Spandana Sphoorty Financial Limited (SPANDANA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Spandana Sphoorty Financial Limited Q1 FY '27 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 the date of this call. These statements do not guarantee the future performance of the company and it may 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. Venkatesh Krishnan, MD and CEO, Spandana Sphoorty Financial, for his opening remarks. Thank you, and over to you, sir.

Good morning, all. Thanks for joining this Q1 FY '27 call. This is the first time we are holding the call in the morning. So we can safely say Spandana [Foreign Language]. A few quantitative and qualitative aspects before I hand over the mic to my colleague, CFO, Ashish Damani. It was a good quarter that went by on multiple fronts. Our AUM grew 11% quarter-on-quarter to INR 4,887 crores. New member addition was at 55% as compared to 44% -- 40% rather in the March quarter. Overall, member count also increased to 1.38 lakh during the quarter as compared to 1.1-odd lakhs in the March quarter. Collection efficiency, which is a X-bucket collection efficiency, which is a very important parameter was at 99.5% as anticipated. Annualized credit cost at 2.1% was against 3.2% in the March quarter. We managed to collect INR 51 crores in the 90-plus pool. The marginal cost of funding came down to 11.3% as against 12% last quarter. And we managed to garner around INR 500 crores of sanction under the credit guarantee scheme, and sanctions are still coming, and there are quite a few sanctions in the pipeline as well. Overall cost of borrowing came down to 12.8% as against 13.2% with bank share going up from 44% to 47%. The new share of portfolio, which is sourcing effective 1st of April 2025, grew to 91%. And of course, the most important thing is that PAT was INR 12 crores as against INR 5 crores in the March '26 quarter. Sufficient liquidity and capital adequacy are areas wherein at this point in time, we are holding good. On the qualitative front, we realize that the top 5 states contribute about 60% of our total share, which is Madhya Pradesh, Bihar, Andhra, Telangana, Odisha and West Bengal. Two states we really want to grow in the coming quarters are Tamil Nadu, where our share currently is just about INR 15 crores out of the industry of INR 38,000 crores. And Maharashtra, where we are at about INR 288 crores as against the industry of INR 24,000 crores. So 1.1% share, we want to take it to at least double it to 2% share. Individual loan product is ready to be piloted in 8 branches in Madhya Pradesh. So we are putting about 8, 10 people. Over the next 3 months, we want to test it out because this is a completely different product, better underwritten with eNACH facility. I want to just check the initial -- what is the acceptability. Of course, this is going to be for existing customers to begin with. But in the days to come, we will migrate to new to Spandana customers as well, anyone who's got a track record elsewhere. Like in any other business, you will always have some -- many of the branches doing well and a few branches not doing well. We also realized that we carved out 100 branches where there was scope for improvement, either on the business or collections of both. And we're trying to put a separate team to revive this because merger or closure in microfinance rarely leads to success. So we said that this time around, we are going to revive these branches, and we are quite hopeful these 100 branches can really turn out to be significant contributors in the times to come. El Nino, much spoken about what's going to happen, time alone will say. But proactively, the credit and business have worked together a strategy how to deal with new customers who are not exposed to any form of credit who are staying in [indiscernible] so on and so forth. So we put some game plan for select districts and states that are likely to be impacted. So it's a wait and watch with adequate controls. The balance rights issue money of INR 200 crores, INR 100 crores from the promoter and the balance INR 100 crores from others who participated is expected this quarter, before the end of this quarter. We have a new Chief Business Officer for South. That position was vacant for a couple of months, has recently joined us. He is going to take care of Andhra, Telangana, Tamil Nadu, Karnataka and Kerala, comes with a lot of experience. So with that, we have all the complements of the 4 Chief Business Officers, North, South, East, West, state heads are there. So overall business is looking good, but that does not -- should not lead to complacency. So we are putting our head down to ensure that we stay focused on basics and the basic is how we are able to collect on the due date, how we are following up on the 1 to 90 bucket, the 90-plus pool is a large pool for us. So ensuring that we keep collecting as much as possible. This is the last year we're going to focus on the so-called 90-plus book because after that, we don't have expect customers who are 2 years or more thereafter paying us. And then, of course, focusing on productivity and disbursals. So all in all, we seem to be on the right direction, keeping fingers crossed for the coming quarters. But at this point in time, we are happy with what's -- how the revised Spandana is shaping up. With that, I hand it over to Ashish, my colleague.

Thanks, Venky. Good morning, everybody. Thank you for joining in this call. I'd like to cover some of the highlights on the financial side, starting with business drivers. Our AUM stood at INR 4,887 crores with 11% quarter-on-quarter growth. So this is -- 12% was the last quarter. This quarter, it's 11%. We just hope that the disbursement trend continues, we will be able to sustain the growth rate for coming quarters as well. New book, which we have originated under the new SRO guidelines or credit rules that we have put up, stands at 91%. Again, this is getting better with every quarter passing by. Hopefully, we should move to 95% or so in the coming quarter. The way portfolio quality has been shaping up as the expected collection efficiency sustains at 99.5% or above, which is what we were expecting it to be. It has a positive bearing on all the quality parameters. So if you look at 1 to 90, it has come down to 1.2% against 1.3% of the AUM last quarter. GNPA stood at 3.6%, again, improved from 3.8% what we have seen in March quarter. Consolidated NPA accordingly was at 0.68% against the 0.73% for March. We continue to hold a reasonable amount of -- or a good amount of provisioning on the NPA. It stood at over 80%. Improvement in business has led to improvement also on the borrowing side. If you see, we had been able to raise INR 1,597 crores in the first quarter. And it has come at a favorable pricing when compared to the last quarter at 11.3%, almost 70 basis points lower than what we have seen in Q4. Even on the liquidity side, we continue to maintain strong liquidity at INR 1,316 crores as of June end. Some of the financial performance highlights. Portfolio, I have covered at 91%, drives the net CE also to 99.4%. This is in the new book, so stood very strong. Portfolio quality and AUM mix is helping us to see register improvement in the yield. So yield accordingly has moved to 24.6%, up from 22.8% in quarter 4. So marginal cost of borrowings, I have covered earlier, but 120 bps was the decline in the cost of borrowing -- marginal our cost of borrowings, and we hope, like Venky explained that there was lot of sanctions that we have received in CGS and we are likely to receive more should help us continue to see some improvement in the marginal cost of borrowings. With the improving trend in the yield and declining borrowing cost, our NIM improved to 12.5% compared to 9.9% in the previous quarter. PPOP accordingly was at INR 16 crores without the recoveries, with recoveries, it was at INR 40 crores. And I think the improvement is clearly visible. Accordingly, the PAT has also seen improvement at INR 12 crores compared to INR 5 crores, which was reported for the quarter 4. I will stop here and maybe open the floor for questions, and take it from there.

[Operator Instructions] The first question is from the line of Harshit Khadka with RoboCapital.

Sir, earlier, we had said that we are comfortable with 2.5% to 3% credit cost. So are we still maintaining that target for FY '27?

Very much. We are at, as I said, 2.1% for Q1 and the efforts are on to retain that.

Okay, sir. Understood. And what is our ROA target for FY '27 and '28?

See, the ROA should be looked at in a BAU. So '28, we expect it to go to the business as usual. And our stated position is 3.5% kind of ROA is something that should be feasible in the kind of ROA tree that we have. The current ROA is at 1%. This should improve from here is the expectation for FY '27.

[Operator Instructions] The next comes from the line of Karthik Srinivas with Unifi Mutual Fund.

And congratulations on a good set of numbers. Sir, I just wanted to understand on the liquidity part, see, we have maintained at about INR 1,300 crores, which is slightly above our BAU, if I'm allowed to put it that way because last year was a little bit of a slowdown and then we had to maintain liquidity. So I just wanted to understand how is it going to be going forward? Will we reduce our liquidity and put it into more use in terms of more disbursements? Or how are you seeing the quarters to come by, sir?

Karthik, thanks for the question. I think the way to look at the liquidity is, yes, we are drawing to ensure that the business disbursements are smooth. And some of it can also always be relating to the timing. Quarter ends, there is a drawdown that happens. And accordingly, you may see slightly higher liquidities. But your point is well taken. As the situation is improving, as the environment is improving, we will like to optimize on the overall liquidity that we will carry in the balance sheet. Having said that, we should always be of the cognizance that in microfinance, it's always better to stay liquid than keep gasping for that.

[Operator Instructions] The next question comes from the line of Sajal Raj with Zenflow Finance.

Am I audible?

Yes.

So congratulations on the improvement in the rating part. Could you share whether this has already translated into lower cost of borrowing? And if so, by roughly how many basis points? Also, what is your expectation for the cost of borrowing in FY '27? Can you provide any broad range?

Sajal, so I am sure you would have noticed that the cost of borrowings incremental has already seen improvement. We are at 11.3% against the 12% last quarter. The rating definitely has a role to play and any improvement there will translate into better pricing for the company. And like we have said, the borrowings under the CGS also is helping us to keep the cost at a lower end of the spectrum. And we hope that this number will sustain, and we may see some more improvement as well. In any case, since the incremental borrowing is going to replace a higher cost of borrowing which we have done in the past, you have seen that translating into benefit on the overall cost of funds as well, which was at 12.8% compared to 13.2%, and we should see some further improvement in the coming quarter.

Just to add on, performance and ratings are intertwined. And as I said, our bank share has gone up from 44% to 47% and efforts are on to increase it further. And more importantly, as days pass by, you will have PSU banks participating, which should also bring down the cost of acquisition.

The next question comes from the line of Abhijit Tibrewal with Motilal Oswal.

Just 2 things. One is on the liability side. Ashish sir, you also kind of mentioned that this quarter, we are expecting more sanctions under CGS. And to that extent, you're expecting the marginal cost of borrowings should trend further lower. But how are things on the other borrowings? Basically, all I'm trying to understand is while we are expecting more PSU banking lines to open up, are we in a situation today where, I mean, access to liabilities can impede our growth targets this year, the business targets this year?

Abhijit, so of the INR 1,597 crores that we have drawn, what was drawn under the CGS for the quarter was about INR 200 crores. The rest is yet to be drawn, that clearly depicts that there is borrowings, which is available outside CGS as well. Even on -- in terms of cost of borrowing, we've been able to secure this borrowing at a reasonably good pricing, even outside CGS I'm saying. And that's how you've seen 11.3% of incremental cost of borrowings and our overall borrowings despite that CGS was only INR 200 crores out of the INR 1,597 crores.

Got it. And sir, what is the target for business disbursements this year?

So, we are looking at anywhere between INR 6,000 crores to INR 6,500 crores. And just to add on to the -- on the liquidity part, even during trying times, institutions were quite supportive of Spandana for a variety of reasons, including the promoter, including the promoter caliber and credibility in the marketplace. Now more and more players are coming into the fold with whom we are talking, some of the names, banking names who are not part of the funding thus far are also talking to us. So it's looking good.

Got it, sir. And then, sir, earlier during the call, someone asked you that, I mean, what is the guidance or what is the target on credit costs this year. So you had said that stays in that same range, 2.5% to 3%. I'm guessing this is gross credit costs that we are talking about. Then you also said that maybe this is the last year where we'll be pursuing recoveries. So I mean, if I were to even include recoveries now, what could net credit costs be like this year?

Closer to nil.

Okay. Great.

And also my statement saying when I said this is the last year, of course, there is always going to be a pool of 90. So what I meant was the older 90-plus, we will not collect it. But of course, you will have some 90 plus this year also. So those collections will always remain. The older pool will stop starting next year onwards.

Sure, sir. That is well received. And the last question that I now had is on the yield trajectory. We have obviously seen yields improve over the last few quarters, also because maybe the reversals are also lower now. At what point will these yields stabilize?

So our ideal yield at which we disburse is around 25.25%. So accordingly, we are very close to that number, Abhijit. So yield going forward should see some improvement. But yes, then it should sustain from there.

The next question comes from the line of Shreepal Doshi with Equirus Capital.

Sir, my first question was on the asset side. Have you taken any rate increase there in the last couple of quarters?

So the last increase that we did was 1st of October '25. After that, there was no rate increase. It's largely the mix changing favorably, which is improving the yield and like the last participant mentioned that the reversals because of the 90-plus is not as much as what we have seen in previous quarters. The yield kind of improves because of that as well.

Just to add. There are no further plans to increase the rates at this point in time.

Okay. Got it. Got it. And sir, we were in this branch rundown journey. So where do we -- when do we see that getting concluded? And what is the number that we have in mind to sort of consolidate that?

So I addressed this partly a little while ago. We have 1,250-odd branches, and it will remain so. No further plans to merge down. Of course, a few branches here and there may underperform and that's why I'm putting up a task force to ensure that these branches have revived rather than shutting it down or merging it. So otherwise, this count of 1,250 will remain. In fact, it might actually go up if you really expand in Tamil Nadu and Maharashtra.

Right, right. So that is where I was -- so that is -- I was going to ask the next question that if you aspire to expand there, especially when you've got a new business head also for that. So in that case, do we see branch expansion coming back actually?

Sure. Some branches in Maharashtra and Tamil Nadu, for sure this year. And then of the 5 or 6 large states that we have, which I spelled it out Madhya Pradesh, Bihar, Odisha, Karnataka, West Bengal, and Andhra, Telangana, we will keep seeing wherever there is potential, we want to grow contiguous if there are gaps in certain districts, we can always keep growing. But at the same time, we also need to ensure that the existing branches are juiced out.

Got it. And the last question was on the asset quality side. So we are in the last week of the month. How are you seeing the current month collection efficiency? I mean you highlighted about the uncertainties of delayed monsoon or El Nino, but are you seeing any of that playing out in July so far? Or we are broadly intact at what we were for the last quarter?

Thus far, in line with what we have seen in the balance month of this year. But as I said, we have taken certain proactive measures to source -- how we source new customers in certain districts which are likely to be impacted. But thus far, no adverse observation in the collection efficiency.

Got it. Got it. I have more questions. I'll come in the queue, sir.

The next question comes from the line of Ashlesh Sonje with Kotak Securities.

A few questions from my side. Firstly, if you can just clarify on whether you are seeing any early signs of elevated bounces or forward flows in your portfolio thus far in the last few months because of the weak monsoon. So that's the first one. And just a follow-up on that one. If you can -- if the asset quality seems to be holding up fine, if you can also share why is that the case in your view?

So the first point, as I said just before this question saying, as of now, we are not seeing any adversity in the way the portfolio is behaving. So that remains. Why is the portfolio holding up, it also depends on how you source customers and what is the kind of discipline that you are trying to in build into your on-time repayment, your meeting centers, your follow-ups both at 1 to 90 levels and 90-plus. So this is a very simple business wherein you've got to keep doing the same thing again and again, day in and day out. There can be some blips here and there depending upon the situation, but large things will not happen if you have your process and controls in place.

Understood. Okay. Second one was on the recoveries. You have indicated that the net credit cost will turn out to be negligible in this year. If I compare that -- so that effectively amounts to, I assume a recovery of close to about INR 250 crores, INR 300 crores -- sorry, INR 150 crores to INR 200 crores in this year. Correct me if I'm wrong there. How does that compare with the total amount of slippages that you have seen in this cycle? I assume that number would be close to about INR 2,000 crores plus.

What has happened in the past, if you try and compare, that's why we have this 90-plus pool, which is large enough, okay. So that should not be a basis for how I look at this year or the years to come through. That pool is large enough, and we are going to collect anywhere between INR 150 crores to INR 200 crores. We are trying to see if we can collect a little more than INR 200 crores as well. With each passing month, today, we are averaging between INR 16 crores and INR 18 crores a month. Aiming for a INR 20 crores, looks a little tough, but you should still put in the efforts to try and see. But flow, as I said, as I said, if your flow is manageable. If you're 99.5%, then your flow is marginalized. And even if you're able to collect 50% of the flow, then home you're home and dry.

Sir, if I were to ask it differently, the pool which is currently in the written-off zone, you would say that the recovery from there would be largely negligible. Is that fair?

No, we are collecting from that only. INR 150 crores, INR 200 crores of collections that we envisage for this year is going to come from the existing 90-plus pool, which is about roughly INR 2,500 crores, of which, we have collected about INR 300 crores last year.

INR 385 crores in last 18 months.