, I've already mentioned in previous meetings and in my opening remarks, that yes, it is high, and it's high for a reason. We have added the DCM structure. We have separated collection team. And over and above that, we are also subscribing to CGFMU. I think that number that is at 8% was probably closer to 9% last quarter, and it will probably reduce further in the next quarter as well. OpEx is not increasing as fast as AUM. So from a percentage standpoint, that should start coming down further in the coming quarters. And the goal is to get it down to 7%, which is what I had stated earlier, I don't know if it was one quarter or two quarters ago by the end of March. So we are well on track to do that. I think what was his third point on...

Right. My last question is on -- so when I look at the MSME par level, I'm talking 31 to 90. So that has marginally moved up from 0.7% to 0.9%. If I take a look at also LAP, the GNPA has doubled and considering that there's an LTV of 65% maximum. My question to you is, has there something seasonally changed in terms of competition or in terms of the quality of the collateral?

There are some issues going on in Telangana. I think that is why I mean that would be the last...

Have been consistent, but Telangana, we are seeing a bit of slightly higher stress, which is again, I think sectoral, I think everybody has been reporting some concerns in Telangana. And that's why you see about 10, 15 basis kind of upward. I'm sure there are other reasons also.

Right. Any particular segments or pockets apart from states like where you see there is too much exuberance rather than yield demand or any initial signs that you see upfront?

None that I can think of for this quarter.

The next question is from the line of Sonal from Prescient Capital. Please go ahead.

This is Sonal Minhas. My first question was with regard to the provisions that we have see in quarter-on-quarter, we've increase the provisions from 17.2% to 19.5%. Just wanted to understand some bit of subjective commentary on where some extra provisioning has been done on a quarter-on-quarter basis. That's one. The second question is that like other NBFCs and other institutions, if you can add a chart or a table on your gross NPA addition, slippage and the similar schedule to provisions, that will just help us to understand.

Provisions have increased by INR 3 crores?

Provision increase in Arman, and Namra -- am I?

Yes. The provisions at the consolidated level have gone up from 17.2 to 19.5. just wanted to understand that.

You're talking P&L number, right?

Yes.

It's primarily I think portfolio would have grown that's why.

Is it linked to increase in the NPA for the last portfolio?

In fact, NPAs have kind of come down. But overall, the portfolio has expanded by about INR 200 crores in microfinance and about INR 100 crores in Arman stand-alone. So the portfolio grows, that number will go up.

If you could just take care of the request on the schedule disclosure for NPAs as well as provisions will just help us understand the math in the...

You want the disclosure on what exactly a table on how the NPA was...

Opening, closing of NPAs and opening, closing of provisions.

Vivek, he is talking about the total provisions and write-offs on the P&L number, not the balance sheet number.

The balance sheet number as well because the balance sheet numbers leads to the P&L number.

As far as Q4 of '26, which is what you are seeing, I mean, that was substantially lower because we had overprovided during the rest of it. For the full-year, it was like INR 150 crores. Yes, it's not really comparable.17.2 and 19.5 was mentioning, that's the P&L number in provisions and write-offs.

There was too much stuff going on last year. So it's not really very comparable from Q4 to Q1. I was a little confused. I was thinking of the balance sheet numbers.

The next question is from the line of Keshav Karwa from White Pine Investment Management Private Limited.

Congratulations on a good set of numbers. Sir, I have two questions. One is on how the July collection trends? Did you see any stress in any of the books as such?