Ladies and gentlemen, good day, and welcome to the Q1 FY24 earnings conference call of Five-Star Business Finance Limited, hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions once the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star 0 on your telephone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Renish Bhuva from ICICI Securities. Thank you, and over to you, Mr. Buwa.
Thank you, Michelle. Hi, good evening, everyone, and welcome to Five-Star Business Finance Q1 FY 2024 earnings call. On behalf of ICICI Securities, I would like to thank Five-Star management team for giving us the opportunity to host this call. Today we have with us the entire top management team of Five-Star, represented by Mr. Lakshmipathi, Chairman and Managing Director, Mr. Rangarajan, CEO, and Mr. Srikanth, CFO. I will now hand over the call to Mr. Lakshmipathi for opening remarks, and then we'll open the floor for Q&A. Over to you, sir.
Yeah. Thank you, Renish. Good afternoon, everyone. I'll invite you to this Q1 earning call. This is the fourth earning call that Five Star is taking up with the participant. I think we have come across one full year. The four performance of Five Star, you people have seen, so it's a clear understanding that what we say and what we do correlates a lot. With this note, let me open up the outlook, what happened in Q1. Generally, for lenders, June quarter is a bit muted comparing to the March. I think for Five Star, the June quarter is a trend setter to see how this financial year will be looking like.
Starting from our AUM growth, we have moved our AUM from INR 5,296 crore last year to INR 7,583 crore, registering a growth of 14% year-on-year. Most importantly, quarter-on-quarter, we moved from INR 6,915 crore to INR 7,583 crore, registering a double-digit growth of 10%, close to 10%. It has come from, we have opened a good amount of branch. Last full year, we have opened 75 branches, and for the first quarter, April to June, we have opened 13 branches. As we always say, one of the growth levers, is starting new branches at existing and the new locations, new states.
This has improved our disbursements, and the disbursement have moved from INR 568 crore to INR 1,132 crore, nearly 99% growth from year-on-year. From quarter-on-quarter, we have moved 2% higher than the March disbursement. This has happened after COVID. This is the first time that June disbursement, June quarter disbursement has crossed March quarter disbursement. Moving to the collection part, I think collection part also, Five-Star has done very well in Q1 of the financial year. Our collection efficiency, as given in our presentation, we have done one of the best collection efficiency and, what we call, D1 C1, that is collecting a EMI from all live customers, has also been very good comparing to March, equal to March.
What this has resulted is, we have made one of the best current customers. We have our current bucket has moved to all-time high of 85%. Pre-COVID, our all-time high was 82% of current and 18% of arrear customers. That has now moved to 85% of current. For the first time ever, our 30-plus metric has dropped down to single digit. It has dropped down to 9.68%. This is the first time in Five-Star. This shows the strong momentum what Five-Star has demonstrated even in collections. If you see across every bucket, be the current or stage 1 or stage 2, we have improved in all buckets. What this has resulted is one of the best asset quality.
Our 90-plus has moved a bit from 1.04% last quarter to 1.08%. This is just a blip of this being the June quarter. The technical NPA, what I said in last call also, the new RBI circular which kicked on, that NPA number has moved on from 1.36% to 1.41%, increase of 5 basis. The 90-plus and NPA, technical NPA, mostly remains the same compared with March quarter. The difference between 90-plus and NPA, which is 0.33%, which comes out to INR 25 crores of arrears, which is lesser than 90 DPD, which is declared as a NPA due to the new circular which got issued.
This, business and collection has resulted in one of the best profits for SISA. Our tax, profit after tax for this quarter has moved from INR 139 crore in last year to INR 184 crore this year, registering at 32%. From last quarter, it moved from INR 169 crore to INR 184 crore, registering a Q on Q of 9%. From our borrowing cost also, I'm happy to say that our cost on book keeps reducing. Even this quarter, it has reduced from 9.87% to 9.80%, and our incremental borrowing cost remains at 9.18%, which is, which is one of the attractive borrowing costs for the size of the company.
Finally, on the provision, we have maintained or increased a bit provision of ECL, which has moved from 1.61% last quarter to 1.64% this quarter. All in all, all the cylinders of business, collections, and profitability and quality has been good for this for for first quarter of this financial year. We're very optimistic and a very strong hope that this will continue for the next 3 quarters. Keeping this in mind, we are revising our growth guidance from 30% to 35%. With this, let me conclude my opening remarks and hand it over to my team. I think start with Srikanth to take you through more on the numbers. Thank you.
Good evening to all of you. A lot of the numbers have already been stated. I'll just take up all, you know, financial metrics and then give you an open out for queries and questions from your side. Our yields continue to be stable at around 24.4%. You know, you'll always see a 10-15 basis points drop, which seems to be on a quarter-over-quarter basis. Like Mr. Parthiv said, our cost came in at 9.8%. That's a very healthy spread of 14.6%, as compared to a 13.6% spread for Q1 of last financial year.
The NIMs is about 17.74%, primarily, you know, coming on account of the lower funding costs, as compared to closer to 17% for last quarter, Q1 of FY 2023. All this has actually resulted in a healthy ROA of about 8.41% for the current quarter and an ROE of 16.62%. The ROE has actually gone up by about 184 basis points year-on-year and about 50 basis points quarter-on-quarter. We continue to, you know, keep a very well-diversified borrowing profile. We have about 50 lenders who have lent to us. Even during the first quarter, which typically tends to be noted of a borrowing particular as well.
We got sanctions of about INR 890 crore, out of which we availed, INR 730 crore of, fresh borrowings. This has come in at an interest rate of 9.18%. Even assuming the all-in cost, including the other fees and other ancillary charges, the number is 9.5%. This compares against 9.53% of last, in Q4 that we raised. The, the interest rates increase in the market has not impacted us yet. There is a possibility that there will be some small revisions in the MCLR that will come through, because most of our sanctions are based on 1, 1 year or 6-month MCLR.
We may see some uptick coming from the book cost, but we are confident that the incremental cost will be around 9.5 or maybe lower, which will sort of offset the increase that may come in on account of the MCLR increases. We can have a very good liquidity on the balance sheet. We have about INR 1,400 crore, inclusive of the INR 160 crore of advanced sanctions that we have taken. During this quarter, CARE also has upgraded our rating to AA-, today we have AA- from all three agencies. The profitability continues to be robust, we had a 32% year-on-year increase in the profitability and a 10.9% on a sequential basis.
We ended the first quarter with about INR 184 crore of profitability. On the PCR side, again, both on the overall AUM, we are maintaining a 1.64%, which is one of the highest for a secured lender. On the stage three assets, we are maintaining a PCR of 44%. This has come down slightly, but then last quarter itself, we had sort of guided you that it was a slight increase in the last quarter. We would like to maintain this around the 40% levels. We are at 44%. Restructured book is performing well. As a percentage of the overall book, it has actually come down to 0.76%, and even on that, we are maintaining a PCR of about 50%.
Again, about 90% of this restructured book is in the standard category. This is after repayment behavior of 7 quarters. On the whole, I think we have had our growth momentum back. Collections have stacked up extremely well. This is reflecting in the profitability. With all of these three metrics, the growth, profitability, and quality remaining robust, you know, we are poised to take advantage of the large opportunity available in this segment. On that note, you know, happy to take any questions that any of you may have. Thank you.
Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and 1 on their telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handouts while asking a question. Ladies and gentlemen, we will wait for a moment while the questions you assemble. You may press star and 1 to ask a question at this time.
We have the first question from the line of Ajit Kumar from Nomura. Please go ahead.
Thank you for taking my question. On the yield side, you were planning to reduce, yield from 4 to 63, if I remember correctly, as the cost come down.
Excuse me, sir. I'm sorry to interrupt, sir, your audio is not clear. May be requested to use your handset.
Am I audible now?
Yes, sir. Please proceed. Can you please repeat your question?
Yeah, sure. My first question is, on the yield side, you were planning to reduce the yield from current 34 to 23 or 22 as the cost of funds goes down. Just wanted to take a status on that. That's my first question.
e have not yet finalized that because you all know that we all think strongly that rate hike cycle is stopped. But we just wanted to see the first symptom from Reserve Bank, how the stance is being taken, then we will take a call appropriately. Yes, what we said holds good.
Okay, cool. Okay, fine. Still,
I'm sorry to interrupt, sir, but we couldn't hear your question, as your voice is breaking.
Oh, am I audible now?
Yes, sir, please, continue.
Yeah, I was asking, the investment on your balance sheet has dropped, from INR 154 crores, last quarter to INR 354 crores in this quarter. I just wanted to see what has happened there.
Yeah, Ajit, there is nothing, you know, if you... The way to look at this is, you will have to add the cash and cash equivalents, bank balances, and the investments. That has actually gone down to about INR 1,600 crore as of last quarter, to about INR 1,400 crore. It's a, it's a strategy that we use if we are able to get a good rate on the fixed deposits, we would prefer placing it there. Typically, you know, March quarter is when banks also are interested in, you know, more of fixed deposits. You know, there was good returns on that. With, you know, the yields going down, the markets are also good now, so mutual funds are earning closer to FD returns. That is where, you know, we have put some monies in the investment.
The way to look at it is, it's a combination of cash, bank balances and investments, rather than looking at a standalone number.
Ajit, does that answer, does that answer your question?
Sir, the participant has left the queue. We'll move on to the next question, which is from the line of Makarand Rajania from Nuvama. Please go ahead.
Yeah, hello. Congratulations on a very good set of numbers. I just had a few questions. Firstly, can if you could explain what happened to OpEx, why that was down, and what is the outlook ahead on OpEx?
Maruk, the, if you're looking at sequential quarters, this is something that we had highlighted even in the last quarter. In terms of the OpEx, the last quarter had a one-timer in terms of the corporate social responsibility expenses of about INR 9-10 crore, which is not coming in the current quarter. Typically, you know, there were other costs that we had taken in the last quarter in terms of provisions or certain conference-related expenses and all, which are not there in the, in the first quarter. There were 1 or 2 one-timers that were there in Q4. Other than that, it's business as usual.
Our guidance that we typically try and keep giving you is from a cost-to-income perspective. While last quarter was at about 38%, it's dropped to about 36.6% in the current quarter. We expect this number to be, you know, around 35%-37%, even in a stable state scenario.
Got it. My other question is, as rates were to fall and when you're going to pass on, you, you're going to pass it on to borrowers when rates are passed. As rates were to fall, how would your margins behave? When will your margins... I mean, they've remained pretty stable, they've expanded. Do you see a drop or, it'll stay above the guided range for a very long time?
We will stay above the guided range for a foreseeable future. I won't say very long time, because even if you have to drop the rates, it will only happen on the incremental book, and the existing book, you know, will continue to keep yielding at 24%. It's not going to have a, you know, very quick impact in terms of the spreads coming down. Over a medium to long term, I think, currently, the spreads are more like about 14.6%. We would like this number to normalize, maybe by about 100-125 basis points, and that's going to take a medium term at least. It's not going to happen in the short term. Consequently, you will also see shrinkage in the margins, which is currently at about 17.5%.
Our guidance has always been that with leverage kicking in, this number will, you know, automatically go down. With us, you know, getting the spreads down, you should probably see again, over a medium to long term, this number compressing by about 200-225 basis points.
Got it. Just in terms of cost of funds, average versus marginal?
Would you say I know there is a gap, but would you still say that average costs have bottomed now or, I mean, they can still be sort of declined?
Nothing major. You can see some decline. Like I said, you know, the book cost is 980, while we are onboarding incremental borrowings at around 950. There is a gap there. You know, you can see some benefit, but it will also be offset to some extent by the MCLR increases that may happen. You know, whatever MCLRs have gone up. Like I said, given that we are on the 6 months to 1 year MCLR, these have not still impacted us. Those may come down. I don't think you will see any significant, you know, benefit coming through in the next few quarters.
Okay, thank you. Thanks a lot.
Thank you. We'll take the next question from the line of Sameer Doshi from JM Financial. Please go ahead.
Yeah, hi. Thanks for the opportunity and congrats on a great set of numbers. So you, you mentioned that the current book is probably at an all-time high, even compared to, obviously, pre-COVID numbers. What would you attribute this to? And, and how do you expect these numbers to move? Obviously, one would want them to improve further, but some changes that you would have implemented and, and, and, this is the outcome. Some insights would be helpful.
I know. I understood the question. Let me repeat my answer.
Sure.
See, I think, our current level of 85% of our current has moved from a substantial number from COVID too. Because we all know COVID got a hit from a retail customers perspective. The strategy, what we have put in place, has really worked out, and that has moved the numbers from earlier lesser numbers to 85% of customers in current today. This will continue, and I foresee this 85% will move closer to 88%-89% by March 2024. This March, this financial year, March. Ideally, I want it to be around the 90% of my customers in current, and 10% of the customers can be in delinquent. This was...
I was just saying that, please remember that the type of customers whom we lend, these are customers who have a little vulnerable cash flows and seasonal incomes, so definitely there will be some delinquencies. If we are able to maintain at 90s to 10, I think, it's a great number to have.
Yes, absolutely. Secondly, on the ticket sizes, obviously the YOY number trade-off looks more than a 10% growth. How does one look at from a 3-5-year perspective?
Samir, as we have been guided, in last calls, pre-COVID, our ticket size was INR 3.5 lakhs, which dropped down to INR 2.5 lakhs in COVID 1 and 2-
Yeah.
due to our conservative approach. That has maintained bounced back, and now we have come to around INR 3.85 lakh per customer. I think in next 3 years, this will have the inflation number added to it. We are-- we don't intend to move our ticket size significantly from INR 3 lakh to 2x or 3x from here, but definitely the inflation number will be added to it. Maybe in around 3 years down the line, we'll be close to INR 4.5 lakh-INR 5 lakh. That will be the average ticket size. Without moving our profile of customers, we'll be dealing with the same profile of customers, adding the inflation number, the average ticket size.
Okay, great. This is helpful. Thank you, all the best.
Thank you.
Thank you. The next question is from the line of Aditya Bagarka from Edelweiss Financial Services. Please go ahead.
Hello, am I audible?
Yes, you are.
Yeah. Hi, sir. great set of numbers. I just had one question on the provisions front. wanted to know that the current provisions are what we should look for going forward, like credit cost, or do you expect it to go down, or was there a one-time thing for the Q1?
See, I think, the last year in total, if you look at credit cost, and I'm not talking about the provisions on any specifically, DPD loans or the recent loans, the credit cost is starting to, you know, sort of, come in because, like we updated even in the last call, there was a significant amount of provisions that we had taken, especially during the first and second waves of COVID. Last year was a tough year when we, you know, when, given our lower PDs and lower LGDs, the ECL was coming in, lower. But having said that, we are also consciously trying to take that number, to something that can, that will sort of, stay.
The guidance that we generally give you on the credit cost return, 2,500 or little over above that, 100 basis points, is something that you should keep in. From an staging perspective, we are also trying to see if we can get the stage one provisions around the RBI stipulated levels of about 50 basis points. That's, that number is probably, you will see a 5 basis points movement quarterly, depending on how the PDPs and LGDs stack up. On stage two, I think 8%-9% is our provision coverage that we are envisaging, and stage three, like I said, about 40%-50%. That's broadly the number that you should build in.
There will also be some technical write-offs that we will take on a quarterly basis. All of these things should give you, you know, closer to about 30 to 100 basis points of risk cost on a quarterly basis going forward.
Got it, sir. Okay. Thank you. Thank you so much.
Thank you. We'll take the next question from the line of Arvind Das from Sundaram Intermediate. Please go ahead.
Hello. Thank you so much for the opportunity, and congratulations on the great set of numbers, sir. I just had one question. NIMs have contracted for quarter even though the portfolio yield has, you know, been stable and also the borrowings on the just come down. Just like to understand why is that?
See, this is partly because of the leverage. You know, earlier a lot of the funding came through from equity, but today, you know, we are levering the balance sheet. And when you lever the balance sheet, you know, you will see the NIMs going down, you will see ROA is going down, but it will have a positive impact on the ROEs. Like we said, NIMs will certainly go down as the leverage in the book increases. But, you know, I would say we are still in a very, very attractive territory as far as NIM is concerned. But you will definitely see NIM compressions coming through in the future quarters as well.
Okay, sir. I asked this question also because, we also had consumed, you know, liquidity, when compared to the last quarter. I thought, like, even though, like, that hasn't had, you know, has a cushioning impact on them. That's why I asked that question.
Yeah. The liquidity comes from debt, right? Which has a cost that will pull down the NIM.
Yeah. Okay. Yeah. Thank you, sir. Thank you so much.
Thank you. The next question is from the line of Ashok Kumar from Individual Investor. Please go ahead.
Hello, can I audible?
Yes, sir, please proceed.
Yeah. Hi, congratulations on great set of numbers. The current quarter numbers are exactly in line with your revised guidance of 35% CAGR growth for the next couple of 3 years. Really happy to see this kind of number. My first question is on our branch expansion into northern state. Basically, we are a secured lender, so the same kind of business model will be continued in the northern states, where we are going to open new branches rapidly in the next couple of 3 years? That's my first question, sir.
Yeah, there is no change in the business model, as we are moving from, you know, South to rest of India. It is a very similar business model with the same yield, similar set of customers. We still believe there is a large opportunity, for the category of customers that we are serving. We are not diluting on anything, whether it is sourcing, underwriting or collections. It's the exact same business model, and we would like to replicate that.
Okay, even in terms of the securitization as well, I mean, the same securitization as well?
Yes, it... Absolutely. Talk about residential property, ticket size, nature of customers, tenure, everything is going to be very similar.
Okay. Thank you. That's helpful. My second question is basically, of course, if you see the valuation on the price, right now, we have reached to a stage where our policies, procedures, and the process and all the, all the fundamentals of the business are exactly in, in line with the mature business or something. Bearing this in mind, do we have any, any future plans catering into the new, new business lines or the products? Maybe, just as an example, like, microfinance lending or maybe, any kind of unsecured lending or something like that.
Ashok, let me be very clear. As I've been saying in last few calls, Ayushar is lending to the small shopkeepers and self-employed who are been in millions in our country. Our first work is to go and capture that market, which has been predominantly captured by the money lenders market. I think we have lot to do in the existing business, and we are extremely doing very well. As I answered in the last question also, today we are a predominant south player, based player, having close to 90% plus of our disbursement and AUMs come from south. I think we, we want to slowly do it in the rest of the country. That is the intent.
You will see a lot of activities happening in other states apart from south. We have lot to do in the same business model, and we are doing extremely very well both from a growth perspective, policy perspective. I think we have revised our guidance from 30%-35%, keeping this business model in, in, in, in, in mind, not looking into any different products at this point of time. Let's be very clear. We want to be a very specialist, one of the leading lenders in the unlent segment at this time. That's, that's where Ayushar wants to be.
Excellent. This is really helpful. Just a clarification, so the revised guidance will be, 35% CAGR growth on the, next 3 years in terms of the AUM and the, and the profitability or, did I, misunderstood it?
What I said is for next three years, AUM, I think profitability will also be in line.
Okay. That's a 35% CAGR. That's what we are, we are aiming for.
Yeah.
Okay. Thank you very much, sir. Thank you very much.
... Question is from the line of Nishant Sawant from Kotak Securities. Please go ahead.
Hi. Thanks for taking my question. I hope I 'm audible.
Yeah, Nishant. Go ahead.
Yeah. Just, just clarifying, we have seen around 9% quarter-on-quarter loan 10% quarter-on-quarter loan growth, and that is translated into a 100 basis points out of reduction in margins. Is that the only reason or is there anything else? I understand, I mean, obviously, interest rates are little what they are, but-
Nishant, I'm not able to get. What? 100% you're talking about? 100.
Yeah. Sorry, your margins have got down by almost 100 basis points. My point was that is this only because of leverage? Because, you know, I, you know, we are yet to see your loan book is up to 9.5% quarter-on-quarter, so.
Nishant, it's purely because of leverage, nothing else.
With that, you know, taking this forward and your new growth agenda, would you have any views when do you probably raise capital?
I think, Nishant, we are very long way from raising our capital. I think, as we said in last call, our goal is now to increase the return on equity to the shareholders. As you see from the numbers from last quarter, we have moved from 16.10 to 16.62, and from last year we moved from 16.78 to 16.62. I think the trajectory is very clear, our logic is very clear, I think the way forward, we have to increase the return on equity. That can come as we increase our leverage. The liquidity in which Five-Star enjoys today, it means for next 3 to 7 years, we may not think of raising any capital.
Sorry, I wanted to actually check was, you know, would you want to call out a target, you know, peak leverage ratio?
This is again something that we have been, you know, sort of guiding. We would like to operate at a peak leverage ratio, and we're talking about leverage total assets to equity at around, you know, 4.5x-5x levels, which means, you know, a debt equity of about 3.5-4. Again, given the internal accruals that we'll continue to keep doing, this is a number that's quite far off, is, is our belief. Definitely not going to happen in the next 3-4 years. But thereafter, you know, depending on the growth and the profitability. We would like to operate at this level because even lenders, rating agencies are comfortable at this level rather than, you know, going all the way up to-
Okay, that's helpful. Just one question, a little indicative is, you know, are you seeing more competition at the ground, you know, either in terms of, you know, in customers or your employees?
Yeah. Nishant, yes, competition is always there. There is no lending product without competition. Compared to other products, I will say the competition is lesser because people find it very difficult to track what we've done for the last 20 years. Because these are the customers where you don't have the credit history or a credit document to underwrite. We have to do it in a touch and feel model, and over a period of time, you'll, you'll only master it. I don't see there is much competition getting into secured loans. I don't know about unsecured loans because that is the talk of the town. Maybe the unsecured loans part may be little heated up.
From a secured perspective, around that INR 3 lakh to INR 5 lakh ticket size, where Five-Star is completely positioned, there are only a handful of players, and within that, Five-Star scores well, both from growth perspective, quality and profitability perspective, so I don't see any threat coming from competition.
Perfect. Thank you. That answers my question.
Thank you.
Thank you. The next question is from the line of Jay Prakash Joshniwal from LIC Mutual Fund. Please go ahead.
Thank you, sir. Good afternoon. Thank you for the results. Sir, quick question. Just going back to the provisioning, cost, question. We had 500 basis point reduction in stage three. Was this related to any change in policy or it's a number possibility?
Far, there is no change, Jay Prakash. It's, the policy remains same. It is just, you know, on the stage three assets, if you look at we, we create higher provisions on these delinquent accounts, you know, and also certain overlay. Some of the delinquent accounts that some of have settled. You know, we create 100% provision on, let's say, on a loan which is considered a CDT. Now, if that loan settles, then, you know, automatically the numbers will come down. You will always... While 5% looks high when you, when you say the number, on a, on a overall book of about 1.5% or 1.6%, that number is fairly small.
Because the book is also small, even, you know, few settlements could have a, could have a, you know, could have a, make a skew this way or that way. Actually, you know, we typically guide around 40%-50%, because we cannot exactly say that the number will hover around, you know, wherever. But I think we will try and maintain 40% definitely, for the foreseeable future.
Okay. Thank you, sir. In the presentation, you mentioned about your IT progress policy. I remember earlier you were talking about by Q2 you'd be there on the LOS and all. What is the timeline right now for reaching the milestone of LOS and our capital build-up schedule?
Mr. Jaiprakash, we have gone live with the new LOS, which is a Salesforce. We are doing a, you know, gradual roll up plan. As we see at the end of Q1, we have 103 branches which have gone live with the Salesforce. The idea is that this will be at least up by at least, you know, close to 200 branches in Q2, and we'll be fully live with Salesforce by the end of Q3. That's our current rollout plan. In addition to that, we have also gone live with our new HRMS, which is Darwinbox platform. We have gone live with that, and we have completely moved over to cloud. It is an AWS migration from, you know, our existing private servers that we were holding.
The other key initiative from an IT perspective is also that we have moved to Oracle Fusion GL completely, which is obviously much more scalable and a robust platform as far as GL is concerned. These are the big initiatives that has happened in IT, specifically during Q1.
Okay. The last question on the cluster strategy illustration, which you mentioned in the presentation. Does it mean that our large peak account handling capacity is somewhere around 1,800-2,000 accounts and AUM of somewhere around INR 30 crore-INR 50 crore?
Yeah. I wouldn't call it as a peak capacity, but I think from a prudence perspective and from a risk management perspective, we will always want to make sure that when a branch crosses that level, we are sort of diversifying, because it, you know, when a branch reaches about close to 2,000 accounts, it very clearly indicates that there is strong potential in the market. Why do you need to concentrate everything in a single branch? Our idea has always been to open cluster of branches around that, and we will distribute accounts accordingly. That's the strategy that we have explained through two live examples, one in AP and one in TN.
Okay. the last question on the collection infrastructure, while I remember there was speaking of achievement year-on-year, one other efficiency, efficiency pick up on that front, et cetera. That's, the question, last question. Thank you.
On the collections infrastructure, I think we had, we had gone out with the vertical structure both in Tamil Nadu and Telangana. It's an evolving model, because as the company's current bucket is improving, we are constantly evaluating the fact that we probably don't need the same level of collection infrastructure. A little bit of people can always move back from collections back to business, because that helps helps to achieve incremental growth without additional headcount. This is something that we are constantly evaluating, and wherever possible, in whichever regions, this is something that we will keep moving. You can check that the buckets have improved, and we have done in the previous already in Telangana as far as Q1 is concerned.
Okay. Great. Thank you.
The next question is from the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead.
Hi. Yes, sir. Just 2 questions here. One was on write-offs. What was the technical write-offs for this quarter versus quarter last year? Second one would be on this, what would be the share of borrowing customers? What would be the share of the top 5?
Pallavi, I think the write-off this quarter was about INR 1.85 crore. Just give me a second, I'll give you the number for last quarter as well. This is, this is a write-off that we did for this June quarter. Last quarter we had actually a return of about INR 4.6 crore. It's lesser. You know, don't, don't do this comparison it also... What we will typically say is about 25 basis points per book is written off in a particular financial year, 25-30 basis points. The quarterly, dispersion effect could be a little different, you know, depending on the some of the numbers, because these are more specific write-offs and not permanent write-offs.
Yeah, the number is INR 2 crore as compared to INR 4.5 crore this quarter, year-on-year, INR 4.5 crore for the same quarter last year. In terms of the, you know, borrowing mix, I think that is again being given in the presentation itself. We have about 66% of our borrowings in the form of bank term loans, about 21% through securitization transactions. These are the two major structures that we have borrowed in. On the capital market side, we have done about 60%, which are NCD, and we have done about 5%, you know, term loans from other institutions, could be NBFCs and all, and 2% is ECS.
Given that there is a bit of an interest from the bank side and for institutions to do securitization transactions, those will be the focus areas for this financial year. We will continue to, you know, keep tapping the capital markets for NCDs. The only problem in raising money for us through NCDs is typically, NCDs, especially from MFs, come with a shorter tenure of about, you know, 24 to 30 months. We typically prefer at least 36 to 48 months, so there could be some bit of a tenure mismatch required, you know, we keep, we keep parcels low. We will continue to keep evaluating this. If you look at our top five lenders, I think we have some of the largest names on that. We have State Bank of India is our largest lender.
We have Kotak, which has a very significant exposure. We have Bank of Maharashtra, who have lent, you know, big monies to us. We have IndusInd Bank, who will be one among the top five. Probably, you know, Axis Bank will be the other, Axis and HSBC Bank will be, the lenders will be in the top, top seven lenders to the company.
Right. My question was in the term loans from the banks only, what would be the share of the top five banks in that?
... out of 66%, you will probably see about 40% coming in from the top side.
Right.
Maybe not 40%. I, I would say about 35%.
Okay, what will be the tenure for these, term loans from the bank?
These are long term, yeah. Especially on the PSU side, we have even started taking loans which are 7-year tenures. Private sector give us 4-5 years. On an average, the origination tenure on term loans from banks will be anywhere around 5.5-6 years.
One last just question is, you know, we do not have a rating from ICRA, a long-term rating. Any particular reason for that?
Nothing particular. You know, these are the, you know, these are the rating agencies who have been associated with this company for, I think at least about 7 years. You know, CARE and ICRA have been rating the company at least since 2015, 2016, so we have gone ahead with them. Recently we have done with the CRA rating. It will definitely come up with some time.
Thank you. Thank you so much.
Thank you. We'll take the next question from the line of Franklin Moraes from Otis Wealth Advisory. Please go ahead.
Yeah, thanks for the opportunity and congratulations on a good quarter as well. I wanted to understand in the newer regions that you are entering, who would be your competition, and what would be the breakeven period?
Franklin, I think, we expect the breakeven period to be a little longer. In South, we typically break even in about 6 months. I think, you know, given, it's the first few years, generally we don't go with a very specific target for a branch. In rest of India, we will want to be, definitely more careful than what we are doing in South. Breakeven period will be a little longer. It expect to be close to probably 9-10 months. On the competition front, I think, you know, small finance banks, to an extent, regional players who are there in particular states. Actually, majority regional players who are there in particular states. There are very few pan-India players who also having a very similar focus like us.
On your AUM growth rate from 30%, you know, to 35% in this quarter. What would be a specific, maybe, couple of reasons that would have led us to this upgrade?
Yeah. Saying that, since COVID-2, our, including COVID-1 and 2, our growth was around 15%. COVID-1, we grew at 14, 15, and COVID-2, also we grew at 15%. We started to move our growth once we saw COVID all got settled and collections are back in full action, because we give more importance to collections rather than growth. We saw from December 2020 on... 2021 onwards, the collections coming in in a pre-COVID level. Then the growth started to focus. That, that is how we gave a guidance of 30% from 15% growth what we saw. Last year we grew at 36%. It was very encouraging from our guidance.
What we saw in September, December and March of last financial year, that business momentum is continuing same in June, as well as in July month, too. That is, that is where we the revised in guidance was being put in place. Growing at 10% Q on Q and seeing the momentum for next 3 quarters very strongly, in the existing and the newer geographies. We think we can easily grow at 35%.
The execution back on Five-Star and the strong momentum is what we are seeing in disbursement and the opportunity that it's a long, long runway run that we have all put together has made our guidance to move from 30 to 35.
Okay. Great, great. Thanks a lot and all the best.
Thank you.
Thank you. The next question is from the line of Pooja Ahuja from Kotak Securities. Please go ahead.
Yeah, hi. Thanks for the opportunity and congratulations on the quarter. First we wanted to understand what has led to a sharp drop in our capital adequacy in Q2?
Two things, Pooja. One is obviously the growth in the, in the book.
Yeah.
Second is, you know, like I said, the mutual fund investments that we have, that we kept as of June, that is risk-weighted 100%. The fixed deposits are not risk-weighted at 100%, so it's, what has caused the drop. You know, given our very high capital adequacy, we are happy, you know, keeping it in an asset that gives us a little more yield as compared to this.
Sure. understood. Secondly, on the growth, I wanted to understand while you've guided for 35%, we've given a 50% plus growth, what are the levels that we would be comfortable with, and what would be a early warning signal in terms of, this is where we would cap even though we, we find opportunities of growth adding 35%?
At 35%, we don't see any warning signal to emerge from, because pre-Covid we were growing at 90% year-on-year. That growth already had seen it. The growth got dropped in Covid-1 and 2 on a conscious reason. The growth is back in Five-Star, so we are moving from 30%-35% guidance. That guidance can even be revised as we see continuous momentum and strong across geographies where we are strongly present and entering into the new geographies, that those confluence we may also revise. See, as long as I keep saying, as long as your collections and quality remains robust rate, with lesser competition in this product, we, we don't-- we will not see any warning signal apart from this. Our collections always on top priority.
Quality of assets should be the first warning signal, which we have been maintaining at this quality of asset for last 20 years. The competition, as I said in earlier question, is far and few comparing to the other lending products. I don't see any, any, any hurdle in growing at 35% year-on-year growth for next 3 years. That's, that's our view of it.
My question was more on from the perspective of, while we can be comfortably growing at 35%, if there are levers to grow further, what is the kind of cap that you'd put, let's say, at maybe 50%, or is this 35% level we, we'd be comfortable with, on a most sustainable basis?
35% is the guidance. You know, I think a little bit this side, that side, is okay. You know, I don't think we will go with a particular number in mind that this is something that we have to achieve. Depending on market opportunities, we can be, you know, we can be a little more aggressive. Like Lakshmipathy Deenadayalan put it, the signal for us is on the asset quality.
Oh, understood. That's in my mind. Thank you.
Thank you. The next question is from the line of Agam from Raj Trading. Please go ahead.
Yeah. Mr. Agam from Raj Trading. I had a quick question. In the commentary you mentioned that for this quarter, I think you have provided around more than 1% base of credit cost. You have guided for around 1% credit cost. Is this for 1, for this quarter and maybe for next, remaining 3 quarters will come down. On a year-on-year basis, the credit cost will be in the guided range?
No, no, no. Agam, for this quarter, the credit cost came in at 70 basis points, not 1.5%. Last NPA was at 1.41%.
Okay. Okay. Okay. Typically in your presentation, the fourth page slide, you have shown the 30-plus DPD, which is consistently moving every quarter, quarter, and monthly. It's around currently it's at 9%. Where do you see this number settling in, or what is a healthy number to look at this?
Yeah, sorry, Agam, we missed your question. Can you repeat it?
Yeah. In your presentation on the slide number 40, you have given a data point on 30-plus DPD in %, which has been declining every quarterly. Where can this number settle at or any number which you aspire to be in?
This is at 9.68 for this quarter. Like we, like we mentioned, obviously, you know, the impact of the second wave of COVID did push up the numbers, and we are being consciously taking efforts to bring this number down. Which is why, you know, you're seeing it coming down further from 10.7% to 9.7% as we see. When the current goes up to 90%, then, you know, you're looking at 30+ numbers. You will also see something in the 1%-20%. When you get to a current of, you know, 89%-90% and the numbers, you will probably have a 30+ number, which will be more like 30% levels. That is where it is stabilized.
You know, from here onwards, the drop also will be, you know, more gradual as what you, what you saw in the last, you know, between June and December. June and December, you would have probably seen about 3.5% drop. I don't think, but, you know, even compared to last quarter, it's only a 70 basis points drop. You will start seeing the drop becoming a lot more gradual, and hopefully over the next 4-6 quarters, this number should settle, you know, around 5%, 6% or below.
Correct. Now the last question. On the concentration side, like, how GB-driven in terms of your top states we are, so the incremental growth will be from the other states, or yet there is enough district level penetration to go in your core states itself?
Clearly, Agam, the core states is what is going to be the primary growth driver for the next 3-5 years. We have guided that for all the new branch openings totally, almost 80% of the new branches will come in from the core states or south states itself, because that is our stronghold, that is the areas where we have very significant experience, and we have built a very good team. This is the guidance that we had given. The core states will continue to grow. The newer states, like we had guided earlier, it's more for us to understand these markets, but it's not for immediate AUM growth.
The fact that we will be wetting our feet in the new states and gaining, you know, practical exposure there, will help us for growth beyond the 3 to 5 years from now. If you look at from short to medium term, the primary growth regions will be for South.
You don't see any market, you know, popping out in any of the core states? There is yet huge opportunity in the core state itself.
Yes, yes, we are. We still believe we are very early stage and multiple opportunities to penetrate are there.
Okay. Okay. That's it from my side. All the best.
Thank you.
Thank you. The next question is from the line of Sumit Rathi from Centrum PMS. Please go ahead.
Thank you for this opportunity. The first question on the growth, raise of the growth guidance from 30% to 35%, I wanted to understand what would be driving this growth?
... will it be more in the increase in ticket size, or would it be driven by addition of new branches, or would it be driven by our normal branches being converted into a super branch? What would we be increasing the target for our existing employees? What would be the, the, you know, the drivers for it, if you can give some color?
Yeah, definitely, Sumit. I think, as I was saying in earlier questions, the growth momentum has been seen very strong the last four quarters. That's the primary factor where, where we are increasing our guidance from 30%-35%. The growth comes from 3 levers. That's what we have been always saying. The first lever is the increase in branches. Last year, we opened close to 70-75 branches. This year we wanted to do little bit more, so it, it, it may be around 80-85 branches. First quarter, we opened close to 16 branches. More branches will be there in the Q2 and Q3. The first lever, lever of growth will come from number of branches that we intend to open for this financial year.
Second will be at the branch level, average of officers per branch is somewhere around 8 officers per branch. That will move from 8-8.5, to 8.5-9. That will bring in more number of people to do more business and transaction. Third, of course, there will be increase in ticket. As we said, we are bouncing back to the pre-COVID ticket size of INR 3.5 lakhs. Inflationary around 6%-7% will get added to the ticket size of what we are currently doing.
All these 3 levers put together and the strong momentum that what we see, at the ground level for last 4 quarters, made us to move from 30% guidance to 35%. It is not that we are putting pressure on our existing officers. Our existing selectivity itself is one of the best in this lending space. We don't intend to put any more pressure from our sourcing officers. The, the levers of growth will confidently bring 35%, or, or, or even more as we move forward.
Wonderful. sir, with the increase in the borrowing side and your intent of adding more value to investors by i-increasing the ROE, what kind of leverage can we envisage, say, over the next 2 to 3 years? Right now, we are at around 2 times leverage in our ROE 3. Also, going forward, like, if you can give some color.
Yeah, definitely. It's a good question. As we have been saying in the calls, our plan is moving from ROA to ROE. If you see in last 4 quarters, the ROE is keeping on increasing, so the plan and strategy is really working around. Yes, we have to increase our leverage. That's where we are increasing our focusing our focus to. So as we speak, we are at 2x of leverage. That will move towards 3x-4x in the next 3 years. At a growth of 35%, you get the mathematical answer to it. You see that 16.62% will be closer to 18% in the next 3 years. So that's the game plan.
Over a long, long term, from 3 years to 5 years, we see that touching 20 and even crossing 20% ROE to our shareholders.
Great. Great, sir. Thank you, and all the best for, coming quarters and year. Thanks a lot.
Thank you. The next question is from the line of Parth Desai from Motilal Oswal. Please go ahead.
Congratulations on the good set of numbers. My main question was on the AUM growth, and I think you provided clarity on where the 3 levers actually come from. My another question, you mentioned that the number of features for branches will increase. From my What I understand about how the cluster branches works, which and certain number of accounts in the branch, you open a new branch. People in a certain number of branches increasing from, like, 8 to 9, as you mentioned, this number of accounts also increase per branch, the threshold will increase. How to attract your branches to expand the branches going ahead?
Sir, considering that you are going to investing in technology, branch, and manpower all together, sir, how we can see the operating leverage to grow in and the economic efficiency to drive moderation in the operating ratios? Thank you.
Parth, you are right in your observation, because, from a cluster approach, as we keep opening new branches by transferring accounts, we don't need to put more number of officers in those branches. It's a balanced call that we'll have to take. Whether we intend to put more officers and graduate such a second branch or whether we want to stop it, because we see more opportunities in the future and then open up a new branch. It's going to be, you know, a combination of this, depending on whatever region in which we are operating. That is only one of the levers that we are looking.
If, let us say, we are not able to find opportunities to put more officers in the same branch, that will more than adequately get compensated by the more number of branches that we're able to open in the cluster. So that's, you know what, on the first question. On your second question, we are still in a very in heavy investment phase, and we have been guiding in the past also that our cost to income ratios is one of the best in the industry at this point of time. So we will not want you to assume too much of efficiency coming in through operational cost savings at this point of time. We are very profitable. We will continue to invest at this point of time, as we see good growth opportunities.
You know, this technology initiatives will at least take 18-24 months for us to, you know, go deeper and start seeing some operational efficiencies and cost savings coming in.
Thank you. Sir. Thank you, sir.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Srikanth Gopalakrishnan for closing comments. Over to you.
Thank you all. I think, as a company, we are continuing to hold, you know, hold your investor interest, as well as the confidence that each of you have placed on us. We are confident about delivering the results that we have sort of guided you on. For now, you know, we would like to sign off and look forward to connecting with you, post the September results. Thank you.
Thank you very much, sir, and thank you to the members of the management. Ladies and gentlemen, on behalf of ICICI Securities, we conclude this conference. We thank you for joining us, and you may now disconnect your line. Thank you.