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, sir.
Yeah, hi, hi thanks, Steve. Hi, good afternoon everyone. Welcome to Five-Star Business Finance Q4 FY2024 earnings conference 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. Lakshmipathy Deenadayalan, Chairman and Managing Director, Mr. Rangarajan Krishnan, CEO, and Mr. Srikanth, CFO. I will now hand over the call to Mr. Pathy for his opening remarks, and then we'll open the floor for Q&A. Over to you, sir.
Yeah, thank you, Renish. Welcome all for this, Five-Star's earnings call. For a full year and for a quarter, ending financial 2024, we are happy and very satisfactory the way in which, we came in, we brought in the growth, combined with the quality and the profitability. Let me go, as usual, let me start with, the branch opening and employee addition. We have opened, close to 147 branches for the full year and 40 branches, in the Q4. As we have been saying in, last few quarters about the cluster branch approach, where, branch becomes bigger in size, say, about 2,500 accounts, close to INR 50 crore of AUM, we, bring in a cluster approach where we split the branch into two or three depending upon the area.
This has been done purely de-risking the branches, having more number of accounts and a bigger team. So equally the account gets split and the team also gets split to the newer location. Out of 147, one-third will be on the cluster approach basis, and two-thirds will be on the new branches basis, which we have guided close to 80-100 branches will be opening year-on-year from a new branch post basis. We have added close to 975 employees in business and collection, comparing to 825 employees in business and collection last year. Last year we opened 73 branches. So employee addition is not much. It is related to that 80-100 branches which we have opened new. Interestingly, our OpEx has kept intact. In fact, it has reduced both for the full year and for the quarter.
So this shows, keeping the productivity at the top and de-risking the bigger branches is a right model and right structure for Five-Star going forward. We'll be repeating this for this year also. Now taking you to the disbursement. Branch opening and the addition of business employees has contributed to the increase in disbursement. We have done INR 1,336 crores of disbursement in last quarter. This is 20% growth year-on-year and 11% growth Q-on-Q. And for the full year, we have done a disbursement of close to INR 4,881 crores, which is 44% growth in disbursement. That has resulted in robust AUM, which has moved to INR 9,640 crores, registering a 39% year-on-year and 8% Q-on-Q. And for the full year, we have grown close to 39% for the financial year 2024.
Now let me take you towards the quality, which is a very important metric. The collection efficiency was good and stable. We stayed at 99% between last quarter and this quarter. Unique customer collection was also at good levels. We were at 97.5%, same as last quarter, a bit of improvement, but broadly at 97.5%. Due to our good collection efforts and strategy, what we have adopted, 30-plus has shown a good drop. From 10.5% in the March of last year, it has dropped down to 7.9% for the March of this year. This is a good drop comparing to 30-plus accounts. We'll be in the same range of close to 7.5%-8% for this financial year. Additional branches increase in AUM and in good quality that has brought in a good profitability for your company.
Our profitability for the quarter has rose to INR 236 crores, which is a 40% year-on-year and 9% Q on Q. For the full year, it has moved to INR 835 crores from INR 603 crores, giving a 30% jump in that. From the liability side, Srikanth will deal it in depth. The incremental cost was at 9.58% comparing to 9.57% last quarter. And the cost on the book stands at 9.71%. With this kind of branch addition, disbursement, and growth will continue for this financial year too. As we have moved from the COVID, we have been giving a 30% above growth year-on-year. That will be continued for this year too. So with this, let me hand over the call to Srikanth to go in depth. Thank you.
So very good afternoon to all of you. As Mr. Pathy had outlined in his remarks, Q4 was another. It's another strong quarter for us. Across the various operational and financial parameters, we have fared very well. As of March 2024, we had a borrower base of about 3.9 lakh, the loans. So this has grown by about 31% on a year-on-year basis. So the portfolio continues to be well diversified and not concentrated in pockets. From a branch count of 373, we ended with 520, which is a combination of new branches and branches opened under the cluster strategy. Disbursements, again, we have already touched upon. It grew 20% year-on-year and 8% quarter-on-quarter. AUM growth for the year was about 39%, from around INR 6,019 crores. It is, we have touched, INR 9,641 crores.
On the financial metrics, our yields continue to remain consistent at around 24%-24.25%. Our cost of funds for this quarter dropped to about 9.64%. So this has resulted in a spread of 14.55% as against a spread of about 14.1% for Q4 FY 2023. With increasing leverage, there is a drop in NIM. It has dropped from 18.47% in Q4 of last year to 17.19%, like I said, primarily on account of increased leverage. For the full year, we had a net interest margin of 17.4% as against 18% for the last financial year. Our cost to income continues to remain very stable. For the quarter, it was at about 35.06% as compared to a little over 38% for Q4 FY 2023. We expect our cost to income to remain stable at around 35%-37% levels even in the steady state.
All this has resulted in an ROA of 8.43% for the quarter. And for the quarter, the ROE for the first time has gone beyond 18%. We were at about 18.65%. But if you look at the full year, we had registered an ROE of 8.42%, which is a drop of 20 basis points comparing to last year, and an ROE of 17.6%, which is almost, 2.6% higher as compared to last financial year. From a borrowing perspective, we continue to be attractive in the from our lender side. We, we have about 45 lenders who have lent to us, while the bank loans continue to be, the major portion of our debt.
I think one of the very important, facets that we have guided you last quarter and what we have done during this quarter is the effort to diversify a liability franchise.
We have made quite good progress on that front. In March, we received a sanction of INR 43 crore from NABARD, one of the largest developmental institutions in the country. The other news, which is also public information, is IFC has subscribed to our NCDs for INR 500 crore. All these are at very attractive pricing. So in Q4, we had received sanctions for about INR 900 crore. We availed about INR 950 crore, some of it coming from the past sanctions. The average continue to be the weighted average rate continues to be very, very attractive at 9.58%. For the full year, we had drawn slightly less than INR 4,000 crore, though our sanctions were at about INR 4,350 crore.
At an all-inclusive cost of about 9.54%, we continue to maintain a good liquidity buffer at about, close to INR 1,880 crores and an additional INR 425 crores of sanction lines which were yet to be drawn. We have already touched upon the, collection efficiency, but I think very impressive numbers across 1+, 30+, and, the Stage III assets. We are maintaining a very good provision coverage ratio both on the overall AUM and on the Stage III assets. Our provision coverage on Stage III continues to be at about 54.27%. And on an overall basis, we are at about 1.64%. The restructured book is almost at an immaterial level as we speak. It is at 0.52% of our overall AUM, but even there, we maintain a provision coverage of, about 55%.
So all of this has given us a very good profitability of INR 236 crore for the quarter and INR 836 crore for the year, which is, roughly 39%-40% growth, you know, both for the quarter as well as for the full year. Our net worth is slightly shy of INR 5,200 crore as of March. So the last couple of years, you know, after the COVID has been very good, years for us, very strong in terms of quality, profitability, and growth. And we expect that this momentum will be carried forward in the current financial year as well. On that note, we will open up for any questions that any of you may have. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use the handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Viral Shah from IIFL Securities. Please go ahead.
Yeah. Hi, team. Congratulations on good set of numbers. My first two questions are for you, Mr. Patheep, and the third one would be for Srikanth. So, Sir, basically, if we look at the business model that you have, successfully scaled up, it is a process-intensive model, right? And this is demonstrated by even your better asset quality outcomes, ultimately on your write-offs, etc. But I wanted to check, how are you able to scale up this business model successfully in the new geographies where you are growing in a non-contiguous manner? Because it requires your employees on the ground, you recruiting right from the ground level up. So if you can throw more light over there.
Yeah. Yes, this is a very niche business model. As I've been saying, these customers, for the business needs and for any other, housing or personal needs, they have to depend on the local money lending market. That is where Five-Star goes and caters and moves them from, informal to formal. This demand is always robust, what I've seen in the last 20 years, and it continues to be robust. From a South perspective, we are a, a South player. If you if you see, in, in the four bigger states in South, we have a good presence, but we don't have a deep presence in the South. So, for a foreseeable, future, if I'm going to focus more on South, that will deliver the growth that, we have been guiding to the market very comfortably.
Having said that, we have also said that we want to have a reasonable presence in the rest of the country. That's where the new states have been put in place. We have a strong presence in MP, and we have a very light presence in other four, five states that we have in the rest of the country. So for a sustainable long growth, I think today South contributes close to 93% of our entire disbursement in AUM. Even in three years down the line, South will continue to contribute close to 85% of the growth and disbursement. So I think our business model on the growth what we have predicted is purely based on the South, and whatever it comes in the rest of the country is going to be addition to our growth.
So, for a follow-up. Right now, if I look at it, we have INR 10,000 crore of AUM, and the employee base is around 9,000.
Yeah.
Yeah. So basically, when we scale up, right, I understand from a geographical perspective, it will be still south-heavy. But I think directionally we are also going to expand our presence in the newer states, the Gujarat, Maharashtra, Rajasthan of the world. And in those geographies, because say if for example we have to build a loan book of say INR 5,000 crore, right, over the next few years, it will also require 5,000 employees. That is like 50% of the current employee base. So how are we able to manage? Because that's one thing that I think comes up in terms of the ability to scale the business.
Yes. Since it's a small ticket, close to INR 3-5 lakhs ticket size per file, and operationally intense business, it needs more manpower than a bigger ticket size product. A few things here is, we put up our, when we put up our branches in the existing locality, we recruit the officers from the locality. So we don't have any constraint that officers who are coming from other NBFCs have to be in the similar space. As long as we are from NBFC space, we are happy to take in. And the business head who's the in charge of the branch is really matters for moving our business and collections. Yeah. Having said that, that's our business model. We have to scale up with the people.
We will, as we have been doing in the past, we'll be doing it very successfully in the future also. That's not a constraint from Five-Star perspective.
Got it, sir. So the second question was from the perspective of the cash collections component. So I see that that number has actually now reduced dramatically from 62% to 47% now. Can you explain, like, what is, of course, driving this on the ground? And is there any intention of further bringing this down?
Yeah. As we have been saying in the past, there is no, there is no push from the company side that customer has to pay in non-cash. But having said that, in, in last few quarters, maybe in two years, gradually, when the UPI transaction is gaining momentum across tier three to tier six towns, our customers have also started to repay their EMIs through NACH and UPI mode. That is why if you see, our, our non-cash portion has crossed 50%, and it's close to 55% in the month of March, March month alone. And if this trend continues, maybe we'll be close to 70% or 65%-70% by this financial year end.
Okay. Does this, will this, mean any savings in terms of OPEX, cash handling, target, etc., or no?
Not much in place. Really. For car, it has to only be better, Viral. At this point of time, we are not guiding you for any betterment that will come in terms of OpEx. We will take it as it comes along. The intention is to get the customers, you know, move from cash to non-cash, which is obviously perceived to be a lot more risk-free. So, you know, for now, we are not guiding on any OpEx increases or saves to come in because of this.
Right. Thank you. And the last question, Srikanth, for you is, right now, we have 14 basis points of spread between the incremental cost of funds and the backbook. And now that we have Q2 of track record in terms of tapping the capital markets, can we say that there is scope for the spreads to expand from here on, by anywhere between 5-10 basis points, not material, but in FY2025?
Viral, you are looking at the full-year number. But if I look at Q4 number alone, the difference between incremental costs and the book cost is just 6 basis points. And while we have tapped into capital markets, we have not really gone deep there, especially in terms of, you know, getting the mutual funds and all that, where we believe that there could be some premium that we'll have to end up paying. So I would probably say, you know, the ability to get the spread expansion is, is not there. At this point of time, we will not guide you for any of the spread expansion. In fact, what we have been saying is, you know, there can be a slight increase in the cost of funds as well.
It depends on what kind of rates we are able to get from banks, what kind of rates, what kind of proportion we are raising from mutual funds where the cost could be slightly higher, could be offset a little bit of it with some priority sector lending from banks. So at this point of time, you know, don't factor in any spread increase to come in. We will see over the next couple of quarters in terms of where the spread sort of normalizes, once we get more into the mutual funds side of things.
Fair enough. Thank you, Srikanth, and all the best.
Thank you.
Thank you. The next question is from the line of Sameer Bhise from JM Financial. Please go ahead.
Yeah. Hi. Thanks for the opportunity, and congrats on a very strong set of numbers. My question is for disbursal growth for FY2025 and maybe a couple of years down the road. Because, say, if we look at Q4, it's at, say, 20% on a YOY basis. How does one think about disbursements, and the AUM over the next couple of years?
So, Sameer, I think, the way you will probably have to look at it is, see, these are long-term loans. So while you, you look at a, you know, 30%+ growth that we are that we are looking at for, on the portfolio, the disbursal will not be a 30% growth. It, it can even come in little lesser. So our point is, so for example, this year, we have done close, you know, INR 4,500-4,600 crore of disbursals. That number next year probably would be, you know, around INR 6,300-6,500 crore. So, you know, roughly, the disbursal growth we are talking about will be more like a 25% kind of a growth that we are looking at for, you know, 25%-27% growth.
It will be slightly lower than the AUM growth that we are projecting given that we do a little bit of a long-term lending. So I would say maybe about 3-5 percentage points lower than the AUM growth is where the disbursal growth would be.
Sure. Thanks. And secondly, Srikanth, the coverage has been going up gradually, which is a good thing. Where do you see this stabilizing?
Yeah. I think where we are is a stable number. You know, I would not really give too much of an emphasis on one to basis points this way that way. Like, last quarter, we were at 1.62%. We are at 1.64%, as we speak. So I think probably anywhere between 1.5%-1.6%, 1.65% is where we would like this to settle at least in the short term. When I mean short term, at least the next one to two years kind of scenario. And, thereafter, you know, depending on how the portfolio performs, how our PDs and LGDs stack up, this number may even come down. Given that we are fully secured and secured against one of the strongest assets, we don't really see the need to create anything beyond 1.6%-1.65%.
Fair enough. That's all from my side for now. I'll come back in the queue. Thank you.
Thank you.
Thank you. The next question is from the line of Chandrasekhar from Fidelity. Please go ahead.
Hi. Good afternoon. A few questions. Just one sec. Maybe tell us on the cost of the IFC money on a fully hedged basis. And given that I think raising external money at this point in time is a little cheaper, how do you think in terms of, you know, funding between domestic and external, the share sort of changing?
So Chandra, the money that we put from IFC is a rupee loan. So we did not take it in dollars. So there's no such thing there.
940. 940.
Yeah. The 940 is what I'm so the 940 is a, it's a rupee NCD that we issued to IFC. They did not bring in dollars. And so there's no hedging cost. The cost is at about what we took at was about 941 including the little bit of a fee that we paid to them. So it's per month basis of 9.41% as against 9.58% cost that we that we raised money in Q4.
Right. Secondly, maybe, given that, you know, by the end of the June quarter, we would cross about INR 10,000 crore, I mean, this is typically at the point where we start looking, looking, approaching the rating agencies for an upgrade. Just, I don't understand some of the conversations or. And if the possibility of a ratings upgrade sometimes this year.
Yeah. Surely, we are optimistic on that, Chandra. As you rightly said, we are moving from a four-digit to five-digit company very soon in this quarter. We will keep approaching them. We'll see how they see, especially the regulatory environment that has been kicked in for the last Q3 from for the banks and NBFCs. We have to see how they are poised. From our performance onwards, we are improving on quarter-quarter basis. So we have to wait and watch.
Okay.
Yeah.
And I just want to add, while Mr. Pathy has guided that we will reach out to them, I would still think that Q1 of this financial may be a little early because our first rating upgrade came in December of 2022. So that's just like about 15 months, 15-18 months when we would go back to them. While the INR 10,000 crore, that is definitely a good metric to go back. But I don't know from a vintage perspective whether they would like to look at it in Q1. I would probably think it's maybe Q2-Q3 down the line rather than June. But having said that, we'll keep making our efforts.
Great. And then, lastly, just on the disbursement, ticket size is moved up to about INR 3.5 lakhs. Maybe, I think, directionally this eventually heads towards INR 4 lakhs-INR 5 lakhs, INR 4.5 lakhs by the end of this year, or how should we just think of that?
Chandra, we have been saying that our sweet spot is between INR 3 lakh-INR 5 lakhs. That's where we come in, neither a small ticket or a microfinance nor an affordable of INR 10 lakhs and above. So we want to be in the range of INR 3-INR 5 lakhs. That's our endeavor. But taking this inflation into account, we from 3.5, we probably be around the INR 4 lakh for this financial year. You're right.
Great. Thank you.
Thank you.
Thank you. The next question is from the line of Dinesh Kulkarni from RDSP. Please go ahead.
Hello?
Yeah, Dinesh, please, please go ahead.
Yeah. First of all, congrats on a good set of numbers. I have a very straightforward, simple question here. I, I see we have added close to 2,000 employees, you know, in the, the previous fiscal lending for 2024. What sort of what sort of a number do we expect, you know, going forward, especially for, for 2025? Can we expect it in the same range, or it will be lower than, what we have seen in the last two years?
Thumb rule what we have been guiding is for every employee, the AUM will be around INR 1.25 crore. That's our thumb rule. We will be we are now more than INR 1 crore per employee. So we'll be in the same range, around INR 1.25 crore per employee. That's our range. So depending on our growth, what we have guided is about 30%. Keeping that in mind, we'll be adding that much of employees. Predominantly, more employees will be added in the business and collection purpose.
Okay. Thank you. Just one more question. I think I missed out on this loan disbursal. Can you just explain a bit more why it will be lower? You would expect it to be lower than, you know, the previous year? I mean, I think it was 25% or something you said?
No, Dinesh, the question is not about amount being lower. What I meant was, with the AUM growth by, let us say, 32%, which is the above 30% that we're talking about, 32-33, you don't need 33% growth in disbursals to come in because there is also the portfolio effect that we've taken. So the disbursal growth will probably be more like 27%-28% rather than being at 32%-33%. So that's the number that I was talking about. It will definitely be more than 20% that we grew, you know, year-over-year.
Awesome. Awesome. I got it. Just, I think, the last question from my end. What kind of, you know, expenses, you know, in terms of operating expenses, we'd expect going forward? They would lower as a percentage of AUM or assets, or they would remain in the same range?
See, for the coming year, for this year, the number is at about 5.6%. This came down from about 6.2%, which was in FY2023. So there has been a sharp drop, of about 60 basis points. This is also on account of the productivity increases, the efficiencies that we have brought in, technology improvements, and all that. So I would probably think the ability to reduce this further would be a lot more gradual than what you saw between FY2023 and 2024.
So, like, we had even guided in a steady state also, we would probably be at about closer to 5% of OPEX's, ex-credit cost. So, you know, we are talking about another 60 basis points of benefits to come in over the next three years. So don't expect a very sharp increase, but you will see some benefits coming through.
Okay. Awesome. Thank you. All the best.
Yeah. Thank you. The next question is from the line of Aditya from Amsec Capital Partners. Please go ahead.
Hello, am I audible? Yeah. Please go ahead. Thank you so much for the opportunity, and congratulations on the great set of numbers. So, just wanted to quickly understand from the management that, how are we looking for the next three years? What would be our strategy? I understand that, the strategy, the growth strategy that we are looking at will be completely in South India, but wanted to get a color on what, what is the AUM per branch and disbursement per branch that we are looking at. And now, moving so moving closer three years, there'll be more three to five-year branches, vintage branches that we'll be having. So if you can just quickly explain that to me.
So Aditya, I'll just explain a couple of points. Firstly, I think we are targeting a CAGR of at least 30%+ growth, so which means, you know, conservatively, on a three-year basis, we'll be able to double our balance sheet. So we'll be close to INR 20,000 crore in three years. That's the first point. Now, of this, what constitutes this INR 20,000 crore? It will largely be from South. So today, South contributes 94% of the portfolio, roughly. We believe the composition of Central India and North India will at least keep improving over the next three years. But I think still, probably about 90% of the portfolio will continue to be contributed by South. Now, from a branch expansion perspective, we are already at about 520 branches at this point of time.
We will very easily be able to double the, you know, points of presence in about the next three years, which means we will have close to 1,000 branches in, you know, a period of three years from now. Like Mr. Pathy explained in the beginning of the call, this will be through a combination of new branches that we are opening, standalone new branches that we are opening, and a split branch, you know, that sort of emanates from larger branches.
The split branch is part of the core strategy, which means we don't want any single branch to become too big and become too risky for any reason, whether it is business, whether it is collections, or whether it is, you know, people dependencies. We wanted to make sure that the risks and the operational metrics are contained at a reasonable level.
We can also fairly, you know, clearly say that I think over the next three years, we are not deviating from the core business focus, which is we will continue to be targeting small businesses and self-employed individuals at this point of time. From a core perspective, we don't have any new product additions. The ticket sizes will be guided more mainly in the nature of inflationary increases. So maybe in about a three-year period, we will be close to INR 5 lakhs at this point of time from about INR 3.5 lakhs. We have been very consistent with respect to both profitability and quality that we'll continue to drive whatever that we are doing. So the growth is definitely not going to come at the cost of either profitability or quality.
Understood, sir. Understood. So just a couple of questions more. So, in the previous participant's question where he had highlighted, where he had asked you about disbursement, so just looking doing simple math, we should be doing easily a 30%-32% disbursement growth even if we take our INR 13.5 crore of disbursement per branch, what we did this year, and we've added close to 147 branches. Is my understanding correct?
So there will also be newer branches that will come in which may not do the INR 13 crore-INR 14 crore disbursement that we are talking about. So you will always have a little bit of a lag there. We.
So if you can help me understand, say, for example, how you show vintage-wise AUM, what would be the vintage-wise disbursement track record of less than one year, one to three, three to five, and more than seven years?
No, I think from a branch perspective, it's not driven by vintage. It's driven by the number of people at the branch. So there could be branches where we have only about 4 officers when we are starting, but there also could be branches where we have close to 10 officers. So, you know, it's not really dependent on vintage. It's dependent on the number of people because what we are talking about is incremental business during a month, and that's not dependent by vintage. That's more based on how many logins each officer is doing and how many officers are there in a particular branch.
Understood, sir. Understood. In our presentation, we are showing that we want to come down to eight to nine days of TAT compared to what we are at 10 today. So, this reduction that we are planning to do will it be more tech-oriented? That is, we are expecting our productivity per employee to go up, or we are planning to add more employees to reach this TAT?
No, I think this will be through a combination of tech plus some process optimizations that we will do. You know, the 8-9 is also today driven largely by many external factors. Because we are dealing with properties, we take an external legal opinion for every property, and that's like a pre-disbursement or a pre-sanction condition. So, you know, there are dependencies, so I don't think it can come down by compromising on something which is core to the company. But we still have some tech initiatives. We went live with Salesforce only last year, and we have a lot of optimizations to do on the Salesforce. In addition, we will also be able to do some process optimizations that should get us, you know, the 15%-20% reduction in overall TAT.
Understood, sir. Understood. Just one last question I would like to squeeze in. So, when we talk about the market size of being INR 22 trillion at our AUM, what would be the market size that you would estimate? Because you would have a much better on-ground understanding of how the market size looks like, right?
Sorry, can you repeat your question?
Market size?
Yeah. Am I audible? Yeah, yeah, yeah. Please go ahead.
Yeah. So, in the presentation, we highlight that the market size is INR 22 trillion. Wanted to get a color on at our ROI of 23%-24%, what would be the market what would be the actual market size? Because you would have a clear understanding of how, in on the ground, the picture looks like.
See, what we have given, the INR 2,200,000 crore market opportunity, has been a study done by CRISIL, based on Five-Star Business Model. This is not based on, on generic, point. It was based on Five-Star Business Model, those people who have, shops, who are self-employed, and who are afford to give up property as a security. So that's where this, number has been brought in. So it's not a broad, broad number. It's a it's a specific number. If we are going to be in a Pan-India player, this is a market that, it is it is available to go to go and, pick it up.
So it is the Five-Star specific. But Aditya, just to add another angle to this whole thing, we have always, sort of maintained that this segment which is graduating from informal to formal, they are not that sensitive to pricing.
I think what they are more sensitive to is whether they are able to get a loan and what's the quantum of loan that they are able to get, and will that quantum help them stand on their own legs, whether it is setting up a business or whether it is putting up a new asset in their family. So with this, we believe that it's not about more of interest rate sensitivities in this segment. It's more about pulling people from informal to formal into the, into the game.
Understood, sir. Thank you so much, and wishing you all the very best for the coming quarters.
Thank you.
Thank you. The next question is in the line of Ajit Kumar from Dharma. Please go ahead.
Yeah. Hi. Thanks for taking my question, and congrats for the quarter. My first question would be, what is the need to keep 55% provision on your restructured book because I guess most of the restructured book would be classified under Stage two . And now we already have 55% provision on Phase III. So what is the requirement of keeping this 55% provision on a restructured book? Yeah.
So I think, you know, about 20%-25% of our restructured book is in Stage 3, so which automatically has a 55%, you know, provision that we are holding. The other part is also that, see, in the restructured book, what has also happened is there has been a capitalization of interest that we did during the six months when the customer did not pay when we had given a moratorium period to the customer. Now, that gets continued to, you know, that accrues interest on a month-on-month basis. Now, if at all, you know, there is a request from the customer towards the rear end of his loan in terms of any discount that he may need on his settlement, there may be some hesitation that he'll have to take on this accrued interest, not on the original principal.
So from that perspective, our belief is that we want to carry given that the portfolio is also accruing interest and, you know, growing, because of the accrued interest on a month-on-month and a quarter-on-quarter basis, we believe that having a slightly higher provision on this book will be a little more prudent as compared to, because it's also finding its way to the top line every month. So that's the intent of keeping a slightly higher provision.
Okay. Okay. Okay. Second question would be, how is balance transfer out, you know, trending as of now versus historical level? BT outlets?
Nothing, so nothing material, Ajit, like what we keep telling. Very few of our customers actually graduate to the next level. So even if you look at BT outs today, I think it's more like 2%-3% that we are talking about. So nothing to be really worried about or alarmed about. It's a very, very immaterial number, pretty much in line with historical averages.
Okay. Okay. And lastly, if you can give a sense on balance transfer in data, I mean, people who are coming from other lenders to Five-Star, I remember it used to be roughly 6%-8% one to 1.5 years back. So what is this number, you know, right now?
Formally, what they're saying, it is about, it is right. It's about 5% or so. But these are from formal lenders. Our basic business model is to, you know, graduate these customers from unorganized financial institutions or money lenders to institutions like Five-Star. There, the number can be significantly higher, which obviously we don't track straight also because you don't really lend money to the money lender, and it does not give you the ability to track as we can track BT income of formal lenders. BT income formal lenders continue to be around the 5%-6% levels.
Okay. Sure. Sure. Thank you. Thanks a lot. That's it for my side.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
I'm audible?
Yeah. Please go ahead.
Yeah, yeah. Thank you very much, sir, for taking time out for this call. Sir, I just wanted to understand something on the ROE and ROA profile. I mean, over next two, three years because we do intend to increase our leverage, right? Currently, it is at 1.1-1.2x odd. And as you increase your leverage, ROA would tend to go down, and ROE would tend to go up, right? So, we have to see next two, three years, how do we see the trajectory of ROE and ROA profile for us over next three years?
Yeah. So as you said, 1.25% is debt to equity. The leverage is at close to 2.2%. What we have been guiding to the market is, we will not come to the market for next five years. So the game plan is to increase our leverage to close to 3.5% in next three years or so. As you keep increasing your leverage, your ROA will come down because you borrow more money, and you pay interest on it. So our guidance for next three years, ROA will be around 6.5%-7%. And if you multiply that with a leverage of 3.5, our guidance for next three years or so, ROE will be around 20%+. Good thing is, we have made a good progress in both increasing our leverage and profitability.
So that is you have seen that in this year and especially in this quarter. Our ROE has moved up 18% plus for the quarter. And for the full year, we're at 17.6%. So that shows a very strong momentum that's being coupled with the leverage and the profitability.
Absolutely. Absolutely. And this 3-year that we have seen, we would see a steady increase and a steady decrease in both ROA and ROE, right? Over next 3 years as we increase our leverage.
That's the game plan. That's, that's the game plan. We'll be constantly focusing to increase our leverage under the same business model. So that will bring down our ROA slightly on a quarterly and yearly basis and increase our ROE to that extent.
Fair enough. Fair enough. And 100% of our loan book is secured, right?
Yes. 100%. No doubt about it. Out of 100%, 95% are self-occupied residential property, and 5% is either shop or the vacant lands.
Okay. So 95% is self-occupied residential property?
Yes. And balance 5% is also secured, secured by shops or vacant lands.
Absolutely. I understand. Yeah. I think, you guys are doing a fantastic job, sir. I mean, kudos to that. And that's it from my side. All the very best. Thank you so much.
Thank you.
Thank you. The next question is from the line of Raghav Garg from Ambit Capital. Please go ahead.
Hey. Hi. Thanks for the opportunity. I just have one question. So I think at some point in time in the past, you know, you've mentioned that one business officer can handle about 120 accounts. And when I look at that ratio today, that's about 81, implying that, you know, a typical business officer is handling about 80 accounts. So what stops us from increasing the workload on a business officer rather than actually going for newer employees, as that would help improve efficiency for you? That's my only question. Thanks.
So rather, it's a combination of having some cushion, because of attrition potentially. So let us say, if every officer is full up on his capacity, and there is some attrition which occurs, let's say, in the middle of the month or during the quarter, it's very difficult for you to rearrange, you know, that officer's account to the others because they are already full up on their capacity. So you can't really optimally operate at exact full capacity in every officer. So that's the first part. And the second, when you're opening a new branch, it always takes time for this buildup to happen. So it's not going to happen on day one.
So, you know, when you're starting, each officer, let's say, logs in about 5 files and about 4 files gets approved. It typically takes at least 2 years for that officer to accumulate close to 100 accounts. So because of the time lag and because of, you know, operational reasons such as attrition, you can't really fully load it up. I think there will always be some lag and cushion which is there in the morning.
Okay. So if, say, we were to look at this number on a two-year lag basis, say, number of accounts today, on a base of employee base, say, one year ago or two years ago, this number would be higher. Is that the correct way to look at it? What would be,
That's fine. That number, if you look at it, the one-year lag, that number is more like, you know, about 100 accounts per officer, INR 3.8 lakh, 3.8, 3.9 on about 4,000 employees. So yeah, that's probably the, you know, one of the ways to look at it. I wouldn't say that's the most ideal way. The most ideal way would probably when we get to a lot more steady state, scenario where you are not opening, you know, so many branches or when you are doing it, very high levels. I think that is when you would probably reach about 120 or so. Till that point of time, if you look at a one-year lag, you know, you are right where if you are operating at about 100-110, that would be an appropriate number.
Understood. One more thing. I think you had mentioned at some point that you would double the branches from here on, right? I think the base is about 590, if it's the right number which I'm looking at. And then you'll take it to 100—sorry, sorry—520 going to 1,000 in the next three years. Is that right? And this would be because of new branches as well as the splitting of some of the existing large branches, correct?
Yeah. Raghav, you're right. There was a question from an investor. For that, we gave a reply that in next 3-4 years, how does this business look like? So we have said, we'll be doubling our branches from 500-1,000. This includes two things. We'll be opening 80-100 branches year on year. That's the guidance that we have been saying to the market. Even last year, we said we'll be opening 80-100. We have done more than 100 branches. Balance is a split. Two-thirds is the new branches, and one-third is a split. So that will get continued. The split branches will take its way this year and maybe next year too. So that can be even added. So both put together is what we have said will be close to 1,000 branches in next 3-4 years.
So, you know, just to follow up on that, when I've looked at historically your business, what you seem to have done is that, while the branch expansion has been there, you've deployed more people in the same branch. And that is why your number of people per branch has almost doubled in the last, I think, 5, 6 years. Will that continue? Will you continue to deploy more people in the same branch, or will you cap it at, say, 18, 20, which is the current run rate right now?
Raghav, that, that is a strategy that what we have been adopting in the last 6-9 months, which is a cluster strategy. We don't want any branch to cross more than 2,000 accounts. It is INR 50 crores of AUM. And we want that to be split into 2-3 branches. So ideally, going forward, Five-Star will operate in the smaller branches, where the accounts are around 1,000 accounts per branch. That is INR 25 crores per branch. That's ideal. If a branch crosses 1,000 accounts, a split will be made, and a new branch around 5-10 kilometers vicinity will be put in. And we'll be transferring some accounts there so that both the branches keep growing. So that is a strategy of cluster.
If you just to recall, there is one unfortunate incident which has happened in another NBFC where a huge amount of fraud has been done in a single branch. So I think keeping too much of accounts and too much of AUM in a single branch really is a risk from a retail perspective. That is where we thought ahead, and we started to put in this cluster approach and splitting branches within the bigger branches. So going forward, we will ideally want to be 8-10 member branches, 8-10 members in a branch, looking after close to less than 1,000 accounts. That will be ideal. That is proven in Five-Star in the last 6-9 months. The smaller branches are productive, effective, and their collections and attrition levels and poaching levels are far, far lesser.
Understood. So those, 8-10 sorry. Yeah. 8-10 number that you're referring to employees, those are just the business officers, right? Business and collections.
No, no. It's a combination of business collection and the support team. We give three support teams for every branch, which is one guy will be credit, one will be cashier, and one will be operations. All put together, I said 10.
Okay. Understood. Understood. And you'll cap the branch capacity handling capacity at 1,000 accounts, right? Is that the number which I?
Yeah. That is ideal, Raghav. That is what, 800-1,000 is the ideal that what we are thinking, right now.
Understood. Thanks. That's all from my side. Thanks a lot for that.
Thank you.
Thank you. The next question is from the line of Arvind from Sundaram Alternates. Please go ahead.
Hello, sir. Thank you so much for the opportunity. You know, congratulations on the great set of numbers. So, like, our growth continues to be, you know, very strong. But, when I flip it into geographies, I can see that, you know, AP and Telangana is, you know, like, very much strong. And, you know, that is—these are the two regions that have primarily contributed to the AUM growth, in FY 2024. And there has been some moderation in growth in, you know, Tamil Nadu and Karnataka regions. Any particular reasons of, you know, the growth has slowed down a bit, in comparison to, like, you know, even, even the overall growth? Can it improve, like, in the subsequent years? That's my first question.
You know, branch additions, when we talk about, like, you know, like, will it predominantly be, like, you know, is it safer to assume that it'll be again in the southern region, whereas the other regions would be minimal, like 80-20, something like that?
Yeah. On the first point, Tamil Nadu and Karnataka have not slowed down, whereas Andhra and Telangana have smoothed up. So Telangana, Tamil Nadu, and Karnataka, if you see standalone comparing to last year, they have also grown pretty very well. And one more point to add. I've been guiding to you people that Karnataka was a little lower, after when the state was coming out of COVID. For the last few quarters, their performance has done extremely very well. The collection efficiency and the quality of asset that we are able to demonstrate in that state. So that state will also be looking up for this financial year. So if you look at this financial year, we will invest a lot in Tamil Nadu and Karnataka together.
that puts both the states competing with AP and Telangana, which is really doing well. From the second question, on the branch addition, we have been always guiding 80-100 new branches will be put up for Five-Star, excluding the split concept, what I said. Out of that, close to 80% will be in south. As I said, Karnataka and Tamil Nadu will take a lion's share in this financial year, with Andhra and Telangana doing really well. So out of 80% put in south, and balance 20% will be in rest of the country.
That too predominantly will be in MP and Maharashtra where we have a very strong presence in MP, and a very reasonable presence in Maharashtra. And both the states have been with us for the last five years. So we have a reasonable experience in that state.
The 20% predominantly will go to these two states.
Sure, sir. And, and, my next question is on, like, cost of funds front. You know, like, since the cost of incremental cost of funds is lower than the book, it's, it's safer to assume that, you know, like, cost of funds would be unlikely to move further from this quarter, the exit quarter. And, like, also to get the PSL benefit, in terms of bank borrowings, like, we needed to do this Udyam registrations of our customers. Has it been done? That's my second question. Yeah.
So I think, on the first point, I think one of the others had a similar question, and I clarified. Today, there is no big delta between our cost of funds on the book and the cost of incremental debt. And given that we are looking to diversify our borrowing sources, hopefully we'll have some more mutual funds and all getting into this where we may have to pay a little bit of a premium. We will not see any big benefit coming through in terms of increase in spreads and all that. If at all, there could be a slight compression that may come through because we may want to pay a little higher to onboard the right kind of lenders to the company.
So, you know, there is not much scope for, you know, reduction, going forward, both on the cost of the funds on the book as well as cost of incremental debt. In terms of the PSL, yes, what we guided, yes, we have made significant strides in terms of getting Udyam registration, the Udyam Assist registration for our customers. Almost 8,000-10,000 customers have already been registered on the portal. So during this year, we are confident that we will be able to onboard lenders who will be lending against the PSL assets. So our belief is that out of the overall disbursals of, let's say, INR 6,000-INR 6,500 crore that we are envisaging for the next year, at least 25%-30% of that would be PSL-compliant assets.
We should be able to get benefit on those assets from a lender's perspective. The quantum of benefit requires to be seen, whether it's going to be translating into a benefit on the cost of funds or people are going to be, you know, newer lenders who have been a little reticent to the company would come in to lend to us and all that. But definitely, we will see at least about INR 1,000 crore-INR 1,500 crore of incremental debt that will be onboarded using the PSL assets.
Understood, sir. Understood. We talk about, you know, borrowings, you know, like, in fixed rate, it's 31%. So remaining is should it be, like, in, repo-linked or MCLR-linked, any mix on that? And then another question is on credit cost. You know, like, credit cost, you know, in this quarter, it's likely higher than the previous quarters, you know, despite, you know, our improving stage two and stage three ratios. Is it to fortify the PCR? Any other or you know, like, indicators which are which is showing, like, yeah.
So on the first question, yes. You know, these will primarily be repo-linked or external benchmark rate-linked facilities because some of the banks, their one-year MCLR s or six-month MCLR s or even three-month MCLR s are higher than the overall cost that we are willing to give to those banks. So if we have to borrow from them, we have to go with an external benchmark rate. So the 29%-30% will be external benchmark-linked, primarily, you know, around the repo rate. See, the credit cost increase for this quarter is primarily on account of a technical write-off that we have taken. So the last couple of quarters, we have not taken any write-offs. And, given that, you know, we do get some taxable charge because of the write-offs, this quarter, we did take about INR 6 crore of write-offs.
So, if you really break up the credit cost of 69 basis points, it is roughly 39 basis points on account of ECL provision and about 29-30 basis points because of the write-off. So if you remove the write-off, the provision is in line with last quarter. And last quarter, we did not have any write-offs. So, broadly, there is no increase in the credit cost as such. It is more on account of the technical write-off that we took during this quarter.
Sure, sir. Thank you. Thank you so much. Thank you.
Thank you. The next question is from the line of Chirag Fialoke from Ratnatraya Capital. Please go ahead.
Hi, congratulations on a good set of numbers. Thank you for the opportunity. Just one question, sir. On the liquidity side or just the cash in hand, could you just help us understand how do you guys think of that? Is it just in terms of number of months of disbursement and OpEx? And even from a future perspective, when you do increase the debt, what kind of cash in hand would you want to keep? That's my only question. Thank you.
So Chirag, broadly, our liquidity policy is to maintain three months of operational expenses, three months of projected lender repayments, and one month of projected dispersals in the form of cash. This number will work anywhere around INR 15-1,600 crores, given that our dispersals are also fairly strong. We are slightly higher as we speak. We are at about INR 1,875 crores. I think we want to continue this policy as we go forward, at least for the next financial year. We will try and see how we can align a lot more closer to the policy than keep more money beyond the policy. But in terms of being prudent lender and to ensure that we don't face any hiccups from a liquidity perspective, we would like to continue this.
I think, another thumb rule that we could probably look at is we will probably have around 15%-18% of our AUM in the form of liquidity, even in a steady state scenario.
Sorry. Could you just repeat the last number? 15? Or how much did you say?
15%-18% of our AUM will be in the form of liquidity.
Understood. Thank you so much. This is the ideal.
Thank you. The next question is from the line of Nischint from Kotak Mutual Fund. Please go ahead.
Hey, this is Nischint from Kotak Mutual Fund. Just one clarification. You know, you mentioned that, you know, your write-off is a technical write-off, but it's actually hitting the P&L, right? So it can't be a technical write-off. Okay. No, no, no. So Nischint, what we mean as technical write-off is not in the strict legal sense of the term. It is more to do with the fact that these are cases which are recoverable where we have the property with us. Necessary legal actions have been instituted against the borrowers. But more to but because these are little these delinquent cases, and we don't want to continually keep showing them as 90-plus assets, we have written off.
So, what I meant by technical write-off is there is not, you know, too much of doubt on the recoverability of these assets, but it will take time to get the money back from these customers. So that's the difference between practical and technical write-off that we make.
Sure. In terms of credit cost, would you be, you know, because there's something which probably can recover, right? So, you know, in terms of credit cost, as per your, you know, your match, would you be closer to where we are at this quarter, which is, you know, sort of around 80 basis points, or, you know, probably the last Q2 where we are closer to 50 basis points?
I think we'll be more closer to where we are this quarter, Nischint. I think we have been, I think, even in the past for about a 75-100 basis points of credit cost. So I think it will be a lot more closer to where we are this quarter rather than what we were either last year or in the last couple of quarters. So, yeah, about 70-80 basis points is probably the number that we would like to, you know, carry on our P&L.
Got it. And just clarification on the same point that you mentioned earlier, you will probably need to kind of keep something like 20% of your balance sheet in cash and liquid investment, is it? Or and is there a scope of reducing it?
We will reduce it. So as we speak, it is at about, you know, roughly around, a little less than 20% of our AUM, not the balance sheet. But we believe that the right number would be more around 15%-17%. So there is definitely scope for reduction. But March being the quarter where a lot of people also want to lend monies to you, and especially the fact that we got big sanctions from institutions like NABARD, we are okay to maintain a little higher liquidity. But our ideal number will be somewhere around 15%-17% of AUM in the form of liquidity.
There was actually an improvement, right, between December and March. So if I actually look at it this quarter, you sort of benefited from maybe lower average cash for the quarter, or?
We will keep bringing it down. So March will most likely, you know, March will always be a little bit of an aberration, but the focus is to be closer to 15%-17% and not, you know, 20%.
Got it. Thank you very much and all the best.
Yeah. Thank you.
Thank you. The next question is from the line of Dinesh Kulkarni from RBSA. Please go ahead.
Hello, sir. Thanks for taking my question again. My question is, you have mentioned that most of our branch growth or the growth would come from the south, right, with 90% focus on the south. The question is, why are we not focusing much on the North or Northwest part of India? Are we experiencing any competitive pressures there, from MFIs or any other competitors?
Not like that. We have been here in the south for the last 20 years. So we know this market. We know these customers. Their behavioral aspect, everything, we can able to read it very well. And we are happy to say. Regional player. We don't want to be seen as a pan-India player right now. That's why our focus is more towards south. And south is more stable. And especially in collections, south is more stable in collections. And the four big states where we have been present, we have not even made a 25% reach in the respective states.
So there's a lot to be done in the south itself. That's point number one. So we don't want to leave an opportunity in a known market and go and search an opportunity in an unknown market. So that's the logic number one.
Second is, having said that, we don't want to see as a North unknown market three years down the line. That's where we have been putting our branches in safer zones, like MP, where we have close to 60+ branches there. We have been investing the 60+ branches in MP for the last five years. So we are doing it very well. Since we are breaking MP, MP very well, we are now getting into the Rajasthan, maybe probably Gujarat, a later part of this year. And we have gone into Maharashtra. And we have been in Chhattisgarh. So these are the states where we are learning our experience slowly, steadily.
So it will be very useful when we look back ourselves three years down the line where our predominant growth will come from, even in the rest of the country. That's our strategy.
Okay, sir. Got it. Thank you. Thanks very much and all the best.
Thank you. Thank you.
Thank you. The next question is from the line of Sagar Dua, an individual investor. Please go ahead.
Hello, Mr. Sagar? Hello, Mr. Sagar? Your voice is not audible. Can you speak?
Hello, sir. I'm an individual investor. Sir, I want to know there is an impression for me that, as we are earning consistently, why we are not paying dividends to shareholders? Yeah. That's a good point. We are, we are in the consideration mode. Both will be taking a call at an appropriate time. And that will be announced, more or less soon. Hello? Sir, hello? Can you hear what we said? Sir, why is it not paying dividend to our shareholders? Oh, I've, I've, I've read. I just replied to you. I'm, I'll—I'm replying it again. That's a good point that both are considering it. We'll be coming out with the dividend thought process very soon.
You'll be hearing this good news from Five-Star very soon. Okay. Thank you, sir. This was the only one question from my side. Thank you so much.
Thank you.
Thank you. As there are no further questions, I would like to hand the conference over to Mr. Lakshmipathy for closing comments. Thank you.
Yeah. Thank you. Thank you all. As we have been saying, we are, we are very robust and very optimistic in, in the in the product and the profile of customers whom we lend. And this optimism will continue, and, and see you very soon. Thank you.
On behalf of ICICI Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.