AAVAS — earnings call

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Prepared remarks

Moderator · Conference Operator

Good day, ladies and gentlemen and a very welcome to the Aavas Financiers Limited Q1

Ladies and gentlemen, we will now begin the question and answer session.

The first question is from the line of Saptarshi Chatterjee from Centrum Broking.

Please go ahead.

Saptarshi Chatterjee

Thank you Sir.

Thanks for the opportunity.

My first question is on the NIMs side, so we have seen increase in the yields, but for the last two quarters, we are seeing reduction in NIMs.

What is the reason for that and what is our outlook for NIMs for this year?

Ghanshyam Rawat

Thank you for your question.

If you see the NIMs from Q4 to Q1 sequentially, in Q4 we have done higher assignment versus Q1 of this year that is why if you see in that quarter we have around Rs.25 Crores income on account of assignment vs. this quarter around Rs.7 Crores income.

If we make apple-to-apple comparison, then NIMs for the Q4 stand at 8.52% and for Q1FY20 we are at 8.10%.

Also, our book is growing, so there is a marginal impact on account of leverage getting increased.

Q4 to Q1 obviously business is also less, so fee income also has some impact on the overall NIMs.

Otherwise if you compare Q1 to Q1 this year there is hardly any impact apart from leverage and because of assignment which is not under our control.

It depends upon the market opportunity.

Saptarshi Chatterjee

Sir, what percentage of our advances are kind of a floating rate?

Sushil Kumar Agarwal

Almost 56% advances are on floating rate.

We have given the exact data on slide #23.

So, of our total assets of Rs.6,362 Crores, Rs.3,536 Crores is floating rate and Rs.2,826 Crores is fixed rate.

Saptarshi Chatterjee

Thank you.

Thirdly, on the NPA side, we have seen some marginal uptick on the GNPA this quarter.

So, are you seeing any kind of early signs?

That is one.

Secondly, out of the one-DPD which we have around 4% then from next few days, how do we increase the efficiency in the collection process?

So, some colour on that?

Sushil Kumar Agarwal

First, since most of our business is in independent house construction and we have quarter-on- quarter wide differences because if you see last year Q1 versus this year Q1, so last year Q1 was Aavas Financiers Limited August 02, 2019 0.64% and this year Q1 is 0.58%, so it is relatively better than last year’s number on the NPA side.

And since we have a very diversified book, so 2-3-basis points here and there, but we always say that we endeavor to keep it less than 1%.

On the one day past due side also, last year Q1 number is 4.9% and this year Q1 number is 4.25%.

So that has also improved and we always endeavor to keep it less than 5%.

So, this is the way as a company we want to continue our efforts on this side.

Saptarshi Chatterjee

But you are not seeing any kind of a concern or early warning signs anywhere?

Sushil Kumar Agarwal

Whatever we have learnt is that in retail businesses whatever will be our one-day past due numbers, normally 10% to 15% of it becomes NPA, so our one-day past due numbers are still in the range less than 5% and overall for last 30 months underwriting we have one-day past due number around 2.5%, so both the numbers are not showing any concerns in this side.

We are hopeful that we will be able to maintain the asset quality intact in the coming quarters also.

Saptarshi Chatterjee

Thank you so much.

Moderator · Conference Operator

Thank you.

The next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

Please go ahead.

Karthik Chellappa

Thank you very much for the opportunity.

Congrats on a good quarter.

My first question is the first quarter disbursement growth rate of 23% looks a bit on the light side compared to let us say our year end kind of target for this year of somewhere close to 25% to 30%.

So, is this more a reflection of let us say a caution in some of your markets where you are going slow or do you think this will actually pickup pace in the quarters to come?

Sushil Kumar Agarwal

Normally our business how it works, if you see last seven to eight years history whenever you have 25% to30% growth target for the next year, so 40% of the business happens in the first half and 60% business happens in the second half.

If you see that way, we are right on our path of this year’s number which we have projected.

In fact, Q1 budget versus actual is on the positive side so we have met our budget which we have decided and board approved.

So, for this year number yes, we are confident that we are very much in line and there is no change even seeing the past numbers, how our business moves quarter-on-quarter in a year.

Karthik Chellappa

Thank you Sushil Ji.

Secondly, if I were to just do a very rough calculation of your opening AUM and then adding disbursements for the quarter less the closing AUM to arrive at some kind of let us say a proxy number for repayment or closure I find that this quarter the absolute amount was actually lower than the repayment amount in the first quarter of last year.

What would explain that?

Sushil Kumar Agarwal

Karthik there is a general slowdown in the industry and most of our peer group has slowed the disbursement.

So first the repayment requests for the BT out has reduced.

Second at company Aavas Financiers Limited August 02, 2019 A P S E A A P K L S A AI I I HAM A A R A

Karthik Chellappa

level we are putting significant efforts on retention of the customers and our data analytics has helped us in a very good way over a period of the last 18 months.

So this is not the phenomenon of this year, but from 2018 our BT out rate which was 0.8% per month, which got reduced last year to 0.5% per month.

And in the current circumstances it has further come down to 0.3% per month.

So, with the help of analytics, the effort which we are putting over a period of last 18 months with a clear cut emphasis of the organization, with a dedicated team for retention and the current market circumstances when all peers are slow on disbursement; all these have helped on this aspect.

My last question is in previous presentations, we used to give out the average ticket size for home loan, mortgage loan, separately, both for AUM and disbursement.

This quarter I do not seem to find it.

Are we going to continue to disclose this going forward?

Sushil Kumar Agarwal

We have given the average ticket size, is it not?

Karthik Chellappa

Overall, but I am asking for the home loan and mortgage loan separately?

Sushil Kumar Agarwal

So, home loan it is 8.99 lakhs, non-home loan it is 7.16 lakhs, and overall it is 8.46 lakhs.

Karthik Chellappa

Can I just get one more data point, Sushil Ji?

The disbursement figure that you have given of 6,710Mn can you split it between home loan and other mortgage loan, what will it be?

Sushil Kumar Agarwal

Karthik, can we come back to you on this number maybe in some time.

It will be roughly around 70:30, which we always keep in mind and overall portfolio is 75:25.

Karthik Chellappa

Disbursements, I will just take it as 70:30, right?

Sushil Kumar Agarwal

Yes.

Karthik Chellappa

Thank you Sushil Ji and team.

Wish you all the very best for the remaining quarters.

Thank you very much.

Moderator · Conference Operator

Thank you.

The next question is from the line of Nischint Chawathe from Kotak Securities.

Please go ahead.

Nischint Chawathe

Just one question, how much did you borrow during the quarter and from which all sources?

Ghanshyam Rawat

During this quarter, we borrowed Rs.274 Crores as a draw down.

I think, we mentioned it in slide number 23.

Overall our sanction is much more than that but as I mentioned earlier, Rs.274 Crores we borrowed from banks, which has an average tenure of 157 months at 9.04%.

It has 175 Crores as term loan & 100 Crores as assignment.

Nischint Chawathe

9.4% you said?

Aavas Financiers Limited August 02, 2019

9.04% and overall if you want more data point on that, in this year, from 1st April 2019 till date we have got Rs.1000 Crores of fresh sanctions, at an average rate of 9% from banks, institutions, IFC.

We are pleased to share one more data point here that first time, we have got sanction from one of the largest life insurance company of India.

And apart from bank borrowing, I think we did some loans sell down of 99-odd Crores?

Yes.

This was like at what rate?

It was a similar rate.

I just mentioned 9.04%, it is the same price range.

Any other borrowings?

I mentioned that Rs.99 Crores we borrowed from the assignment and then remaining 175 Crores we borrowed from term loans.

Got it.

Sushil Kumar Agarwal

We have got new sanctions of around Rs.1000 Crores.

So according to business plan, we continue to draw down these numbers.

Nischint Chawathe

Liability side you remain extremely strong?

Ghanshyam Rawat

As we mentioned Rs.1000 Crores we got fresh sanctions.

Already we mentioned the entire liquidity position, how much liquidity we are carrying, around Rs.625 Crores is cash in hand and another Rs.854 Crores is undrawn sanctioned limit as on June 30.

And we do not have any ALM gaps.

The collection from assets is much higher than what is our repayment obligation.

So, June 30, itself we were having almost Rs.2000 crores fund to do normal business, after meeting all our debt repayment obligations.

Nischint Chawathe

Do you have any plans to kind of raise lending rates or you are fine at these levels?

Sushil Kumar Agarwal

Nischint, as a company we have told and given guidance also.

We endeavor to keep our spreads around 5%, but again that is also not the business thesis.

Our business thesis is 2.5% ROA, you gross it up by tax, and then you have credit cost and then opex.

That should be your lending rate minus borrowing rate and eventually we are able to maintain that from last 28 quarters and if there will be a decrease in spreads, we will compensate it by lowering the operational cost and you can see that we have already got around 40-50 basis points opex reduction in Q1 itself this year.

So, yes, we are comfortable.

We want to be consistent.

We do not want to change things.

Aavas Financiers Limited August 02, 2019 A P S E A A P K L S A AI I I HAM A A R A

Ghanshyam Rawat

Yes, apart from what Sushil Ji said, if you see my incremental borrowing, Rs.1000 Crores we got a fresh sanction at 9%, which is just 20-basis point higher than from our overall average cost of borrowing.

Our new business yield is also coming at slightly better level, if you see Q4 to Q1 my rate on fresh incremental lending got increased by 25-basis points.

So, to some extend we are able to pass on to our customers, and we do have buffer through the opex leverage and all other things, you have seen and our opex to AUM also came down.

Nischint Chawathe

Thank you very much and all the best.

Moderator · Conference Operator

Thank you.

The next question is from the line of Tanuj Mehta from Dalal & Broacha.

Please go ahead.

Tanuj Mehta

Thank you for the opportunity Sir.

About our opex to income ratio, what is the reason for it is declining?

Sushil Kumar Agarwal

Tanuj, as a normal business process, we have invested in manpower, technology, analytics and processes.

Second is with the increase in business we are getting operating leverages and that will continue.

Also, in the HFC business your new disbursements to AUM ratio also plays a critical role in this so, by virtue of design and our investments, we continue to improve on our operational efficiencies in the near term also.

Tanuj Mehta

What about the expansion strategy?

Do you have any branch additions and additional plans?

Sushil Kumar Agarwal

As a company, we open 40 to 50 branches annually and normally that happens in Q2 and Q3. So, this year also we will have around 40 branches, new opening.

Tanuj Mehta

So, how much time it takes to breakeven one branch?

Sushil Kumar Agarwal

Tanuj, it depends on the town, the category of the branch and the business model associated to it.

But normally our branches breakeven in six months to 12 months time depending on the town and the category of the branch.

Tanuj Mehta

What is the average tenure for our loans, housing and non-housing?

Sushil Kumar Agarwal

Tanuj, our average tenure of the loan is around 14 years and normal behavior wise, our average tenure of the asset is around 7.5 years.

Tanuj Mehta

About stress, do you see any stress in our home loan portfolio, I mean housing portfolio?

Sushil Kumar Agarwal

Tanuj, I have replied on the previous question that stress indicator we measure our portfolio on one-day past due basis and our one-day past due number is still less than 5%.

And we also check additional data point that whatever we have done in the last 30 months, how that portfolio is behaving.

On that side also our one-day past due is less than 2.5%.

So at least for the near term Aavas Financiers Limited August 02, 2019 we are not seeing any stress on our asset quality and we endeavor to keep it consistent with GNPA less than 1%.

Tanuj Mehta

About economic slowdown, do you see any impact of economic slowdown in your overall growth?

Sushil Kumar Agarwal

Tanuj, at Aavas we are having a moderate budget for this year and we have completed our Q1 numbers and our Q1 achievement is better than the budget.

So, at least at this point of time, or for at least next three quarters, we are not seeing any impact on our growth number, which we have projected.

Thank you Sir.

Thank you.

The next question is from the line of Saurabh Dhole from Trivantage Capital.

Please go ahead.

Good evening.

Thanks for taking my questions.

Sir, couple of questions, firstly on slide #22 where you gave the segment GNPAs.

I am a little curious here with respect to the home loan GNPA and the other mortgage loan GNPA because typically what we see for a lot of lenders, the other mortgage NPAs are far higher than the typical home loan NPAs, so I am just curious to know what is it that you do differently here?

The basic difference is that our business model, we are having in-house sourcing and then we have very robust risk processes on the four verticals, underwriting risk side, legal risk side, technical risk side, and operational risk side, so we have 400 underwriters of which 150 are chartered accountants.

We have almost 100 civil engineers in-house and we use 250 external engineering firms for us.

We have 120 lawyers in-house and 200 external law firms for the security creation processes and we have a very strong operational risk framework.

Also. the segment which we cater, so our housing loan is for the end users and average ticket size is 9 lakhs and 95% of the people live in that house which we have funded for them.

On the non-home loan side, our average ticket size is around Rs.7.5 lakhs and that too for the end use of business and other requirements backed by a residential mortgage.

Average LTV on this side is around 50% and on POS basis I think it will be further 2-3% down.

So, I think the difference is in the sourcing model, the risk model and the asset segmentation, in which we are.

Most of the other players, their non-housing portfolio has much higher ticket size than us so this is what I can say how we differentiate our business model in the segment.

Saurabh Dhole

So, the other mortgage loan book this is typically mortgaged by self-occupied residential properties?

Sushil Kumar Agarwal

Yes.

Saurabh Dhole

Aavas Financiers Limited August 02, 2019 A P S E A A P K L S A AI I I HAM A A R A

Sir, just one more question on your current stock of gross NPAs can you give us a breakup between salaried, and self-employed?

Sushil Kumar Agarwal

Goss NPAs on salaried portfolio is 0.39%, self-employed portfolio is 0.84% and overall it comes to 0.67% in the housing loan segment.

Saurabh Dhole

Can I also have the absolute numbers?

Sushil Kumar Agarwal

Salaried Rs.

5.7 Crores and self-employed Rs.

20.3 Crores in the housing loan segment.

Saurabh Dhole

Just one last question, what is the current number of employees who are working for your company and what was it last year?

Sushil Kumar Agarwal

Last year June 2018 we were around 1900-2000 employees and this year June end we have around 2300-2400 employees.

Saurabh Dhole

Thank you so much.

Moderator · Conference Operator

Thank you.

The next question is from the line of Abhijit Tibrewal from ICICI Securities.

Please go ahead.

Abhijit Tibrewal

Thanks for the question.

Congratulations Sushil Ji and Ghanshyam Ji for a very good quarter.

I just wanted to gather your thoughts around the competitive intensity now given that we know the largest housing finance company in our country has also become very active in the affordable housing space.

Just wanted to gather some thoughts on the competitive intensity now.

Sushil Kumar Agarwal

Abhijit, as you know, we are working in nine states and we have 211 branches and we are catering to almost 1500 towns in this category.

We have almost 1500 employees which are at the ground level; because our sourcing is done in-house.

So, on the ground, yes inflow has increased on the lead side for us though competition from the peers has reduced.

Yes, SBI & HDFC are getting into those markets, but still they are catering more to the formal income segment and as you know at Aavas we mostly cater to informal income segment.

So that is one point.

Second since we as a company maintain that we want to continue our growth trajectory in a consistent manner, so despite the increase in the lead inflow we are still doing the moderate numbers and we have increased our filtering levels at the ground level to be cautious on that side in the market, but yes for smaller peers the competition has reduced and senior peers are doing more of the formal segment, so in this kind of situation we are not feeling a hit.

Abhijit Tibrewal

Thank you.

So, if my understanding is right because they are taking more to the formal segment vis-a-vis us, we are catering to an informal segment we are not feeling any pressure on our yield?

Sushil Kumar Agarwal

We are in fact getting more and more lead flow in our system and we are getting further more ability to pick and choose, but at the management level, we want to be consistent in our journey Aavas Financiers Limited August 02, 2019 so we have increased our filtering levels, so we will be consistent in our business and disbursement numbers.

Aditya Jain

Thank you so much.

All the very best.

Thank you.

The next question is from the line of Aditya Jain from Citi Group.

Please go ahead.

Good evening Sir.

I just wanted to ask on the cost side, so just 13% cost growth year-on-year in the quarter, one was there any one-off either in the base or in this quarter or is this a very normal growth?

Then what would be the outlook for full year cost growth?

Which slide are you referring?

Cost growth on the P&L in terms of slide #29?

Sushil Kumar Agarwal

Slide #29, non-interest expenses.

So from Rs.44 Crores to Rs.49 Crores, Rs.5 Crores increase.

So, Aditya, as we always say that the significant investment in the management team, technology, and all those things we have done in the past, so that is getting reflected.

Also, most of the costs impact comes when we add new branches and as a policy, normally, we do that in Q2 and Q3. So, Q1 only one branch has got increased.

So, our opex level is consistent for Q1. On a percentage basis, as we have already informed you all, year-on-year we will have around 40-50 basis points opex improvement that is reflecting here because of higher growth or higher base in the book, new disbursement to opening AUM ratio.

And on year-on-year basis also I think if AUM growth will be in trajectory as Q1, our income growth will be in the same ratio of 30-35% and opex growth will be less than 8% to 10% of income growth.

So, we will have that positive jaws in our balance sheet for this year.

Aditya Jain

So just to understand when you say opex growth less than 8% to 10% of income growth you mean if income growth is 30% then opex could be 20% to 22%?

Sushil Kumar Agarwal

Yes.

Aditya Jain

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Yuvraj Choudhary from Anand Rathi.

Please go ahead.

Sir by the time Yuvraj joins back the queue again we will move to the next question from the line of Subhranshu Mishra from Bank of Baroda.

Please go ahead.

Subhranshu Mishra

Good evening Sushil Ji and good evening Ghanshyam Ji.

Just wanted to understand your target market segment because your yields are at around 13%-14% range bound so I am assuming most of these are from bottom of the pyramid, underserved category.

What I want to understand is that once you on-board the customer, what are the measures that you take so that there is no customer attrition and there is very minimal prepayment because these customers once they are on-boarded Aavas Financiers Limited August 02, 2019 that they can go move on to the banking channel, say 24 months, 36 months down the line in the product life cycle, so if I could understand that with respect to your salaried customers as well as self-employed customer it will be very helpful Sir?

Sushil Kumar Agarwal

Mr. Subhranshu in the earning call initially also, we had explained that at Aavas we have taken dedicated efforts to reduce our attrition, maintain high retention, so we have done three exercises on that side.

First, we have a dedicated team which works on the customer retention, second our data analytics has identified segment in a better way and their journey with us and outside us quarter-on-quarter on the basis of this they give us identified data.

Where the customer has significantly improved its credit worthiness or there is score on our scorecard based on that we productively talk to customers if we can work with him for the requirement which they do need.

Third, is the market wise also intelligence, we cover through our branches, data analytics so we divided the markets into where population is more than 10 lakhs and where population is less than 10 lakhs.

So, markets where population is more than 10 lakhs there customer comes for rate reduction to us because they are mature market and after our funding with maybe two, three years of repayment history, the customers can be given a loan by top 4 guys or banks.

There we take help of our treasury.

In the smaller markets, customer comes to us for a more loan requirement not for the prices.

There also our data analytics scorecard gives us a preapproved kind of offers so if any customer comes to the branch, our branch service executive can talk to the customer, understand his requirements and can cater over the counter.

All these put together has helped us retaining this customer, understanding their requirements, understanding their behaviors, so data analytics has helped us in a great stance.

For 2018 our BT out was 0.8% per month, which has reduced to now 0.3% per month over a period of last six months.

Subhranshu Mishra

Sir in terms of your asset quality, what are the PD and LGD assumptions that you take.

Is it different from one state to the other, if that can be given some more flavor, it will be very helpful Sir?

Sushil Kumar Agarwal

Subhranshu, this calculation is done by auditors and they have their own statistical model and analytics model, in which they consider behavior, ticket wise, profile wise, segment wise, geography wise behavior of the customer and based on all these parameters they come for some conclusion and this exercise we do every six months and I think that has not changed over a period of last one year.

Subhranshu Mishra

What are your PD and LGD assumptions right now Sir at least for the top three states such as Rajasthan, Maharashtra and Gujarat?

Sushil Kumar Agarwal

Subhranshu I won’t be able to answer right now because that is a wider exercise done on wider set of documents and not specific to any states is readily available.

If you want, we can come back to you on this may be after some time.

Aavas Financiers Limited August 02, 2019

Subhranshu Mishra

Sure Sir and just one last data point question Sir.

What is your risk premium that the banks charge you as on date and what was it in September 2018 Sir?

Sushil Kumar Agarwal

Subhranshu, we have a very varied set of lenders.

We have 35 lenders and they are from different segments from public sector to private sector to multilaterals to insurance to mutual funds and any specific risk premium of specific contract note I will not be able to tell you.

No Sir a ballpark number.

I am not asking very specific because 43% of your funding is term loans and these are from banks so they would be charging an average risk premium above the MCLR way back and they would be also charging some kind of risk premium, so I am just trying to understand has not decreased/increased or remained the same?

You know current market situation and dynamics is there.

There is risk averseness over there but as I mentioned earlier also, in these four months we have got fresh sanctions of Rs.1000 Crores from the banks and other institutions, overall costing of that Rs.1000 Crores coming at 9%.

If you compare with the same period of the last year, it was somewhere around 8.70-8.80% so marginal increase of 20-25bps is there on fresh borrowing.

You can calculate MCLR, it depends on bank-to-bank, there is no hard and fast rule nowadays in the market.

Thank you Sushil Ji and thank you Ghanshyam Ji.

Thank you.

The next question is from the line of Yuvraj Choudhary from Anand Rathi.

Please go ahead.

Thanks for the opportunity.

I have one question.

On the side 31, the I-GAAP to Ind-As reconciliation, there is an item incremental income on the assigned income, it is minus 61 million.

Sir can you throw some light and how this figure negative and what are the calculation involved?

Yuvraj, when you do Ind-As accounting, there is a set of assignment which you have done in the past so for them in the current quarter there will be unwinding of income and for the fresh assignment you do upfronting of income.

Say our outstanding book as of 31 March 2019 was around Rs.

1,100 Crores of assignment and in the current quarter we have done only Rs.100 Crores new assignments, so unwinding will come from this Rs.1100 Crores and upfronting will be done for Rs.

100 Crores, so that is where these changes happens, but only thing that I want to tell you is that while we have been doing assignments for the last three-four years, most of the peers have just started after the liquidity crisis, so the impact of unwinding is not as high for us as might be for the other peers.

Yuvraj Choudhary

Thanks a lot.

Best of luck.

Aavas Financiers Limited August 02, 2019

Moderator · Conference Operator

Thank you.

The next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

Please go ahead.

Karthik Chellappa

Thank you very much for the opportunity again.

Sir, just two data points for this quarter can I get the total disbursement in number of cases for home loans and other mortgage loan separately?

Sushil Kumar Agarwal

We will get back to you or we will publish this number after this call for everybody’s purpose.

Karthik Chellappa

Another one is the loan yield for this quarter which is around 13.85 can you give me what that number would be for home loan and in mortgage loan again separately?

Sushil Kumar Agarwal

Home loan it is 13.3% and non-home loan it is 15.5%, average is around 13.85%.

Karthik Chellappa

Thank you very much.

Moderator · Conference Operator

Thank you.

That was the last question.

I now hand the conference over to Mr. Sushil Kumar Agarwal for closing comments.

Sushil Kumar Agarwal

Thank you all for attending the call and listening patiently.

To summarize at Aavas we aim to be one of the key enablers in broadening and deepening of credit facilities to unserved and underserved customers in semi-urban and rural area.

Our deep understanding of this segment and our in-house execution model will enable us to fulfill the aspiration of our customers as well as expectation of our various stakeholders.

We feel we are on the right track to build an organization that will evolve from being just another housing finance company into an institution of respect.

Thank you so much for your time.

For any further information or clarification, we request you to get in touch with Himanshu Agrawal in our Investor Relations team or SGA, our Investor Relations Advisor, they would be happy to help you.

Thank you very much and hope to get your continued support.

Moderator · Conference Operator

Thank you ladies and gentlemen.

On behalf of Aavas Financiers Limited that concludes this conference for today.

Thank you for joining us and you may now disconnect your lines.