Five-Star Business Finance Ltd

NSE:FIVESTAR

Earnings Call Analysis

Strong Quarterly Performance with Optimistic Outlook

The company reported a solid quarter with Profit After Tax (PAT) growing 8% to 9% sequentially to INR 199 crores, up from INR 184 crores the previous quarter, and a significant increase from INR 144 crores year-on-year. The firm's net worth remains robust and it boasts an impressive capital adequacy near 60%. Collections have shown resilience, bouncing back stronger post-COVID times, underscoring the company's confidence in improved collections each successive quarter. Credit costs are expected to remain below 1% despite the ambitious guidance for a year-on-year growth of over 35%. With a strong branch network, the company is well-positioned for sustained growth in the forthcoming quarters.

Robust Collection Efficiencies and Financial Growth

The company showcased an excellent quarter marked by robust collections, with efficiency surpassing previous marks, and outstanding financial metrics. The collection efficiency improved to over 100% from 99.6%, and unique customer payments climbed from 97.5% to 98%. This signifies that 98% of customers paid their EMIs each month in the last quarter. Furthermore, the 30+ day overdue figures decreased from 9.68% to 8.59%. The company aims to achieve 90% of customers in current status and only 10% in arrears within the next two quarters. Reflecting on the business expansion, the company opened approximately 70 new branches, culminating in a total of 456 branches. Consequently, loan disbursements soared by 6% sequentially and 50% year-on-year, leading to an all-time high of INR 1,204 crores. This increment propelled the Assets Under Management (AUM) to grow by 9% sequentially and 44% year-on-year to INR 8,264 crores.

Stable Yields and Cost-efficient Borrowing Strategy

Despite the aggressive branch expansion, the company's cost-to-income ratio remained stable at around 36%, adhering to the guided steady-state of 35% to 37%. The yields were consistent at 24.2%, while the cost of funds displayed a declining trend, suggesting that the company is perceived as an attractive entity for lenders. The borrowing costs on book decreased slightly from 9.8% to 9.7%, and incremental borrowing costs stabilized at about 9.5%, allowing the company to sustain a spread of about 14.5%. The leverage increased modestly, but with strong accruals, there's an expectation of gradual leverage growth. Impressively, the company maintains a Net Interest Margin (NIM) of 17.7%, illustrating a return on assets of 8.5% and a return on equity slightly above 17%. There is no anticipation of significant negative impacts on the cost of funds as Five-Star continues to borrow at competitive rates.

Competitive Edge and Technological Advancements

Five-Star has carved a niche in the lending market, focusing on loans between INR 1 lakh and INR 10 lakh, a range where they see less competition due to the operational viability and challenging underwriting processes required. Their sweet spot between INR 3 lakhs to INR 5 lakhs is well-served by their ability to underwrite effectively, spending up to 7 days on each file. The company competes with various entities, including fintechs, which primarily focus on Tier 1 and Tier 2 cities with different product offerings. Conversly, Five-Star specializes in longer-term, bigger-ticket size loans, catering to business setup needs in Tier 3 to Tier 7 towns. Additionally, the company is transitioning to Salesforce across all branches without any disruption to growth or disbursements, which should streamline operations and improve efficiency going forward.

Strategic Borrowing Mix and Market Movement

In terms of funding, Five-Star continues to evaluate securitization as a primary avenue without exceeding one-third of its total borrowings through this method. The recent investment by Deutsche Bank of INR 350 crore in one of the company’s Pass-Through Papers (PTPs) signifies market confidence in Five-Star's securitized assets. The company's borrowing mix has seen a reduction in Non-Convertible Debentures (NCD) to 4%, mainly because of higher costs and shorter tenure offerings from the market, as well as redemptions post-COVID. Nevertheless, efforts to penetrate the NCD market continue as Five-Star seeks to diversify its borrowing strategies and maintain cost-effective funding.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day and welcome to Five-Star Business Finance Limited Q2 FY '24 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that the conference is being recorded.I now hand the conference over to Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director. Thank you and over to you, sir.

[Lakshmipathy Deenadayalan, executive]

Yes. Thank you. Thank you for transferring the call. And I welcome all the participant to the fifth earning call overall and the second earning call for this financial year.As you all know, we connected you with the last September number results, September 2022. We are again connecting you back with September '23, almost 5 quarters and 1 full financial year has been -- the connection between you and us.It's a very exciting journey for us for last 12 months. Always Five-Star, we are proud to say, we are a collection-first to NBFC because we feel growth is very lighter side, but collecting back is going to be the difference between any lender.So to start yet -- to start with the numbers, I'll start with the collection side. Collections -- overall collections came out very well. We'll say this is an excellent quarter from a quality perspective. The collection efficiency, comparing with last quarter, moved from 99.6% to over 100% and unique customer which be call collecting EMI from every customer which we measure by D1C1, the terminology what internally we call, moved from 97.5% to 98%. So the 98% of the customers have paid EMI in each month in last quarter. That's a very encouraging sign. So the forward flow has been arrested to that extent.The next important metric in collections is 30+ where people ask us. I'm happy to say that 30+ has also dropped down from 9.68% last quarter to 8.59% this quarter. And another color of collections what we see the current to the arrears ratio of the customers. It was at 78% of the customers were in current and 22% of the customers were in arrears last September. And it moved to 85% of the customers in current and 15% of the customers in arrears in June. We have bettered that in September. We are close to 87%, precisely 86.5% of the customers are in current now and only 13.5% of the customers in arrears. This we will -- as guided to the market, we will reach this to 90%. That is 90% of the customers will be in current and 10% alone will be in the arrears going forward, maybe in next two quarters, maybe June of 2025.And going -- taking you to the next important collection metric, which is a non-performing asset, 90+, we call, it also bettered from 1.08% in June quarter to 1.07% in September quarter. Coming to the IRAC Stage 3 as per the circular, new circular, even that we have bettered ourself. We were at 1.41% in June quarter, which has come down to 1.37%. So all in all the collections on all metrics and all buckets have shown a tremendous improvement that again proves that Five-Star is a collection-first business model.And now taking you to the business side which is very important, first from the branch we have opened close to 70 branches in last quarter, which is one of the highest in history of Five-Star. So the total branch count is at 456 branches as we stand today. And because of branches getting opened and business officers getting joined in the new branch, our loan disbursement is also seen all-time high. It was at INR 1,132 crores in June. It has gone up to INR 1,204 crores, registering a 6% increase and registering a 50% increase comparing to last year. And this has resulted in good growth in AUM. We have moved from INR 7,583 crores in June to INR 8,264 crores in September with a growth of 9% sequentially and 44% year-on-year. Both in quality and growth has resulted good profits. Our incomes have gone up from INR 484 crores last quarter to INR 522 crores this quarter, registering a growth of 8% sequentially and 44% year-on-year. And profit after tax has moved from INR 184 crores to close to INR 200 crores a quarter, which is INR 199 crores, registering a 9% growth and 38% growth year-on-year.Finally, before handing over to Srikanth, the borrowing side has also shown a good amount of stability. Our cost of borrowing on the book is -- in this quarter is at 9.7%, moved a tad lesser from 9.8%. And incremental borrowing is coming at at 9.5% all in all. So from the collection side, business side, and the borrowing side Five-Star is able to bring out their best performance again in the September quarter and this will continue as we move forward.Now, I'll hand it over to Srikanth to go deeper into each subject then we'll take up the questions.

[Srikanth Gopalakrishnan, executive]

Thank you, sir, and a very good morning to all of you. As Mr. Pathy has highlighted some of the numbers around collections, business as well as the borrowing, I'll just touch some final aspects and hand it over to all of you for any questions that you may have.In terms of the financial metrics, we have grown our AUM at about 9% sequentially to INR 8,264 crores. Coming on the back of very strong branch expansion, 70 new branches have been added for the quarter, and on the back of borrower expansion. So again, this has not been a ticket size-led growth but it's diversified growth that we have managed to achieve.So our borrower base increased from about 3.2 lakhs in June to 3.4 lakhs as of September. In terms of the financial metrics, the yields have remained stable at around 24.2%. The cost of funds, surprisingly, continues to show a decreasing trend which means Five-Star is looked at as a very attractive destination for lenders to lend monies to. So while we are borrowing incrementally at 9.5%, the book cost dropped from 9.8% to 9.7%, so which is a spread of close to 14.5%. The leverage has moved up a little bit, but given our strong accruals, I think, we will still see a gradual growth in the leverage in the quarters to come. So the NIMs are almost at about 17.7%, translating to a return on assets of about 8.5% and return on equity of a little over 17%.We have also -- despite the branch expansion, we have managed to keep the cost intact. Our cost to income is still only at about 36% or so and we have been guiding all of you that even in a steady state, this number will be anywhere around 35% to 37%. In terms of the borrowings, we have borrowed almost more than INR 2,000 crores in the first half of this year with about INR 1,150 crores coming in the second quarter. The good part is we have managed to add two new banks and sizable sanctions have come in. In fact, one of the transactions while the execution spilled over to 3 October because of some change in holidays. But, including that cost, I think we are at about 9.5% incremental cost. And as we speak, the incremental cost continues to stay around 9.5% to 9.6%. So we don't envisage any significant impact -- negative impact on the cost of funds in the quarters to come.Collection efficiencies have stacked up really well. Like what Mr. Pathy highlighted. Not just 1+ even our 30+ has continued to show a decreasing trend. From about 9.68% last quarter, we have brought that down to about 8.59% for this quarter. So we will continue to keep demonstrating this number on the lower trajectory, which will ensure that stretched portfolio. For us it's not a stretch, 30+ is not a stretch, but typically markets perceive 30+ to be a stretch portfolio. Even that number will start -- continues to keep going down.We continue to maintain a good provision coverage ratio on our overall book on the Stage 3 assets, as well as on our restructured portfolio. On the overall book, we are almost at similar levels of PCR. We were at 1.64% last quarter. Just dropped by 1 basis point to 1.63%. On Stage 3 assets, we have taken the PCR to about a little over 50%. We were at about 44% last quarter. This is again coming purely out of the ECL model and overlays that the company wants to carry on its books on a conservative basis. Restructured book continues to show a very encouraging trend. Most of the book is in the standard category. In fact, the overall restructured book has actually come down to 0.66% of our overall book. And even on this, we maintained close to a 50%, provision coverage. So we don't really envisage any risks emanating out of this restructured book in the quarters of the years to come.PAT registered a 8% to 9% growth from about INR 184 crores last quarter to INR 199 crores sequentially and year-on year, it went up from INR 144 crores to INR 199 crores. Net worth continues to remain robust. Capital adequacy is almost close to 60%.So I think all in all it's been a very encouraging quarter in terms of asset quality, profitability and the growth. And given the branch network that we have built in, I think today we have a very solid platform to ensure that the we build our growth on this strong [indiscernible] in a very safe and secure manner. So whatever guidance we have given you had been continues to stand. We are hopeful of coming out with a strong set of results in the quarters to come as well.On that note, I will hand over to any of you for questions. Happy to take the questions.

[Operator]

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama.

[Mahrukh Adajania, analyst]

My first question is on your collection efficiency. You have always delivered well on collections and you seem very confident that the customers in arrears will improve from thereon as well. So what gives you the confidence, because your collection infrastructure has always been strong? Is it that their business environment is improving or that your collection efforts have intensified further? That's my first question.

[Lakshmipathy Deenadayalan, executive]

Yes, business model what Five-Star has built for last 20 years plus or more than that is from the back of the -- assessing the collection first and assessing the customer on the cash flow and character, leaving the collateral aside.So what gives us the confidence is the profile of customers whom we are backing for last two decades purely the shopkeepers and [ self-employeds ] of our country they are quite busy now. And their sales are coming back to the pre-COVID level and our margins are sticking very well. So this is from one side. Second side, as you know we are a secured lender. We lend -- our entire loans are secured. We lend on the residential property where the customers and family member live in. This also gives the emotional attach and seriousness to the family members even during the downturn cash flow cycle. So these two things, the service sector whom we are backing and we are backing them with one of the strong collaterals. And of course the third one is important, the collection infrastructure, what we have put at the ground level we are able to reach customers, our customers are able to reach us in 30 minutes of time. So all 3 put together, our collections are always on the good side.There was some kind of pressure during COVID times because we didn't restructure a lot. So we are correcting those things and we're bouncing back better than all COVID -- all pre-COVID collections metric quarter where Five-Star has seen. So the strength of the cash flow and the underwriting strength and the infrastructure collections we put up at the ground level all 3 are giving us good results quarter-on-quarter. That gives us strong belief that going forward our collections will be better, better every quarter.

[Mahrukh Adajania, analyst]

Got it, sir. And so as the business environment is improving, which is why you're confident of holding credit costs here, is it or because there has been strong growth post COVID? So as the portfolio seasons, do we see inching up of credit cost or it's going to stay at these levels?

[Lakshmipathy Deenadayalan, executive]

So I think the credit cost will stay in the same sub 1% level. Even during demon and COVID 1 and 2, we didn't see this getting spiked up. Just spiking for a very short period of time in corporate and got settled where our eventual credit cost has to be. So I don't think the credit cost will have any impact even the growth fixing for Five-Star because the growth what we are getting into the guidance of 35% plus year-on year, it's not going to be a big growth for Five-Star because we have already seen big growth in COVID. So we know how to underwrite the customer, keep the collections intact so it doesn't have any impact on the credit cost going forward.

[Mahrukh Adajania, analyst]

Got it, sir. Sir, my last question is on attrition. So in your segment of business, the attrition rate increased in the last 6 months or in the last 9 months or is it manageable because attrition rate in the other BFSI space is on the higher side?

[Lakshmipathy Deenadayalan, executive]

Nowadays attrition has not specifically increased. It is remaining at the same level. We are expecting that over the next three to four quarters things will gradually come down. But I think we measure attrition very clearly, at what level is the attrition happening both from an experience perspective and from an internal levels perspective. Or else the attrition largely is happening at the people who are less than 12 months old in Five-Star. So that's a manageable attrition and also it's happening at mostly junior levels.If you have to measure attrition at branch managers and above, it's an extremely low number for us and we continue to be one of the best in the industry as far as that is concerned. So it's under manageable limit.

[Operator]

The next question is from the line of Shubhranshu Mishra from PhillipCapital.

[Lakshmipathy Deenadayalan, executive]

So actually we probably move to the next question which is from the line of Sameer Bhise from JM Financial.

[Operator]

The next question is from the line of Aditya Padhi from Girik Capital.

[Aditya Padhi, analyst]

Am I audible?

[Lakshmipathy Deenadayalan, executive]

Yes.

[Aditya Padhi, analyst]

Congratulations on a wonderful set of numbers. And just, sir, one question. Regarding the portfolio yield on your Slide 38, we can see there's a 20 bps drop in the Q2 FY '24. Any reason for that? So see, you'll just have to look at this a little differently. We will always have about 20, 25 basis points movement in the yield because see, the way that the entire approval process happens is on an ideal basis. While whatever is the difference that is charged to the customer on an overdue account, it's because of the -- it's through the penal interest methodology, which doesn't come into the yield. So whenever there is a reduction in overdue or whenever there is a little bit of ideal numbers not coming through in terms of the repayment schedule, you will see a slight movement in the yield. So our submission is that don't give too much of importance to a 20, 25 basis points movement in field this way that way. We'll always see that happening, depending on how the DPD numbers stack up because we assume that the customer has actually made the payment while doing the approval for the next month and the overdue also gets added to the denominator. So both these aspects may pull down the yield 15, 20 basis points this way that way. Unless the yields are going to go above or below by more than 25, 30 basis points is when the concern should be, which we have never seen in the past. So 15, 20 basis points, it is more accounting methodology rather than anything impacting the underlying portfolio.

[Operator]

Next question is from the line of Sameer Bhise from JM Financial.

[Sameer Bhise, analyst]

Yes. Am I audible?

[Lakshmipathy Deenadayalan, executive]

Yes, Sameer.

[Sameer Bhise, analyst]

Congrats on a strong set of numbers. Pathy sir, just wanted to ask on the competitive intensity in our core products, given that we've been doing so well. Have you seen competitive intensity increase and just some sense on the landscape going ahead.

[Lakshmipathy Deenadayalan, executive]

Yes. Of course, competitive intensity will be there in the minds of many lenders, whether that is going to actually take part at the ground level, we have to wait and see because everyone wanted to get into the lending to the shopkeepers and lending to the self-employeds of this country, that's the buzz word today. But my own view, it's my own view is the competitive intensity is increasing sub INR 1 lakh level and above INR 10 lakh level. There is a reason for it. Sub INR 1 lakh level, generally, it's the microfinance or unsecured loans, where your underwriting takes very little, right? You can underwrite it quickly, whether it is accurate or not, we have to wait and see but underwriting and your turnaround time is very quick. For a INR 10 lakh loan and above, you spend that much of good time for underwriting that. It is worth spending for that. That's what market thinks. But within between INR 1 lakh and INR 10 lakh, we see lesser people getting into it. Either they see it is operationally not viable or the underwriting becomes more challenged. I think that's where Five-Star kicks in. We have been doing it for the last 2 decades very well.Our sweet spot is between INR 3 lakhs to INR 5 lakhs. Here, the turnaround time for each file takes close to 5 to 7 days. So we spend almost 3 days at the ground level to underwrite their character cash flow and collateral. You know it very well. But people find it very difficult to get into these kind of loans to spend this much of time. But for us, it makes more sense because we have been doing it year-on-year. So keeping these things in mind, I'm seeing the competitiveness is increasing, but it is not as in any other products that what we see, vehicles, gold or home loans, comparing to that, the competitive intensity is lesser here because a lot of work has to be done by any lender if he wants to be a long-term lender.

[Sameer Bhise, analyst]

Okay. And what kind of players have you seen incrementally looking at this product, are these SSDs or smaller NBFCs or any of the technology-led companies also are looking at this product?

[Lakshmipathy Deenadayalan, executive]

Sameer, I'll say all. I don't want to miss anyone because everyone wanted to get in. But let me put an important point. See, everyone wanted to get into [ at ] their experience and their beliefs. For example, just to take fintech, I have already said in the conference call, fintechs, they wanted to get into this shopkeepers lending, but I don't know how successful they are. Only the data you people have to share with us. But their product is a little different and their place of operation is a little different. They are operating in Tier 1 and Tier 2, whereas we are operating at Tier 3 to Tier 7 towns, which is even at 25,000 population Five-Star branch will be there. But at that location, the technology penetration or the QR code penetration is not high. So their place of operations are Tier 1 and Tier 2, and our place of operation is a little different.And coming to the product also, they lend to unsecured short-term cash flow based algorithm, whereas we lend a bigger-ticket size to set up a business or to repay money lenders borrowing for a longer term, 7 years. So I think you have to see lending to a shopkeeper can be the same, but the product is different, the place of operation is different.

[Sameer Bhise, analyst]

Fair enough. This is actually helpful. Secondly, in terms of the technology piece are we like fully live on sales force across all branches now?

[Lakshmipathy Deenadayalan, executive]

Yes, I'll ask Rangarajan to explain that.

[Rangarajan Krishnan, executive]

So Sameer, we have given a gliding path wherein we wanted to move from the old ERP that we had in the sales force. So as of the first quarter-end, we had gone live only with 1 state, which is Tami Nadu. As of Q2, we have gone live with Karnataka and all the Central Indian states, and we have given a clear path that by end of Q3, it will be fully live. So as we speak in October, we have gone live with one of our biggest states, which is Andhra Pradesh. So that leaves us only with one state, which is yet to go live which is Telangana. And incidentally, we are kicking off the training in Telangana today. So we are well -- clearly on the path to a complete integration with the sales at the end of Q3.

[Lakshmipathy Deenadayalan, executive]

So Sameer, I just wanted to highlight 1 point here, transforming from one ERP to other ERP is a big exercise. Five-Star started this exercise from Q1 of this financial year, and we are successfully doing it on a quarter-on-quarter basis. If you see our disbursement or growth didn't come under any effect at all? So the credit has to be given to our teams for planning which state to go live and when. So I think we will completely move from an existing ERP to the new ERP without any disturbance in the growth and disbursements. So that is the key point. I don't see any growth disturbance happening because of the ERP transition.

[Sameer Bhise, analyst]

This is helpful. Sir, one final question to Srikanth on securitization. How do we see the opportunity going ahead? Or do you want to keep the share at current levels?

[Srikanth Gopalakrishnan, executive]

Sameer, so we are definitely looking at broad basing our borrowings in terms of various structures, in terms of the type of lenders from whom we borrow. Securitization is definitely an attractive source given that it's the ring-fence pool of receivables, there is a great enhancement that we offer to the lender. So we are looking at securitization as one of the key avenues for our -- as a funding resource. But having said that, given that at the time of giving these loans, these probably are a little more cherry-pick as compared to the other loans. We would not want to be very high on securitization. Specifically, we'll try and maintain at about 25% to 35% of our overall borrowings.In fact, we onboarded one very strong name. That's the name that I said, which ideally should have gotten signed by 29th September. Because of the change in holidays, it was pushed to 3rd October. So Deutsche Bank has actually taken a INR 350 crore exposure through investment in one of our PTPs. So we will continue to keep evaluating that from the right kind of lenders and for a good amount of quantum. Given that it's an on-book treatment today, we don't really distinguish too much between a term loan and a securitized receivable. So we'll continue to look at it, but we will ensure that we don't probably cross, let's say, 1/3 of our borrowings in the form of securitization.

[Sameer Bhise, analyst]

Okay. This is helpful. And all the best.

[Operator]

The next question is from the line of Nischint Chawathe from Kotak.

[Nischint Chawathe, analyst]

The first one is on the borrowings mix and the share of NCD has kind of come down to 4%. Any specific reason? I mean, it's come down -- or it has kind of collapsed from like 35%, 40% in the past.

[Srikanth Gopalakrishnan, executive]

So listen, there's no specific reason as such. A lot of NCDs got onboarded, especially during the COVID first wave and the COVID second wave as part of the TLTRO and [ PCD schemes ], all of which got redeemed in the recent past. And today, the markets are a little choppy. While definitely, we are exploring raising NCDs from mutual funds, from alternate investment funds, wealth of the people, the interest rates are not that conducive. If you compare the differential between a bank term loan and an NCD interest rate, the difference is almost like 50, 75 basis points.So today -- given that we are getting a good traction from banks through the term loans and the fact that these are coming in at more attractive rates and for longer tenures, today markets are not willing to take exposures of more than, let us say, 2, 2.5 years, while our product is a 7-year loan. So keeping in mind the cost consideration, ALS consideration, we have been a little more skewed towards term loans. But having said that, we are making all our efforts towards penetrating the NCD markets across various categories of institutions, and you will see that going up in the next few quarters.

[Nischint Chawathe, analyst]

I mean if I look at it, your cost of funding is 9.5%. If we are seeing 50, 75 basis points, you are effectively saying that the NCD demand is coming closer to around 10%, 10.25%, which is somewhere closer to probably what an A-rated company may be borrowing. So I'm just wondering that -- so were the investors in these NCDs earlier mutual funds or the banks? Or is it something that probably a set of kind of lenders are today missing in our borrowings profile?

[Srikanth Gopalakrishnan, executive]

I would probably say mutual funds are one set of categories that we have been targeting. But they have been a little choppy to say. They're not extreme -- like I said, they're not willing to take a longer tenor debt on an NCD. If today, we have to do an 18, 24-month kind of NCD, I think we will get that for, let's say, 9.25% and 25 basis points over than what we are coming through. But other than that, especially in the past, like I said, the TLTRO and PCD, NCDs were subscribed to by the banks. So as a category, mutual funds have been a little more nascent in our portfolio. We probably had mutual fund borrowings only from 1 or 2 AMPs. But that is something that we are trying to address. But today, there is also a good amount of demand for NCDs from AIS, from wealth management firms, there are corporates who want to subscribe to the NCDs as part of their investment strategy. So I think we will definitely see traction coming through. We are also making some headway with mutual funds. But like I said, it's a little time-consuming process given the lack of complete stability in the market. But sooner than later, I think we will have NCD traction building up substantially.

[Nischint Chawathe, analyst]

Sure. The second question is on growth. The way you're tracking growth in the first half of the year, do you want to increase the guidance for the year?

[Lakshmipathy Deenadayalan, executive]

Nischint, Pathy, here. If you recollect in the month of May and June, we came to the market and we revised our guidance from 30% to 35%. Having said that, our growth is becoming stronger quarter-on-quarter, we're able to be 9% sequentially, and that will continue in the next quarter also turns as well. We don't want to revise the guidance immediately. We'll wait and watch how this demand at the ground level, it is picking up. As we guided to the market, we'll open 70 to 80 branches. Already we have opened 100 branches in first 6 months, 83 branches, more precise. So that shows that the demand at the ground level is picking up very well.But I don't want to give too much of guidance changes this way and that way. So we'll wait for next 2 quarters. Definitely, the same trend continues. March quarter, I'll come out with a revised guidance, if needed. But as I speak now, the 35% growth guidance, which we changed now becomes more stronger and stronger in our mind. This will be there for a longer period.

[Nischint Chawathe, analyst]

So the question actually essentially was that are you able to see anything in the ground because of which you would sort of have a slightly softer guidance for the year? [indiscernible]

[Lakshmipathy Deenadayalan, executive]

Yes, I understand. I understood that. I don't see anything affecting our guidance growth because we have said 35% growth, and we have been growing at 40% year-on-year comparatively. I don't see anything affecting at the ground level. The cash flows are good. The demands are good. As I said, we opened more branches seeing a good demand, mostly in the southern states and the new states which we wanted to get in. And month-on-month, also our disbursements are going up. So I'm not seeing any significant insights from the ground level that will affect the growth trajectory.

[Operator]

The next question is from the line of Ajit Kumar from Nomura.

[Ajit Kumar, analyst]

So 2 to 3 questions from my side. First one is, if I look at your state-wise AUM numbers, growth in AP has been quite strong from past 5 to 6 quarters, higher than the overall AUM growth. Any specific reason for this? And do you expect this trend to continue? That is my first question.

[Lakshmipathy Deenadayalan, executive]

Yes, Ajit. I'll take up the first question. See, I think the southern states are a big contribution for our disbursement and our AUM, close to 96% of our growth comes from south. If you bifurcate south, Andhra is now becoming a leading contributor to the disbursement and AUM growth because we see good demand there. The population is very good, and you see a lot of towns interconnected very closely in -- especially in the coastal part of Andhra, where most of our branches have been present.So we also see a very good collection traction in Andhra. Keeping all this in mind, we are investing a lot in Andhra. Even from out of the 80-plus branches which we opened for the first 6 months, I think more than 50% of the branches would have gone to Andhra. So we see a good demand there. The collection culture is good there. And the team, what we have gathered there is also giving us a very great result. All put together, Andhra is improving their AUM on a Q-on-Q basis.That doesn't mean Tamil Nadu, Telangana and Karnataka is lagging that. But comparatively Andhra's growth looks pretty good, and we are very happy with the way in which we have taken up Andhra.

[Ajit Kumar, analyst]

Sure, sure. Second question is how should we look at the branch addition going forward? You had guided earlier 50 to 70 branch addition every year. But this quarter itself, we have added roughly 70 branches. So what would be the momentum going forward as well?

[Lakshmipathy Deenadayalan, executive]

Yes, momentum will be strong is what we hope because one of the key metrics which induces us to open branches is the demand at the ground level. How do we measure that? When a branch is getting break-evened in 6 months, that means the branch is [ gardening ] close to INR 2.5 crores of AUM in first 6 months. So that gives a clear indication that the customers wanted to move from informal to formal side and come to Five-Star for their business and housing needs. So this is the first and foremost indication, what we have to see at the ground level. Till now it's very encouraging. The branches what we have opened is breaking even at 6 to 9 months as we speak.So I'm thinking we will revise the guidance of branch opening now moving from 70 to 80, what we said this year, we will be at close to surprisingly as close to 120 branches for this full financial year. If all things go well, we will add another 40 branches in the next 6 months.

[Ajit Kumar, analyst]

And lastly, 30+ DPD has come down to 8.6%, which is great. So looking at the current situation on ground, how should this number trend, let's say, in the remaining half of the year?

[Srikanth Gopalakrishnan, executive]

So, Ajit, there has been a clear focus in making sure that the collection efficiency is starting up extremely well, especially the unique collection efficiency that we track. And we have given you the numbers. So the unique collection efficiency that Mr. Pathy also mentioned in his opening remarks, we have crossed 98%. So that's clearly arresting the forward flows to a very, very significant extent. So you will see this number getting improved even further. Let me say that the current portfolio will go closer to 90%. Obviously, the 30+ will drop even further to where we expect in the next 2 to 3 quarters.

[Operator]

The next question is from the line of Jaiprakash Toshniwa from LIC MF.

[Jaiprakash Toshniwal, analyst]

Sir, taking the question of Nischint on NCD side, is there a discussion with credit rating agencies to improve our rating and if that's yes, then what are the KPIs we are looking to increase our ratings?

[Srikanth Gopalakrishnan, executive]

So Jai, I think we have gotten the rating upgrades from A+ to AA- over the last couple of quarters. Some of the rating agencies came up in the December or the March quarter and one rating agency upgraded us in the last quarter. So I don't think there is any immediate rating upgrade on the annual. The next rating upgrade will probably depend upon the kind of portfolio growth that we get to and maybe a little bit comfort of the rating agency in terms of seasoning of the portfolio.But having said all this, yes, I think today, the NCD market is not coming in is because not just because of company-specific factors. There are a lot of microeconomic factors which are at play, especially there are companies who are willing to offer significantly higher rates to on board NCDs and especially companies, the gold loan NBFCs, microfinance companies and even vehicles, they are willing to take monies at shorter tenures which is more attractive given the volatile interest rate environment. People are not willing to commit for a longer period of time. They don't know how the entire interest rate scenario is going to stack up, which is where we are probably not able to raise as much of NCDs as we would have liked because we want at least for a 3 or a 3-plus year kind of a tenure. And the rates to stack up closer to what we are borrowing either through the term loan or securitization, but the numbers are a little wacky.And given that our demand is being met by banks through term loans and securitization transactions, we have not aggressively gone out to issue LCDs for subscription. But having said that, there is a very clear mandate to the treasury internally that we will have to push the NCDs both through the private placement and also public issue of NCDs, which may come in during the later part of this year or early part of next year. So I think you will start seeing traction coming in the next few quarters and the NCD proportion also going up significantly.Hopefully, the interest rate environment also will get a lot more benign. And then with that stability, I think we should be attractively looked at even by the NCD players, be it the mutual fund, AIS or the wealth management funds for them to invest monies into our papers.

[Jaiprakash Toshniwal, analyst]

Okay. Second question is, sir, on our AUM of state-wise. So if we look into the last 2 quarters, you have added Rajasthan and it's [indiscernible] Maharashtra, Chhattisgarh, Uttar Pradesh, the growth is pretty slow out there in terms of [indiscernible]. So anything specific you want to highlight or it's just that you're building up the portfolio and being cautious on [indiscernible]?

[Lakshmipathy Deenadayalan, executive]

Yes. Jai, this is Pathy here. Jai, your point is very clear, and we picked up very well. That is our style. If you have been hearing our conference call since last 5 times, we are very clear here to say we are not going to rush for the growth in the newer geographies. We don't want to do that. So the growth is going to come from the southern market where we have been lending and collecting for last 20 years. That gives us a great confidence whom we are lending, how we are lending and how we are collecting the EMIs back.Having said that, if you see 3 years, 5 years down the line, we don't want to be in a southern market alone. We want to be a pan-India market. So we are starting to invest people -- starting to lend in the newer markets slowly but steadily. So whatever the growth guidance I have given, I have only given keeping the South market in mind. And I don't want to pressurize my rest of the country team to show the growth and lend into wrong hands.So we want to be very slow, and we want to be very steady. If you see quarter-on-quarter or year-on-year, the states what you said, we'll have a steady growth. But please don't compare that with the Southern market because that's our growth engine, whereas the rest of the country will become a growth engine at the right time.So now I'll hand it over to Ranga to talk a little bit more on the rest of the country.

[Rangarajan Krishnan, executive]

So as Pathy has rightly summarized it, as far as any new state is concerned, we've always been guiding that we will be extremely conservative in the first 24 months. So in the first 24 months we will hardly be opening, maybe 4 to 6 branches only in a newer state because the 24-month [ subsidiary ] period is an extremely critical period for us, where we get to see a variety of things clearly on the ground. That includes our own people, that includes the first few loans that we have lent. We also told you in the past that for the first probably a year or so, every loan that we give out in a new state is approved either by [indiscernible].So we are that much very, very clearly focused on what are the set of customers that we are building in the new state, who are the teams that we are hitting in the first -- in the few branches. So these new states, we will pick it up slowly. If you look at Madhya Pradesh, which we opened about 5 years back, today Madhya Pradesh has more than 50 branches. So it's not going to -- growth is not going to come in a sudden manner in newer states. The growth is more than adequately compensated in the southern markets. In the newer markets, this year we will identify Rajasthan, UP and Gujarat apart from expansion in Maharashtra. So these are the new markets where we'll clearly see us putting up branches and putting us on investing teams, but the growth will definitely take time to pick up in the newer states.

[Jaiprakash Toshniwal, analyst]

Okay. Interesting, sir. And just last question, while you mentioned that competitive intensity is there from everywhere, you are not concerned much about it. So what are the key areas or pointers you are right now focusing on in terms of concerning points or anything you want to highlight?

[Lakshmipathy Deenadayalan, executive]

We are focusing on what we have been focusing for the last 20 years, nothing special that we are taking from a competitive intensity perspective. As I said, competitive intensity should be there for a right product. So people are all willing to get into this segment, bigger NBFCs and smaller finance banks. But the experience says it's not so easy game to play. But it's a good part to play sub- INR1 lakh and more than INR 10 lakh, INR 15 lakh area where people find it very comfortable. But nothing specific that we are worried about competitiveness, and we are not growing aggressively or we are not growing slowly, we are tweaking our lending rates, nothing doing from our side.We are doing our business as we've been doing. But one point what I wanted to emphasize here, we don't want to be a southern lender anymore. So we want to be at pan-India. Maybe the competitiveness is -- maybe one of the reasons where we wanted to get into newer locations also. So we are very keen. As Ranga said, today, we are at 9 states. We'll be at 10, 11 states a year or 2. So that also keeps us more safer that we have reached to the more geographies and more people know Five-Star.

[Operator]

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

[Vivek Ramakrishnan, analyst]

Sir, most of my questions have been answered and good wishes to you all. Just as a follow-up, in terms of when you go into a new state, are you finding any major cultural differences when you compare to the Southern states where you are comfortable in? That's question #1.Question #2 is in terms of attrition, when you do that at the lower management level, which is what you said, where do they usually grow? Do you have any idea whether they're going to another bank or an NBFC? That's question #2.And question #3, I don't know -- we buy into your optimism, but if you could tell us what worries you on the ground, that will be useful also.

[Lakshmipathy Deenadayalan, executive]

From a newer state, I'll ask Ranga to answer. On question #2, I can't answer anything with whom we are going towards. I think, see, this business model is very unique. I don't think no one does this kind of business model, underwriting, collection setup, which I have not seen any NBFCs because we are not copied from anyone. Everything has been built here from the base of the experience. So we don't specifically take people from a specific name or specific entity. Anyone wishes to grow their career can join Five-Star because they can grow their careers because the company is good. The growth rates are good, the incentives are good. The business model competitiveness is lower comparing to other products. So anyone can join Five-Start and earn a good name and career in Five-Star.Talking to the third point, which you said nothing specific concerns me at this given point of time. It is good that people all talk about lending to small businesses. We are happy to [ register ] ourselves that we are a category creator. When no one saw this as an opportunity 20 years back, we saw this as an opportunity and we never diverted into any other product. We just sticked on with the same customers, same profiles for decades. So we are very happy that more people are looking into it. So I don't see any concern. I feel a bit proud that we are able to take this category from informal to slowly to the formal side.

[Rangarajan Krishnan, executive]

Vivek on the first question where you were asking about any cultural differences in newer states. There will be definitely cultural differences. I think in India, taste changes every 50 kilometers. So you will not find that even restaurants are very similar in 50 kilometers. So which means when we are entering a new state, there will be cultural differences.See, there are fundamentally the set of customers that we target that does not differ. We still go behind essential services, we still go behind [indiscernible] category. But within that, there will always be slight nuances in cash flows, in repayment track. I think more importantly, there will be a lot of cultural differences between people, which is our own people. So remember every state has a unique culture in terms of loyalty, in terms of people sticking to a particular company, building career, admission levels are very different. So that's -- every state is different. I don't think we are saying one state is better than the other. But it's important for you to understand the nuances of that state to make sure that you're an attractive employee in that new state.Also what differs significantly between state to state is land and costs are very different. The way you evaluate the legal risks, the way you evaluate title rates and go get your mortgage registered is different. It's not one country still. So there are multiple nuances especially when it comes to dealing with ancestral properties and the way liabilities have been passed on through generations. It's a very different and nuanced market. So it takes time for you to learn these things, which is why in the first 24 months of entering a new state, we don't put pressure at all from a growth perspective for the newer state. It's more important for us to understand all the nuances, get the fundamental right and then set up the stage for growth for a longer period of time.

[Lakshmipathy Deenadayalan, executive]

Vivek, sorry, I misunderstood your question. If your question is on the attrition, where does our people go, if that is your question, yes, today, as this business model is getting more hotter and hotter, people are finding right talent from here, they chose Five-Star employees to pick and build it. But it is not so easy for that to people just to poach our employees and start building the Five-Star model. But as rightly said, this is not a model that can be built in overnight. It has to be built with the exercise.So I can't name where the people are moving in. Yes, there is a good amount of demand from our employee side which is getting poached by other NBFCs and small finance banks.

[Operator]

The next question is from the line of Pallavi Deshpande from Sameeksha Capital.

[Pallavi Deshpande, analyst]

Just wanted to know of these new branches that you'll be adding what would be the spread out South versus non-South? And second was on the collections and cash, what would be the percentage of that?

[Lakshmipathy Deenadayalan, executive]

So what we have been guiding to the market is close to 75% to 25% -- 75% is to 25%. That is 75% of the branches will be in South and 20%, 25% of the branches will be in rest of the country. So that's what we have been guiding. More or less, it's aligning with the same percentage, what I said.From a cash collection versus noncash, we are at -- close to 55% of our collections comes from cash and 45% comes from noncash in all types of digital media, including digital type, including the [ NASH ]. It used to be around 65% more that is slowly coming down to 55% now, and it may also further come down as we move forward. But we are not here to guide market that we'll be at so and so percentage of cash because we are very comfortable with cash. As long as customer is comfortable, we are comfortable. As long as customer feels digital is comfortable, we are comfortable. So there's nothing hard and fast from our side. As we speak, we have 55% of our collections coming in cash.

[Pallavi Deshpande, analyst]

Sir, on this guidance with regard to the branches, right, a year back, we were looking at more spreading out to the non-South region. Is there anything -- is there a change in strategy? Just wanted to understand that because -- I mean the opportunity may be still big in south, is that the reason?

[Lakshmipathy Deenadayalan, executive]

No opportunity in -- see, we have not changed this pattern what I guided earlier. It was 75% to 80% in percentage of branches in South and 25% to 20% of the branches will be in non-South, to be more specific. 1 or 2 branches can miss this way or that way. But broadly, our thought process is very clear. We want to be a very strong player in North going forward. Going forward means going forward for the next few years, not few quarters. But having said that, South is a very big market.Just to give a comparison, HDFC has close to 500 branches in Tamil Nadu. I just saw it in public domain. It's a public data. So we have only 120 branches here. If a bank has 500 branches, why can't we? So that's from 1 state, if you multiply that with 4 big states of South, which is Andhra, Telangana and Karnataka, you have a very huge opportunity in South itself. But as I said from a competitive intensity to improve our presence where we are not there, we are very clearly focused -- too focus on non-South, which is the central and the northern, western part of our countries. So there is no change in the thought process. Still, we feel South is a dominant place to operate and non-South is very key from Five-Star's perspective. So we are investing a lot in non-South too.

[Pallavi Deshpande, analyst]

Sir, 2 years hence do we see this mix changing? Because like you said, you wait for 2 years for the branches to mature. You open only 3 or 4. You see you learn about the state and then you open more branches. So does this mix change 2 years hence in terms of 75%, 25%?

[Lakshmipathy Deenadayalan, executive]

Certainly it will change. All depends upon the results of what we are getting from the non-South branches what we have put in Rajasthan, Uttar Pradesh and expanding in Gujarat and Maharashtra. So we'll wait and see how the results are. But as I said, we will not push for the results. Let the results come as it comes. When the results are good, when the green shoots are able to -- we are able to see that, definitely, we will not shy away by revising the guidance of 75% to 25%.

[Operator]

The next question is from the line of Saptarshee Chatterjee from [ Groww AMC ].

[Unknown Analyst]

Congratulations on the great numbers. My question is more on the environment part that already have touched upon it, but like we are seeing commentaries from the consumption companies that real and semi-urban consumption demand has been slow. But on that perspective, we are seeing that growth [indiscernible] as well as some of the NBFCs have been very strong. So can you please touch upon how you are seeing more of the like demand and cash flow of your customers? And there are you -- do you have to like pedal more towards distribution-driven growth and customer acquisition-driven growth or more customer acquisitions? Or it is a strong demand?

[Srikanth Gopalakrishnan, executive]

So Saptarshee, there are 2 ways to tackle this question. One is, what are you seeing primarily from a consumption perspective on rural and semi-urban. And our growth is purely not dependent only on that aspect. Our growth is also dependent on how much of conversions that we're able to do from people who are moving from unorganized to organized sector. So as far as that is concerned, we are clearly seeing trends in markets after market wherever we are able to open new branches, we are seeing very, very good traction, and we're able to convert more and more people from unorganized money leading to more organized this one -- lending. So that is what is giving us a solid growth on the ground.So the strategy has not changed for us. I think that is what is giving us the confidence from a growth guidance perspective also. Of course, it is going to be a combination of distribution-led growth. So that's where we have now increased the guidance in terms of number of branches that we are willing to open in a particular year. We've already opened 83 branches for this year. And Mr. Pathy has guided just now that we will be at least opening another 40 to 45 branches during this year itself. So it is going to be a combination of distribution-led strategy and the fact of people moving from unorganized to organized that is giving us the combination of good growth guidance.

[Unknown Analyst]

Understood. Very helpful. Just one part on this which is that these revised branches, are you going much deeper into the geographics like some Tier 2, Tier 4 to Tier 5, Tier 6 for the branches?

[Srikanth Gopalakrishnan, executive]

So we have 2 branch-led strategies. One is what do we do in the southern markets and second is what do we do on the non-South out markets? So as far as the southern markets are concerned, the clear strategy of the company is penetrate deeper and deeper. We are already going up to Tier 7 cities, and we still have huge opportunity for us, even within Tier 6, Tier 7 cities in each of the southern markets where we are already present. So as far as South is concerned, the strategy clearly is penetrate deeper and deeper, open more branches, expand the franchise and attract customers more and more.But as far as the non-South locations are concerned, we are just putting the first few branches probably in a particular state. So in these states, we are still not going very, very deep. Most of our branches are still in probably Tier 2 to Tier 3 or Tier 4 cities. We will penetrate these larger cities first, get a hand of the culture and the state and slowly penetrate in these states as we move forward from here.

[Unknown Analyst]

Understood, sir. Very helpful. And last question is on the yields part. Like wanted to know -- you have already touched upon the competition, but wanted to know what are the yield level that your competition is working on and therefore the differential of your yield versus competition? And overall, let's say, some 2, 3 years down the line, do you see that growth and yields will be a challenge? And if the situations and demands worsen, which one will you prioritize more on, either on yields or on growth?

[Lakshmipathy Deenadayalan, executive]

So Saptarshee, I think on the yields, if you look at from a competition perspective, we are probably lower. If not -- we are at least at par, if not lower than our competitors. So it is not very differential and the kind of demand that we are getting. If we are way off from the market, this is not the demand that we'll be getting. So we are at par in the market. In fact, we are actually better than some of the bigger players also in terms of the yields.And like we have been guiding, see our intent is not to keep the yields at where they are today. Our intent is to ensure that we maintain the spreads. Now we had quite some benefit on the cost of funds coming through in the last about 4 to 6 quarters. And given the very volatile interest rate environment, we have not past some of these benefits to our borrowers, which we will start gradually passing on once the interest rate environment becomes a lot more predictable. So the question is not compromising yield or compromising growth or whatever. I think the question is more towards ensuring that we are a responsible lender, lending at the right interest rates to our borrowers.See, the segment is not very price sensitive. So a percentage difference in yield for 7-year loans will probably translate to about INR 70 to INR 80 of EMI every month for INR 1 lakh of loan. So it's not a really price-sensitive segment. But at the same time, we want to be a responsible lender and operate at around 12% to 13% kind of a spread in a steady-state scenario. So once the interest rate environment settles, I think we'll start seeing some benefits that we pass on to our borrowers. So in terms of -- not with a view to ensure that we get the growth that we want. But like I said, being a responsible lender and ensuring that the borrowers get the optimal cost for their borrowings.

[Operator]

The next question is from the line of [ Aravind ] from Sundaram Alternates.

[Unknown Analyst]

Congratulations on the great set of numbers. Most of my questions are answered. I just have like one question like on this, gross Stage 3 assets in terms of 1-year lag. I can see that like from first quarter of 2023, it's been inching up. Is that -- is there any -- some cause of concern there [indiscernible]? And I have one more question on other income. I will come to it.

[Lakshmipathy Deenadayalan, executive]

So I think the intent is not concern. The point is also that when you are growing the lag is slightly higher. And compared to what we have been seeing in FY '21 or FY '22, the growth was also much slower. So the buildup was much lesser. But having said that, if you look at the last -- the last quarter numbers also, typically, the 1-year lag has always been at around 1.75% to 2% level. And this is something that we have shown the Q2 FY '21, which was a COVID period, Q2 FY '22, which was again a COVID period, and Q2 FY '24. So I think largely, the numbers will be around the 2% level, which is where this number has always been even in the past.In fact, it used to be more if we extrapolated a few quarters earlier when we were on a much faster growth pace, this number would have been higher. But a 1-year lag will typically settle at around the 1.75% to 2% level. And this also has the new RBI norm built into, right? It's 1.35%. So you should also take that into consideration. When you look at Q2 FY '21 or Q2 FY '22, that does not have the RBI norm getting built. So technically, if you see 1.7% of Q2 FY '22, it's not an apple-to-apple comparison as against 1.95% of Q2 FY '24. There is -- the Q2 FY '22 would have been a [ 90-plus ] number of about 1% to 1.1%. Recently what we are looking at the new IRAC number of 1.35% for Q2 FY '24. So you'll also have to factor in for the 20, 30 basis points increase.

[Unknown Executive]

And just 2 more questions. So one is on other income. Other income doesn't look like disconnected to disbursements, even though the disbursements have grown quarter-on-quarter like the other income [indiscernible] income hasn't grown. That is one thing. And operating expenses, I have one question on that. Like, so we are investing heavily in the IT, like either for ERP or other technological transformation stuff. Will that have an impact on OpEx to profit ratio or cost to income ratio like in a significant way?

[Lakshmipathy Deenadayalan, executive]

So firstly, Arvind, on the -- your observation is right on the other income. The other incomes are predominantly investment income that we earn on our FDs, that we earn on our mutual funds on the excess liquidity that we carry. So it does not really have a straight correlation to the disbursals that we do. It depends on the kind of borrowings that we do and the yields that are available out there. So last year, the other incomes were actually lower because the yields were much lower in the market. The yields are definitely getting better and this where we are seeing the other incomes getting higher.See, in terms of the operating expenses, while we are definitely putting a lot more investment into the technology and all that, rather than looking at either an operational expense in absolute quantum or whatever, I think the way that you will also have to see is look at the cost to incomes. So which is where we guided our cost to income is expected to be around the 35% to 37% range. And this is not a permeant range for the last 4 to 6 quarters ever since we have been -- even prior to that, it was range bound, but the last 5 quarters when we've been public, I think it has remained range bound around the 36% to 37% level. We are very confident that despite the investments that we make into technology, we are not doing anything that's probably a [ sum cost ] that will give us benefits over a long period of time, we are reaping the benefits. So you will see the cost to income to stabilize around those levels in the quarters to come as well. So no adverse impact expected on the P&L because of additional technology spends or the slightly increased operating expenses.

[Unknown Analyst]

Sure. But my question is [indiscernible] just on the core fee income, the INR 42 crores I guess.

[Lakshmipathy Deenadayalan, executive]

Sorry, Arvind, is there something that's remaining unanswered for you?

[Unknown Analyst]

Yes. Sir, like, I was asking specifically on the core fee income around like the INR 42 crores. I thought that was just related to disbursement. I understand the other income is a summation of the core fee income based on disbursement and then like investments we make and other [indiscernible].

[Lakshmipathy Deenadayalan, executive]

Today the core fee income is also part of the interest income. If you look at the interest income, it comprises of interest on loans, it comprises of interest on fixed deposits, it comprises of processing fees and the other legal and operational expenses, where the proportion remains unamortized. So everything is getting clubbed under the interest income in Slide 47 that we have given. The other 2 numbers that you're talking about, which is net gain on fair value changes is primarily on account of the mutual fund income that we do. And fee and other income will be primarily recovery of bad debt and the other incidental incomes that we get on account of certain storage costs and all that. The numbers are anyway fairly muted. It's about, INR 7 crores, INR 8 crores per quarter.

[Operator]

The next question is from the line of [ Harshvardhan Agrawal from Bandhan AMC ].

[Unknown Analyst]

I just wanted to understand, you mentioned that...

[Operator]

Harshvardhan sir, can you speak loudly? Your voice is very low.

[Unknown Analyst]

Sure. So just wanted to understand, we mentioned [indiscernible] second half of the year for the new branches are 120, earlier that was around 70, 80. Sir, just wanted [indiscernible] second half because I believe in opening branches there are some marketing expenses et cetera that will inch up. So does that mean that OpEx in the second half would be higher than the OpEx from the first half?

[Lakshmipathy Deenadayalan, executive]

See I think the good part is if you break that 120, 80 branches have been opened in first 6 months itself. So all the cost has been incurred in the cost as we have shown in the September itself. So it's only the balance 40, 45 branches, which we will be opening in the next 6 months. But the good part is the 80 branches, which got opened in the first 6 months starts to react more positively for the next 6 months. So that will adequately take care of the income side.I think I'll ask Srikant to explain it a little more.

[Srikanth Gopalakrishnan, executive]

Yes. See, on the operating expenses side, what we always say is, irrespective of the branches that we put in, our breakeven is one of the strongest. In about 6 to 9 months, we are able to break even at a branch level. And even for recovering [indiscernible] at office level, this is like 9 to 12 months that we are able to do. So from that perspective, there is no adverse impact that we are expecting either OpEx as a percentage of AUM or like I updated in the earlier question in terms of the cost to income. So the broad guidance around the OpEx to AUM of about 6%, 6.5% and the cost to income guidance of about 35% to 37% continues to stand even in the growing scenario.

[Lakshmipathy Deenadayalan, executive]

We will take one more final question.

[Operator]

Okay, sir. The next question is from the line of Nidhesh from Investec.

[Nidhesh Jain, analyst]

Sir, a couple of questions. First is, how is the vintage, let's say, 12-month MOB Stage 3 products? And second is how are the BT outtrades we are monitoring -- we are seeing in that portfolio?

[Lakshmipathy Deenadayalan, executive]

So, Nidhesh, I think the point is in terms of the Stage 3 1-year vintage, we will not see much at all. Like what we say is we don't -- what we track is mortality account, that is very, very far and few for us. So you will not see 1-year vintage loans, which are getting into Stage 3. Typically, the breakup of Stage 3 will be more like 3-plus year loans because our belief is for whatever, a little bit of shocks or delays that the customer could do, he may probably delay it [ 1 in 18 ] installments or so. So that means typically for him to get into Stage 3 will be at the end of the third year or so. So you will not really see too much of 1-year vintage in Stage 3. The quick mortality is extremely low.Sorry, what was the second question?

[Nidhesh Jain, analyst]

What are the balance transfer rates?

[Lakshmipathy Deenadayalan, executive]

See today our balance transfers, both in and out, are extremely minimal. Like we said, our business model is built to displace the money lenders. So while we'll be taking a lot of loans away from the unorganized markets, those don't typically classify as balance transfers in. And similarly, our borrowers are happy with us. As long as we provide them what they want in terms of the loan quantum, good service and the flexibility in terms of retaining, they're happy to stay with us. So I think you will not see either of the numbers crossing about 2%, 3% both BT in and BT out.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Lakshmipathy Deenadayalan sir, for closing comments.

[Lakshmipathy Deenadayalan, executive]

Yes. Thank you, participant. I know there is a few more questions lined up, but we've already crossed 1 hour, 45 minutes. And thank you for patiently being with us. We have -- we apologize for the building questions. Definitely, we will take it up in the next earning call or you can reach out to the IR team, where the number has been given in the website where we will take up your questions.To conclude, as I said, we have been with you for last full -- 1 full year with 5 quarters of numbers and what we say and what we deliver now matches very clearly. And we are very confident that this category, what we have built in the last 20 years here to stay and here to grow and Five-Star has an edge comparing with other lenders, the experience what we got in the last 20 years will help us to scale through with the right quality and right profitability without using these 2.So thank you again for reaching out in this conference call and be waiting for a long time, and we will meet in the next earnings call. Thank you.

[Operator]

Thank you. On behalf of ICICI Securities that concludes this conference. Thank you for joining us, and you may now disconnect your lines.