Can Fin Homes Limited (511196) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Earnings Conference Call of Can Fin Homes Limited, hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Utsav Gogirwar from Investec Capital Services. Thank you, and over to you.

Thank you, Stephen. Good morning, all. Welcome to the Quarter 3 FY '20 earnings conference call of Can Fin Homes Limited. To discuss the financial performance of Can Fin Homes and to address your queries, we have with us today, Mr. Girish Kousgi, MD and CEO of Can Fin Homes; Mr. Shreekant Bhandiwad, Deputy MD; Ms. Shamila, Business Aid; and Mr. Prashanth Joishy, CFO of Can Fin Homes Limited. I would now like to hand over the call to Mr. Girish Kousgi for his opening comments. Over to you, sir.

Good morning to all of you. We had a very good quarter. You must have seen the numbers. I just thought I'd just give you a summary and then share vision and then open the discussion for any specific questions which you may have. If you look at growth in terms of disbursement, last quarter was almost flat, last to last quarter was negative, whereas Q3, we have grown by 12%. So disbursement has grown by 12%. This is a very good sign we think because we've been saying this since last few months that we are seeing growth in the market because we operate in niche segment where we don't see too much of competition. And this quarter, we've seen a growth of 12% disbursement, which is quite different compared to the previous few quarters. Book has grown by 15%. I'm just rounding it off. If you look at revenue, revenue has grown by 16.41%. It was INR 444 crores, and this is all Y-o-Y Q3 comparison. Revenue has grown by 16.41% from INR 444 crores to INR 517 crores. If you look at net interest income, the growth is about 23%. And we had a very good increase in PAT, which is 41%. Last year, Q3 was INR 76 crores. And this year, Q3 is INR 107 crores. So it's an increase of 41%. Our NIM has increased. In comparison, last quarter was 3.31% and this quarter it's 3.42%. Going forward, we will try and maintain this NIM. NIM won't increase substantially because there'll be only variance in terms of maybe 2 or 3 bps. Yield has more or less remained very stable. We maintained spread of -- we actually, we improved spread to 2.32%, it was 2.17%. So now it is 2.32%. The incremental cost of borrowing in Q3 has come down. So we've managed to keep our cost pretty low. Asset quality is quite stable. Last quarter was 0.79%. This quarter is 0.8%. A lot of effort has gone into collections and recovery. We have seen some result this quarter, and coming quarter, you will see a significant impact in terms of NPA numbers. If you look at our liability mix, more or less, I think we have focused largely on banks, keeping costs as the guiding factor. You have to compare with last year Q3. There's an increase from 48% to 57%. NHB, it was 13% last year, Q3. And this year, it's 15%. So not much of a change there. And NHB, we actually prefer because -- so a, it's from regulators, so they're a little stringent compared to other [ hill ] stations where we borrow. And to that extent, we feel really reassured. And in a way, we get it with the advantage of lower cost. Market borrowing was 38%. Now it has come down to 26%. We've kept our CP percentage quite low within [ 26% ]. It's hardly 9%. And deposits grew from 1% to 2%. Now, this is broadly on the numbers. In terms of our strategy, we remain focused on home. Today, our home is almost close to 94%. And I'm just taking [indiscernible] part of home loan because that is a second loan given on the primary security and primary loan based on the repayment track record. So our LAP exposure is only INR 5 crores, and all others put together it's another 1% -- sorry 5% and 1%. So 94% is home loan. So we want to keep it this way. Our salaried is still at a portfolio of 71%. Even on incremental sourcing, our salaried is about 70%. Our ticket size remains almost same. There's no change in ticket size. We focus on affordable. We operate in Tier 2, 3, 4 kind of cities. And therefore, our focus is on low property value and low loan ticket size. In terms of branch expansion, I had said this earlier also, we would reach a branch count of 200 by March. So we stay committed to that number. We see -- in terms of market, there has been a lot of challenge in the market. Demand is slowly coming back, but still a long way to go. Especially in nonaffordable space, there is too much of pain in systems. Since we don't operate in that, we are not really impacted. So for us, the growth has -- market has slowed down a bit since number of players have come down, and we thought it's an opportunity for us to try and grow our book, keeping our risk profile of the company intact. So we could encash on this till now. So going forward, we'll try and keep growing at a reasonable growth. I would now request for any specific questions, which investors might have.

[Operator Instructions] The first question is from the line of Dhagash Shah from CD Equisearch.

My question is that, what percentage of your incremental loan book in Q3 has been in organic?

Everything is organic. 100% is organic.

Okay. And sir, regarding your LAP book, can you tell us that what is the largest exposure?

See, if you look at our LAP, it's only 5%. And we focus on low ticket size. Average ticket size for LAP and non-LAP is still the same. So in terms of what would be the -- I'm not very sure, I need to check this. So by highest LAP could be, I'm not very sure, maybe INR 40 lakhs, INR 50 lakhs, I need to check that. Otherwise, if you look my INR 50 lakhs and above, at portfolio level, is only 3%, and majority of this 3% is from -- is home and salaries.

Okay. So roughly sir you're saying out of that INR 1,000 crores, largest is INR 40 lakhs, INR 50 lakhs?

I'm not very sure. This is my guess. It should be in the range of maybe INR 40 lakhs, INR 45 lakhs.

Okay. And sir, regarding the last question, you mentioned that 100% is organic. So could you give us an idea about what part of it is refinanced from other banks or other NBFCs?

No. Refinance from other banks or NBFC is 0. This is the entire business, which Can Fin has done. So there is no inorganic growth.

So are we looking at inorganics going ahead?

Not at the moment.

Okay. And sir, just one last understanding part of it that why is the comparative growth slow in the housing book?

I'm not very sure with this question because we see that there is growth in both the home and nonhome. Only thing is since the nonhome, the book is very small. So the growth seems to be a little higher. And in home, since we have a large portfolio. See in home, we have grown by 15% and nonhome is about 20%. So since the base is very small and that's the reason you would see the growth in nonhome is quite high compared to home. Otherwise, our focus remains on home.

Correct, sir. But when I said...

[Operator Instructions] The next questions is from the line of Nishant Shah from Macquarie.

Yes, sir. So just trying to put this into context, where we have our margins at 3.4%, which have improved, spreads have improved, we have a tax benefit, and we have like a couple of competitors, a fairly large-sized competitors who are active in the affordable space, now becoming beleaguered, right? So what stops us from like trying to push the pedal on growth a little bit, right? Are we just trying -- like at least, optically, it looks like we're just pricing ourselves out of the market by holding on to our spreads and our NIM. Is there no space where you vacated? We appreciate that, like the space itself is taking time to grow, but then is there no scope for market share gains?

See market -- we want to be very, very cautious in our growth. We want to grow. We will definitely grow much higher than market growth rate, but we don't want to really press the pedal too much and grow at a rate, which is harmful for the asset quality. So we are very, very clear on asset quality. We feel about 19%, 20% growth is a good growth rate, considering the market situation. And therefore, we want to be focused on 20% growth rate. So is there an opportunity to grow at 25%, 30%? The answer is yes and no. The answer is yes, but then definitely, it will come with a lot of nuances, a lot of challenges, which we don't want to take, because we are very, very clear on asset quality. Growth of 30% in this market, definitely, the portfolio would suffer. And we don't want to grow, compromising on asset quality and compromising on profitability. And therefore, we thought that 20% is a good rate.

Fair enough, sir. So just a couple of follow-ups on this. So let's say, let's take something like a DHFL, right? They vacated the space. Probably, there's a little bit of room for you to price the risk better. But are we not able to like gain some of the market share from some of these vacated spaces, like where without compromising on your asset quality? Or is your understanding that these were probably opportunities which could have never fit into your risk appetite criteria at these kind of borrowers?

Let me answer your question in 2 parts. One, definitely, we are trying to gain that share, and therefore, you can see growth, which has come back, A. B, our risk appetite is different. So most of -- I don't want to name the HFC or company. But what we do is what fits into our risk profile, we are happy to do. And we see that a significant part of the space, which is vacated, doesn't fit into our risk profile and therefore we're quite [indiscernible]. Yes.

Fair enough. And just one last thing on this...

[Operator Instructions] Mr. Shah, sorry to interrupt, sir but for any follow up request you rejoin the queue please.

Sure. Okay.

The next question is from the line of Nirmal Bari from Sameeksha Capital.

My first question is on the repayment rate tax. Repayment plus prepayment rate has shot up in the current quarter to almost 8-quarter high. So what is it that we are seeing in the market? And specifically, with, let's say, pooling rates as well as MCLR coming down, is it a trend that banks are poaching on to our clients or why is it so high?

Okay. So why is it so high? It was high in this quarter because of the CLSS subsi credit, and therefore, the book came down, and that's where you see that the prepayments approvals are high. Otherwise, we've been managing customer retention very well. So that is the only reason. So decrease in interest rate, both in MCLR and repo, that is there -- that was there even in the past so because there is a differential pricing which banks charge and which we charge. And therefore, there is always an arbitrage. So we have taken that into account in our business model. So that is not the reason. The reason is because of a subsidy amount. Because of that book went down.

What would be the quantum of this subsidy in the current quarter?

It's about INR 145 crores, INR 150 crores.

INR 145 crores with credit, okay. And secondly, the capital adequacy ratio has also shot up from 18% to 22% in the current quarter. So what was the reason for that?

So -- and capital adequacy is 22%, okay? So share, basically, there are 3 parts. One is sanctioned and agreement not signed. This is category 1. Second category is sanctioned agreement. One is signed, one is not signed. So these are 2 categories. Number three is, sanctioned, agreement signed and part disbursed. So we need to provide for sanctioned and part disbursed, sanctioned and agreement signed, and not for sanctioned, agreement not signed. So there was some classification, which we did in the last quarter, which we rectified this quarter, and therefore, 22% is the right number.

Okay. And if you may allow one last question...

[Operator Instructions] The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

My question has been answered.

The next question is from the line of Punit Mittal from Global Core Capital.

I had 2 questions. First of all, Mr. Girish, welcome to Can Fin. Exciting to have you on board.

Thank you so much.

Now 2 questions. One is on the repayment. It seems your repayment has increased, which is surprising given that the competition is reduced and as you've mentioned that you don't compete with banks. So where is this repayment coming from?

So -- okay. I think I answered part of this question earlier. Let me just repeat. Repayment looks to be higher in this quarter because there was about INR 145 crores of CLSS credit what we got, and therefore, the book went down to that extent, A. B, when I said we don't compete with banks, we don't compete with banks when we source and book business. But however, after, let's say, 2 or 3 years' time, so customer would see an opportunity. This is in the business model. This is true for any HFC because there is a differential in pricing between banks and HFCs. So after 3 to -- let's say, 3 years or 4 years, some of the customers may move out. So today, we have HFCs, which charge different rates. For example, let's say, starting from 9%, right up to 15%, 16%. So we have categories of HFCs. We have categories of banks. PSU banks charging the lowest, starting from 8.2%, 8.3%, and there are certain banks, which charge about 8.95%, 9%, 9.25%. And there are HFCs -- there are so many categories. Starting from 8.75%, they go right up to 14.5%, 15%. So there is always an -- there is always a -- there is risk of book depletion in terms of HFCs losing some kind of book to bank. For example, Can Fin would lose some kind of book to bank, which charge lower rate. At the same time, Can Fin also has an opportunity to do the BT in from HFCs where the rate is higher, rate to customer is higher, but which fits into our risk profile. So there is BT in and BT out. Every day, day in and day out, this is there. So we have a strategy to retain our customers. So that is in place. But having said that, we need to budget this. This is part of a plan. So this was their -- when HFC started decades back. And this will continue for next 4 to 5 decades, maybe more than that. So this is part of the business model, and we manage that. Decrease in the -- increase in prepayment in Q3 was because of CLSS subsidy. I hope I've answered your questions.

Sir it seems like we lost the connection from Mr. Mittal. We move to the next question from the line of Amit Rane from Quantum Securities.

I had one question on asset quality. How much is the Stage 2 assets as on Q3 and comparative number in Q2?

We can share that with you.

Okay. And sir, outstanding borrowings as on Q3 FY '20?

Outstanding borrowing is at [ INR 20,000 crores... ]

INR 17,800 crores.

Q3 '18?

No, no, current.

Q3 '19? Current? So it's 20,100...

The borrowing.

No. The borrowing.

INR 17,800 crores.

The next question is from the line of Ritesh Bhagwati from Rockstud Capital.

Sir my question is like, was this growth in disbursement a one-off one, as we did quite better in this quarter versus previous quarter? And will we able to maintain this kind of disbursement growth for our forthcoming quarters as well? So that is my first question.

Yes. So we've been -- I have said this before also, we are seeing an opportunity. And therefore, we want to growth -- we want to grow and we will grow at about 19%, 20%. So what growth we have seen in Q3, this would continue in the quarters to come.

Okay. So you're saying like overall disbursement growth rate can be in the range of 19% to 20%?

Yes. So what I'm saying is, in next 4 to 5 quarters, we can see a growth of 20%.

Okay, next 4 to 5 quarters, at least 20% kind of disbursement? And one last, like, in regards to the stake sales of Canara Bank, sir that has been an overhang on the company since [ cycle of ] Time? So what is wrong? What's happening over there?

I mean, the answer is, we are concerned -- no, we are focused on business and operations. So company is pretty strong. We see growth coming in from various quarters. So we are focused on that. So today, our parent is Canara Bank, so it is eventually their decision. So I won't be able to comment on that. As far as we are concerned, we focus on company operations and business.

Next question is from the line of Bunty Chawla from IDBI.

Congratulation on a good set of numbers.

Thank you.

I have 2 questions. One is that, as we have seen the cost of funds has declined during this quarter, but there has not been a big movement on the yield front. So how would we see the net interest margin for next 2 to 3 quarters? How should that shape up?

So any incremental reduction in cost of borrowing, you can see the impact in next 4 quarters. So the impact in this quarter were little. Next quarter will be slightly better. And then, of course -- so in next 3 to 4 quarters, you can see the impact. However, what is important is, we have been able to raise funds at a much lower cost. So it's a good sign for next 3 to 4 quarters in terms of earnings.

So can we say the margins should improve from here on and the cost of funds should decline?

We don't know how the intercept market is going to pan out in future, though the trend looks to be either flattish or slightly down. So all we can say is that we will maintain our spread and maintain our NIM. So there could be a slight increase by maybe 2, 3 bps, but otherwise, by and large, we will try to maintain this.

Okay. And secondly -- lastly, sir, previously, we used to give the -- our target for the loan growth for next 3 to 5 years. So now that has been removed from the presentation. Now what is the thought process? How we should take the loan growth per se for next year and next to next year?

I can talk about next 2 years. All of us know how the market is. So a lot of things changed after ILFS scenario. And therefore, what you saw earlier is not there now. So next 2 years, our growth will be moderated. As I mentioned, it will be in the range of 19%, 20%. So we will take stock after 2 years, what should be the growth rate depending on the market situation. Because now we see a lot of pain in system, the demand -- though demand is there, supply is quite low. So since there is a gap in demand and supply, we can't really grow at the rate, which we saw pre-ILFS regime. So for next 2 years, we would grow much higher than industry growth rate.

So 19%, 20% for next 2 years, you were just talking about loan growth...

About 19%, 20% is what we feel that we should be able to grow.

For loan growth or for disbursement you're speaking because...

I'm talking about [ ALM ] growth.

The next question is from the line of Antariksha Banerjee from ICICI Mutual Fund.

My first question is on the liabilities piece. You gave out the borrowings number, sir. Now if I look at from mix, it's -- what the message is you have degrown your capital market borrowings by 20% both year-on-year or quarter-on-quarter, roughly like that. And I'm sure that will be including NCD, CPs both. Now I speak about this in light of the event on your rating that happened during the quarter and subsequently, the announcement by your parent to not go to the stake sale. So what is the dialogue we are having with the rating agencies now? And what's your plan for fresh capital market borrowings in this quarter? Or when will you look to that?

Okay. So let me answer your question in 3 parts. One is, if you look at the CP, CP is about 9% of the total liabilities. Okay, now CP, we want to raise CP only if we have a backup. And we want to keep this percentage quite low. So we want to be a little low NCD considering the risk. So that is by design. Now on the NCD, there were -- there's some maturities happened. So we have a plan to raise NCD, which we will -- which maybe we will unveil in next few months. Now what drives the source of borrowing is largely the cost. Now banks, we are able to raise long-term funds from banks at a much lower rate. It's in spite of one notch rating downgrade. We were able to raise at the best possible rate. So we were raising at AAA rates. So I think that has not impacted us at all. And now since the decision is out on the stake sale, we are engaging with rating [ agents ] and they are pretty comfortable. So I think we expect maybe in the days to come. So there will be a revision in rating.

Sure. So when you're talking about your cost of funds going down in the next 3, 4 quarters, it is including of your NCD raising plans and the borrowing mix and whatever?

What I mentioned was at the overall level, we will maintain our spread and NIM, so which means I have to manage main overall cost of funds at a lower level, so that we will manage. Because today, if you look at -- for me, NHB is the lowest followed by banks. Of course, I'm not talking about CP. CP would be the lowest then NHB and banks. So NCD would come at a slightly higher cost and even deposit at a slightly higher cost.

Can you tell us how much outstanding bank lines we still have unutilized?

We have close to about INR 4,000 crores.

INR 4,000 crores unutilized lines.

Yes.

Absolutely.

No, the INR 4,000 crores is unutilized, which is documented and unutilized.

Sure. And the second is...

When I say this, I'm excluding sanctions.

Yes, sure. Okay. Do you want me to follow up or do you want me to join the queue?

Sir, I request you to rejoin the queue, please. The next question is from the line of Digant Haria from Antique Stockbroking.

Sir, I think the results have been so good that there is nothing to ask on the business part. So I have 2 questions, which are slightly more theoretical. One is that since you have just spent a few months with whatever experience you could gather of this organization, what would be your 2 or 3 top priorities in the next 1 year? So that's my question number one. And question number two, is that I understand that seeing the stake sale part, you guys have nothing to do, it's the parent who will decide. But what are your dialogues with the banks because I think we have a lot of borrowings, which come from banks, Canara Bank, especially and a lot of other banks. So what do you expect -- or you can give us any color on what can happen if, say, the buyer is a private entity, whenever that happens, what happens to the comfort that the banks enjoy right now versus what they can later on? So that's it from my side.

So for us, top 3 priorities are not in the order of priority. But yes, these are the top 3. Growth, asset quality and profitability. So these 3 are the top 3 priorities. And in terms of dialogue with the banks, our pitch is very clear. As a company, standalone, we are doing extremely well. We have a very clear strategy laid out. We are seeing growth. We are making more profits and maintaining asset quality. So what happens in terms of change of hands is something which we won't really get into. So I want to really speculate on that. If at all it happens in the future, at that point in time, probably, I would be able to comment. So as of now, our focus is only on the company in terms of managing and growing.

The next question is from the line of Kunal Shah from Edelweiss.

Congratulations for good set of numbers. Firstly, in terms of the overall exposure on the home loan side, how much would be towards the underconstruction property?

I mean, I guess you're asking this question for the apartments, correct, flats?

Yes, yes, yes.

Yes. So if you look at the total portfolio, 75% is self-construction, independent house and composite loans. So only 25% is apartment funding. So out of that, we fund only low-rise projects and we fund at nearing completion stage. So if you're asking about completion, that's hardly anything because we...

Okay. Yes, so in terms of the risk on the asset quality, what we are seeing it for the other housing finance company with a similar profile, they have a relatively higher GNPLs compared to us. So we are not seeing that kind of stress rising in our book?

No, we are not seeing.

We're stable.

We are not seeing because of 3, 4 reasons. One, our share of LAP is very low, it's hardly 5%, A. B, we operate in very select and safe geographies. Number three, we assess only based on declared income, not surrogate income. Number four, we are in affordable space. So our ticket sizes are much lower. Even in case of stress, if we have to sell the property, our recovery is 100% in terms of costs because -- and we have literally no exposure to developers. Because of all these 4, 5 reasons, we are not seeing stress, which generally is seen by other companies.

Sure. And what is the incremental yield and incremental cost? And cost, if you can just break it down between at what rate are you borrowing from banks and through NCDs?

NCD, we have not borrowed for the last few months. So NCD, I won't be able to comment. But I can see at least 20, 25 bps lower on the bank rate.

No. Sir, what's the rate as of now, incremental? What is the...

No, it is blended. So I'm saying it is blend. Blended bank borrowing would be about 20 bps lower, which is 7.75%.

Okay. And incremental yields?

Our spread is 2.35%.

Okay.

2.32%. So our spread is 2.32%, so our cost is about -- if you take for Q3, it is -- cost is 7.88% and yield is 10.2%.

No, sir, this is on a book basis. I'm asking incremental.

So incremental, I told 7.75%.

Cost is 7.75%.

Cost is 7.75%.

Yield is -- we don't have readily available. Incremental yield is pretty good.

Incremental yield, I'll come back to you. Incremental cost is about 7.75%.

The next question is from the line of Piran Engineer from Motilal Oswal Securities Limited.

Congrats on the quarter. I just wanted one clarification. To an earlier question, you said that you don't do refinance of other HFC's loans, but then you also said that you do BT ins. Can you please clarify on that? And how much of our disbursement actually came from BT in?

What I meant was, definitely, we do BT. What I meant was, there is no portfolio buyout.

Yes, that's fine. But in terms of BT in, how much would that have been?

So on a monthly basis, we do BT of about -- not much, about 20%.

20% of disbursement. Hello?

Yes.

Yes. 20% of disbursements is BT in on average?

Yes.

Okay. And my second question is, over the last couple of quarters, large HFCs have cut their home loan rates. And how much have we cut our home loan rates in the last 6 months?

We have not cut across all the segments. Certain segments, we've cut about 30 bps and certain segments for some time about 0.45% to 0.5%, but then that is 50 bps. So it is between the 30 to 50 bps.

So what does our interest rate start at now?

8.75%.

See, with an offer, now it is 8.75%.

The next question is from the line of Sanket Chheda from IDFC Securities.

Congrats on good set of numbers. Probably an improvement on all the fronts. So sir my question is on NIM. So the benefit that we might have derived from annual rate we said that you were talking about in last quarter also. So all of that has coming into this quarter or there is some benefit pending in Q4 also?

No. As I told you in any -- if you want to see an impact, it will be spread across 3 to 4 quarters. It's a 1-year cycle. So to answer your question, yes, there is some impact in this quarter. There was some impact in last quarter also. So every quarter, there will be some impact. So that is only one part of it. And also, there is a lot of focus to increase NIM. And therefore, you have many pieces added to this increase.

Okay. And sir, just on the funding mix, we used to have NHB more than 20% at some point in time in past. So being -- it being the lowest source of funding, are we planning to increase that? Or this is the optimum level, which we can borrow from NHB?

It depends on the rate. For example, in last 6 to 8 months, we are seeing -- we're getting funded at a very, very competitive rate from NHB, whereas earlier it wasn't. So from whom we will source primarily depends on cost we are raising. A higher return. Now, it is quite low.