CGCL — earnings call

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Prepared remarks

RELATIONS · Management

Capri Global Capital Limited August 03, 2021

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

The first question is from the line of Shanaya Nair from Excel Investments.

Please go ahead.

Shanaya Nair

Sir do you feel with the emergence of FinTech and banks already offering better rates, the competition is getting more fierce.

How do you view of this competition.

Also, what are you doing in terms of leveraging technology to enhance capabilities to improve CAPEX as many of your peers have already stepped up their game on the tech front?

Rajesh Sharma

So, if we talk about FinTech are operating purely in the unsecured space, and they are catering to that segment which is able to give their documentation and data.

Wherein at Capri we are Capri Global Capital Limited August 03, 2021 focusing on self-employed non-professional with no income proof customer like small kirana store, maybe a small tailoring shop or a woman led group making snacks and supplying to few places.

So these are the businesses we are funding in Tier-3, Tier-4 towns.

And we believe these are businesses which can be underwritten by touch and technology mix of both.

Unless you meet the customer, you visit them, you understand by personal discussion you cannot do underwriting.

So this segment, what we cater, what FinTech are going to do is entirely different.

And as far as use of technology is concerned, we are using loan management, loan origination system, we have in-house data analytics team, we have recently hired a CTO to further enhance our technology stack and changing few aspect.

Further, we have using best of the consultant including KPMG and BCG to improve our processes and to use wherever we can use a technology in processing part.

So, front end we cannot use the technology entirely the way FinTech do so, reason being the segment is entirely different, but extensively we are using technology wherever we can in terms of processing, in terms of enabling our collection team with the tablets and issuing the e-receipt, onboarding the customer using video KYC, all those things we are already using it.

Shanaya Nair

Okay, thank you sir.

Sir, I have one more question for you, Sir smaller and affordable housing is seeing a far bit of traction since June, especially in Tier-2 and Tier-3.

So, how has been the demand for housing in for Capri since then, and when do you see things like they will normalize.

Also salaried borrowers are at 46%, does this mean that this will be shift from a strategy to tap banking the unpack, will spread reduce here going forward according to you?

Rajesh Sharma

So, June onwards already activity in Tier-3, Tier-4 towns where majority of branches have been picked up and disbursement have started.

So, whether be it MSME or be affordable housing we have seen a good demand coming up.

And if we talk about salaried segment, with the more funds we are getting from NHB at a much lower rate about 3% and where we can earn about 6% spread we are offering to even salaried class formal segment as well.

So, I believe formal, informal salary segment in times to come may go up to 60% and remaining 40% in housing still continue to remain about self-employed non-professional.

But we are seeing a good traction and despite we’re seeing the lockdown the activity has rebounded and we see this year we should continue on a growth path.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shripal Doshi from Equirus Securities.

Please go ahead.

Shripal Doshi

Sir my question was on the housing space.

So during the last quarter when we had lockdown.

So, how did the collections happen and if you can share some color on your like month wise collection efficiency for this segment?

Rajesh Sharma

So, we track the collection efficiency on a quarterly basis.

So, if you look at from June’20, when the collection efficiency was 76%, it has now come to 95%.

So, in housing finance we have seen Capri Global Capital Limited August 03, 2021 a very good collection efficiency, it is nearly pre-COVID level.

So, collection efficiency is picked up very well.

June’21 quarter it was about 95%.

Shripal Doshi

Okay.

And Sir when you say this for the quarter so, it is cumulative like for the three months, what was the demand and against that what you received or are you seeing at the month.

How do you look at that, how do I look at that?

Rajesh Sharma

Collectively for the three months, presentation made versus collections received, is the percentage.

March’21 it was 93%, June’21 it has improved to further 95%.

Shripal Doshi

And Sir, did you track something like one plus DPD number or something like that?

Rajesh Sharma

Yes, we do track that is a essential part of monitoring the collection branch-to-branch, division- to-division and pan India.

We do track one plus.

Shripal Doshi

So what would that number be for our quarter, like 1Q 2022?

Rajesh Sharma

Just a moment.

So if we look at our stage one portfolio at a consolidated level.

If we talk about MSME it was Rs.1,908 crore which is about 75% and Stage-2 was about 11.7% which is about 298 crore and Stage-3 is about in MSME 144 crore about 5.7% and if you talk about Housing Finance then…

Shripal Doshi

Sir those numbers I have because Stage-3 in Housing is 1.9, Stage-2 is 10.4, but one plus DPD would be different, would be part of Stage-1 right?

Rajesh Sharma

Yes.

Shripal Doshi

So, how does that look like?

Rajesh Sharma

That data we have to give you separately, we will come back to you at the end of the call you can again connect.

Shripal Doshi

Sure.

And sir my question again on housing side, what percentage of our collections come through like online or through say bank like NACH system and how much do we collect physically from the customers?

Rajesh Sharma

So, if we understand our more than 95% payment comes through either presentation of eNACH or by collection of cheque and some of the payment which are less than of total collection about 5% comes when the collection executive visit their customer and immediately they collect some cash maybe 15,000, 20,000 kind of a situation and within 24 hours we issue the receipt, some of the collection we immediately issue the receipt through their collection application on their mobile phone or tablets.

So, it is only less than 5% otherwise, they’re all collection first are Capri Global Capital Limited August 03, 2021 presented through electronically and only on the bounce they have been called upon and some visits are made and during those some of the visits some of the collection happen through cash, which is overall collection about less than 5%.

Shripal Doshi

Okay.

And sir how are we seeing things evolving in the month of July for say for each of our segments like in terms of business activity, as well as, as you highlighted their collections have further improved so, if you can just give some number perspective there?

Rajesh Sharma

July, disbursement will be much better as compared to June and we hope that we should be able to disburse close to 150+ crore alone in the June and we are targeting that this March we should be able to achieve a growth 20% upward.

Shripal Doshi

Okay, for FY22?

Rajesh Sharma

Yes.

Shripal Doshi

Okay.

And Sir in the housing space again, like where we operate, we have some other peers also in the ecosystem who have similar like geographical presence.

But if you look at, they indicated that the quarter was a little challenging.

So, how do you evaluate 1Q, and how do you see going ahead like the next nine months of the year, turning out for the housing space?

Rajesh Sharma

So, everybody knows that Q1 was a challenging quarter for everyone because of the Wave 2 where neither businesses were working nor our teams were on the ground to do the business of collection.

So, April, May, there was no disbursal happening as I said earlier, and June onwards disbursements have started in a slow manner which has picked up now in July.

So, hoping that in next nine months with the better preparation by government and various other organization, vaccination picking up wave three should not have that kind of impact, hoping that even some slight challenges come for a lockdown in a specific pocket.

Even countering that, hoping that it will not be longer period.

We should be able to grow there is enough demand on ground and we have a strong distribution system, people on the ground and we are in this space for almost nine years now.

So with the brand presence 92 with a further emphasis on adding more branches during current year.

We hope that our growth momentum will continue, growth will be a regular feature with us in MSME in affordable housing segment.

Shripal Doshi

Sir one last question, for our customer segment how do we, what percentage of our disbursements or our sourcing would be for ongoing construction, and one time for buying the house, because what I am trying to understand here is, if the construction is happening.

Rajesh Sharma

You are asking for housing finance related?

Shripal Doshi

Yes, Sir only for housing finance.

Capri Global Capital Limited August 03, 2021

Rajesh Sharma

Housing Finance related we don’t fund under construction project anymore.

Shripal Doshi

Okay, Sir doesn’t that take away an opportunity of a sustainability of disbursement?

Rajesh Sharma

So, disbursement will as I said, we are targeting growth.

So, every month-on-month disbursement will keep happening, our growth will come from MSME and Affordable Housing, Construction Finance vertical will remain more or less, less than 10% growth, but overall businesses will grow about 20%.

So, that will be backed by strong disbursement and we hope to achieve that without any surprises.

Moderator · Conference Operator

Thank you.

The next question is from the line of Preethi Singh from Value Investments.

Please go ahead.

Preethi Singh

So, Sir I have a couple of questions.

So, the first one, we are projecting an AUM growth of around 22% in the next five years.

So could you please elaborate which segments would see major growth, and are there any new products in the pipeline.

Also, the base is low which is around 50 billion, so don’t you think there is scope for more growth, more than 22% of growth?

Rajesh Sharma

So, our main growth will keep happening from MSME and affordable housing, our construction finance will deliver growth and vertical wise about 10% but MSME will deliver about +25% and housing will deliver about +22%.

So, on a conservative basis, we hope that 22% growth we can achieve.

We intend to add another 200 branches over a period of next five years time and that will be supportive to our growth.

As far as new product is concerned, we are evaluating couple of product and once we shortlist, build the team and do the technology and everything we will announce that once a reasonable progress has been made, but even without the new addition of the product, we will be able to achieve this growth.

Number two, any new product we add our core theme will remain the same, that we will continue to cater to those segments whom banks are not doing because of lack of the way they are organized, the way they are not able to demonstrate their income proof, documentation, and their entire transactions are because of the nature of business are not booked in statement account.

So, new product whatever we are in consultation with BCG, Boston Consulting Group and once they give their final findings and we are able to zero in and appoint the technology vendor and build the team, we will come back and inform in a formal way properly in grill way.

So our growth momentum even without that will continue and with those new product we add it will further give impetus to our growth.

Preethi Singh

Okay, got it sir.

And sir we have opened around five new branches but our OPEX cost is down quarter-on-quarter.

So where are the savings been achieved to offset the cost of these branches.

And what will be our full year guidance for cost income?

Rajesh Sharma

So our cost income ratio whatever we have achieved in Q1 more or less it will remain in the same range.

It will gradually come down but with the addition of branches it will be equilibrium Capri Global Capital Limited August 03, 2021 between the OPEX versus the efficiency.

Since we are adding few more branches but, on the conservative side our cost to income ratio will not go up, it will slightly will keep coming down.

Raj Ahuja

Preethi, Raj here.

I would like to add to what Mr. Rajesh said, most of our cost over a period of time we have actually variablized the cost and it is also directly linked to the disbursements.

And during the month or the quarter where the disbursements goes up, our cost goes up as we have seen in quarter four, our cost to income ratio was 44%.

But that is also offset by a equivalent amount in the other income which is basically the processing fees and the legal and technical charges which you charge from the customer.

To that an extent cost goes up and to the same extent our other operating income also goes up.

On a standalone basis in a normal quarter our costs will remain like Mr. Rajesh said around 35% to 40% levels.

Preethi Singh

Okay, got it.

And also could you please tell how your credit underwriting norms have changed in the last year or so, and have you changed in underwriting customers to ensure lower stress levels from incrementing lending?

Rajesh Sharma

So, our underwriting standard and sourcing strategy continue to remain the same, not that we changed anything, only in Housing Finance because we are getting a cheaper fund about 3% being in the rural housing financing scheme, where they have a cap of we cannot earn a spread more than 6%.

So, to some extent we are catering to those customers also in the formal salaried segment about 8.5%, 9% like government employees kind of a target customer in that Tier 3, Tier 4 towns.

But our sourcing and the underwriting remains the same, target the customer which are not catered by banking system and will continue to remain the same, there is no change in sourcing or underwriting strategy.

Even in the worst time of pandemic and where businesses have been severely affected in the lockdown, our portfolio is secured by collateral and loan to value in MSME is about 50%, in Housing Finance it’s about 57% and even for a while, if they go under restructuring or they are NPA doesn’t mean they are credit losses, by and large we are able to recover the money.

So it is a secure lending portfolio and we will continue to remain this niche segment which we are catering to.

Preethi Singh

Right.

And just a last question from my end, from the credit cost we have made very strong provisioning.

So what will be our credit cost in FY22 and in FY23?

Raj Ahuja

Preethi we are in this quarter made a provision and provisions plus the write-offs put together the cost is around 150 bps on the annualized basis.

We expect this to remain at similar or a little lesser level in the next two quarters.

And year ending quarter we are hopeful that let say this will taper down to around 120 bps for that particular quarter.

So weighted average for the year will be around 130, 135 bps is our estimate and that, in our opinion should be sufficient for us to sail us through the actual credit losses we might have.

FY13 actually, if the things pick-up back again where the impact is not seen in FY23, sorry, we are hopeful actually we’ll be seeing a reversal of the trend happening.

Like what Rajesh was mentioning that our portfolio is completely Capri Global Capital Limited August 03, 2021 secured portfolio.

And once this whole wave goes off, and then we start recovering, we actually might end up seeing some of the reversals in some of the pockets from the provisions which you already created.

But on a conservative basis, we should still say that next year also we should be in the range of around 80 to 100 bps cost.

Moderator · Conference Operator

Thank you.

As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.

Rajesh Sharma

So thank you for attending the call.

As we stated, we will continue to drive our businesses on our stated strategy MSME and affordable housing will continue to remain our key growth driver.

And we will after two year consolidation in the portfolio post IL&FS and DHFL in this pandemic, I think we are back on the growth trajectory.

Last year we have grown about 20% and this year we are aiming on a conservative basis to achieve 22% growth rate.

And for next five year we’ll be consistently intend to deliver this growth and we will have content to demand a major focus on secured portfolio led by MSME and Affordable Housing.

Construction finance where we cater to small developer average single size of less than 8 crore Tier 3, Tier 4 town, that I will grow if the pace of about 10% and overall basis that will remain less than 25% of the overall book.

So thank you, we wish you all there to stay safe and stay healthy.

Thank you.

Moderator · Conference Operator

Thank you.

On behalf of Go India Advisors and Capri Global, that concludes this conference.

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