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IndoStar Capital Finance Ltd
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Good morning, ladies and gentlemen. Welcome to the IndoStar Capital Finance, Q1 FY '22 Results Conference Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Thanks a lot, Lisa, and good morning, everyone, and welcome to the IndoStar Capital Finance results conference call to discuss Q1 FY '22 [indiscernible]. Today, we have with us Mr. R. Sridhar, the Executive Vice Chairman and CEO; Mr. Amol Joshi, CFO; Mr. Deep Jaggi, Chief Business Officer; Ms. Jaya Janardanan, our Chief Operating Officer; and Mr. Salil Bawa, who is the Head of Investor Relations. Now without much ado, I hand it over to Mr. Sridhar for the opening comments, and post which, we will have a Q&A session. Thanks, and over to you, sir.
Thank you, Alpesh, and thanks for all the participants for taking time out to join this Q1 FY '22 earnings call. I hope all of you and family are staying safe and healthy. So before we discuss the Q1 numbers, I would like to set the context for our interaction to their [indiscernible]. So as you all know, IndoStar is managing a transition for the past few years from moving -- from corporate lending business to granular retail business. And when I joined in 2017, we had a 80-20 mix of corporate and retail, which we have in the last 4 years successfully converted in 20-80 almost. So in the last 2 or 3 years, when the entire industry faced multiple challenges, commencing from the credibility and liquidity crisis [indiscernible] and other, followed by sluggish GDP through the down cycle and on top of it, along with 15, 16 months of pandemic COVID 1 and COVID 2. So during this challenging period, we have achieved a few strategic initiatives, which have put IndoStar on a strong wicket for future growth. So the first few thing which we have done during this period, is strengthening of the balance sheet. So in that respect, we have been able to bring a global strong private equity, Brookfield, which is the second largest in the world. Brookfield had multiple options to invest in the NBFC space as we have multiple partners who are looking for capital. In fact -- finally, the chemistry workout and Brookfield has taken equity in the company. And now become a significant, second largest shareholder with a majority stake. This partnership has not only provided capital -- growth capital, but also strengthened our hand and that Brookfield had a lot of relationships with the banking community. It has also improved our liquidity pipeline substantially. So at one stroke, we have strengthened the liability substantially. Because of the huge growth capital had come and also looking into the impact of the challenges, which we were facing in the environment, Board has mandated the company and the management to clean the books. So we have taken accelerated provision, aggressive write-off and a couple of various transactions we have done in the last 2 years, particularly in March '20 and in March '21. And with that, by Q1 of June 30, I see that we have completely cleaned the book, and I do feel that there will be no further credit cost, which will come on the portfolio, which is up to 31st of October 2020. So these 2 have been the major decision, which we have taken to strengthen the liability side. The third major decision we have taken is a partnership with ICICI Bank as we have encountered a massive liquidity crunch in the market growth. As a strategy we have built a partnership with ICICI Bank where we have already lent more than INR 1000 crores in the CV business on a franchisee model, equal lending model, and we have renegotiated the commercial. And that partnership is going to let us leverage more going forward as well as it will provide the much-needed liquidity interest when the liquidity comes -- the liquidity crunch comes back in our 5-year lens. So with this kind of initiatives we have done, we have also prepared an aspirational 5-year plan commencing from 30 April, 2021 to 31st March 2026. Where we have articulated clearly our granular retail journey. So in that, what we have done in the 5-year plan is, clearly, we have spelled out that we will exit the Corporate Lending business. We are now 77% retail and 23% corporate, which I hope that by March 2022, will come down below 10%. And in the next 1 year, which will eventually become 0, leading to the IndoStar becoming a fully 100% retail financing company.And in the retail financing space, we are strategically going to use 3 balance sheets. The parent balance sheet is going to be fully 100% used within, which will comprise of mainly used to commercial vehicle financing business. In the used commercial vehicle financing business, which we have been doing, we are going to expand geography, product as well as customer segment. As you all know, there are 2 major companies in the business, it's Shriram Transport and Chola. So we have carved a list for our customer segment, which is beyond first time users. Shriram Transport is leader in first time user segment. We are not going to be [indiscernible] there. It's a very difficult business. So we are going to be from first time borrowers to [indiscernible] owners as against the earlier customer segment of 2 or 3 vehicles owned. So this expands our customer base for future growth potential. As we are presenting 250 locations, we have an aspiration to build 1,000 branches, which would be built on a hub and spoke model with smart branches. The hub and spoke focus for every hub there in 3 branches and on greenhouse center, consisting of 5 business locations, contributing to about INR 6 crores per month disbursement. So today, we have 250 after 2 hubs they shall contribute about INR 300 crores per month. From there, we are moving to 200 hubs in the next 5 years. So that is the geographical expansion, which will consist of all the 4 zones east, west north and south, as well as we have already started our presence at Northeast. So that is one. The third is the product expansion. Apart from used commercial vehicles, we will also be creating preference in tractors, passenger commercial vehicles and construction equipment. We do hope that our projections show this will not go beyond 5% each contributing to 15% in total. The balance 85% will be in used commercial vehicle. So we are going to focus on 5 to 12 segments where the penetration of the current player is less than 50%, meaning a lot of scope for us to gain market share. And as you all know, the scrappage policy is on the implementation phase. Once the pandemic subsides, it's going to come and we estimate that 78 lack vehicles, which are due on 15 years will be phased out gradually, and this will generate a huge replacement demand of INR 100,000 to INR 126 crores. So facing this kind of an opportunity, we have strengthened our senior management team by bringing in a Chief Business Officer, who has totally 20 years in this space. And recently, did -- and recently we have brought Mr. Ravikumar, another 20-year veteran for Chola. Both of them have come and they have been followed by a lot of regional, divisional and [indiscernible]. So we have fantastic team in place at and the proof of it is in the business which we have done from November 2020. After the pandemic moratorium and [indiscernible], the portfolio we have generated in the last 9 months from November to July of INR 1,250 crores. Most of the more than 95% of them Stage 1, which is true, but the -- what we have done, the learnings we have made at the past and changes we have made in the team as well as the policy is going to be fantastic. So from current INR 3,000 crores, we feel that in the next 5 years, this used commercial vehicle finance business will grow at least to 10x in the next 5 years. That is the kind of potential is there, and we are well prepared to take that advantage. As far as the second balance sheet is concerned, which is going to be our housing finance business, where we have focused on [indiscernible]. I am happy to inform you that we have crossed INR 1,000 crores AUM in this business. In the last 2, 3 years, we have been very good. This is a incredible jewel in our crown, the housing finance business. This business, we have started during 2018, and we have generated INR 1,000 crores AUM, good -- a good profitability and what is raised exceptional asset quality. So the management team, which had given us this kind of a performance made the Board and the shareholders see that the business instead of being a stand-alone should be more independent. So we have recently promoted our business to a CEO position, and we have capitalized this company substantially. And also, we are going to reconstitute the Board, and we are going to do everything, which will make this independent in the next 6 months. So this business is, as you all know, is going to be in 6 or 7 states consisting of mostly south and west states. And it is going to be the self-construction state. The ticket size is less than INR 10 lakhs, finance is going to be around 14%. As the cost of funds is very low. And the risk is less, we feel that this business will be more than 3% ROA business with leverage it can produce a fantastic economy with in.The credit cost in this business in a far as we are concerned is substantially low. And we do feel that we will be able to grow this business from the current INR 1,000 crores by 7 to 8x in the next 5 years, that is the kind of potential is there. And this business will grow its separate independent branches and people. The third balance sheet we are going to use is going to be the partnership bank balance sheet, which is an off-balance sheet strategy we have developed for our SME as well as the new vehicle business. As you all know, we have developed a business partnership with ICICI Bank that will be strengthened going forward. So the low-end main business is coming from new vehicle business will be done in partnership this time. So with these 3 initiatives, we do feel that we have a fantastic growth story in the retail business from Q1 FY '22. So in commercial vehicle financial business, the used commercial vehicle and the other 3 products will be giving a 17% to 18% yield, and we have already touched in July 17.5% yield. So that would be further strengthened. And with the cost of funds going down, we have now 9.5% projected to be made, and we are going to be reach the capital of about 30% at double-digit making a smart banking going to be there. With smart branches where the expansion of the branches, operating expenses are going to be low and with the digitization, we do see the operating expenses will be controlled and the productivity will be increased. Where we would be able to produce a very good return on asset in both these businesses. With our balance sheet strategy, the leverage is going to be fantastic. So with these things with the kind of liability strength, which we have done, what we are looking at is no more further credit cost, the business teams are committing to us that the business which we will be doing most of them, more than 90% of them will be at stage 1. Necessitating a lesser credit provisioning, as we are carrying in the past 2 years, a lot of provisions with the write-off, we are also working on a micro level with each and every contract to enable and look at write-backs. The write-offs, which we have done are mostly technical write-off, which are being done in the accounts and the balance sheet. But as far as the business is concerned, the collection initiatives are continuing. So we do expect that no further credit cost and there is a very good possibility of write-back. So all our challenges and problems are behind us, and we are looking forward to 5 years of an exciting journey, where we are making IndoStar as an emerging company with good business of granular, small ticket, highly scalable, high potential and profitable. With the kind of infrastructure investments, smart branches and the digitization. We do see the operating expenses control and credit cost control. We should be in a position to bring a fantastic retail book. A few words about Corporate before I leave the forum for questions. Is the Corporate book, as I've told you is bending down, and today, we have a total INR 900 crores book. We have already taken a provision of INR 200 crores. The management overlay where which we have estimated could be the virtual aspect of the run down this business. But we do see that more than appreciate and I do feel that it is fully protected and covered, but here also, there is a possibility of some write-back. As the borrowers with whom we have a long relationship, when they understand that we are not going to lend further, they are also shifting to our lender -- the balance tranches for happening with [indiscernible] literally near 0. So we do expect that we have a cushion there. So we are looking forward to a fantastic 5 years. The IndoStar is growing on rotation in good business lines. So we have put the building blocks on both liabilities as well as on the asset side. As we are building our branches from 250 to 1000. You will find that our cost to income as well as the operating expenses will be cut that we should all be viewed as expenses, these are all investments. And as we are combining smart branches, which are very cost effective with the digitalization, the breakeven of these centers are made 50% time. In earlier it used to take 15, 16 months, now it's going to be 8 to 9 months. So all these branches are going to pay back quickly. And in the ramp-up period, it is necessary for us to invest. And that's why you will find that the little cost to income but other income going up with good deals, we do expect that cost to income will come down to 30% in the next 5 years. So that is the kind of information or preview I'm giving to you. As far as the Q1 is concerned, I would consider this to be a strong quarter for us, considering the enrollment. Here we have made a disbursement of INR 628 crores during this month, averaging to INR 210 crores in a month. And in the CV business, which is going to be the engine for growth, we have already started doing INR 230 crores which is nearly INR 1 crore per branch per month. It is likely to go up to INR 300 crores, INR 350 crores. So we are confident that every quarter, we should be achieve more than INR 1,000 crores of disbursement. As I had mentioned, the credit cost we have been conservative in cleaning up. So we have taken a credit cost on a proactive basis. So all our credit costs are over. Now we are looking to gain all these businesses going forward. So with this news, I leave the forum for an interaction. Me and my team would be very happy to answer all your questions. Thank you.
[Operator Instructions]The first question is from the line of Dixit Doshi from Whitestone Financial Advisors.
Sir, my first question is related to the prepayment and the balance transfer. So if I look at, we have done a INR 627 crores of disbursement, and our retail book has come down quarter-on-quarter by almost INR 520 crores. So the prepayment or balance transfer is almost INR 1,100 crores plus. So -- and we are targeting INR 1,000 crore disbursement every quarter, then what gives you confidence of adding INR 3,000 to INR 4,000 crore book, which you used to tell in the last quarter?
Yes. See, in the past -- there are 2 things. One is the runoff of our existing book. And as our disbursement growth beyond the runoff that in positive accretion. So that has started already happened. The second one is in this quarter, we have also sold the portfolio. So that is why you will find that the retail portfolio has come down. That's all lower now. So from now on, there will be a positive increase to all our assets. So as I had mentioned to you, we are confident of growing the rate of disbursement in retail lending up beyond INR 1,000 crores in this quarter itself. So from this quarter, there will be a growth [indiscernible] and quarter-on-quarter in the 3 retail businesses, which we are focusing, particularly, vehicle will be building, then affordable than SME. In all these 3 businesses, so each will take 3 quarters, this should be INR 3,000 crores. That is what I've been saying.
Okay. And can you just elaborate on -- I mean, say that how much would be the monthly or quarterly run rate of rundown of the book, prepayment or balance sheet?
Should be slightly less than INR 200 crores.
Quarterly?
Yes -- monthly, monthly.
Okay. Monthly. Okay. Now sir, second question is, what will be the annual size of the used CV market? And related to that, you mentioned that scrappage policy will benefit. But just a question related to that, that somebody has a 15-year old vehicle, and he go for a scrappage, he will be getting in some of the incentives like the registration cost will not be there for a new vehicle purchase. Then why you would go for a used CV rather than a new purchase?
See, basically, we are going to focus on 5 to 10-year segment, which in 8 year model, the current estimate is around 7 to 8 million vehicles are there in the population. Where Shriram Transport and Chola are the major players and a few different players there. So their penetration is less than 50%, if you look at their assets under management. So the balance is contributed by the unorganic sector. There are no other serious players in this segment. So that is why because of my background, where we used to commercial vehicle finance business. For 3 decades, we are getting into the space sensing a great opportunity. So the base itself will be a fantastic opportunity to gain market share from our village sector. Plus, as I mentioned, the 15-year old vehicle are 78 lakhs. So these vehicles are anywhere between 15 to 25 or 30. So these vehicles application, we have to understand. These applications are small distance freight forwarding activity. It could be in the construction site, carrying sand and bricks. It could be garbage cleaning in municipal corporations. It could be household shifting, but it would do a very short distance freight carrying because of the age and the inefficiency. So when the government brings to many new restrictions and constrain from operating this business, these people would like to change their vehicle, but they cannot go for new vehicle because the price differential will be huge, which will not support their retaining. So they will go for newer vehicle. So when they go, for example, 10-year-old vehicle, the one with 10-year old will go for a 5-year old, the guy who has sold for 5 years will go for a new vehicle. That's a [indiscernible]. So every vehicle, this is more than 16% if it has to become a new vehicle demand. It has to change 3x. So that is why we feel 8 lakh vehicles, if it has to phase out, we'll have to create a 24 lakh of replacement demand. If you take an average of 5 lakh, INR 120,000 crores will be the replacement amount. That is what I mentioned. And this 15-year old is not going to be a static one. Every year, there will be 1-year vehicle will become 15-year. So it's going to be a continuous replacement demand, which will come. And if this becomes consistent, I'm very confident the government will bring down 15 to 12-years. Then the 12-year will become 10-years. So the end of life policy in the next 10 or 15-years will become 10-years is what I suppose. For the benefit of this country, better fuel efficiency, better on the green, all that will be helping if we modernize the fleet. So the used vehicle replacement is going to be continuous for the next decade or 2. So sensing an opportunity, we are getting into that space in a very aggressive manner with an aspirational growth plan. This is very profitable, highly scalable, and we have the [indiscernible] we had 20 to 25 years of experience in building this segment.
Okay. Great, sir. And just one last question from my side. Sir, what is the deadline for promoter to bring down the stake to 75% by when they have to bring it down?
Today, because of the pandemic, there is no hard and fast rule here. But the shareholders are [indiscernible] and then we'll do in consultation with regulator.
Okay. But is there any deadline from regulators that by this time...
No. See, stabilization is different. But considering the pandemic, the regulation is flexible.
[Operator Instructions] The next question is from the line of Rishika Pusa from RoboCapital.
So my first question is that you have talked in the last con call and also in this con call about multiple loan book growth around 7,8x. And also, you have talked just about INR 1,000 crores of disbursement. So if there is no third wave, can we expect this at least 40% annual growth run rate to start from next 1 or 2 quarters in loan book side?
Yes. The base is low. The growth percentage will be very high. So we are a INR 6,000 crore retail book now. So that's INR 6,000 crores in 1 year, if we are doing a INR 4,500 crores of disbursement, there will be a disbursement growth to the way we 75%. But if you deduct the runoff, we will be growing around 30% to 35%.
Okay. And my second question is, sir, what will be the credit cost for FY '22 and FY '23?
See, our credit cost is completely provided and protected as I've told you. There will be no further credit cuts from retail business as well as corporate business for the existing portfolio, which was there as of 31 October 2020. So that is one batch of assets we are keeping. The second batch is businesses, which we have discussed from November 1, 2020, as I mentioned, that will continue to be most of the portfolio, more than 94% will be stage 1. So there will be a very less incremental provision, which would be required, as we are also hoping that there will be possibilities of write-back. The net of the write-back and the incremental provision will be positive to the end.
Okay. So sir, I read that between Chola and Shriram Transport, so will it be fair to say the normalized credit cost in future years will be between the credit cost for those 2 players, which comes to around 1.5% to 1.75%.
Yes, I will tell you a benchmark that Shriram is operating at more than 20%, so 24%. So their credit cost is higher because they are operating in a slightly riskier segment. And Chola is at 13% blended deal, where the used vehicles are around 15%, new vehicles are around 12%, 12.5%. So they are operating at 14%. So we are adopting a different strategy. So we will be operating on a balance sheet completely used, which will be between 17% to 18%. So the yield of invest car is going to be between Chola and Shriram, as you rightly said, but it is going to be fully used vehicle. And then no vehicles will be in a bank's balance sheet. So we do hope that our blend will be around 16%. So if you take an industry benchmark of over the last few decades, it will be 10% of the yield could be the maximum credit loss. So you are right, in putting a onetime 21.6% at eternal credit cost in our CV book going forward.
The next question is from the line of Abhijeet.
So the first question was around your asset quality. If you could please kind of help us understand what is your Stage 2 looking like now? And if possible, if you could give a product-wise Stage 2 for the 3 retail product segments?
Yes. So this is Amol here. One is, as we alluded in Q4, our Stage 2 at the time was 24.5%. We have seen a slight improvement there. We've focused at our side, clearly, being on containing stage 1 and Stage 2 movement. And also with a new collection trade at the help, we clearly see traction, and it's only become better as of July. So between the products, the key movement between Q4 and Q1 has been on the SME book, where we have seen some incremental stress where there's a Stage 1 to Stage 2 movement and also some restructuring that they have done. As I mentioned in our previous calls, any restructuring that we do even for a 0 DPD customer. We, by default, classify that customer as a Stage 2 customer and do a incremental provision -- are there also -- while we've been bringing a 10% provision on all the restructuring, are they also recognize the fact that is needed incremental potion and they've uptear limit from 5% to 10%. So we have also taken a recognition of that fact, and were required on a case-by-case basis, even though it's a granular retail portfolio, we have stepped up provision accordingly. So while overall basis, it has bode into a better tery from an SME perspective, there's been some incremental movement from Stage 1 to Stage 2.
And going forward, we do expect that they should come to a single-digit Stage 2.
And sir, can you say it may come down to single-digit Stage 2? And Amol was alluding to that from 24.5% in 4Q, it has come down marginally. So fair to say that maybe, let's say, if we are at around that 20% to 23% mark Stage 2, when do you expect this to come down to single-digit Stage 2?
See, there are a couple of strategies we are adapting. One is, as I told you, October 2020, that book, we are building a separate collection vertical and we are doing everything to collect and roll back the stages, 3 to 2 and 2 to 1, that's a big focus that we are doing. Also, the book which we are generating now new book, as I told you in the 9 months, more than 95% is in Stage 1. So we will continue that kind of incremental book, which will also help us improving the verified book cases. So that is why we feel that it should move to a single digit by March '22 as we put another INR 3000 crores, INR 4,000 crores of book with an exceptional effort quite.
Okay. Okay. All right. And Amol, you alluded that there has been some movement from stage 1 to stage 2 in your CV book. I recall last quarter, we had suggested that the CV Stage 2 was around 32%. Would it typically be around the 32% to 35% mark now?
Yes, it is holding -- it's actually a few percentage points better, but is in the same range.
Okay. Okay. And any indication on how -- what are -- what is the kind of provisioning that we are carrying in the different product segments, CV, SME and affordable housing?
So clearly, in Q4, we did step-up in going, especially on Stage 3. You can see that in the asset quality slide that we have put in. We are at 55% and thereabouts for CV. And SME also, we have increased it for HFC we are at around 20%. What we have clearly seen is that these provisions as we start recovery process and things normalize on the ground, we expect as we revisit the ECL model in the coming quarters is to get a big tone down. Because when we did it, we had the advantage that we did in the mid of June, where Wave 2 was at its peak. And hence, the whole environment supported that kind of -- as we go through the year and things normalize, we will see some turn down in the overall closing rates we are carrying at every stage of our book.
Sure. And the other question that I had was on the restructuring. Obviously, on a flow-through basis, we see that the absolute amount of restructured pool has come down. But importantly for us and maybe the other investors is to understand that what is the pipeline looking like for you? Because I mean, like you know, this restructuring window is open until September end. So I mean, what are the thoughts around where would this restructuring pool finding sector, depending on what the pipeline is looking like now?
Yes. Thank you. Thank you for the question. Gives me an opportunity to explain it in detail. So clearly, you would have seen that for our affordable home finance business, we had done 0 restructuring. So restructuring for us as a tool is an opportunity only if the customer needs it. Our team actually assesses the requirements -- a lot of times, what we have seen some of the other lenders to that our customers, have it allowed them restructuring. So they treat it as the right, whereas when we see capacity to pay, we hold on with an option from our customers, at least. So that kind of conflict happens on the ground. But clearly, as we move beyond the Wave 2, in July, we've seen the traction for restructuring coming down. Then all of the pockets where we might eventually take a call between now and 30th September, but we don't see any major upswing in the kind of volumes you are looking for restructuring.
Sure. And the other 2 questions that I had was for Sridhar, sir. One was on growth. The other one was on OpEx, while you're obviously briefly touched upon them in a few of the previous questions. But where we are now and assuming that, I mean, the COVID is here to stay for maybe the next few quarters. And we really can't kind of predict how the COVID situation in the country will be like. But that thing aside, I mean, for the next, let's say, 4 or 5 years, where do you see yourselves growing to, over the next 4 or 5 years. And the other thing is around the OpEx. I mean you did talk about opening smart branches, which will have about half the breakeven time. You did talk about that hub and spoke model. But having said that, I mean, where do you see this OpEx finally kind of settling down after, let's say, the next 3 to 4 years.
See, as I told you, the OpEx today is looking a little high because of some one-off costs are there. So if you net it off, this should be around INR 25 crores for this quarter. This would grow a little bit on a quarter-on-quarter basis due to the infrastructure, which we are creating. As we will grow our branches, there will be an operating expenses, which will come. So as I mentioned to you, that should be looked at as an investment for future growth. Because without branches, we will not be able to grow our book. Having said that, we are also focusing on reducing the operating expenses substantially. So we are going for low cost, low -- less pace branches, which will have very less fixed cost. Plus we are combining with the state-of-art to digitization, an app, it will be given to the field staff for doing most of their activity. So with that, we would be able to reduce the operating expenses substantially and enhance the productivity after [indiscernible]. So that would be reflected in the breakeven, which we would measure in terms of that. So that is the point. This quarter it has been inflated to the extent of around INR 20 crores, which had the one-off cost, which should be utilized. And with regard to our growth, I have already mentioned to you that in the vehicle finance -- used vehicle, I feel that from the current levels of 3,200 or something like that, we can look at in 10x in 5 years' time. And as well as in the new commercial vehicle, which would be 25% of that book. In affordable housing, I am putting from 1,000 -- 7 to 8x, but if we are confident of the asset quality, we can even look up at 10x there. So the potential for growth is fantastic in our space. And as you noticed, that these businesses are niche businesses, where we are having a entry barriers. So not a new players are going to come into this space in a good way. The potential is very high, profitability is good, and the scalability is outstanding. So if we have the right kind of deals, which can source from enterprise and [indiscernible]. Then we should be in for a fantastic 5-year growth plan.
The next question is from the line of [ Pankaj Prasoon ] from [ HNI Investor ].
My question is very strategic in nature. What I want to understand that last 4, 5 quarters, you are doing very terrific provisioning and all. So can you assure us, as an investor, that from hereon, there will be no such kind of bombarding on us. The first thing is that. And what I understand with due to CapEx policy and the pent-up demand, the kind of sign up plus one activity is going to come to India. So the demand for commercial vehicle will be very large. And what I understand from the IndoStar team is having collective growth -- collectively, they have managed more than INR 1.5 crores net of assets, either with [indiscernible] that could be ordered in advance collectively. So with that said, so we are right now at end of 5 years, you are targeting something like INR 40,000 crores. Don't you think that the kind of team you have, you have a great potential to reach to more than INR 1.5 crore. So those things I want to understand.
Thank you, sir, for you zeal. What we normally do is we put together a plan and execute it. So you are absolutely right. In my past also, when I looked at 3x growth, I have grown 7x, 8x. So as you rightly said, if we have the building block of reliability, strength, you know that we have Brookfield as our partner. They have a big part there, if there is an opportunity to grow more, capital is not a constraint. So today, NBFCs apart from the asset sales strength should have their liability sales strength [indiscernible]. So as I have articulated, a partner like Brookfield plus a strong ALM and the liquidity pipeline and another strategic partnership with ICICI puts IndoStar in a different league with the kind of products which we are going to be presenting a granular ticket size, which is scalable with high potential in the next 5 to 10 years. We are a different kind of an NBFC, which is going to take advantage of the unfolding potential, which is going to come post the pandemic. So as you rightly said, the combined assets under management, which myself, Deep and Ravi and other team members have done, is in excess of INR 100,000 crores or something like that. So there are not many players who are going to come into used commercial vehicles. We are going to be the third largest player. And because of lower size, our ability to grow, and we are going to be nimble. So as you rightly said, we are putting a number and for further direction but if there is an opportunity, nothing puts us in a constraint to grow beyond what I have mentioned.
Yes. And sir, my one concern was that if can you assure us, that's really helpful, there will not be any negative surprise on the provisioning front?
I'm assuring you.
Yes. So what I understand is that Brookfield has got a very good name. This is the only NBFC, [ MNC ] and [ NBFC ]. It is trading at such a steep discount. And we are, I think -- probably we are not able to convince them, except that now onwards, we are not going to give you so.
Not only on the credit cost. So we are doing a transition. So during the transition, unfortunately, we encountered multiple challenges. And because of that, all these things have happened. As I mentioned to you, all these are over. And now we should march forward. With the Corporate Lending going down, retail business going up, credit costs have been taken, drive-back profitability. I'm sure that the market will recognize. And the other one is the affordable housing finance business, which have not been factored by the market, will also see traction. And I'm very confident that this will be noticed, and that will show month-on-month and quarter-on-quarter progress in our performance. The market will recognize. That will happen from now. So I'm assuring you that.
Sir, one more thing. Do we see that we will be a flavor of fintech also in IndoStar?
Yes, yes. It's tough. Our business has involved an asset, which needs to be done. So we are building a very state-of-the-art digital [ equation ]. So we'll also bring in fintech partners to help us in customer evaluation, in risk management and fraud control, so many things which we are talking to multiple players. And we will bring that once our digitization is ready in the next couple of months.
So sir, I would request you to kindly incorporate those things in the next investment presentation, please.
Okay. Thank you, [ Pankaj ]. Thanks for the suggestion. We have taken our time and we will incorporate this.
Yes. Sir, one more thing. On the ISO front in the past, I have seen the big authority from the company has used this like a day-to-day expenses kind of. So please be mindful, sir, because our equity is very costly. IndoStar equity is not so cheap sir. So in the past, it has happened, and that has happened a lot.
Okay. Sir, we take a point. Now the team which had the initial lease-up have all left. Now whatever we are giving is a rear-ended [ diversity ]. So it's a 10, 20, 30, 40. So the team has been clearly told that it is a retention policy as we are emerging, but if we are going to give a result now, which would be top-down for about 150, 200 people only. So it won't be a challenge in the future.
I see IndoStar in -- at least in single digit market cap.
The next question is from the line of Prasheel Shah from CapGrow Capital.
Just going to know about data keeping question. So on Slide 19, you have shown the G&P and net NPL for the firm. So does this include the standard provisions as well in excess of NPL?
This is Amol here. This is only the [ split ] fee that we are putting out here.
So what is the excess that we are carrying on the books?
So what happens is that the provision pool is you typically target against the individual assets. So just to give you some flavor around our INR [ 1,780 ] crores of AUM, we're carrying around 8.8% of provision cover between Stage 1, Stage 2 and Stage 3. On Slide 19, what you see is only the safety book.
8.8% of the book you're carrying, sir, right?
Yes, right.
Okay. And so just wanted to know about the growth that already previous participants have asked. So what challenges are we facing today when we go out to disburse? What is stopping us from disbursing? Because it is really your competitor Shriram and Chola, they still have grown their book year-on-year in the past few quarters, whereas we have run down our book for the previous 6 quarters and even beyond that. So what challenges are we facing? What is stopping us from growing our book, especially when we have so much capital sitting on our books?
From last March '20, when the lockdown started, everybody stopped the disbursing, but some companies which are old have still continued. But we stopped the [indiscernible] medical policy but as and when we collect 100% collection, then we'll restart. So slowly, the collection efficiency improved, which we have given on our table. October 2020, we achieved 100%, and we started disbursement from November. So if you are comparing the disbursement numbers between IndoStar, Shriram and Chola, if you see the branch average, everything will be more or less same. So Shriram has got about INR 2,000 crores -- 2,000 branches positioned. So they do easily INR 2,000 crores, they can do even still more. So this business is having a upside of about [indiscernible] crore or INR 1.5 crore will be the productivity of a branch [indiscernible]. So as and when we ramp our infrastructure branch network, our disbursements will grow. So today, there is no comparison. 250 branches, we are doing INR 250 crores.
Sorry, you say so as and when you open new branches, growth should come? Is that correct?
Yes, yes. See, for example, as I told you, today, 250 branches with 50 hubs. So these 50 hubs have got hub locations, plus 3 branches on 1 rural center, which will do 5 locations, which will do about INR 6 crores disbursement minimum. So for our 50 hubs, this should be INR 300 crores, which we will reach this month or next month. So when we do that, as and when we keep increasing our hubs, our business will still grow. So for example, in 2026 when we are going to have 200 hubs with an inflation of 25%, we should be doing INR 1,500 crores disbursement per month, which is estimate.
So with these hubs rising and the number of branches also rising...
Yes.
How do we see efficiency kick in? Because we are also guiding for a drop in cost to income. So are you saying that these branches are not -- they are very low-cost model? Or how does that work?
To explain, low-cost branches, we call it smart branch, combined with the digitization app and all that, we are reducing the operating expenses, which we are incurring now in the Gen 1 branch. Now these Gen 2 branches will be low cost. And then productivity will be increasing, have against the 25 lakh productivity the field officers will be doing 25 lakh. So because of that, the breakeven will come down. from 15, 16 to 7, 8 months. So that is the efficiency, which we'll keep. And as I've told you, in order to sustain the asset quality, we are also building a collection [ model ]. We have brought in a guy who had spent 11 years in Chola as the national collection head for TV. And with that, we are building a collection. So from the portfolio which we have generated from November, we are trying to keep more than 95% in the Stage 1 all the time. So that we are monitoring very closely. And when we do that, the asset quality will get [ straight ]. So the operating expenses reduction relatively increase and efficient credit management, we will be able to increase the return on assets substantially. Because we are operating in a higher-yielding product, cost of funds is going down. So all these things are going to work. So the strategy is in place. We have to just go and execute it.
Okay. And one last question. You said that Stage 2 in the previous quarter was 24.5%. And this quarter, it is a little lower than that. So how does that compare to pre-COVID scenario?
So clearly, before pre-COVID, we had better challenges in growing the book. So it used to hover around 12% to 15%. Our going-forward outlook that we have is, as we've alluded, to bring it down to single digit, as we embark on our journey to really expand retail business.
Okay. So roughly around 8 -- I can say, I can assume that 7, 8 percentage points, we are higher than pre-COVID right now on Stage 2?
Yes, you're right. Yes. The external environment is such that I think it will only get better from here.
And most of it will be sitting in CV?
CV is my largest retail book, you're right. Most of it is in CV.
Thank you. The next question is from the line of Alpesh Mehta.
Most of the questions have been answered. Sir, 2 questions from my side. One is after entire execution of the story, in your 3-year or 5-year plan, where do you see your ROAs and the ROEs settling down? That's the first part.Secondly, from a near-term perspective, we are still sitting on a very high amount of liquidity, which will be one of the highest in the system at almost 23%, 24% of the borrowings. So what is the plan to run down this excess liquidity from the balance sheet considering the environment now? And 2 questions for Amol as well. Amol, all these restructured loan buyers think they should be a part of the GS2 loans. And is there any pipeline left on the request that we have? And another question on the corporate loan would be, are we done with all the kind of provisioning which is required on the corporate loans? So any termination losses or the mark-to-market losses when we file down the portfolio?
Yes. So as I had articulated, Alpesh, the ROE will keep increasing. The incremental book, which we are doing it in a double-digit NIM. So with the credit cost behind us, which we have an aspiration to have an ROE of more than 3% in both of those business. But the credit rating mandated leverage is 5x. So what we are trying to do is the 3%, 3.5% ROA here will take us to a 15% ROE. But what we are doing as a strategy to enhance the return for the stakeholders, we are also combining a strategy of off-balance sheet in the businesses of new vehicles and SME. So that would require a lower capital so we can leverage around 6x. So I do foresee in the next 5 years, we should be on a gradual increase from now should be in the band of between 15% to 18% is what is our production show, which we should definitely be able to achieve it if our executions are in place. So that is what we are doing. And as far as the liquidity is concerned, we are making conscious efforts to reduce it. Because of the environment, the rating agencies have requested us, mandated us to carry a larger cash. As things improve, the cash is being reduced. And we are also making a little bit of improvement in the treasury income. Plus, the cost of funds is continuously on the decline. So from double digit, we have now come to 9.5%. We project it to be 9% by March '22. And still if the benign interest rate regime continues, it should be marking this average cost. So marginal cost is lower. Average cost is coming down. So I do feel that in the next 1 or 2 years, if this trend continues, there will be a convergence of the average and the marginal cost below 9%, which is going to enhance our net interest margin substantially. So all our sites, we are making progress and the results will be visible in the quarters going forward.
Sir, just slightly on this point. On the incremental [ center ], incremental cost is around 8.4%, right? And the lending that you are doing, is that around 16% on the CV loan. So almost 7.5% kind of a spread and the 10% plus kind of a margin are we doing for the incremental book under the CV right now?
Yes, CV. As you rightly said, we will be in a double-digit net interest margin in the used vehicles all the time. Even if you assume that in the next 2, 3, 4 years, the capital adequacy comes down to 20%. Even then, the 8% spread will give you a 10% NIM because we are adding 3% capital to it. And if you look at our affordable housing, we have a 40% plus capital adequacy there. So there, with a trend of 6%, there also we will be near to double-digit net interest margin. So all these things will be visible once the existing book kind of growth comes in control. So we are attending to it. So by March '22, we will look totally different. With another INR 3,000 crore, INR 4,000 crores, we put it into the retail of good quality. Everything will look different. So that would be a foundation on which we would like to grow next full year.
And the existing book, which is pre-October '20, is it fair to assume that by mid of next year, the entire book would be repaid of the retail loans?
Yes, some of the retail -- yes, yes, most of them will run off, particularly the acquired book will go up by the middle of next year. And some restructured books have been elongated impairment charges. So that will continue. But what happens is that the control on the credit cost has already been taken. So there will be no more negative surprises in that portfolio. So it will run off. So the new book, which we are developing is micromanaged on a day-to-day basis. So this will take control of the situation and monitor it on a daily basis. So we don't allow any slippages there. So any remedy is attended to immediately then and there. So we would like it to be a culture of the company. And then on top of it, we are also building a collection vertical. So everyone is going to be preoccupied and obsessed with asset quality and we will be focusing on that. So the existing book, when it ramps up, we allow a much superior quality portfolio in both our businesses.
Great. And Amol, the last 2 questions.
Yes. Sure, Alpesh. Thanks. On restructuring, clearly, our window is another 1.5 months. And you've seen the numbers beginning Q1, which were during COVID. So as things normalize, we will actively work with our customers to ensure we don't opt for this, especially if we see that it is only a short-term some blip. Where required, we'll still exercise the call to do the restructuring. Affordable home, as you've seen, we have managed to hold good. It has led to increase of some NPA, but quite confident that as we proceed to August and September, some restructuring will happen there, which would not be in excess of around 2% or 3% of the overall book. In terms of your question on corporate book, the INR 200 crores provision that we carry, we feel, is sufficient to take any shocks as we come. Some traction on sell-down is already happening. Hopefully, when we give Q2 numbers, we'll have some concrete numbers to share with you and the team.
Okay. Great. I guess we are run out of the time. Sir, do you have any closing comments?
No, as I had mentioned that I have detailed -- given an overview of what is that we are planning to do in the next 5 years. So we have to come out of the handover of the past that's over, and we have control on everything. We have put the building blocks in place. The team is very confident and bullish about the re-execution of that, which we will all see on a month-on-month and quarter-on-quarter the improvement in the pay. So we are going to have an exciting 5-year journey. And we do hope that there are no environmental shocks which will come. On that basis, we have built it, and whatever I have articulated, we are confident of achieving it and we will one day improve. As I said, no credit costs and there are possibilities of write-back. Growth is absolutely in play.So with these words, I would look forward to meeting you again in the next investor call and wish you all, again, safety and health for you and your family. Thanks for joining us, and I look forward to meeting you again. Thank you.
Thanks a lot, everyone, for joining us for this call. And thanks a lot to the management for allowing me to host this. Thank you.
Thank you. Thank you very much. If you have any further questions, please feel free to reach any one of us.
Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.