Capri Global Capital Ltd
NSE:CGCL
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Capri Global Capital Ltd
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Ladies and gentlemen, good day, and welcome to Capri Global Capital Limited Q4 FY '22 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravikant Bhat from Capri Global Limited. Thank you, and over to you, sir.
Hi, and good afternoon, everyone. Welcome to the Capri Q4 FY '22 Results Call. Before we begin with the opening comments by MD, Mr. Rajesh Sharma, I will read out a brief disclaimer.
Certain statements in the call contain words or phases that are forward-looking statements, and all these forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those contemplated by the forward-looking statements. Any opinion, estimate or projection herein constitutes a judgment as of the date of this call. And therefore, there can be no assurance that future results or events will be consistent with any such opinion, estimate or projection.
The full disclaimer can be accessed on the Slide 2 of our Q4 FY '22 investor deck.
With that, I now hand over the call to our MD, Mr. Rajesh Sharma, to present his opening comments.
Good afternoon, friends, and happy welcome to Capri Global's Q4 FY '22 Earnings Call. It is a pleasure to once again discuss our quarterly earnings performance with you all.
We announced our audited consolidated results for Q4 and FY '22 on Saturday, 22nd May 2022. I hope you had an opportunity to go through our investor deck. In my opening comments, I shall focus on 3 aspects: business and earnings performance, asset quality and credit cost and our growth guidance.
During Q4 FY '22, the operating environment was largely smooth with hardly any disruption during the short-lived third COVID-19 wave. On business side, we delivered a 37% year-on-year growth in AUM, including the INR 1.2 billion we booked under co-lending, which is a new initiative for us. This compares with our 20% year-on-year target we thought we would deliver in FY '22 while maintaining a 22% to 27% medium-term CAGR target. Clearly, the performance has been much above our guided path.
Performance across all verticals was strong, including in Construction Finance where we consciously pegged growth to the retail AUM performance to keep its shares under 20% of consolidated AUM.
The co-lending mechanism was activated for MSME. We achieved INR 1.15 billion AUM under this mechanism, the first full quarter of operations. Although we are not sharing an explicit target yet for this AUM, it would be fair to consider INR 1 billion to INR 1.5 billion as base quarterly momentum for the MSME product under co-lending.
Co-lending for Affordable Housing has been activated in Q1 FY '23 for which we tied up with the State Bank of India in March '22. We are gearing up for the formal launch of 20 gold loan branches in June. We shared in Q3 FY '22 earnings call we have some ambitious plan here with AUM target of INR 80 billion, an exclusive network of 1,500 branches in the 5 years by 2028. We aim to open 100 gold loan branches in H1 FY '23. Top and middle range leadership has already been onboarded and lower level recruitments are on fast track.
On disbursals, the growth for Q4 FY '22 [ appears ] EBIT 12% year-on-year. However, it should be noted that Q4 FY '21 disbursals were also an outcome of pent-up demand following normalization for second lockdown. In fact, we did 68% of FY '21 disbursal in Q4 '21 alone. Hence, a better comparison would be the full year disbursal performance, which was INR 28.4 billion over INR 15 billion in FY '21. This signifies a 90% year-on-year growth.
Our car loan distribution business had first full year of operations. The vertical originated INR 17.4 billion in new car loan origination for our partner banks. The business performance progressively improved during the year, peaking at INR 7.8 billion in Q4 FY '22. We are confident of doing upward of INR 30 billion in car loan origination in FY '23. The vertical contributed INR 467 million in gross fee income as a profitable since Q2 FY '22.
I shall now briefly comment on earnings. Our [ stressed ] NIM [indiscernible], resilience and expansion in 9 months FY '22 exhibited weakness in Q4 '22. This is after adjusting for some one-off effect. The charts on Slide 14 are self-explanatory. We had held back rate increases. However, after the specific RBI rate action earlier this month and quick general acceptance of a tighter rate scenario, we are in the process of resetting yields on all the loans that were such reset are due or overdue. There is a meaningful portfolio that can be repriced in both Affordable Housing and MSME segment. We expect to stabilize and effect a trend reversal on NIMs going ahead.
We have already made a beginning in Affordable Housing loan, where incremental yields were better in Q4 FY '22. Please refer to Slide 13 in this regard.
Our expansion, both people and network, is reflected in the inflated operating costs as well as the bumped up cost ratio as listed in Slide 15. We have had the strongest expansion since FY '19, some of it front loaded.
Slide 29 shows our head count increase, which is up by 1.7x year-on-year basis. We also added 32 branches during the year. Our business model places network and people on the center of growth plans and are essential for our business. To that extent, we shall still cause an expansion. We are confident some of the course corrections, I mean, that I discussed initially eventually match our cost ratio lower.
On asset quality, I would say we are satisfied overall, although the quarter may be somewhat showing the higher credit cost and delinquency.
The elevated credit costs in absolute terms, our Stage 3 assets have shown a decline. Collection efficiency, especially in MSME, which was lagging, has caught up strongly to touch 100%. Other parameters, like [ CBR ], are exhibiting improvement and are closer to pre-pandemic level. Qualitatively, we can say we are more optimistic about asset quality turning out better than year before.
The write-off, too, have been higher than in any year after FY '16, in other words, elevated write-offs are much there for us. Cumulatively, we wrote off INR 413 million in FY '22, of which 25% margin in Construction Finance. It was purely technical in nature and shall be fully recovered. The rest in retail portfolio had a sticky element and has been prudently written off.
Despite the spreads and costs moving adversely, we have delivered a good performance at operating profit level, which increased 84% year-on-year in Q4 FY '22 and 28% year-on-year in FY '22. Our net profit registered a 54% year-on-year growth in Q4 FY '22 and healthy 16% year-on-year growth in FY '23.
Finally, on the outlook ahead, I would consider optimist on the growth given. We are much going for us a strong retail sales team that can deliver both on- and off-balance sheet growth and a healthy EBITDA to wholesale lending. We consider 25% year-on-year AUM growth achieved in FY '23.
On our NIM, we expect to report a much better performance as compared to Q4 FY '22. In other words, Q4 '22 would be considered a bottoming out level for our NIM. Certain line items like credit costs were one-off. So there was no sustained trend over there. Such items are simply was to better level going high. Fee contribution from the car-owned distribution business is yet to achieve maturity, and hence, shall be a growth contributor to the net income. So overall, our earnings should exhibit a healthy growth trend.
With that, I conclude my opening remarks. We shall now take questions. Thank you.
[Operator Instructions] Our first question is from the line of Ashwin Agarwal with Akash Ganga Investments Pvt Ltd.
First of all, congratulations for those results. So my question was that due to rising interest rates, so how do you see the borrowing costs moving forward as the interest rates are going to rise further? And how should the same be passed on to the borrowers?
So our majority of portfolio under MSME and Affordable Housing are semi-fixed level. And there, it is possible to pass on the hike to the customer. And our customers of that no-income-proof category where the smaller customers are there, they have more care for the availability of funds and the cost of funds.
So passing on 30 to 40 basis to the customer will not be difficult. So I think that cost of fund, whatever increases, we are going to have our ALCO meeting during the month end. By that time, we'll be able to take the effect of all the bank and similar hikes. And on that basis, a formula, which has been given by the RBI. We'll pass on the entire cost to our customers.
So the spreads would be largely be maintained in 6.3% to 6.5% kind of range only? More ore less the...
Yes.
Okay. So that range.
Yes. Spread we'll be able to maintain.
And my next question also that when you see our growth targets, major contributors are going to come from the Gold and MSMEs. Like how do you see the MSME sector like shaping up in terms of growth?
So MSME segment is going to be a key contributor for us. I think going forward, on a consolidated basis, MSME segment will continue to remain the biggest contributor. Currently, the AUM is about 50%. And with the gold loan inclusion, it may come down to about 35%. But still it is going to be the majority of it.
[Operator Instructions] Our next question is from the line of Naman Bhansali with Perpetuity Ventures LLP.
My first question is on the cost-to-income ratio, which has been slightly inching upwards. And is it attributed majorly to branch expansion? And what sort of guidance do we have here for FY '23, given that we'll continue to add new branches?
So I would like to say that our cost-to-income ratio also comprises the cost of car loan segment, where almost 400 employees have. So in the current context, cost erosion would be a more robust way of tracking our cost efficiency. Please note that our employee and nonemployee operating expenses now include the OpEx incurred on our car loan distribution team, which is almost 16% of our head count in all our payrolls. The AUM -- this creates a onetime pre-generating AUM and not a spread generating AUM that sits on our balance sheet.
Hence, while looking at the quarterly cost by every AUM ratio, one should include the car loan AUM in the denominator. This would deflate the cost average AUM ratio by 50, 60 basis points.
So if you look at our average AUM, OpEx will decline by 50, 60 basis that way. I think while we have given a 40% cost-to-income ratio guidance in FY '22, I think we should be able to keep our cost-to-income ratio in the range about 40%.
Okay. And my second question, is that -- could you please talk a bit on the Housing Finance business? Like has the things improved and how have they increased? And anything on how we see that on the business environment side?
So if you look at our Housing business, AUM is growing almost 51% during this year. And now we increased -- we already increased about 32 branches during the year. Our expansion is continuing. And the funds in the Housing Finance company are available from NHB at about 4%. So there's a big cushion available in the margins because of the low-cost fund availability from the NHB.
And demand is there. We see on the ground the business is growing well. Next year also we'll continue with the pace of 30%-plus onwards in this segment. So because of low-cost fund, because of the demand, because of the increase in the branch, I think growth will be there and margin will be better.
[Operator Instructions] Next question is from the line of Amresh Kumar with Geosphere Capital.
I wanted to ask you something on your gold loan business. In the past, you have explained that this is a very good opportunity. And there are -- this is a very good business. I mean you get high single digits to double-digit margins and then there is hardly any cost of delinquency. So this is indeed a good business. But in the past, can you explain why there has been such -- only few players in this business?
I will give you another observation of mine. The State Bank of India, which increased its gold loan business by about 5x in last 2, 3 years, now it has also gone slow. Last 2, 3 quarters, I'm not saying it's even growing that fast. So just can you explain what is stopping everyone else to come into this? Just your observation.
So gold loan business requires a deep penetration and large number of branches. Otherwise, a very high operating cost business in the segment that NBFCs do operate.
The customer of the banks are different than NBFC customers are. An entirely different bank would lend about 9% rate of interest, whereas NBFC do lend in the range of about 15% to 20%. So there is a distinctly different customer segment.
To operate the gold loan segment is a high operating business, as I said, and will require a large number of branch networks. If you see our plan, we're also planning to open the 1,500 branches. To deeply penetrate, your branches has to be in the place -- in the ground floor level where the rentals are high. You have to put up the storeroom, take the insurance, keep the very well-trained gold valuer and then we will do the business.
So it is a business, which requires a particular size. Without that, this business will not be able to be profitable. Hence, any NBFC who either plans for a deep branch network, 1,000 plus, it will not turn out to be profitable. And this could be one detriment.
Barring that, I think there is a good appetite more in the Northwest. South is already well covered by Muthoot, Manappuram and other players. But North would still have a lot of scope. If you see other competition in the gold loan are there also, new expansion -- 80% expansion is happening in Northwest.
We had engaged the Boston Consulting Group and a couple of credit bureaus to get the data. And I think this business still has a lot of scope. And what we are talking is only creating a book of next INR 5,000 crores to INR 8,000 crores, which is in NIM context. And overall, looking at the size of INR 3 lakh crore is still very small.
So while it in overall context, it is doable, but it is going to be profitable for us. And it will give us a cross-sell opportunity. Now our customer segment is the same, the kind of customer we deal in MSME, Housing Finance same and same customer will be in the gold loan. So this is also going to help in the cross-sell as well.
So my question on this would be a bank giving gold loan at 9%, 10%, and NBFC like you a giving gold loan at 15%, 16%. And I understand that banks have higher cost of operations and all. So do you think at 10% them giving their ROA in this business or ROE in this business would be similar to yours?
I have not tried what the bank ROE, but I would say a bank deal with the customer who are their existing customers whose data is available to them. And we have seen just value the gold, take the KYC and give the money in the same within 10 minutes. Whereas the bank take much longer time. So the customer segment is different. Now what will be the bank's ROE on this, I have not really cracked.
Okay. And sir, second question is on your asset quality. In the last quarter, did it vary from what you had expected at the beginning of the quarter or was it in line with your expectations? And what do you expect now for next quarter or 2 where your asset quality would be in terms of new stress formation?
So in the last quarter, we have seen the collection trend of a particular segment of the customer. And based on the feedback by our collection team and their track record, we have chosen to write off those accounts where we estimated that money is not going to come and it is better to clean up rather than continuing those accounts.
While technically, the collection effort reporting to civil and the recovery efforts by [ Section 113 ], other measures will continue. But as a prudent measure to clean up the balance sheet of such accounts, we have decided to write off those accounts.
And if you see our write-off, which is about, at the consolidated level, it is about INR 22 crores write-off we have done. And similarly, we have taken additional provision also. So that has resulted us in a higher PCR and strengthened the balance sheet.
Going forward, this is a one-off. This is not going to be repeated. And we feel the coming year our delinquency will be lower. Our GNPA level will be lower. If you see the trend in delinquency trend also, our delinquency trend is showing healthy, GNPA has come down, net NPA has come down. So GNPA has come down as compared to quarter [ 2.99 ], it has come down to 3.4 [indiscernible] at a consolidated level. If you talk about Housing Finance company, it has come down to 1.5%. And if you talk about CGCL, where the GNPA has come down from 3.5% to 2.7%. So basically, the GNPA has come down.
Going forward also, our collection efficiency, as I said, it is nearly pre-COVID level in Housing Finance segment, so it is almost crossing about 99%.
So collection efficiency is good. [indiscernible] has taken place. So in future, we don't see any trend coming off, which will be surprises.
Got it. So I assume that this was your cleanup quarter, the last quarter. So my last question would be, sir, on the progress of your core lending business with SBI. I assume this is very exciting and there will be the opportunity for you. So can you just expand a little bit more on this. Where have you -- where have we reached in last 1 quarter? And where we are right now? And where are you seeing this going forward in next few quarters? Any guidance, any kind of color would be very good for us.
Currently, co-lending happens pretty manually because all PSU banks follow a very strong system of technology, firewalls. They have given to some vendor where technology module will be developed, where we will put up the firewall in our system and that, too, some intervening system will go -- sit in their system, and they will approve or decline based on their underwriting parameters. And that will happen online.
Currently, all is happening is manual. With that, also, we are able to achieve in the last quarter INR 1.15 billion co-lending. And with this pace, we're hopeful to do about INR 6 billion co-lending in the next years minimum. I think this is a very conservative target. Hoping that the bank technology platform will be built in next 3 to 4 months, then this volume will take off.
Here the advantage is 80% money is going to be given by the bank, 20% is by us. And that 20% also indirectly we get funding. So our ability to leverage will become almost 25x, and this can be a real game changer.
Another aspect this year. Every year, we see about 10% to 12% of foreclosure and those customers goes to the lower rate of interest for other NBFC or preferably with the bank. And those customers are our best screened portfolio. With the co-lending, we will be able to hold those customers with us rather they leave us, and that will bring a big change in our foreclosure trend. If you look at the last year, last year is almost INR 600 crore plus amount of customers we have lost under foreclosure. Their income has gone for the subsequent years.
And if you are able to retain even 60%, 70% of that under the co-lending, this is going to make our profitability better. So under the co-lending arrangement, we are -- any customer count for foreclosure, we lose the rate and shift to the co-lending because in Housing Finance, our co-lending tie-up is at about 6.8% and our MSME pool lending tie-up is about 8.5%.
So customer would be given a loan at 14%, wanted some -- because after 12 months record or some other programs, some banks or some NBFCs or other bank is willing to give a lower rate at 11% or 10.5% or 10%. Under the co-lending, we'll be able to retain by offering the lower rate of interest. And by the major chunk of the customer, best of the customers who leave us we'll be able to retain, this is going to significantly change our income. Those customers, we can do cross-sell also later.
So I think co-lending is going to be a big game changer for us. And we are hoping that technology will be built very soon. Banks already given that mandate through their open tender system and when other matters with. And we hope that next 3 to 4 months, that should be in place.
But without that also, on a consolidated basis, we'll be able to achieve about INR 600 crores under the co-lending.
[Operator Instructions] Our next question is from the line of Dr. Ajit Kaushal, an investor.
Hello? Hello?
Yes, you're audible.
Yes. This is Dr. Ajit Kaushal, I'm a professor of law. First of all, I would like to congratulate you for a very good result once again. And under your leadership, the company is growing well.
I would like to ask a question, which really concerns me as a shareholder. You are already a Managing Director and now you are a Chief Financial Officer of the company as well. So what we imagine would you like to be why you're making such kind of changes? Do you see -- do you foresee to acquire another CFO in the future if he could work full time in the company?
So CFO is a KMP position, which cannot be kept vacant for more than 6 months, and that is the reason to feel that the Board has given the additional charge to me, especially if it cannot be kept open for more than 6 months. While we were looking out for a CFO, we had highlighted somebody. And because of some reason, he couldn't join us and that has delayed the process.
So search is on. We hope that next 2, 3 months, we should be able to onboard the CFO. And we've already given that mandate to the large search firm. So it should be filled very soon.
Okay. So sir, we have firm belief on your leaders. And I'm sure that Capri Global is going to stay a very good example as far as the corporate governance is concerned.
My second question is, sir, that your life would be as our auditor. And now in case of Deloitte, another auditor has come. Deloitte has very good reputation in the market. I know, as a shareholder, that one would be, I mean, the frame of mind, what were the circumstances and reason Deloitte was changed? That's maybe the reason behind it.
So last year, Reserve Bank of India has come out with a circular that any auditor who is continuing in NBFC cannot keep more than 8 number of audits, whereby Deloitte was with us in the fourth year and they have to limit that -- limit under that circular.
So we have to choose another auditor. The current auditor, M M Nissim & Co has been selected very carefully by talking to many. And M M Nissim & Co also happened to be auditor of HDFC Bank, [indiscernible] Prime and many other reputable large corporates.
So based on their strength, we have selected them. And I think they are equally good as compared to Deloitte also. So they're a very high-quality audit firm. And Deloitte has to go because of the limitation RBI has put into them, not that we had asked them to go.
[Operator Instructions] Our next question is from the line of [ Vinit Agrawal ] with Edelweiss Broking Ltd.
Congratulations on a good set of numbers. Just one question. How much of your restructured books are still under moratorium? And what are the collection efficiency under the relationships?
As far as our MSME is concerned, we have about -- NBFC is concerned, our MSME book as NBFC is concerned, we have about 3.3% book still under restructuring. And in NBFC, the moratorium period is over. However, Housing Finance is still continuing.
And how is the collect -- yes, sorry.
So about INR 13 crores, 14 lakhs worth of still in the Housing Finance. Moratorium is continuing.
And how is the collection efficiency there in the restructuring books?
Restructuring book collection efficiencies is slightly lower than the normal pool. It is about 80%, but collection efforts are going on. And all of these are secured.
So the moment money doesn't come, they fall in the NPA category. And there, we are able to initiate the [ surfacing ] action and start the recovery. So anything which go in [ surfacing ], we are able to recover the amount within 9 months' time. And so I don't think it is any major concern on that side being amount is also small. And the moment it becomes NPA, it entitles us to take over their secured effect under surfacing required amount.
[Operator Instructions] As there are no further questions, I would like to hand the conference over to the management for closing remarks.
Yes. Thank you all for joining the call. So as I said, we will continue to grow on the path of our strategy of lending in the secured segment, where banks are not capturing and selling to those customers, be it MSME, be it Affordable Housing and now be it the gold loan. The same kind of customer in the common geography we'll continue to operate and I think it is a business, which requires the ground local understanding, have entry barriers. Having this business is more than about 9 years, we are quite confident to grow about 25% for next 4, 5 years. And we are -- as a promoter, we are committed to infuse more as and when needed by the write issue or any other mode. So we are committed to this business.
And we see there's a golden opportunity because of the core lending, where our ROE will be better because once the co-lending take off, we don't require much of capital. And this can be a complete change in the business.
Our new car loan origination business, where we don't provide any capital, but use our banking relationship leverage and our branch network leverage. Next year, we continue to -- we'll continue to do about INR 3,000 crores of average new car organization. That means almost INR 75 crore worth of fee income we'll be able to generate and it will be a very good profitability contributor.
So collectively, looking at co-lending profit, looking at their profit from new car loan vertical should improve our profitability. Although on the gold loan branches next year, we'll be spending money and gold loan banking will take about 15 to 18 months to deliver profit. They will remain under initially the process of setup and delivering some losses. But in 18 months onwards, they will become profitable. But the profit generated from car loan, co-lending and then the high AUM growth, I think should be able to take care of it. So overall, we are quite optimistic for the next year with all these positive developments. Thank you. Thank you so much.
Thank you. On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.