LTF — earnings call
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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 Rikin Shah from Credit Suisse.
Please go ahead.
Rikin Shah
I had three questions.
First one, while your consumer loan is completely a digital native product, the SME loan product seems to be, the channels for them both seem to be traditional as well as via the digital app and given that both these products are growing rapidly from a very small base, just wanted to get a better understanding of the target segment, ticket size and yields in these segments.
That is the first one, second one is on the fee income, while the NIMs have expanded led by the retail growth and the mix change, the fee income has gone down sequentially.
Given that the retail disbursements are picking up, is there any further color on the weakness in the fee income and the outlook from here?
And thirdly, the question is on the Real Estate.
Out of the total loan book of Rs.
9,000 crores plus, post we have this Rs.
2,100 crores of gain from the mutual fund and if I recall correctly Rs.
300 crores of overlay provisions that we carry, what would be the total provision coverage on the Real Estate book?
That is all from my end, sir. e L&T Finance Holdings October 21, 2022
Dinanath Dubhashi
I will answer the first two, we are not giving product wise provision coverages and I think now disclosure norms are continuously being strengthened, so I am not sure I can give numbers which are not there in the investor presentation on the call.
So, let me answer the first two which are more descriptive in nature.
So, first the route., So, Consumer Loans, the credit algorithms on the entire customer segment really can be digital, can be completely data driven and hence not only credit, but the entire process including documentation, KYC, everything can be digital.
And that is why, with that conviction, we kept and it is not as if there was not request from the business to have it physical and all, but we kept that as a conviction.
SME on the other hand, we have two segments, one is SEP, i.e., Self-Employed Professionals where we are now targeting, first, to start with chartered accountants and doctors and then there is SENP which are small businesses.
So, right now, to be very frank, the SEP, the chartered accountants and doctors is what we believe can be completely digital; it is centralized credit, digital. there is still an aspect of personal discussion in it.
So, in a way, even if it is completely, I would say, non-paper, I don’t call it totally digital because there is a human intervention of a personal discussion, we have to get lot more confidence in our data base, scale, etc., to let go personal discussions.
Some competitors especially I would say the marquee NBFC is quite old in this and I am aware that they do certain segments without personal discussion and hats off to them for the expertise they have built over the years for this.
We are pretty new and hence my credit department still sees the need of a personal discussion for SEP.
As far as SENP is concerned, while the onboarding is digital, it is completely assisted digital and the documentations required as well as the credit appraisal, factory visit, legal, technical, all these are completely physical at this point of time.
So, this business being digital totally is in my belief about a 2-year runway.
We will keep making small moves towards that, but not I would say hedonistic or a stupid push for somehow, I want it digital against where the market is.
So, we will not be, I would say, just unreasonably wanting to go digital in this, the market is still quite physical in this.
One by one items we are getting as far as digital is concerned, like for example, if the customer shares particular codes with us we can access his tax record, GST records, we can access his bank records, many of these things, even if his financial statements are physical, there are softwares as you know very well to convert it to digital and analyze.
So, various aspects we will keep digitizing as we go.
Like for example, PD, personal discussions, many cases, we do video PD.
Now, if I can call it digital, yes, but it is not truly digital, I mean it just replaces somebody going there and doing a PD, so it is more better for TAT, but it is still a PD.
Just for claiming digital I can say digital, but it is not truly digital.
Geo tag for example, we now, every customer is geo tagged which is a good digital movement in that direction, but to answer you frankly for SME, SENP SME especially to move to totally digital, I see for us and I don’t want to speak for the industry, it’s a 2-year period.
Perhaps what we will move for is lower ticket sizes.
What we tried to do is keep it 100% paperless, that scanned at the DSA and we process.
So, no paper flows in the company.
That is what we tried to do.
To answer your ticket size answer, the average ticket size for Consumer Loans is around Rs.
1.4 lakhs for Consumer Loans and for SME it is around Rs.
25 lakhs.
Rikin Shah
Just on this point, while I am not sure whether you would be able to talk about the yields, but on qualitative basis, would the yields be largely in line of higher or lower than our Retail loan book yield of 15-16%?
Dinanath Dubhashi
Around that.
It is largely in line with that, around that, both the products.
Rikin Shah
That answers the first question.
Dinanath Dubhashi
Fee income, fairly simple answer.
Some part of the fee also comes from wholesale disbursements, so as wholesale disbursements have reduced significantly, the fee income related to that has also reduced, so that absolute fee income has reduced, number one.
Secondly, as we have reduced our liquidity and what it is actually e L&T Finance Holdings October 21, 2022 a negative carry, so the cost of funds has also gone down and other income has also gone down, so actually PAT will go up because of that, because that income is negative carry if you understand.
So, it is fee and other income, other income includes interest on liquid balances that we carry, so even if that has come down, the interest cost has reduced more than that.
I already said, your Real Estate question, I won't be able to answer.
Moderator · Conference Operator
Thank you.
The next question is from the line of Kunal Shah from ICICI Securities.
Please go ahead.
Kunal Shah
Firstly, in terms of the cost, when we are rolling out Retail products and launching many of the products, if you can just explain in terms of the cost of acquisition, how we are faring compared to that of the other players and how would we ensure the retention because may be you might acquire the customers, but most of these segments are very competitive and then we tend to lose it out to say some of the other banks and NBFCs as well, so how do we try to balance both in terms of the cost of acquisition, retention and where do we see the overall opex to assets with the scaled up Retail products?
Dinanath Dubhashi
Excellent question, I will answer this in two ways, one is cost of opex and second is acquisition cost specifically.
So overall opex.
If you see overall opex, yes, it is higher than what it used to be maybe 2 years back.
Right now, very importantly, is the investments that we are doing in new branches, in digital and in growing.
And in our calculation, close to around 4% of cost to income is investment and the rest is steady state cost.
This will continue even perhaps, large part of next year, as we grow branches, as we put more people in growing especially SME and Home Loans.
SME and Home Loans right now are in growth phase, naturally every product won't be at nice steady state, making a lot of money for the company.
This is how every company will have to grow that there are cash cows and then there are stars which will be hopefully tomorrow's cash cows.
So, investment is going into these products, a lot of investment is going into IT, digital.
Our commitment is by 2026, majority of our products should be IT enabled, I think if I am not mistaken, you travelled with our team everywhere and you saw some of the apps that are working and that will continue, Kunal, that will continue as we go ahead.
So, we are not too worried about the overall cost now.
This we believe will bring more than its stead in terms of income as we go ahead, but all the time where we launch new products, new businesses, there will be a phase of investment in those products as we go ahead.
So, most of the branches that these new businesses happen at the same locations no doubt, but it will also mean investment in people, then the branches will not be enough, you have seen some of the Rural Business / Micro Finance branches, obviously you can't do Home Loans from there.
So, those kinds of investments will happen.
So, we are in that phase right now.
Overall, the plan for the next 3 years shows operating cost trending well as more and more products get into more mature stage.
So, that is number one.
And number two is acquisition.
Generally speaking, we keep our acquisition cost within the range of the processing fee that we earn from the customer, so we try to see that that doesn’t become negative.
Now, why are we saying try to see is there will be various periods, various seasons where we will invest, that we will maybe reduce the processing fee a little bit, so we will be little bit negative there or in new products that we launch like in Home Loans, SMEs, may be initially we have to part a little bit more for DSAs and as more and more these products we do, two things will happen; as volume grows those fees will come down, number one.
Number two, as we slowly have our own channels because any business initially it will be DSA led and then as you get your own sourcing mechanism, the percentage of DSA and own sourcing will change and last but not the least when cross selling and top up kicks in, this third item, proximity based selling, cross selling, top up, etc., will also come.
Now, every product moves in this direction, even though Two-wheeler or Tractor doesn’t have a DSA, they have dealers.
So, only Micro Loans actually is a business where we don’t have to pass on the acquisition cost, but in all other businesses we have to pass on acquisition cost.
So, it works on these three principles, first try and make the acquisition cost lower than processing fee and use your speed, your servicing to make sure that the customer sees value in paying that processing fee, that is number one, acknowledging that in certain new products that won't be possible, but also consider it as an investment and then as we go ahead, reduce that, pass on and also e L&T Finance Holdings October 21, 2022 increase the percentage of own sourcing and then lastly increase the percentage of cross sell and up sell, top ups.
So, that is how the business will grow and keep getting more and more profitable.
Does that answer your question?
Kunal Shah
Yes, and if we have to put out a number in terms of opex to assets, particularly on the Retail side, so where do you see it eventually, may be currently it is around about 4.4% and it has been in that range, but may be DSAs also there is lot of competitive pressure given dealer payouts and we’re still at the lower end, so do we see that this might inch up closer towards 5% or 4.75% or so, as we try to scale up?
Dinanath Dubhashi
No, going up is out of question.
No. So, this is also perhaps more because of our SME and Housing.
Two things will happen in the next 2-3 quarters, as volumes of SME and Housing increase, that portion will move up and with Micro Loans, Farm increasing, it will move down, so that weighted average actually, I see remaining steady for the next let us say, 4 quarters because of this and as then for these other two products also, it will start trending down from there.
Kunal Shah
And secondly, in terms of core NIMs, even though may be we are highlighting that it is largely because of Retail, but if we look at the core NIMs in Retail that has been down, may be when we look at it including the fee income, it is down almost like say 24 odd basis points and the wholesale is something may be wherein NIMs plus fee has actually gone up by 17 basis points, so how much do we see it sustainable because when we look at around the Retail there is hardly like 10 basis points kind of an improvement in margins and most of it are also fixed rate products, so there wouldn’t have entire repricing and there is benefit of deployment of liquidity as well, so where do we see this NIMs plus fee sustaining?
Dinanath Dubhashi
Kunal, frankly, if you are commenting at 10 basis points, 15 basis points, I won't be able to give you answer because every quarter it can certainly move 10-15 basis points, it will depend so much on product mix and things like that.
The statement I made was, so by the way I don’t know which number you said it has come down because our retail NIMs have actually gone, just NIMs, core NIMs have gone up both Y-o-Y as well as Q-on-Q, at least the numbers that I see, from 9.85% to 9.95% it has gone up.
Kunal Shah
Sir, I was referring to NIM plus fee, that is still down from 11.57% to 11.3%.
Dinanath Dubhashi
We have been conservative in recognizing some cross-selling income at this point of time, some developments in the industry regarding insurance companies etc., we have been very conservative in recognizing that, I will be able to say only that, but NIMs for example, 10-15 basis points here and there, every quarter I may not be able to comment on.
What we believe is 2-3 things will work right; Micro Loans growing well, which is a high NIM product, SME and Consumer Loans should grow up from now and then Home Loans growing.
But yes, hopefully the higher NIM products are growing more, that is the first aspect of that.
The interest cost is increasing, but not increasing like 50 basis points of repo rate etc., increasing less than that and most importantly even the fixed rate products, most of our fixed rate products are 2-year loans, with the duration of just above 1 year.
They also cycle down quickly, so the only thing which we will have to consider is competition, that whether competition will allow us to pass on in each and every product or whether we choose to pass on or keep interest rate same and grow volumes.
Those calls will be taken strategically.
So, frankly with the NIMs that we have, the strong NIMs, 9.5% for example, at 9.5% NIM if I get a choice of increasing volume and sacrificing NIM by 20 basis points or increasing volume less and keeping NIM same, I will take the first choice anytime because the absolute NIMs are so high.
So, I will e L&T Finance Holdings October 21, 2022 grow volumes more and may be reduce NIMs a little bit.
The strategic direction I would like to give is we are confident of maintaining good levels of NIMs plus fees, whether it will trend 5-10 basis points up, down, in the current interest rate scenario I will be not only daring but foolish to predict over the next couple of quarters.
Moderator · Conference Operator
Thank you.
The next question is from the line of Nischint Chawathe from Kotak.
Please go ahead.
Nischint Chawathe
Just one question is, while everything looks good on the macro and we clearly see collections improving etc., why did you have almost Rs.
500 crores kind of a write-off in the quarter?
Dinanath Dubhashi
See, it is like this, the entire OTR book, not entire, whatever moves, we have two choices here, that either to show GS3 and 100% provision or to write it off.
So, only the GS3 number changes, right because the provision is 100%, the NS3 number will not change.
So, let me at least write-off and get the tax advantage, it is a financial decision.
Whatever is 100% provided, for business it is neutral and write-off doesn’t mean we give up the effort to collect.
So, either we keep a 100% provision and collect or we write-off and collect.
Business wise, it means the same.
It is a financial decision.
Very simple, if this Rs.
550 crores, if you wouldn’t have written-off the GS3 would have been higher by Rs.
550 crores, the PCR would have been higher because they were 100% provided and NS3 will be the same.
Nischint Chawathe
The point I was trying to make is that there is almost a Rs.
556 crores kind of a credit cost for the quarter, your overall provisions on the balance sheet have been stable, then this is write-off that has hit the P&L, right?
Dinanath Dubhashi
No, don’t look at it like that.
The overall credit cost actually without taking, let us just take a step back and gross up this Rs.
422 crores that we took from the overlays, then it comes to close to Rs.
1,000 crores which you can say that Rs.
1,000 crores is same as last quarter, so what is the big deal, so but this Rs.
1,000 crores includes Rs.
422 crores of roll forward from OTR which is now over.
So, it is not going to come next quarter.
So, without OTR flow, this Rs.
1,000 crores will be around Rs.
550 crores, around Rs.
570 crores and this OTR flow is not going to be there for next quarter, it is over because everything has flown now simply by dates, 90 plus done, everything means whatever had to flown, flown and finished, so that is the way to look at this.
So, whichever way, this pocket, that pocket, the way is very simple, ~Rs.
575 crores is credit cost this quarter which is only going to trend down going ahead.
That is the conclusion.
Nischint Chawathe
So, this is basically onetime OTR thing which is?
Dinanath Dubhashi
Exactly, that is what we have said, committed.
Nischint Chawathe
And what would have been the standard asset ECL on balance sheet?
Dinanath Dubhashi
ECL, that is Stage 1, Stage 2 total plus OTR, we have given that number in the presentation.
So, Stage 1 plus Stage 2 plus OTR consol is 2.1%, for Retail, it is 2.4%, Stage 1 plus Stage 2 plus OTR, standard assets. e L&T Finance Holdings October 21, 2022
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Please go ahead.
Abhijit Tibrewal
Sir, first question is around capital gains that you are expecting from the sale of your AMC business.
Wanted to understand, though you have given brief commentary in the presentation, I wanted to understand what proportion, firstly what is the capital gains that you are expecting from this transaction and what proportion out of this will be utilized for macro prudential provisions and will the remaining be kind of kept on the balance sheet for growth capital?
Dinanath Dubhashi
Approximate capital gains, the pricing we have already told, how much it is, the total is about, we have sold it for USD 425 million plus cash and the surplus cash should be another USD 100 million, around that area.
Now, it depends on many things.
We were initially expecting the transaction to close in October end, so we had taken a cover up to that.
We are now revising the cover, so what is the rate of cover, exactly when will be the date, rupee, dollar, at least the rupee dollar is depreciating, so at least we are happy.
I don’t know what happens to the rest of the world, but we will finalize first of all the amount, this is the consideration in dollars, the exact amount in rupees, I will be happy if somebody can predict the dollar rupee rate especially because we have to renew the cover at the end of this month, otherwise I would have told you the exact rate at what we have covered and all those things, so that’s that and exact proportion of that what I will use for various, if I had to disclose it now, I would have disclosed it in the presentation.
So, very clearly it is something that the Board will take the decision once the eggs hatch and then we will immediately communicate.
Primarily, it will be used for strengthening the balance sheet.
Abhijit Tibrewal
Sir, second question that I had was that multiple times, during the opening remarks and when few of the participants earlier asked you in precise that the pain from at least unsecured OTR book is now behind, when we kind of look at your ROA tree, the biggest line item which keeps moving or is the most volatile is credit cost, so given that you also suggested to the last participant that credit cost will now start to moderate, what would be a steady state kind of a credit cost for the kind of franchise that we have now from let us say from here onwards?
Dinanath Dubhashi
Retail credit cost is about 3.5% for this quarter.
We expect it to start coming down and go below 3% hopefully by the end of this year itself or around 3%, may be not below, but close to 3% by the end of this year.
Abhijit Tibrewal
And then from next fiscal year onwards should be more in the range of 2.5% for the full year?
Dinanath Dubhashi
Let us hope.
The business has the capacity of reducing it further, let us hope.
Abhijeet Tibrewal
Sir, my last question is that while we guide in the Lakshya plan that we would endeavor or target 30% kind of a loan CAGR in Retail, can you also help us think through how should we look at the wholesale book because time and again, there have been various media articles and we have also suggested in some earnings calls that we plan to do something on the Real Estate business and the Infrastructure segment, so how should we think about, what are you trying to do in these two particular Wholesale segments, Real Estate and Infrastructure?
Dinanath Dubhashi
Real Estate segment, very clearly, we have stopped doing any new sanctions, we are concentrating on two things, one is completion of projects and getting the repayments and various presentations that we have done before e L&T Finance Holdings October 21, 2022 shows the progress that we have done over the last 1 year and even this quarter we collected about Rs.
850 crores.
Simultaneously, we are also looking at various partners who can come with us with a priority structure for getting into, because even though we are not doing any new sanctions, for completion of projects we have to put out money.
So, we are actually looking at partner funds especially who will come hopefully on a portfolio or at least asset by asset, come in with a priority structure, we will not disburse any further, they will disburse priority loan, complete the project, then as the cash flows come, they will take their money first and then we will get our money.
So, the structures like that, obviously with our loan remaining current all the time, that is obvious and so that is the structure we are looking at in Real Estate and that we have been very clear.
Infra is, actually we are looking for a partner because we believe that the business has good potential to grow, it doesn’t, perhaps putting more capital into it, doesn’t fit in our overall ROA promise that we have given and hence we are limiting capital.
So, one way, the ideal way is to get a partner into this business, preferably a majority partner for this business and efforts are on there.
And has some people come and discussed with us?
At various times there will be media reporting, so that can't be helped, we can't control that and that will happen.
If that happens, and why I am saying ‘if’ is that in a rising interest scenario obviously people's interest will vary naturally.
If interest rates were steady or coming down, by now there would have been tremendous interest, but as interest rate is going up it is very natural that people will vary to take up a large book especially, so that efforts are on and when we see a fruit, we will obviously come to you.
In the meanwhile, as you know, we have a very strong sell down engine and as we become more selective in further underwriting and to start selling down more aggressively, the capital towards this business will reduce.
It will reduce capital towards this business while protecting the franchise which hopefully can be sold soon.
So, that is the overall strategy and that is why I am not talking about the overall book, etc., because Wholesale book I don’t want to give a trend, if it trends down by how much, how fast, we will see in the next 2-3 quarters.
I want to only talk about the Retail book, the way it will grow.
By the way, we have not promised 30%, we have promised 25%, but we have shown 9% Q-on-Q, so probably this year it may be 30%.
Abhijeet Tibrewal
And I am squeezing just one last data keeping question, let me know if you already published it in presentation, what is the quantum of the OTR pool that we have at now and if we used to give out a slide where you used to publish the absolute quantum of standard asset provisions on Stage 1 and Stage 2, so if you could please share that with us?
Dinanath Dubhashi
We just told that Stage 1 and Stage 2 is about 2.1%, absolute quantum is what about Rs.
1,800 crores total, so that comes to around 2.1% Stage 1 plus Stage 2 plus OTR.
So, that is the number and I already published it on the call.
That is number one.
Number two, largely the OTR remaining now is Housing that is about, Housing is around Rs 884 crores, around Rs.
900 crores of Housing.
That is the largely one remaining.
Large part of it around Rs.
600 crores will open up next year.
However, it is fully secured, we have tested security of everything and there we are quite confident that big costs will not come, it will be in steady state credit cost.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen, this was the last question for today.
I would now like to hand the conference over to Mr. Dinanath Dubhashi for closing comments.
Dinanath Dubhashi
Thank you.
Thank you once again ladies and gentlemen, excellent questions, I would only like to once again express the confidence that not only the quarter is good in all aspects, growth, margins, cost, credit cost, excellent growth in ROA, NS3 for Retail, reduction in Wholesale, it is all happening according to plan, but various measures we are taking, various tools we are using, launching, various initiatives we are taking, products, digital makes us tremendously confident that we will be able to follow up on this act and improve it quarter and quarter as we go e L&T Finance Holdings October 21, 2022 ahead and the Lakshya 26 objectives, I am beginning to get confident that we will be able to actually prepone the achievement of these objectives as we go ahead.
So, on that note, thank you for being patient.
Thank you for your continuous support.
We will of course be available for any investor meets, etc., that you guys arrange.
My IR will be available, myself will be available as we go ahead and before we end wish you all a very Happy Diwali.
This Diwali is perhaps the first Diwali which comes without any shadow of the pandemic, so wish you all a very happy healthy Diwali.
God bless all of you.
Thank you.
Moderator · Conference Operator
Thank you.
On behalf of L&T Finance Holdings Limited, that concludes this conference.
Thank you for joining us and you may now disconnect your lines. *Since the transcript has been derived from a voice recording tool, necessary corrections have been made to remove anomalies as well as manifest but inconsequential factual discrepancies, repetitions in Q&A which would have unintentionally crept in, if any e L&T Finance Holdings