Emerald Finance Limited (538882) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Emerald Finance Limited Q2 and H1 FY '25 Earnings Conference Call hosted by Kirin Advisors. [Operator's Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Chandni Chande from Kirin Advisors. Thank you, and over to you, ma'am.

On the behalf of Kirin Advisors, I welcome you all to the conference call of Emerald Finance Limited. From management team, we have Mr. Sanjay Aggarwal, Managing Director; Mr. Talin Aggarwal, Head of Business Development; and Ms. Gurmeet Kaur, Chief Risk Officer. Now I hand over the call to Mr. Sanjay Aggarwal. Over to you, sir.

Good afternoon, everyone. I am very pleased to welcome you all to our Q2 FY '25 and H1 FY '25 Earnings Call. Thank you all for taking time to join us today. As we review our company's financial and operational performance for the second quarter and for the first half of the financial year. With me is Ms. Gurmeet Kaur. She is the Chief Risk Adviser. She was earlier with Citi Financial as Deputy Head Credit and with Bajaj Finance as CRO. Also with me is my son, Talin, he is CTO and Head of Strategic Partnerships. As far as income is concerned, our total income for the Q2 '25 on a consolidated basis has grown by 80% to INR 5.01 crores and on a consolidated basis, our PAT has more than doubled by 139% to INR 2.06 crores. For the first half year, our consolidated income has increased by 56% to INR 9.41 crores from INR 6.04 crores, and PAT has increased in the first half year to 108% -- by 108% to INR 3.77 crores. Also, we have received full payment against the warrants issued to Mauritius-based fund, Investee Global, in the month of May. And in this current month, in the month of September, we have allotted them 26.7 lakh shares. With this, the total FY holding in our company has increased to 9.23%. For the fifth row in a year -- year in a row, we have declared dividend. And we'll be shortly paying in this current month. I'm very happy to report that we have 0 delinquency in the first half of the year. There was a nil NPA in the first 6 months of the year. Also, we have issued ESOPs to 4 senior employees last year. And we are also in the process of issuing to 5 more employees in the current quarter. As far as our main product, EWA is concerned, we are operational with almost 25 companies as of now. We have just started funding salaries of the Safai Karamcharis of Chandigarh Municipal Corporation. And we are also in the process of tying up with at least one more such corporation in Uttar Pradesh. We have also tied up in this current month with a very large corporate in Mumbai, which is providing back-end services to banks like Kotak Mahindra, Axis, ICICI for EWA product. Through our subsidiary in the distribution business, we have funded, in the first half of the year, more than INR 110 crores in gold loans. This is mainly done through HDFC Bank and Axis Bank. I would like to keep it very short and crisp, so you have more time for question and answers. In the closing, I would like to express my gratitude to all our shareholders, customers, partners and especially to our employees for their continued trust and support. We are really excited about the opportunity in the coming months and years, and we continuously deliver -- hope to continuously deliver on sustained growth and value. I'm looking forward to some questions from your side, please. Thank you.

[Operator Instructions] The first question is from the line of Vishal Singh from Finvestor.

Sir, am I audible?

Yes, yes, Mr. Vishal.

Sir, first of all, congratulations on a good set of numbers. Sir, in last con call, sir, you have said that in your EWA program, you will tie up with -- your target is to tie up with at least 100 corporates. And what I'm seeing by following our company, right now, we are at 25. So I think the guidance you are giving is very optimistic. Or you have some plans to meet your target by the end of this financial year? And the second question is, sir, I've gone through your media release. And what I can see that you have started a loan kind of thing. So is there any NPA overview in there because it is very different from EWA program. So what is overall thought process on this?

No, come again for the second part. I can not understand your second question, please.

Sir, I've gone through your media release. Media release or media note you have given. And I can see there is something written like you have started a token loan kind of thing that will be starting within -- starting from Q3. So what will be the NPA overview on this because our company is not occurring any NPA?

Got it. Got it. See, as far as your first question is concerned, we have tied up with already 25 companies. As you know, it's the network what we had established and started producing results now. So we're planning to target at least 15 more companies in this quarter that will take the numbers to 40 and the balance, we should hopefully, as our network is expanding and the number of companies also onboarding has started increasing. So at least 15 we should onboard in this third quarter and the balance is -- hopefully, we should be able to incorporate in the fourth quarter. And your second question regarding new product line we are starting?

Yes, sir. Yes, sir, the new product that has started the loan.

Gurmeet, would you like to take that, please?

Yes, Sanjay. So when you talk about the new product line, it is going to be a variation of the unsecured loans, small ticket size that we're talking about. We are going to be introducing small ticket size personal loans to our EWA corporate partners. And we are also looking at an option of tying up with the various merchants who provide different services or products online. And so an EWA customer can opt to use the limit to purchase that particular product as well.

And ma'am, in EWA product, the salary, which are given by the corporate there, the EWA advance is being deducted from the salary slip also I believe. So when your customer is opting for this loan, the same thing will be done by the corporate [indiscernible]?

Absolutely. Yes, please. So depending upon the eligibility criteria, which will be different in order to mitigate our risk and also what is the percentage of the salary that we'll give as a small ticket personal loan. This will become more like an EMI product. So an EMI product to be paid between 3 months to 6 months. So the repayment every month will be deducted by the employer from their salary itself. And during this particular time when the personal loan is going on, he cannot withdraw on his EWA limit. So that is how we will be mitigating the risk.

The next question is from the line of Mann from GrowthSphere Ventures.

Am I audible?

Yes.

Congrats for a very good and healthy set of numbers. So I'll start my question with simple one. I think that the understanding of mine is missing here. So you are tying up with the corporates and you are advancing in EWA loans upto 1 month of advance, right? So -- and hence, there is 0 delinquency. But what if the employee leaves the organization after taking the loan? In that case, the NPA arises and the guarantees given by the corporates or that will be on our books?

If I may answer this?

Yes.

So the advance we give is a percentage of the recruit salary. So essentially someone's worked for 10 days, recruit salary worth 10 days, in that case, it extends 4 days worth of advance. So eventually if the person even leaves the organization, there's enough in the full and final settlement with the company from which they pay off.

Okay. Okay. So I think that -- yes, yes, this was missing from my understanding. Okay. Second was that ma'am stated that personal loans that will be tied up with the salary. So that is very similar to what the corporates -- sorry, big banks are doing, right? So it is unsecured small finance kind of a product. So the NPAs are bound to arise in those. It will not be 0 delinquency kind of a situation, right?

It's very possible. Of course, it's very possible. But then the way we make our business plan, we always bake in what is the presumed risk that we are willing to take. Because if there is no risk, there is no return. So the pricing of this particular portfolio is also going to be different. The underwriting assessment that we would be doing for this customer is going to be more stricter than what we currently do for the EWA customer. And thirdly, what is also important to note is that there would be a minimum eligibility criteria that we will set for the employee of the company, right, who would be eligible for a product like that. He should have shown some kind of a traction on the EWA before we offer this particular product to this particular employee. And lastly, in order to mitigate the possibility of the customer leaving, we also have an EMAT, which is set on his verified bank account. So in an event the deduction doesn't happen, we can also automatically invoke the EMAT to take the money from this account. And lastly, we also have an adequate collection set up. In an event delinquency happened, we will do the systematic follow-up to collect our money.

Okay. Got it. So can you -- so you said about certain qualities while underwriting. Can you expand on the underwriting process or the minimum criteria after which you will be advancing the loan to that person?

I think one of the key things is that the policy will be very captive to the organization. However, just to give you a flavor of 3 key component of an underwriting process is one is the extensive KYC verification of the customer, including the video KYC. The second key element is the minimum eligibility criteria, where we look at the employment terms, the net earned salary over a period of time and whether this particular employee is permanent, contractual or yet under his probation period, for example, yes?. There could be more minimum eligibility criteria depending upon different income brackets and the organizations that he worked for. And the third key component comes is, what are the different assessments that we possibly do on this particular customer, it is going to be the bureau check that is going to be happening in case of -- and there could be a physical verification that could be conducted to verify his current residential address apart from, of course, the income and the debt that we would take from the bureau and from the employer and then that will lead to a debt burden calculation.

Okay. Got it. So coming back to the EWA part, right? So this is like a very low risk kind of business. So just wanted to understand the total TAM of the market, if it is possible.

So the size of the market you're talking about?

Yes, yes, yes.

Talin, would you like to take that?

So the total TAM of the market, I mean, this is an evolving market. So EWA is a very new product in the Indian market. It's a very robust in the Western countries, but in India it is very, very nascent. There are only a few players there. So all of us together are sort of creating the market. But if you want the total TAM on a monthly basis, that would come to a couple of thousands of crores. I mean if you see the overall salary data of India and you just take a certain percentage of that, that would come to a couple of -- almost tens of thousands of crores per month. So that is the overall TAM we're targeting. But again, as I mentioned, this is an evolving market and us plus the competition started to create the market as of today. But it will take a couple of years for us to reach a decent business and more or less reach the TAM.

Got it. So in that case, if it is very developed outside India, then why the giants like HDFC, Axis, ICICI, they have like salary account tied up with big corporates. So for them, it is very integrated kind of a product. So why haven't they tapped this market, any reason?

So the thing is, one, this is the short-term small-ticket loans. These are typically loans with an average ticket size of INR 25,000 for a tenure of 1 month, plus they're unsecured. So all these banks, the big banks have a certain percentage of portfolio which they can allocate to unsecured loans, plus they essentially do not prefer to do such small loans. Again, if you see the market evolving from 2020 to 2021, there were hundreds of players doing loans less than INR 50,000. But in the last year or so, a lot of them have moved on to greater than INR 50,000, INR 1 lakh loans. So because this is a slightly riskier segment, plus the unit economics don't work here in such a small ticket size.

Talin, if I may just add another thing. There is also a regulation for the banks that they can't offer nil interest products, okay? So EWA product that we offer is supported by a disbursement fee for -- based on the amount of disbursal the person takes and we don't charge any rate of interest. So when you look at the consumer durable lending, which Bajaj Finserv does, and it's an NBFC, or other companies who are doing it, they typically do a 0 interest credit processing fee-driven model. So the bank because of the CASA and the other compliances that they need to meet, they can't do 0% lending. Small ticket-size clubbed with 0% lending and hence, this particular value proposition does not fit.

Okay. Got it. So in that case, you see it right, there are a couple of players with you who are building this Indian market. So I just wanted to know the players who are competing with you, whether in private or public spaces. And also, if it is possible, how the global scenario has evolved in past, say, 1 decade or 1.5 decade? And who are players in the global markets who have shaped this market as such?

If I may take this. So in India, our biggest competition is coming from, right now, JIFFY. So there is a Bombay-based company called JIFFY. There is Bombay-based company called then FatakPay. There is a Bengaluru-based company called Refyne. So these are the main players other than us, who have been offering this to the Indian market. And in terms of global competition, so this is a very advanced product in the United States. So U.S., [Foreign Language] you have the likes of RainPay, you have DailyPay, and there's another EarningsPay there. So there, it is a very, very developed product. So the likes of Walmart, Taco Bell, McDonald's employees use these products in those economies. So our target is also to essentially, eventually, when the market, as it is growing, to tap into these larger corporate, services to their employees.

Right. So what is your view? So I think that the U.S. doesn't have that unorganized money lending, which India has. So what is your view since it is a very small ticket size, INR 10,000, INR 15,000? So that is one of the biggest competition that you guys might be facing. So any views on that part?

So I think that's the biggest advantage we have at our end because these unorganized money lenders, they tend to charge exorbitant interest rates because they're highly unregulated. So there is a very, very good opportunity we have. Once the market awareness is there, then I think we can very quickly tap into these spaces because as ma'am mentioned, we do not charge any interest. We only charge a processing fee, it only comes to about 1%, 1.5% on the transaction value as compared to a 5%, 10% interest that these unregulated players charge.

Sorry, sir, I was of the view that you are -- you guys are charging the processing fee of 2.5% -- 2%, 2.5%, 3% because I read the same on our first con call. So why this discrepancy?

So it varies. It's a range-based debt. So on average, it comes to about 2%.

Average rate is 2%. Okay. And in that case, what's IRR of the whole year comes out if you were to put a number on that?

Aggregate IRR comes to about 26%, 28%.

26%, 28%. Yes, cool. And so you guys are planning the personal loans, which are tied up to the salary as well as this EWA loans, right? So any particular disbursement figure or AUM figure that you have in your mind right now?

As quickly as we can grow and as much as we can grow this business to.

I think this question, you should ask us in the first quarter next year. Yes. When we do this -- when we do the next [indiscernible], you should be asking, we are in the phase of designing the product construct and getting our policies ready. So we would be able to give you more precise and accurate information in another 2 months' time.

Yes. But the intention behind asking this question was just that I wanted to know what amount of funding we guys require. You have a certain debt-to-equity ratio in mind. I guess it is 2:1. So what kind of funding...

Sanjay, can I ask you to take this question? What kind of debt-to-equity?

Yes. See, funding is not an issue. We have sufficient credit lines and that's very well capitalized. Funding is not an issue at all. There are a lot of unutilized limits also with us and we are very well capitalized right now.

The next question is from the line of Aman Baheti from Mool Capital Private Limited.

And big congratulations to the Emerald team for a great set of performance this quarter. I have a few questions related to operating margins and strategy. So my first question is on operating margins. Sir, we have done around 70% this quarter and 68% for the first half. So are these kind of margins sustainable in the long term or they seem to dip in the future?

See, as far as the EWA product is concerned, as we grow the business, we did not increase our team size. Currently, we have a team of 8 people, 5 are techies and 8 outside consultants. So, as the business grows, we need not increase -- correspondingly increase in the employee base. Plus, our margins are right now higher because most of it is funded by the equity. As we take -- get more funding, then maybe the margin might slightly decrease because of that.

So sir, do you have any figure in mind like a sustainable margin figure that you want to continue with?

We don't have any figure in mind as such. Let's see when the things come to this. As far as concerned, I think, for the EWA product, on the very -- that we are doing about INR 1.5 crores of disbursement right now in EWA. Even if we go up to INR 100 crores, you do not have to correspondingly increase the team size. Because we need to have to just increase by 2 or 3 people and maybe some collection team.

Right, sir. So are we seeing to hire some people because we want to get like 100 clients this year or next year. So, are we looking to hire more people to get more clients?

We are engaging with more and more agents. They are on a variable cost with us. They are not on a fixed cost with us. We already have a team of 3 people in our office who are handling business development. But we are planning to engage with more and more agents pan-India to source more clients for us.

Can I just add here, Sanjay?

Yes.

So, Aman, this is regarding the span of control. So, we have already built a foundation in such a way, that most of our processes are automated. And because this is a small ticket size loan and it is 100% automated kind of a process. The need for having a very large operational team is not required. You're right, as we grow the business, we may end up having 1 or 2 senior people who will manage more strategic alliances. But it is not a -- this particular business is not a people's driven business. This is more of a process driven business -- process and systems driven business.

Right, right, right. And sir, I'm asking on a corporate basis, what is the average size of the corporate, in terms of number of employees that we are targeting?

Currently, average ticket size is about 200. But now, we have tied up with Municipal Corporation of Chandigarh, their staff strength is about 3000. And we have tied up with a very large IT company, Chandigarh-based, their staff strength is about 1500. And we have tied up with a large backend company in Bombay, their staff strength is about 900. But current now average ticket size, if I talk, about 25 corporates, we have talked about, average ticket size will be around 200 employees.

Okay, sir. Okay. And sir, apart from our EWA product, do we charge any fee for just the salary processing thing for them?

Come again. Come again, please.

Sir, apart from our EWA product, let's say, a company comes to you and asks you to just process their salary. So, do we charge a fee for it or...

No, no, we don't charge them anything.

And Sanjay, this is a slightly different question, if I may add. We don't do any organization salary processing. We are not funding the salaries for the corporate.

Right, right. I mean just what Razorpay does, right? Razorpay also does some...

So we are not payment gateways. We are an NBFC. So we have a unsecured product, which is an EWA product. So for the amount that the customer based on his eligibility that he withdraws and we take a withdrawal or a disbursement fee on that particular amount.

Okay. Okay. Got it. And Sanjay, sir, this is for you. So what is your outlook on the traditional business side regarding the SME loans and gold loans?

So that will continue to grow. That will continue to grow that business. See, there are 3 lines of business. One is EWA, second is the business loans, what they're doing; and third is the distribution business. Both EWA and the distribution are asset-light. And our book size is built through our SME loans, we continue to grow that. And that book also is performing extremely well.

The next question is from the line of Chandan Mishra from Finvestors.

First of all, I want to congratulate you on your good results, sir. My question is regarding guidance. During last con-call, you have given guidance for 8x to 10x PAT in the next three months, you did in the 3 years. My question is, are we maintaining for the same?

Yes, yes, definitely. I'm talking about the PAT. 8x to 10x growth in PAT in the next 3 years.

The next question is from the line of Darshil Jhaveri from Crown Capital.

I hope I am audible?

Yes, yes.

So just first, I just wanted to understand the business a bit better. So what is our average ticket size of the loan that we are giving in? So I just wanted to know who is the person who's taking a loan? Are they like -- so what would be -- like it could be giving around INR 5,000, INR 10,000 loan or what is it?

So the average ticket size for our EWA customer is about INR 20,000 per month. These are people typically earning between INR 30,000 to INR 50,000 per month, out of which they take INR 15,000 to INR 20,000 from us.

Okay. Okay. Okay. Fair enough, sir. And sir, would you say that like our main competition in this from EWA would be that if someone could take an EWA loan or would they take a small loan that other microfinance companies are offering? So is there like a direct competition from them? Or are we like -- or are we more better than these loans?

So there's 2 things in this. So one, microfinance companies normally do not give a loan worth INR 20,000, INR 15,000, that too for a tenure of 1 month or 2 months. Secondly, we are embedded into the corporate. We have a partnership directly with the corporate. So the repayment is made by the corporate, the salary deduction. So that reduces the hassle of repayment on the customer.

Okay. Correct, correct, correct, sir. Okay. And sir, just wanted to know like so our major income that we have like in the quarter. So what -- we also do some part of gold, right? So gold loan, this one. So what part of comes from EWA services? And could you just give me the basic breakup? Like what percentage comes from which like income streams?

See, almost 50% is right now from distribution income. For the gold loans, what I'm talking about, we are distributors for HDFC -- loan distributors for HDFC and Axis Bank. There, we get only fee income. There's no risk on our books. And currently, right now, the income from EWA is not that high. But going forward, we expect that this will become a major portion of our revenue.

Okay. Okay. Okay. Got it. Fair enough. Sir, just like wanted to know like you've given a guidance of 8x to 10x the PAT in the next 3 years. So how would it be? Would it be a linear way or maybe just like a year of building up and then we would see it? So just like maybe in the near term, like what could you -- what can we expect next year for like...

What expect is organic growth. So like we are -- quarter-on-quarter, we are growing. We just expect the organic growth. With this pace only, we’ll be able to deliver 8x to 10x growth. So, look at this from year-on-year growth, growing more than 100% year-on-year. On this period, of course, we are able to grow to 8x to 10x.

Okay. Okay. Fair enough.

As the market expands, that also will add to our bottom line. People don't even know about this product.

Yes, yes, yes. It's a very interesting product that I think has a lot of penetration is not there, or awareness is not there in our markets.

But this product is very popular in the U.S., and it's getting -- it's catching up a lot of popularity in Indonesia, Philippines. If you go where companies are becoming really big. I was really surprised the way that companies are growing in Philippines and Indonesia, EWA companies are growing in that part of the world.

Okay. So sir, do we have like any competition from any existing players who are doing this? Like any threat of -- like there will be more competition and we're taking a 2% even in that come to a price war or something like that? So could you just...