Ladies and gentlemen, good day, and welcome to Aavas Financiers Limited Q2 and H1 FY 2022 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 are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sushil Agarwal, MD and CEO. Thank you, and over to you, sir.
Good afternoon, everybody. Thank you for participating on the earnings call to discuss the performance of our company for Q2 and H1 FY 2022. With me, I have Mr. Ghanshyam Rawat, CFO, Himanshu Agrawal, Investor Relations team, other senior member of the management team of Aavas. Also we have SGA our IR advisors. The results and the presentations are available on the stock exchange as well as our company website, and I hope everyone has had a chance to look at it. I am happy to inform you that during the quarter, the company's long-term credit rating outlook was revised from AA- stable to AA- positive by CARE. I take this opportunity to thank all of you and our stakeholders for their continued trust and support.
With the calibrated reopening of various states and the success of the nationwide vaccination drive, the economic activities has shown a robust and continuous improvement across the country. For Q2 FY 2022, we disbursed INR 901 crore, registering a 35% year-on-year growth. This is almost 90% of disbursement in Q4 FY 2021, so in terms of incremental business, we are very close to the level prior to second wave of COVID-19. All this while, we have maintained our operating metrics safe and delivered profit after tax growth of 31% year-on-year as per Ind AS accounting and 22% year-on-year as per IGAAP accounting for H1 FY 2022. Further, with our philosophy of consistent growth, we registered AUM growth of 21% year-on-year as of September 2021.
As mentioned during the earnings call of Q1 FY 2022, based on our regular interaction with the borrowers and the payment behavior exhibited by them during the first wave of COVID-19 FY 2021, we are expected to see a similar improving trend in collection from Q2 FY 2022 onwards. In line with our expectation, 1 day past due has improved markedly from 12.67% in June 2021 to 8.88% in September 2021. From here on, we should witness a gradual improvement and hope to reach same level as March 2021 by March 2022, if there is no third wave in the subsequent quarters. I would now hand over the line to Ghanshyamji, CFO, to discuss various business parameters in detail.
Thank you, Sushil ji.
Good afternoon, everyone, and a warm welcome to our earnings call. During the quarter, the company borrowed an incremental amount of INR 8,899 million at 6.48%. As of September 21, our average cost of borrowing stood at 7.17% on the outstanding amount of INR 88,428 million. During the quarter, our long-term rating outlook was revised by CARE from AA- stable to AA- positive. ICRA continued to maintain long-term credit rating AA- with a stable outlook. Despite a higher short-term rating, A1+, we continue to maintain zero exposure to commercial paper as a prudent borrowing practice. IGAAP to Ind AS reconciliation has been explained in detail for profit after tax and the net worth on slide number 31 and 33 of our presentation.
Further, a few important parameters. As on thirtieth September 2021, total number of live account stood at 1,35,453. That is almost growth of 20%-20% quarter-over-quarter growth. Total number of branches, 297. That is 38 new branches added in last twelve months. Employee count, 4,627. 31% increase quarter-over-quarter. Assets under management grew 21% quarter-over-quarter to INR 1,01,481 million as on thirtieth September 2021. Product-wise break up, home loans 72.1%, other mortgage loans 27.9%. Occupation-wise, break up, salary 39.8%, self-employed 60.2%. Disbursement increased by 35% quarter-over-quarter to INR 9,016 million in quarter two FY 2022.
By 55% year-on-year to INR 13,641 million for H1 FY 2022. As on 30th September 2021, our average borrowing cost 7.17% against an average portfolio yield of 12.90, resulted in a spread of 5.73%. Borrowing. We are excited to diversify the cost-effective long-term financing. We have strong relationship with various development finance institutions. Overall borrowing mix as on 30th September 2021 is 36.8% from term loan, 22.7% from assignment and securitization, 23% from National Housing Bank and 17.6% from debt capital markets. Asset quality. One-day past due stood at 8.88%.
Gross Stage three stood at 9.96%, and net Stage three stood at 0.72% as on 30th September 2021. During the quarter, resolution plan has been implemented for certain borrower accounts as per RBI resolution framework 2.0 dated 5th May 2021. Such accounts with outstanding amount of INR 1,482 million have been classified as Stage two and risk-based provision created as per regulatory and Ind AS accounting principles. Provisions. Total COVID-19 provision stood at INR 148.2 million as on 30th September 2021. Total ECL provision, including COVID-19 provision and provisioning for resolution framework 2.0, stood at INR 700.5 million as on 30th September 2021.
Liquidity of INR 23,809 million as on 30th September 2021. Breakups are as below. Cash and cash equivalents of INR 12,050 million. Unavailed CC limit of INR 1,190 million. Documented unavailed sanction from National Housing Bank, INR 2,550 million. Documented unavailed sanction from other banks, INR 8,100 million. Profitability. Profit after tax increased by 31% year-on-year to INR 1,522 million as on for H1 FY 2022 as per Ind AS accounting. As per IGAAP, PAT registered a year-on-year growth of 22% to INR 1,548 million for H1 FY 2022. ROA stood at 3.25% and ROE 12.25% for H1 FY 2022.
ROA was 3.90 and ROE 14.66% for Q2 FY 2022. As on 30th September 2021, we are very well capitalized with a net worth of INR 25,700 million. Our book value per share stood at INR 325.7. Now, with this, I open the floor for Q&A session. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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. Our first question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yes, sir. Thank you for allowing me this opportunity. Sushil Agarwal and team, first of all, congratulations on crossing this milestone of INR 10,000 crore in AUM. My question was more around two things. First is the 1+ DPD number. In your opening remarks, you suggested that by the end of the year, we would want to go back to levels of about 6.4%, which was there, I think, at the end of last fiscal year. Just wanted to understand, is it more of a conservative guidance or can we, I mean, kind of reach that threshold of 5% in 1+ DPD that you keep guiding by the end of this year? That's my first question, sir.
Good afternoon, Abhijit. As you see, this quarter, we were able to reduce our 1+ DPD number by 4% and customer behavior pattern is improving month-on-month. The way I see our book is that out of 1 lakh, around 40,000 live customers, we have only 1,000 customers who has not paid the September month installment, current month installment. That rate is very encouraging. Now, that is coming around 0.6%-0.7% of the customer. Between 8.8% and 0.67%, there's a gap of around 8%.
These customers are paying current month installments and, if somebody has one installment due or somebody has two installment due because of COVID and other circumstances in the past, we need to see how quickly they can recover out of that, and that will decide the path of our one day past due number. As management, we see that now this number will come down gradually, and we anticipate that around half percent per month. We can see if no third wave is there, then that number is there. As a management, we are committed to give our 100% efforts and it can bring better rate also if the circumstances will improve.
Sure, sir. Sir, the second question was around the operating expenses that we have reported during the quarter. I mean, are these, I mean, higher or looking optically higher because you've been investing significantly in branch expansions and building up employee bench strength?
Abhijit, the way we always narrate our OpEx number is that we will continue to invest in technology, manpower, distribution, on a consistent basis. Like every year, we open 30-35 branches. Last year also we opened 30 branches, and this year again, within H1, we have opened around 18 branches. That will be there. The OpEx was because we have built up the capacity in last Q4 and Q3. You know H1, H1 was impacted by COVID, and this time because COVID impact was 45-60 days time. We have not impacted the regular salary increments, bonuses, et cetera. All those have been given. It has three impacts. One is ESOP cost.
ESOP cost of around 3.5% is more than the Q4 in this cost. Second is 18 branches which we have opened, that additional cost. Normally, we used to open new branches in H2 of the year, but this time because we have prepared, we opened this time. Third one is normal increment. Last year increments were not there, but this year we have given full increments as per our company policy to all employees. All these three things put together is there. Since Q1 number was less than the normal number of around INR 200 crore- 250 crore rupees, it's a denominator effect also.
On a consistent basis, we say that we can improve our OpEx percentage to as good as it by 25-30 basis points over a year-on-year basis over a period of next two-three years.
Sure, sir. That is useful. Sir, my last question is around the disbursements. I understand disbursements in Q1 were impacted by the second COVID wave. As you have kind of guided in the past that we typically do disbursements of about 35%-40% of the full year disbursements in the first six months, which is H1 and the remaining let's say 60%-65% in the H2 of the year. For this year as well, I mean, looking at, I mean, the kind of demand and the competitive landscape, will it be fair to assume that we will kind of continue to deliver on that run rate? Lastly, Sushil ji, if you can touch upon this new...
Two new states, I mean, Odisha and Karnataka that you have entered in this financial year. I mean, have you done any pilots already there? After that, have you kind of opened up branches there?
Abhijit, on disbursement side, normally, yes, it is same. H1 is 40% and H2 60% kind of numbers. We are on same trajectory for this year. Since Q1 was impacted with a one-month disbursement number, H2 number can be better than that also. Second, I want to touch upon our state opening and branch opening policy again. We are consistent in our approach. Every five years, we open four new states. First to fifth year of operation, we started Rajasthan, Gujarat, Maharashtra and MP. After from sixth to tenth year of operation, which we have completed in 2021, we started UP, Uttarakhand, Chhattisgarh and Haryana. Now this is third span of our control.
For next five years term, we will again open four new states. In that journey, we have started two new states this year, Karnataka and Odisha. We see a lot of potential. We have seen a data through analytics model, and we are confident that these markets have lots of potential in tier-2, tier-3 cities. At the same time, the customer behavior is also in line with our philosophy. We will add another two states, maybe one year ahead or two year ahead, but we'll continue our philosophy of developing four new states every five years in the journey.
Thank you, Sushil ji. This is very useful. Again, congratulations and wish your team the very best. Thank you.
Thank you. The next question is from the line of Aditya Jain from Citigroup. Please go ahead.
Sir, in the maybe a small point, but the Stage one plus Stage two coverage is up a little bit quarter-over-quarter. It's a very small amount, but given the recovery from Stage three, probably Stage two should also have moved down, so we have voluntarily increased coverage. Or is the mix of Stage one plus Stage two actually increased towards Stage two a little bit?
You are saying that Stage two provisioning has increased?
That's right. Stage one plus two provisioning has increased. Yes.
Okay. You know, as I mentioned in the commentary, our pool which has been given a restructuring INR 148 crore, against which we have created INR 40 crore provision. Entire thing is lying at Stage two. With that additional project, our ratio got increased basically.
Understood. When you talk about 30-35% branches being added every year, for the next two-three years, that might give us maybe close to 15% branch growth. If we are, let's say aiming for 30-35% kind of disbursement growth.
Correct.
The disbursement per branch would have to touch between INR 1.1 crore-INR 1.5 crore per month. Just your thoughts on that, just in terms of capacity utilization, where are branches now and how you see that changing?
Aditya, we always say that we will be consistent in our AUM growth, which will be 20%-25% growth all the time. Since we listed, we always say 20%-25% AUM growth. For that kind of AUM growth, whatever disbursement number is required, it is a combination of two things. One is new disbursement and second is containing the prepayment rate of the existing book. Because see, last two years we have reduced our prepayment rate significantly in our portfolio, which has helped us, despite doing calibrated disbursement growth, we are able to achieve our AUM growth. In the future also we will be doing the same. The growth, how it will come? Growth has three elements to come. One is distribution, which is for next three years anyway another 100 branches will be open.
Second is whatever branches we opened in last three years, it has lag efficiency. First year when we open the branch, it operates around 50%, second year 60%-70%, and third year onwards it reach more than 85%-90% of achievement. That lag efficiency will come. Fourth, because of technology and other processes and investment in that side, we get other, all the other efficiency, on the book. Fourth one, which is a positive one for us significantly, is that our borrowing cost coming down, which also gives us, opportunity to have much better customer segment and which we, like more salaried customer and more formal income segment customer, which earlier we were not able to do because of our cost of borrowing.
I think all these four elements puts us in a framework where we can consistently deliver 20%-25% AUM growth in the near to short-term future.
Can you clarify the increase efficiency around 50 to 80, 90%? The base as 100% that you assume that how much as of now?
We have five categories of branches, Aditya. Branches which have potential up to INR 1 crore, branches which have potential up to INR 2 crore, branches which have potential up to INR 5 crore, branches which have more than INR 5 crore potential. It's a mix of all those kinds of segments. But technically speaking, with 300 branches, it should be around INR 1.5 crore per branch at 85%-90% of capacity utilization.
Got it. Okay. Thank you.
Thank you. Our next question is from the line of Kunal Shah from IIFL Securities. Please go ahead.
Yeah. Hi, good afternoon. So, firstly, in terms of restructuring, I think there is some unwind in what we have been indicating. So, obviously it's reflected in terms of the collection efficiency, the way we have seen 1+ DPD requirement being lower. Was there any movement from the earlier restructuring as well, or when we look at it, only INR 37 crore for this quarter, incremental, is it all the incremental or there has been some prepayments or maybe repayments which have happened from earlier restructuring and this quarter would be higher than INR 37 crore?
You are right, Kunal. From the previous restructuring which we have done, around INR 5 crore-INR 7 crore of customers had prepaid their loans. Incremental number will be 5+, 5-7 crore rupees more than what you can add directly from the Q2 to actual Q3 minus one.
Okay, but it's only INR 5 crore. That's hardly the case. Yeah. Okay. Got it, yeah. Okay. Secondly, in terms of MSME, when we look at it, now we are getting towards the disbursements of almost INR 100 crore a quarter. It's coming up. Last time it was INR 30 crore- 35 crore. How should we see this business again scaling up? Again, there is lot of reset in the uptake on the mortgage loan side, ex of MSME as well. Are we deriving more comfort and we should see the growth coming back significantly in the lending in that segment too?
Kunal, if you will see the display in our company, H1 is a little bit less on housing loan and more on MSME and LAP loan. We are more on self-construction housing side and after R1, we'll add all those thing. Then the H2 picks up for the housing construction per se. In the H2, normally our housing loan disbursement in proportion of total disbursement becomes high and overall it remains 70%-75% home loan or 25%-27% of non-home loans. I think this will be the same trajectory. In the non-housing loan segment, we have now two segments for emerging. Three segments. One is LAP, which used to be earlier 70% and top-up loans somewhere around 20%-25% and MSME was less.
Our MSME is also 100% backed by housing mortgages which customer has, customers living in. Difference for us in LAP and MSME is that first, end users always confirm for the business purpose. Second, the tenure is less, around seven years for the MSME customer. And third, we check all the government compliances like Udyam Aadhar, GST returns, et cetera. That segment we are focusing, rather than LAP, in our non-housing loan segment. Going forward, again, we are committed that housing should be 70%-75% and non-housing loans should be 25%-27%. In that, maybe 40% will be MSME, 40% will be home loan or mortgage loan, and 20% will be top-up loans.
Since last almost 15 months, we are very slow on giving and enhancing our exposure on the existing customer base because of the COVID situation. We will renew every quarter and once we are comfortable that normal business scenario is there and customer requirement is genuine for the productive use, not for the distress purpose of the top-up loans. We will again go back to the 4%-5% of our loan on the existing customer to the top-up loans.
Sure. In terms of maybe the negative list which was there in terms of the non-housing part, so is it like now the underwriting standards they have been revised and they have made maybe earlier the way they were stringent. In fact, they have been relaxed a bit, and we should start seeing more approvals coming from that segment because of this change in stance clearly?
Kunal, so in that segment we have improved our filters after COVID.
Yeah.
Say like earlier there were maybe three filters for being the case, now we are using six filters for these cases. We have not reduced our due diligence and criteria. It's a natural demand which is coming up and since we have a very large distribution base, we are sourcing almost 12,000 files per month and increasingly this number is increasing quarter-over-quarter. It's a natural demand. We have not filtered our selection criteria for the business.
Sure. One last question in terms of this, geographical additions to the branches. Again, it's primarily coming in Karnataka and Odisha, and there's hardly been any additions in the existing locations. Broadly, I think you have been earlier articulating that it would be like 70-30 kind of ratio. Would we see the catch up in the existing locations as well in terms of the branch additions or maybe there the growth will largely be driven by the productivity improvement?
Kunal, you are right. As we say, 30 branches every year we will open. Next five years we'll open 150 branches. Out of 150 branches in the new states we will have 50-55 branches and rest 90-100 branches within the existing states. Existing states expansion of the branches will happen in H2. H1 we have started new state branches, likewise. We are consistent in that approach.
Okay. Got that. Okay. Yeah. Thanks. Thanks and all the best. Yeah.
Thank you. Our next question is from the line of Vikram Subramanian from Spark Capital. Please go ahead.
Hi, sir. Thanks for taking my question. A part of my question has already been answered. You just mentioned about the split between home loans and other mortgages, and into which probably it'll the cycle will correct back and there'll be more incremental home loan disbursement. I just want to ask a follow-up to that. If I look at that in tandem with the salaried versus non-salaried split, there the salaried has increased significantly in the past one year. Should we read it as, you know, a bit to move towards a bit of higher yield lending to other mortgage loans, but at the same time keeping you know risk under control by doing more of salaried other mortgages?
Is that a strategy that we are following or this is, they are not correlated and, you know, it'll both of these numbers will just correct back to the previous levels of 35% on salaried and 25% on other mortgages? Could you please give some explanation on that?
First of all, there is no correlation between this. Actually, I've told that now our cost of borrowing has significantly come down. With that, the new states where we have opened, in the new states we focus more on less riskier portfolio for first three or four years in the operation. That's where our this salaried proportion from 35% to 40% or 38% has increased. I think so going forward, as our rating will improve and cost of borrowing will further come down, maybe this ratio can again further move to 42, 58. But right now, we are seeing that this should be consistent, 40 to 60 ratio, and we are okay with that kind of risk and profile mix in our portfolio going forward also.
Got it. The other mortgages might come down a bit faster, but the salaried might remain at this 13.40% range for a slightly more medium term period. Am I right in assuming this?
Correct.
Okay. Got it, sir. That was all. Thank you.
Thank you.
Our next question is from the line of Karthik Chellappa from Buena Vista Fund Management. Please go ahead.
Thank you very much for the opportunity, sir. Three questions from my side. Firstly, on a like-to-like basis, how have the loan yields of the home loan and other mortgage loans varied year on year?
Karthik, good afternoon.
Good afternoon.
Percentage of home loan versus non-home loan?
I just want the loan yield. How has that changed for home loan and other mortgage loan on a year-on-year basis?
Yield on home loan and non-home loan percentage, what?
Yield.
Yield. Karthik, home loan yield was around 12% and non-home loan yield was 14.75% and, in the previous years and current year also, home loan yield is 11.92%, and non-home loan yield is 14.78%.
Okay. Which means on a specific product basis, year on year, there hasn't been much change in the yield of the individual products, right?
Yeah. Correct. It's almost same.
Okay. Generally, sir, you said the mix is changing away from LAP to MSME loans within the other mortgage loans. What is the difference in the yield for a typical MSME loan versus LAP?
Karthik, it's around 100 basis point difference. The major difference is tenure. In that, the tenure is around 10-12 years. In MSME loans, the tenure is five-seven years. MSME loans, because there we can check the end use specifically, and we can also borrow shorter tenures than this, like three-five years for that kind of portfolio. The yield is 100 basis points less, but borrowing cost is further 100-200 basis points less for that kind of portfolio, for that kind of tenure.
This is very clear.
We are trying to maintain a spread, which is 5%. As I've told you, because of COVID, though we have already passed on 25 basis points to all our customers as per dual committee recommendation in last year, still our spread is around 5.73%. If there is no COVID-free days, we would like to pass on this benefit to the existing customer base as we have done in last 10- years history. We match borrowing versus lending spread 5% on particular profile also, portfolio also and very granular level. We don't work like we have disbursed some yield and then we will ask treasury to borrow according to money. Whatever price treasury can borrow the money, we create portfolio and product around it and work around it.
Excellent. This is very clear, Sushil ji. The second question is, if I look at the securitization income booked this quarter of about INR 33 crore on a securitized volume of about INR 170 crore, the yield works out to be one of the highest that we have earned in any quarter. What would explain this? Is it the nature of the portfolio that we have securitized? Could you give us some color?
Yeah. Karthik, it was mostly portfolio of LAP and MSME. There we were having the yield of around 14.5%, around 15%, and the borrowing cost was 7.4%, so around 7.5%-8% kind of spread.
It's relatively the higher yield in richer portfolio which we have securitized this quarter, which explains the higher yield than.
Correct. Correct.
Okay. The last one, Sushil ji, is typically when we enter new states, our strategy has always been that for the first 12 to 18 months, we don't give any targets, we scan the market, et cetera. But this is probably the first time that we have entered a state with 11 branches initially itself, which is actually quite large because even in some of the existing states like Chhattisgarh also, the number of branches are still single digits. So any color on what is so special about Karnataka that you see that you have chosen to enter with, let's say, some as high as 11 branches?
Yeah. Kartik, first, there are two parts of these 11 branches. five are continuous distribution approach because we are working in Maharashtra since last seven-eight years and there is one portion of Karnataka which was attached to Maharashtra, Kolhapur branch and we have shifted the same Kolhapur state head for us to this branch, they are Belgaum, Hubli, Davangere, Bellary. That side of the distribution is contiguous distribution for us. We were working in 50-100 km range in that market. We understand that market very well. New market which we have opened is around four-five branches in that side and that is where we have opened 11 branches in Karnataka.
We see out of this around six branches are in contiguous distribution approach and 5 branches as a new state opening. Got it. This is very, very clear. Thank you very much, Sushil ji and Ghanshyam ji, and wish you and the team at Aavas a very happy Diwali. That's all from my side. Very happy Diwali to you also, Karthik. Thank you very much. Thank you.
Thank you. The next question is from the line of Bhavya from Fortress Group. Please go ahead. It seems the line from Bhavya is on hold. We will move to our next caller. That is from the line of Bharat Shah from ASK Investment Managers. Please go ahead.
Hi, Sushil ji. Namaskar.
Good morning. Namaskar, Bharat.
Namaskar, Ghanshyam ji. Sushil ji, now that we, it does appear that we as a country are reaching towards, hopefully more normalcy and all businesses are looking forward to aspirational and higher trajectory of growth. This may be a good time to revisit our original kind of funding model in terms of ROE metrics. If you believe that barring some rude surprises again on the pandemic side, and if you believe that home loans in particular are showing a greater proclivity for growth in the lending side, can you structurally what kind of model are we looking at in terms of spread, net interest margin, cost to income ratio and the credit costs and eventually culminating into ROE?
In your case, ROE little particular because of the excess liquidity on the balance sheet. Otherwise, ROE also would have been a more critical outcome out of that. If you can link it to that, to ROE metrics, that would be helpful.
Yeah. Good afternoon, Bharat Shah. If you will see, our current quarter ROE is already 15%, which we always used to say that we will reach after two-three years, 15%-15% kind of consistent ROE trajectory. We have already reached this quarter despite COVID-19 wave two and et cetera. The way I see the business, at least even for next three years, if we are able to deliver 20%-25% growth trajectory, we will double the book from INR 10,000 crore to INR 20,000 crore.
On that book, if even if we can -aintain 5% spread, which we used to maintain last 10 years, but last 1.5 years it is more than 5%, 5.75% despite we have transferred 25 basis points already to our customer base. I think that kind of a spread for another 3 years if we can maintain and credit cost, I am hopeful that we can contain our NPA around 1% and credit cost should not be more than 20-25 basis points, which was our earlier trajectory in the past 10 years. OpEx side, we have a scope of going 25-30 basis points down year-on-year basis. That will give us leeway even if spread comes down by 75 basis points from today, 5.75%.
Still we can deliver our ROE numbers, and ROE should incrementally increase with the increase of leverage in the balance sheet. We have already reached quarter-over-quarter basis 15% kind of ROE. Maybe next two to three years we can reach maybe up to 18%, 17%. I hope in this kind of business that kind of ROE is reasonable for long-term sustainable growth in our business. On the growth side, if you will see, we are very consistent. Even in COVID times, we were able to deliver 22% AUM growth. We always keep bench strength on our distribution side, 25%-30%. We always say that if the tough time will come, if the more competition will come, still we can deliver our numbers.
If both the scenario is favorable, we can over-deliver our numbers. Based on that, I think we are hopeful giving that 20%-25% growth trajectory over a period of three years with consistent operating metrics.
20%-25% business growth, about 5.5%-6% kind of margin. Any pressures on the margin hopefully neutralized by cost savings as a cost to income ratio. Credit cost of about 25 basis points and NPA below 1%. That would be the kind of a summary if we assume that the picture now is normal and in fact actually looking better and more progressively interesting in terms of the growth. Is that the metrics that you think you'll be working with?
Yeah, sir. We hope so. If the situation will not get worse from here, I think next three- year it should be stable, good to decline for us.
What kind of ROE could you implement?
Sir, ROE, we always used to say that we will be consistently delivering 2.5%+ ROE. Since you know our leverage is less, so right now we are giving 3%+. Hopefully, ROE into leverage is such a multiplier of ROE, which I am explaining to you that it will be 15%-18% kind of ROE range over the next three years.
Okay. You know, Sushil ji, in a business like yours, essentially long-term lending for mortgage area, low interest rate environment in case of excess equity capital on the book is actually hurtful because it doesn't give you enough opportunity to put leverage in the balance sheet and enjoy the spread of the lending rates. Therefore, in low interest rate kind of environment, excess equity capital on the book is a source of some kind of limitation. Unless we grow at a rate much higher than return on equity, we will not be able to soak up or use excess liquidity or excess equity capital on the book.
Therefore, our growth rate has to be significantly higher than return on equity in order for us to use excess equity capital and therefore use a more judicious kind of balance sheet where there is a little bit more leverage rather than too much excess equity capital. That in turn drives ROE as well. Won't you think that will be essential?
Yes, sir. I agree with your point, but since last five years, every year something or other is coming. First demonetization, then liquidity crisis, then IL&FS crisis, then COVID one, then COVID two. If things will normalize maybe over the next one- year, two years, three years' time, we can think of other side. Till that time, as a management, we see that survival risk is more important for us and a little bit less leverage gives us a comfort of sustaining long-term business. I agree with your point. If next 18-24 months things doesn't have any of this kind of survival events in the industry, we are in agreement with your advice.
See, that is why I am bringing the question again. Given the fact that we have excess equity capital, and we've been very judicious in underwriting our business by proper credit selection, so that it doesn't end up reflecting in higher credit costs, which is the right thing to do, to maintain that hygiene and discipline. Unless we grow it not more like 20%, but probably materially higher than that, so that we are well over the return on equity in terms of the growth rate sustained, so that that becomes a source of improving both our ROE, so that financial structure becomes more balanced rather than lopsided in favor of equity capital.
Yeah, sir. As I mentioned, if situation will improve in 18-24 months, we will see to it. Sir, one thing you need to appreciate that because of this capital and low leverage, during COVID time, we were able to get two rating upgrades. We have been given more trust by the lenders that during pandemic time everybody was ready to fund us and at a much cheaper rate on the balance sheet. That borrowing cost impact which has come down significantly has also improved our return. I agree with your point, and whenever we are coming next to Mumbai, we will come and seek your advice and we'll see how we can improve the things in future also.
No, no, thank you, Sushil ji. Always a pleasure meeting with you. One last question. One last rather point I'll make. Given our very prudent and wise lending practices, conservative asset liability match, duration discipline that we maintain, all these are hugely praiseworthy aspects of the way relatively smaller lending organization like yours but has very prudently and intelligently managed the situation. The way I try to sort out the dilemma of excess equity capital on your books resulting in lower return on equity, optically it results in a lower return on equity. I try to look at your total balance sheet and divide it into as if normatively your normal debt equity ratio for the mortgage lender should at least be six to eight times the equity capital, if not more.
I try to theoretically split your total capital accordingly and try to rework real ROE. At some stage, that imagined ROE in my head and actual ROE have to kind of come together, and that value not only be anchored only with the growth rate it has.
Correct. I will also do the calculation like you. By this year end, we should be somewhere around INR 12,000 crore a year and around INR 1,000 crore of FDR on the balance sheet for the future lending. INR 13,000 crore book divided by 6, INR 2,200 crore capital. Right now we are having INR 2,570 crore capital, out of which INR 170 crore securitization excess money to INR 2,400. Only INR 200 crore capital is excess. I think that is sufficient that we should always keep in a buffer for the next year growth, even on INR 12,000 crore, if the next year grow 20%-24% or 25%. The next year profit again it will be reaching in the same ratio which you are talking.
Thank you. Mr. Shah. I request you to join the queue for any follow-up. Our next question is from the line of Shubhranshu Mishra from Systematix. Please go ahead.
Thank you for the opportunity, Sushil ji and Ghanshyam ji. Two questions. First is on the customer segment. If you can dwell on this, what category of customers do we have in salaried? I mean, how do you split it into PSU, private, government employees? What are their average salary levels and what are their average income and age when they are onboarded? And similarly, if you can dwell upon the self-employed segment, what kind of industries are they from? Are they more of traders? More dependent on manufacturing. What are their average income levels? What are their average family incomes? And do we look at cash flows or do we look at GST terms or we look at a mix of GST and cash flows while underwriting them? That's the first.
Second question is, given the fact that, I mean, we will be doing some amount of outside city documents. So these documents sometimes also happen to be slightly haphazard. So how do we go about understanding those documents? Because the law stipulates that they should go back in history for 13 years. So how do we understand the entire history of the document, legality of the document? How many lawyers do we have which are on roll, off roll? How do we understand that and how do we store these documents as well? Is it a centralized storage or a decentralized storage? So these are my two questions. Thank you.
Yeah. You ask at the annual report in two minutes time, but I will try to explain. Firstly, we have salaried 38% customer in which our average ticket size is around INR 9,000- 10,000. Average installment level is around INR 11,600. We have income to installment ratio of around 33%, so average salary level around INR 30,000- 35,000. In this we have both public sector and private sector, but we don't differentiate between that wise. This is whosoever is getting salary into the bank account and that is getting credited for more than 12-24 months, we keep them as a salaried customer and apart from that, we do the CIBIL and Bureau score check. That is the profile of salaried customer.
In the self-employed segment, in the 60%, we have around 40 profiles which we track. None of the portfolio is more than 5%-6% in the book. Last 32 quarters, quarter on quarter, profile-wise, geography-wise, we input the data into our analytics algorithm method. By assessing these customers we do cash-flow-based accounting. In our underwriting team of the 400 underwriters, I think more than 300 are chartered accountants. Now we have processed more than 4 lakh files over the last 11 years. We have our own data learning and everything put into analytics. That helps us assessing the self-employed customer in our portfolio.
Coming back to your second question, from the very first inception, since we started working in Tier 2, Tier 5, we have a deep understanding and knowledge of area where we work on the property title. Right now in company we have more than 100 lawyers and 300 law firms work for us. In most of the cases, we have two legal reports. One from in-house lawyer, one from outside lawyer. To tell you about that, particularness of the how we check the best criteria is how many cases got rejected in scrutiny processing while you have done that. In last 11 years, not a single case or order passed against us by any DRT and collector for the title correctness of the document.
I think the emphasis is that now we have assessed 4 lakh customers and we have disbursed around 1 lakh 90,000 customers and live accounts are 1 lakh 40,000 in the book. Now we have significantly got understanding knowledge and around the retail title where we fund. We don't fund any property that's where we cannot use the SARFAESI proceedings. Hope I have answered your question.
The documents, are they centralized or decentralized?
Yeah. We store documents centralized at Jaipur. We have Iron Mountain facility, which is the world's best storage facility, premier in the country and the world. We store our documents with them.
Thank you, Mr. Mishra. I request you to join the queue for any follow-up. Our next question is from the line of Kiran Engineer from CLSA. Please go ahead.
Yeah. Hi, good afternoon and congrats on the good set of numbers. Just a couple of questions. One is on your hiring strength. You all said you hired about 30%, is your employee growth, right, on a year-on-year basis. I just wanted to understand that, you know, when does operating leverage then kick in? Because our employee count has been growing faster than the AUM, faster than the branch count growth. Ideally, out of the 1,000-odd employees hired last year, you know, could you give us a function cost?
Yeah. Kiran, no? Kiran?
Yeah, Kiran.
Good afternoon. Normally, we always say we will keep on investing in distribution because we want to run this company for next 20 to 30 years. There will always be this investment in distribution according to branches, according to business, according to circumstances. Last six months there is a tough competition around the market and as our policy we say that we create bench strength always for our businesses and in the difficult time also we will deliver. In the difficult time is not there, we will over-deliver. That is the reason the staff strength has grown more than the AUM growth number or disbursement growth number. But the distribution has also increased on the other side. Second is, most of it.
If you'll see our current manpower strength, it is towards 2% in the business side and 1% in the support side. That is the breakup we keep always when we hire our manpower.
No. I got that, but if I have to just think about it bottom up, if we've opened 30-35 branches, each branch might have five-six employees, so that's maybe 200 employees here. In some centralized functions, et cetera, maybe another 50 or 100. Or if I could ask you another way, maybe over the next three-five years, what sort of an employee count growth do we see?
We are saying that we will grow our AUM by 20%-25%. Though in practicality we say that our employee growth should be less than the AUM growth because we are using the technology also, and that will also play a role. That's the fact. Current growth is because we have created a buffer because of the heightened competition in the market and everybody wants Aavas employee in their framework for all the smaller to large HFC. This we have as a proven practice from the management side. We have taken it a step. Yes, going forward, employee growth should be around 15%-20% vis-a-vis AUM growth of 20%-25%.
Okay, that answers it. Sir, my second question is actually more of a clarification. You said that the spreads today are 5.7, 5.8 and you are targeting about 5% or so. If that does happen in the near term, you know, how should we think about your ROA and ROE? Do we expect ROE, which is 15% now to sort of again drop because a 70-80 basis points spread compression is quite severe.
Kiran, if you have heard correctly, I have told that whatever spread we will bring it down, we will save that much of cost in the OpEx.
Okay. About 20-25 basis points every year.
Yeah.
Got it. Okay, that's it from my end. Thank you and all the best.
Thank you. The next question is from the line of Shreepal Doshi from Equirus . Please go ahead.
Hello, sir. Good evening, and thank you for giving me the opportunity. My question was on the restructuring front. What is the nature of restructuring? Like how much moratorium or extension will be given to our customers?
It's in the form of moratorium because in the COVID wave one customer has taken the moratorium and that is the language they have correctly understood. It is in the same line of that. The moratorium is from three-nine months kind of vintage according to customer request and past experience on how much, how many months moratorium he has taken in the COVID phase one.
Got it. Sir, second question was with respect to, like, as you alluded that we are focused on the non-CHL front, we are focusing more on MSME. How about the underwriting? Is it done by the same credit underwriting officer at the branch or do we have a separate structure or infrastructure because this will require different set of understanding?
Shreepal, we have the strength of underwriting informal income business class in inception. As you know, we have a 65% self-employed that's informal income. That's where our 75%+ team are grounded on at the ground level as credit officers. For us, in housing loan when we give, we check end use either it will be for construction, renovation, it's for purchase then or we do the transaction. Same is here in MSME. We are assessing the same customer on the basis of cash flow, GST, Udyam Aadhar, business is same. But what is the difference between LAP and MSME? MSME, we are able to extend the end use of the fund which we are giving for a business loan.
In the LAP it can be used for personal purposes also, for daughter's marriage also, for some other incidents also. Their tenure was high and less probability of checking the end tenure. In MSME, we have more end use checking capability and tenure is less.
Got it. One last question was with respect to branches. What percentage of our branches would be mature and how do we define, like, you know, like, would we consider basically a branch having an AUM of INR 200 crore, for example, would be a mature branch? And what percentage of our branches today would be mature? And what would be the OpEx upon AUM and C-C/A ratio for that, for those set of branches?
Shreepal, I personally consider a branch mature when it is positive ROE. Every quarter we do the ROE calculation of each of the branches with fully loaded cost of entire balance sheet. Mostly in tier 2 to tier 5, within 12 months all our branches become positive ROE branches. For metro branches, yes, it takes two-three years to reach that kind of level. Out of 300 branches, more than 85% branches are ROE positive. As you know, within the last 12 months, we have opened another 40 branches, so that, I'm hopeful 90% of it will become ROE positive in next 12 months. Remaining 30-40 branches which are not positive ROE in more than 12 months, we are working as a team.
As I told, some of branches will be metro branches, so anyway their target ROE is two years.
sir, like, just a follow-up question there. What is, like, the ideal OpEx upon AUM that we are looking at, what percentage of our branches would be already achieving that sort of a metric?
I will just give you one example. For the understanding, say if a town has 4 lakh population, divide by 5, 40,000 households. When we open a branch, we say in next 15 years it will cover 5% of the population. 2,000 home loans we need to give in 15 years. Divide by 180 months, we need to do 10-15 cases per month. That is the potential for us for that branch, which means if the branch will do INR 1.5 crore business, we will earn 2%-2.5% fees. We make a criteria that this branch cannot have cost more than INR 3 lakh.
Now when we take the office it should be INR 25,000-INR 30,000 rent, other OpEx will be INR 15,000, then we'll keep around INR 1.5 lakh rupees cost as a manpower cost. All those should deliver in next one- year around INR 1-1.5 crore rupees kind of volume, which will fetch us maybe INR 2 lakh-3 lakh rupees fees, which should take care of entire branch OpEx. That's our definition of viability of the branch. Because it's a 15-year VC, if your branch is ROE positive in the first year, then next 15 years lending minus borrowing everything should come to company as a spend.
Thank you, Mr. Doshi. The question has joined the queue for any follow-up. The next question is from the line of Vikas Kasturi from Focus Capital. Please go ahead.
Namaste Sushil ji and namaste Ghanshyam ji. Congratulations on a fantastic milestone. I wish you a very happy Diwali. Sir, I had a question. You have a branch in Jayanagar in Bangalore, which is an upmarket kind of locality. What is the rationale for setting up that branch? And the second question is, sir, you have a subsidiary called Aavas FinServ. What are your plans with respect to that? That's it, sir. Thank you.
Yeah. Anywhere new state we open, we need to open a regional office which is in the mainstream of the capital of that state. Jayanagar branch will work like a regional office for entire Karnataka operation for us. That's where we opened a Jayanagar branch there. Second question is Aavas FinServ. We have Aavas FinServ. We have applied for a license to RBI, and whenever they will approve, we will do MSME business, and a subsidiary, which will again be backed by mortgages. That's the idea. The application is still with RBI, so whenever it will come, we will operate.
Okay. Thank you, sir. Thank you very much.
Thank you. Next is from the line of Siddharth Purohit, SMC Global Securities initial investor. Please go ahead.
Sushil ji, congratulations on good set of numbers, and thank you for taking my questions. Most of the questions were answered. I just had one small question. On the upfronting income of fresh retail loans, what we see is, about INR 33 crores that is recognized in FY, H1 FY 2022 on a securitized volume of INR 175 crores. However, we also see about INR 36 crores of reversal in the P&L. If you could throw some light on that, and is the company following a contractual, cash flow or behavioral, cash flow pattern for recognizing this income?
We work on behavioral cash flow. We have already said, like, INR 2,000 crore of book which is assignment.
Okay.
For which income is upfront booking. Whatever we have booked upfront, every quarter there will be reversal. Whatever we have booked.
What's this? Something, something.
that reversal will come every quarter. Like Q1, we don't have the new assignment, so INR 18 crore was the reversal on the existing assignments. This quarter again, INR 18 crore of reversal, but INR 33 crore rupee is the upfronting income. That's where you are seeing H1 INR 33 crore rupees of reversal.
Understood. Just a follow-up on that. You know, in H1 FY 2021 last half year, we had about INR 150 crore of securitization against which income of INR 18 crore was booked. You know, there is a vast difference between INR 18 crore and INR 150 crore against INR 33 crore out of INR 175 crore securitization. If you could help me explain that would be great. Thank you.
You are talking volume, securitizing volume versus income booked in this half year?
Yes, yes. INR 33 crores and INR 175 crores is what you have booked. However, if you see last year, it was about INR 18 crores and INR 150 crores.
We will try to explain this question again. I think this question was raised earlier also. In this quarter, we have assigned MSME loan book, which was having a higher yield and got securitized at 7.4%. Its spread was around 8%+. Last year when we did assignment of INR 155 crore around in the last year H1, which was purely home loan book, where spread was at 5%. You see a similar quantum was securitized in this H1, but income was a lot higher.
Understood. That helps. Thank you so much.
Thank you.
Thank you.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sushil Agarwal for closing comments. Thank you, and over to you, sir.
Yeah. Thank you, all for attending the call. To summarize, at Aavas we aim to be one of the key enablers in broadening and deepening of credit facilities to unserved and underserved customers in the semi-urban and rural areas. Further, we will continue to make investments in digital initiatives and distribution as that will further improve the operational efficiency and enable us to serve our customer even better. Thank you so much for your time. For any further information, we request you to get in touch with Himanshu in our Investor Relations team or SGA or IR advisors, and they would be happy to help you. From entire family of Aavas, here we are wishing you a very, very happy Diwali and a prosperous new year. Thank you very much.
Thank you very much. Ladies and gentlemen, on behalf of Aavas Financiers Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.