Ladies and gentlemen, good day and welcome to the Home First Finance Company India Limited Q3 and nine month FY2023 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Manish Kayal, Investor Relations Head. Thank you, over to you, sir.
Thank you, Vivian. Good afternoon, everyone. I hope that all of you and your families are safe and healthy. I'm Manish Goyal, and I look after Investor Relations for Home First Finance. I extend a very warm welcome to all the participants on our Q3 FY23 financial results conference call. As usual, Home First management is represented by MD and CEO, Mr. Manoj Viswanathan, and CFO, Ms. Nutan Gaba Patwari . I hope everybody had an opportunity to go through our investor deck and press release uploaded on stock exchanges and on our website yesterday. We will start this call with an opening remark by Manoj and Nutan, and then we'll have a Q&A session. With this introduction, I hand over the call to Manoj.
Thank you, Manish. Good afternoon, everyone. I'm pleased to showcase the strong business momentum that we are seeing in our business. Distribution expansion is our key focus area. We now do business at 261 touchpoints across tier 1, 2, and 3 markets. Physical branches stand at 102. Q3 FY23 saw the momentum continuing on disbursements. We disbursed INR 780 crores in Q3 , which is the highest till date, with a growth of 11.1% on a quarter-on-quarter basis and 37% on a year-on-year basis. The AUM grew to INR 6,751 crores, a growth of 35.2% year-on-year and 7.6% quarter-on-quarter. The portfolio health has improved further.
1-plus DPD has reduced to 4.4% from 4.7%. 30-plus DPD reduced to 3% from 3.3%. GNP has reduced to 1.8% from 1.9%. We will now focus on some of the key drivers and metrics of the business. Coming to technology, during Q3 FY23, digital adoption has further improved. Usage of the customer app for various activities has increased. 91% of our customers are registered on our app as of December, compared to 87% in September. 89% of our customer queries are now coming via the app. Digitally signed agreements have reached a significant 47% of all customer loan agreements which were executed in the quarter.
We continue to focus our expansion in the states of Gujarat, Maharashtra, AP, Telangana, Karnataka, and Tamil Nadu. Coming to margins, the spreads are at 5.7% after two repricing actions of 25 basis points in Q2 and 50 basis points in Q3. Our spread guidance for the medium term remains at 5.25%, along with the cost of borrowing increases. On borrowing, we continue to focus on diversifying our funding sources. We have raised INR 280 crore from International Finance Corporation through our seven-year, up to seven-year debt. On asset quality, all buckets continue to improve. In Q3, 1-plus DPD reduced to 4.4% from 4.7%. 30 DPD reduced to 3% from 3.3%.
Our gross stage three GNP as per RBI circulated 12th November 2021, reduced to 1.8% from 1.9%. This includes INR 390 million, that is 0.7%, which is currently in buckets which are less than 90 DPD, but included in NPA due to asset classification norms as per RBI notification dated 12th November 2021. Adjusted for this, the number stands at 1.1% in December. Coming to the outlook on growth, we will continue to focus on growth through a combination of three strategies. Deeper expansion into Tier 2 and Tier 3 towns in existing states. We plan to reach 400 touchpoints in two years. Increasing market share in existing markets, you know, is our second strategy.
Expansion of customer target segment through co-lending, and we expect to reach the milestone of INR 10,000 crores in the next 15 to 18 months. On technology, we will continue to maintain our lead on systems and technology to build moats in origination, underwriting, and collections. Our technology lead will drive our industry-leading productivity metrics and profitability. Coming to funding, we have access to diversified funding sources, and we will continue to build on this further. Lastly, a good team is most critical to achieve our ambitions, and we will continue to invest in finding and training the right people so that we can build a team that can take this company to the next trajectory. With this, I would like to now hand over the call to Nutan to take you through the financials. Nutan, over to you.
Good afternoon, all. I will take you through our performance for Q3 FY23. Starting with the key highlights on financials, we continue to stay focused on our key operating metrics with an intention to deliver mid-teen ROE in a couple of years. With that, our net interest margin for the quarter is stable at 6.4%, even in the increasing interest rate environment. QoQ spreads are lower by 10 basis points. We have increased our yield by 50 basis points effective December 1, and book cost of borrowing increased by 30 basis points on a QoQ basis. Our core business health is very strong. Net interest income has gone up by 50.4% on YOY basis and 8.6% on a QoQ basis. We did direct assignment of INR 59 crores during the quarter as a liquidity strategy.
We continue to have robust demand for our portfolio of assets. We also did a co-lending transaction of INR 30 crores during the quarter. OPEX to assets stands at 2.8 for the quarter. As guided earlier, we expect this ratio to remain in the range of 3%-3.2% going ahead as we focus on expansion. Cost to income at 35.3% in Q3, decreased of 210 basis points on a QOQ basis. Q3 FY23 PPOP stands at INR 81.7 crores, growth of 10% on a QOQ basis and 25.5% on a YOY basis. Credit cost was at 0.4%, is within our expected range. Our ECL provision stands at 1% of the total principal outstanding. We continue to remain conservative with the provisions.
Total provision coverage ratio stands at 63.6%. Prior to NPA reclassification as per RBI circular, PCR stands at 87.4%, versus 91% in Q2 FY23. Our profit after tax was 59 crores, grew by 8.2% on a QOQ basis and 27.9% on a YOY basis. Moving to liquidity and borrowings. The company continues to have diversified and cost-effective long-term financing sources. During the quarter, we raised 280 crores from IFC via NCDs to finance affordable and green housing. We have a healthy mix of borrowing with 66% borrowings from banks, 17% from NHB refinance, 19% from assignment and 6% from NCDs. We continue to have zero borrowings to commercial paper.
Our cost of borrowing is competitive at 7.4%, increase of 30 basis points from 7.1% on a QOQ basis. Our marginal cost of borrowing for Q3 FY23 was at 8.5%. During nine months FY23, we have not availed any new initial borrowing. Moving to capital. Our capital adequacy ratio is 49.6% with Tier 1 at 49.1%. Our December net worth stands at INR 1,748 crore versus INR 1,574 as of March. Our quarter ROA stands at 3.8%. Our annualized ROE stands at 13.7% on Q3 numbers. Our book value share is INR 199. We are also delighted to share with you that HomeFirst is now being rated as low risk on ESG risk parameters for Morningstar Sustainalytics.
Our score of 16.2, we believe is the best amongst BFSI peers. This validation by a large agency highlights HomeFirst focus on sustainability and superior corporate governance. With this, I open the floor for Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Participants who wish to ask a question may kindly press star one on your touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mona Khetan from Dolat Capital. Kindly proceed.
Yeah. Hi, good evening. Congratulations on a good set of numbers. Firstly, on the PLR hike of 50 basis point last quarter. Is it fully built into the yields or yet to play out?
Mona because we've taken the repricing effective 1st of September, the PNL benefit has come only for one month. The benefit of three months will come only in quarter four. To that extent, there is some upside on the yield line in Q4 as well.
Sure. If I look at the incremental yields on slide 27, they seem to have moderated from 13.4% last quarter to 13.2%. Is that, am I reading the numbers right or there's some typo somewhere?
The numbers are correct. This moderation is to enable sustained growth as we have been now focused on more competitive pricing in the market. We will continue to maintain the guided spread that we've been doing of around 525, no 5.25%.
Okay. Okay. Incremental yields have actually moderated versus last quarter. Okay.
Yes.
Because of pricing. Okay. Got it. How about the BTLs, if you could give some color?
BTLs we've been published, is 4.8% for Q3. It's mentioned in slide number 24.
Okay. Okay. Sure. Just finally, on the direct assignment book, you know the book and the related income has moderated over the quarter. Anything to read into it?
I think we've been able to generate a lot of liquidity through other sources. Particularly for this quarter we were doing the IFC transaction. We also had visibility into the CLSS subsidy that we received in December and also in January. From that perspective, we did not feel the need to do assignment. It will continue to remain a good liquidity tool. We've guided about INR 100 crores a quarter. That remains the ballpark where we want to be plus minus INR 20, 30 crores a quarter.
Okay. If I look at the last four, five quarters, also, the Borrowings share has come down in the overall ALM mix. No change as such in strategy, right? It's purely the liquidity part you highlighted.
Absolutely.
Thank you. I'll come back in the queue.
Thank you. The next question is from the line of Shreepal Doshi from Equirus. Kindly proceed.
Thank you for giving me the opportunity, congrats on yet another strong quarter. Pavan, my question was pertaining to the operational metrics. If you look at the disbursements upon employee and AUM upon employee, that has seen a very like strong increase over the last, say, seven, eight quarters despite adding branches and employees. What is the comfortable disbursement upon employee sort of a metric that we are looking at? If you look at currently disbursement upon employee is almost INR 80 lakhs and AUM upon employee is almost INR 7 crore. What is the number that we are looking at or we are comfortable with?
INR 80 lakhs per quarter, I guess you mean.
INR 80 lakhs per employee is the disbursement number that we have averaged, if you look at.
For the quarter, I guess you're saying, right?
Yeah, for the quarter, yes.
Yeah. I think our attempt is basically to keep improving on that number. I mean, we are not working with any particular number in mind, but we have, you know, whatever we have, we keep working on improving it. Some of it is discovery because we are implementing a lot of digital processes. You know, for example, if you see, compared to one year ago, 50% of our customers have migrated into e-signature process, so that they can complete agreements, you know, electronically. Many such small initiatives are helping us to improve the productivity of the team. This is a number that can, you know, that we are trying to keep improving over time. We are not, we don't have any specific target number in mind.
Why I'm coming onto that question is also because if you look at our employees' role, it's much more comprehensive. Like, they're not only responsible for sourcing, they're also responsible for collection part. Therefore, if you look at the AUM upon employee, that number is also almost INR 7 crore now. From that perspective, is there a check? In an event of a weak economic situation or bad collections, their efforts would shift towards, you know, bringing in those collections. From that mindset, do we have any thought process?
No. We have been through such phases during COVID, when, you know, the emphasis was on collections. That is an advantage of our model because these employees are well-trained on collections. We don't really need to deploy new resources or, you know, look for resources outside. They are able to quickly redeploy them on collections if there is a crisis somewhere or if there is a crisis-like situation. That's the advantage of our model. You know, in the absence of any COVID-related shocks, it's largely business as usual in collections. The, you know, time which is spent, time is, you know, well balanced between origination and collections.
Okay. Got it. The second question was with respect to the yield for the pool lending, loans that we are doing. What is the yield there?
The pool lending loans would be at, you know, typically, I mean, in the context of today's market rates, they would be at, 10.5, or thereabouts, 10.5%.
Okay. Okay. Just wanted to understand the yield differential for home loans and the LAP that we have. If you could provide the range for home loans and the range.
150-200 basis points between home loans and LAP, the differential yields.
150-200 basis point.
Yeah.
Okay. Okay. Got it. One last question, was with respect to the NHB. During this quarter, we have not utilized any NHB lines, how much do we have as sanction lines?
INR 600 crores. Shreepal, we've also mentioned that specifically in slide number 33.
Sorry, ma'am, I missed that part.
INR 600 crores is the approval that we have from NHB.
Okay. Which is not yet utilized for this year.
Correct.
Okay. Okay. Just last question was with respect to the PMAY subsidy. When was the last credit that happened, and are we expecting any credits that we will receive for our customers?
We got INR 80 crores of subsidy in December. We also got a slightly larger chunk in January, after which most part of it is done. We will have another INR 20-30 crores to go, and that's pretty much about it.
Okay. Got it, ma'am. Thank you. Thank you so much, and good luck for the next quarter.
Thank you.
Thank you. The next question is from the line of Mayank from InCred Capital. Kindly proceed.
Thank you for the opportunity, and congrats on the good set of numbers. My question is basically on the PMAY subsidy. Are you seeing any kind of lower sanctions, delay, tightening or anything there? Can the lower subsidy going forward from government impact demand in our customer profile?
See, the program, the subsidy program was closed as of last March itself. We have not offered a subsidy to any customers who were onboarded after March. What the subsidy that we are receiving now is for customers who were onboarded prior to that and who are eligible for the subsidy. This is also now almost done and, you know, I mean, all the backlog has been cleared out. There is very little left to go now. Both the scheme as well as the subsidy process is kind of coming concluded now. We have been now almost one year of, not one year, about nine months, post the closure of the subsidy, where the demand has been very strong.
Basically, we're not still getting any impact demand because of the subsidy?
No, there is no, I mean, there is no demand impact, because of the subsidy, program being closed. Yeah.
My second question is basically on the our bounce rate. We are seeing the bounce rate normalizing, and last quarter we were talking about the customer shifting from cash to online payment because of which our bounce rate were impacted. Any color on that?
The trend seems to continue. I mean, it is moderated slightly compared to last quarter, but we are still seeing a very large number of customers paying immediately after bouncing the payment. That remains a mystery. Now we have a very, I mean, we have a daily track of this. We are getting almost 5% of the payments within three days of bouncing. You know, conversations with customers are not really yielding any insight on that as to why they are bouncing and paying immediately.
Okay. Okay. Thanks. Thanks. That's all from my side. End of questions. Thanks.
Thank you.
Participants, if you wish to ask a question, kindly press star one. The next question is from the line of Shubhranshu Mishra from PhillipCapital. Kindly proceed.
Hi, good afternoon. Thank you for the opportunity. Couple of questions. The first one is if you can give the split of employees function-wise, how many are in HO, how many in sales, how many in collections, how many in credit? The second is on the credit underwriting. Do we utilize our sourcing employees to do the underwriting as well, or do we have a separate credit underwriting team? Also if we deploy any sort of external evaluation experts to do the evaluation. That is second and the third would be on the collections itself. What percentage of total collections are cash now versus, say, a year ago? What percentage are on NACH? On NACH, what is the bounce rate that we get? Thanks.
Sure. Head office will be about 15% of our employees. About 150 employees are in head office versus about 800+ or close to 850 employees in the branches. As far as underwriting is concerned, we have a central team. Our underwriting model itself is centralized model, where we have a central team of about 15-20 employees who are, you know, underwriting every loan. The data capture and some amount of data collection and customer interaction happens at the branch level. At the branch level, there is no authority to approve any transaction. As far as the legal and technical checks are concerned, it's all done by service providers at each location.
We have a panel of lawyers and valuers who will do the valuation and those reports are actually checked by the centralized underwriting team as well before, you know, giving the final go ahead. The last question I think was on collections. The cash part of the collections. Cash part of collections, if you see, five quarters back, it used to be about 8%. Now it is about 6%, as per the charts that we are publishing. Yeah, I think the trend, it has generally trended down from about 10% to about 6% currently. Even the 6% that we collect in cash is not being collected, you know, by our employees individually.
It is, these customers deposit, these, deposit the cash at Fino outlets, the Fino Payments Bank outlets, and the payment comes to us in an electronic format. Actual physical cash collection is only about 1% currently. The ACS coverage is there for 100% of the customers. Some of them bounce the payments, and that's where the cash collection comes into play.
Balance 94% are on NACH?
No, it's not like that. It's actually, the bounce rate is about 14% as we have published. The 86% of the customers would have cleared their NACH payment and the 14% have bounced their NACH payment. We have to have some alternative method of collection for the 14% of the customers. That alternative is in many, in most of the cases it is also electronic, like through a UPI payment or through the app, et cetera. Out of that 14, about six of those 14 customers are also paying in cash. The balance eight are paying electronically.
Understood. If I could just squeeze in one more question. The files, are they stored at a centralized location? Are they stored at the branches, or is there an external agency again deployed for this?
Sorry, what central, sorry?
The loan documents, the various other documents, where are they stored? Are they stored in situ in branches, or is there a centralized location, or do we have a vendor?
Stored in a centralized, we have an agreement with, I mean, or arrangement with the vaulting company. They vault the agreements, the loan agreements, the property papers and other important documents. They, it's vaulted directly there. The branches actually send the documents directly to the vault. And it's vaulted over there. These vaults are actually located in the NCR region.
Understood. Thank you. That is very helpful. I'll come back in the queue.
Thank you.
The next question is from the line of Raghav Garg from Ambit Capital. Kindly proceed.
Hi. Thanks for the opportunity. Just a couple of questions from my side. If you could highlight what kind of competitive scenario that you're looking at in South of India where your exposure has been increasing since last several quarters. Also I think you're focusing more on the row houses in that region. Specifically in that segment, can you comment what are the kind of ticket sizes that you are financing and what kind of customers are these which go for such houses? My last question is, are these loans which you give for row houses, are these generated through developer partnerships or you are or there is some other model that you're following here? Thanks. That'll be all from my side.
Yeah. In South India, you know, the origination is largely individual customers who construct their own homes. The concept of row houses is not that prevalent in South, in the southern states. It's mostly customers building houses on their own plots. That's generally what we originate. As far as row houses are concerned, the model exists in places like Maharashtra and Gujarat, you know, especially in smaller towns. And there the arrangement is or the agreement or the partnership is with the developer who's building the row houses and the developer sends us the references of customers, you know, who require these loans. That's generally the origination model with row houses.
Thanks.
Raghav, are you there?
Yeah. My question's answered. Thanks.
Thank you.
The next question is from the line of Nidhesh Jain from Investec. Kindly proceed.
Thanks for the opportunity, sir. Firstly, on the connector count, can you share the number of active connectors for the quarter?
INR 2,100.
Thank you. Secondly, on the incremental yields, the quarter-on-quarter drop in incremental yields, we have also witnessed an increase in share of LAP in this quarter. It is more strategic or it is competitive intensity that we are witnessing because of which the incremental yield has dropped?
We want to maintain, you know, competitive pressure in the market and ensure that, you know, we are gaining share. Which is why we have kept the rates competitive because, right now when, you know, the rates are, you know, rates are expected to taper off, it's a good time to be more competitive in the market and gain share because the risk of, you know, the risk of actually, you know, the spreads getting compressed is lesser at this point of time because we are expecting the rates to taper off. We thought, rather than increasing the rates, let us stay competitive and gain share. I think that's the thought process behind the, you know, rates that we are maintaining in the market today.
Sure. Lastly, on the LAP book, we have seen very strong growth in that portfolio. I think almost doubling of over a one-year period. What is the strategy there and how is the asset quality trends in that LAP book?
LAP is something that we have been saying that, you know, we have, you know, we are comfortable with the 15% kind of number for the AUM. I think the percentage is catching up gradually. As far as delinquency trends are concerned, I think they are trending well, which is why we are comfortable in onboarding them. They are trending well as of now.
Sure. If you can share 1 basis point of LAP versus housing loan portfolio could be differentiated in that or?
Broadly they would be in the same ballpark.
Okay. Thank you. Thank you, sir. That's it from my side.
Thank you.
The next question is from the line of Jigar Jani from Nuvama Wealth. Kindly proceed.
Yeah. Hi. Thanks for taking the question and congratulations on a great set of results. What I have seen is basically that your new to credit customers have been consistently falling down at a rapid rate. Also, we are seeing a substantial increase in the ticket sizes, ticket sizes above INR 15 lakhs. The proportion as a percentage of the total AUM is going up. Broadly, where do you see this segment and do you think that you will eventually migrate to a more higher ticket size and competing more in the prime segment, maybe two or three years down the line? What kind of competitive pressures do you think that will place on your spreads maybe two or three years down the line? Some thoughts on that would be great.
Yeah. Starting with the, you know, new to credit customers. This is a function of, actually credit activity in the market and, you know, we have been saying that every quarter this number, you know, of new customers who are new to credit keeps decreasing. You know, having said that, even customers who have credit history, recent credit history do not find it very easy to get a housing loan, and they generally form the target segment for us. These are customers who may have informal income, who are working in small companies, where, you know, documentation is, their income documentation is not very strong, et cetera.
While they may have a bureau score, the rest of the criteria that is required by larger lenders is not fulfilled, and hence they form our target segment. The bureau score is also attained on the back of, you know, very recent loans or very small loans like consumer loans, et cetera, consumer durable or two-wheeler loans. Generally lenders do not give much credibility to that bureau score as a primary, you can say, primary criteria for providing a loan, housing loan to the customer. That really does not impact, you know, our target population in terms of size of the addressable market.
As far as ticket size is concerned, it's more of a secular increase because we are operating in markets which are fairly, you can say affluent and well-developed and industrialized markets. Gujarat and the southern markets, Maharashtra and including southern markets, the per capita incomes are much higher than national average. We are seeing a trend of people in the affordable segment also constructing better quality homes, larger homes, et cetera, you know, with their incomes rising up. It's more of a secular increase. The segment is the same. The target population, target segment is actually the same. People are preferring to, you know, spend a little more on their homes, and as a result of which ticket sizes are moving up.
You know, land values are moving up as a result of which their ticket size is also moving up, et cetera. It's a more of a secular increase. I mean, it is not really any conscious effort from our side to address a different population or a different target segment.
Okay, understood. Great. Anshul, I think you were guiding for about 150 branches in the next couple of years. What is the branch expansion plan, maybe in Q4 and for the rest FY 2024, if you could guide on the branch expansion?
Branch expansion we have, you know, so, we have about five to seven branches which are kind of work in progress and which should get completed in this quarter. That's kind of a similar number every quarter is what we are looking at. I mean, some quarters there is a lull, you know, and there's some catch up in the next quarter kind of a thing.
Okay. It's basically, just one branch addition this quarter is just a one-off and you would again come back to the run rate.
Yeah. Like it's just that a few branches are in the last stages, so, you know, we're just waiting for it to get completed, kind of a number.
We also front-loaded the branch expansion in H1 of this year where we added about 20+ branches. That kind of helps most part of the job this year has already been done.
Okay, understood. Most of the expansion that you will see is post Q4 and FY 2024.
Yes. Yes. Q1 you will see again, you know, or H1 next year you will again see bulk of the additions, for next year.
Sure. The last question, on your borrowing, bank borrowings, how much of this, repo or MCLR or the general interest rate hikes have impacted in your borrowing costs? I mean, how much more do you see, the, cost of borrowing, inching up from here? Probably on the incremental cost of borrowing is 0.5. How much more, expansion do you foresee based on the current interest rate hikes that have been done till now or anything that will follow?
On the marginal cost of borrowing, we are pretty much at the peak rates. Any further increase from here will largely depend on where the policy rates will be. On the back book or the book cost of borrowing, we're at 7.4% for the quarter, with NHB coming in in the next couple of quarters. We should be able to manage this with a 30 to 40 basis point increase, let's say in Q4, and maybe similar increase in Q1. We should be able to keep it way below the marginal cost of borrowing for at least next two quarters.
Your yield increases, which is 50 basis will start reflecting from Q4 basically in the back book also.
There is a portion which is already reflected because it was effective first December, but fully it will reflect in Q4.
Any plans for any incremental yield increases for sale types from your end, maybe in Q4?
Discussion, that will be a more, you know, a board and a ALCO decision, which we have to take place over time. What we are focused on is maintaining the spread that we have guided, which is 5.25.
Understood. Thanks so much for your answers and best of luck. Thank you.
Thank you.
The next question is from the line of Pooja Ahuja from Monarch Networth Capital. Kindly proceed.
Yeah, hi. Thanks for the opportunity. First we wanted to understand why it was mentioned in the opening comments that the credit cost, we have been cautious in terms of maintaining additional provisions. Just wanted to understand on a sustainable basis, what is our credit cost guidance for the next maybe two, three years?
30-50 basis points is what we've been guiding.
We maintain that?
Yes. Yes.
Sure. Given the disbursement growth that we have been witnessing, are we still maintaining our AUM guidance of 30% or do we see a higher growth there?
No, we have been maintaining a guidance of 30%. We are, you know, aim of the team and objective of the team is to try and do better, 30% is something that we are guiding towards.
Okay. sure. On the bounce rates, do you think this 14% or 15% level is now the normal levels or do we see further improvement from here on? We've seen some improvement in January, I think. Would it be in this 14%-15% range?
Looking at the behavior of the customers, it looks like it can improve substantially because we have been tracking the number of customers who pay immediately after bouncing, and we have seen that almost 5% pay immediately in the first, in the immediate three days after bouncing. Logically, it looks like these customers can be convinced to clear their payments and, you know, reduce the bounce rate. But we are still not getting any insights on how that has to be achieved and, yes, we are working on that.
Okay. Understood. That's it from my end. Thank you.
Thank you. The next question is from the line of Amit Jain from Axis Capital. Can we proceed?
Yeah. Hi, sir. Thanks for taking my question. Sir, I had a question on the mix of salaried versus self-employed. The proportion of self-employed has been today steadily rising. It's close to 30% now. Is there any change in strategy or is that a conscious decision? What is the optimal mix that you would look at in terms of salaried versus self-employed?
I think it's a function of the distribution. Historically our distribution was more, you know, focused on larger towns, you know, where there is a larger population of salaried customers and, now, you know, as with, you know, continuing, you know, expansion into, smaller towns, tier 3, tier 3 and 4 towns, the population of self-employed is larger. There is again a very, very gradual increase in the population of self-employed. Other than that, there is nothing that we are doing, you know, consciously to onboard self-employed customers specifically.
Sure, sir. On that would be all. Thank you.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Can we proceed?
Yes. Thank you for taking my questions. Hi, Manoj and Nuten. I hope both of you are doing well. First, congratulations on a very good quarter. My question is more around the demand environment and let me kind of take a few seconds to explain what I'm trying to understand. At least when we speak to the larger HFCs, I mean, they have talked about, I mean, some sluggishness in demand which was there in the Q3 . Obviously, I mean, our disbursements were very healthy, and they don't kind of suggest that. Moreover, what you also kind of suggested that, I mean, with, I mean, incremental needs at these levels, you are kind of trying to gain market share, which is praiseworthy.
What I'm trying to understand is, are you seeing why I'm trying to understand this is, like, I mean, I believe prime housing and affordable housing are, I mean, very different things and should be looked upon differently. What I'm trying to understand is because the EMIs have gone up, given the higher interest rates, has the loan eligibility of the customers come down and which may kind of impact the demand going forward? I mean, how are you kind of looking at the demand environment, in addition to kind of gaining market share?
Demand in the segment that we are targeting, the demand in this segment is strong. You know, doesn't seem to have got impacted by increase in interest rates. The, while, you know, in the higher ticket size segment, it could have impacted because, you know, ticket size is also large and EMI, the EMI changes due to increase in interest rates are also large. In our segment we are not seeing any impact on demand as such. And the customers also, you know, take a while to actually take a decision to build a house and there are many other moving parts in building a house like buying a plot, et cetera.
The interest rates, interest rate is only one component out of their, you know, multiple decision points. We are, so far we are not seeing any impact on demand and demand continues to remain strong. I don't know whether that answers your question.
No, it does. I mean, because I mean, what I was trying to understand is if in affordable housing we are continuing to see a good demand and we're not seeing any impact on demand because the interest rates have gone up. I mean, that's a I would say take it as a healthy sign. The second question that I had was for Nuten. There are two questions for Nuten. One is, I mean, how should we think about, I mean, the provisioning cover or, I mean, either on Stage Three loans or the ECL. I mean, why I'm asking this is there are two schools of thought here.
One is, I mean, one are companies who say that, I mean, listen, this is our ECL model, and based on that, what our ECL model indicates, and this is the kind of provisioning cover that we want to maintain. There is another set of companies who think differently, who say that, I mean, when the going is good and then when the profits are good, then maybe we should kind of build up some buffer in terms of provisions. How are we thinking about the provisioning cover?
Abhijeet, as a company, we have focused on early delinquencies. You would have seen that, you know, the bounce rate is trending well. 1 basis point is down to March 20 levels. We are amongst very few companies where the 30 BPDs are 3% now. All is going good in terms of delinquencies. What we want to really do on the ACL side is to have an extremely strong balance sheet, so that my net NPA over time is manageable in terms of discussion from a financials perspective. That's the goal. Like you said, if we are in a space where we have some room, idea is to keep the provision levels healthy and run with that.
We've been guiding 1% of ACL provision on the total principal outstanding. That's essentially the number we've been carrying for some time, and as long as possible we will want to do so. We are not deviating from that in the medium term.
Got it. Lastly, we keep wanting to understand, I mean, there are few HFCs who've reported and some larger HFCs who've reported, and who kind of suggest that there is a one-time gain that they're seeing from the assigned pools of loans. I mean, is there anything that we are seeing in how we kind of do accounting? Typically, in an assignment transaction, we book the upfront assignment income. Now that interest rates are going up, I mean, is there a positive or a negative variance which is there from the assigned pools of loans?
That assigned pool is mark to market, essentially what you're talking about needs to be done at every quarter end, and we do so. The modification amount that ends up coming is a relatively more low number, because there have been some assignment that has been done prior to the rate increase, which is, let's say, pre, or pre mid-COVID, and some assignment that has been done post mid-COVID. On a blended basis, the number doesn't remain meaningful, and it goes to the other operating income line.
Got it. This is very, very useful. Thank you so much. Wishing both of you the very best and to the rest of the team. Thank you so much.
Thank you, Abhijeet.
Thank you.
Thank you. The next question is from the line of Mayank from InCred Capital. Kindly proceed.
Yeah, thanks for the follow-up. My question is on the spreads of 5.25, when do we expect to reach that level in the mid-term or long term?
Mid-term.
I guess three to, two to three years.
The spread of 5.25%?
Yeah, yeah.
What is the question? We missed the last part of the question.
Why do, by when we do expect to reach the level of 5.25 spreads?
5.25 is, we are, you know, in this interest, increasing interest rate scenario, we are getting towards a 5.25% spread. Currently it stands at 5.7. If interest rates increase further and, you know, they're likely to increase or there's likely to be some catch-up of the increased interest rates now for the next two quarters. That's why we are getting towards 5.25%.
By next, one year we can expect to reach by 5.25?
Yeah. In next one year or maybe next two, three quarters.
Okay. Thanks. That's all from my end. Thank you.
Thank you. Participants, if you wish to ask a question, kindly press star one. The next question is from the line of Ravi Naredi from Naredi Investments. Kindly proceed.
Thank you very much. Thanks, Mr. Manoj and your team for fantastic result and growth. Sir, my question is, when we are technology-driven company, why cost to income ratio rise by 2.3%, 230 basis points?
Here on here.
Sorry? Yeah, here on here. I think, you know, we had last year when we spoke, we had mentioned that our costs are likely to increase in the medium term because during COVID, we did not make certain investments. We are making those investments now for the next 12 to 18 months. We had guided that the cost is likely to increase. You know, after that we'll again start moderating. That is the trend that is that we're following.
Okay. Sir, do you find more challenge from asset side or liability side in this scenario?
I think, you know, asset side we went through a certain, let's say, difficult phase during COVID, but we have come out of that well. You know, frankly speaking, same on the liability side as well. As of now, we are fairly comfortable on both, you know, on both these aspects.
Okay. Okay. Sir, when we are growing since last 45% AUM, why you are thinking the growth will be 20% in future? Guidance 20%.
30, sir. We said,
30. Okay.
30.
30 is okay. Thank you. Thank you, sir. Thank you.
Thank you. The next question is from the line of Nischint from Kotak. Kindly proceed.
Thanks for taking my question. Your borrowing cost is around 7.4%, and you mentioned that your incremental cost of borrowing is somewhere close to 8.5%. If I heard that right, 8.5% or 8.75%. You know, when do you really think that your weighted average cost of funding will kind of, you know, come to the marginal rate? Is it like two quarters away, four quarters away? If you could give some color on that.
Nischint, the marginal cost of borrowing of 8.5 does not include the benefit of NHB borrowing. As we continue to draw down the NHB funds in Q4 and subsequently in Q1, we will get that benefit and that will start also reflecting in the book cost of borrowing. At the same time, the lagged increase of MCLR will also flow in. In an ideal situation if NHB did not exist, this convergence would have happened, let's say, in two to three quarters from now. Because of the presence of NHB borrowing and this mix, being at 20% plus, the overall cost of borrowing will remain below 8.5%. That's what we are looking at right now in our models. We are looking
With NHB, how much would be the difference? I mean, if one has to look at 7.4 except NHB.
Yeah. Almost I would say 50 basis points will be the benefit on the total book if you peel off the NHB borrowings.
We're comparing 7.9 versus 8.7, something like that.
That's right. That's right.
As of now there is no plan to raise lending rates on the asset side. I mean, if you don't do anything you should kind of come to 5.25% over maybe two quarters or so.
if we don't do anything, yes.
I mean, that's a call you will obviously still be developing, I mean, over time.
Yes.
Sure. On the ticket size, you know, if you could kind of give some guidance. I think ticket size seems to be inching up a little bit. Are you doing more discourse then towards, you know, slightly larger tickets? Is there a trend over there or am I trying to read too much?
no, that's it's more of a secular trend and very gradual trend, you know, because we are operating in, some of the more affluent markets. We are seeing, customers also spending more on, building homes. It's just, related to that and, we're not reading too much into it.
I think you also mentioned that, you know, you're going into the cycle into your tier three or tier four towns.
Right.
Is it something kind of, you know, sort of, you know, appearing to be more of an inflation all throughout? Or is it something that there is a mix change when you're going to the smaller towns? Very logically everything else being same, if you go to the smaller size, the ticket size would go down. It is going up, so I don't know how much you read that.
Yeah. In southern markets we are not seeing that trend. Southern markets, the ticket sizes seem to be stable or larger actually as we go into smaller towns. People seem to build larger houses in even tier two, tier three towns. We are not seeing that reduction in ticket size as we go, you know, go more in, more deeper. That trend is, I think some more, more common in the northern markets, where the houses become smaller and, you know, the budgets are smaller in, you know, smaller towns. In southern markets, we are not seeing that trend. As a result of which the ticket sizes are holding up or increasing slightly.
Is that something like, you know, average, whatever apartment size or, you know, in terms of square feet or something that you track which size has given you some sense in terms of their pricing et cetera? I mean if you have any color that you can share on that.
We will have to get back on that. On the I think you're talking about the square foot…
Something like that. You know, whether it is a sign of an inflation out there or is it just a sign of affluence of people buying more houses.
Yeah. Yeah. We have that. We don't have it offhand right now. I mean, it's a bit of both. I think maybe increase in square footage as well as, you know, people using better material or more expensive material in their homes. It's a bit of both which is contributing to the ticket sales.
Sure. I'll take it offline as well. Thank you very much and all the best.
Yeah. Thank you. The next question is from the line of Bhuvnesh Garg from Investec Capital. Kindly proceed.
Yeah. Hi, thank you for the opportunity. I have a question on the bounce rate. Just want to understand that what kind of penalties are charged to a customer by the bank and the company in the scenario of payment bounce, and what's the reaction of the customers during your conversation on this? Do you understand these charges and what's their reaction to having to pay these charges?
Yeah. Mainly the charges are related to bouncing. We take a bounce charge from the customer, which is INR 500 plus GST. A total of INR 590 is what we charge from the customer if they bounce the payment. The collection is generally on a best effort basis, so it's not collected from customers who pay immediately. It's if they have delayed a little bit, you know, then we collect a bounce charge. Currently the penetration would be with probably 20%. 20% of the customers will be making the bounce charge, so it's not very hard and fast. Other than that, there are no other penalties as such. The penalties accumulate.
I mean, we don't bill the penalties to the customer. If the customer is in 30 days past due or, you know, higher buckets, then we keep accumulating the penalties. When the customer comes to settle the property or when they finally come to close the loan, that's when we charge the penalties. That's, that's been, that's been our process, you know, for several years now. The ideally behind it is that when the customer is ready to make an installment payment, then we would ideally like to collect that installment payment rather than charge penalties on the customer.
Okay, sir. This INR 500 is fee penalty by the company, right? That you guys take. Then there would be some penalty charged by the bank as well, right?
Yeah. The bank from which the customer has issued a mandate, they will also charge something which is ranges between INR 50 to INR 200, INR 300 generally.
Okay. Okay. Yeah. Okay. So, okay. You are saying 20% of your customers who bounce, eventually they end up paying this bounce charge?
Correct. Yeah. Because the majority of the collection also happens electronically on the, on the app, et cetera. We have not made it very hard, hard and fast on the app. If customers are paying on the app, and we are avoiding any, you can say we are reducing our collection effort to that extent, then we don't insist on the bounce charge.
Okay, sir. Okay, fine. Thank you. All the best.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Kindly proceed.
Yes. Thanks for allowing me a follow-up. One more thing I wanted to understand, Manoj, I mean, during your opening remarks, you talked about in 261 touchpoints across tier one, tier two, tier three markets. Wanted to understand let's say about two years back, at the time of our IPO, if I were to kind of look at, our branch presence, they were predominantly urban centers, metros, peripheries of metros and urban centers. I mean, how are we now thinking about it? I mean, are we with distribution touchpoints in addition to branches that we are adding, are these touchpoints coming up, in tier two and tier three markets?
If you have this data, I mean, out of our AUM today, what proportion of the AUM is coming from tier 2 and tier 3 markets, and how has that number changed vis-a-vis let's say one or two years back?
Yeah. As you know, broadly about 30% is coming from the tier 3 markets. Tier 1 and tier 2 we generally used to be present, you know, even say a couple of years ago. Tier 3 would be a new, you know, or a good number of tier 3 markets would be an addition over the last two years. About 30% of our business is coming from tier 3 markets now.
30% from Tier 3 markets now.
30. 30% is coming from tier three markets. I mean, that number would have been much lower two years ago.
30% is a form of your disbursement mix.
Pardon?
A proportion of your disbursement mix. Got it. Got it. The idea going forward is that these touchpoints that you are adding will largely be there in tier two and tier three markets?
Largely, yes, in tier two and tier three markets. There may be a few pockets where, you know, some tier one or tier two markets are also not yet covered in some states. Largely, yes, tier three, tier two, tier three markets. Yes.
Abhijit, by virtue of the presence we've had in tier one markets, we've kind of covered those markets from all angles, in terms of the housing demand where it's being generated from. In those markets it's about, in the tier one markets, it's about market share growth. In some markets we'll probably be let's say 2.5 to 10, 3%. The idea is to take it up in those markets in combination with deepening presence in tier two, tier three markets. That mix will still not change a lot because in the disbursal proportion, both will continue to grow. One will grow because of market share, the other will grow because of penetration.
Got it. Got it. This is extremely useful. Thank you so much.
Thank you. The next question is from the line of Vignesh Iyer from Sequent Investments. Kindly proceed.
Congratulations on good set of numbers. I did miss some part of the call, so apologies if it sounds repetitive. I just want to know, so your disbursement is at INR 780 crores in this quarter with 11% QOQ. I just wanted to understand, going ahead for quarter four or even for FY 2024, are we heading towards a four-figure number? If you could just help us understand.
Yeah, I mean, the target is to, you know, keep growing and keep moving up. I don't know whether we'll hit four figures in the next quarter or the quarter after that, but yes, that's the next milestone.
Okay. Any ballpark numbers? I mean, any, you know, like you gave something for AUM guidance, right? Anything on similar lines?
The aim is to keep growing at about 7%, 8%, 10% on disbursement every quarter. That's the growth that we are looking at.
Oh, okay. Perfect. Thank you, sir. That's all. That's all from my side. Thank you. All the best.
Thank you. The next question is from the line of Chandra from Fidelity. Kindly proceed.
Hi, I'm going to ask a quick question. When we look at the flow of.
Mr. Chandra, sorry to interrupt, sir. Your voice is very low. Could you speak closer to the handset?
Yeah. Is it better now?
Yes. Thank you.
Sorry. Manish, on a flow basis, I think for the LAP you've been repeating in the past is 15. My assumption is that over a period of time, LAP gets to 15, we do that at possibly about 200 basis points higher yield. If I had to sort of just look from the margins over a period of time, 8 to 10 basis points, you should have a tailwind to margins over a period of time from that. Secondly, as you were saying, you're doing a little more business in Tier 3 towns where your price sensitivity is not as much. My sense is that your ability to hold yields should be a little better.
Just given these two factors, as tailwinds to sustainability of yields, just a little curious, on, you know, the spread, number which you talked about. A, is that more, a little more temporary because right now, I mean, cost of funds is just rising a little quick and maybe, you know, two years out this instead of 5.25 you know, once or eight cycles sort of turns and in the past, that given you've held, yields, well that maybe this number could be something different.
Yeah. See we are guiding to this number because, you know, there has been sharp increase in rates. Also, you know, as far as the rates in the market are concerned, we don't want to do too many, too many changes. This is why you're seeing our, you know, origination yield also, you know, moderating. In the, I mean, we have, we have kept it that way in the expectation that, you know, it will, I mean, the rates will taper off and, you know, then start declining over a period of time. We don't want to keep increasing the rates in the market and then, you know, after a couple of quarters then we have to reduce it, reduce it on the back book, et cetera.
So which is why we have kept it this way. So which is why, you know, there is a medium term guidance of 5.25%. You are right, we have some tailwinds, you know, and we have certain things on our side. The LAP, you know, penetration is one and, you know, the penetration to smaller markets is another one. Similarly, you know, we have co-lending and stuff like that. Yes, we should be able to, you know, cross those numbers that we have mentioned.
Sure. Essentially this, I mean, there is a near-term obviously cost headwind and you want to effectively just keep your yields where they are. If the cycle turns, I mean, this 5.25% is not sort of the be all and end all of it. I mean, there is-
Absolutely.
Yeah. Yeah.
Okay. Thank you.
Yeah. Yeah.
Mr. Chandra, any further questions?
No, that's it . Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you everyone for joining on the call. I hope we have been able to answer all your queries. In case you require any further details, you can contact, Manish or get in touch with Orient Capital, our external investor relation advisor. Thank you very much.
Thank you. On behalf of Home First Finance Company India Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.