Capri Global Capital Limited (531595) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Capri Global Capital Limited hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravikant Bhat from Capri Global. Thank you, and over to you, sir.

Good morning, everyone. Welcome to the Capri Global Q1 FY '22 Results Conference Call. We shall be starting today with the opening remarks by our MD, Mr. Rajesh Sharma, followed by a detail -- by the detailed remarks by our Group ED and CFO, Raj Ahuja, on the business and financial performance during Q1 FY '22. I now hand over the call to our MD, Mr. Rajesh Sharma.

Yes. Good morning, everyone. I once again take the pleasure in welcoming you all to discuss Capri Global's Q1 FY '22 financial results. We declared our audited consolidated results for Q1 FY '22 yesterday. I hope you have found time to go through the earnings release. The Q1 results or financial in particular, have been anticipated both with the mix of caution as well as a strong hope that the recent stress event produced by the serious second wave of COVID-19 shall prove to the transitory and better days for growth and earnings would be light ahead. While we at CGCL, I've also faced challenges, I'm happy to state that our optimism remained firm. In my remarks ahead, I shall dwell upon the key operational highlights for the quarter gone by and also give some more objective flavor on a few business aspects we discussed in Q4 FY '21 results call. By the end of the call today, I hope we shall pass on our optimism to the larger investor community. When we last spoke in late May, we were already in the midst of second lockdown due to which we had completely halted disbursement activity in the month of April and May. The challenges of lockdown was compounded by a large number of CGCL employees also testing positive for COVID-19. To ensure employees well-being and morale, we ensure timely financial and nonfinancial help was available to all the employees. We also tied up with the private health care providers to vaccinate eligible employees at workplace. Over 50% of CGCL employees are already vaccinated with at least first dose of COVID-19 vaccine. The second COVID-19 wave, we have been quick on our heels to resume operations at all levels. In our last conversation, I had mentioned we expected meaningful pickup in businesses only in H2 FY '22. As you may have noted, we have already made a beginning towards the same with the resumption of disbursal in the month of June. In fact, the entire disbursal in Q1 FY '22 reflects activity only for the month of June. Discussions around the possibility of a third COVID-19 wave continue to attract attention of policymakers and people in general. Presently, we are cautiously optimistic and I accordingly positioned ourself for the incremental business. We are avoiding micro subsegment like hospitality, travel and tourism, et cetera, and focusing more on essential services segment, which we believe shall weather better way induced lockdown. Out of the 8 states where we operate in only parts of Maharashtra, particularly the districts in Western Maharashtra continue to witness persistent and elevated level of COVID-19 infections with the death positivity rate significantly higher than the national average. The local administration has, therefore, kept these areas under continued lockdown with minimal daily business activity. All other key states like Gujarat, MP, Rajasthan, UP, Delhi-NCR, Punjab and Haryana have been continuously softening pace of new infections and are witnessing a slow but steady return to normalcy. The SIDBI MSME Pulse Report, which compiles trend for the MSME segment as noted in its latest addition, the improving growth trends in the segment. The micro subsegment of INR 10 lakh to INR 15 lakh where CGCL's operating had witnessed a healthiest growth of 7% Y-o-Y amongst all MSME subsegments. Other net indicators like credit inquiry volumes, credit activity by regions, et cetera, indicates a pickup in activity from April 2021 lows. We see these as favorable pointers for an important product segment of CGCL. We, therefore, believe we are in course of repeat our AUM growth performance FY '21. We are targeting at least 20% Y-o-Y growth in AUM in FY '22. From a medium-term perspective, we believe we are now at an inflection point. Our AUM shall cross INR 50 million level in Q2 FY '22. We have set ourselves a base case AUM CAGR target of 22% between FY '22 to FY '27. In a more optimistic scenario, we would like to achieve a CAGR of up to 27%. Our growth shall be organic and at present does not involve any plans in organic growth through mergers or acquisitions. MSME in Housing Finance shall continue to be the key growth driver of our organic growth. We firmly believe we have carved a niche in the Construction Finance segment. Our performance in the Construction Finance segment over past 5 years speaks for itself. Keeping our overall risk cadence in mind, we are willing to see the Construction Finance portfolio in a secular growth trajectory, although the growth rate shall remain below the headline AUM growth rate. During Q4 FY '21, we had initiated distribution of third-party products in car loan segment. We currently have tied up with the 3 leading commercial bank to distribute their car loan product for a fee consideration. This way, we'll be able to utilize our branch network and our people to distribute the same. We are distributing this product from all our locations and have continued to build a strong momentum in sourcing. As of June 2021, we achieved disbursal of INR 100 crore plus and look forward to sharing some specifics on the business in future conversations this year. Our capital adequacy level remains one of the best in the peer group. We are well capitalized to meet our medium-term growth targets. As part of liquidity management, we continue to prepay costlier borrowing in Q1 FY '22. The treasury starts with short-term deployment of surplus funds, and it tapped some credit worthy short-term opportunities. We opened 4 new branches during Q1 FY '22, taking the branch count to 89. As we speak, the branch count has further increased to 92. We have begun deploying the fresh resources hired in Q4 FY '21, and they have further added to our headcount in Q1 FY '22. Our total headcount increased from 1,945 in Q4 FY '21 to 1,966 in Q1 FY '22. To sum it up, we believe we have managed to navigate another challenging quarter well. Like previous occasions, I remain hopeful we shall have stories of progress in improvements to share in our future conservation this year. With this, I would now hand over the call to our group CFO, Raj Ahuja.

Thank you, Rajesh. Hello, everybody. This is Raj Ahuja, Group CFO at Capri Global. I shall be presenting the key financial performance highlights of quarter 1 FY '22 now. Wherever I'm not specific, all reference shall be to the consolidated financials. I shall start with the business highlights first. Our consolidated disbursals in our 3 main products, which is MSME, Housing Finance and Construction Finance, though declined quarter-on-quarter, but was up 7x year-on-year. Our total AUM touched INR 49.5 billion with a marginally positive momentum of 2% increase quarter-on-quarter and a more robust 22% growth year-on-year. We do not securitize any loan assets. As such, we do not carry any off balance sheet AUM. As noted earlier by Rajesh, our lending activity was suspended in the month of April and May, and we resumed our operations only in June '21. As such our AUM momentum can be set to be reflective of just month of June's operational activity. MSME AUM increased 24% year-on-year. Housing Finance AUM increased 33% year-on-year, while Construction Finance AUM showed a decline up 10% year-on-year. This is in line with our business strategy on the various business segments. Indirect retail AUM of INR 3.2 billion was largely flat quarter-on-quarter but up 3x year-on-year. This indirect AUM is reflected -- inflated due to exposure in loans against securities of INR 2.6 billion. This is a short-term deployment of funds and shall runoff in first half of FY '22 itself. You may refer to Slides 5 and 6 of the investor deck to understand the quarterly trend in disbursements and AUM respectively. We continue to hold PTCs worth INR 1.73 billion, representing a pool of affordable home loans. That is classified under investments and not under AUM. We had purchased this pool in quarter 4 of FY '21, which carries a credit enhancement of INR 596 million, which represents roughly 30% of the pool. The outstanding in this pool has since run down and the current outstanding is INR 1.5 billion. PTCs are shown as a part of investment, which I just mentioned earlier. The granularity in business segments in terms of average ticket size, LTV ratios and geographical distribution remains mostly unaffected. Overall, there is no chunkiness in exposures and individual data is cluster around the mean. Please refer to Slides 12 to 14 for segmental information on the same. The borrowing declined 4.4% quarter-on-quarter and now it stands at INR 36 billion as we repaid around INR 10.2 billion of our borrowings in quarter 1 FY '22, even as our incremental requirement remains tepid. We have an aggregate INR 9 billion in undrawn lines of credit available with us. In addition to that, we have fresh lines of credit sanctioned to us in quarter 1 of FY '22, which stood at around INR 2 billion. As a prudent measure, we shall continue to rely on medium-term borrowings in the form of term loans and to a lesser extent, entities for funding our balance sheet. We shall continue to avoid money market instruments. Our ALM buckets are well managed with inflows exceeding outflows in all maturity buckets, both in the short-term ALM matching and as well as the long-term ALM. Coming to the earnings, I shall speak on the core earnings first. Our NII, net interest income, which was impacted by interest income receivables and negative carry on funds in quarter 4 of FY '21, it shows resilience in quarter 1 FY '22, increased 19% year-on-year and 20% quarter-on-quarter in quarter 1 of FY '22. We are reporting an overall yield of 14.6% on AUM. This excludes the yield on PTCs and other short-term treasury investments. This compares with 14.9% in quarter 4 FY '21 and 16.1% in quarter 4 of FY '21. The decline in loan yields reflects the general slide in segmental yields observed over the past few quarters. Slide 8 carries the periodical trend in the segmental yields across segments and overall. We experienced continued softening of cost of funds during quarter 1 FY '22. The cost of funds during quarter 4 declined 10 bps quarter-on-quarter and 170 bps year-on-year, and now it stands at 8.4%. Spreads weakened 20 bps quarter-on-quarter to 6.2%, but improved 20 bps over quarter 1 of FY '21. We expect spreads to stay stable going forward in the similar range. As part of financing our cost of funds and given our comfortable liquidity position, we shall refer to prepay obligations, wherever it is feasible contractually and from the liquidity point of view. The cost income ratio softened to 35.9% in quarter 1 FY '22 from 47.3% in quarter 4 of FY '21. But this was higher than what reported in quarter 1 of FY '21 at 27.2%. The year-on-year increase in the cost income ratio is reflective of the full impact of the recruitments done during quarter 4 of FY '21. We shall continue to hire in line with our branch expansion requirements during the rest of FY '22 also, and that might impact the cost to some extent. Credit costs, including write-ups stood at INR 181 million, which is around 150 bps on the average AUM. This was lower than INR 203 million reported in quarter 1 FY '21 and INR 227 million reported in quarter 4 of FY '21. Our total ECL provision now stands at INR 1.31 billion, and this contains an overlay provision of roughly INR 209 million, which is created on the basis of our estimation of the over generated provisions. We shall continue creating small buffers through overlay provisions to cushion on any future impacts on asset quality as we move forward. As a result of all the above, the quarter 1 FY '22 net profits increased 69% quarter-on-quarter and 16% year-on-year. And now in this quarter, it stands at INR 459 million. I shall now turn to the asset quality. Our gross Stage 3 assets stood at 3.4% and net Stage 3 ratio at 80 bps. We consider the entire stock of ECL provision to compute net Stage 3 ratio. After the Supreme Court ruling in March '21 on asset quality classification, there are no accounts in standstill classification today. The gross Stage 3 ratio is reflective of the stress from hostile pro forma NPAs. Our total restructured book now stands at INR 2,038 million versus INR 1,840 million in quarter 4 of FY '21. The MSME book contributed INR 1,952 million and Housing Finance, INR 86 million to the restructuring book. The aggregate restructuring book now stands at 4% -- 4.1% of our AUM. There are no restructured accounts in INR 11.9 billion Construction Finance and indirect retail lending book. Pipeline for restructuring in MSME or Housing is thin. We do not expect to add meaningfully to the current restructured book. As such, we are likely to remain below our initial quarter 4 FY '21 estimates of 100 to 200 bps of addition to restructuring book under the resolution frame of 2. Outlook for FY '22. In summary, the challenges posed by COVID-19 are very much share in the second year of pandemic. Like everyone, we are hopeful of vaccinations and other breakthroughs to contribute to normalizing life. But as pragmatic business managers, we remain watchful of the overall scenario. We had stated in quarter 4 FY '21 earnings call that FY '22 shall be one of the managing P&L challenges, while second half of the FY '22 is likely to present better growth opportunities. We have seen the same playing out in quarter 2 of FY '22. Credit costs could stay elevated and may get an opportunity to taper only in quarter 4 of FY '22. In this backdrop, I would like to reiterate CGCL has amongst the strongest capital adequacy ratios at 37.5%, a robust core operating profit and multiple liability relationships to fund its growth. We therefore remain confident of our growth trajectory over medium term. With this, I shall conclude my remarks. We are open to take questions now. Thank you.

[Operator Instructions] The first question is from the line of [ Shanaya Nair ] from [ Excel Investments ].

Hello, am I audible, sir?

Yes. You are.

Sir, do you feel that the emergence of fintech and banks already offering better rates, your competition is getting more fierce, how do you weave of this competition? Also, what are you doing in terms of leveraging technology to enhance capabilities to improve OpEx as -- CapEx as many of your peers have already stepped up their game on the tech front?

So if we talk about fintech are operating purely in the unsecured space, and they are catering to that segment, which is able to give their documentation and data. Whereas at Capri, we are focusing on self-employed nonprofessional with no income proof customers like small kirana store, maybe a small tailoring shop or a women-led group making snacks and supplying to few places. So these are the businesses we are funding in Tier 3, Tier 4 towns. And we believe these are businesses which can be [ underwritten ] by touch and technology mix of both. Unless you meet the customer, you visit them, you understand by personal discussion, you cannot do underwriting. So the segment, what we cater and what fintech are going to do is entirely different. And as far as use of technology is concerned, we have -- we are using loan management, loan origination system. We have in-house data analytics team. We have recently hired a CTO to further enhance our technology stack and changing few aspects. Further, we are using best of the consultant, including KPMG and BCG to improve our processes and to use wherever we can use the technology and processing part. So front end, we cannot use the technology entirely the way fintech do, so reason being the segment is entirely different. But extensively, we are using technology wherever we can in terms of processing, in terms of enabling our collection team with the tablets and issuing the e-receipt, onboarding the customer using video KYC, all those things, we are already using it.

Okay. Sir, I have 1 more question for you. Sir, smaller and affordable housing is seeing a fair bit of traction since June, especially in Tier 2 and Tier 3. So how has been the demand for housing in for Capri since then? And when do you see things like they will normalize? Also, salaried borrowers are at 46%. Does this mean that this will be a shift from a strategy to tap banking the unpack? Will spread reduce more going forward according to you?

So June onwards already activity in Tier 3, Tier 4 town where majority of branches have been picked up and disbursement has started. So whether be it MSME or be Affordable Housing, we have seen a good demand coming up. And if we talk about salaried segment, I think with the more funds we are getting from NHB at a much lower rate, about 3% and where we can earn about 6% spread we are offering to even salaried class formal segment as well. So I believe a formal, informal salary segment in times to come, may go up to 60% and remaining 40% in housing, still continue to remain about self-employed, nonprofessional. But we are seeing a good traction in that. And despite we are seeing the lockdown, the activity has rebounded, and we see this year, we should continue on a growth path.

[Operator Instructions] The next question is from the line of Shreepal Doshi from Equirus Securities.

And sir, I really appreciate the detailed presentation. Sir, my question was on the housing space. So during the last quarter, when we had lockdown, so like how did the collections happen? And if you can share some color on like month-wise collection efficiency for this segment?

So we track the collection efficiency on a quarterly basis. So if you look at from June '20 when the collection efficiency was 76%, it has now come to 95%. So in Housing Finance, we have seen a very good collection efficiency in this nearly pre-COVID level. And so I think collection efficiency has picked up very well. For 2021 quarter, it was about 95%.

Okay. Okay. And sir when you say this for the quarter, so is it -- do we mean it is cumulative, like for the 3 months, what was the demand and against and what you received? Or are you seeing at the month -- how do you look at that? How do I look at that?

Collectively, for the 3 months presentation made versus collection received is the percentage. March '21, it was 93%. June '21, it has improved to further 95%.

Okay. Okay. And sir, like -- do you track something like 1 plus DPD number or something like that?

Yes, we do track. That is an essential part of monitoring the collection branch to branch, region to region and pan-India. We do track 1 plus.

So what would that number be, sir, for our quarter 1 like 1Q '22?

Just a moment. So if we look at our Stage 1 portfolio at a consolidated level, to talk about MSME, it was INR 1,908 crores, which is about 75%. And Stage 2 was about 11.7%, which is about INR 298 crore. And Stage 3 is about, in MSME, INR 144 crore, about 5.7%. And if we talk about Housing Finance...

Sir, those numbers I have because I think Stage 3 in housing is 1.9%. Stage 2 is 10.4%. But 1 plus DPD would be different -- would be part of Stage 1, right?

Yes.

So what -- how does that look like then?

That data we have to give you separately. We will come back to you at the end of the call, you can again connect. We will invite you again.

And sir, my question again on housing side. What percentage of our collections come through like online or through, say, bank like payment eNACH system? And how much do we collect physically from the customers?

So if you understand, our more than 95% payment comes through either presentation of eNACH or by collection of check. And some of the payments, which are less than of total collection, about 5% comes when the collection executive visit the customer and immediately, they collect some cash, maybe INR 15,000, INR 20,000 kind of execution. And within 24 hours, we issue the receipt, some of the collection executive immediately issue the receipt through their collection application on their mobile phone or on tablets. So it is only less than 5%. Otherwise, where all collections first are presented through electronically. And only on the bounce, they have been called upon and some visits are made. And during those some of the visits, some of the collection happened through cash, which is overall collection about less than 5%.

Okay. Okay. And sir, how are we seeing things evolving in the month of July for, say, for each of our segments, like in terms of business activity as well as, as you highlighted, that collections have further improved? So if you can just give some number perspective there?