Good evening, ladies and gentlemen. This call is not for media representatives or Bank of America Investment Bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America Investment Bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good day and welcome to the Mahindra & Mahindra Financial Services Limited Q3 FY25 earnings conference call. This call will be recorded, and the recording will be made public by the company pursuant to its regulatory obligations. Certain personal information, such as your name and organization, may be asked during the call. If you do not wish for it to be disclosed, please immediately discontinue this call. As a reminder, all participant lines will be in the listen-only mode.
There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star and then zero on your touch-tone phone. I'd now like to turn the call over to Mr. Anuj Singla. Please go ahead.
Thank you, Darwin. Good evening, everyone. This is Anuj Singla from Bank of America. Thank you very much for joining us for the Mahindra Finance call to discuss Q3 FY25 earnings. To discuss the earnings, I'm pleased to welcome Mr. Raul Rebello, Managing Director & CEO, and Mr. Sandeep Mandrekar, Chief Business Officer. Thank you very much for the opportunity to host you, sir. I now invite Mr. Rebello for his opening remarks. With that, over to you, Mr. Rebello.
One who is joined from different time zones too. So in summary, this has been a quarter which is characterized, from our standpoint, as a stable one. What's really underscored is the fact that we've had some positive momentum in growth and margins, and largely, asset quality has remained range-bound. The deck has been uploaded in the last few minutes, or maybe last 10, 15 minutes on the exchanges. So I'd request everyone to keep the document handy. I will be referring to certain pages on the document as we proceed. So first page is page number four, which is titled as Key Highlights. Disbursements have been up 25% quarter on quarter. Relative, if you look at Q3 of last year, we're up 7%. In our business, there's a lot of seasonality involved.
We have seen this year being flattish most part of the year, Q1 and Q2, but Q3 has seen positive momentum in growth. On the diversification front, directionally, we're moving well. The SME disbursements have come up with a 60% YOY growth, which is encouraging. Asset quality has, as I mentioned, remained range-bound. GS3 is at 3.9%. We do understand the environment continues to be, it has its set of challenges, and on our part, we remain focused on prioritizing collections. Moving to margins, NIMs have remained overall stable. On a quarter-on-quarter, on a sequential basis, we've seen a 10 basis points gain from last quarter at 6.6%, which on consolidation basis means that the PAT came in at INR 899 crore, which is, of course, also a benefit that we have gained from the provision relief.
There's a detailed document where I'll talk through the provision relief that we have benefited from. But overall, I think, as I mentioned, a quarter which is encouraging. Moving to some of the non-financial but strategic highlights for the quarter. Specifically, on the auto front, you would have seen in the last quarter a lot of OEMs talk about the EV, the new passenger EVs which are coming forth. We think this is a very positive move. Being a significant PV player, we have decided to actively participate in the new EV passenger vehicle momentum which will pick up. We've secured an exclusive lending partnership with M&M for the new two Born Electric vehicles which are slated for booking from 14th of February. Similarly, one of the other strategic imperatives that we've been talking about is fee-based income.
In that line, in the quarter gone by, we linked a credit card partnership with RBL Bank, post-getting the license from RBL for co-branded credit cards. We've also, after getting our corporate agency license, signed up nine insurance providers for distributing life, non-life, and health insurance. Another source of revenue is for the vehicles that we finance. We're looking at getting some amount of revenue from the FASTag issuance. For that, we have tied up with IDFC Bank, which just happened in the last quarter. And we've also received from NPCI an in-principle approval for the TPAP license, which will again improve our digital presence. I would now move to page number seven. Double-clicking on growth, as we've seen and witnessed in the year gone by, the first two quarters were rather soft.
This quarter has seen a comeback of growth of sorts, led largely by the farm business, which is the tractor business and the passenger vehicle segment. Tractor specifically saw 24% growth, which was encouraging. Passenger vehicles at 8% is also decent. This is on the back of what we could call as revival in the underlying industry, as well as our efforts to improve coverage in dealerships and geographies. Disbursements were rather slower in the CV business, which saw a 5% YOY degrowth, but sequential growth still of 25-odd%. Our SME business, as I mentioned earlier, has seen a promising growth of 60% YOY. We do recognize this is from a relatively lower base, but what's really moving here is the LAP business, which now constitutes the majority of the business, and this business is coming at a good clip.
Before we move to page number eight, which talks about margins. On the margin front, what you would see that the NIMs are at 6.6% for the quarter. This is a 10% sequential gain. It has, of course, been a 20 basis points fall from last year's same time, Q3. If I break up NIMs, what you're seeing is that there's been a 20 basis points sequential improvement in the loan and fee income. We are looking at whatever other levers at our end to kind of get a sequential improvement here. Overall, cross-sale continues. Cross-sale fee-based income continues to be an agenda item for us. On the cost side, we have seen a 10 basis points increase. Underlying factors here are there is, of course, now the debt equity is higher, leverage is at a higher level. We're also seeing a run-off in the earlier lines. The lower-priced lines are running off.
So, of course, we are trying to get in the incremental funding at a lower level, and we have had reasonable success on that front. But at an overall basis, cost has kind of moved up sequentially by 10 basis points. Moving to page number nine, which we have detailed commentary on asset quality. Here, the highlights are that GS3 moved up sequentially by 10 basis points. It is still 4 basis points lower than quarter three of last fiscal. On a sequential standpoint, we have added INR 216 crores. If you see the right side of the page, INR 216 crores GS3 has got added. It's a consolidated figure, but when we look at respective asset categories, we added tractor last quarter slightly higher. We've seen, actually, a sequential reduction in tractor. Of course, other asset categories have added to the GS3 stock.
We continue to look at levers that can keep the GS3 numbers under control, and for us, the primary variables there are to continue to originate a decent amount of prime-plus customers in the origination mix, continue on the underwriting practices, and the entire use of collection toolkits that will keep GS3 range-bound, so if you look at the bottom half of the page, you would see that for the quarter, we have added only nine crores in terms of overall credit cost. The big difference here is the provision reduction of 434 crores. I'd request you to move to the next page for me to give you some color on what's moved there, so if you look at page number 10, I'm referring to page number 10 on the PCR change because of the LGD decline. Just for understanding, the company follows the complete ECL model-based methodology.
We follow LGD using cash flow for a 42-month period. Now, for Q3, for the first time in this fiscal, the June 2021 stock has got included in this 42-month pool. You would recollect the June 2021 stock actually had a INR 4,000 crore, and that's what I'm referring to in the slide. The June 2022 stock had a INR 4,000 crore addition to the pool. The cash flow of this pool has seen we have demonstrated very high collection in this pool, which has led to the LGD coming down, I think, in one quarter itself. Now, this is encouraging, and of course, we do not this is provision is a function of LGD and PD.
PDs will definitely climb in this environment, but what we've benefited for is, one, the stock of LGD that we could collect from, which is a 4,000 crore pool which came in in FY22 Q1, and the demonstrated collectibility of this pool has been good, which has resulted in the PCR falling from 59%-50%. The other moving factor, if you just move to the next page, you would see that for our stated goals for the full year is to keep credit cost in the 1.3%-1.5% range. This is how Q3 has panned out, and how we look at executing on Q4, we still hold these targeted ranges of 1.3%-1.5%. What is also encouraging to note is the end losses, which we've been for some time now commentating upon, has remained in a declining trend.
You would see that in the page on the left top of the page. Sequentially, the net losses have been coming down, and even for the nine months of this fiscal, it is INR 53 crores, INR 52 crores lower than last year's nine months. Let's move to page number 11. So on page number 11, I have some organizational updates to share with all of you. We've also posted it on the exchange. The first part on talent, we have been strengthening our senior talent pipeline. We've made announcements in the last quarter. We have mostly done at the senior level. The CFO, we have a CFO. Of course, there's an interim CFO in place. Animesh is the interim CFO, but we have had a very high bar for who would be the CFO going forward, and we're happy to announce that Pradeep Agrawal will be joining us shortly.
He's currently the CFO at Aditya Birla Capital. And we also have a senior leader, Anurag, who will be joining us as the head of marketing and corporate communications. These are the two senior-level leadership that we have to announce. Besides that, this is an organization which is prioritizing. Overall, we have a 26,000 workforce, and we continue to make sure that the entire workforce is aligned to the new ways of operating, whether it is in the lean mechanism or the digital toolkits that we have recently unfolded. 49% of our employees have gone through new certifications and done the digital dexterity program. We've also added the POSP, the capability for them to cross-sell insurance. 4,000 employees have got certified. So we're looking at a very encouraging talent pool being ready to work in the new ways of how we fashion the organization working forward.
On the tech and digital front, we have moved 40% of the applications to the cloud now. In the last two, three quarters, there's been a significant upgrade. The LOS stacks for the SME business, we've kind of onboarded the Salesforce toolkits, and we're using AI, which is contextual to our business for cross-sell collections and underwriting. Some updates on the OpEx side, how we're looking at keeping OpEx lean. A lot of the CPC capabilities continue to be upgraded. From a distribution standpoint, we've not had too many branch additions, but we've added 25 branches in the last quarter. Overall, year to date, 34 branches. We plan to add another 15-20 for the year, and we will see that going forward next year too. We continue to have a high bar on our entire governance and risk capabilities that we add on.
Most of our risk models have been upgraded. Our underwriting tools have been refreshed, and we're looking at the tools now sloping risk in a much more encouraging way. Moving to page number 13. Yeah, here, this is just a slide which keeps us honest to what we have the ambition for the organization to close FY25. We're not changing any numbers here, which we are looking at more aspirational closure numbers for the year. Overall, we're trending well on asset quality. NIMs, yes, is also in the range that we want to close the year 6.5%-6.7%. Growth seems to be trending again in the direction. Diversification, yes, that's the only one which is going slower than what we anticipate, and our way we're maintaining that we would like to be in the 1.8%-2%.
Finally, this is a focus slide for all the focus that the team has for delivering on FY25. But yeah, this is not an organization which is only looking at short term. We are also looking at being future-ready, and we have ambitions on growth and profitability across lending and asset categories and other financial service opportunities. On these lines, as well as we would like to share with you a more holistic plan on our digital AI use cases that we are planning, and very soon, at the end of Q4 results, we will have a very detailed roadmap for how we're looking at navigating the next three to four years, being absolutely future-ready and operating in a manner which we think we'll be able to unlock value and unlock revenue from different revenue pools that are available for us.
I pause here now and invite we'll open it up again for Q&A.
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 withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question and to limit your questions to two per participant. You may rejoin the queue for follow-up questions. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. We have the first question from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Good evening, everyone. Thank you for taking my question.
Sir, I mean, first things first, I mean, I would say congratulations on a good quarter, but there are two things I wanted to understand. First thing is we have been, for the last couple of quarters, been talking about this benefit from ECL model to say a provision release, which we have seen in this quarter and has resulted in a decline in the provision releases. Just trying to understand what about benefit which have to come from this ECL model refresh, which we were expecting for the last two quarters. But last two quarters, are they already there, or is there room for further releases in provisions for the next couple of quarters? That's my first question.
Yeah, thanks, Abhijit. So I would say that the benefit has got baked in in this quarter.
I think for the last few quarters, we have been mentioning that because in the 42-month pool for which we look at LGD cash flows of LGD, the Q1, which was a pool which is a significant pool, and that's what I detailed in slide number 10, the 4,000 crores which came in between March 2021 and June 2021. I mean, in June 2021, this 4,000 crores got added. It gave us a, and this pool, typically because it was coming after COVID, the pool collectibility of that pool, which we demonstrated on a collection, was very encouraging. I would say that the LGD benefit is kind of fully baked in for now. Yeah, this is something we knew was going to come in specifically because of the way in which the ECL model works. LGD is a programmatic number.
It works completely based on cash flow that we're able to execute on the 42-month pool. So this is baked in. Got it. And just to follow up on that, sir, so suffice to say that, I mean, provision coverage across stage one, stage two, stage three that we are carrying today are largely going to be steady state from here on. See, as you know, provision is a function of PD and LGD, right? The PD, every year, refresh the PD, and the PD naturally would, in today's environment, generally seem to trend upwards because whether you look at all the macro factors that go into PD, typically the externals are not extremely rosy. LGD is a variable which will move basically basis the cash flow of the 42 months.
So if we continue to collect well for the pool which is in the LGD consideration, we will see these numbers being in this range. If the collection is not demonstrated to the way it is, it might see an upward trajectory. This sharp decrease is largely because of the, as I said, the INR 4,000 crore pool which came into the consideration set and the collection efficiency of that INR 4,000 crores which came to the pool. Got it. Thank you. And then the last question which I have is, again, what you just referred to, sir, as the environment. Just trying to understand if you could give some color on your individual product segments, maybe particularly tractors, CVs, how are they behaving during the? See, I think our observations are not too divergent from, I'm sure, what you've heard from the community.
It is an environment wherein we need to make sure that our collection front lines are on the job because there is a level of leverage which we see which is higher than the past, and in this environment, it's very important that we constantly be engaged with the end customer. We are able to collect in time and sensitize them on keeping a certain level of discipline, so we continue to be on the ball. Collection is a big priority for us, and we have actually made sure that the collection offices get all the enablers to kind of meet those outcomes. Having said that, the initiatives that we have taken in the last two, three years of moving into the prime segment, having a higher mix of customers in the prime segment is also auguring well for us in this environment, but nothing taken for granted.
We constantly need to be on the ball. Specifically, portfolios like three-wheelers, etc., are more susceptible to disruptions and to these kind of situations where there is a liquidity stress. So we are making sure that we don't leave any effort on the collection front. Thank you. The next question is from the line of Renish from ICICI. Please go ahead. Yeah. Hi, sir. Just two questions from my side. One, again, on the provisioning front. So this quarter, we saw roughly 434 crores of provision reversal. At the same time, there is a write-off or, let's say, the losses of 400 crores. So let's say going ahead, entering FY26, and if there is no such provision reversal, what kind of a steady state credit cost one should assume? See, you're right. This benefit has basically got crystallized in this quarter.
We have, in past forums, also said that we would like to operate in a credit cost range between 1.3%-1.5%. That's for this year and going forward also being that below 1.5% range. To get to that, we'll have to make sure that it's a combination of net losses and provisions. If we keep the GS3 numbers range bound, then the provision increase won't be so high. Of course, we'll have to see how the PD number works. But the controllable variables here are to keep the GS3 numbers in that zone and make sure that whatever write-offs and disposal losses are also not going up.
I think if you kind of refer to the pages that we disclosed, what's been a good trend is that the end losses have been on a declining trend, which means credit costs to be in that 1.5% or 1.3%-1.5% zone seems a plausible outcome if we execute them.
Thank you. The next question is from the line of Viral Shah from IIFL Securities. Please go ahead.
Yeah. Hi. Thank you. I have two questions. So first of all, on the asset quality front, just again touching base over there. So can you give us some flavor of, again, I understand you were saying that next year you won't have this and you aspire to be at, say, 1.5%.
But the very fact that you will also be growing the book, right, and you will have incremental stage one to provision, how can we be, say, at 1.5% credit cost also next year if the write-off, say, even this quarter is at 1.4%?
Yeah. So if the write-offs have been on a declining trend, I mean, we've seen over the last couple of years, this write-off number has actually been coming down steadily, right? So if we keep the GS3 numbers and as the book grows, if the GS3 needs to be in the same percentage, absolute values might go up because there's a rolling stock which moves from stage two to stage three. But as you know, we also have a stated growth plan of 15%-18%.
Hence, on an absolute basis, if we keep the GST numbers range bound and curtail the end losses, keeping credit costs in that zone shouldn't be too challenging. Just to give you a quick look back on the end losses, this number from 23 from 2.6 has already slid down last year to 1.6, and YTD is 1.2. I'm talking about end losses. Hence, maybe the remaining to be in, again, I'm kind of giving you ranges 1.3-1.5. That's again an ambition. I'm not saying that this is cast in stone. If the end losses are kept in that range, then whatever 20-30 basis points of provisions is something that we should be able, or we should keep as a range to operate within.
Thank you. The next question is from the line of Kaitav Shah from Anand Rathi. Please go ahead.
Yeah. Thank you.
Am I audible?
Yes. Yes.
Okay. Sir, just wanted to understand. So our CFO, the previous CFO, resigned on 31st October, and in the interim, we had no CFO, in which period we had this write-back.
Sorry, I didn't understand the question.
Sir, the previous CFO tenure ended on 31st October. Correct?
Yes, that's right.
And an interim CFO has been appointed from today, tomorrow.
Yes.
So this time frame where we got this provision write-back, we did not have any CFO?
No, what is the connection of the question? I mean, as we've explained in detail, the PCR number is a function of the ECL model. The ECL model, we have a full-fledged finance team. The finance team is not represented only by the CFO.
We have a very well-equipped finance team, and the whole purpose and the whole exercise is done with the senior finance team and the statutory auditors and, of course, the audit committee and board. So I don't understand the question, actually.
Thank you, sir. And second question, in terms of your provision coverage ratio, given that we are moving now to more premium set of customers, is the PCR perhaps going to trend lower over the medium term? Is that an aspiration?
No, I don't think the, see, the PCR benefit, as the cost of repricing has largely been kind of demonstrated right now because of what came into the 42-month pool, which is the June 2021 stock. I do not really see a decline further.
There might be a small uptick maybe because this benefit definitely gives us a one-time or not a one-time, but a benefit which fructified in this quarter. The levers for keeping PCR in a zone will be all the kind of cash flows that we are able to demonstrate that can come in through the 42-month pool, which is considered for LGD, right? As I said, LGD is largely within our control. PD is a function of whatever gets refreshed on a quarterly basis and how that number moves.
Thank you. The next question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
Hi. Thanks for taking my question. The first question is actually on margins. When and how do we sort of expect to go to the 7.5% margin benchmark? And I think the second one essentially is on your outlook on growth.
This year, disbursement growth has been rather tepid. How should we think about it for the next year given the fact that the overall outlook for auto industry itself is a bit soft? And M&M is probably gaining market share, but most of it is in the prime segment where probably we don't have access to.
Yeah. Thanks, Nischint. See, on the margin front, I just want to reset. 7.5% was a kind of aspiration we shared in FY22 end. I think post that, as you know, the NIMS, at that point of time, no one could hazard that the cost of funds would remain elevated for two and a half years. We did recalibrate our NIM aspirations, at least for this fiscal to end between 6.5% to 6.7%.
I did share with you all that in the longer tenure or the longer period, we would look at NIM climbing up. But I don't think 7.5% with the kind of choice metrics that we have shared on the profile of incremental customers as well as the kind of product choices that we are making for the future will achieve a 7.5%. So 7% is more like the long-range target. Immediately this year, closing in the 6.5%-6.7% is the goal. What clearly we will try to offset from the declining NIM is to keep OpEx in that range of 2.5%-2.7% and keep credit cost in the range that we shared earlier, right? So to get to the, at least for this year, 1.8%-2% ROAs. But for a longer term, yes, the aspiration is to climb up to 2.5%.
Your second question on growth, see, the bulk of the organization is still heavily dependent on the wheels business. As you know, 93% is still the wheels business. In the wheels business, there are not every cohort is growing in the same manner. You have the CV business, which has seen prolonged stress in terms of not really breaking out in terms of growth. There's underlying reasons why CV has been range bound. There have been kind of growth, which we have seen in the past in the used vehicle. This quarter has not seen such a very encouraging number. PV, you're very right. The larger growth is happening in the extreme prime segment, which is very, very price conscious.
We've been able to grow in that segment, but our growth has a certain upper ceiling beyond which it will have a kind of impact on our margins. So we are conscious of in the vehicle cohort where we are choosing to balance between growth and margins. We will continue to double-click on tractor, which gives us higher NIM capability on used vehicle, which continues to give us a higher NIM capability. And specifically to look at in the longer run, avoiding huge dependency on one asset category, which is wheels, we've shared with you our plans on the SME business, on the mortgage business, and specifically on fee-based income because finally, yield is a function of both IRR as well as fee-based income.
To achieve those margin goals which I shared earlier, there is an asset diversification plan, and then there is a fee-based plan to kind of get to those aspirations. Got it. But any specific number that you want to kind of guide to for, let's say, the next financial year in terms of growth?
On asset growth?
Yeah. We'd like to be in the mid to high teens.
Got it. Perfect. Thank you very much and all the best.
Thanks.
Thank you. We have the next question from the line of Raghav Garg from Ambit Capital. Please go ahead.
Sir, hi. Good evening and thanks for the opportunity. I just wanted to confirm a number with you. Your net slippage for the quarter is around INR 665 crores. Is that right?
We don't disclose that. You can compute it, Raghav.
Sure. So as per my calculation, it's coming out to be that number, which is about 150% higher versus last year. You also said that tractor slippages have come down versus last quarter, which is 2Q. Can you highlight which segments contributed to these slippages to this extent of 670 crores in this quarter?
So we don't do it just being fair to the level of disclosures, Raghav. We don't do a product by product. But we did see a correction in tractors I mentioned from last time, but there have been slippages. You're right versus last year, but if you do the same slippage to last quarter, Raghav, you would see that this quarter has seen a lower net slippage.
Right. But I think I was trying to understand what's from a place where we are seeing CV delinquencies rise in the system and generally in the auto loan space as well. A lot of lenders have pointed out that there is some stress in that segment. So I was trying to understand from that perspective, if at all, there's any pain in any of the other segments apart from tractors?
Well, I think overall, the environment, as I said, is not as rosy as it was maybe if you look at Q3 of last year. Possibly last year was, I would say, a year which one can look at as a year which is much more from the underlying ability for collection was a much better place last year than this year. So it's not a very comparable 12 months that's gone by.
Other than tractor, which we saw quarterly, last quarter we saw tractor GST number spike more than as I called it out, it was more a delay than a default. We did see that number come back, and that's the GST number which I called out as a reduction over last quarter. Overall, if I were just to talk about, there is no specific pain in any segment. As you know, we participate in three-wheelers, passenger vehicles, CV, mostly in the light and small commercial bus segment, PV used CV, used tractor. Yeah, these are the wheel segment. I wouldn't call out a very abnormal slippage in any one of them. It was segments did see their relative level of pain.
Understood.
Another question is between the write-offs of about INR 450 crores and this slippage number of INR 670 crores, your collection efficiency numbers that you report have still managed to hold stable at 95%. Now, one of the things that I'm thinking is that there's probably that pool of INR 4,000 crores that you're referring to may have contributed to this 95% number being stable by quarter on quarter, whichever way you want to look at it. So if you sort of remove the impact of that pool, the collection efficiency ratio has come down. Is that the correct understanding?
Not really because the collection efficiency formula is basically a static constant, and that pool is the LGD pool. But I think what you have to look at collection efficiency is real-time CD and OD collection, right? That's what goes in the numerator divided by the current due collection.
So that formula is not similar to the LGD numerator denominator. Understood. And just one last question from my side. Sorry. You're at 15% Tier 1. When do you plan to raise capital? So it is clearly on our minds, and we usually, when we come to these levels, we start warming up the engine for Tier 1 augmentation. So at the right time, we will have commentary on that.
The next six months, is that possible or something like that?
I've said what I could give you in as much as expected terms.
Fair enough. Yeah. Yeah. Yeah.
Thank you. The next question comes from the line of Avinash Singh from Emkay Global Financial Services Limited. Please go ahead.
Yeah. Thanks for the opportunity. A couple of questions. The first one is again on the yields and margins.
So, what you are indicating that the growth in the EV segment is in a way while EV is going to contribute some bit to growth. You are also going to kind of go into prime mortgages and prime LAP. All this put together is still going to put pressure on yields. Now, on the OpEx side, of course, I understand that over the medium run, these prime businesses are typically lower OpEx. But at the moment you expand into this, again, OpEx is going to be sort of on the higher side. Now, on the credit cost side, even if there's still the improvement because I mean, the reversal part or other PCR reduction part is done, so FY26 should not see.
So if we kind of try to add, of course, I'm calling you on the fact that what you are saying on the fee side, but there's pressure on the pure interest income yield. Some bit of OPEX, even I mean, operating yield is getting delayed because you are entering into newer segments. So do you see the FY26, your ROA numbers could be better, I mean, than what is there in FY25, or can it cross 2%? So that's question one. And second, if I just look at the last quarter, I mean, it's a smaller segment, but yet we see kind of a bit of a slowdown in your pre-owned vehicle segment. Is it because of your kind of a proactive move seeing the environment, or I mean, is it that there is kind of a weak demand itself?
Yeah. I didn't get your second one, but I'll first attempt the first one. So when we look at our overall growth plan, see, we are building an organization for the future also. So when we take calls to diversify and build new business lines, one should take into context this is not just to deliver FY26 numbers or 27 numbers. Many of these are long-term initiatives and long-term investments that we think we have to make. At a certain size and scale, having a loan book of INR 115,000 odd crores and from an organization which is looking at playing a much more holistic financial services play for the foreseeable future, we do believe some of these investments on the diversification front are longer-term initiatives that we are making, right?
Whether it is the prime mortgages or it is playing in other categories of the wheels business, these are all slated with a larger ambition to being a growing franchise and also to be a sustainable, profitable franchise. On the choices that we have made, we do understand some of it will consume OpEx in the near term. This is for us growth OpEx. Some of it, we do understand that will have impacts on margins. We have a calibrated view on how much of the new segments we will do on balance sheet and off balance sheet. We have talked about in the past of our strategic tie-ups in co-lending coordination with certain partners. We believe that there is a certain revenue that will accrue to us from a distribution play.
We are, after all, sitting at a very strong position of strength in 6,000 dealerships across the country. We can orchestrate a lot of this finance or lending fee. Part of it, we will keep on our balance sheet, which we think is extremely margin-sensitive. We might offload to partners. But the objective is to be able to consolidate this momentum, this growth momentum, and feed either our balance sheet growth or our off-balance sheet growth, whichever is deemed fit to get to both our growth and margin objectives. Your second question, if I mean, I couldn't completely understand it. If you could just repeat it.
Your kind of muted growth or rather a negative growth in the pre-owned vehicle disbursement.
So what is happening there, I mean, because I mean, yeah, a relatively smaller piece in the pie, but in the quarter, it was doing for in the first half, it was doing quite well, but in the Q3, suddenly there is a kind of a decline in disbursement in pre-owned vehicles. So what is happening there?
Yeah. So in the pre-owned vehicles, part of it is our own vehicles which come up, the new PVs or tractors that we fund when customers want to finish their period or they need a top-up loan on that. And part of it, a large part of it is from which happens in the commerce, which happens in the used vehicle industry. What we have seen, the PV continues, the used CV as the main CV business, LCV, SCVs are not growing significantly.
Some of the replacement demand in that segment is starting to be muted. And also, we have to factor in what is the risk that is in part of these segments. So it's a combination of what is the underlying replacement demand which is there, as well as some of the risk factors that we take in. Nevertheless, in our mind, we could have executed better on this. We want to make sure that incremental sourcing of used PV, CV, tractor is 20% of our incremental disbursement. It was a soft execution one that I would call it. We have to work within the constraints, and we have put in, in fact, augmented the used CV team to be able to bite a little more of the acquisition that is capable. But our plans are to be participating much higher than where we are right now in this segment.
Okay. Thank you.
Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. So firstly, again, getting back onto the overall provision coverage. So again, states to the decrease which has been there, that is also on account of a similar pool because during that period, in fact, stage two assets also went up to almost 4,000 odd crores. So is it the same pool getting added, and that's where stage two is also down in terms of the coverage?
So you're talking about the stage two PCR? Yeah. So stage two coverage has also dropped from 10.6 to 9.1, almost like 150 odd basis points. So is it like a similar pool? Because when I look at the June 2021 stage two pool, along with stage three, June 2021 stage two pool was also up by 4,000 odd crores. Yeah.
So the coverage, see, the stage two is again a function of PD and LGD. So there are factors which work. There are three macroeconomic factors that work behind the scenes. And those factors, along with the collection that you would have demonstrated in the stage two pool, would have resulted to the coverage number. The LGD is common across the stages.
Yeah. LGD is common as the PD one. And maybe overall, when we look at it, after that June 2021 behavior, if we look at till maybe at least like March 2022 behavior, there was again a contraction of almost like 5,000 odd crores in the stage three pool. And similarly, stage two pool also contracted by 4,000 odd crores. So would that again have any kind of an impact in terms of, obviously, these are getting out of the pool?
But can we then fairly assume that the provisioning coverage will keep on inching up over a period as the new pool gets added and the collection might not be that robust as we saw in the June 2021 pool?
So to some extent, you could say marginally might go up. Again, a lot of it is contingent basis. If the team continues to have a collection for that 42-month pool, if the cash flows, which can emanate out of better collection, then that could, of course, impact how much that increase in PCR or LGD will spike.
Yeah. But the only thing is this collection would be over the period, okay? So it's not like a one-quarter phenomenon. So at least in terms of the trend, obviously, you were well aware in terms of June 2021 pool having a much better collection.
You have looked at it over the past three years, and you were confident that this coverage would come down. But in terms of how the incremental pool has behaved, it's not like one single quarter phenomenon. It just gets added. But there is a fair trend in terms of the collections. And if you can guide based on that, because this gets slightly volatile on a quarterly basis, but at least you would be aware about it, yeah.
Yeah, we are. We kind of know the model kind of has reflected what kind of cash flows have happened in the 42-month moving period. So there is part handling what we can do again in every quarter. But as you rightly said, a lot of it has already got baked in.
Kunal, just to add, it will be giving, I guess, too much while we do, of course, as management, know what it is and we can bake in what additional collections can come in. I would refrain from giving specific guidance on how the LGD will kind of move specifically in the foreseeable future.
Sure. On OPEX, when we look at it, so this quarter, it's been up. Maybe you have been indicating that there could be some upward bias as you would continue to invest. Then maybe we have reached that level of 2.5-2.7. Should we see the efficiency gains and that helping contain the OPEX, or there could be some upside risk to the OPEX to accept guidance which we are given?
So if we bake in all the what goes in behind OPEX, there's of course staff, there is acquisition cost, there's collection cost, and then there is diversification for the new businesses. For the existing wheels businesses, clearly, we would expect that the efficiency levels start kicking in because these are steady-state businesses with all the efficiency toolkits that are there today. And just to keep everyone mindful that we have actually, from March ending of the last fiscal, our staff strength has come down for the main businesses. So we are getting the teams to be much more efficient for the core businesses. There will be growth-related expenses that we will incur for the diversification businesses. There will also be, as we flesh out more of the underwriting teams, risk team, compliance teams, and we invest a little more in tech, there might be some investments over there.
And I would also not shy away from, in the environment that we are operating in, to spend reasonably on collections, right? So overall, yes, we would still like to operate in that 2.7 kind of corridor, not to go up to a maximum 2.8. But there is a lot of efficiency gains that we are extracting from the teams.
Okay. Got it. Thanks and all the rest here.
Thank you. The next question is from the line of Kushan Parikh from Morgan Stanley. Please go ahead.
Hi. Thanks for taking my question. Sorry to just keep harping on the provision coverage part. Appreciate your point that you would like to refrain from giving specific guidance on how the new pool of loans essentially is performing from an LGD perspective. But could you just give us a picture on the, I mean, how should we view the glide path?
I mean, appreciate your point that you could see a slight uptick in provision cover given the environment and rising PDs and the LGD performance of the new pool. But will this be more gradual in nature or over many quarters, or should we expect a sudden spike again two quarters down the line?
Yeah. So I'd kind of borrow from what I said to Kunal also earlier. We don't expect a very sharp increase because, I mean, you could also just go back and see the collection efficiency that we demonstrated from 22 onwards, as well as what has been the net losses. So in summary, I would say it would be range-bound. It clearly won't climb back to those levels. The post-COVID effect or the kind of impact of the second wave got the whole PCR cover to basically climb up to those levels.
With what we have seen now and what collections we have seen in the last two, three years, I would more safely say this would be marginally increasing, but more or less very, very range-bound, clearly below the peak levels that we went to earlier.
Got it. And this will be happening gradually over the quarters, not a one-time change or a refresh in this level.
Yes. Yes. Absolutely.
I understand. Okay. That was my only question.
Thank you. Thank you. We have the next question from the line of Viral Shah from IIFL Securities. Please go ahead.
Yeah. Thank you for the opportunity to let me ask the question again. So thanks, all. Just one thing. Can you give some commentary as to how are the prices of used vehicles trending?
So the commercial vehicles, the PVs, the tractors, and recently, and what you say, what it has been like six months or a year back?
Yeah. I have not seen any sharp decline. I think some would, I mean, think about it, the CV business, because the rates of the new vehicles have been going up. Clearly, there will be a certain impact on the used vehicles. Of course, the PVs, we have seen a big onslaught of price reductions at the middle level and some models. It's a very model-to-model. Some models have had a drastic drop. So one could think that even it could rub off on the used vehicle side. But in total, I don't think we have a very. We're not seeing very huge drops, but I would invite my colleague, Sandeep here, to give more color on specific prices.
Yeah. I think the prices, if you look at it from last year to this year, have more or less remained stable in the market. They haven't dropped or increased either. If you look at the last three to four months' time when we have started to already see discounts getting offered onto the new vehicles, this automatically has some bit of rub-off effect on the used vehicle prices. But nothing at this point of time to feel worried about in terms of large drops which have happened.
So just on the last three, four months piece, that slight, say, correction which you're referring to, that's true for all the segments of used vehicles or just in PVs?
No. I was talking more from a new vehicle passenger vehicle standpoint, wherein we have seen the month giving more discounts on the vehicle leading to on-road prices going down.
Correct. Correct.
But are we seeing similar trend in, say, a used commercial vehicle or a used tractor?
Not yet. Not yet. So I'm saying if it's not yet gone and dropped the prices on the used, they have held their prices. We haven't seen much drops on it as of now.
Got it. Thank you. Thanks a lot.
Thank you. The next question is from the line of Punit Bahlan i from Macquarie Capital. Please go ahead.
Thanks for taking my question. Firstly, on the margin bit, I - sorry, I missed the opening remarks. What was the reason for the yield improvement of 20 basis points?
Sequentially, we've been - there are different levers that can work over here. Clearly, we have been looking at optimizing on the incremental pricing. At the same time, part of the mix which can also kind of impact. And thirdly, fee-based income, which is the biggest kind of initiatives we are driving. The corporate agency license has actually given us, in the last seven, eight months, a pretty healthy fee-based income. Even if you look at previously when you normalize for the MIBL contribution, even normalizing for that, it's been a very healthy addition to our overall income and yield outcomes.
Okay. Okay. Got it. I was just really on the PCR change. Say last quarter, you have given your recovery period for LGD was Q4 2021 to Q2 2025. So that included the 1Q FY 2022 period, right? I'm wondering if this quarter also it included, then why was this change not done last quarter when the high recovery period was included in the last quarter as well? If we are going by that 42-month period.
No, no, no. I don't think you've read it right.
What happens is that there is a new pool which has come in. The entry pool for Q3 of FY 25, this pool did not come in in last quarter. This pool has come in in this quarter itself because of 42. If you trace back 42 months from December, June 2021 is what comes into the mix, right? So this entire INR 4,000 crores, which is the LGD recovery pool for the next 42 months, is the first time that Q1 FY 22 has come into the mix.
Okay. Got it. And so when this goes out of the mix, your PCR might increase, right? Because this has led to a 900 basis points decline in PCR. So going forward, once this pool is excluded, there will be some increase in PCR, right?
Yeah. There will be a gradual because there's a certain benefit that this has accrued right now, and that's what I said. It'll be range-bound. We don't see it spiking up. We see a gradual tick, but it will be range-bound. In my estimate, since we're all pushing on this, I don't think this will definitely go beyond a 54% number. That's why I said between a 51%-54% number in the near future, and at one point, it is 1.3%-1.5% factor is this, right? Sorry. That's the credit cost aspiration that we have. Again, I'm not giving you guidance here. This is an aspiration that we have, but this year, 1.3%-1.5%, absolutely, if you were asking for this year.
Right. Right. Right. Okay, and so on the write-off policy, could you comment? What's the write-off policy? Is it?
So there is no change in the write-off policy. Like most vehicle lenders, we look at what's the good time to write off. Again, the kind of recoveries that we see in the NPA pool gives us enough of input to decide when to write off. And we have not changed any write-off logic, if that's the question.
Got it. Got it. Thank you so much, sir. Yeah.
Thank you. The next question is from the line of Nitesh Chen from Investec. Please go ahead.
Thanks for the opportunity. Can you share some details on what is happening in Mahindra Rural Housing?
Sorry to interrupt, but you were not audible.
Hello? Am I audible now? This is better, sir. Please go ahead. Yeah. Sure. So I have two questions. First question is on Mahindra Rural Housing plans.
What is happening there and what is the medium to long-term strategy for that business? And in terms of capital requirement, how much capital we are likely to infuse in that business?
Yeah. Thanks. So we have shared last time that we plan to participate in a much holistic manner in the mortgage business. Before we really participate in a meaningful manner, it makes sense that we clean and steady-state create a semblance of a reasonable amount of asset quality outcomes in the MRHFL business. You would have seen in that light, we have done additional provisioning for this quarter. We believe that that business needs to be set first right in order before we grow mortgages overall. I don't know whether I informed you guys. We talked about a very senior resource from Bajaj Housing Finance who was deputed there. He continues to work closely with the management team.
In fact, he was seconded earlier. Now he's moved full-time to that entity and will ensure that very soon we see MRHFL set in order. The team is working in that direction. We have already reduced a significant amount of manpower. OPEX will come down, and of course, asset quality, we are expecting to see changes, positive changes there. From a capital adequacy, that entity is adequately capitalized. There is no need. We are not growing anyway. We are looking at more right-sizing that organization and making sure the asset quality in that organization reaches a desirable level. There is no immediate exuberant growth plans there. So whatever capital is in that organization, it's adequately capitalized.
A nd the mortgage business will be done through that organization only, right?
We will share plans. We said we plan to play mortgages holistically.
I did mention at the start, end of Q4, we will give you a slightly longer-range strategy view of Mahindra Finance. In that time, we will detail where mortgages will be done, to what extent will be done, what parts of mortgage will be done. Please be patient with us at the end of Q4. And when we have this longer-range view, we will share these details.
And second question is on ROA. ROA trajectory from 2% to 2.5%. How long do you think you will be able to reach there? And what are the levers you have to reach to 2.5% ROA?
Yeah. Again, I would say we are having a very detailed walk of our ROA plan. Please bear with us for another quarter, end of Q4.
We plan to have a very detailed, in fact, investor analyst day of sorts where we will share much more details on the overall growth aspirations, asset category participation aspirations, digital AI capabilities that we have built. So all of that talk, please be patient with us. We will share that in detail in the next quarter.
Okay. Thank you, sir. Thank you from my side. That's it from my side. Thank you.
Thank you. We have the next question from the line of Sonal Gandhi from Asian Market Securities. Please go ahead.
Yeah. Thanks for the opportunity. Apologies, you know, at the outset, I'm hopping a bit on the provisions part. But when I look at your FY 2022 numbers, the write-offs for the entire year were closer to about INR 2,500 crores and a significant chunk of it came in Q4.
So if you could just explain, I mean, how would this LGD work? Because right now we've reduced our PCR to 50%. End of Q4, FY 2022, I think we did write-offs of about 1,200 crores. So I mean, how gradual would this increase be from 3% to, say, 3.3, 3.4%? Or it could happen in the next one year itself. Sorry, I didn't understand. What is 3.5%? So currently, your total provisions, total ECL provisions stands at about 3%. This number was slightly higher in the previous quarter. And obviously, with the new ECL model, the requirement for PCR has gone down. Now, if I look at your loan losses or actual write-offs for FY 2022, I think they were closer to 2,500 crores. So I'm just trying to understand that year, the write-offs were the highest.
So when, I mean, we are seeing that currently the total ECL is at 3%, Stage 3, PCR is at 50%, and it will gradually move up. But if I look at Q4 FY 2022 numbers, write-offs were slightly higher, at about INR 1,200 crores in that quarter itself. So I mean, just to understand, when we are modeling, how do we kind of model credit cost? Because again, there would be this variable which would come into factor, and then the provision coverage would go up.
Yeah. So the PCR number is, again, at the cost of repeating, it's a number which there is the LGD and PD are the two big variables. The LGD is something which is basically based on cash flows that have happened for the 42-month period, right? The PD is a number which gets refreshed.
Now, to your question, I think your larger question is, how will the PCR go forward? I don't think you can do a map-to-map on the end losses of FY 2022 because the end losses of FY 2022 would include pools which are not exactly in the LGD 42-month period. It could be of previous period. So doing a like-to-like mapping and trying to future forecast basis FY 2022 write-offs, FY 2022 write-offs would not be an accurate comparison, as I said, because write-offs happen from different pools, right? It happens from sometimes. And we also have settlement losses which come into the loan loss. So I wouldn't hazard a line-to-line comparison of looking at forecasting the PCR number with connecting the dots on the write-off for FY 2022 and 2023. As I said, we look at a gradual possible movement.
The other way to look at it is, if you look at prior to the COVID period, our PCR numbers, which is again the LGD number, have always been in that 40-55 range. I do believe that our normal LGD PCR numbers should also reflect that because they are still in the vehicle business. In fact, what's happened from FY 2022 onwards is the end losses as well as the collection efficiencies have improved. In fact, the loan losses have come down. We don't see a big departure from the steady-state LGDs, which were set prior to the COVID period.
Okay. At the beginning of the year, in the annual report, we had mentioned that we're planning to open about 120-150 branches in the current year, maybe over the next 12-18 months. So where does this stand today?
How do we see this 100-120 branches being added? Do we really want to add those new branches, given we want to control that OpEx element?
Yeah. So a lot of these branches serve for incremental revenue in the future. These distribution points clearly give us a huge amount of ability to acquire new customers as well as service customers and service dealerships. So as I said, we opened 25 in the last quarter, 35 totally in the year. These are mainstream actual branches. I did mention that we have got some hybrid branches which operate out of dealerships and some small-format branches. So we will look at increasing the amount of distribution for our overall growth plans, not just for one year, two years, but for the foreseeable future. We do know that this and branches, by the way, don't increase. Only OpEx.
There's a certain CapEx amount, so setting up a branch is important from a growth standpoint. It will attract some CapEx, OpEx requirements, and that's baked into our OpEx ranges that we've shared with you.
Thank you.
And anything on the technology part?
Any questions? Please join the queue if you have follow-up questions. Thank you. The next question is from the line of Jigar Jani from B&K Securities. Please go ahead.
Yeah. Hi, sir. Thank you for taking my question. Just one quick.
Jigar, your line is unclear. You are inaudible in between. Jigar, are we audible to you?
Is this better?
Yes. Please go ahead. Yeah.
I was saying, if you look at the GNPA number and the difference between the GS3 number, that difference, which is about 6,200 odd crores of GNPA and a stage 3 of 4,500 crores, that seems to have been sticky since the last three, four quarters. When do we expect this gap to close between the GNPA and GS3? And secondly, just to follow up on the same is that the gap which is there between the two numbers, that would be sitting in stage 2. But do we carry the stage 2 provisions or a certain extra provision on this pool of assets?
Yeah. Hi, Jigar. We do carry the same stage 2 provision on this asset. If they are IRAC but not NPA's, they sit largely in stage 2. And yeah, they would take the stage 2 provision. This number, you're right.
I mean, it's difficult to get three EMIs sometimes. So that's why that pool has remained range-bound. But yeah, I don't know whether I shared earlier, we have reconfigured the collection team to be product-specific right now. It is our stated goal to start seeing this number go down. But your observation is right. It's remained range-bound. Largely, what happens is these customers pay one EMI and stay in the same pool. Getting three EMIs or four EMIs is going to be a little more, especially in an environment like this, is going to be a bit more tough.
But do you expect slippage from this bucket? Or would it be like towards the end of the tenure, you would be collecting probably these extra EMIs? That is how it would work.
Yeah. Yeah. More like that. More like that because it's tough for them.
So usually at the end of the tenure, the kind of forthcomingness of these customers to clear will always be there. Inter-loan, it is inter-tenure, it gets tough to plow back four EMIs.
Sure. So probably near the end of FY 2026, because our behavioral tenure is about two, two and a half years, probably by end of FY 2026, we should see this gap kind of closing?
I don't have a ready comment. We'll have to modulate to see that.
All of this may not be from the last one year or the last two years. Since we have a tenure of four to five years, it will be difficult to say that everything will get over in the next two years, right? Because you will keep on having new customers also coming in there.
Okay. Understood. Understood. Thank you so much, [audio distortion] . Thank you.
Thank you. Ladies and gentlemen, we will now take the last question, which will be from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.
Yeah. Hi. Good evening. Thanks for taking my question. I have two of them. First is, I wanted to understand the cost. I see when I look at your last seven, eight quarters data, I mean, our asset quality has pretty much stabilized with our stage 2 plus stage 3 in the range of about 10% odd. However, our overall ECL provision on the balance sheet has come down from 5% to now just at about 3% odd.
Now, in the current environment, by your own admission, where there is a bit of a volatility and you believe that there is a possibility that there could be some deterioration in asset quality, wouldn't it have been a bit more prudent to not write back these provisions into the P&L and maybe create some sort of a management overlay, especially given that in the past, we have seen a lot of volatility as far as the provision coverages are concerned? Wouldn't it have been a little more prudent to just hold back these provisions rather than writing it back into the P&L? Just wanted to have your thoughts to share on this.
Well, it's a fair point. And the ECL model ideally should reflect what is the underlying LGD and PD. You're right. Management can decide to make overlay provisions. We did contemplate it.
We just felt we'd be being a bit too cute and trying to basically do artwork on top of the model. At the right time, if we believe that we've got to start creating buffers, we will do it. In this quarter, we saw the LGDs work in the manner. We didn't want to kind of create something which is over and above what the model was prescribing because it is reflective of the collection that has happened of that pool. It will be our stated goal to continue to kind of collect and make sure that we keep these ranges. Of course, it's not going to stay at this level. It will marginally move up. But it's a valid observation. It was something that we definitely thought about. And it's not that we can't do it in the future.
If we believe that we can stomach some overlays, we will evaluate it at the right time.
Okay. Sure. The second question that I have is about capital infusion into the subsidiary. Now, while we appreciate that you have been supporting the housing finance subsidiary through thick and thin, while material progress over the past few years has been fairly limited, right? But again, if I look at it from a capital allocation standpoint, probably in a couple of quarters, we ourselves will start hitting a debt equity of about 6x. So how should we look at capital raising for the parent entity, Mahindra Finance itself, considering that Mahindra Rural Housing is also in need of capital?
Yeah. I'm not sure whether you heard me earlier. I did mention that at these levels, we are actively looking at our Tier 1 requirements.
And we do believe that in the recent or the upcoming quarters, you will hear from us. And we are at certain levels, which we believe is the right time to evaluate augmenting tier one.
Oh, okay. All right. Sorry, I missed that comment. But thank you so much. And I wish you all the best for future quarters.
Thank you.
Thank you. I would now like to hand the conference over to Mr. Anuj Singla for any closing comments. Over to you, sir.
Thank you, Raul and Mahindra Finance, for the opportunity again. Any closing comments from you, Raul?
So thank you. Thank you, everyone, for being with us on the call. I do understand we had a little bit of a delay in uploading the document, but I hope you've had the chance to answer.
We've covered all your questions, and we can also take conversations on it. I do understand the PCR cover was the larger part of the discussion. We do believe that this quarter one of FY 22 has given us a certain LGD decline here. But overall, the collection focus of the organization remains making sure we underwrite well, making sure we have the right balance of growth and margins and risks. That's largely what we continue to prioritize for the organization. And thank you for all your questions. And hopefully, we've addressed all of them. Thank you, Anuj.
Thank you. Ladies and gentlemen, we now conclude this conference. Thank you all for joining us. You may now disconnect your lines.