Bajaj Finance Ltd

NSE:BAJFINANCE

Earnings Call Analysis

Bajaj Finance Positive Q2 FY24 Performance

Bajaj Finance reported robust growth in Q2 FY24, with assets under management (AUM) soaring by INR 20,167 crores, marking a 33% increase to INR 2,90,264 crores. The quarter saw the booking of over 8.5 million loans and the addition of 3.58 million new customers. The company's profit after tax (PAT) jumped by 28% to INR 3,551 crores, with a return on equity (ROE) slightly over the hurdle rate at 24.1%. Net non-performing assets (NPAs) were stable at 31 basis points. The new car financing business expanded to 85 locations, while a microfinance pilot began in 12 villages. A solid liquidity buffer of INR 11,400 crores was maintained. The quarter saw a slight increase in cost of funds by 6 basis points to 7.67%. Net interest income (NII) grew 26%, with a marginal NIM compression of 14 basis points. Capital adequacy remained robust at 23.19%, with Tier 1 capital at 21.88%. The Board approved a capital raise of INR 10,000 crores, with advancements also in digital platforms and strategic acquisitions.

Strong Performance and Growth Trajectory

The company has achieved impressive growth, with Assets Under Management (AUM) growing by 33% to INR 2,90,264 crores, as it booked over 8.5 million loans and added 3.58 million new customers. Their digital engagement also soared with the Bajaj Finserv App nearing 45 million customers.

Profitability and Efficiency Metrics

Profit After Tax (PAT) rose by 28% to INR 3,551 crores, with Return on Equity (ROE) slightly crossing the 24% threshold. Net Interest Income (NII) grew by 26%, indicating a strong income from interest-earning assets. The company has managed its credit costs, coming in at INR 1,077 crores and released INR 100 crores of management and macro overlay in the current quarter.

Robust Capital and Risk Positioning

The net Non-Performing Assets (NPAs) have remained steady at 31 basis points, showcasing sound asset quality. The company's capital adequacy is strong at 23.19% with the Tier 1 capital at 21.88%. Additionally, they've made strategic moves by entering into a term sheet for a 26% stake acquisition in Pennant Technologies.

Operational Highlights and Expansion

Business to Business (B2B) disbursements grew by 31% year-on-year, and the company has made expansions into new car financing and launched a microfinance pilot. The deposits book also saw a significant increase by 39%, showing an equally strong liability focus alongside assets.

Product and Customer Engagement

The metrics for both products per customer and engagement are improving, with a move toward digital platforms. The company has observed a product per customer increase and remains comfortable with its ability to mine the franchise and generate outcomes similar to past performance.

Outlook and Future Guidance

While the company expects some compression in Net Interest Margins (NIM), they are confident in sustaining a 5% Return on Assets (ROA) on a full-year basis. They are actively monitoring and managing portfolio risk, including preventive measures taken in segments with smaller ticket loans.

Growing Digital Footprint

The company highlighted significant growth in digital engagement, with substantial increase in app downloads and services requests coming through their digital platform. This underlines a strategic shift towards leveraging digital channels for customer onboarding and service.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Bajaj Finance Q2 FY 2024 Earnings Conference Call hosted by Morgan Stanley. This event is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures.

Please note that this call and your questions will be recorded and may in certain circumstances be distributed to clients and/or made publicly available. By participating in this event, you consent to such recording, distribution and publication. [Operator Instructions]

I will now hand the conference over to Mr. Subramanian Iyer from Morgan Stanley to begin. Thank you, and over to you, sir.

[Subramanian Iyer, analyst]

Thank you, Nadia. Hello, everyone. This is Subramanian Iyer from Morgan Stanley. Thank you very much for joining us for the Bajaj Finance Q2 FY '24 earnings call. To discuss the results, I'm pleased to welcome Mr. Rajeev Jain, Managing Director; Mr. Sandeep Jain, Chief Financial Officer; and other senior members of the management team. Thank you, Rajeev and Sandeep, for giving us the opportunity to host you.

So without further ado, I now invite Rajeev to take us through the key financial highlights for the quarter, post which we will open the floor for Q&A. With that, over to you, Rajeev.

[Rajeev Jain, executive]

Thank you Morgan Stanley. Thank you, Subu for hosting us. I have with me a set of my colleagues there, Anup, our Executive Director; Rakesh, our Executive Director, a few other senior colleagues in the room here. I'll take you through the investor deck, which has been uploaded on the Investors Section of our website. I'll refer to that.

So without taking too much time, let's just jump right in to panel #4, which is our executive summary. So I would say good quarter across all financial and portfolio metrics. AUM grew by INR 20,167 crores. We booked over 8.5 million loans in the quarter that went by, added 3.58 million new customers. And the Bajaj Finserv App now has just a below 45 million customers.

Overall AUM crossed INR 2,90,000 crores to end at INR 2,90,264 crores, growth of 33%. OpEx to NIM (sic) [ OpEx to NII ] continues to hold at 34%, which is really where it was last quarter as well. PAT grew by 28% to INR 3,551 crores. ROE crossed the hurdle rate of 24% to come in at 24.1%. And net NPA remained pretty steady at 31 basis points.

If you move to the next panel, very quickly. I won't make all the points, but I've talked about AUM growth. I've talked about AUM. New loans booked I've talked about. B2B disbursements came in -- grew by 31%, came in at INR 18,610 crores on a year-on-year basis. New car financing business has gone live. We are now present in 85 locations. We are quite excited about the business that's the way it's kicked off and festive season is anyway right here. Microfinance pilot got launched on 1st of September. It's in a pilot in 12 villages in India, in UP and Karnataka, and 100 locations are on track to go live by March '24. And if all goes well next year, we'll have 300 villages in India by March '24.

Customer franchise. I talked about it, 3.6 million addition. Overall, first half, we've now added 7.42 million customers -- new customers to the franchise. Franchise just a tad below 77 million customers. I think we're very confident that we'll add this year between 13 million and 14 million new customers, added 106 locations to the overall location footprint and now at 3,900 -- 3,934-odd locations.

Liquidity buffer stood at INR 11,400 crores, so remained pretty strong. Q2 cost of funds came in at 7.67%. Sequentially, it grew by 6 basis points. Deposits book, so liability focus remained as strong as the asset side, grew by 39%, and to 50 -- just a tad below INR 55,000 crores.

Operating efficiencies. So overall, NIM grew by -- NII grew by 26%. NIM compression in the quarter was 14 basis points on a sequential basis. OpEx to NIM (sic) [ OpEx to NII ] continued to hold steady, as I said earlier, at 34%. Employee headcount crossed 50,000 people. We added 4,500 people. And annualized attrition at this point in time is at 13.5% ((sic) [ 13.4% ] versus same time last year when we did not publish this metric, it was 18.6%. So clearly, we are headed in the right direction as a company on employee attrition as well.

Credit cost came in at INR 1,077 crores. We released INR 100 crores Sandeep?

[Sandeep Jain, executive]

INR 100 crores.

[Rajeev Jain, executive]

INR 100 crores of management and macro overlay was released in the current quarter, okay, it's right there. GNPA and NNPA pretty strong at 91 basis points and 31 basis points. you can see a movement of 4 basis points sequentially and 3 basis points. It's just daily equity frames rather than anything else that -- if you have any questions that Sandeep can answer later or Fakhari can answer, but there's no movement there except for days. So it looks the best in the fourth quarter, just to give a texture. It looks flattish in the second quarter. It looks...

[Sandeep Jain, executive]

Flattish in the first quarter.

[Rajeev Jain, executive]

Flattish in the first quarter.

[Sandeep Jain, executive]

And then Q2 has the noise of 92 days in a quarter resulting in higher flow of gains.

[Rajeev Jain, executive]

Quarter 3 is?

[Sandeep Jain, executive]

Flattish.

[Rajeev Jain, executive]

Flattish. So Q1 and Q3 are flattish, and Q2 is elevated, and that's how it will be every year and Q4 is better. So that's how the -- daily GBD moves. So you will see that it's very marginal, but just to make the point.

Stage 3 assets, as you can see, continue to be in the right direction. Risk metrics ex B2B businesses remain all green, except B2C, which is yellow.

PAT, I've talked about. PBT, I've talked about. Annualized ROA came in at 5.16% as against 5.4% mainly NIM compression, which is slowly bringing it back to pre-COVID levels. Overall, on a full year basis, we feel that there is another 20, 25 basis -- of 30 basis points of NIM compression that will happen between operating leverage and so on and so forth, we should be able to sustain a 5% ROA on an exit basis as we deliver the full year.

Capital adequacy remained strong at 23.2% (sic) [ 23.19% ]. Tier 1 capital of that was tad below 22% at 21.88%. Just 2 updates, I mean, you're aware of this. We the Board of Directors has approved raising capital to the extent of INR 10,000 crores, INR 8,800 crores from PIB and INR 1,200 crores through preferential allotment to Bajaj Finserv, to the promoters of the company, to Bajaj Finserv, so that's just one update.

And second being Pennant Technologies, in which the company has entered into a binding term sheet for an acquisition of a 26% stake in the company for an aggregate amount of INR 267.5 crores valuing the company at INR 875 crores.

That's quickly -- I'll just jump quickly to omnipresence update on Page 11. All metrics are moving in right direction. Downloads 16.5 million -- 17 million in the quarter. Net installs of 45 million. In-App programs, 134, remain among the top 5 on Google Play store. Service, 35% of service requests are now coming through consumer requests, service requests are coming through the app. UPI handles, bill pay transactions, they're all moving in the right direction. We continue to remain highly focused on app and web matrix and the momentum remains pretty strong. I think that's...

On panel 13 quickly, no panel 13. Just on key financial metrics, next panel? Yes, panel 14, sorry, 13 or 14? 14, on panel 14, pretty much very steady. As you can see, H1 FY '24, INR 62,195 AUM per customer. PAT per customer is just a tad below INR 1,500. Cross-sell franchise moving in the right direction, all metrics are moving in the right direction, We remain pretty comfortable with the ability to mine the franchise and continue to generate similar outcomes has been so as you can see in this panel for the last 7, 8 years.

Jumping right quickly to -- to end of it so that I can open it up for questions on portfolio metrics. As you can see, 2 panels 52 or 51? To 52, as you can see, everything remains within the corridor. Consumer durable and lifestyle, 99.51% current. 2-wheeler 3-wheeler, 94 -- 94.71% current. Digital products, 99.41%. Urban B2C 98.74%. So all of them remain better than Feb '20. And other than while -- even rural B2C -- move to the next panel. Even rural B2C is just a tad below where it used to be in February '20. But we -- from a management assurance standpoint, we -- as you can see, the Stage 2 used to be 110 basis points, is now 140 basis points. And that's why I say it's a yellow, Otherwise, in general, we are pretty comfortable on all credit metrics.

Just one last point I wanted to cover on PPC. We've added a new panel, which is panel #41. It's a new panel that we've added. This used to be earlier there 5, 6 years ago, as our product portfolio has continued to move as various products have got an added lever on lending side or on the payment side. It was a question from various investors that how is your PPC is moving. So -- but just -- I'll take 2 minutes to make the point. There are 4 key blocks in which our product per customer is broken up in. Lending, all lending products of the company. Distribution of products and services, all value-added products and services of BFL and partners. Deposits with fixed deposits and systematic deposit plan, which is FD. And payments, which is any one of them being bought by a customer as taken as one payment product is really how they've been slotted.

As you can see, as of '21, we used to have 5 products per customer, and there used to be 2 colors as of FY '23. There are now 3 colors. It has moved from 5 products per customer on the left-hand side that you see to 5.81 products per customer. As of first half of the year, at this point in time, it's looking at 5.97 products per customer, 35 to 40 basis points, 0.4 is now payments product.

On the right-hand side is as customers get onboarded, principally how do they move in 12 MOB, 18 MOB and 24 MOB is as they complete. So if we are originating more and more customers, the left-hand side will look a little suppressed. But as the -- so both have to be looked at, that in 24 months on board, because in the last 18 months, principally, we've onboarded 19 million new customers. Last year was 12 million customers, and this year, first half 7.5 million customers, that's 19-odd million customers. So as their mind and as they warm up to more engaged, using digital assets and otherwise, their take-up rates improve. So that's -- look at both of them independently is the only point.

With that, I've come to end of my points that I wanted to raise. Happy to answer any questions, between me and the management team members. Subu, over to you.

[Subramanian Iyer, analyst]

Nadia, we can open the question queue.

[Operator]

[Operator Instructions] Our first question goes to Antariksha Banerjee of ICICI Prudential.

[Antariksha Banerjee, analyst]

I am audible right?

[Rajeev Jain, executive]

Yes, you are audible, very much.

[Antariksha Banerjee, analyst]

Two questions. One is starting from the point that the rural B2C is still flagging red. And I think last quarter, you had spoken about some analysis that we were conducting on the leverage of customers and how that's moved. Any update you would want to share on that? And any portfolio actions that you've updated since then?

[Rajeev Jain, executive]

Yes. So we wanted to really publish. We were ready, but principally -- due to technically did not allow us to publish that, rightfully so, but we can share some update. I mean everyone wants to publish it. So look, the way it's looking like is if you take '20, '22 and '23 in terms of count of loans that India was disbursing across all personal loans have grown from 4.5-odd crores to -- by '22, it has gone to 7-odd crores to by '23 it had gone to last year, it was 10.5-odd crores, 10.7 crores to be precise. The largest growth principally it seems was in less than INR 50,000 where -- and in INR 8 lakh plus. Okay, just at a frame level. So that's level to input for you.

On an AUM basis, however, the less than INR 50,000 contribution to the total -- and the total AUM looks to be like 13.5 -- grew from INR 7 lakh crore in FY '20 to around INR 13.5 lakh crores. Okay, pegs the data at 98%, 99%. So take it at a trend line level rather than if I want to 3 percentage -- if I may say so, adjusted for -- adjusted. Otherwise, directionally, these numbers are -- do INR 7.63 lakh crores has moved to INR 10.5 lakh crores to INR 13.5 lakh crores. What it principally says is that at an industry level, the 93.73% of the total balances of INR 7.6 lakh crores used to be current, in FY '20. That number in FY '22 was 99.75% current. And that number in FY '23 is 92.21% current, industry level, okay, this is industry.

When we look at that versus us, we look like in FY '20, we were at 98.2% current. As of '22, we were 97.12% current and at -- as of '23, we are at 98% current. And if you look -- so we've done -- when we look at this data, the -- what it also told us is that less than INR 50,000 is really where a lot of corrosive outcomes are. And what -- level 2 has told us is that principally those who have more of them doesn't mean they are more leveraged, but those who are more of them are more leveraged -- are more improving, sorry, not leveraged. I clarify and I reemphasize the point. They're not necessarily more leveraged. They are more improving.

So what we have done is we've cut between 8% and 14% of the business in urban and rural, 14% in rural and 8% in urban as a preventive measure to those who have more smaller ticket loans, while they may be short term in nature represents imprudence. So that really -- would have liked to publish this data because it would help -- it will help you guys. So -- but for technical reasons we could not publish this data. But I think it -- last point. sorry, sorry. You're fully seized of it. We are looking at this data on a close -- very closely on a month-on-month basis. And taking decisions to ensure we continue to protect the credit risk and portfolio risk in the company.

[Sandeep Jain, executive]

Just 2 followups from my side. I think, as Rajeev called out at the beginning of the call itself, take the data with a pinch of salt at this point of time, based on our internal analysis of how we understand the data to be, that's point number one. Point number two is the portfolio held that Rajeev referred to. We have taken into consideration customers with no delinquency all the way up to 179 days overdue. Customers beyond overdues of 180 days past due were ignored because the write-off policies to various actions that respective banks and NBFC would take, we are not privy to that. So for comparison point of view, we have only considered customers from no delinquency up to 179 days overdue.

[Rajeev Jain, executive]

It doesn't callout to pick this data from us.

[Antariksha Banerjee, analyst]

And a small followup...

[Rajeev Jain, executive]

And we are doing this across all portfolios. Let me make that point. It's not just for unsecured. We're now doing because the overall supply side, as I keep making the point, across asset classes has increased significantly. So it's not just for unsecured. This principle applies to all our product lines, and we're acting -- we've acted across product lines as a company to make sure that this imprudence, and it shows up. So you may have a home loan with 3 BNPL, and I don't have, shows up that if you have 3 BNPL, your loss -- your default rates looks to be 2 to 2.5x, even for home loan, just as an example to make the point.

[Antariksha Banerjee, analyst]

Got it.

[Rajeev Jain, executive]

Sorry, go ahead.

[Antariksha Banerjee, analyst]

A small followup for this. Based on this exercise, do you conclude that the larger ticket INR 8 lakh plus or even maybe the INR 5 lakh plus, if it is more overlapping with our customer base, despite having grown so fast is relatively less of a problem, at least at this point?

[Rajeev Jain, executive]

So if you look at the INR 8 lakh plus, in FY '20, the number looked like 291 basis points. INR 8 lakh plus in FY '22 is looking like 90-plus I'm talking -- is looking like 128 basis points and INR 8 lakh plus in -- as of FY '23 is looking like 115 basis points. This is industry, okay. We were 28 basis points in FY '20, we were 31 basis points, and we are at 18 basis points. So yes, we do conclude that adjusted for less than INR 50,000 numbers in general of greater than INR 51,000 and above are looking lower than FY '20.

[Antariksha Banerjee, analyst]

I just have one other different topic, and I'll not take much time. This is regarding the capital raise. I just wanted to understand what are your plans of utilizing this capital in the mortgage business versus the non-mortgage side of the business, especially given the fact that the housing business is supposed to list separately as per regulations.

[Rajeev Jain, executive]

I mean, so principally, that listing is 8, 9 quarters away. As of now, it's 8 quarters away. We have -- I have said in public domain that we have promptly placed -- requested for extension, that's point number two. It's principally capital adequacy, as you heard me, was 21.88%. Strong growth in both sides, both BFL and BFSL. H1 '24 momentum, if I look at it, is -- has been the strongest that we have seen in the last 4 years.

We virtually added INR 43,000 crores on a consolidated basis. Even BFL has -- is launching a whole lot of new lines of business, right? Non-Bajaj Auto has gone live. We are now doing 20,000 non-Bajaj auto 2-wheelers a month. LAP in BFL has gone live. New car financing has gone live. MFI's pilot, I just talked about, Tractors going live on January 1. Emerging local corporate in BFL going live in December.

So clearly, there is action on both sides of the balance sheet. And we are prudent allocators of capital. So at a fundamental level, we'll -- all I can tell you is we'll prudently allocate capital and also generate the sustainable return on equity would get capital for all our lines of business. I don't mean entities. I mean those -- and we are very capital prudent and very...

Lastly, I think since you talked capital raise, we've always raised capital and consistently demonstrated our ability to effectively -- deploy it effectively and deliver medium-term ROE goals. So even while we have 1 year to raise capital, even as we raise capital, we are clear that the short-term stroke -- medium-term goals of ROE hurdle rate that we established will not be compromised in any given manner.

[Operator]

And the next question goes to Viral Shah of IIFL Securities.

[Viral Shah, analyst]

Congress Rajeev and Sandeep on good numbers. So while you answered the first piece of my question on leverage, just wanted to clarify that, is it possible to do that, if not now, but maybe next quarter once the capital raise is done, if that is a consent for putting out the data in terms of leverage at the customer end?

[Rajeev Jain, executive]

We will try and work closely with the bureau because it's in the -- we are not been constrained, we'll work with the bureau and try and assess. And maybe if they deem appropriate that you guys can reach out and work with them, that's also probably -- we would assure you that we'll try on this.

[Viral Shah, analyst]

And just incrementally on the other piece of question is within the housing finance subsidiary. So right now, the mix of home loans it's actually 60%. And because of the opportunities out there in the market, I think we're seeing opportunities in the developer and LRD segments. But what's the time frame over which you have to reach 60%? Is Atul here?

[Atul Jain, executive]

I'm Atul here, so I'll answer this question. So regulatorily, we are required to have a 60% asset mix by 31st March 2024, that's a RBI guideline. And against that, as of 30th September, we had 59%. See the definition of a residential housing varies as per the regulation. So that includes 50% of the individual home loan, which has to exclude top-up. When you see the published figure, when you see it home loan at 56%, actually, the home loan -- individual home loan, which is excluding top-ups and the other [indiscernible] component is roughly around 51%. Then up to 10%, you can have a CRE-RH, which is called amount lend for construction of residential dwelling units. So when you add both, as of today, as of 30th September, we are at 59.01%, which is very close to 60%, which is required to be 31st March '24, and we intend to meet that from the -- before the regulated -- regulation given time.

[Viral Shah, analyst]

Okay. So fair enough. So there is not going to be any incremental material delta from there in terms of mix change even from now?

[Atul Jain, executive]

Yes. Right now, it is 59.01%. So 59.01% has to move to 60% and that we have a good 6 months. Our attempt would be that before -- up to 31st December, which is Q3 itself, we should be reaching that number of 60%, what is required on 31st March '24.

[Viral Shah, analyst]

Got it. Just one on last piece of question. Rajeev, was -- in terms of when I look at those panels for different products, so what I see is that for some of them, the Stage 2 has come down and probably the Stage 3 has gone up, so whether you look at B2C. So this is a phenomena that you were referring to earlier, right? Nothing incrementally to read into it?

[Rajeev Jain, executive]

Yes.

[Sandeep Jain, executive]

This is exactly the thing that we are referring to.

[Rajeev Jain, executive]

That's panel 49.

[Sandeep Jain, executive]

Earlier was stuck because of day past due logic into Stage 2 in the last quarter. And because of 92 days quarter, which is 31 days of July, 31 days of August and 30 days of September, these customers have moved from 89 days to over 90 days in the current quarter.

[Viral Shah, analyst]

Okay. And is this a -- it should correct in the third quarter, basically?

[Sandeep Jain, executive]

Yes. Yes. Third quarter, as Rajeev explained, it will be a normalized quarter. Some noise will come in Q4 again, where because of number of days in the quarter being lower, one may see 1 month of skip in terms of the NPA classification.

[Rajeev Jain, executive]

I just want to clarify to everybody that because we bank on 2nd it's important...

[Sandeep Jain, executive]

This phenomenon is pretty specific to us because in most of the businesses, the banking due date for the customer is second of the month. That creates anomaly of customer getting step to 89 days at times in a given quarter.

[Rajeev Jain, executive]

99% of our banking across the entire 24 million -- 23.5 million customers in banking would be today at on the 2nd of the month.

[Viral Shah, analyst]

Okay. Sir, just to get it right, so in the quarters where you -- where the number of days are higher, you will see the more slippage into Stage 3, right?

[Sandeep Jain, executive]

Yes. And this is specific to Q2. Fortunately, there are only 4 quarters in a year. So it can't be more than 1 quarter. So this is specific to Q2. Q2 normally ends up losing out, and Q4 happens to be gainer because of days past due logic.

[Operator]

And the next question go to Piran Engineer of CLSA.

[Piran Engineer, analyst]

Just wanted to understand your NPLs in B2C, both urban and rural are pretty much similar, but we have green in one and yellow in one. And same thing for SME, which is an unsecured product, NPLs of 1.25%. So I just wanted to understand why we treat them as different in terms of our outlook? And secondly, will we expect -- like we've seen growth in rural B2C slowing down this quarter, will be expected to slowdown in SME and urban B2C next quarter onwards?

[Rajeev Jain, executive]

It's purely data dependent. At this point in time, the only place where we are -- where we have a stance of -- in fact, let me make a point and I made that last quarter that principally rural B2C slowed further. It grew year-on-year, first quarter 17%. Actually, you saw the numbers '21, I had clarified it had gold loan. In second quarter has actually grown only 12%. So it's pure data dependent, as we feel that's one part.

Second, as I've said, Piran, that -- technically, I can tell you, it's green. But we are exactly stating what are -- the greens and the yellows and reds are management assurance. What do we assess the position to be, that's an important point is what I would just want to make to you.

If you go to urban B2C, okay, you saw Stage 2 at 143 basis points and 95 basis points, okay? Whereas it's 109 basis points and 141 basis points. So -- and leave even the number, it could have been even 109 or 120. It is possible we may have still given management assurance at yellow, I think I just want to clarify that.

[Piran Engineer, analyst]

Sorry. It was at 1.19%. I'm looking at Slide 48. So am I reading it...

[Sandeep Jain, executive]

It is GNPA.

[Piran Engineer, analyst]

Yes.

[Rajeev Jain, executive]

I'm looking at -- go to 51 and 52, which is really where we provide management assurance of. This is -- so if you see urban B2C panel 52, you have to see.

[Piran Engineer, analyst]

Okay.

[Rajeev Jain, executive]

You see 143 basis points, and you see 95 basis points. This is urban B2C. If you see the next panel, which is rural B2C. You'll see 109 basis points and 141 basis points. And you're starting to see it come off, okay? So it's possible by February or so the business would start to grow again is really how -- Sandeep, do you want to make...

[Sandeep Jain, executive]

Yes, I think Piran there are a couple of things...

[Piran Engineer, analyst]

Yes, the only confusion is Slide 48 and 52, because 48 when I just look at the numbers numerically, okay, fine, this is GNPA and you're referring to Stage 2. Fair enough. Sorry, carry on.

[Rajeev Jain, executive]

And I think, Piran, one moves to the GNPA always. So the early metrics is what is current, what is Stage 2, and then Stage 3. In our business, we like to catch things in early buckets rather than in late buckets, at a philosophical level.

[Sandeep Jain, executive]

And I think, Piran, what you are seeing is position on a given day, which is for respective quarters, we are also looking at eventual flow into losses. So what you are not able to see is the bounce rate. You're not able to see collection efficiency and the eventual loss that's flowing in the P&L. Based on that, we also determine whether a particular business should be tagged as green or should it be tagged as yellow. At this point in time, we believe rural B2C should be tagged as yellow, and we should take corrective action, which we have already taken.

[Rajeev Jain, executive]

Growing at most slowly, because that's what we can do.

[Sandeep Jain, executive]

And maybe probably one quarter from now, if we find things are looking better, the internal portfolio bounce rates, efficiencies and flow to losses are looking better, we may restart growing the business back again.

[Piran Engineer, analyst]

Got it. Got it. And just secondly, on your LRD book, and that's been a strong growth driver. Can you just give us some more color on the book in terms of how much of it is, say, malls versus offices or who the type of landlords are, et cetera? I know in the past you said that it is even safer with LAM...

[Rajeev Jain, executive]

Do you want the names?

[Piran Engineer, analyst]

But -- Yes, no, no. That's fine, but some comfort around it because it's grown to like $2 billion now.

[Sandeep Jain, executive]

So I'll give you the complete texture. Now so what we do as an LRD product, we -- by definition, we generally don't do retail malls. We do generally a grade A commercial. It's a 12-year-old business for us. We have been doing earlier there, and we have always seen an impeccable behavior. Now on a basic guardrails, generally mall and the retail malls are not done. It is except barring 1 exposure, which is at a REIT level where we have a retail exposure.

It is -- the business has always been 100% current for us irrespective of the size. It is generally the lease, the rentals are to Fortune 500 companies, mostly to MNCs in the IT sector. It's a grade A commercial. So 100% of the portfolio largely would be grade A commercial with retail being only one where the corporate -- large corporate is there, which is a REIT exposure, which is a REIT non-grade A commercial office space.

Our lessees are all largely Fortune 500 companies and all cash flows are escrow. By a normal definition as a escrow -- the receipts in escrow to the discounting, the EMA requirement, we have a clear buffer of close to 30% to 40% kind of a buffer from it happens. And escrow compliance is clear here too just to give you a total comfort.

[Rajeev Jain, executive]

Last point. If they were ever butterflies in the stomach on this business, that was March 2020 till March 2022. Because we thought work from home is the new future, what would happen to this portfolio. This portfolio even between March '20 and March '22, we didn't see a single instance of default. If there was ever a event that those 24 months where the test case much harder than any other portfolio for this, because they were all empty, and rentals have to keep coming.

[Sandeep Jain, executive]

So one last data point on this, just to give more -- our total vacancy in our LRD portfolio is 1.6% against the total commercial market vacancy of close to 15% to 16%. So the vacancy level, even despite -- we normally have a large cushion in the cash flow to where the total vacancy at a portfolio level is 1.6%.

[Rajeev Jain, executive]

Because we get to know through...

[Sandeep Jain, executive]

Yes, the escrow receipts.

[Rajeev Jain, executive]

Escrow receipts, absolutely.

[Operator]

And the next question goes to Abhishek Murarka of HSBC.

[Abhishek Murarka, analyst]

Rajeev and team, congratulations for the quarter. So just one question on this NIM guidance. So you said another 30 bps of compression to go mostly due to an increase in cost of funds and pretty much unlikely that you'll see any kind of yield compression here?

[Sandeep Jain, executive]

Abhishek, yes, I think if you look at the overall interest rate curve, it's significantly volatile in recent times. This is based on our assessment of situation as of today. We believe cost of fund is heading northwards. Of course, as I said, volatility has remained in place for quite some time now. I think the bigger thing is replacement of old monies that we had borrowed for 2 years and 3 years at very, very low price. They are coming for maturity and renewals, as the renewal takes place for us and for the industry, the cost for us tends to rise. And I think a significant portion of them are coming from sort of between next quarter and probably early part of Q4.

[Rajeev Jain, executive]

So I think it will peak out by Q4. But clearly, second, third, and fourth quarter, we will see replacement as the largest driver.

[Sandeep Jain, executive]

In fact if you notice in the current quarter, the movement in cost of fund was quite marginal. But I think...

[Abhishek Murarka, analyst]

Exactly.

[Sandeep Jain, executive]

Cash momentum in Q3 probably.

[Abhishek Murarka, analyst]

Got it. And very unlikely that you would have space to increase yields from your -- in any of the segments?

[Rajeev Jain, executive]

Yes. We never diluted in our -- the answer is yes. Other than our variable businesses, variable businesses being 32%, 33% mortgages, that's one part through the commercial balance sheet, which is 7%. That's 40%. Another 5%, 6% is -- yes. So 46% of the balance sheet has variability, rest of the balance sheet. Of course, competitive activity may not allow us to. But just from a variable to fixed balance sheet component standpoint, 50% is fixed and 46% is variable.

But staying with the last point, I would say, and that's really where we have been continuing to invest in building or doing in our digital transformation, in omnipresence strategy. And as I said over the last 2 quarters, we have peaked out. So clearly, operating leverage will start to play through. It's playing through already for the last 2 quarters. It will start to play through, more so as we move from here. And there would be a moment when we'll further accelerate expansion. And as we -- so for the next 2 quarters, we do clearly see operating leverage to play a bigger role in mitigating the NII compression.

[Abhishek Murarka, analyst]

And Rajeev, in your OpEx, so that was my second question on OpEx, what is the extent of the discretionary element? So out of, let's say, quarterly INR 3,000 crores kind of amount, how much is discretionary, which you can run down apart from banking on operating leverage to drive down the cost ratios?

[Rajeev Jain, executive]

Look, we -- I keep saying to people we are a model company. If I don't want to spend the money, I don't want to spend the money. I mean, 45% is fixed, right? That's compensation, right? That's salaries. Rest, I can argue with you, 55 -- I mean, just theoretically, can I -- can we squeeze out -- and we did that, right, in pandemic. I want to make -- and so it's a philosophical point rather than how much can we squeeze point. We remain a growth company. So it's not like we got to go back to the pandemic days where we really worked hard on squeezing cost out. But we are a lot more optimal or optimizing cost more than we are in at this point in time. So is all I would just say, Abhishek.

[Abhishek Murarka, analyst]

Okay, sure. And just one quick question on the Pennant Technologies, if you can shed some light on how exactly it helps. What are the plans there?

[Rajeev Jain, executive]

Rakesh.

[Rakesh Bhatt, executive]

So relationship with Pennant actually goes all the way back. I was just mentioning that -- you would have read also that it's a strategic investment. Our relationship with Pennant Technologies goes a long way back in 2016, it began. And it has strengthened year-on-year. And we are at a stage wherein we are migrating our full core back-end loan management application current to Pennant Technologies. So being a core platform and our partnership being quite good and the founders running the company got well, there were a lot of dimensions, okay, which made it imperative for us, okay, to invest into Pennant Technologies.

As you understand, the scale at which Bajaj Finance operates, we required a very robust platform. A, our multiple group companies also use the platform, Bajaj Housing Finance uses it, the full end-to-end lending suite of Pennant Technologies and a couple of more companies are also planning to go.

So at a group level, although, it really made sense for us to do investment. And finally, it's -- we don't move technology investments on a financial basis, okay. It's more of a strategic basis, what we intend to do. With the owners and the founders, okay, having the free hand in running the company, and we're providing them the strategic directions and the tools which were created at Bajaj Finance and the playbooks at Bajaj Finance will help the company to move forward. That's essentially that.

[Rajeev Jain, executive]

Strategic for us, and it's strategic for them.

[Rakesh Bhatt, executive]

On that point, Sandeep, you are right.

[Rajeev Jain, executive]

Is the second order point that Rakesh was making. So it's strategic for both. It's not just strategic for us. Clearly, strategic to us as it becomes a core lending platform for us. We've taken our time. Core lending platforms need to be really solid, need to be really resilient for us to take the decision to move. So we have taken -- we moved product by product over a long period of time. I think that just to reemphasize the point. And two, we clearly intend to help them build a road map for them as a company to become from a what I would call a small-sized company to a medium-sized company and hopefully, someday a large-sized company so that we also create value for them and for us. So that's a clean objective.

[Operator]

And the next question goes to Kuntal Shah of Oaklane Capital Management.

[Kuntal Shah, analyst]

And my questions are two. So Rajeev, we have started investing upward of INR 200 crores in several companies, RBL, MobiKwik, today Pennant Technology. So I'm sure some of them would be strategic partnership, some would be growth and some would be learning cost, low-cost experiments. But given the 24% hurdle, what's your view and outlook? And more importantly, what is the quantum of investment we, as an investor can expect going ahead? And secondly, on mobile, can you share some statistics on the quantum of origination, failed journeys or drop-off rates, DAU/MAU churn, et cetera, anything you can share with us on the mobile side.

[Rajeev Jain, executive]

So MAU is around 21 million, that number, I know. Okay. We don't publish it. We can publish reels of data. It will confuse you guys. So out of 45 million net installed the MAUs are anywhere between 20 million, 21 million and that number is growing, okay? 90-day installed ratios -- rates are 76%, 77%, 78%.

[Rakesh Bhatt, executive]

Around 2 million daily active user.

[Rajeev Jain, executive]

Daily active user, as Rakesh is saying, it's around 2 million, 2.5 million. So -- and as the payment start to play through, we will see more adoptions.

On drop-offs, et cetera, Kuntal, what -- these are journeys. When I say journeys, the digital transformation. We are very clear that we run two companies now. We run an off-line world, and we run a digital twin. And I do now realize that why is it so hard to pull off in a company, a digital twin and a normal twin. So clearly, it's a journey. And since you raised the point, I'll make the point that the way you see today, the asset is going to go through a dramatic change in the next 9, 12 months' time.

I mean, we are off to a, what I would call a Phase 3 transformation of the entire asset. And it's not that you will see it in 9 months, you will see changes happen every quarter because when we built this asset in December '21, it was based on imagination. Now the asset is being built on data. Okay? So that's a fundamental shift. We had imagination about building the asset. Now we have a clear view on what leads to raise index. And I can go on and on, okay? So it's now being built on data. The entire Phase 3 infrastructure that has been created is based on hard customer experience data. Okay? So those are some 2, 3 points to you on.

Now on investments. One, we are very prudent about what we do. This is our -- the first investment that we made was MobiKwik. We learned a lot from them. We didn't know mobile technology. That investment principally, if all had gone well, would have made significant money for you as investors and for us as an investor. Someday, we clearly do believe still that there may be value -- that investors will value the business. So that's one part.

Second, was RBL and we remain invested. They are a strategic partner of ours. As a -- we have 3.5 million cards that we have helped create in our partnership, with a strategic partnership, and we've onboarded 5.5 million credit cards over a 7-year journey with them, plus minus, I think, I maybe see 2 to 3 lakh -- 4.8 million as Manish said, 4.8 million ever cards onboarded, and we have 3.5 million cards relationship with them. And as they transform the bank, hopefully, the investors would -- we as investors and you as further investors in us would realize value.

The third investment we made last year was Snapwork, that is a small investment. The fourth investment we made is Pennant Technologies. We have slotted our investments principally in 3 areas of application development on one side; second is product, and third is emerging data. One investment a year is really what we think we can consume, absorb or work with. So that's really how -- so the only thing I want to assure you we will remain very prudent in the way we make investments because we realize it's hard to make money, it's easy to spend it. And they are strategic in nature, and they go through a very rigorous process before being approved. So our investment case rationale remains reasonably high, and it's by design, does that answer your question?

[Kuntal Shah, analyst]

Yes. And just one last question. Can you care to comment on RPA and the impact on OpEx the way you visualize going ahead in next couple of years?

[Rajeev Jain, executive]

RPA? RPA, now people will -- okay. Anurag is saying, I'll answer. So let him answer.

[Anurag Jain, executive]

So Kuntal...

[Rajeev Jain, executive]

RPA.

[Anurag Jain, executive]

Yes, absolutely. So RPA are replacement to the APIs that we use. RPAs is a very short-term bridge that we use in case the API development takes time. We deploy RPAs. Once the API development gets completed, the RPAs gets in some cases. So our preference is to remain on APIs, which are far more scalable and far more configurable rather than RPAs, which continues to keep changing as the UI/UX undergo change. So our preference is to go towards the APIs than the RPA.

[Rajeev Jain, executive]

And on the second of the month, which I made earlier point on, because we bank 23 million installments, in general, between second and third, we see 200 million-odd API hits on those 2 days because people want to come and check whether they've got debited whether the statement of account of theirs got -- is reflecting that or not. So it's a highly scalable, highly resilient. We've never been down even on a single day in the last 2 years since we have that line.

[Atul Jain, executive]

If the reference of RPA was in respect to operating efficiency, we use it a bit somewhere in -- in our operations process. But okay, not at that kind of a scale, we'd like to invest into pure technology rather than RPA. So we...

[Rajeev Jain, executive]

Automate the full process.

[Atul Jain, executive]

Yes, automate the full process as a goal, and it's only in between bridge as Anurag is mentioning. So over a long term, we don't -- today itself, RPA doesn't contribute to operating efficiency in the scale at which you might be visualizing.

[Operator]

And the next question goes to Kunal Shah of Citigroup.

[Kunal Shah, analyst]

Yes. So firstly, with respect to the overall growth momentum the way you mentioned like first half has been really better. We are seeing almost like 17% year-to-date growth. And given the expansion of the investments which we have done, are we more confident that maybe compared to like 29%, 31% guidance, which we had given in the last quarter, we should be much more than that even not only in this particular year, but over the medium term, given that there is a fund raise also which is there?

[Rajeev Jain, executive]

We'll say a year at a time. So clearly, can I say, given the strong momentum in the first half of the year we are pretty confident of the year? The answer is yes. The long-term guidance that we provided, do we remain confident of delivering that? The answer is yes. Anything over and above that, Kunal, we are here to work hard to deliver, create value for shareholders' and to dominate financial services, that's one of our ambitions, right? So I mean, if you're doing well on the credit side, if operating leverage is playing through, we can continue to deliver the hurdle rates of ROA and ROE. And we have sufficient gap, anyway the answer is yes.

We -- just on a separate note, and I didn't make that point earlier when the question on leverage analysis was asked, we've seen tremendous amount of competitive activity. As part of the leverage analysis, that point also clearly came through that we used to have a 7.5% share of the personal loan market in India. And that remains at 7.2% even now. I mean, this is despite so much intense competitive activity between FY '20 and FY '23, we've seen less than 25 basis points reduction. And that is because we have tightened the screws because we run -- our ratios run at 20% of industry in terms of the operating performance. And so we do -- we remain reasonably excited about all our lines of businesses, and have market share goals for each one of them. And we are in the right place to ensure that we can leverage that.

[Kunal Shah, analyst]

Sure. And we never had the instances of inorganic opportunity earlier, but now...

[Rajeev Jain, executive]

I am losing you Kunal.

[Kunal Shah, analyst]

Even in terms of the -- no, we haven't had the instances of -- yes, can you hear me?

[Rajeev Jain, executive]

A little better, but earlier, I could not hear you at all.

[Kunal Shah, analyst]

Yes. So I was saying we never had the instance of inorganic opportunity, but now the product book has also diversified and we are getting into the newer segments. So still would we keep this stance of maybe growing everything organically or will still evaluate anything inorganically to achieve the scale or maybe to build the businesses?

[Rajeev Jain, executive]

In general, on the lending side of the business, purely organic. At the time, we have the long-term orientation. We think we at least feel that building lending businesses organically is a better way to go. So on the lending side of the business purely organic. The answer is -- that doesn't mean never say never, maybe someday, but at least not in the near term horizon.

[Operator]

And the next question, go to Shubhranshu Mishra of PhillipCapital.

[Shubhranshu Mishra, analyst]

So two quick questions. The first one is as and when the housing finance company gets listed, how do we look at the structure of the listing, how much would Bajaj Finserv own and how much would Bajaj Finance own that would be first. Second is that we have alluded to a market share gain of almost 4% to 5% in our LRS from 1.7% here. So if we can go segment-by-segment chalk-out, in which particular segments, we're going to gain market share, in the -- which is the 5-year rolling plan?

[Rajeev Jain, executive]

Data-dependent point is one. We would like to grow all lines of businesses, including B2B. If our market share, let's say, in B2B is 50% plus, we would grow that as well. Let me make that point. I earlier just made a point that in my market share -- if our market as a company in personal loans is 7.2% to 7.3%, we would like to grow that as well. So subject to data dependent being defined as if the credit is holding, you would grow the business. If credit is not holding, you would not grow the business because we are in a credit business.

All lines Shubhranshu remain in high growth. As you can see, even from the press release, the growth and the mix, largely you take even 3 years or 4 years has remained steady. Adjusted by plus/minus 1% or 2%. If you go to, let's say, in the presentation on portfolio mix, that would be -- I mean, you look at the growth rate for the second quarter, right? 2-wheeler, 3-wheeler, 63% because 10% of that growth is non-captive now. So -- if it was captive to captive, it would have been a 50% growth, 12-odd-percent growth is non-captive, so that's a new line of business.

If you go to panel 45, you see year-on-year growth, 39%, 29%, 37%, rural B2C we talked about, it's we who pulled back 38%, 38%, 46%, 28%. So there's tremendous opportunity in each one of these lines. The composition is another thing to look at because this is plus/minus the composition that gives us the hurdle rate of ROA and ROE. So if this shifts significantly, which is not expected to shift from a business model standpoint, this is really where the corridor is plus/minus 1% or 2%, so growth rates are strong across. Number one, composition has remained largely here for, I would say, 4 years plus/minus 1%, maximum 2%. And this is really what the compensation ought to be plus/minus 1%, and we just sell on.

[Sandeep Jain, executive]

I think, Shubhranshu, as we've always said, the divergent financial services model allows us to slowdown a particular business, probably escalate a particular business based on, as Rajeev says, data dependency. As you look at our 2-wheeler, 3-wheeler is showing very strong read on portfolio quality, 94.5% portfolio quality, we have never seen in that business.

[Rajeev Jain, executive]

Never.

[Sandeep Jain, executive]

That is now growing at 63%, in the same vein similar high-margin business like rural B2C. But the data is not allowing us to grow. We are growing at 17% on a YoY basis. I think...

[Rajeev Jain, executive]

12%,12%.

[Sandeep Jain, executive]

Yes. 12%.

[Rajeev Jain, executive]

In the second quarter.

[Sandeep Jain, executive]

So I think we do look at the business with data in mind in terms of incremental rate. Based on that, we push forward, we pull back depending on our stance of the business.

[Shubhranshu Mishra, analyst]

And the first question, the structure of Bajaj Finance listing, that was not...

[Rajeev Jain, executive]

Take that as well.

[Sandeep Jain, executive]

Listing of BFSL, I think Rajeev has called it out a couple of times, it's 8 quarters away from now. We have requested and as it has been put out in paper as well in some way. We would like to request for an extension if possible. However, if it doesn't come, then of course, we will work towards this, what the structure will be, how the listing will take place, et cetera, are something that are not known. It's too far at this point in time. I think strategy will evolve overtime on that business.

[Shubhranshu Mishra, analyst]

If I can just squeeze in one last question. What is the revenue of Pennant Technologies as well as Snapwork which is driven by Bajaj Finance today? And how does it look like 3 years from now?

[Rajeev Jain, executive]

Last year, when we acquired Snapwork turnover was INR 37 crores, this year it was INR 62 crores to INR 63 crores. Well run small business, but well run, builds mobile application for most financial services players in India. So -- and we're helping them shape the business, grow the company. Finance this year?

[Shubhranshu Mishra, analyst]

What's our continuation in both, that was my only question.

[Rajeev Jain, executive]

30%, when we bought it last year...

[Shubhranshu Mishra, analyst]

30% in each?

[Rajeev Jain, executive]

No, no. Snapwork, 35%.

[Sandeep Jain, executive]

And Pennant is also in 30%, 40%.

[Rajeev Jain, executive]

BFL and BHFL.

[Sandeep Jain, executive]

Yes.

[Rajeev Jain, executive]

Both BFL and BHFL put together another 30%, 35%. But they're now winning -- Pennant as a company is winning contracts with the largest of the guys now in India. So they are now clearly the lending platform to go to.

[Sandeep Jain, executive]

That's right. So for Snapwork like they're expanding international market. So this percentage is expected to go down. Our contribution to the overall revenue for Snapwork is expected to go down. And we see next 12-, 24-month period, the percentage will be in between the range of 20% to 25% for Snapwork. And as we've just invested in Pennant and they have plans to expand internationally and invest further on their road map as they take the product internationally and more deployment in the domestic markets.

[Atul Jain, executive]

Just to call out a word of caution, Pennant, we have signed a binding term sheet -- investment, yes. So as the investments are subject to final negotiation and so on and so forth that will take place of terms and conditions, shareholder agreement and so on and so forth. We expect to complete everything by 30 September -- 31 December.

[Operator]

The next question goes to Ashish Sharma of ENAM Asset Management.

[Ashish Sharma, analyst]

I'm not sure if it is repetitive. Rajeev, so just your comments on -- I mean, we've heard that regulator has been mentioning off-late being a little concerned on the growth on unsecured loans. I think in the press conference, they had clarified their concern on the growth part only. But what's your sense of the noise around the unsecured loans?

[Rajeev Jain, executive]

It's moderated growth. As we are now tracking, as I said earlier, we are tracking bureau data every month, it's moderate. I think there is reasonable moderation in terms of AUM and disbursement, not so much on count as yet. I think that's the only added point I would make. So in terms of value, there is moderation. In terms of year-on-year growth rate on AUM disbursement, growth is moderation. But on count there is yet to be full moderation. But as the new FLDG guidelines kick in, which have kicked in, what RBI announced 2 months ago, I think, should moderate that as well. I think it was Grade 7 and that should significantly moderate that number as well.

[Ashish Sharma, analyst]

And in case like what we are hearing in terms of preventive action, the raising of risk weight limits, does that even -- I mean, there would be some impact on the profitability. But overall, it doesn't sort of change anything, I mean, from a overall perspective...

[Rajeev Jain, executive]

As Sandeep said earlier, that we have levers there are what we call scale builders in our business and profit builders in our business. And they're not 1 or 2, there are multiple in each line. We just orchestrate. That's really what we continue to do on an ongoing basis. They are clearly -- and we have demonstrated that I would say, to be modest successfully. Over time, that we don't push the what should not be pushed, and we pull what needs to be pulled. So that's really what we intend to continue doing.

[Ashish Sharma, analyst]

Perfect. And just lastly on BHFL. So we will be raising INR 10,000 crores. Do we even infuse over the next 12 to 24 months in BHFL. I mean, anything above what we have already invested?

[Rajeev Jain, executive]

Yes. The answer is yes. We like to run businesses on low leverage ratios. Build a good quality business but with low leverage, so even a mortgage business, which today, if you take the second quarter, is at 22 basis points -- GNPA is 22 basis points?

[Sandeep Jain, executive]

24.

[Rajeev Jain, executive]

24 basis points and 9 basis points, we don't go by capital adequacy. The rightful metric is leverage. So our internal hurdle rate is 7x leverage, even for a mortgage business, 6.5% to 7%, as Atul was saying.

[Atul Jain, executive]

6.5.

[Rajeev Jain, executive]

We are at 6.5. So 7x leverage is what we have internally defined to be the rightful leverage ratio even for a mortgage kind of business. So we would be -- are we committed to continue to invest in the business to build it on, answer is, yes.

[Operator]

Thank you. That's all the questions that we have time for today. I would now like to turn the conference back to Mr. Iyer for any closing comments.

[Subramanian Iyer, analyst]

Thank you, Rajeev, Sandeep, Atul, Anup, Rakesh and Bajaj Finance team for your time and insights. I wish you all the very best. Thanks, everyone else for attending.

[Rajeev Jain, executive]

Thank you for patient hearing. Thank you. Good night.

[Sandeep Jain, executive]

Thank you. Bye-bye.

[Operator]

Thank you. On behalf of Morgan Stanley, that concludes this conference, thank you for joining us, and you may disconnect your lines.