SAMMAANCAP — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

Moderator · Conference Operator

MR. KAMAL MULCHANDANI – INVESTEC Sammaan Capital Limited February 11, 2025

Ladies and gentlemen, good day, and welcome to Sammaan Capital Limited Q3 FY '25 Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Kamal Mulchandani from Investec Capital.

Thank you, and over to you, sir.

Thank you very much.

Our first question comes from the line of Abhiram Iyer from Deutsche Bank.

Please go ahead.

Abhiram Iyer

Congratulations on a strong set of numbers and results.

I had two questions.

The first question was to do with the NPAs.

Obviously, we've seen a significant reduction in the NPA levels.

Could you just elaborate a bit more on is this a one-off?

How do you see levels going forward?

And effectively, how the reduction has been especially compared to peers?

That's question one.

The question two was pertaining to Slide 15.

Thanks for giving a bit more color on the growth AUM portfolio.

And as you mentioned, 66% is pretty much the co-lending part of it.

What I just wanted to understand here is that is about 9%, which is mentioned as retained portion 8.5%.

Is this basically your retain -- your attention of the disbursed product co-lending model?

And is this par alongside the co-lending partner?

Or does this fit as sort of behind the co-lending partner?

Gagan Banga

Sure.

So firstly, just to understand and it's a good input next time, we will structured answer because I get asked this question all the time.

Co-lending is just one other form of assignment of loans.

There are two options for assignment of loans.

One is called direct assignment.

The other is called co-lending.

The big difference between the two is a minimum holding period of 6 months and a minimum retention of risk of 5%.

Whereas in co-lending, there is no minimum holding period.

But the minimum retention of risk is 20%.

Co-lending is further restricted only to priority sector loans.

We are more focused on ensuring that a large portion of what we originate fits, especially capital fits into the co-lending structure.

Now both in direct assignment as well as in co-lending, the risk is shared on a pari-passu basis.

The 5% or as a market practice, more than 10% that I minimum retain in direct assignment and the 20% that minimum retain in co-lending, which you see here as approximately 8%, 9% is not junior does not come after anyone.

It is pass.

As the borrower pays, they take 80%, 90% of what they are supposed to get, we take 10% to 20% of what is owed to us.

If a borrower does not pay, then they take 80%, 90% of the hit, we take 10% to 20% of the hit.

So there is no senior junior.

There is no first loss default guarantee.

There is no credit enhancement.

There is another structure, which is a more classic securitization structure, which we don't really resort to very regularly.

We -- it is called the pass-through certificate structure.

It is typically resorted to in loans which will be slightly larger in ticket size.

There one gives a credit enhancement.

The instrument gets rated and this is the target rating, the credit enhancement is prescribed.

And if the excess interest flow, so the customer is paying over the instrument coupon typically, and that is getting trapped only if the default is to happen over the excess interest flow, does the credit enhancement get dipped into.

In our history of having done about INR25,000 crores of such transactions, and these are rated and monitored by a variety of rating agencies, there has not been a single instance where the credit enhancement has been dipped into.

And this is anyways on a going-forward basis, a very small part of our strategy.

Sammaan Capital Limited February 11, 2025 Sammaan Capital is a social housing company.

100% of what it does today is social between affordable home lending, all of which fits into the priority sector norms of the Reserve Bank of India.

Even the MSME lending, which is secured by property, is priority sector for banks and that is our key focus area.

As for the other question around NPAs and credit costs, etcetera, our guidance for the credit cost on a total AUM basis has been detailed at 80 to 100 basis points annualized.

And as I said, the fiscal '27 goal for net NPA is 120 basis points.

We have used the provisions that got created through the various tactical steps that we took last quarter.

And we have created an additional provision cover, which has reduced the NPAs.

But on a normalized sort of basis, the NPAs would be 100 to 150 basis points on an average about 120 basis points.

This is net of the provisions that we will be making of around 100 basis points annualized.

Moderator · Conference Operator

The next question comes from the line of Rishikesh from RoboCapital.

Rishikesh

So, sir, if I understand, we have added around INR9,000 crores growth AUM in last 9 months, and we would be adding around INR25,000 crores in, say, '26 and around INR40,000 crores in FY '27.

So could you share what is the blended yield on that and spreads as well?

Gagan Banga

My friend, all of this is already detailed.

So if you look at Slide number 6, we detail product by product of what the yields are, what the mix of the product would be.

And if you flip back to Slide 5, we also talk about what would be the AUM on each company on a stand-alone basis and what is the targeted ROA.

So if you are to ask me on a blended basis, I would say Sammaan Capital would be generating about a 10.5% yield.

Sammaan Finserve will be generating around 12% to 12.5% yield.

And on that basis, we will be generating a 4-plus percent ROA in each of the two companies.

In terms of how we will get to this number, we have detailed the disbursement target.

So next year, we should be disbursing around INR2,000 crores a month in Sammaan Capital.

And the following year, we should be disbursing around INR3,000 crores a month, consolidated is about INR2,000 crores in capital and about INR1,000 crores in Sammaan Finserve.

Rishikesh

That is helpful.

Can you also share the spread numbers, please?

What would be the spread?

Gagan Banga

So the spread in our case, since we sell down the loan is not the correct way of looking at it.

The 80% of the loan moves away from our balance sheet, which is why return on asset -- return on asset for the portion which stays back on our balance sheet is more relevant, where we are targeting 4% plus in each of the two companies.

If you want a full detailed calculation, you can reach out to our Investor Relations team, and they'll run you line by line as to how we get to the 4%.

Rishikesh

Okay.

Got it.

Sure.

Secondly, also on the opex part, our other expense has gone down quarter- on-quarter from INR134 crores to INR72 crores.

And even our employee expense has gone Sammaan Capital Limited February 11, 2025 down from INR200 crores to INR180 crores.

So can you please throw some light over here?

And how should we see this on a sustainable basis?

Gagan Banga

So last time, I had mentioned that there was a bunch up of the increment, and we paid the increment with a lag effect from 1st April sometime in the second quarter.

And therefore, there was a heightened operating employee expense.

The operating expense -- other expense typically moves up and down because of the way that ESOPs are getting valued.

That's a fluid statement as far as IFRS 9 is concerned, and that makes the whole line slightly volatile.

Moderator · Conference Operator

Rishikesh sir, may we request you to return to the question queue for follow up questions.

There are several participants waiting for their turn.

Thank you.

The next question -- before we take the next question, we'll take two more questions.

The next question comes from Megh Shah from Prospero Tree Asset Management LLP.

Megh Shah

So we are raising funds at around 10 percentage, 10.5 percentage.

And you said that the yield for us is around 10.5 percentage.

So how do we make profit on that?

Gagan Banga

Our flow cost of capital will be between 9.5% and 10%.

And as I said, the -- we retain only a small portion of the loan on our balance sheet.

For the portion that we sell down, we get a continuing trail income from the bank.

So the bank will typically buy it at a lower rate.

So hypothetically, if we are giving them a home loan in Sammaan Capital, which we are originating at 9.9%, the bank would typically take that loan from us at 9.1%, which will give us a straight 80 basis points income every year.

Plus the bank would typically also give us an annual management fees for managing the life cycle of the loan for doing the customer service, collections, etcetera.

That would typically be in the ballpark of 50 basis points for the overall loan.

So that becomes on our 20%, a very large contributor, almost 2.5%.

We also would be getting fee when we originate the loan on the 100% of the loan, we would typically in over 90% of the loans be able to attach an insurance product, which comes in handy to the borrower in the case of an unfortunate event of an accident or loss of life.

There also, we are able to make -- since the premium would come on the overall value of the loan on the portion that we hold back, it will be a 4x multiplier.

This minus our operating expenses, which is on 100% of the loan and the credit cost, which is on the 20% of the loan that we hold, we make a 400 basis points return on asset.

So which is why I was explaining to the previous -- I was stating to the previous participant that ours is not a typical spread business where you borrow at X and lend at Y and your income is restricted to Y minus X.

It's a business where we since we are outsourcing our liabilities and ALM, we continue to make a spread on the portion which is not on our balance sheet and therefore, is not funded by our on-balance sheet financing cost.

Moderator · Conference Operator

The next question comes from the line of Damodar, an Individual Investor.

Damodar

My question is I'm a little investor.

I have been investing in Sammaan Capital for almost 7 years.

I hold a significant portion of the shares also.

I mean my only question is when will our company Sammaan Capital Limited February 11, 2025 be valued at 2x or 3x of the book value?

I mean, just a prediction kind of a thing because investors have been not gaining much in last 5 to 6 years.

So if you can give an estimate like when will all the agencies, rating agencies or the fund houses give recommendations like good old days of 2016, 2017?

That's my question.

Gagan Banga

Sir, firstly, I'm thankful for your support.

We are held by around 450,000 shareholders and each of you as individual shareholders are the backbone of the company.

So thank you for that.

As management, you may appreciate we don't really control the up or downward movement of the stock price.

What we certainly work towards is achieving certain return ratios for our investors, which then may make the company interesting.

We have detailed in -- on Slides 12 and 13, what our goals are.

So hypothetically, if the company was to get to 15-ish percent -- 18-ish percent ROE, which we are targeting and a 3-plus percent ROA that we are targeting, it may be better on a normalized market basis that you may consult your financial adviser, if you have one, to see what kind of a value can be ascribed to this company.

What I can assure you of, like I said a few times in the call, as a management team, we had already been working hard.

Our efforts were more over the last few years to stabilize the company.

Our shareholders by giving us the quantum of equity capital that we have received in the last 12 months have given us a different type of enthusiasm, a different type of strength.

And it is with that enthusiasm and strength that I can tell you we are working even harder to make sure that we achieve these goals.

The good thing is most of the struggles that we had, which were distracting the management team are now behind us.

And a large portion, if not all, of our management bandwidth is focused on achieving these ratios.

Along the way, we will have hiccups.

We now have the bandwidth and the wherewithal to manage those hiccups a lot, lot better than we could do a few years ago.

So nothing should be distracting us from these goals.

And I'm quite hopeful that we will, in the given time lines, be able to achieve the goals.

And that should hopefully create value for you, much like how valuable this company was, as you said back in the good old days.

Thank you.

Thank you for sparing so much time through this call.

Thank you again for your support, and I look forward to speaking with you next quarter.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, we take that as the last question.

On behalf of Investec Capital, that concludes this conference.

Thank you all for joining us.

You may now disconnect your lines.