Fino Payments Bank Ltd
NSE:FINOPB
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Fino Payments Bank Ltd
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Good day, ladies and gentlemen. Welcome to the Fino Payments Bank Limited Q1 FY '23 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. Rajat Gupta from Go India Advisors. Thank you, and over to you, sir.
Yes. Thank you, Lizan. Good afternoon, everybody, and welcome to Fino Payments Bank earnings call to discuss the Q1 FY '23 results. We have on the call with us today, Mr. Rishi Gupta, Managing Director and Chief Executive Officer; Mr. Ketan Merchant, Chief Financial Officer; and Mr. Sayantan Mitra from the Investor Relations team.
We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risk that the company faces.
We now request Mr. Rishi Gupta to take us through the company's business outlook and financial highlights, subsequent to which, we will open the floor for Q&A. Thank you, and over to you, sir.
Thank you, Rajat. Good afternoon, ladies and gentlemen, and thank you for joining us today for our earnings call.
Fino's business model was conceptualized keeping in mind the problems of a common man who doesn't have easy access to a neighborhood bank, who is unable to bank in normal banking hours and have many other constraints. Our vision was to provide all-inclusive fintech growth to this set of people by making them not only comfortable with organized banking but getting them to move on to a digital banking. Over the years, we created relevant products to service those customers. Our products like domestic money transfer, which is a remittance product, micro ATM and AEPS, which are cash withdrawal products, makes banking easily accessible to the lower set of population and offers them differentiated services. These are normal banking products, which are there for everybody's use on a daily basis.
The growth we saw in this model gave us the confidence that this business model is sustainable and scalable. This is also evident from the strong growth we have seen since the last 5 years. Our merchant base has grown by 11x. Our 4-year revenue CAGR till FY '22 was nearly 40%, and have been profitable for more than half the time of our bank. While Ketan will discuss the quarterly numbers in detail, I would like to take this opportunity to mention a few highlights for this quarter.
We have delivered a very strong revenue growth in quarter 1, which is also sequentially higher than quarter 4, a seasonally strong quarter for us. This is the first time our quarter 1 has been higher than quarter 4 in so many years. Our PAT grew over 3x in this quarter, and this is despite the investments which are ongoing in the digital business. We have achieved an all-time high of throughput of more than INR 60,000 crores, of which nearly INR 50,000-plus crores were on non-digital side. This is also the first for us. Our digital impetus continues and for the quarter 1 FY '23, our digital constitutes nearly 16% of our total throughput. Our strong focus on customer engagement is showing results. Growth in our mature and higher-margin products is significantly high, as you can see on the CASA side. Our product mix is evolving and moving towards high-growth and higher-margin products like CASA and CMS, which now constitute over 20% of our revenues.
Our ability to cross-sell is getting standard substantially so that in FINO 2.0, we can make cross-sell a sustainable part of our growth story. Our focus has always been on profitable growth and being very competitive in our offerings. What we now have is a very strong business with large physical presence and diversified income streams. We are future-ready and our digital investments are underway, and this product will be rolled out in staggered manner over the next 2 to 3 quarters.
There is a still significant headroom for growth in FINO 1.0, which is our core business across products expected to grow at a CAGR of 25%, around that figure. But what really excites us is our next phase of growth, our digital initiatives, which will form FINO 2.0. This unique combination of physical and digital will elongate a secular growth period. FINO 2.0 is a natural evolution in the customer lifecycle journey and will enable our existing customers to move to the fintech value curve. My aim in long run is to take our customers from around INR 400 to INR 500 right now to INR 1,000 through our omnichannel presence and that should -- shall cater to the profitability and ROE targets, which we have over the medium-term period. At the same time, our [ digital start ] will help us target millennials, a new user growth, which will provide us with more diversified customer base and will enhance our product offerings.
We believe that we have a strong strategy positioning in fintech space in India on [ around ] the 3 key factors: our asset-light business model; a diversified product offering with the combination of higher volumes; and a higher margin product and having well-invested technology stack, which gives us a unique edge by making us future ready for our next phase of growth.
Before I hand it over to Ketan on detailed update, I would like to mention following 3 key aspects emerging for this quarter from a strategic direction perspective. Our annuity income, which is basically our CASA subscription, which builds predictability to our model, has increased [ 4.8x ] on a year-on-year basis. Our core product of growth, CMS, has increased more than 2x on a year-on-year basis. Digital base has been built for our forthright cross-selling in FY '23, '24 onwards.
With this, I would like to hand over to Ketan for his comments on our financial performance.
Thank you, Rishi. Good afternoon, ladies and gentlemen. I hope you've seen our presentation, which has been already uploaded. Over the next 10-odd minutes, I'll briefly talk about the performance in this quarter and also give a strategic direction, how this quarter dovetails into a long-term plan, which we are doing.
To begin with, as Rishi mentioned in his comments, we delivered a strong revenue growth sequentially as well. To resonate again what Rishi said, if you go to Slide #12 of our invested deck, it actually clearly shows the trend for the past couple of years and how this momentum of quarter 1 stands out to be the best over the years. Our Q1 revenue were at INR 289 crores, a Y-o-Y increase of 40%. Our Q1 throughput at INR 60,784 crores has increased by 47% Y-o-Y. Again, this is the first quarter where we have had a nondigital throughput in excess of INR 50,000 crores.
Coming to profitability, on a Y-o-Y basis, our EBITDA has more than doubled to INR 24 crores, and we delivered a quarterly PAT of INR 10.1 crores, a growth of 3x or 3.3x. This, we believe, is a remarkable achievement for a young company like us because we are still in the client acquisition phase and in this new phase and monetization is yet to come. Before, I cover each of the business segments briefly, I intend to throw some light on the operational highlights.
As Rishi mentioned, we are guiding you about our digital journey as part of FINO 2.0. This is going to be a medium-term investment before business starts accruing on this new channel. But when we make this statement, what essentially it means? You would all agree that customer acquisition rates for Fino are on meteoric rise every quarter. This is generating healthy subscription and now on annuity income as well. But is this subscription income the only potential for the product? Digital journey as part of FINO 2.0 is the answer to this.
Let me attempt to substantiate this to you with some interesting data points emerging from India's digitization story. Our overall digital throughput has grown in Q1 FY '23 by 285% Y-o-Y. But more interestingly, it is the real Bharat, which is standing out in this journey -- on this FINO 2.0 journey. When I'm saying it's real Bharat, it is about the states wherein the digitization journey for us has been taking an uptick. In FY '22, all senior bank account holders from Bihar transferred INR 28 billion digitally. The highest average value of digital payments per unique customer came in from Pondicherry followed by Telangana, while most of the number of transactions per unique customers were in Telangana followed by Andhra Pradesh. None of the states having major metro cities like Maharashtra, Karnataka, Delhi, Tamil Nadu and other figured in the list. This just validates what I started off with. Basis of our investments towards digital in 2.0 with more use cases on the platform, we are confident we'll be able to do more with these customers with the product suite, which we are planning to come on the digital as well.
Indication of increase in average deposit balances and average spends on alternate channel like debit cards are also very strong indicators for us in terms of customer loyalty. In fact, the average debit card spends in Q1 FY '23 is in a knocking distance of INR 3,000 per transaction. This is a phenomenal growth considering the payment bank offering. It is not only about digital. We mentioned the thought that distribution network continues to be a core strength for us. Our merchant base or distribution network continues to grow fast. The total merchant count has increased by 58% Y-o-Y and now our distribution point stands at 11.4 lakhs.
Before I cover each of the business segments, I would also like to talk about digital investments. The investments, which we are making to build our digital stack has started showing initial results. We have seen, and Rishi earlier mentioned as well, our digital throughput is now contributing 16% of the total throughput. Now it's about how do we ensure in FY '23 and '24, the cross-selling and upselling on these digital products.
If I go to customer-wise things, let me start off with growth products, as Rishi had mentioned, CASA. We opened 6.2 lakh CASA accounts during the quarter. If we consider the footfall of offers transactions generated by our remittance, micro ATM and other AEPS and other transaction business, the account opening will translate into a footfall conversion ratio of 2.3%. That is the conversion ratio. When the transaction business or the other banking customers come and transact on our merchant points, 2.3% of those are converted into our account. Many customers transact more than once in our ecosystem and the conversion ratio will further improve with more customers, and that is a strategy which we are working on.
The account opening is the genesis of our customer ownership, which leads to a tremendous annuity income potential and also forms the base of our digital initiative. Remaining on the annuity income or mentioning about that, earlier, Rishi also mentioned our renewals focus, renewal of subscription. And we've grown our renewal income by 4.7x on a Y-o-Y basis and also 26% on a sequential basis. As we further build on more use cases, this will also start generating various transaction-based fee income for us as well. All of this has been our key focus area as it builds customer stickiness as seen in our debit card spends, which has increased from INR 835 crores to INR 1,521 crores and 82% growth on a year-on-year basis.
Coming to our second growth product, which is CMS, the B2B business, that is also growing very strongly and continues to be a growth driver. The CMS ecosystem has substantially increased. Our strategy, as I mentioned in the earlier call, is also to diversify the partners or to diversify the industry in which we are giving CMS services. Our partners are no longer only financial services and NBFC and MFI, we have new partners who are cab aggregators, OTT platforms, e-commerce players and many such customers. The data point out here is the throughput share from financial services partners, which was at 93% in Q1 FY '22 is now in Q1 FY '23 at 60%. Diversification of income in this B2B segment is key strategy of us, and we are achieving it also.
Today, we have a large client base of 152 clients, which was at 131 a quarter back. On a Y-o-Y basis, the revenue has increased by 1.6x to INR 21 crores. There is a strong potential of cash digitization in India, and this segment will continue to see the growth. Whilst I'm talking about the growth, I should also mention, and this is again something which we've been mentioning in earlier calls as well, margins in certain cases are expected to moderate and are indeed moderating. In CMS, margins are moderating and still above 40%. But volume growth and diversified industry strategy makes us confident for growth and profitability here.
As shown in Slide 13, CASA and CMS, our growth products and highest margin products have taken higher share of our revenue pie. In FY '21, the share in the revenue pie for these 2 products was at 12%, and now it is at 21%. And our growth strategy continues -- that CASA and CMS, our customer acquisitions stream will continue in line with our strategic plans.
Going on to the next customer segment, micro ATM and AEPS, the transaction business or the legacy products, which we say. What we've done is based on the market feedback, we started showing these 2 segments separately. So let me just first start off with AEPS. AEPS constitutes -- or the market size of AEPS is 5x that of the market size of MATM, and for us, has shown growth on all parameters. Industry on a Y-o-Y basis for AEPS has grown by 28%, and we have grown by 40%. Here again, margins, as we had given earlier guidance, are moderating as our share of open banking and AEPS has increased from 26% to 40% on our own AEPS channel. And our own AEPS channel has grown by 10% and open banking share has gone up from 26% to 40%.
Coming to micro ATM. Micro ATM, this business is seeing some headwinds, and we continue to be a dominant player out there. It is important segment as it serves entry point for a new customer. It is about the footfall conversion, which we had mentioned earlier. Remittance, AEPS and micro ATM continues to be driving footfall, the 2.3% conversion, which I had earlier mentioned as well. So that is our strategy. Competition intensity in this segment is high and margins are again moderating. And that's why the number of micro ATMs have tripled in last 2 years, but the growth is missing over the last 2 to 3 quarters. Our strategy out here, as I earlier mentioned, is to continue to focus on this segment from a conversion perspective and a footfall, as also to maintain margin and not go on fierce price competition the way it is being seen in the industry.
Coming to the frontward part of our business, which is remittance, post COVID, the growth is stabilizing. On a Y-o-Y basis, we have seen a growth of 67%. So on a sequential basis, we've seen a growth of 3%. For remittance, it is a critical part. Again, as we mentioned it for the micro ATM, it is the first entry point, while it's a low-margin product, but it essentially gives us access to the customer base and helps us to convert. We have strong presence in states where remittance are high like Gujarat, Kerala and UP and Bihar.
Amongst the business momentum continuing, I also want to put following points on the table. I have spoken about margins. Margins currently, whilst moderated from earlier quarter are higher than -- still over 30%. This is a function of our strategy to take balanced approach on long-term growth and profitability. Our endeavor continues to build a sustainable base for customer acquisition, the point which I have reiterated earlier, and that too on a profitable basis and use other legacy transaction business to mobilize the acquisition. And thereafter, as Rishi said, put a platform for cross-sell. Our open banking business is growing at a faster pace. However, in the long run, we would keep the balance between open banking and own channel in the ratio of 33:61.
Before I close, I would like to give some insights in terms of our strategy or our midterm outlook. We are attempting to deliver a 20% growth in our transactions through matured business. This growth would also bring in operations of scale advantage to counter inflation as is being seen specifically in the technology and the digital world. Our AEPS business is showing much stronger growth prospects than anticipated, as I had mentioned earlier. CASA and CMS would continue to be the growth drivers and thereafter creating more cross-sell and upsell opportunities. The digital throughput is increasing. We are investing, and it is a plan for us to have a long-term strategy wherein FINO 2.0 would dovetail a cross-sell, upsell and digital, along with the customer acquisition spree, which is currently on.
With this, I would like to open the floor for questions for me and Rishi to take. Thank you very much.
[Operator Instructions] The first question is from the line of Sri Karthik from Investec.
I have a couple of questions. One on the balance sheet and then one on the business. With respect to your balance sheet management, what I was wondering is, why have we been increasing our borrowings on the balance sheet side? And especially, given that there is more treasury operation and an increasing rate environment, has that led to a material treasury loss for us during the quarter? So those 2 on the balance sheet front. A third question on the business, I want to understand the [indiscernible] on the CASA customer base.
Yes. Hi, Sri Karthik, Ketan here. Let me just first attempt to address the balance sheet point. You're right. If you see on the balance sheet side, our borrowings from INR 249 crores have gone up to INR 581 crores. Now again, here, it is nothing to do with the long-term strategic borrowing. These are all overnight borrowings, which are essentially there. Now is it -- your second point and if you go to the asset side as well, our investment, which was at INR 631 crores has gone to INR 1,102 crores. So there is a whopping growth out there as well. On the point on the losses on the balance sheet, which couple of other financial players are doing, the answer towards us is no. Whilst the repo rate and the rate overnight have gone up, our treasury has actually generated more profit than this thing. This is based on our position, which we had taken last year, and we continue to.
The point to essentially note out here is unlike the traditional banks, we do not have an HFT position wherein any mark-to-market losses get impacted out here. However, we are making for the CASA balances, which are coming. And as we are seeing out here as well, the deposits have grown from INR 500 crores to INR 581 crores, a 16% growth, coupled by the other EMD deposits also which we get. We are playing in a manner that we are net positive for this quarter, and there is a stress testing analysis, which is done that even if the overnight rates go up to 200 basis points or 225 basis points further, we are -- we will continue to have profit only. Sorry, that was your -- on the balance sheet piece.
On the second question, you mentioned something on CASA.
But it was not clear. Can you repeat the question?
I was asking your 1-year renewal rate on the CASA customers, given that you've started to report your renewal revenues.
Yes. So our renewal rate for CASA, you're right, our renewal has gone by 4.79x in this thing. So we have a renewal rate, which is in excess of 50% when the customer is coming across. So every year, when a customer comes, more than 50% of the guys comes and renew it next year.
The next question is from the line of Rahul Maheshwary from Ambit Asset Management.
Am I audible?
Yes, Rahul.
3 questions. First, can you [Technical Difficulty]
Sorry to interrupt, Mr. Maheshwary, your audio is breaking up. The next question is from the line of Anuj Narula from JM Financial.
I have a couple of questions. One is, many of the other banks are offering zero balance accounts, which are free as well. So just wanted to understand how do we capture more market share [ forward because ] we are charging a subscription fee for maintaining a bank account with us? And another question is, what are the key business verticals that we have focused that we feel would constitute for the larger share of revenue mix in the next 2, 3 years? And how do we plan to go about it?
Let me answer the first one. See, in our case, while we also offer zero balance, but we are not focusing on that -- count that much. Our ability to get subscription and open more than 2 lakh accounts on a monthly basis consistently, is testimony to the fact that there are people who are ready to pay. Now free zero balance accounts or free accounts have a very low activeness and a very low transaction business. And if you see our balances have gone up from -- by 28% from [ INR 800-odd to INR 1,100-odd ] on an average basis. And a lot of them, nearly 33% of them are becoming more digitally active as well. So our belief is that to get the customer activeness as well as to get more balances into the account, it's better to price the product. And the customer is ready to pay for it because they're able to get the convenience and easy accessibility, which is there. In our case, because we are right there at his house, he doesn't need to travel, he saves a lot of time and the cost to travel and do a business at a bank, a bank branch. And so that is where he feels is a better option.
But one also should know that while some of them may be zero balance accounts, but there are still charges which bank levies for various other transactions, nonbranch, nonbased branch charges and other charges, which also are in the similar range. So while there are no upfront charges but bank typically adds -- puts some charges into the account over a period of time. So that's your question -- answer to question #1. Question #2, Ketan?
Yes. Thank you, Rishi. On the question #2, if I understood it right, what you wanted to know is what would be the growth drivers in the midterm coming across. So I'll just resonate what I ended my transcript with. We are expecting our legacy business or the transaction business or the mature products to grow anywhere in the range of 20%. The growth drivers essentially would be the customer acquisition, just to resonate what Rishi said and you also heard, what your first question was, for us, customer acquisition is a profitable product, the subscription thing which we are running it off. As we speak, CASA, and if I go to Slide #17 of my presentation, a 57% margin is where I get on customer acquisition. If I give some statistics, how is the momentum on a year-on-year basis, our customer acquisition accounts opened have increased by 80%, as that's the kind of growth which we are seeing on a Y-o-Y basis.
The other engine of growth is also a CMS. CMS has a margin of around 40%. So the CASA and CMS, the growth drivers, which now constitute 21%, a year back in FY '21 ending, it was 12%, will continue to be our growth drivers on profitability for next couple of years. It is not only this. As I said earlier, the digital stack and the new products which we are bringing on, whether it is international remittance and we've got a couple of approvals in terms of mutual fund distribution and so on as well from RBI. With this customer acquisition, we intend to put a plan on the digital as well as our physical channels, wherein we can have an impact coming on our bottom line as well. So to summarize, CASA and CMS, key growth drivers, and the base for the future FY '23,'24 cross-sell or matured products expected to grow at 20%. And the new products, interest, remittance, mutual funds will start contributing from FY '23, '24 as well in terms of cross-sell.
[Operator Instructions] The next question is from the line of Chandrasekhar Sridhar from Fidelity.
Just I think one of the bigger purposes of also doing the CASA over a time is that you want to have the share of [ owners ] transactions being a little higher than where we are. I get the fact that we're still very small just in terms of number of accounts we have with the whole system. But where -- is there at some point, we see some inflection point where the share of owners starts picking up relative? Because right now, the [ offer ] is still growing larger and I agree that the system is still much larger than where we are, so offer will still grow. But if you have to, say, look maybe 2 years out or something, is there some -- a point at which this starts changing?
Yes. Interesting question, Chandra. So my share on this is that if I look at the forward or if I look at the way we have been building our business, taking you back a couple of years, when we started the business, we used to do half our volume of transactions and 2 years back or so. And now we are at a INR 50,000 crore number on a quarterly basis. Having said that, our number of accounts, we used to barley open 30,000, 40,000 accounts. In last to last year, we were averaging about 1 lakh. This last year, we averaged about 1.75 lakhs. This year, we are already at 2 lakh-plus on a monthly basis, and hopefully, the numbers will go up. If I look at the next couple of years, if I add the run rate, which is there, I think we'll cross 1 crore number of accounts in the next 1.5, 2 years, maybe earlier also, if we maintain the same run rate and grow from here as well.
So the share of our CASA accounts and the income percentage will go up considerably. If you look at it, it is now hovering around 14%. It used to be in the single digit, low single digit a couple of years back. So if I look at from an overall revenue perspective, our owners business or customer acquiring business will continue to grow. Having said that, because the fact that we are also expanding our merchant network, we are also pushing people to come to our platform because that's the -- if I look at, that's the hopper we have. In that hopper, the more the people come, a part of that percentage roughly around 2%, which Ketan mentioned, gets converted into CASA.
While CASA is there, let me also share some numbers. In one of our slides, we have mentioned that when a person comes to us on an offers transaction, we make about INR 55 to INR 65 on an average per annum. It moves to INR 370 when we open a subscription account for him. We have seen in the last 1 year because of the debit card transactions, the offers transactions on to the platform, the balances, which is keeping the money which I get on [ Nash ] and other activities, I make roughly about INR 100 on an account on an average basis. So INR 370 becomes INR 470 on that in the next 1 year basis on an average basis. Plus I'm able to cross-sell to him. So your question is -- for us, we will continue to push on the offers. Our share of CASA percentage will continue to grow. We are seeing a good momentum in that, and we are now also linked to many more states and nearly 89% of our customers are primary customers. They are seeded with government schemes and other benefits, which is also resulting in a higher owners transaction as well as higher renewal accounts.
So on an overall basis, while we are not tracking owners, whether it will overtake offers, but percentage-wise, growth-wise, margin-wise and the cross-sell benefits which we see and to add the digital overlay over it, we are seeing a very positive trend on the customer acquiring business which we have started a couple of years back. And I think that will continue to be there as the way I look at. The market is quite big on that.
I guess the broader question was that, given that we've seen there is pricing pressure and the pricing pressure seems being a function of, A, competition and, B, of the share of offers going up. Obviously, the owners were -- it's just not margin beneficial for you. But fair enough. I think the second question is just what -- where -- maybe you could start sharing some metrics or do you -- so you could just tell us what are the number of our own merchants who are doing more than 1 product and how many are doing maybe 3 products?
Yes, Chandra. Ketan here. We shall try and put it across in the -- from the next presentation.
The next question is from the line of Shreya Shivani from CLSA.
So I have 3 questions broadly. I think I heard you say that you will want to change the remittance mix between own and API channel to 33 to like 30 to -- something like that, 33 to -- 30 to 70 ratio. Now that kind of mix you guys used to have back in FY '19, like way back before the COVID even started. So I mean, how would you go about it? You -- this basically means you will be pushing more of your own channel because you can't really stop business coming on the API channel. I mean I just want to understand that part of the business. This is first. Secondly, on the CASA account opening, clearly, the trend has been very strong and many congratulations on that.
So I just wanted to -- a couple of quarters back, you had mentioned that you will be able to reach 1 crore CASA accounts by like, say, FY '24 or something like that. Do you think you'll be able to surpass that now, given the run rate that you've already achieved in this year? That's my second. And the last question really is on the cross-sell products. I mean, if you can, apart from us knowing that the businesses will be operational in the second half of this year, if you can give us a little more color around which will be the product that will get launched first, what kind of successes have you seen in the pilot program, that will be useful. Those are my 3 questions.
Thanks, Shreya. Let me just take your first question first. This is open banking versus own. You're right. I'll draw the attention on Slide #24, wherein we have given data of how it was in Q1 FY '22 and how it is in Q1 FY '23. Just a minor point to put across, it was not only remittance. What I've essentially set off is that between -- on all the products, whether it's micro ATM, AEPS and remittance, the transaction products, taken together, our endeavor has been to put a ratio of 33 and 67, that's the number which we quoted. Currently, we are off because you're right, the open banking essentially has grown faster.
Open banking has grown faster on account of 2 aspects. One is, if I do a year-on-year comparison, remittance, which is a generally dominant part of open banking, there was a recovery growth which was happening. The COVID had impacted, Phase I and Phase 2, the only product which had impacted, which was dominant in open banking was remittance. So there has been a remittance recovery. On an overall basis, if we see, remittance has grown on a year-on-year basis by 67% and API being the strong partner, that is how it is [ secured ].
Second aspect, to give a more strategic outlook in terms of how do we eventually come to our desired metrics between own banking and open banking, yes, we are attempting to have a larger share in terms of the transaction business as well. So we're not controlling the open banking. That will come as it comes, but we are definitely -- the focus essentially is on the -- on acquisition of the new distribution points and enhancing business on our own site, specifically in AEPS, for ourselves where the market growth is essentially there. However, we also have to look at it in a slightly nontypical metrics basis as well because the -- besides the margin being high for own banking, it also gives us a very high potential for the conversion as well. So own banking, we will grow. We are looking at a weighted average kind of a growth in these transaction products in the range of 20%. Own banking, we are giving more impetus in terms of the distribution network. And in the long run, our desired ratio between own and this thing continues to be a 67:33. And currently, we are a bit off on that. So that is your question.
And let me take the CASA. On the CASA side, you're absolutely right. Looking at the traction, which is there currently in our platform on opening account, I will go with you in terms of that we should cross more than 1 crore CASA accounts by end of FY '24. And on the cross-sell part question, I think on the cross-sell, only international remittance is something which we have started to pilot, that too at our branch level. We are -- it is in a learning phase right now for us. As you know for an IR business, there are a lot of compliance requirements and regulatory compulsions which have to be completed first. So hopefully, in this quarter of FY -- quarter 2 end or quarter 3 beginning, we should see our international remittance being launched at the merchant level. That is where we will see a higher traction coming on to the platform.
As far as other products are concerned, digital gold is something which -- digital insurance is something which we started with Go Digit. And that has shown a good traction. Shopkeeper insurance has seen a good traction. I think in the [ first ] month, we opened more than 5,000 insurance in the month of June. We expect that the run rate will continue to be good. Loan referral, we have seen a good traction on loan referral as well. On an average, now if I look at from a customer point of view, if I add all the products, there are a couple of more products which are expected to be launched over the next 6 months to 1 year. In fact, there are about 6, 7 of them. We expect our customer share to go up. We did some analysis, and we found roughly about INR 20-odd we are making per account on cross-sell already in this quarter. So that is a good healthy growth, which we are seeing. Hopefully, by more push and by more going digital, we should be able to increase the percentages there.
Got it. Can I ask another question on the digital gold bit? Is it in the pilot phase right now or it is yet to be tested as well?
Sorry, actually, I didn't want to -- it was more digit insurance as in digital gold. Digital gold, we have started in a small bit, but nothing major as of now, if you ask me on that side. It is more as an investment product. But as we gain more traction on the digital side, then we should start seeing more uplift on the digital gold as an investment product.
Got it. And in the next 6 -- like you mentioned in the next 6 months to 1 year, you plan to launch 6 to 7 new products. This includes your remittance and -- insurance is already out there, this includes your loan products, right? What all would...
Yes. Mutual fund products, insurance also, couple of new products, which we have launched, then we also got approval from Reserve Bank on fixed deposits and DEMAT accounts, even PAN Cards. So all those will be there. So see, the idea is to make this merchant have many products and service the customer who comes for multiple requirements, whether financial or related to some of the nonfinancial pieces like PAN and DEMAT and other pieces. So the idea is to make all of that available at the merchants, so we see a higher traction, higher footfall and ability to have a higher income per account.
Got it. And one last question from my side. The pilot program for these products before you launch, how -- what's the time period usually for those pilot programs? You run it for 2 to 3 months or something like that?
Roughly 3 to 4 months is something which we look at for products, especially which are on high -- like IR is a very high compliance product. You understand because of the [ EML ] and all the factors which have to be factored in as far as international maintenance is concerned. We will probably test it for a longer period of time and then launch it. But some products which are not that complex, like the digital insurance, which we started on shopkeepers. Within 2 months, we were able to launch it. So it depends on product to product and the complexities which are there. And also the APIs which we have with our partners.
The next question is from the line of Renish Bhuva from ICICI Securities.
Congrats on a great set of numbers. So there is just 2 questions. One is sort of a clarification on the notes to account part, we have mentioned some -- the employee benefit under this section of code of security. So sir, what is that? I mean -- and what kind of accounting impact we see on P&L because of this?
Hi, Renish. Ketan here. Renish, last year, we had issued, from a motivation of the staff perspective, the ESOP application, ESOP for all the key management staff has been given off. So the impact -- that is the note which you are referring to. The impact of that on an annualized basis to the P&L is around INR 6 crores. That is based on the calculation, including the Black-Scholes method and the RBI regulation, which comes through. And this has been given to a set of employees, the key set of employees, the core set of employees in terms of them driving the function and the organization to the next level.
Got it. And sir, secondly, on this investment side, we did mention about we're going to invest behind sort of building this FINO 2.0 version. So sir, what kind of annual investment we are planning? And does this will have any impact on, let's say, our earlier assets' profits for FY '23, '24?
Thanks, Renish, for the question. If you go back to our primary proceeds, we have raised somewhere around INR 300 crores. And [ while this is fragmenting ] Tier 1 capital, our thought process around was that there is a digital and technology initiative as we want to be ahead of the curve and wherein our target audience before this, reach completely out there in the digital space, we want to ensure that they have customer trust, loyalty and the other aspects so that they continue. And also, we can have cross-sell. In regards to your pointed question in terms of how does this essentially impact the profitability? I think we have started investing -- most of this investment would essentially be in the CapEx nature.
And so we're building stacks, we're building solutions, which will be there. Do I want to essentially put a number that how much of this through -- via the depreciation line or via the amortization line will come through? The answer is no. We have started making a plan in terms of how do we, over next 18 to 24 months, utilize somewhere in the range of around INR 150 crores to INR 180 crores in terms of the technology and digital initiatives. The impact on this year's P&L will depend upon how fast these [ tax are borne ]. For us, the accretion or the real benefit of digital, as I said earlier, we have started taking in FY '23 and '24 as well. So maybe over a period of time, it will be.
However, just to conclude on this particular point, and it is very important with what Rishi started off with, in long run, it will be the ROE target, which we set ourselves in -- at the time of the public launch and otherwise is what we are looking at. It will also be a balanced approach in terms of profitability and growth. But we will not shy away from making capital investments in this field so that '23-'24, '24-'25 onwards, we can start getting benefits out of coming to it.
Got it, sir. So again, I mean, just a follow-up on this. So maybe this INR 150 crores, INR 180 crores, whatever way we spend, either it will flow through depreciation. So in that case, the P&L impact will be a little prolonged. And if we do it via OpEx, it will be front-ended.
Yes. It depends upon the nature of this thing which we are doing. But again, since we are attempting to build a robust digital platform, the CapEx element of this is expected to be in the higher proportion. That is the question which you're looking at.
Got it. Got it, sir. And just a last thing on the gross margin side. So we are at 30% now, okay? Now considering all the cross-sell, upsell or maybe the benefits, which we want to derive from this digital initiative, where should one look at it as a steady state margin for our kind of a business?
Yes. That is a very, very good one. And Renish, if you recollect the last call and the way I started off this time with the transcript as well, we had mentioned that when it was around 32%, we are looking at a 30% kind of a thing. I should be very honest out here that in this particular quarter, I was not expecting that it will go to 30%. I was looking at largely a slightly moderate kind of a margin compression, which is happening. Having said that, based on the kind of the product mix, which has changed, the remittance, the AEPS, increase in open banking, it is indeed taken us to 30%.
We are looking at a margin from here on to be in range bound. This also resonates with earlier question, perhaps Shreya asked, how are we going to balance open banking and our own banking -- our own channel. So we are cooking an additional impetus in terms of our own channel. The CASA and CMS, which are growth drivers, maybe I'm repeating this again, at a 57% and a 40% margin will also play its part in the weighted average margin. So to broadly look at how will margin shape up from here on, our endeavor is to keep it range bound in the current where we are.
Got it. Got it, sir. And sorry, sir, just last thing on the micro ATM side. Okay, so since this has been our one of the high-margin products. And if I sort of look at it on Y-o-Y basis, margins or, let's say, the revenue is declined by almost 40%, 50%. And I think that is a primary reason why our PAT stands at INR 10 crore. Let's say, it should have been higher if we would have maintained the micro ATM share in the overall business. So particularly, I can understand this is a [indiscernible] product for us wherein at a later stage we will cross-sell, upsell. But considering this is one of the high-margin product and without cross-sell, upsell, we are making 40%, 50% margin, so why can't we sort of focus on scaling up this product and sort of maintain in the range bound of around, let's say, 15%, 20% of the total revenue versus where it is currently at 10%, and then focus on cross-sell, upsell? I mean just your broad thoughts will be helpful, sir.
Renish, thanks. I think you are right. Micro ATM over last 3 quarters has not shaping out the way it is. AEPS in fact, is shaping out. Now we are also ourselves in terms of last call also we had mentioned that we are essentially grappling because you're right, Micro ATM on a stand-alone basis gives a margin of around 45%, 46% is what we are seeing it off. Currently, in the emerging Bharat, in the state which I essentially mentioned, and honestly, we do not know it's a post-COVID phenomena or what -- how is it working out, the devices, which are essentially happening, it's tripled in last 2 years, I mentioned in my transcript. But the industry-wide growth or our growth doesn't seem to be coming out here. How are we attempting to tackle it off? Have we only considered it as a hook product? The answer essentially is no.
We are still endeavoring in that, on a combined basis, we have a kind of a 20%-odd growth coming from there. But as we essentially stand out here, we are exploring opportunities. Can we go into the other target segment as well, wherein the micro ATM was at its peak? Should we try and put it more in terms of our urban audience as well where currently it is more of a rural phenomena? Our sales team and our product team are working in terms of the revival of this product. I would not say revival -- revival is a very strong product, revival of the growth anticipated in this, more so because Aadhaar enabled payment system is growing. So there is some -- the demand for overall cash withdrawal is there. As we speak currently, do we have a very concrete step that how will we change it up? We are working on this, and maybe it will require a quarter or 2 more in terms of to reassess that do we need to completely change.
One point I want to mention out here is that we are maintaining the margin out here unlike competition. There is intense competition. People are attempting to give devices without any fees, et cetera, et cetera. We have not gone completely into that. So we are maintaining the margin. We are attempting new ways in terms of bundling. And we see over next 2 quarters, how is this going to plan out for us, including the new target segment, which I just mentioned.
The next question is from the line of Harsh Shah from Reliance General Insurance.
My questions have been answered.
We'll move on to the next question, that is from the line of Ashish Kumar from Infinity Alternatives.
Great show on the revenue growth. My question was around the gross margins. Basically, and just following up from the last question from the last speaker, do we see that these margins will -- given the fact that the product mix is changing in a manner where the margins are kind of going down, do you see a risk that we may -- the gross margin may slip to mid-20s or go below 30%?
Ashish, thanks. I'll try and reframe what I was mentioning to Renish earlier that product mix, yes, they have changed. There were a couple of logical reasons which I explained as well that remittance being a dominant for open banking that is -- has grown. Earlier, we did not have a material AEPS happening in open banking. That is growing. But are you -- if your question is very pointed that are we looking at 20s kind of a margin, is that something which is what we are looking at? The answer essentially is no. We are looking at margin being range bound from here on. And not to forget the growth drivers, which are -- which we have been emphasizing is that both CASA and CMS, those are high-margin products in the range of 57% and even more in the time of renewal and 40% in CASA. So we are expecting a range bound margin which is happening. And eventually, as we said, our product mix between open banking and own, we are looking at a 67:33, which I had earlier given guidance as well.
Sure. The second question was in relation to your investments that you are making. Because if I look at the below-the-gross-margin line, right, there is a very little movement quarter-on-quarter in terms of the below-the-gross-margin line. Are most of our investments in the form of CapEx? Or are we looking at OpEx kind of a thing? And I'll tell you where I'm coming from, given the fact that, given the competitive dynamics, we are closer to, let's say, 30% gross margin, it would -- it might mean that our -- if you are looking at increasing investments over the next couple of quarters, it might mean that we might be looking at low teens kind of ROE over this next 2, 3 quarters. Is that a fair way to look at it?
Ashish, again, a good point. As I said -- and you're right, our base capital maybe around 6 months back, we were making our plans and we had also mentioned that this capital will take us through the next couple of years and more in terms of our plans. So our investments in technology and digital are in the conceptualizing or the implementation phase and which will start happening over next couple of quarters and more. As regards to your point on OpEx and CapEx, I mentioned it earlier, most of these [ tax ] which we are making on the platform, which we are making are to generate revenue for future, which will be coming earlier from '23, '24 onwards. So most of this would end up being CapEx.
Having said that, we are no different from the rest of the technology industry or a fintech bank wherein we are also seeing some spurts in terms of the technology inflation, which is coming to us, specifically on the technology OpEx cost side as well. So primarily on the CapEx side, technology inflation is hitting us, but we're expecting it to control it off. And we also expect, on a gradual basis and a balanced approach between profitability and growth.
On your question on ROE, I think ROE is something which we had mentioned at the time of the public issue. We are looking at anything in the range of 20%-plus over a long-term period or over a mid-to-long-term period, and we are working towards that into a balanced approach on profitability and volume growth.
Sure. And just to kind of -- if I can push my luck with a third question, on the borrowings and the investments that we have done, you mentioned that we are making a positive contribution on that. So on that INR 500 crore book, what will be the kind of profitability that we will be looking at that piece?
Yes. On the treasury side, currently, our income for the quarter was anywhere in the range of around INR 17 crores. We are making a good spread. And this is what I said, despite the repricing of the rates, which has happened. The way our book is also positioned with of is that we are having a repricing in this quarter as well. So every time there is a rate hike anticipation, our book has been 6 months and -- or residually 6 and 9 months tenure and part of it is repriced. So overall, we intend to continue our borrowing. So I do not want to put essentially a forward-looking number on the treasury piece, given how the interest rates go. But as I said, we have a cushion of the sensitivity analysis of anywhere in the range of 225 basis points wherein our spread will continue to be super positive. And this is even without repricing. With the kind of repricing book which we are looking at, even the sensitivity analysis of the interest rates up will further increase as well. I hope I could give a directional guidance on...
No, no, I think that's very good. I was just trying to understand that if we were to remove the net treasury income from the book, then probably our core business probably made a marginal profit.
Yes. We have to look at it in 2 aspects here. I would say that because the major part of our treasury income is also coming from the deposit growth. If you've seen that on a quarter-on-quarter basis, sequential basis, our deposits or the CASA deposits have increased by 17%. So this is how we are deploying it essentially. So whilst, we are not a balance sheet focus based for the reasons and the statistics, which we explained in terms of how our debit card spends are increasing, how our customer balances are increasing it off, we are having a benefit and a substantial or a reasonable benefit coming on account of our business growth as well.
Also the point to note out here, which does not come on the face of the balance sheet as well, because of the payment bank designation, which we have, in addition to this INR 580 crore of deposit, which is shown, we also have around INR 250-odd crores of EMD balances, which are there and which are, by the virtue of regulation, need to be classified under a separate heading. That also is available for us in terms of deployment. And both of this is connected to business. One is connected to the customer acquisition, 80% growth, which you've seen. The other one is connected to the 58% acquisition on the merchant distribution network, which we have seen.
The next question is from the line of [ Hitesh Randhawa ] from Raveshia Asset Management.
My first question was around the cyclicality element that I had observed actually on the Slide 12 of the presentation. So maybe could you please elaborate on the cyclicality element? Another question that I had was around the employee expenses. There is a 20% increase sequentially. So maybe could you please elaborate on that as well as to what contributed to that? And are there any nonrecurring components within this, which wouldn't be contributing in the upcoming quarters? And last question that I have is around -- I think your press release talks about some kind of a moderation in the onboarding thing. So kind of -- could you please let me know what is the average CASA onboarding [ renewal ] fee right now? And maybe how much has it come by? And maybe what do you expect the trend to be?
So on the first part on the cyclicality, you're right, our first quarter normally has been always low for us because a lot of people will actually -- especially are kind of migrant people. They go back to their homes for crop and other purposes. So that is where we see the cash withdrawal as well as the remittance business normally drops. This year, while they still could have been higher compared to a normal quarter, but the quarter 1 still helps cyclicality, which we were able to overcome by our expansion, which we did in the last year or so. So starting July, August when people come back, actually, they come back from the month of June onwards. So April, May, we have seen relatively low numbers, and then it starts to build up during the year. If you look at our past 2, 3 years of trends also, you will see, starting from middle of quarter 2 till quarter 3, quarter 4, that has been major growth months for us.
As far as employee expenses, maybe Ketan can answer.
Yes. Thanks, Rishi. On the employee expenses, I think 2 points to make out here, maybe a reiteration of what I said earlier to one of the questions. Yes, we have started the ESOP scheme, picked from '21 policy, which we had done. So there is an impact which is coming essentially out of that. Second, 2 other aspects which we are seeing is also the kind of growth which we have seen. We overall have a 150-odd people team, in-house technology team, which is there. And I should actually confess it off that the technology cost or the technology people cost, and here I'm saying technology is also the high-flying digital guys as well, are really going off the roof, okay? So we are essentially having some challenges -- not we, the industry as a whole is also having challenges in terms of technology. Our understanding is that this kind of a thing may remain or maybe the overall funding in the space is reducing it off so some sort of a moderation or some sort of a [ bandwidth ], which will come through.
So is this a normal thing, which we are essentially looking at on a year-on-year basis, the 20% kind of the growth? The answer to that is no. We are working on an overall inflation-based metrics as well. So we are balancing between rewarding our good employees and the profitability as well. So we will -- depending upon how the market goes, specifically in technology and digital, we will be having a moderation coming out there. Sorry, there was a third question as well.
Third question on moderation on onboarding in the press release, I could not figure what you are referring to.
So in the press release, basically, it is stated that subscription and onboarding revenue has kind of continued to register strong momentum, 68% despite the moderation in onboarding fees. So my question was kind of what is the -- when you're talking about moderation in onboarding fees, how much has it moderated by, what are the -- what is the current average onboarding fee? And how much has it come down by?
Okay. Let me attempt to put this across, what we were trying to -- and which is also in the face of our presentation as well, that the kind of impetus which our renewal fee has shown, and I have given some statistics and data of 4.7x growing on a Y-o-Y basis. What we were trying to say out here is whilst the account opening momentum is excellent, we have opened 6.2 lakhs accounts this quarter, which vis-a-vis is 6.7 lakhs account last quarter. However -- so that's where our new subscription account, the onboarding fees, which we are seeing is moderated off. So -- and again, our growth plans in terms of new subscription is also equally very aggressive. I said we've grown 80% on a year-on-year basis.
So what we were trying to say out here is, despite a lower or relatively marginal drop in terms of the new accounts, which is opened on subscriptions to onboarded fees, our renewal income, the way we are doing, has -- or the annuity income has completely compensated that off. But I think from a directional and a guidance perspective, new accounts opening momentum, we are putting a lot of efforts and innovative manners in which we can continue our aggressive or super aggressive customer acquisition speed.
Right. Okay. Sure. So I've just a couple of follow-up questions actually on the basis of your answer. So has the ESOP cost been entirely kind of maybe considered in this quarter's employee expense? Or is it going to be amortized over the -- all the 4 quarters?
So it has been -- on an overall basis, the ESOP cost, as I said earlier, it will be on an overall 4-quarter basis is what we are looking at.
Okay. Sure. And I think, [indiscernible], you spoke about the cyclicality element. I think would it be fair to say that, okay, the cyclicality element would also be present in the account openings as well? And maybe as we proceed throughout the year, the account will be [indiscernible] due to the cyclicality element?
Yes, absolutely, you are right. We should expect -- in fact, if I say between April, May, June, we saw that April numbers were lower, but it kind of started to recover from May and June. So we should see a higher number in this quarter and onwards.
Okay. And. say, kind of -- just maybe I'll just squeeze in couple of more questions. See, I think you also spoke about, say, kind of the digital expenses actually and your press release again, where, kind of, there are some digital spend investments that have been and otherwise the PAT would have been higher by 30%. So again, kind of -- should I expect this to be something that, okay, which would continue for the remainder of the quarters, this incremental digital spends? Or again, is this kind of a nonrecurring kind of thing for now?
No. I think, as I said earlier, we are going to invest and digital spends will essentially continue as well. So it is not nonrecurring kind of a thing. It is a recurring spend, which we are essentially looking at. It also depends upon, as I earlier mentioned it off, the kind of platforms and how are we splitting it between the OpEx and CapEx. Currently, a large part of it is essentially coming on account of the team and on the technology and the digital side, which we are putting across.
Okay. And, say, kind of on the merchant side, actually, so what percentage of merchants are active right now? And what initiatives do we take to, say, kind of maybe activate nonactive merchants and how much time does it take for the newly onboarded merchants to maybe start contributing meaningfully? And I think the last one is on the Paysprint acquisition as well, say, kind of maybe how is that going, actually, what's -- in terms of -- have we already started benefiting from them? Have we started integrating their APIs into our FINO 2.0 application? And maybe going ahead, what are the plans?
So on the first question, on the merchant side, we roughly see about 50% to 60% merchants who are active on a monthly basis. So -- and the numbers keep on varying, the same merchant may be active this month may not be active next month. But on average, roughly about 50% to 60% of the merchants are active. Multiple things we do, one is that we have a field force which is there on the ground, which engages with the merchants and the distributors. We have our own platforms on chatbot, where we can engage with them. We also have IVR calling system. We have a big call center, both inbound and outbound, which is there where we engage with the customer on a regular basis -- our merchants on a regular basis.
And we have a big analytics team, which keeps on giving us data in terms of who should we expect with high trade in this month, whose volumes will come down, come up. So there is lot of engagements, both digitally and physically with the merchant on a regular basis. That's why you would see that the volumes are growing and the merchant's expansion is also growing because of the physical as well as the digital nature of our engagement with them. As far as the second question, Ketan?
On the strategic investment of Paysprint, that is not a short-term phenomenon. We have our long-term vision in terms of increasing our network and increasing our footfall and thereby having the higher customer acquisition. So this is just the first quarter out there. So we're looking at a more strategic kind of partnership and the benefits of that will start accreting to us maybe from quarter 3 ending or quarter 4.
The next question is from the line of Shreya Shivani from CLSA.
Just a last technical bit. This new products, even the international remittance, the income will flow into the other line item, right, from second half of FY '23 or in FY '24? Because till now, that line only includes interest income and maybe some other charges. Is that correct?
Yes, there will be a separate line item wherein it will start coming through once it becomes a material kind of a thing.
Yes. Okay. So effectively, from second half of FY '23, we should expect some revenue in that line, right, if you're launching the product in next 2 quarters? The digital insurance and remittance, international and other things.
Yes, that's how it will be once it picks up the momentum. And Rishi said, it's the lead period. We've already done it on the branch. This quarter, we will do it in terms of merchant and maybe in quarter 3 ending or quarter 4, this can be having a reasonable impact on the bottom line coming through in terms of revenue product which comes.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.
Thank you. Thank you, everyone, for participating. It's been a very rewarding quarter for us. If you see from the bottom -- from the top line point of view, sequentially, we have grown. On an annual basis also, we grew by 40%. We expect profits to continue to grow from here. Quarter 1 normally is a lower profit quarter for us every year. We should expect profit growth as well as top line growth from the quarter 2 onwards onset. The market is big. Our CASA, CMS and some of the products have started to show a lot of traction. Our ownership story and the implementation of that has been very, very good. We expect as more and more customers will -- get onboarded on the Fino platform, will we, over a period of time, not only increase our stickiness and activeness with the merchant and the customer, but will also result in a higher cross-sell and a higher digital influence with the customer over a period of time. And thank you, everyone with this. That's it. Yes.
Thank you. Thank you, everyone.
Thank you. Ladies and gentlemen, on behalf of Go India Advisors, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines.