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IndoStar Capital Finance Ltd
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Ladies and gentlemen, good day, and welcome to IndoStar Capital Finance Earnings Conference Call hosted by Motilal Oswal Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Piran Engineer from Motilal Oswal. Thank you, and over to you, sir.
Yes. Thanks, Indira. Welcome all to this conference call of IndoStar Capital Holdings -- IndoStar Capital Finance, I'm sorry. We have with us Mr. R. Sridhar, Executive Vice Chairman and CEO; Mr. Shailesh Shirali, Whole-Time Director; Mr. Prashant Joshi, Chief Operating and Risk Officer; Mr. Amol Joshi, Chief Financial Officer; Mr. Pankaj Thapar, Director of Strategy; and Mr. Rajagopal Ramanathan, Director of Investor Relations. I'd now like to hand over the call to Mr. Amol Joshi for the opening remarks, following which we can take Q&A. Thank you, and over to you, sir.
Good morning, everyone. Welcome to our earnings call. What we are going to do is basically, I'll hand over the phone to Mr. R. Sridhar to give us an introduction on the results and where we are on our equity raise and liquidity-related situation, then we'll open the floor for any questions and answers from you. And we'll -- as a management team, we will answer the questions. Sridhar, over to you.
Yes. Good morning to all of you. First of all, let me wish everyone of you and your family, health and safety in this COVID scenario. And I would also like to thank each one of you for taking time out to participate in this call. So as we are going to discuss the Q4 and FY '20 numbers, I thought I would give you a overview of how we have approached the scenario, which started from the IL&FS failure leading to liquidity stress and now followed by the COVID impact. So as a company which had predominantly the corporate lending business, which had very impeccable run with high profit and high-quality portfolio till March 2019, post IL&FS, when we were encountering stress and liquidity issues, we took the decision to run off this portfolio. So in the last 18 months, we have been able to bring it down by 50%. The peak portfolio during middle of '18 was around INR 6,000 crores, now we have brought it down to INR 3,000 crores, which clearly means that we have been able to collect INR 3,000 crores during this period from our borrowers, which indicates the fundamental quality of the book. Having said that, we have faced few stress in these accounts. In the corporate lending business, which is structured financing, we had 2 accounts, which were in the public domain, everybody knows about it. And in real estate, there was one account where we faced stress. So we thought that while we are running this book off in the next 12 to 18 months, we should protect the balance sheet from the risks associated with these 3 accounts. That's one major decision we had taken. The second most important thing which had happened in IndoStar is in these challenging times, we could bring in a very strong partner, Brookfield, which had come and recently invested INR 1,225 crores in equity of the company, strengthening our capital and net worth to 41% capital adequacy now. And the leverage after this investment has become around 1.5x. So this investment has made our balance sheet very strong with IndoStar becoming amongst the listed NBFCs with the highest capital adequacy and the lowest leverage. We consider this partnership very significant in our company and the quality of the investor who is partnering with the company clearly indicates the confidence the investors have placed on the platform and the management of the company. The third most important decision which we have taken is having decided to run off the corporate lending portfolio as well as bringing in a partner with huge capital in this challenging times, we also thought that we should protect the balance sheet from the impact of COVID, which is today remaining a little bit uncertain. So we have decided to take aggressive provisioning and accelerated write-offs in some of these corporate lending borrowers as well as in some cases in the retail business also. So even the RBI-prescribed 5% provision in Q4 and another 5% provision in Q1 relating to case where we have given moratorium, we have upfronted it and taken the entire 10% during this quarter. So the conservative approach we have adopted in these 3 decision-making has made IndoStar a strong company as far as our balance sheet is concerned and resilient in terms of the future growth and provisions, which are already taken by the company. With this strength in the balance sheet and the partnership of Brookfield, we are now looking to the future to build our retail business very strongly in the next 3 to 5 years. So our future, we are splitting into 2: one is the short-term approach, that is the immediate term, and the long-term strategy. So in the short term, where the impact of COVID is going to be very significant, we do expect that the impact would be there till September and the normalcy fully will restore from October. So during this period, we are focusing on 3 important things: One is liquidity. The liquidity, as you know, that by bringing in a large investor like Brookfield, even if there is no collections from the customers and even if we don't raise any money from the banks and institutions, the money which we have today is sufficient to meet all our liabilities till March '21. So the liquidity of the company is very, very strong. The second important thing which we are focusing is the control on the operating expenses and try to reduce as much as possible. So the moment the COVID has started, we have freezed -- frozen the new recruitments and superfluous positions we have discarded. And all these things we have done in the human resources area without much of disruption to our employees. So there is a lot of cost-saving we have been able to do in this area. The second most important thing, which we are focused on cost reduction is on the branches. So the infrastructure we had, we also had another 161 branches from IndiaInfoline. So we have rationalized these 2 now and 230 branches we had, and we are now merging some of these branches to -- around 10% of this 230 will get reduced. And we are also getting into a lot of digital areas to interact with customers and all -- we are doing all this. So significant reduction in operating expenses in the immediate term has been focused, and I think we would be achieving 15% to 20% reduction from the levels of FY '20. And the third important focus for the immediate term is on the asset quality. See, asset quality of the company has always remained good, but during these COVID times, when the moratorium has been given by Reserve Bank, so first moratorium and the second moratorium, it is a 6-months period. So in the first moratorium, we have decided to give to all the customers who are standard and the NPL customers, we have not given. So the standard customers, some of them said we do not want. So those who didn't want moratorium, we have collected money. And from the month of March, April and May, there are gradually number of people who have even sought moratorium have started repaying as and when they started their business. And in the second moratorium, June to August, we have decided not to give moratorium to everyone, and those who are seeking moratorium, on a case-by-case basis, we would extend the moratorium. So we are confident that in the June and July and August, the number of people who are not going to seek moratorium is -- substantially is going to increase. In June, we are seeing that more than 50% of our customers will repay, that is our projection. So in the August -- July and August also, we would see there would be -- a lot of people will come out of moratorium and pay. So this is the immediate strategy we are adopting. And in the long term, we are going to look at opportunities in the CV and affordable home finance area. In the CV, which used vehicle financing will be our focus. And all of you are aware, that used vehicle financing is a profitable business where only very few companies are there. So IndoStar, with its background and track record and what we have been able to achieve in the last 2 or 3 years, is well placed to take advantage of the replacement demand, which is the best case available in the 5- to 12-year-old segments, plus the demand, which is going to unfold on account of scrappage policy as and when it is introduced, is going to be phenomenal. So we are preparing ourselves to take advantage of the potential, which is going to unfold in the used vehicle area. No doubt, we will also be present in the new vehicles. But the new vehicles we would like it to be off balance sheet, and we will do it in the balance sheet of banks with whom we would partner. And the second important area which we would focus for growth in the retail business is the affordable home finance. As you all know, the affordable home finance is a very high potential business. But the experience of some of the companies have been very, very different in this business. IndoStar stepped into this business about 2.5 years back, and we have built near to about INR 1,000 crores portfolio with an excellent quality and profitability. So we have been able to get about 14% yield. And this portfolio has got about 99% in the current bucket, which gives us confidence about the capability of our team. And now with the capital which has come from the Brookfield partnership, we can look at making this business stand-alone and scale-up in the next 3 to 5 years. So these 2 businesses is what we are going to focus. And if you look at the growth which we have achieved in the retail business in the last 2.5 years, 3 years, the time we started in December '18, we have grown this book about 4x. So that is an indication of the capability of the team, which can do wonders in the next 3 to 5 years. So the immediate future, we are going to be cautious with the kind of provisions and the aggressive write-offs we have taken with the capital, we have made, our balance sheet very strong and resilient. And as and when the normalcy restores, IndoStar Star is today, amongst the NBFCs, well placed to take advantage. The very important strength of IndoStar, apart from the balance sheet strength and liquidity, is the size. So we are today about INR 10,000 crores, out of which, if you take the corporate lending business of INR 3,000 crores, our retail business stands at about INR 7,000 crores size. So this INR 7,000 crores is the size of some of the large NBFCs today with INR 50,000 crores, INR 80,000 crores, INR 1 lakh crore, which were about 10 years back. So I consider IndoStar to be at this stage an inflection point, where with the size being low, the base, reporting excellent growth percentage and numbers is possible for IndoStar. So the size makes it possible for us to look at huge growth, whereas big companies will find it difficult to grow very fast because of the liquidity and capital constraints. So these are all some of the things which I thought where we are today and where we are looking to grow in the future. So we would become more or less a 100% retail company in the days to come, and we are very confident that we will build a very high quality, high, profitable, good on governance and excellent returns to everyone, every stakeholder, is what our aspiration, and I'm very confident that with the kind of team we have, we will be able to do it. With these initial remarks, I leave the mic back to Amol.
Thank you, Sridhar. So if we can now take on questions, we will be happy to answer.
[Operator Instructions] Our first question is from the line of Aakash from HDFC Securities.
Yes. I have a couple of them, the first few are bookkeeping questions. So if I look at your under operating expenses, there appears to be a spike this quarter that comes from the unallocated portion. So is it possible you could elaborate on that, please?
Amol?
Sure. Aakash, if you can just help me as to which number you're looking at? What we do internally is clearly expenses which are allocated to businesses are directly incorporated into the segment P&L. So you should -- you're looking at the quarterly numbers or the full year number?
I'm looking at the quarterly numbers. So if I look at your total -- so depreciation and other expenses on a consolidated basis for the quarter is, 1 second...
Is it -- you're looking at operating expenses of INR 311 million for the quarter?
Yes. So is there a spike in the unallocated bit, that is my question?
Yes. So basically, I'll use the word, which is the corporate center, which holds a lot of common costs which are there for the entity. And as you would have known, we have done a lot of projects internally as well on [ whether it's ] for the COVID situation or for related to the new investments coming in. So a lot of costs which were held centrally are the number that you see there. And I'm happy to have a separate chat with you and walk you through the details of that.
Sure. Okay. And also in terms of the accelerated write-offs and the regular write-offs that you have disclosed in your investor presentation, would most of them pertain to this quarter? So you disclosed the figure for the full year?
Yes. So if you look at it, for the full year, the P&L hit we have taken is INR 864 crores, of which INR 244 crores was the number for my 9 months. So the incremental hit for the quarter is INR 620 crores. All right? And then that INR 620 crores is what is given in this full year slide, so you'll be able to place it as well by segment.
Okay. And if I look at, say, in your segment-wise disclosures, the credit costs in the vehicle finance and housing finance -- and affordable housing segment seemed to be a little on the higher side, which was sort of alluded to in Mr. Sridhar's opening remarks. So could you possibly elaborate on those, please?
Yes. So on the housing, clearly, it is the COVID-19 overlay which we have done. Otherwise -- so there are 2 aspects which go in all our provisioning decisions. One is clearly the regulatory minimum, which we use as a floor. And as we are all aware, RBI has asked us to be with a top-up provision of 10%. So that clearly is built into it. In housing, you see it because it's appropriately allocated to that entity, and we use it -- it's a 100% subsidiary through which we operate. On the CV part, if you look -- again, look at my accelerated write-offs, we have done a few write-offs of INR 60 crores in the CV business. Hence, you find the Q4 number to be a bit elevated.
And these would pertain to the IIFL portfolio, the mix?
Actually, the INR 60 crores write-offs -- yes. No. And we have actually disclosed that in Slide 8. The INR 60 crores accelerated write-off in the CV business is INR 30 crores for our organic book and INR 30 crores for our IIFL book.
Okay. And so then I have 2 sort of strategic questions that sort of pertain to the opening remarks as well as your investor presentation. So there is a mention there that you all could look at inorganic growth opportunities. So what kind of asset classes would you sort of consider entering into?
See, we have just mentioned an intent as we think that there will be -- a lot of consolidation opportunities will emerge when we open up and when the NBFCs of small size will face the liquidity constraints. So we are not specifically telling anything. We are only saying that with the kind of capital and platform we have, we have the capability to look at it.
Okay. And on the corporate lending piece, you did mention that you always want to sort of run this portfolio down. But that being said, for the longest time, it has been a very profitable business and if a good opportunity were to come your way, would you -- and assuming it meets all your criteria, would you sort of consider lending or it's something that is completely off the table for now?
Yes, yes. See, the kind of track record we had, we are also tempted to grow that. But our initial strategy was to keep it at around INR 5,000 crores and build retail on top of it so that the percentage of corporate lending mix comes down. But the kind of liquidity constraints we faced and the corporate and the real estate sector difficulties and challenges in the last 1 year, we decided that we should not lend further now and then run this book off. So that's a very conscious decision we have taken. It's a tough call. But in this scenario, I think it's a good decision. So we are also indicating to the market clearly that our intent is to build a retail financing company.
Okay. And if I may just squeeze in one last question, sir. The credit costs that are -- that you've mentioned on Slide #8 in terms of the write-offs and accelerated write-offs in the corporate lending book, these pertain to only 3 accounts in -- so 2 being in the nonreal estate bit and 1 real estate that you -- real estate account that you have alluded to in your opening remarks as well as in previous calls, right? There is nothing else out there?
Yes. All the other things are performing well, and the majority of these provisions and write-offs is relating to only these 3 accounts. Apart from that, whatever is there, it comes in the normal ECL.
[Operator Instructions] We'll take our next question from the line of Piran Engineer from Motilal Oswal.
I have a couple of questions. So actually on the CV side, what sort of collection efficiency are you seeing there? What percentage have taken a moratorium? And any color on trends you see going forward? And I mean by going forward, I mean, over the next 6 to 9 months, that would be helpful.
Yes, the CV business, as you know, Piran is earn-and-pay business. And it has been facing headwinds for the last few quarters because the industry went through a sluggish growth. So our portfolio was performing well. And in that time, we had also bought the IIFL's CV business, we were integrating. And now in the month of March, April and May, which we went into a deep lockdown, first of its kind in India, so we thought that we should give moratorium to every customer because they are not plying vehicle. If you don't ply vehicle, you cannot pay. So we have given, and it's about more than 85% of the people have opted for moratorium on the standard customers. And some of them said we do not want, they have paid. So we have seen from March, April and May slowly gradually when it opened up, many were plying vehicles. But because of inherent problems on the road as well as driver shortage, they have not been able to fully operate the vehicles. But the collection -- number of people who started paying have gradually increased. But in June, July, August, in the moratorium 2.0, as I mentioned earlier, we are going to give moratorium to only people who are genuinely in difficulty, for them only we are going to give. But definitely in June, from the trend which we are seeing, more than 50% of our people have already started plying and money will be coming. So gradually, that will increase. So the GDP plus the other issues which are there is going to impact the sale of new vehicles. But as and when the customers have started plying the vehicles, I don't think paying our installments will be a problem. But still, considering the immediate outlook on the COVID impact, we have cushioned our provisions by taking aggravated and accelerated provisions and write-offs in CV business also on some of the higher DPD cases. So going forward, slowly and gradually, this would increase. By September, you will find that 100% of the people will come out of the moratorium and pay.
So sir, right now, then is it fair to say that collection efficiency might be around 30%, 35%? Like, initial 2 weeks of June?
Definitely. It's definitely more than that.
Oh, more than that. Okay. Okay. Sir, would you say that a single truck operator is better placed in this environment versus a large fleet operator or vice versa?
See, the large fleet operator is dependent on the industrial goods movement, which is being carried on the National Highways. So they are -- unless the industry starts producing, then there will be a problem. So that is why we see that these people replacement is very short cycle; 3 to 4 years, they replace the vehicle. So that is not happening. So fleet owners will find it difficult because they are all not going to get the money from their logistics immediately. The credit period is increasing. But when it comes to the segment where we are operating and the single lorry operators, they are all cash-and-carry business. So they get the money immediately. There will be no problem. So that is why we have always felt like small and medium truck owners and used vehicles within the CV and road transport industry is better than new vehicles and fleet owners. That has been our strong belief, and it's -- our stand is definitely vindicated.
Sir, but there's actually another contrary school of thought that, say, if a fleet owner operate -- has demand for 100 trucks, he'll own only 60 and maybe 40 is outsourced. And now if the demand goes down, the people he outsources too, but that is not happening. And maybe that is our customer segment, so it will be more vulnerable. Do you agree with that?
No, not at all. Because the fleet owner is not having contract. People who have contracts are different. The fleet owner himself is outsourced by the large logistics company. For example, if you take Hindustan Lever (sic) [ Hindustan Unilever ], if it wants 1,000 vehicles in Bombay, it will go to one aggregator. And that aggregator, then he outsources. So some fleet owners may have contracts, not all fleet owners. So I don't think that point is valid. They will definitely face cash flow problems, and their replacements will be longer because your BS-VI cost has gone up and the import-export is down. All these problems are definitely making them replace longer. So that is why new vehicle sales, we expect that it would be sluggish in the next 3 to 6 months. But used vehicles on the contrary is not creating new capacity. It will move from one person to another. So I am very confident that once the COVID impact subsides, the used vehicle demand will be higher than the new vehicle demand, at least for the next -- at least in this financial year.
Understood. Understood. And sir, one last question on the CV front. I'm looking at Slide 21, actually, Tamil Nadu is only 8% of your book, which is actually surprising compared to your peers and also the fact that your head office is in Chennai?
Yes. See, this is because earlier when we were only IndoStar, this was very high because we started the business with Tamil Nadu and our headquarters was in Chennai. But subsequently, you must remember, Piran, we bought the portfolio from IIFL. So that IIFL had West and North. So that is why Tamil Nadu would have -- would be showing a little lesser. But it will catch up. South will always be 50% of the -- any company's portfolio.
Exactly. That's what I was expecting.
Yes. It will -- we will also catch up.
Fair enough. And sir, on the corporate business, what is the status of the 3 stressed accounts as in -- how much of the portfolio have we written off? How much is left on the book? And on what is left on the book, how much have we provided? If you can just give us some granular details, that'd be helpful.
See, in one entertainment company, we have completely zeroed it. And in another fitness company, about INR 12 crores is pending, for which we have got security. Otherwise, everything is provided.
And the real estate?
In the real estate, Amol, any -- can you tell?
Yes. So there's only 1 asset, which is a real estate developer in the North, on which there's a provision of 20% as of 31st March. And we are quite confident that the security covers the balance portion of the exposure.
And what is the outstanding in that?
INR 154 crores.
Okay. Okay. And in the North, in that one, we do not have any provisions against the INR 12 crores?
That INR 12 crores is again fully secured and a stage 1 asset?
Oh, it's a stage 1 asset. Understood.
Yes.
Barring these 3, there are no other stressor now?
We don't see any stress in the other parts of the portfolio.
[Operator Instructions] Our next question is from the line of [ Nikhil C ] from Kotak Securities.
This is Nischint here. Just some comments if you could make on -- really on the funding side. I think you have raised fair bit of funding even since April. And in the month -- in the fourth quarter, also, you raised around INR 800-odd crores. So if you could just give some color in terms of what are you really raising, at what rates and are these PSU banks, private banks? Who's really buying the securitized? So maybe some color on that, really, and then maybe we'll have some specific questions as well.
Prashant, would you like to respond?
Yes. Yes, Sridhar. Thank you. So the majority of the funding that we have raised, particularly in Q4 on the securitization side, has been a combination of public sector banks under the PCG scheme and private sector banks, but majority has come from public sector banks under the PCG scheme. Thereafter, the monies that we have raised have come from 3 sources: one is institutions. So we have raised money in the housing finance company from NHB. We have also raised money from SIDBI. And we have also raised money from insurance companies and public sector banks after the lockdown. As far as the rates are concerned, from -- it's a normal term loan. The rates have been in the range of about 9% to 9.5% incrementally of what we have raised post the lockdown. And the institutional money, which is SIDBI, NHB, are far cheaper than that. Those are under specific schemes, which were launched by the government, they are about close to 300 basis points lower than the number I mentioned before.
And how does the pipeline look like from now on in terms of new sanctions that you would have got or...
So we actually have a fair amount of LTRO 1 as well as LTRO 2 pipeline, which is unfolding and even the term loans proposals. So as things stand, even today, there are discussions of about INR 500 crores to INR 700 crores, which are ongoing, and we expect at least half of them to materialize over the next 30 to 45 days.
Sorry, I missed this. How many banks have given you moratorium?
We have received moratorium from 3 banks. 2 banks in moratorium 1 and 1 bank in moratorium 2. Of the total quantum, it has not been significant. So of all the payments that are due in these 3 months -- in 3 to 4 months, roughly about 10% in value is where we have received moratorium.
Sure. So what are the payouts in the next 6 months? And what is the cash that is available right now? So how would it -- how should we think about your cash flow position? I mean just assuming a situation where possibly collection efficiency remains at like maybe 30%.
Yes. So -- and that's what, in fact, we have projected and Slide 14 in our presentation gives out what we have. So today, we have cash and equivalents of about INR 2,000 crores. And we have provided the details in June as we stand today. And if you look at the -- just look at the repayment, forget the inflows right now. And if you look at the total repayments, then they add up to about INR 1,700 crores to INR 1,800 crores. So theoretically, even if we were not to have anything at all, even then we should be able to service all our debt till March '21, as Sridhar mentioned.
Sure. And these term loans are after the moratorium impact or just before the moratorium impact after factoring the benefit of it?
There's -- really very little, right? And the moratorium also is only up to August for whatever little that we have got. So really, that doesn't move the needle either way.
[Operator Instructions] As there are no further questions from the participants, I now hand the floor back to the management for closing comments. Over to you, sir.
Amol?
Yes. So thank you, everyone, for your questions. To reiterate the messaging that we have done on the call today, we continue to be extremely watchful in the current situation. Our focus is -- has been and will be to ring-fence the business. And the provisions we are carrying are adequate to cover for any future expected losses in the near-to-medium term. We will continue to deleverage from our wholesale lending business and any liquidity from that is clearly focused on growing our retail business. The cost management focus will continue, and we are quite confident that after the equity infusion, we will be able to grab the opportunities that are opening up in the market as things slowly start going towards the normal. Thank you, everyone, to join us on the call today, and have a great day. Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.