IndoStar Capital Finance Ltd

NSE:INDOSTAR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '24 Earnings Conference Call of IndoStar Capital Finance Limited. [Operator Instructions] Please note that this conference is recorded.

I now hand over to Mr. Nikunj Jain from Orient Capital. Thank you, and over to you, sir.

[Nikunj Jain, analyst]

Thank you, Asha. Good afternoon, ladies and gentlemen. I welcome you for the Q2 and H1 FY '24 Earnings Conference Call of IndoStar Capital Finance Limited. To discuss this quarter's business performance, we have from the management, Mr. Karthikeyan Srinivasan, CEO; Mr. VinodKumar Panicker, CFO; and Mr. Shreejit Menon, CEO IndoStar Home Finance Private Limited.

Before we proceed with this call, I would like to mention that some of the statements made in today's call maybe in nature and may involve risks and uncertainties. For more details, kindly refer to the investor presentation and other filings that can be found on the company's webcast. Without further ado, I would like to hand over the call to management for their opening comments, and then we will open the floor for Q&A. Thank you, and over to you, sir.

[Karthikeyan Srinivasan, executive]

Good afternoon, ladies and gentlemen. I, Karthikeyan Srinivasan, would like to extend a warm welcome to all of you attending our Q2 and H1 FY '24 earnings conference call to discuss the financial performance. I wish to express my heartfelt gratitude to all those, who dedicated the time to join the call and have consistently been part of our journey.

Joining me today are Mr. VinodKumar Panicker, our Chief Financial Officer; and Mr. Shreejit Menon, the Chief Executive Officer of IndoStar Home Finance Private Limited.

The performance of our company is closely intertwined with the Indian economic performance as we focus mainly on the commercial banking. The economy grew at 7.6% in FY '23, exceeding government's projections. India was one of the fastest-growing economies in the world, and this performance underscored the country's resilience compared to the general slowdown in Europe and other parts of the world.

The GDP growth outlook for '24 is currently expected to be more than 6%. With a decent monsoon, well-contained inflation, increasing consumption would likely boost the private CapEx. The manufacturing sector is also experiencing robust expansion with the IIP reaching a 14-month high of 10.3% in August.

Despite the global geopolitical uncertainty, the economy seems to be resilient and showing times of gaining momentum. Consumer demand is on the rise and is expected to strengthen further during the upcoming festival season. In June, retail inflation surged to 7.4% and has corrected to 5% in the month of September.

In the commercial vehicle industry, the industry is poised to grow in a very robust manner due to the continuing robust industrial activity with the GDP growth. The commercial vehicle business is seeing heightened activities, freight and passenger movements seeing significant growth. The GST collections at greater than 10%, fast-track collections greater than 20% and stable fuel prices since July '22, indicate a very good year for the commercial vehicle business.

Turning our attention to the used commercial vehicle industry. The demand has remained robust, primarily driven by the transition from BS-IV to BS-VI, which resulted in a price differential of around 25% to 30%. For the past 2 years, there has been an increase in the price of the used commercial vehicles, and this trend is expected to continue in the coming year. However, it is unlikely that the average ticket size of the financing used commercial vehicles will see a substantial growth in the short term.

The company is expanding its operations with specific focus on the used commercial vehicle sector, where we concentrate on the more profitable used commercial vehicle segment, particularly in the Tier 3 and Tier 4 towns. Additionally, the company is harnessing technology-enabled systems to enhance compliance with process, increase the collection efficiency, improve our credit and underwriting and boost to the sales productivity.

We can anticipate the robust growth in the used commercial vehicle industry in '25. The demand for used CVs remain strong because we can transport the same volume of goods at a lower per tonne cost and experience reduced downtime. Further, the useful life of the CVs have extended following NBFC financing vehicles up to a vintage of up to 12 years. The maintenance cost of these vehicles have also decreased, thanks to better engineered components in BS-IV vehicles.

The connection with fleet operators has gradually decreased over the past 4, 5 years. In summary, the demand for used CV remains strong driven by first time users and first time buyers.

I'm delighted to share that our company has been experiencing steady growth, and it is picking up pace quarter-on-quarter. This has been seen in our disbursement growth during the quarter, which stood at around INR 1,269 crores growing 13% sequentially. During the quarter, the company took a decisive step forward in its stated retailization strategy by selling a significant portion of its legacy corporate book to Phoenix ARC. The sale consists of certain accounts that were tagged in Stage 2, aggregating to dues outstanding of INR 915 crores.

This arrangement will enable us further to increase our focus on building the core retail lending business. Post the transaction, the share of the retail lending book in the company's assets under management has increased from 85% to 95%. Our ability to collect payments has been exceptionally strong, underscoring the resilience of our business model and the trust our customers have in us. Our previous guidance remains unaltered and have confidence in our capacity to meet our objectives.

We are actively exploring fresh products and strategies to generate additional income and enhance returns. Diversifying our product range will enable us to maintain a competitive edge in the market and provide consistent value to stakeholders.

In conclusion, I'd like to express my appreciation for your ongoing support. We are committed to sustaining our focus on growth, the quality of our portfolio and operational efficiency. With a strong financial foundation and a healthy liquidity position and strategic initiatives in place, we are well positioned for a prosperous and profitable future.

With that, I'll now pass the call on to Mr. Vinod Panicker to present this financial performance.

[VinodKumar Panicker, executive]

Thank you, Karthikeyan. And good afternoon to all of you. I sincerely appreciate your presence on this conference call today. And I appreciate the fact that most of you have been with us over the last several quarters.

Please allow me to provide you with an overview of our financial performance for Q2 and H1 of FY '24. Our consolidated net interest income reached a figure of INR 148.1 crores, showing a 2% increase quarter-on-quarter. This is in spite of we selling of our corporate loan book of INR 915 crores to an ARC, as Karthikeyan just mentioned a couple of minutes back, which reduced our interest income by about INR 29 crores.

Our net interest margin for the same period expanded by about 20 basis points to reach 6.7%. We are pleased to report that our yields are significantly improved, and we are focusing on Tier 3 and Tier 4 markets. Notably, 95% of our CV disbursement is in the used CV space, which permits us to get better yields.

Turning to the operating expenses. We recover -- we recorded a total cost of about INR 119 crores in the second quarter, representing a 3% increase over the immediately preceding quarter, which is mainly on account of increase in manpower cost, which is essentially needed to sustain growth. Also, there was a onetime cost of INR 3 crores, which was in relation to the ARC sale. Our profit after tax for Q2 FY '24 stood at INR 25 lakh -- sorry, INR 25 crores as compared to the PAT of INR 39 crores in the immediately preceding quarter, largely on account of the drop in the corporate loan book income, as mentioned above.

We achieved a total collection of INR 963 crores during the quarter as against INR 140 crores in the immediately preceding quarter. Our gross collection efficiency reached a figure of 135% in the current quarter, showcasing our commitment to maintaining high credit standards and operational efficiency.

The EMI-to-EMI collection for the CV business was at 90%, and in the HFC business, it was as high as 96%. And EMI plus overdue collection for the CV was at 97%. For HFC, it was something more than 99%. Our focus on portfolio quality has led -- has ensured that there is only a marginal increase in the Stage 3 assets at -- which was at about 6.7% at the end of Q2 FY '24 versus 6.6% in the immediately preceding quarter.

Even this increase on account -- is on account of the reduction in the AUM due to the sale of the corporate lending book, which was close to INR 915 crores. Furthermore, our consolidated net Stage 3 asset was at about 3.3%, demonstrating an effective credit risk management strategy that the company has in place.

In terms of funding, we made progress in improving our liquidity position by raising incremental funding of about INR 970 crores in the second quarter. As on 30th of September, we maintained a cash and cash equivalent of about INR 372 crores, and our capital adequacy stood at about 32.8% and debt equity at about 1.8x, both of which gives ample -- idea to anyone who looks at the numbers that there is ample headroom for further growth and for further borrowing, which will lead to further growth. We are confident that this will help drive profitable growth in the coming quarters and years.

Our assets under management of INR 7,726 crores as compared to INR 8,062 crores in the immediately preceding quarter was mainly, as I said earlier, because on account of the corporate loan book that was sold. And -- but then the intention, like Karthik had mentioned, intention was to show our focus on retailization which is -- which actually meant that we needed to sell off the corporate book.

The increased disbursement of INR 1,269 crores in the current quarter was up versus the INR 1,116 crores in the immediately preceding quarter, and that can be attributed to the strong focus on the retail segment. Retailization efforts continue to yield favorable results, and we are confident in sustaining profitable growth in the coming quarters.

For the first half of the year, we have done a total disbursement of about INR 2,385 crores as against a committed figure of about INR 5,500 crores consolidated disbursement for the entire year.

In the Vehicle Finance business, our AUM as of 30th September stood at INR 4,383 crores showing a 12% increase over the immediately preceding quarter. And the housing finance AUM at INR 1,894 crores showed a 9% increase over the immediately preceding quarter. As mentioned previously, our emphasis continues to be on growing the used CV book and the housing finance segment book. And we are experiencing significant growth in the AUM, which would be expected to continue.

Now I would like to invite my colleague, Shreejit Menon, to cover further -- and more detailed insight on the Housing Finance business, which is another key focus area for us. Over to you, Shreejit.

[Shreejit Menon, executive]

Thank you, Vinod. Good afternoon, everyone. I hope you're all doing well.

Let me start by presenting an overview of IndoStar Home Finance progress in the affordable housing finance segment. We focused primarily on Tier 2 and Tier 3 markets with a deep presence in Southern and Western part of India. We continued with our strategy of focusing on small towns and semi-urban geographies, which not only helped us to maintain the average ticket size under 1 million, but also benefited us with very high originating yields.

These geographies helped us to build on to our targeted segment of Self Construction along with an opportunity to originate high-quality Micro LAP.

We continue to maintain superior asset quality, which can be seen from our Gross Stage 3 assets level of 1.25%. This is after recognizing the ONAN norms, which came into play from 1st of October last year. Even with rising interest cost scenario, we are able to maintain the spreads in the range of 5% to 5.5% consistently with the right mix of home loan and LAP origination. With a strong foundation in terms of distribution, risk and underwriting, technology and people, we are on the right path to achieve the desired growth.

In Q2 FY '24, we have disbursed loans worth INR 221 crores at an average yield of 15.8% as compared to INR 190 crores disbursed in Q1 FY '24 at similar yields. If I compare the half year disbursement performance, we disbursed INR 411 crores in H1 FY '24 as against INR 197 crores in H1 FY '23. Hence, we've almost doubled our disbursement from a similar period of last year.

Our customer profile composition remains the same with a 50-50 proportion between salaried and self-employed profiles. Our AUM stood at INR 1,894 crores as against INR 1,623 crores in March '23, marking a growth of 17% for the H1 period. Our headcount as on September 23 stood at 1,053 and we have 140 branches pan-India as of date.

On the liability side, we raised INR 423 crores during H1 FY '24 across different channels such as term loans, NCDs, PTCs and direct assignment. Maintaining adequate liquidity has always been our priority and we've built a robust pipeline of funding to support business growth. In this quarter, we assigned LAP-only assets as a part of strategy, which allowed us to originate more LAP as well as to maintain a healthy share of home loan assets as part of the loan book.

After launching series of technology initiatives, which I talked about in the last call in Q1 FY '24, such as the sales, the collection and the customer app, we continue to progress well on the automation journey with our personal discussion app going live this quarter. With almost 100% adoption rate of the sales and the personal discussion app, we are confident of achieving our objective of paper-less loan journey, which is a significant step towards sustainable rate of improving productivity and enhancing customer experience.

Now let's take a look at our financial performance. In terms of financial results, we recorded a net total income of INR 91 crores for H1 FY '24, representing an encouraging 12% increase year-on-year basis. Our profit after tax stood at INR 22 crores for H1 FY '24, indicating positive momentum in our operations. As mentioned by me earlier, managing asset quality has always been our top priority, and we've been able to successfully maintain our Gross Stage 3 rate at 1.25% as of September '23.

Net Stage 3 assets stood at 0.96%. So we continue to be under 1% on our Net Stage 3 assets. I'm also happy to share that our 30-plus DPD numbers stood at 2.67% and our 1-plus numbers stood at 4.3%. In fact, our 1-plus numbers have trended downwards from March '23.

Our capital adequacy ratio currently stands at 70.8%, underlining our ability to support business growth while ensuring ample capital results.

In conclusion, IndoStar Home Finance is well poised for a bright future. Our commitment to making housing affordable to the lowest rung of Indian demography remains unwavering. We will continue to invest in technology, expand our reach in the chosen geographies and maintain a strong financial position to serve our customers better. We are excited about the progress we intend to make, and we appreciate your continued support.

Thank you for your attention. I now hand over the -- to the moderator to open the floor for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Mr. Vivek Ramakrishnan from DSP Mutual Fund.

[Vivek Ramakrishnan, analyst]

Sir, my questions are around Slide 36 and 16 of your presentation, reconciling the various bits. We see that 90 DPD is increasing even as 30 DPDs actually coming down nice and sharply. So my questions are how many of those 90 DPD customers are currently paying at least 1 installment and keeping their account current. And the second thing is -- or are you going to repossess the trucks and sell them if that is the case?

And then reconciling that with the collection efficiency number, we see that it's -- you indicated more than 100% on a cumulative basis. When will that bring the GNP down, especially in the commercial vehicle -- I mean, the nonhousing business down significantly?

And just one additional question, which if I can ask is on the ARC sale, which you said about INR 915 crores. Is it in the form of security receipts? Or have you sold it for cash?

[Karthikeyan Srinivasan, executive]

Yes, I'll start one by one. See my 90 plus increases because I have a tie-up with ICICI, where -- which is a sourcing and servicing arrangement. Post 60 DPD, I am obligated to buy the loan from ICICI. So it directly comes into my book as 90 plus, where the customer keeps paying 1 EMI, but because of the ONAN criteria, I'm not able to roll it back to less than 0 DPD.

That's why it remains in Stage 3. Most of these cases, typically, what happens is these guys pay for some months and then try to switch it to some other financial and go away, or the extreme case, repossess the vehicle and realize the value. That's why the 90-plus always goes up, my 30 plus is better because I -- when I buyback from ICICI, it directly comes in my book as 90 plus. That's the answer for that.

Overall, in the commercial vehicle segment, we are seeing quarter-on-quarter reduction, without assuming the ICICI numbers. Probably we can send it across to you separately as to how the book is behaving without ICICI so that you can get a fair picture. We feel like in the next 2 quarters, we'll be seeing significant reduction in the overall nonhousing Stage 3. Two things are happening. One is on the CV space, the overall market is doing well, so month on month I'm able to see reduction. On the SME portion of it, we have tightened our legal aspects of it.

We have a lot of cases where we have realized -- where we have the possession of the asset or where we have been able to move significant process in the legal. That will create a good impact in reducing my overall Stage 3 percentage by March. On the corporate portion of it, it is an SRD. 85-15 is the ASR. We realized INR 103 crores as cash and the balance as ASR.

[Operator]

[Operator Instructions] The next question is from the line of Mr. Hitesh Arora from Unifi Capital.

[Hitesh Arora, analyst]

I have a couple of questions. If you could enlighten us on the funding arrangement with banks, how are we looking there? Our interest cost seems to have gone up this quarter. The -- yes, if you could kindly enlighten how are we both on the stand-alone side as well as in the home loan side?

[VinodKumar Panicker, executive]

Thanks, Hitesh. Vinod here. I will speak about the stand-alone first, and then on the Home Finance, I will request Shreejit to touch upon the details.

On the bank funding, we are actually in the process of -- we started speaking to the bank only towards end of May or early June, which is what we have been -- we have said in the last call also. And banks have started coming back towards -- and they are very positive about the voting when we actually got a first sanction of a term loan after about 18 months from the bank.

And we are expecting many more to come along the way in this quarter, in fact, in the third quarter, some to come and many more to come in the next quarter. That will see a reduction in the cost. You specifically harped upon the increased cost. The increased cost is on account of the NCDs that we had done which -- including the other cost, was slightly on a higher side. But we are seeing that the bank funding that we would end up getting now would bring down our cost. But we feel that, that -- seeing some, I would say, benefit or some significant benefit on the cost could be, I would say, a couple of quarters away.

[Hitesh Arora, analyst]

And how about this term loan that we sanctioned? What is the quantum of that?

[VinodKumar Panicker, executive]

It's INR 100 crores to begin with.

[Hitesh Arora, analyst]

And this is a PSU?

[VinodKumar Panicker, executive]

No, it's a private sector bank.

[Hitesh Arora, analyst]

Private sector bank. So the PSU banks have not been welcoming enough?

[Karthikeyan Srinivasan, executive]

We are expecting...

[VinodKumar Panicker, executive]

There are about 2, 3 of them in the pipeline, which should possibly fructify in the current quarter.

[Hitesh Arora, analyst]

Okay, sure. And just come on the home -- yes, maybe if you could enlighten us on the Housing Finance business, how's the funding there?

[Shreejit Menon, executive]

Yes. So as I mentioned, we raised about INR 423 crores in the first half of this year, and it was a combination of term loans where we got support both from PSUs as well as a couple of private banks. In fact, existing bankers to us topped up their loans. And we also had a couple of direct assignment transactions. As I mentioned in my opening note, we looked at selling out our LAP pools, which got a lot of interest from the market. And we also did PTC transaction, which works very well on our ALM strategy.

[Hitesh Arora, analyst]

The bank funding of this INR 423 crores would be how much?

[Shreejit Menon, executive]

So we had about INR 200-odd crores that would come in from banks. INR 130 crores is the bank funding.

[Hitesh Arora, analyst]

And you said this is a mix of both...

[Shreejit Menon, executive]

Sorry, INR 130 crores.

[Unknown Analyst]

INR 130 crores? Okay. And that's a mix of PSU and private bank?

[Shreejit Menon, executive]

That's right. That's correct.

[Hitesh Arora, analyst]

And just to ask you on the status of this -- we were doing -- we were talking with JM earlier and then the talks on spinoff. What is the status of that? Is the DD done, we move to the next stage, et cetera?

[Shreejit Menon, executive]

Yes. So thanks for inquiring on this potential merger. And as you know, the DD is done, but the negotiations are ongoing. There are several critical aspects of the transaction, which we are evaluating right now. And at this stage, there is nothing to report. If there is something that is to be reported publicly, we'll come back to you on that.

[Hitesh Arora, analyst]

And any sense on -- assuming it goes through well, et cetera, in your desired format, what would be the expected time line?

[Shreejit Menon, executive]

Difficult to give a time line at this stage. Time will tell, actually. I think we'll need to wait patiently.

[Hitesh Arora, analyst]

Fair enough. And one more question if I had -- if I could ask, was on the SME business. I know we bound on some part of the book there. How is it looking, what the strategy? And if you could also tell on the gross and net stage and the provisions there? And how much is in Stage 2 as well?

[Karthikeyan Srinivasan, executive]

Yes. On the one -- SME, as our stated position is we'll wind it down. We are working very rigorously with -- to reduce this Stage 3. If you look at it, our Stage 3 has come down significantly quarter-on-quarter from INR 191 crores in June to INR 163 crores is what is the downward movement in SME. In Stage 2, it is around INR 162 crores.

But the book is adequately provided. We have a provisioning of almost 30% in the book. We don't expect any significant deterioration in this because we expect a lot of release -- whatever we are settling, we're setting at much beyond the provision value which we are carrying. So we don't see any major stage there. We are working on -- with the legal so that we can reduce the overall SME Stage 3. That's the strategy on SME.

[VinodKumar Panicker, executive]

On an overall basis, also SME has come down by more than INR 100 crores in the quarter.

[Hitesh Arora, analyst]

Yes, again that -- sir, this 30% provision is on the Stage 3?

[Karthikeyan Srinivasan, executive]

Correct.

[Hitesh Arora, analyst]

Sorry, I think you're saying something else.

[Karthikeyan Srinivasan, executive]

[Foreign Language] I said actually it is 37.

[Hitesh Arora, analyst]

37? Okay.

[Operator]

The next question is from the line of Mr. Gunit Singh from CCIPL.

[Gunit Singh, analyst]

So we have been seeing a rapid growth in the economy since last couple of years, and most of the NBFCs are [indiscernible] faster than that. But our revenues have been struggling since FY '19. So what is the reason for that? And when we'll be able to cross the INR 1,600 crores revenues we saw in FY 2020?

[VinodKumar Panicker, executive]

Gunit, Vinod here. See, after FY '19, we had seen on sort of COVID, and that actually had an issue. And then to make the issues worse, there was this issue that we had come across in FY '22 basis, which we had to take a huge provisioning and a lot of write-off. That had an impact on the income that was getting generated. And to correct the thing -- correct the process or to correct the way we do our business, we had to actually step back for a couple of quarters or maybe about 8 months last -- in the last financial year to ensure that we set things right before we actually take a leap and look at our volumes and look at disbursements that is what we did.

And post the third quarter of last year, we are seeing growth. In the -- we did about INR 343 crores in the third quarter. We did about INR 656 crores in the fourth quarter, [ INR 1,057 ] crores and about INR 1,000 crores plus in this quarter. So the income from all these are going to come now. And then now that all the issues that were there have been identified -- have been cleaned up, we see only the income going up.

In the current quarter also, the revenue did see a drop versus the immediately preceding quarter. In fact, I pointed it out in my opening comments that there was a drop of INR 29 crores on the sale of the ARC book. And like Karthik mentioned that that's a legacy book, and we are now possibly at the -- we have come to end of all the legacy issues. So there is nothing else now left for -- and the only way we see things going forward is there will be growth in revenues, growth in profitability and growth in the overall book.

[Gunit Singh, analyst]

Sir, all the issues in the -- that were in the past, have all of them been solved or some of them are still remaining?

[VinodKumar Panicker, executive]

They were sorted out in the last year itself. And that is why we -- post that, only we started, I would say, disbursing all over again.

[Karthikeyan Srinivasan, executive]

See, the SME Stage 3 is the only thing that needs to get resolved. The balance are under control.

[Gunit Singh, analyst]

And by when will this be resolved?

[Karthikeyan Srinivasan, executive]

In our assessment, by March, we'll be able to find a solution for this.

[Gunit Singh, analyst]

All right. Sir, I mean -- in terms of guidance, I mean, what kind of numbers should we look at for FY '24 in terms of top line and bottom line? And for FY '25, I mean, what kind of growth do we see?

[VinodKumar Panicker, executive]

We had said that we would do a disbursement of about -- on an overall basis of about INR 5,500 crores in the current year and about INR 7,500 crores in the next year. That's what we had said, basis which we would look at in ROA of about 1% in the current year and look at the ROA of about 2% in the coming year -- in FY '25.

[Gunit Singh, analyst]

All right. And if you have the numbers for FY '23, just to compare?

[VinodKumar Panicker, executive]

FY '23 had seen a lot of reversal basis, which I would say the ROA and maybe in the fourth quarter, there was a huge reversal of about INR 50 crores in relation to ESOP, which saw, I would say, an ROA of about 1.25%. But then that was on account of certain reversals, which had happened.

[Gunit Singh, analyst]

And how much were the loan disposals in FY '23?

[Karthikeyan Srinivasan, executive]

INR 1,600 crores roughly.

[VinodKumar Panicker, executive]

Roughly about INR 1,600 crores. Exact figure was about INR 1,687 crores for the stand-alone. And on an overall basis...

[Karthikeyan Srinivasan, executive]

INR 2,099 corers for the consolidated.

[Gunit Singh, analyst]

All right. Just to get an idea, where the INR 5,000 crore loan dispersal, what kind of, I mean, top line, bottom should -- we'll be looking at?

[VinodKumar Panicker, executive]

If it's INR 5,000 crores, I would say that -- I would possibly talk about the ROA part. Maybe we can separately -- maybe as a separate call to discuss what is our expectations in terms of top line and bottom line because we didn't want to get into that kind of detailing right now, if that is all right.

[Operator]

The next question is from the line of [ Mr. Kush ] from Nippon India Mutual Fund.

[Unknown Analyst]

Sir, with regard to the sale to ARC, can you specify the 2 accounts which you have sold? And what was the aggregate value of those 2 accounts in our books?

[Karthikeyan Srinivasan, executive]

I don't know if I can mention the names. We will keep it off-line, [ Kush ]. But these are 2 large real estate accounts of Bombay, which were INR 915 crores. So we'll keep the name separate. We'll not go into a recorded transaction with that.

[Operator]

The next question is from the line of Mr. Rishikesh Oza from RoboCapital.

[Rishikesh Oza, analyst]

Sir, I missed the disbursement target for the year. You said INR 5,000 crores approximately?

[VinodKumar Panicker, executive]

INR 5,500 crores.

[Rishikesh Oza, analyst]

Okay. And what would that be for FY '25?

[VinodKumar Panicker, executive]

INR 7,500 crores.

[Rishikesh Oza, analyst]

INR 7,500 crores?

[VinodKumar Panicker, executive]

Yes.

[Rishikesh Oza, analyst]

Okay, okay. Also, sir, if you could touch upon the operating expense. How do you see the operating expense for FY '24 H2 and for FY '25?

[VinodKumar Panicker, executive]

FY '24, the OpEx as a percentage of AUM would be in the 4.5% kind of range and which should go down to about 3.5%, 3.6% in the next year. That is where we are expected the cost -- expecting the cost to be. We are currently in the process of recruiting manpower. In fact, I did mention it in my opening remarks saying that we are looking at growing. So -- and Housing Finance by themselves, they are looking at increasing their offices -- number of offices.

So all this will see some bit of increased cost in the current year, which is why we are talking about this 4.5%. Next year, we should possibly have all this happening, but then the numbers would definitely reduce -- the increase would definitely reduce.

[Rishikesh Oza, analyst]

Okay, okay. And sir, if you could also indicate on credit cost, how do you see them for FY '24 H2 and for next year FY '25?

[VinodKumar Panicker, executive]

We are expecting a maximum credit cost of about 1.25% in the current year. And next year, we would be in the same range, maybe in the 1.25% to 1.5%.

[Rishikesh Oza, analyst]

Okay. And how do you see the normalized credit cost to be going ahead?

[Karthikeyan Srinivasan, executive]

In the segment, we are in -- we expect it to be around 1.25% to 1.5% going forward also because we have mentioned the reasons why we are in the used CV space. And we see the industry being robust in that segment because it's scrappage policy likely to come in with the overall operating efficiency at the used level being much higher. We feel like that, will be the cost, we'll be able to manage.

[Rishikesh Oza, analyst]

Okay, okay. And just last question. The SME book that we are going to run down, are we going to run it down further in this year itself?

[Karthikeyan Srinivasan, executive]

See, the Stage 3 book only will get run down this year. The overall book is much larger. It's around INR 800 crores. Without the Stage 3, it's around INR 700 crores. It will take some more years to run down because all these are long-term loans with an average tenure of around 15 to 18 years. And today, with the rates going up, the BT market is not that open in the market. So it will take some more years to be -- but those are on Stage 1 book. So our Stage 2 books, we are not that worried.

[Operator]

The next question is from the line of [ Mr. Sagar Shah ] from Piper Serica Advisors Private Limited.

[Unknown Analyst]

Now my first question was related to our actually long-term vision. Means I can clearly see that you are turning the company around -- you are actually delisting your portfolio, you are actually cleaning up your portfolio. So first of all, since I'm new to the company, I wanted to understand your thought process. When we look at your compare in the next -- for the next 3 years, so first of all, I can see you are targeting the CV segment and right now the CV cycle is strong, the business momentum is strong. So first of all, I would like to understand the long-term vision, sir, for the next 3 years. And then I'll follow up with my business question.

[Karthikeyan Srinivasan, executive]

Yes. Our focus is on improving the economic -- EWS segment. So our focus will be on the used commercial vehicle and on the affordable housing space. That's where we want to be focused on. On the used commercial vehicle segment, as Mr. Vinod mentioned some time back, we want to grow the book. We want to disburse around INR 4,000 crores this year -- INR 4,400 crores this year, INR 6,000 crores next year and INR 7,500 crores the next year after that.

[VinodKumar Panicker, executive]

The INR 4,400 crores is in the current -- is in the CV segment. On an overall basis, INR 5,500 crores. INR 6,000 crores is for the CV segment in the next year and totally INR 7,500 crores. And that -- and currently, the focus that the company has is these 2 segments. Karthik, during his call at initial comments, he had mentioned that we are looking at new products, which would possibly complement the existing bouquet of products that we have.

So those are things that would come on to the drawing board. In fact, we are already looking at them. Some of them would possibly come towards the end of this year or early part of next year. So those will be an additional, I would say, disbursement. We'll have the additional disbursement target and would actually grow the book even further.

[Unknown Analyst]

Okay, okay. Sure, sir, I got your point on that. So basically, I'm now coming on to your business question, on your funding mix, actually. I can see your overall funding mix, since we have raised around -- you just said at around INR 400 crores for the housing business actually -- for housing subsidiary. And in your funding mix, your [ banks contribute ] around 22%. And so for the next 3 years, how -- should we at least assume that the funding mix from the -- funding from the banks should contribute at least 50%? Or what's your overall target basically on your funding mix?

[VinodKumar Panicker, executive]

For any NBFC, that would be an ideal target. See, we -- our banking asset -- mix banking contribution is currently lower. Because I think I said that in one of my earlier responses, that the approach that -- we started approaching the banks only after our Q4 results of last year. That was only in early June that we started meeting the bank.

So that is the reason why it is taking -- it took some time for us to get the sanctions. And we believe that some of the sanctions will come in the current quarter, a lot more will come in the next quarter. And over a period of time -- I would say, over the next 2 to 3 quarters or 3 to 4 quarters, we would see that 50-50 kind of bits. Otherwise, we have been getting funding mainly in this last 9 months. A lot of it has come through NCDs for the stand-alone company. And in case of housing finance, it has been a mix of securitization plus the bank.

[Unknown Analyst]

Okay. Sure, sir. Now my last question, sir, related to -- was on slide 36 actually. I can see your delinquency levels are decreasing, but your bounce rates are increasing actually. Right from June '22 till almost September '23, your almost bounce rates are going by almost every -- almost 100 basis points every quarter.

Right now, the bounce rates are 14.3%. So what are the reasons for such a mismatch actually between the 30-plus DPD and for the 90 plus DPD in our bounce rates? Because in your slide, you have clearly highlighted about your model actually, about your analytics model, how you basically manage your risk using this model. So this is -- I'm not saying still is the worrying thing, but increasing 100 basis points bounce rates every quarter might be alarming in the future that's why.

[Shreejit Menon, executive]

So you're right about the observation in terms of the bounce rate for the HFC, having gone up by some 12% in December '22 to about 14.3%. We look at 2 aspects. One is we look at the current bucket bounce. And as you know, as the number of delinquent customers go up, at an overall level, you will find those customers will bounce and then we approach for repayment.

But when you look at our current bucket bounce rates, the current bucket bounce rates are still in the 9% to 10% range, which is what we target. And that is why you see -- because there are very minimal flow forward from the X bucket, which is why you see that our 1-plus numbers have actually gone down. That's one reason, which gives us comfort even though there is a slight uptick.

As you know, in the last 1.5 years, we've been also increasing our LAP part of the business, which today is about 30% of our origination. Typically, in LAP, you'll see a slightly higher bounce rate, although repayments do come in after the customer bounces. So it's a combination of that. It's a combination of the seasoning of the book, a combination of a slight increase in the LAP part of the business. We've also gone into Tier 3, Tier 4, where the banking habits are still getting developed. But we are not worried because as you rightly pointed out, you see the 1-plus numbers and the 30 plus and the 90 plus numbers, they are well in control.

[Unknown Analyst]

Okay. So basically, the reason that you're highlighting is acquiring new customers basically? And for that reason, your bounce rates for the initial level are going up. But they are actually there -- you can say maybe they're stabilizing once the customer has a journey within those? Is my understanding correct?

[Shreejit Menon, executive]

So as the vintage goes up, you'll find some of the bounces on the vintage still going up. That's point number one. Second is by virtue of changing the mix from more home loans to a little bit of LAP, in LAP typically you see a slightly high bounce, right? That's the second thing. And third is, as the absolute pool of delinquent customers go up, that those customers will anyway bounce.

So the current bucket bounces are in control. And so overall, which is why even though the bounce rate has gone up, the overall delinquency is flat. In fact, the 1-plus numbers have actually gone down because we've seen a lot of resolutions as well.

[Operator]

Your next question is from the line of Ms. [ Saloni Shah ] an individual investor.

[Unknown Attendee]

So I have a few questions, first one being how much percentage of the housing book is towards the rural areas versus Tier 1, Tier 2 or Tier 3 cities?

[Shreejit Menon, executive]

So today, Tier 1 cities, mam, contributes less than 30% of all the business that we do. Our large concentration is on Tier 2 and beyond. And so you can say about -- I won't say they are absolute rural because we don't go into the villages, we go to the semi-urban pockets. And that would be about 70% of the business that we do.

[Unknown Attendee]

Okay, sir. Okay. And my second question is, how is underwriting policy distant -- like how do we keep a check on the quality of these lendings in the rural areas?

[Shreejit Menon, executive]

So every geography, when we look at our business, we have a specific policy both in terms of the underwriting and the risk that we'll onboard. The ticket sizes, caps that we'll keep on the loan that we'll originate, the collateral policies, as you know, in every geography is different from the other geographies.

So when we start a geography, we do a very detailed review of the landscape. We'll also look at what the competitors are doing before we frame our policy. And we, of course, pay a lot of attention to the people that we hire in each of these geographies. So a combination of all of these things has really helped our business keep this kind of quality of portfolio that you see.

[Operator]

The next question is from the line of Mr. [ Pranav Singh ], an individual Investor. .

[Unknown Attendee]

We have touched on these points so just wanted a little bit more information. So our borrowing cost in the stand-alone entity and also in housing finance seems to be higher by about 2%. So do we have kind of an expected time line by which it would normalize?

[VinodKumar Panicker, executive]

Pranav, see, the housing finance cost would be definitely lower than the stand-alone. Here, the difference is about 2%. And we mentioned -- in one of the earlier queries, I replied that it's a lot to do with the NCD borrowings that we have done. With the banks now starting to come in, we would be having our cost reduced. And I had said that this could be about -- reducing it in a substantial way would be about 2 to 3 quarters.

[Unknown Attendee]

Okay, sure. And another thing, sir. Right now, home finance operating expenditure is about 67% of AUM, so which would be higher because we are undertaking expansion. So for the housing finance piece, what would be the long-term range for operating expenditure, if we had something in mind?

[Shreejit Menon, executive]

So the long-term range in housing finance will be in the range of 3.5% to 3.75%. And OpEx to income -- the OpEx to income will be under 50%. So it will be about 45%, will be a term range. Yes. OpEx to average asset ratio will be about 3.5%, that will be the range that we'd like to keep.

[Unknown Attendee]

Okay. Great. So these things -- and one small question I had. I read in a rating rationale that our CV disbursements after April 2022, they have been performing very well with average 1.2% Gross Stage 3. So what would be the portion of the older portfolio before April 2022? And is there any difference in asset quality and interest rates across these 2 portfolios?

[Karthikeyan Srinivasan, executive]

See, the interest rates of the new portfolio is much higher. They are at around 300 bps higher than whatever is the old portfolio, which now contributes 50% of the overall. So 50% is the old portfolio and 50% is new portfolio. So that's how it is.

[Unknown Attendee]

Okay. And any -- about asset quality of the old portfolio, will there be substantial difference?

[Karthikeyan Srinivasan, executive]

See, as you are aware, last year, we ran into certain problems on control issues, basis which we have ourselves downgraded and kept few assets at a lower staging. Compared to that, the new assets, we don't have any issues. So that's why they are at 1.2%.

Secondly, we have also tightened the way which we underwrite and the processes around how we underwrite. So we feel like the new portfolio will be much more superior. And we'll -- over a period of time, when the whole portfolio dies down, we will be -- or runs down, we'll be in the -- one of the best in the industry in terms of our overall Stage 3.

[VinodKumar Panicker, executive]

And you also pointed out the CRISIL rationale -- rating rationale, which mentioned about this 1.2%.

[Unknown Attendee]

Yes. So I mean -- since it's already about 18 months in April 2022, so we should expect that maybe 18, 1.5 years, 2 years, that by end of FY '25, this portfolio will all be gone, right? So we'll be within the new portfolio?

[VinodKumar Panicker, executive]

Correct.

[Operator]

The next question is from the line of Mr. Rikesh Parikh from Rockstud Capital LLP.

[Rikesh Parikh, analyst]

Sir, regarding CV business, we are seeing that the LTV has gone up to 78% so any -- anything to look into it?

[Karthikeyan Srinivasan, executive]

No, see, if you look at it overall -- if you go deeper geographies, there is a significant movement towards the single-axle truck. And these trucks where there are a lot of asset value that has gone up because the single-axle truck at a point of time, ICVs were replacing it. But today, it's back to single axles again. So that has increased the cost of these assets significantly. So that's the reason why it has gone up marginally. I believe that even at 78%, the LTVs are much more very reasonable because the customer almost pays 25% on the overall cost.

[Rikesh Parikh, analyst]

Okay. Second is on our -- can you just quantify the size of our ICICI Bank AUM. And since a lot of -- 60-plus DPD is coming into our books as such, so what is the asset quality over there in terms of 60-plus DPD as a percentage?

[Karthikeyan Srinivasan, executive]

See, INR 250 crores roughly is the overall ICICI book, and we are maintaining around 93% Stage 1. So that's how the overall book is trending.

[Rikesh Parikh, analyst]

So, is any percentages -- 60% plus moving over that?

[VinodKumar Panicker, executive]

One minute, you want 60-plus percentage?

[Rikesh Parikh, analyst]

Yes.

[Karthikeyan Srinivasan, executive]

Probably I'll come back to you offline on that separately.

[VinodKumar Panicker, executive]

Rikesh, if you can separately call us up, maybe in the latter half of the day, we'll respond to you.

[Rikesh Parikh, analyst]

Yes. And just last question. On stock exchanges, there is some compliance pending as such for the last few quarters. So anything you can just complete those compliance detail as such -- like something like detail compliance [indiscernible] still be pending or something like that?

[VinodKumar Panicker, executive]

No. See, I think the only compliance which was pending was in relation to the SDD, which we have -- subsequently we have responded to the stock exchanges, maybe 3, 4 days back. I think they will possibly review our response and then confirm that there is no noncompliance left.

[Operator]

Thank you. In the interest of time, that would be the last question. I would now like to hand the conference over to Mr. Nikunj Jain from Orient Capital for closing comments. Please go ahead, sir.

[Nikunj Jain, analyst]

Yes. I would like to thank the management for taking the time out for this conference call today. And also, thanks to all the participants. If you have any queries, please feel free to contact us. We are Orient Capital Investor Relations advisers to IndoStar Capital Finance Limited. Thank you so much.

[VinodKumar Panicker, executive]

Thank you.

[Operator]

Thank you, sir. On behalf of IndoStar Capital Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.