Satin Creditcare Network Limited (SATIN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Satin Creditcare Network Limited Q3 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. H.P. Singh, Chairman and Managing Director of Satin Creditcare Network India Limited. Thank you, and over to you, sir.

Thank you. Good morning, and thank you all for taking the time out and joining us today to discuss our third quarter and 9 months ended 31st December 2020 financial performance. We have issued a detailed press release and investor presentation for the past quarter. Hopefully, all of you have had a chance to review it. During the third quarter, we witnessed a broad-based pickup across various sectors of the economy. We are also on the path of our healthy business growth, with our disbursements picking up by approximately 154% on a sequential basis to INR 1,822 crores, reaching closer to the pre-COVID levels. Our AUM growth has also resumed from Q3 FY '21 onwards, backed by robust growth in disbursements. As of 31st December 2020, our consolidated AUM stands at INR 7,880 crores, registering a growth of 8.2% year-on-year and 2.1% sequentially. More importantly, we have addressed a strong month-on-month improvement in our collections. Our collection efficiency for the month of December 2020 stood at 98%, which is close to our pre-COVID levels. For the 9 months ended 31st December 2020, our cumulative collection efficiency stood at 92%, with 98% of the MFI customers having paid full installments against the demand in January 2021 as against 68% in September 2020. The number of nonpaying clients has improved from 11% in September 2020 to less than 2% in January 2021. This improvement in repayment rates highlights our underwriting and collection framework along with the resilience of our customer base. The balance side is also a testimony to our investment in process and technology ever since demonetizations, where we were hit very hard. In terms of statewide collection efficiency trend, UP, MP, Bihar and Orissa plucked 100% in December '20, Punjab at 91%, West Bengal at 90% and Assam at 84%. The company has added support staff population in the hard pockets, which has yielded good results in terms of improved collection efficiency. We are confident that with the increase in GDP and overall improved business conditions, collection efficiency will improve in quarter 4 FY '21 and financial year 2021/'22. For the third quarter, our net interest income stood at INR 160 crores while our pre-provisioning operating profit stood at INR 53 crores. Adopting our conservative approach, we had a credit cost of INR 159 crores on account of the asset quality risks posed by COVID-19 and news disruptions and other external factors. With this, our on-book provisions stand at INR 305 crores as of December 2020, covering 5.7% of our on-book AUM. On the asset quality front, our GNPA stands at 1.5% since the company has not recognized any NPA since 31st of August 2020. In line with the interim order of honorable Supreme Court, the GNPA without considering Assam stands at 0.5%. We have pro forma GNPA of 9.6%, but if we exclude the Assam portfolio, our pro forma GNPA stands at 7.6%. Ensuring portfolio quality is our foremost priority. We are tightening -- we have tightened our credit assessment criteria post COVID-19. This has held us in good stead as our PAR1 percent for disbursement made in this fiscal year stood at 0.47%. Our total portfolio outstanding of new disbursement made during April '20 to January '21 constitutes 49% of the on-book JLG portfolio as of January '21. Just to give you an update on our capitalization and liquidity position. Our capital base continues to be strong with a capital adequacy ratio of 25.3%, which is well above the regulatory requirements. In addition, we have proactively taken steps to augment our capital position by successfully raising INR 120 crores via rights issue of approximately INR 2 crores partly paid equity shares in 9 months FY '21. We have already seen INR 15 per share as share application money while the Board has decided to make first call of INR 30 per share on partly paid equity shares. And the report date is fixed for February 24, 2021. Liquidity-wise, we continue to remain comfortable with cash reserves of INR 1,831 crores as on 31st December 2020. Furthermore, we have undrawn sanctions worth INR 881 crores. Our structurally positive ALM also adds to our advancement. We received ECB sanction of USD 15 million, out of which an amount of USD 10 million has already been drawn down in the month of January 2021. We are also pleased to share 2 very significant improvements on technology front. While we successfully developed our in-house customer service app during lockdown, we have now added the option of paying through Satin's website as well as UPI 2.0, which is an auto debit option to scale up cashless collection. We have now geotagged 89% of our clients' homes to further strengthen control and centralize monitoring. The percentage of promoter pledge has gone down to 5.08% as on December 31, 2020. An update on our subsidiaries. We are looking forward to growing our secured lending portfolio. All our subsidiaries have been making good progress. Satin Housing Finance Limited, which primarily caters to customers belonging to the middle and low-income groups in peripherals of Tier 2 and below cities, has now reached an AUM of INR 200 crores with presence across both states. SHFL has a 100% retail book comprising of 82% affordable housing loan and 18% LAP. Despite a challenging environment scenario, SHFL has had a profitable quarter. No loan was restructured. Around 20% of clients availed moratorium. Cumulative collection efficiency for 9 months '21 stood at robust 99.3%. SCNL includes equity of INR 15 crores in SHFL, taking total equity investment by SCNL to INR 95 crores with capital adequacy of 97.3%. The monthly disbursal numbers are higher than FY 2011. Satin Finserv, our MSME arm, has reached an AUM of INR 127 crores with capital adequacy ratio as of 31st December 2020 stood at 85.5%. SFL has focused on retail -- secured retail MSME lending. Cumulative collection efficiency reached 96.6% while collection efficiency for the month of December reached 99%. To give you a more general insight, as of 31st December 2020, out of the 1,429 active loan clients, less than 2% are nonpaying while just around 3% of the clients have availed complete moratorium. Around 7% of loans were restructured. SFL moved to our in-house software just recently. Our AUM under business correspondent services offered by Taraashna Financial Services has increased to INR 646 crores. As of 31st December 2020, the company operates in more than 7 states, 202 branches. The company has more than 3.56 lakh active clients currently. Collection efficiency at December 2020 stood at 91%, while cumulative collection efficiency stood at 84%. Two new BC partners were added during 9 months FY '21. No loan was restructured. Approximately 16% clients availed complete moratorium. Although the contribution of secured lending portfolio has increased to 8% of the total AUM, in line with the company's endeavor to diversify this while achieving a better product mix to achieve the next leg of growth, our long-term endeavor remains to achieve at least 25% contribution from our secured lending portfolio in the coming years. Finally, to conclude, we expect our profitability to improve in the next financial year as provisions decline and disbursement and AUM increase in the coming quarters. We are quite optimistic about our housing finance subsidiary to grow much faster as we have laid a solid foundation during the last few years of operations, a good team, underwriting processes, technology controls. Our healthy balance sheet and strong liquidity position, coupled with pickup in disbursement, will help us get back on a pre-COVID growth trajectory. Furthermore, the successful rollout of the COVID-19 vaccination program by the government of India by January gives us the hope for a quicker-than-expected restoration of normalcy in the economy. On that positive note, I would like to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Anand Bhavnani ] from White Oak Capital.

Sir, with regards to the various geographies that you operate in, how has our provision varied across different states? Like what would be the NPA levels and provision for, let's say, UP, MP, Bihar and [indiscernible] with that...

[ Anand ], sorry to interrupt, but the management is unable to hear you. Can you please speak a little bit loud? If you're on speaker, can you...

Am I audible now?

It's better.

Shall I go ahead?

Please go ahead, [ Anand ].

I'll come back in a little bit if the line is...

No. It's okay.

Okay. I'll go ahead. My question was if you can give us some sense of the NPAs -- cumulative NPAs till date pro forma for each of our maybe geographies like UP, MP and so on? And what is the provision against this -- for individual geography?

So we have seen improvement across geographies, and things are improving in general in all the geographies. For the purpose of our ECL cancellation, we have places like that in Tier 1 and seen the blended trend in portfolio for the last 5 years, as we have explained that in the previous call. So we have seen the -- taken the blended trend and the blended portfolio policy for the purpose of calculating the ECL. But across geographies, we have seen improvement happening from second quarter to third quarter and month-on-month also within the third quarter and in January. The trends -- collection trends are positive in all the geographies.

Just to add, I think a lot of people had concerns about Assam, ECL and everything coming in. But just to give you understanding, that's the reason why we stated the Assam collection efficiency that it is not completely [ go-go ] over there. And technically, it's around 84% where the collection efficiency stands. When you've got a blended ECL coming on across the geographies, I think that probably takes into care whatever the collection efficiency level are there across all that.

Sir, my question was more on NPA. The pro forma NPA at the company level is 9.6%. I want to understand which states are above this 9.6% number. Some would be below, but which ones are above and by how much?

So technically, if you look at it, Assam would be there in terms of the -- we simply average out the thing. But granularly, if you have to go down, we can probably let you know what it, across over there in various states, would be. But the only thing which you'll have to probably keep in mind, it's fine wherever it is going. But the trend becomes very positive for us, and that is a good sign for us. UP, which technically was our only state reduced, which was like the highest and where we still have a significant presence, is the lowest amongst all the PAR numbers across geography. I don't have the exact numbers, but that is how it is panning out to be. So this is what probably should be looked at when we complete this thing. But happy to answer it off-line on the state in terms of percentages.

Sure, sir. And sir, a follow-up question on UP. You said the experience has been very good, in fact, the best, if I got it right. What are the drivers of this relatively better performance in UP?

See, I'll -- you'll have to get into the genetics of the pandemic technically. And the overall genetics, I can probably share it with you right now. For -- I think for us all to understand is that it was a lull for about 9 months or about 12 months now. Now once there is a lull, which is -- which ended up with a lockdown for 3 months and then, furthermore, this happened 3 months and then start picking up the economy back in the system. The cash flow will always be erratic. Somebody who has missed close to about 8 to 10 installments, for them to really come back in one go and get it back, that's the reason why there has been a spike on the -- and this reason of spike is there all across the peers and the NBFC and the banking space. But the fact of the matter is that as I pointed out, that 0.47% is now our collection efficient -- sorry, PAR numbers for the disbursements made after April show us that the portfolio mix of the old and the new disbursement is now 50-50. And as time progresses, the old will start repaying that, but it is still a tail, which will happen. So that is something which we'll have to. And the moment the numbers of the new disbursement starts overpowering the old disbursement, you will see the difference happening in all the numbers, the NPAs and all put together. And that's the genesis how it happens.

Sure. Lastly, on provisions, now on pro forma, we see this number of 9.6%. What is your assessment of, as of today, the eventual NPAs and the credit cost that you would have there?

I'll answer your question, and I have maintained this since day 1 of the pandemic because I know it. But if you look at the complete total -- the total credit cost in the ultimate analysis of the pandemic, and this is what I'm talking about, you won't -- you probably should not look at quarter-by-quarter basis. But if I give you a total listing, the credit cost and my -- the thing which I have maintained earlier, will be around 5% to 6% and not more than that.

Next question is from the line of Rishikesh Oza from RoboCapital.

Just one question from my side. What is your expected loan book growth for FY '22?

FY '22, we are targeting -- since now disbursements are back to the pre-COVID level, we are targeting about 25% to 30% loan book growth in FY '22.

Okay. And the credit cost that you said, 5% to 6%, that is for FY '22 you're expecting, right?

No. I said the overall blended credit cost, when you look at the complete analysis, see, you'll have to understand the analogy. The analogy is that the loan tenure is for about 2 years. And now 1 year has probably gone by. What I'm looking at is a complete thing when the overall tail finishes, which happened in demonetization, ultimately in demonetization. When we started, the NPA levels were higher. But once you finish off the complete tail and the recurrent disbursement which happened, the ultimate credit cost was about 6% to 7% over there also. So that is what I'm saying is right now the NPA would probably be at about 9.6%, which we were showing. But at the end, the credit cost will be limited to about 5% to 6%, not more than that.

Okay. Okay. Got it.

And just to give you maybe one more point to it because since the last 3 years, 4 years, on a year-on-year basis, we still get write-off, write-back, basically, which are close to about INR 22 crores, INR 25 crores year-on-year. And that is probably the way where you will look at the complete net-off of the credit cost coming in as a percentage of it.

[Operator Instructions] The next question is from the line of Ritesh Gandhi from Discovery Capital.

If we actually add up...

Sorry, Mr. Gandhi, but we missed out on the start. So if you could please repeat again.

Sorry?

So if we then look at the total AUM of people who are either under moratorium, haven't paid as yet or have partially paid, how much does that come to? And against that, how much have we actually provisioned up to now?

Nonpaying is 2%.

So nonpaying, Ritesh, is about 1.93%, which have -- people who have not even paid us a single installment. Now that is probably the number of the percentage, which is probably the thing. Somebody who has paid even after 6 months, 7 months, who is paying partial even or fully. I think fully is, I think, close to about 85%, 86% who have paid each and every installment. About 14%, I think, 13% to 14% would be who have done partial, not -- somebody who has done even a partial investment -- partial collection technically means that he is not a defaulter or his intent to repay is not questionable because they will make the payment sooner or later. The only place -- and I could have probably extrapolated when this question was also asked on the credit cost. But what I've extrapolated is that 1.93% is the nonpaying clients, which is also getting back because if you look at the -- from an 11% nonpaying client, a couple of months earlier about -- in September, sorry, it is now down to 1.93%. So people are coming back slowly into the fold, but it takes a while because of income [ erraticness ] as well as having an overdue, which is significant enough to come back and clear off the complete overdue.

Got it. And so effectively, we feel that we've got adequate coverage with regards to -- but I mean is there any risk that actually we have under provided up to now and we may need to make additional provisions? And as we look ahead, should we be looking -- how should we be looking at a normalized profitability into FY '22? Because AUM is now higher than we were in FY '20, so would we be expecting now higher numbers overall? Some piece on...

Yes. Ritesh, both sides. So in terms of our disbursement numbers, definitely, we're looking at growth now. So that is one. The second is I think the peak probably of having 90 days and plus probably has peaked out. Now the question is how much are we able to get back. And that is being shown amply by our collection efficiency, our new disbursement, our nonpaying clients coming down. So our peak has probably been there. And that is the reason why I'm seeing a long tail completely across over there. The credit cost in total of the pandemic will not go beyond 5% to 6%. So you can see that -- I think I probably will not be able to hazard a guess on numbers. But my sense is that the peak has probably happened in December quarter. And I think now it's a question of how and how much we are able to scale it back to reach the numbers of 5% to 6%. I have still kept our margin for ourselves and being conservative because that's how people would like to judge us, looking at the demon levels as well as this. And this is what I want to probably put it across in a very, very clear manner. But ultimately, over there, when 70% of our book was hurt, we were still able to contain our credit cost down -- in a complete level to about 6% to 7%. Our sense is that we'll probably be hit only once the complete thing happens across.

All right. And the last question is just on Assam and potential implications you see and how you're playing out and if we think we're adequately covered in Assam as well.

So Assam, we have technically been -- we have been making provisions for Assam since it erupted in September, October '20 -- sorry, '19. So it's been there. Our sense is that, ultimately, it is -- we start disbursements over there right now until the time the elections are not held. And in spite of the fact that having stopped disbursement, the collection efficiency still holds at about 84%. So that is a very positive sign for us. It's a slow process of getting back the clients which have already have had overdues across over there, but I think we are practically covered in Assam right now.

The next question is from the line of [ Anshukant Taneja ] from Asian Development Bank.

Thank you for the update. This is really very helpful. And we are very happy to see the rebound in Satin's operations. I think the conversation has clearly shifted from sort of safeguarding the portfolio about a few quarters ago to now talking about growth and scaling up. Can we get a sense, please, of what is the profile of the new clients that Satin is targeting? And how do they fit in, in the context of first-time borrowers versus existing clients of Satin? And secondly, a question which is more on the financing side. Clearly, there is an overwhelming level of liquidity right now, and that is surely taking care of a lot of the concerns around capital and provisioning, et cetera. But is there a kind of a longer-term plan as to what level of liquidity will you retain going forward?

So yes. So to answer your first question there, we earlier were looking at only the existing clients and their disbursement. So if we look at the proposition right now, we made disbursements to the first -- sorry, L1 customers, which is only about 34%. But the context is that, slowly, that's picking up. From existing clients, the base is shifting now to acquisition of new clients also, which also signifies our way of looking at how growth will really pan out in the next year or so. On the capital front, I think since we are calling out and we had envisaged this earlier, for us, I think the only thing which I can probably put across in the longer term is that we've always been capital proactive whenever anything has probably happened across. And this has amply been shown when I think ADB also came in with us during demon at this across over there. We would always be sufficiently capitalized to fund our growth, which technically is not even a concern for us right now, having called for this call money and now during this time also. So on the overall front, I think capitalization for us is probably not a big concern.

Sure. I think we also want to understand that there is right now substantially high levels of liquidity, which is probably also required given that banks were having wavering risk appetite in the recent past. Presumably, this will be run down as your portfolio expands. So is there a kind of a target level of liquidity that you would keep going forward?

So we have deliberately maintained higher amount of liquidity in the 9 months during COVID period, which has given comfort to all the stakeholders as things are improving and bankers are also opening their wallets, et cetera, once things are stabilized a little bit more. We generally used to work between 45 and 60 days' liquidity. As on today, that is close to about 75 to 90 days. But as things will improve, we'll bring it back to those levels. And then we'll take it -- take the call, depending upon how the overall ecosystem will work.

Next question is from the line of [ Agastya Dave ] from CAO Capital.