Please note that this call is being recorded. I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities. Thank you, and over to you.
Good evening, everyone. Welcome to the earnings conference call of Cholamandalam Investment and Finance Company Limited. To discuss the 3Q FY 25 performance of Chola and share industry and business updates, we have with us the senior management, represented by Mr. Vellayan Subbiah, Chairman and Non-Executive Director, Mr. Ravindra Kundu, Managing Director, and Mr. Arul Selvan, Chief Financial Officer. I would now like to hand over the call to Vellayan for his opening comment, after which we'll take the Q&A.
Thank you, Nischint. Good afternoon, good evening, everybody. Key financial results for the quarter and the year-to-date December 2024: disbursement for INR 25,806 crores for the quarter, which is up by 15%, and INR 74,452 crores for the YTD, that's up by 16%. The total AUM is now at INR 189,141 crores, which is up by 34% year-on-year. Net income for the quarter was at INR 3,541 crores, which is up by 37% year-on-year, and INR 9,812 crores for year-to-date, which is up by 39% year-on-year. That is at INR 1,087 crores for the quarter, which is up by 24%, and INR 2,992 crores for the year-to-date, which is up by 27%. I'll just go through some of the disbursement data at a business level. The vehicle finance disbursement was at INR 14,390 crores in Q3 FY 25, which is a growth of 16%. Disbursement in year-to-date December 2024 was at INR 39,492 crores, which is a growth of 12%.
Our loan against property business disbursed INR 4,205 crores for the quarter, as against INR 3,409 crores, which is a growth of 23%. And year-to-date disbursements are INR 12,374 crores, which is a growth of 33%. Home loans disbursed INR 1,820 crores in Q3, and that is a growth of 15%. And year-to-date, the disbursements were INR 5,421 crores, which is a growth of 17%. SME disbursed INR 1,911 crores, and that is as against INR 1,981 crores in the same quarter last year. And year-to-date is INR 6,029 crores, which is a growth of 1%. CSEL, which is our consumer and small enterprise business, disbursed INR 1,449 crores in the quarter, as against INR 2,773 crores, which is a growth of 14%. And the secured business and personal loans disbursed INR 331 crores, as against INR 280 crores, which is a growth of 18%. And year-to-date, it disbursed INR 911 crores, which is a growth of 29%. Assets under management stood at INR 189,141 crores .
PBT growth in Q3 was at 27%, and for year-to-date, it's at 28%. PBT ROA for the quarter is at 3.2%, and year-to-date is at 3.1%. ROE for the quarter was at 19.6%, as against 18.9%. The company continues to hold a strong liquidity position with INR 15,159 crores of cash balance at the end of December 2024, including INR 3,421 crores invested in G-Sec and SDL, and INR 1,594 crores invested in T-Bills, and INR 758 crores invested in Swiss Chronon investments, with a total liquidity position of INR 15,077 crores, including undrawn bank lines. The ALM is comparable with no negative cumulative mismatches across all time buckets. Our consolidated PBT was INR 1,465 crores for the quarter, which is a growth of 27%. In terms of asset quality, Stage 3 levels representing 90-plus days increased to 2.91% as of December 2024, from 2.83% as of September 2024. GNPA as per RBI norms increased to 4%, as against 3.78%.
NNPA also increased 2.66%, as against 2.48%, and NNPA is below the threshold of 6% prescribed by RBI for PCA. In terms of capital adequacy, as of 31st December, we were at 19.76%, as against the regulatory requirement of 15%. Year-one capital was at 14.92%. In terms of dividend, the board of directors approved the payment of an interim dividend of 55%, being INR 1.30 crores per share, HSA per share, on the equity shares of the company for the year ending March 31st, 2024, so I will stop with that and be happy to turn it over to the audience for questions. Thank you very much.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We'll take a first question from the line of Dhaval Gada from DSP. Please go ahead.
Yeah. Hi. Thank you for the opportunity. I had a couple of questions. The first one relates to asset quality. So last quarter, I think we commented that generally we expect Stage 3 Assets to improve in the second half of the year. If you look at slide 29, generally the improvement is less, and we've seen some increases, especially in the newer businesses. Could you talk a little bit around, is it in line with what you expect and things should improve in the fourth quarter, or what's sort of gone in the new businesses? So that's the first part. And the second question relates to, if you look at slide 67 and 68, which is on CSEL and SME, generally if you look at the ROA improvement, the PBT ROA improvement, we expected some bit of credit cost normalization as well.
What should be the steady-state credit cost in both the businesses in your view, and where it should be in the current year and then in the medium term? Yeah. Thanks.
Yeah. So first of all, I mentioned last time still that the Q2 to Q3, it will be flat actually. And we have tried our little bit, and we see that little bit in terms of NCL of vehicle finance is actually now seen at the extent of 10 basis points. At the same time, the CSEL is actually showing a little higher NCL. That is because of the partnership is actually showing higher NCL. And we mentioned in the last time also that we are coming out of the partnership business slowly. We already come down to three partners from 10 partners in the last two years' time, and likely to go down further, and we will come out completely from the next financial year.
As we come out of the small ticket size loan, where the NCLs are high, you will see that the NCL of CSEL will start coming down. So standalone CSEL without partner is much lower, but if you add the NCL, it is actually higher. And the second is that even in the case of the partnership group, we are getting FLDG in the income line. So overall NCL, whatever you're seeing, it is inflated by 1% because that is added in the income line also. So your question is, when the CSEL NCL will come down, it will come down only when we start doing lesser partnership, and when we completely come out from the partnership, that's the CSEL. And we are likely to do that within the next one year's time.
You will see that the partnership book will get run down because these are small ticket, small tenor books, and majorly will get run down, and the balance will get run down in the next two years' time. When it comes to the SME, SME is basically similar to loan against property where the customer is basically having a collateral, and then we have to do SARFAESI, and resolution of the cases takes nine months to one year, so there are SARFAESI which is lined up, and once the SARFAESI is start kicking in, then the NCL will start giving the reversal as we have seen in the case of Vellayan, so next financial year, you will see those reversals will start coming, and we'll see our NCL in the case of SME will be instead of negative, it will be positive, and therefore the ROA can go up.
So, this is what is the feedback on SME and the CSEL delivery. Is there anything we can do without?
Yeah. So Kundu, just a follow-up. In terms of the partnership, as per CSEL first, in terms of partnership business, what is the NCL right now? And XO partner, or either one you can give, XO partnership, what's the NCL right now? Like it's sub 4% or even lower? So what should be the expectation for next year and beyond? That is one. And on SME, you said that reversal this year elevated, and then next year probably reversal. On average, what should be the NCL that we should look at in this business on a more medium-term basis?
Yeah. So one is that the reversal happen only when you start getting seizure and properties started getting auctioned, the reversal will start happening. But in steady-state, this particular book also will behave like loan against property. So 0.5% is the NCL. You can take it as a steady-state for the SME business. As far as the CSEL partnership and non-partnership, traditional partnership, we have never given the bifurcation, and we have not disclosed that. So we don't want to comment on that as of now, but obviously when it will start coming down, the significant amount of NCL, which is showing up like it is 5.7%, initially it will come down below 5%, and then it will start coming down further.
Got it. Just last question on growth. So last time you mentioned that 25% growth expectation in the medium term. Does that sort of still hold true, or any thoughts that you have for next year or beyond in terms of growth expectation?
So we are holding on it. The 25% growth, we are going to deliver that even next financial year.
Perfect. Thank you, and all the best.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to answer queries from all participants, kindly restrict your questions to two at a time. You may join back the queue for follow-up questions. We'll take our next question from the line of Dhaval Gala from Aditya Birla Sun Life AMC. Please go ahead.
Thank you for the opportunity. Very good set of numbers. Congratulations to the management team. So two questions. First, on net interest margins, if you could let us know the current movement or repricing of the borrowings, and how would we be placed, assume the rate cycle is peak, and if there is any cut, how should one look at next year? And second question, on the asset quality front, if you could highlight, generally that trend is that fourth quarter numbers looks to be far better than the previous three quarters, and there is better collection efficiency across the vehicle or all the auto financing book. Should one expect similarity in the current financial year? And maybe what could be the guidance for credit cost next financial year?
For only borrowing cost, we are holding it at similar levels, and we expect if there are reductions coming through by the reaction etc., then that will go through, but that will be a lag of quarter, but I think then it will come. Yeah. Yeah. The quarter four will be better than the quarter three, and it has been like that, but if you see that in general, the second half normally from quarter three onwards start doing better. And this year we said that this year scenario is slightly different. Things are not looking so good in terms of all the metrics and all the macros, so therefore, things will start improving slightly slow, and therefore we said that quarter three will be flat, and the improvement in quarter four as compared to quarter three, if you take the last year was very good.
So those will happen definitely, quarter three to quarter four improvements. It will not be to the level of the last year, and slowly, slowly improving because the capacity utilization of the vehicle is still improving. IFEs are still improving. It has not come to the level of what it was last year, so it will take about another three to four quarters to increase to the level of last year performance, so that is what is the thing, so from here, things should improve as far as the vehicle finance portfolio is concerned. We have seen that, and we have started actually delivering a slight reduction in the NCL over the quarter, and then quarter four will be definitely better than the quarter three.
We have to see quarter one because normally quarter one is a slightly lean period, and then obviously the next year will be better than the financial year.
All right.
Dhaval?
Yeah.
Question?
Yeah. Yeah. Thank you. Thanks a lot, and all the best, sir.
Thank you.
Thank you.
We'll take our next question from the line of Akshay Jain from Autonomous Research. Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. I have two questions. One, the credit costs continue to remain in the postcode of around 155-160 basis points for the last three quarters. Why do we see that elevated credit costs in vehicle finance fees and deviation in new businesses? Can you please provide some more color on this? As in, the stress in the vehicle finance is being seen across products, vehicles, geographies, or is it restricted to some certain specific segments? And also, you mentioned something on the new business side, but I guess you missed the SBPL piece. So if you can provide something on that also.
Yeah. So first of all, before coming to vehicle finance, I'll tell you that it is not only the credit cost is basically coming from the new business.
It is also the reversal of the credit cost from the LAP which was coming, which has now started stopping, and then they started getting into the normalization of the new credit cost. They were earlier say - 20. Now they are less.
10%.
10%. So that is also a swing happening because they have also reached to the rock bottom level of stage two and stage three, and reversals are now not possible further. So one is that the credit cost is coming from that. In the nature also, they were also continuously reducing their NNPA. They have come down to 1.2 level, and their NCL is at 0.3 level. Though their NCLs are at same level, it's not gone up. But ideally, in the affordable business also, the NCLs are slightly higher than that. So it is not only coming from the new businesses. It is also coming from LAP and nature. Now coming to the SBPL, SBPL is delivering 6% plus ROA, and their NCL is likely to be 1.5%-2% in a steady-state situation.
So, we are also getting NCL to be standard because now that book is getting settled down. Now, coming to the vehicle finance, which part of the market is basically not doing? We mentioned that last year. Small commercial vehicle and light commercial vehicle for us, they are not doing well from quarter two of the last year, last financial year itself. It started increasing the imprint delinquency, and we have taken the conscious decision to reduce the market share in the small commercial vehicle last year itself. And now we are seeing that the early default and non-starter started coming down from November onwards. So, things are improving in the small and light as concerned. In addition to that, we have also seen the used commercial vehicle and also tractors are not doing well. But all those two products also now seeing that things are improving.
In vehicle finance, we can say that the last two years of performing some product not performing is started performing better from quarter three onwards. The improvements are slightly not visible as of now. We are able to see from the impairment delinquency only point of view. Therefore, the stage three is not visible. Stage two has come down in vehicle finance, and stage three is slightly up by 10 basis points, 9 basis points. Things are going to improve in next three to four quarters as similar to what it used to be, but we have to wait for that.
So is it right to call that you are calling a peak to the current stress, and Q4 will definitely be a strong quarter given the seasonality, and Q1 should start seeing moderation further?
So as of now, we should not use this strong and all. It will be better than quarter three, definitely. We are trying strongly to get the better performance, but things are looking better now in terms of impairment delinquency, and also the roll rates have started coming down in the early buckets. The important is that the resolution of the higher bucket cases, which is already slow, that is taking time. So unless the customer will move to Stage 3, start giving two, three installments, they will not come back. So that is the reason I'm not using the strong performance coming up very soon. It will definitely come in three to four quarters, but not immediately. But going forward, it will continue to improve.
Got it, sir. And if I may, last technical question on GNPA versus GS3. So your GNPAs are up 22 basis points in the quarter and 46 basis points in this year. Are the drivers here similar to what we can see in GS3? And what is the main difference between the GNPA and GS3? Because one is at 2.91 and the other is 4%.
Yeah. And then the market becomes very good, then all the GNPA customers who have actually come back from Stage 3 will become normalized. But what is happening that things have just started improving. So some people have come back, but it's still showing up GNPA because GNPA, once you test the GNPA and it has come down to, say, 30-60 or 60-90, still the customer will be in GNPA. But in the Stage 3, once customer is coming below 90 days, which is coming out of the Stage 3. So during this kind of situation where things have started improving, there is always gap in the Stage 3 and GNPA.
Akshay Jain?
Understood, sir. Thank you.
Thank you. We'll take our next question from the line of Harshit Toshniwal from Premji. Please go ahead.
Hi, sir. I'm not audible.
Harshit, your volume is very low. Please use your handset.
Yes. Is it better?
Yes. Please go ahead.
Yeah. Hi. Thank you, sir, for the opportunity. Sir, the question was more on the headcount increase and more specifically that, as you mentioned, the higher bucket cases this time are more sticky. So if you can throw some light about the allocation towards the collection within the employee count. And also when we, I mean, simple metric, if you try to look at more like disbursement per employee, so that number has not seen much efficiency over the last three, four years. Now, is it more sticky that the collection efforts are becoming tougher in this cycle? So to that extent, can that have any implication on the cost ratios in the next three, four quarters for us?
Yeah. So this is the market is actually not doing up significantly. The market is cut at, say, 5%-10%.
The disbursements are depending on the number of vehicles being sold by the industry. So the productivity of the sales executive also gets impacted. And also, when the portfolio is actually a slightly challenging environment, the sales executives are also responsible for the early default follow-up and non-starter follow-up. So obviously, they are putting their effort, but the number of units is not going up, which is going to go up only when the industry starts seeing the good number in terms of the percentage of units being sold by the manufacturer and the dealer. At the same time, when it comes to the collection, the collection executives are given more number of accounts during this situation.
People were hired in this company.
This time, we have hired around 55% people in the collection only, and majority of people have actually gone into the collection. Those people who are like you also asked that what is the strategy of collection. We have created a separate bucket-wise approach for the product. We have a separate bucket. Cars and MHCV, we have a different bucket. Two-wheelers, too, we have a different bucket. And soft bucket, hard bucket, medium bucket, like that, we have broken up and given the allocation to different. Higher bucket executives are getting lower account of allocation and lower bucket executives are having a higher bucket account. There is a strategy on collection, and it's getting implemented across all the businesses.
Just a follow-up to that . Now, maybe the early bucket collections would be a responsibility for the mixed responsibility of the salesperson itself. But if you look at, say, 65,000 employees today, how much would be core collection or collection managers? I think there would be a lot of agencies at the back end, which number will not be represented here, agency and the agency employee. But how much of the 65,000 would be core collection dedicated ones, maybe the harder bucket one? And if you can say, compare that what percentage it was a year back, some direction to the number.
Now? 21,000 is collection now, and earlier what was the percentage for? I mean, one year back?
Harshit, does that answer your question?
I think just the one year back number is less. Yeah.
It's the same ratio. It has not moved much with the ratio.
Okay. Okay. The ratio is similar. Got it. Sure. Okay.
Thank you. We'll take our next question from the line of Raghav Garg from Ambit Capital. Please go ahead.
Thank you for the opportunity and congrats on the results. Firstly, sorry I could not hear your commentary on trust utilization properly. What is it? That's it. If you can repeat very briefly.
Yeah.
The other thing is that also your view on vehicle finance just talking about three to four quarters is all right. So in light of that, what will be your credit cost guidance for next year? That's my first question. Thank you.
Yeah. So, capacity utilization, you see that the inflation of the vehicle has gone up during the last one year. We have seen that significantly. That is also because the supply has been less. So if supply is less, the onions being transported by the small vehicle, the small commercial vehicle between Sri Lanka to Mumbai, the number of trips have come down. So it came down as low as 50%, and then it started going up. The capacity utilization started improving as the supply of the vehicles, the supply of the food has improved. Last month, transportation has improved. The capacity utilization is improving month on month. And it has come to 70%-80% now, and it requires to move further. I'm talking from the small commercial vehicle point of view.
Similarly, when you see that industrial port production or the GDP is strongly correlated with heavy commercial vehicles capacity utilization, there we see that the on-ground activity on infra, road, mining, and manufacturing are slightly down. It has improved in November and December, but still not up, so in the heavy commercial vehicle, the sales are down, and the portfolio quality, capacity utilization is slightly getting impacted. Though Chola is not more exposed in the heavy commercial vehicles, so we do not have that problem as far as the HCV is concerned, and HCV problem has started now. Small commercial vehicle-like commercial vehicle problem actually started last year, which is now coming down, and it is improving in fact, so therefore, in order to basically see that the NCL will start coming down to the industry level, I see at least three to four quarters is there.
From Chola's point of view, since our exposure are less in HCV, our next credit cost should start coming down from quarter four onwards.
Right. And what is your guidance for next year's credit cost? What is it?
It will be lower than the current year.
Okay. Understood. And sir, my other question is on LAP portfolio. So there also, you've seen some NPLs increase. Now, I've seen the numbers, but if you can give a more ground-level flavor as to what are the reasons why a customer is finding it difficult to make repayments? So that's another question, sir.
As of now, we have last two, three years, we have evenly released our stage three. And these are all regular and normal roll forwards, which is in the BAU roll forwards. If you look at it still at an overall stage three level, it's holding at 2.25%. So there is no significant change in terms of the movement in the stage three. If you look at even December 2023, stage three of LAP book, it was about 803 growth. And we are almost at the same level for the last 12 months. Maybe there is a dip because of some resolution, successive resolutions happening in between, and then normal roll forwards happen. So it has remained stagnant for the last, in fact, last 15 months, it's almost at the same level.
Understood. And one last question from my side. In the CSEL disbursement of about INR 3,100-3,200 crores, how much of this was from the partnership?
Partnership was?
1,200.
1,200 croress.
Okay. And this you're saying will go down significantly in next year, right?
Yes. Next year, it should not be there. This quarter, it will come down.
Okay. Understood. Thanks a lot, and that's all from my side.
Thank you.
Thank you.
Ladies and gentlemen, we request you to restrict to one question at a time, please. You may join back the queue for follow-up questions. We'll take our next question from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Good evening, everyone. Thank you for taking my questions. Two questions. First one, a clarification question. Ravindra, when you say things will start improving from fourth quarter and maybe it will take three to four quarters for things to get normalized, what I'm trying to understand is, I mean, what is the underlying rationale when you say that? Is it more in the nature of seasonality that we've seen fourth quarter, or do we think that the macro themselves will start improving and come from maybe better government spending, which will lead to an improvement that we're talking about?
So for fourth quarter, I mentioned about the heavy commercial vehicle where our exposure is negligible. So we are not relating to that one. I'm saying the GDP growth, which has come down, or IP showing lower, those data points are basically showing that the capacity utilization of heavy commercial has been impacted. The on-ground activity on mining, construction, road, and everything is actually not that gone up or picked up as similar to last financial year. So therefore, we will have to wait for heavy commercial vehicle capacity utilization to go up in next three to four quarter time. As far as the small and lights are concerned, these are more strongly correlated consumption and rural economy, last point, transportation, and all that has started improving. And that's the reason we said that we are expecting things to improve slowly from Q4 onward.
And next year, net credit cost will be better than the last financial year as far as the vehicle finance and assets and such a lot.
Got it. And sir, then the second question that I had was more on used vehicle and two-wheelers. Sir, I mean, people, other lenders, other NBFCs, some banks have talked about some stress that we are seeing in used vehicle business. I'm talking more about the refinance part of used vehicle business, which is often treated as a consumption loan. So what are we seeing there? And sir, two-wheeler, again, I mean, we've heard some lenders talk about challenges in two-wheeler in terms of collections because the ticket sizes are low. Given that whatever stresses are being seen in microfinance, there are some spillovers. So what is our assessment of the used vehicle refinance business and the two-wheeler business?
Two-wheeler, tractor, and small commercial vehicle, light commercial vehicle, and used commercial vehicle, all these five products, the delinquency started moving up from the quarter two of the last financial year itself, which is because of the consumption, because of the rural economy not doing well at that point in time, then consumption in the urban also impacted. Last month, transportation got impacted. Now we are seeing that all of these are actually started improving, especially from November and December. We have only seen two months. That's the reason I'm not able to say that this is going to be done. Everything will be cleaned up in next one to two quarters. That's the reason I'm saying we have to wait for some time, but things are improving, and next year will be better.
Now, coming to the specific to two-wheeler, if we do all two-wheeler across all OEM, then there is a problem. There are selective OEMs. We have done it in the past, and you know very well. And that's the reason the overall performance of two-wheeler is looking better now. And used commercial vehicle also improving and showing the better capacity utilization. Therefore, portfolio is started improving.
Got it. Thank you. And sir, just one final, one last question.
Thank you for joining back the queue, please, as we have other participants.
Sure. Thank you.
Thank you. We'll take our next question from the line of Pranav from J.P. Morgan. Please go ahead.
Yeah. Thanks a lot for the opportunity. Just a couple of questions. So I was going to say one clarification. I think you mentioned operator profitability was 50% and now it's 70%. Sorry, the capacity utilization was 50% and now it's 70%-80%. So are you comparing 3Q to 2Q or 3Q to 3Q last year for SUVs and LCVs?
Q1, Q2 versus Q3.
But doesn't that improvement generally always happen? 3Q is more active. So doesn't that always be the case?
No, no. I'm saying this capacity utilization has gone down so badly. From there, it started improving. Normally, the capacity utilization doesn't go down so badly. It remained at 70% level during the lean period and comes back to 90% level in the peak period. So during this financial year, due to the heat wave, then excessive rain, election, post-election transition, was taking time. So capacity utilization got impacted.
Okay. Understood. So it's 50, 70, 80 this year, and that was 70 and 90 levels last year for SUVs and LCVs.
Correct. Correct.
Got it. And second, just on your disbursement level sequentially in the new businesses, even if I look at home loan, it's not flat. LAP has come down. Even CSL is down, but I think CSL will be more because your partnerships are higher disbursements. But on the LAP and HL, the trend, how do you see it moving forward for you to achieve your 25% growth target for next year?
So last, if you look at it, the previous two quarters were okay. But last quarter, we had a small dip that's primarily because some of the markets, we have external forces playing in the SROs because they couldn't disburse the full. That is one of the primary reasons in some of the major markets there was a drop. But we are very confident, and things will stabilize this quarter onward, and the disbursement will come to the normal level for LAPs.
For HL, the disbursement has increased. The overall numbers, which we feel, are around 15% growth on a YOI basis, and going forward, the AUM growth will be around 35% plus. For next two years, this is the common point which we have been highlighting in the last meeting.
Got it. Thanks.
For disbursement, we are saying that 15% and 35% with the closing asset. That is fine. For next time for us, in order to basically deliver 25% growth for the company, that is what HL is promising because they are expanding and stabilizing and expanding and stabilizing.
Got it. Thank you, sir. I'll come back in the queue.
Thank you. Ladies and gentlemen, we request you to restrict to one question at a time, please. You may join back the queue for follow-up questions. We'll take our next question from the line of Hardik Shah from Goldman Sachs. Please go ahead.
Thank you. Am I audible?
Yes. Please go ahead, Hardik.
Sir, two quick questions. One is how much of our last affordable housing would be linked to repo, and how would the transmission look like if hypothetically we were to get stuck in February?
We have our own internal benchmark for our reference rate, and that's what we follow for this, and that is a combination of the tenor and the asset profile, so we have a transfer price to the business, and this is the transfer price adding various components. We arrive at the reference price, and that's the reference price, and because the transfer price takes the market pricing, if there are any reductions, that gets flow down, and the reference price will change.
Okay. So the transmission will happen not immediately, but with some kind of lag. So can you help us think through in terms of what that lag could look like, please?
It depends on where or whether our borrowings are also getting the impact of the repo. So for example, we have MCLR slabs, which may not reduce. So then we will not be able to reduce it because unless the banks pass it on, we will not be able to reduce it. We need to understand month on month, we do this exercise, and then we factor in what is the pricing for the book that needs to be done. It depends on how fast the borrowing we get the impact, then we can pass it on.
Understood. And sir, second question on the credit cost. You mentioned that you expect credit cost for vehicle finance lower for the next year from the current year. What would that look like for the overall book? If you could guide on that front.
I don't know if we are saying this sector, which is how we are looking a little better, just the vehicle finance. Obviously, vehicle finance is actually 56%. That much is backed from the overall book. Yeah. But obviously, for the company also, it will come down.
Okay. Thank you, sir.
Thank you. We'll take our next question from the line of Subramanian Iyer from Morgan Stanley. Please go ahead.
Hi. Thanks for the opportunity. I just had a couple of data questions. So one is, in your P&L, you have this net gain on derecognition of financial instruments of INR 65 crores. Is this assignment? Just wanted to confirm that.
Yeah. It is an assignment. We have an opportunity to do. Normally, we have not been doing, but this time there was a request from one of the banks, so we thought we'll do it.
Okay. And you mentioned about 1% of MCL in the CSL being FLDG. So that works out to about INR 35-37 crores. Is that already in the other income this time?
It is in the income line of CSL. Yeah. It is in the income line of the CSL.
Wonderful. Thanks so much and wish you all the best.
Thank you. We'll take our next question from the line of Piran Engineer from CLSA. Please go ahead.
Yeah. Hi. Hi, team Congress. On the quarter, a couple of questions. Firstly, how should we think about growth in LAP over a two, three-year period? I was going to ask for home loans also, but you've already answered that. But on home loans, how confident are you to maintain yields at 16% and also grow at 30%?
We'll take the LAP first. We have been growing last three, four years consistently. If you look at it earlier, because of the lower denominator effect, it was showing a higher percentage. We have grown to a certain state where 25% disbursement growth and about 35%-40% AUM growth is what we look at it in a steady state. That's what we are looking at, and that is what we are very confident and we are working towards in achieving that. You can take 25% disbursement growth and 35%-40% AUM growth for LAP.
For HL, I have already answered. We are looking at 15% disbursement growth and around 25% book growth, 25%-30% book growth for next at least two to three years. And we feel that right now we have stabilized and we have become a pan-India player in affordable segment. And for the current year, what we have also done, we have started increasing on the efficiency management. So the slight, the upward, which is the reduction trend, that's what we are focusing to ensure that the efficiency levels go up. And also, going forward, we see there is still scope of at least the coverage of 300 more branches pan-India next two to three years because we are operational at right now at 700 branches, whereas vehicle finance is around 1,200 locations, 1,200 branches.
So there is still scope headroom for us to grow next two to three years and have coverage across all the locations everywhere. So right now, we are focusing on the stabilization and increasing the efficiency. Next, it will be on growth phase for next coverage for next two to three years in terms of book growth.
Sir, sorry. Mike.
Some lines, asset margin is showing 15.9%. Obviously, when we start growing across the country, it will be a little bit, will go down, but it will get offset by the better expense line, which is 3.9% as of now, has come down from.
So your voice is not clear.
What we are saying is that the yield, if you said, "No, how can you hold it at this level for how long?" They are saying that yield can go down a little bit, but to the extent of it also will improve. At ROA level, there is no change.
Understood. And sir, just secondly, on the used car market, you mentioned that used commercial vehicle was under stress for the last four or five quarters. But one of the other players also recently mentioned that used car market is seeing delinquencies. Is that also what you are seeing, and what are the sort of actions that you all are taking?
So, for the used car business is doing well. It is not having any stress. Right, it is improving. As such, we are doing well in that.
Okay. Thank you, and wish you all the best.
Thank you.
Thank you. We'll take our next question from the line of Chandra from Fidelity. Please go ahead.
Hi. I had a couple of questions. I'm just trying to reconcile the two statements that you made. One was it will take up to three to four quarters for stability in credit costs, but your early delinquencies you are saying are coming down. If your early delinquencies are coming down, why would it take three to four quarters for credit costs to stabilize? That's question number one. And second was, at the start of the year, you were of the view that this is, I mean, the next few years, also assets will start improving for Chola with every passing year. I mean, far from improving, also assets are actually going up. I understand, obviously, there is a little more investment into the collection, but maybe just what's happened on the cost side and how should we just move forward to model the next two?
There are two things I said as far as the credit cost is concerned. One is that from the commercial vehicle point of view, what I mentioned, that small and light are improving, but heavies are actually strongly correlated with highest GDP. We see that those two data points are not showing so good results. For heavy commercial vehicle, it might take some longer period. Chola is not exposed to HCV, so we are not having that problem. For the industry, it might take commercial vehicle is improving in three to four quarters. As far as Chola is concerned, we mentioned that we have seen little improvement in this last two months, November and December, and therefore Q4 will be better. From here, it will be improving quarter on quarter.
But in quarter one, which is a lean period, we have to see how that impact, what would be the number. But we are quite comfortable that things are improving much faster than Q4 quarter. As far as the OpEx is concerned, we have been maintaining that. We are in growth phase. We are introducing product after product. We are working on consumer durable now. And we have also developed our own digital platform where we have been doing the PLCS, and that is also the new investment. We are also going through a lot of changes in technology side, which, some are compliance related, some are improving the efficiency related, so therefore we mentioned that currently we are expecting our OpEx to be there at a 3% level, not that year on year it will come down.
Year on year, for new businesses, we'll reduce the OpEx, and the investment will continue to be there, and we should hold the OpEx at the same level. When the investment on the new businesses will get over, and then definitely we will be reducing the OpEx, which is going to be after two years, not year on year immediately.
Got it. Okay. Thank you.
Thank you. We'll take our next question from the line of Suhas Hari from ICICI Prudential AMC. Please go ahead. Suhas?
I think there was a mistake. I don't think I really asked. I think there was some error in that. Sorry. Sorry for that.
There is no question. All right, sir. Thank you. We'll take our next question from the line of Abhishek M from HSBC. Please go ahead.
Yeah. Hello. Good evening, and thanks for taking my question. So sir, I think for credit cost, initially you all had called out about 1.3% for the year. You're at 1.4 YTD. So do you still hold on to 1.3% because 4Q should be much better typically, even if it is higher than last year? Or do you think 1.4% is more the level to think about?
As of now, 1.4. We will see when we are expecting quarter four to be better, but let's take 1.4 as our target.
As an outer target. Okay, and next year should be better. Based on your commentary on used CV, tractor, the LCV, HCV, I think generally your commentary on vehicle and then as you come out of partnership, etc., and CSEL. So.
Yeah.
It should be better next year. Yeah.
That's correct. Absolutely. Next year will be better than this financial year. We are banking on the vehicle finance more. And as far as the small CSEL is concerned, we will come out of the partnership, and that will improve the unit credit cost.
Understood, sir. And margins, just quickly, you expect it to improve as rates come down, or do you think that will have to be passed on and basically margins should remain flattish from here?
Sir, vehicle finance is around fixed rate that is 56%. If rate cut comes, then obviously vehicle finance will be more benefited, and we have also mentioned that in years, our marginal book yield is higher than the book yield, and that is getting transferred slowly, so quarter on quarter, we get 10 basis points benefit on account of that. Next year, margin will be higher because of that.
Got it. Got it. Thank you so much and all the best. Thank you.
Thank you.
Thank you.
Next question is from the line of Vikram Subramanian from Marshall Wace. Please go ahead.
Hello. Hi, sir. Thanks for taking my question. Just to follow up on asset quality, I know it's been discussed quite a bit, but just wanted to get a bit more clarity. A couple of things that I understand from what you have commented is 1Q had quite a bit of system issues because of heat wave and election and all of that, which resulted in significant drop in capacity utilization. And right now, there is a bit of stress on HCV capacity utilization as well. But given that now in 2Q, you say capacity utilization has increased significantly, and our proportion of HCV is also quite low, why isn't it that we won't see a sharp credit cost reduction in 4Q? Ideally, that should be the case, right, given that the base has so much stress, 1Q and 3Q.
Can you give some explanation or color there, please?
So as I mentioned, the improvements are not sharply happening. It has seen that it is going up from 60 to 70, but last year, the 70 was the base state, and it went up to 90. It's good time. That is the reason we are saying that this year, the second half improvement is lower than the second half improvement of last year. And capacity utilization started improving for small and light, but for those customers who have already gone into the phase III, they will not be positioned to come back, and they will not be in position to pay two EMI, three EMI at a time. So that is what is going to take time.
Okay. Okay. Fair enough. And just another follow-up on OpEx. I think one of the previous participants had asked about the investment phase and when OpEx will reduce. From your comment, is it right to understand for the next couple of years, OpEx to assets will be flat, and then it will start to reduce?
That's correct. Absolutely.
Okay. Thanks. Thanks. That's all.
Thank you. Next question is from the line of Viral Shah from IIFL. Please go ahead.
Hello.
Yes, Viral Shah.
Hello.
Go ahead.
Yeah. Sir, I have a few follow-ups on the questions that have been already kind of answered, but some bit of ambiguity. One is on CSEL. You mentioned that the credit cost actually increased, and of course, it is because of partnership and the FLDGs that have other income. But when I look at your yields, which includes the other income, that has actually sequentially declined. How should we think about it?
That is because of the reversal of income also when the customers are getting onto NPA and runoff, and the interest income is actually coming down for that portion.
Okay. Got it. And sir, your comments with regards to various subsegments of vehicle have been quite helpful. Just one, I think the missing piece over there is how is the used heavy commercial vehicle doing? So while you mentioned heavy, it probably is now getting into the relative stress and will take now three, four quarters to improve, but the used heavy, how is it trending? And more so from a market perspective. I know we are not the big players.
The used is also relatively now doing better in the normal and the upper market.
And you mean to say the used heavy, right? Not the used small and medium?
Yeah. Yeah.
Okay. Sir. And sir, with regards to the home loan piece, so we saw a 20 basis points decline sequentially in terms of yields. What was it driven by?
There were two points in that. There was also the interest reversal on the 3 EMI part, which has been mandated by RBI on the reversal interest of these particular customers. Also, the yields have the as we go to self-employed, self-category, the yields are slightly being competitive, and we are going to stabilize at the places. At the same level, the yields we are going to maintain.
Okay. And what would be the reason for, say, the relative moderation in the disbursements in home loans? I get flatish quarter on quarter. Was it because of any localized disruption in any states or geographies?
No. It is on the overall numbers as of now. We said 15% growth year-on-year basis, and the book growth around 25%-30%.
Got it, sir. Thank you so much and all the best.
Thank you.
Thank you.
Next question is from the line of Renish Bhuva from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. So just two things from my side, again, on the expense ratio side. So I do understand that in some of the new businesses, the expense ratio could be higher. But when we look at the vehicle finance business, the cost ratio has been increasing, which is now at 3.4% versus 2.8% in the first quarter of 2024 and 3.2% in the last quarter. So how one should think about it? It is the competitive intensity, which is leading to higher payouts at the dealer point, and hence the increase or there is some structural change in the business model, which is leading to higher cost issues, sir.
This quarter one, 24, was actually 2.8%. After that it started going up. As I mentioned, from the last year Q2 onwards, we started seeing the delinquency going up, and therefore we started recruiting manpower in collection, created more vertical within the collection. That's what one figure. And at the same time, we have also started reducing the number of cases by the executive because those executives who were doing the 10 units in small commercial vehicles started doing six and seven. And over the period, we have seen that there is a drop in sales in lights and small, and that also reduced the productivity of the people. It is the productivity of the sales executive and which has come down during two years because of the market. And also because we wanted to further extend the collection, we have recruited more manpower in collection.
So that activity, I think, is over. From here, next year onwards, you will see that the improvement will come in the vehicle in terms of opportunity.
Got it. Got it. And sir, just last thing again on the housing loan. So at roughly INR 17,000 crores of book at 15%-16% yield, we are targeting 35% kind of a growth. So I mean, is there any huge white space available wherein we see this kind of a growth, or we see sharp moderation in yields maybe a couple of years down the line?
One is that the growth is basically because of the stickiness of the portfolio for the longer term. When you do the 15% disbursement, it normally will deliver you 25%-30% growth automatically. Second is that the incomes are higher because we are expanding into Tier 2, Tier 3, Tier 4 towns where the yields are better. Our expansion from south to non-south started two years back and which has continued so far, and we are getting a better result in terms of the yield. Yield also gets the overall income also gets benefited when we started doing insurance, generating insurance, and that also added. But now it is getting normalized. We are at 15.9%. This 15.9% to 15.9% is the income we are quite comfortable, and we are hoping that the yield will be maintained. ROE is at actually say 4.3%.
So this 4.3 can go up only when the OpEx will go down. So the previous question which was asked was that what would be the outlook of the NIM as well as the expenses? We said that the NIM can come down and expenses can also correspondingly come down, but ROE we can hold it at this level.
Got it. Got it. Okay. That's it from my side, sir. Thank you. And that's all.
Thank you.
Thank you. We'll take a next question from the line of Arvind R. from Sundaram Alternates. Please go ahead.
Thank you so much for the opportunity , and congratulations on the good set of numbers. Sir, like you mentioned, so much about asset quality. I would like to get a qualitative view, just like in vehicle finance, you mentioned any system issues. SME and LAP, affordable housing, these are the segments that really have grown much faster, not just for us, but for the entire system. Do you see any leverage-related issues for the system level, like in affordable housing segment or in the LAP segment that could stop?
Actually, when we are financing LAP or affordable housing, we are checking that whether the customer has a 10 unit or not. For affordable housing, that means purchasing house or construction of house. If the customer's income is such that he has taken loan and is not able to pay further loan, obviously we are not approving the loan, both in the case of LAP and affordable. The capacity of the customer is always evaluated based on the income assessed by the people who are doing the PD and also GD, and also we are seeing that what are the inflows coming in the bank, all put together. The over-leveraging is not possible when we are financing.
No, understood, sir. But we are seeing in different affordable housing portfolios of different companies, because of exposure to unchecked growth, there is some level of stress. I'm not saying a significant stress coming out yet, but I was just trying to understand, do you see any risks down the line in affordable housing or LAP? Yeah.
No, so we are seeing that. I mean, with the interest situation, we are not approving the loan.
Sure. Thank you.
Thank you. We'll take a next question from the line of Roshan Chutkey from ICICI Prudential Mutual Fund. Please go ahead.
Yeah. Thanks so much for taking the question. Just one question, sir. At the system level for the CV book, how are you reading the asset quality? What is your read of the asset quality for the system?
Sorry?
In the CV book, sir, what is your read of the asset quality at the system level?
Yeah. We discussed that. I mean, it is like it is moving from product to product. So now it looks like it is impacting more on the heavy commercial vehicle, and small and light, we have seen the portfolio how it is behaving quite sometimes.
Okay. Thanks. That's all from my side.
Thank you. We'll take a next question from the line of Kunal Shah from Citi. Please go ahead.
Yeah. Thanks for taking the question. So I understand on the home loan side, 15% disbursement growth translating because of the stickiness of the longer duration. But in general, when we look at it, the overall disbursement run rate has been quite low over the past few quarters across the segments. So still, we are continuing with almost like 25% AUM growth. So business loans, we have seen that there's hardly like 7% growth, and a few of the segments have started to show stress. So now, why is still being confident on the overall AUM growth, or do we see any kind of a risk out there because disbursement growth in other segments is not suggesting that? Yeah.
So we have seen that each and every segment we have considered and after considering only, then we are also planning to also seeing that what would be the next stage. We see disbursed at the rate of 18%. Our growth can be 45% can be achieved in terms of the and we have considered all the run rates of 3Q, 4Q, everything we have considered, and after that, we have seen that.
Sure. And secondly, in terms of the vehicle OpEx to assets, so you indicated why it's been higher, but have you picked out and should we see the improvement going forward, or will it again take a few quarters and it will stay elevated?
We think it's for us, yeah, to be improving, and we are quite comfortable that the trend which we have seen in the last two months will be maintained in the coming months, and we are expecting that to improve in the next financial year as well.
So OpEx to assets in vehicles?
Yes.
Okay.
OpEx to assets. OpEx to assets is going to be flat for some time, and then vehicle finance will start reducing because we have decreased the collection and increased what we have added in the last one and a half years. Further, we need not increase it to achieve the next financial year goal. That will help us to reduce the OpEx in vehicle financing. But at an overall level, what we said is that it will be flat for some time because we have to grow here, and we're continuously working on both product launching as well as the technology improvement and the branch expansion as well as going on.
Got it. Got it. Okay. Yeah. Thanks. Thanks a lot for this. Yeah.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities for closing comments. Over to you.
Thank you very much for joining us today. We thank the management for providing us an opportunity to host the call.
Thank you.
Thank you so much.
Thank you. On behalf of Kotak Securities, that concludes this conference. Thank you for joining us, and we may now disconnect your line.