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JM Financial Ltd
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Ladies and gentlemen, good day, and welcome to the JM Financial Limited conference call to discuss the company's financial performance for the second quarter and half year ended September 30, 2022. [Operator Instructions] Please note that this conference is being recorded.
Kindly note that any forward-looking statements made on this call are based on the management's current expectations. However, the actual results may vary significantly, and therefore, the accuracy and completeness of this expectation cannot be guaranteed.
I now hand the conference over to Mr. Vishal Kampani. Thank you, and over to you, sir.
Thank you. On behalf of JM Financial, we extend a very warm welcome to all of you to the conference call of JM Financial Limited to discuss our results, both for the second quarter and half year ended September 30, 2022. We have uploaded our results presentation, press release on the website and stock exchanges. I hope all of you have had a chance to go through the same.
Our consolidated revenue for the half year ended FY '23 is INR 1,683 crores, which represents a decrease of 14% Y-o-Y. For the same period, profit after tax is INR 350 crores, a decrease of 7.3% Y-o-Y. This represents earnings per share of INR 3.67 vis-a-vis INR 3.96 for the last quarter.
Our FY '23 quarter 2 revenue is approximately INR 877 crores. PBT for the same period is INR 318 crores, which is almost flat on a Y-o-Y basis. Tax for this quarter increased by approximately 3% Y-o-Y from INR 174 crores to INR 180 crores.
As on September 30, 2022, net worth, excluding minority interest, is INR 7,916 crores translating into a book value of share -- book value per share of INR 82.91. Our consolidated loan book is now at INR 14,670 crores, which is up 32.5% year-on-year.
I will now take you through the breakup of the loan book of INR 14,670 crores. Wholesale mortgages constitute the largest part of the book at 49.9%, which is approximately INR 7,321 crores. The wholesale mortgage book registered a Y-o-Y increase of 11.3%. The capital market loan book is 7.8% at INR 1,141 crores. The capital markets book has registered a Y-o-Y growth of 42.5%.
Our bespoke financing loan book, which includes both our corporate loans originated by our investment bank as well as the promoter financing book, constitutes almost 26% of the loan book at INR 3,821 crores. This loan book has registered a Y-o-Y growth of 39.6%.
The retail mortgages loan book, which constitutes our affordable housing loans and our loan against property business, is approximately 9.5% of the loan book, which is at INR 1,392 crores, and this loan book has registered a Y-o-Y growth of 62.9%. Our financial institutions loan book, which primarily funds smaller NBFCs, MFIs and a few fintechs, constitute 6.8% of our loan book at INR 995 crores.
Turning to asset quality. The gross NPA of the lending business is at 3.9%, our net NPA is at 2.4%, and our SMA2 stood at 1.3% on a consolidated basis as of September 30, 2022. On leverage and liabilities, on a consolidated basis, our group debt equity is at 1.21x.
And during the half year ended FY '23, we raised approximately INR 1,900 crores through long-term borrowings. We raised more than INR 600 crores through NCDs of which almost INR 300 crores are in the 10-year bucket. We raised almost INR 1,300 crores through banks and others. Our borrowing comprises over 80% from long-term sources and 20% from short term. Almost half of our short-term borrowing is for working capital requirements for our brokerage business.
Moving on to segments. Our first segment is Investment Bank segment. For the half year ended September 30, 2022, the Investment Bank segment had revenues of INR 607 crores, profit before tax of INR 256 crores, and a profit after tax of INR 203 crores, which is an increase of 29.7% year-on-year. The annualized return on assets in this business is at 6.1% and return on equity from this business is 16.4%.
The second segment in our group is Mortgage Lending, which includes both our wholesale and retail mortgage businesses. For the half year ended September 30, '22, the Mortgage Lending segment reported net revenues of INR 353 crores with a pre-provision profit of INR 293 crores, profit before tax of INR 198 crores. The annualized ROA for this business is 2.9% and ROE is at 7%. In quarter 2 FY '23, our net revenue and pre-provision profit stood at INR 178 crores and INR 148 crores, respectively, and the PBT of the business is at INR 119 crores.
On the retail mortgage business, we have a very granular retail mortgage book of INR 1,035 crores across 8,583 customers with an average ticket size of INR 12 lakhs, carrying an average yield of 13.3% and an LTV of 55%. Our book is well spread across 9 states and 75 branches. And on the wholesale mortgages, the loan book has increased from INR 5,409 crores as of June '22, to INR 6,668 crores as of September '22.
Our third business segment is our Distressed Credit business, including our ARC and the alternative credit business. Our AUM on September 30 is INR 11,349 crores, an increase of 6.2% Y-o-Y. For the half year ended September 30, '22, the segment had net revenues of INR 54 crores with a PBT of INR 32 crores. In quarter 2 FY '23, the net revenue stood at INR 44 crores, with a PBT of INR 28 crores.
Our fourth segment is Platform AWS. The business is completely focused on providing an integrated investment advisory and transaction services platform for all the individual clients of the company. This comprises of Asset Management, our Equity Broking & Securities business as well as our Wealth Management business. So we integratedly call this Platform AWS. For the half year ended FY '22, the platform AWS business segment had revenues of INR 293 crores with a profit before tax of INR 16 crores. The profit after tax for this segment is INR 14 crores. In quarter 2 FY '23, our revenue stood at INR 163 crores, profit before tax at INR 9 crores and PAT at INR 8 crores. We operate both through our own branches and franchises. We have been growing our franchise network, which now stands at 682 locations in 197 cities.
On Wealth Management, our private wealth caters to high-net-worth individuals with an AUM of INR 58,000 crores. As you know, we have started our Elite Wealth business in 2019. We've added 91 advisers across 8 locations and have an AUM of close to INR 1,150 crores, demonstrating a 46% growth Y-o-Y.
On our Retail Wealth business, which predominantly deals with retail customers through our IFA network, we have 7,500 active independent financial advisers/distributors. And this business has recorded a steady growth of 18% Y-o-Y and its current AUM is INR 22,250 crores.
Over the last year, we have built out a full PMS team. We have made very senior hires and our total team size in PMS now is 25 people. In the AMC business, again, we've added a lot of people and our engagement efforts are picking pace, and we've been rebuilding all our relationships with several key distributors. Our total AUM stands at INR 3,000 crores, almost INR 600 crores in equity and the balance in there. In a bid to grow our AUM and folio base, we have added people across all functions, investment teams, products, sales, risk, operations and technology.
With this, I would like to conclude my initial remarks, and we'll be happy to take any questions. Over to the moderator.
[Operator Instructions] We have our first question from the line of Vivek from Bestpals. We'll move on to the next question from the line of Dhruvesh Sanghvi from Prospero Tree. We move on to the next question from the line of Himanshu Upadhyay from O3 Capital.
Am I audible?
Yes, I can hear you clearly.
Yes. So I had a question on wholesale book. Sir, Ahmedabad had suddenly become 6.5% of assets of JM credit solutions and which was 3% in last quarter. Sir, is it a new focus market for us or it is 1 or 2 relationship, which has grown up? Can you elaborate on the opportunity and...
It is 1 or 2 relationships which have become larger. I don't think Ahmedabad will grow beyond these levels. It will get cashed out at between 6% to 7%.
Okay. And another question on wholesale is, the growth in wholesale, what we have seen pretty significant in last 1 quarter of around 22%. Is it because of existing relationship or we have signed a significant number of relationships and hence, there is some -- there is a strong growth we are seeing? So can you give some color on what is driving the growth and...
Yes, that's a good question. I think we're seeing growth in both. I would think the growth is almost 50% weighted for existing relationships and 50% in terms of new relationships. We've added 4 new accounts in real estate and around 3 new accounts on the corporate side.
Okay. And one last thing. We have seen pretty good growth in financial institution funding. Can you give an idea of what type of lending are these NBFCs and how granular are these loans? What mechanism we have to check the misallocation of capital does not happen at the NBFC and yield on NBFC loans we disbursed and the business model of NBFCs to whom we are lending. Is it sustainable business model? So some idea more on this.
Yes. I'll give you a quick background on it. So we've been preparing for this business for almost 2, 2.5 years. We have a fully built out risk team. They are almost 7 to 8 people who are in risk management. We have another 4, 5 people in origination. And we also have a big origination of our investment banking, which knows many of these NBFCs.
All of the NBFCs, each and every NBFC that we lend to has an extremely granular focus on a retail book. We do not onward lend to any wholesale NBFC. We only lend to retail NBFC. Almost 80% plus of the lending that we have done are NBFCs rated between A to AA-. So A, A+ or AA-, and 20% will be A- to sort of BBB. The sectors are across the board. I mean, there's MFI, there is vehicle financing, some are into MSME loans and some [indiscernible] all kinds of assets.
And the idea is to basically increase this book quite substantially over the next 5 years and make it as large as a bespoke, which does corporate and promoter lending as well as our real estate book. And after ILFS and COVID both, there's been a big shakeout, and we've realized that many of the smaller NBFCs don't get access to capital markets easily. So what we do is we start with the lending. We build a relationship with them, and then we will offer our debt capital market products or equity capital market products as well as many of our MLD and NCD products, which can be sold out to our institutional distribution as well as our wealth distribution.
So this business is both being built from a balance sheet perspective. It is also being built from a syndication perspective, and also 2 or 3 years down the line when we have enough of data and we have a data platform build, which is able to run a lot of analysis. I think we'll also get into the securitization business of the end product, which we will be able to source from many of these NBFCs. So that is the broad plan. We have almost a 15, 16 member team, and I think it will be by March 31, it will be close to a 20, 25 member team. And I think that team itself, over the next 18 months to 2 years will further double to around anywhere between 50 to 60 people.
One last thing, what is the yield on these loans to NBFC?
Yes. So it's average yielding around 11.5% to 12%.
We have a next question from the line of Pranav Shenoy from O3 Capital.
Yes, am I audible?
Yes.
My question is, we have seen high growth in retail mortgages. Can you give in percentage terms, the NPA and stress in loans, which we were given 2 years back?
Yes. I have Manish here on the line. He'll answer the question.
So the growth in retail mortgage business is basically out of the new branches, and we have a low base last year. So last year, after COVID, we actually expanded to now 75 branches, and that is where the growth has come through on the retail deposit side. The NPA number is 0.72% or 0.73% -- 0.7%. So that is on the NPA, collection efficacy is around...
Okay. My next question is in our broking business, the ADTO has increased, but the value of cash trades has reduced in absolute terms. And what impact is it having on the profitability of the broking business?
Yes. So I think F&O has gone up a lot. I think cash is not down as much, but as you can see from even NSE's results, I mean, option trading sort of is the most attractive segment for most investors and traders in the market. So yes, the derivative volumes have gone up a lot. But overall, I think there is an impact on yield because derivative yield is obviously way lower than cash. But on a gross basis, it's increasing revenues.
So I think we are okay as of now. But I think cash is not down more than 5%, even though derivatives is up sharply, cash is not down more than 5%. For us, cash is very strong because we do a lot [indiscernible] and we want lot of direct customers on our platform trading with us, and they're going to continue to push and grow that business. And we are getting a lot of customers from our Private Wealth, Elite Wealth and our Retail Wealth channels also, which we are converting into direct equity customers. And therefore, we have not seen a significant decline in our cash, our cash has been almost stable to flat.
Okay. Another question I had was in Private Wealth, the AUM, the size of business has reduced significantly in the quarter. And it is more in recurring revenue. Can this be explained?
Yes. So I think a couple of things. As I said, we are pushing more for a lot of direct customers on our broking platform. So we've analyzed a lot of the focus on growing that base. Secondly, on the both recurring as well as the transactional side, we had a lot of debt AUM. And because of the interest rates, having adverse movements specifically over the last 3, 4 months, we ourselves advise many of our clients to exit some of those funds. So I think that is short-term in nature. I think you will see some of that reverse over the next 6 months.
Okay. I just have one last question. Many of the competitors are reducing their wholesale book and are not lending currently. Can you give some sense of competitive intensity? And can NIMs improve from here or -- in the wholesale book?
Yes. So that's a great question. So a couple of reasons. Okay. Many of the competitors who are exiting the business I think have seen rating downgrades. You see a lot of rating downgrades and automatically some of the wholesale businesses become sort of uncompetitive, right? So having said that, at least on the wholesale mortgage side, we are seeing a big market share shift away from smaller developers to the larger developers. So I think, for example, the top 50 developers in Mumbai would have almost 70% to 80% of market share in terms of new sales.
And the same thing is happening in our book. We are seeing more concentration with the larger developers, and we used to have higher concentration with the middle -- small to middle developers earlier. So that has put some pressure on yield, but it's not competitive pressure. It's pressure from our yields, which used to be north of 15% and our incremental yield for new loans, which is growing at around 13.5% to 14%.
So therefore, there is almost 100 to 125 basis points reduction in yield. But with that, even the risk is coming down because we are funding higher quality and much better developers compared to what we were doing, I would say, pre-COVID or pre-ILFS. So yes, that is the yield pressure.
But on the competitive side, I think the environment is pretty benign. It's pretty soft. Lots of players have exited the market. At the same time, we are seeing a new category of AIF who want to come and lend and do business in real estate. But that is coming more at the land stage. And if you look at our portfolio, our portfolio is 11.3% land. So it's not very large. And therefore, we are not really seeing that much of the AIF competition with us. Secondly, most of the AIFs are wanting 15%, 16% kind of IRR minimum. And we are at anywhere 13.5% to 14%. So it's a very, very different market, almost 150 to 200 basis points spread.
And as I said, our book is only 11.3% in land. So, so far, we still haven't faced that competition. And 11.3% also is high for us because we like to keep land at less than 10%. And also the new regulations from RBI are making it very complicated to do land acquisition finance because now land financing can only be done post approvals. So I think automatically, land will drift down to sub 5% in our book and construction finance book will further increase and the lending and takeout lending for projects in advanced stage will further increase.
We have a next question from the line of Kunal Shah from ICICI Securities.
So firstly, in terms of the pipeline, so definitely this quarter, we have seen the scale up in the wholesale mortgages. But if you can just highlight in terms of the pipeline as well. And this is -- is this more sustainable or this is a short-term and it would run down over a period. So if you can just explain them? And how are we moving towards our INR 15,000 crores of target in the wholesale mortgage?
Yes. So I think -- so, Kunal, the pipeline is very healthy. It's very, very strong. And I think that the pipeline will become even stronger over the next year, 1.5 years, specifically because of some competitive actions in the market, and some mergers that are going through. So I don't see an issue on pipeline. I don't see an issue on loan book growth.
The only thing is our diligence takes time, right? So as you very well know that we are pretty slow at disbursing our loans, we do our diligence properly. So you may not see that same jump in loan book every quarter. And you may see it every 2 quarters because it takes almost 3 to 4 months to do complete diligence, documentation, everything and close the loan.
We are also looking to expand our team size. We would be expanding our wholesale mortgages team by more than 30% in the next 18 months to 2 years because right now, our team is completely choke. We have absolutely no bandwidth to take any more pipeline, at least for the next 6 months with the amount of work that we are seeing ahead of us. So we're looking to add people, and as I said, we'll be growing our team by more than 30% over the next 12 to 18 months.
Sure. So what you are suggesting is maybe whatever was there in terms of the evaluation in the due diligence that is largely done until Q2, and then maybe a wait also and finally, in 6 months, we'll see the further buildup of the overall book?
That's absolutely correct. So see, a lot of the loan book growth that you saw that came in sort of in August, September. The work has started for that in March, April, May, right? So it just takes time to close. So that is the nature of the wholesale business. Yes, unlike retail where you can disburse even in like 10 days. In wholesale, you're giving INR 50 crores, INR 100 crores, INR 150 crores to someone, it requires a lot of detailing work here. So that takes time.
So that same -- so the whole focus was to get this growth out for the 6 months and the whole team's focus now is, if we really don't have a December focus, we actually have a March focus. We really have a 6-month focus that we want to get. We have certain targets which we want to meet in March. There's enough pipeline, frankly. Pipeline is not an issue. It's just our team size and our execution capability right now, which is a little bit of a bottleneck. But as I said, we'll address it very quickly.
Sure. And in terms of asset quality, so how -- maybe once we transition to the RBI norms from 1st of October, do we see any change or maybe whatever is the conversion from, say, SMA2 to GNPA, that is largely taking into effect the revised loan?
Yes. So let me give a -- good question, an important question. I'll just give a broad perspective on all of it. I'm not seeing sort of any major effect. In fact, no effects on the RBI changes which are required. But as you know, we have a big restructure -- we had a big restructured book because of COVID and the DCCO book, right, which is almost 19% of our book. I'm happy to report that, that 19% book is now at 13%. So 6% has been repaid or refinanced.
Now in that 13%, almost -- we believe almost 80% is sort of running on time to repay and to get refinanced. So it's literally a small percentage of 2% to 3% where we are closely monitoring and maybe there could be some slippages, not all of it, some slippages from that could flow into SMA2, which is still not into SMA2. We are very well covered on the book. I mean I've personally seen each and every account, our committee, our Board has seen at every account. And the cover -- even though they've serviced almost 18 months of additional interest on average, our covers are still healthy and they're above 1.3x to 1.4x today.
One reason being is that in most of the cases, we've seen appreciation in the selling price. The selling prices are up anywhere between 10% to 15%, even 20% in certain cases in certain projects, and plus the sales has been strong. It is only about making sure that these get refinanced or some other asset sale happens, then they're able to repay on time. So that 3% number is what we are watching very, very carefully.
Now what percentage of that 3% slips into SMA2 over the next 6 months to 1 year is hard for me to say. Will nothing slip? No, I can't even say that. just saying we are monitoring it very, very closely. Does it give me sleepless nights? Not at all because we are very well covered on the asset side and the expected LGD from that should be very, very low.
Okay. And can it get offset from the resolution of the current NPA and SMA2 book because we used to highlight earlier in terms of resolution...
There is a distinct possibility that may happen because incrementally, we don't need provisions on our book now. I think our -- I told you that last quarter -- I mean 2 quarters back also, but I think we are almost done with the provisioning cycle. I mean we don't even need to report what is COVID, non-COVID. I mean business is back to normal completely now.
Yes. And lastly, in terms of the guidance which we had given. So obviously, with respect to mortgage lending, it seems to be on track, net NPA plus SMA2 is also less than 5% and Investment Bank is also getting into mid-teens to high teens. How confident are we about Platform AWS and scaling up the mutual fund to INR 25,000-odd crores?
Yes. So we've added a lot of people. We are working very hard. Our -- we don't talk about the investments we are making in digital, but believe me, a lot of investments are happening right now. Few of our products will be ready to hit the market in calendar year '23 on the broking side, on the distribution side. On the asset management side, many of our products are already rolling. The interest from distributors -- I mean, you can imagine that we're going back and doing a NFO after 14 years, last NFO was almost 14 years ago. And so we are getting good traction from the distributors.
And my view is the space is wide open. I mean, the growth that we are going to see on investment products literally, whether it's coming directly through equity, through asset management like mutual funds, PMS or AIS or even through our wealth management advisory business, I think we're just at the tip of the iceberg in terms of what is going to happen to India next 20 years.
So I'm right now more focused on making investments than really seeing any short-term returns. My horizon is extremely long-term in this business. And with a very clear sort of goal that we really want to be in the top 5 players in this space on a consol basis by 2030. So we're going to keep investing. So at least for the next 2 to 3 years, every dollar of profit that we make, we're going to keep investing in infrastructure, whether it is physical or even digital, we're going to keep investing back.
We have our next question from the line of Dhruvesh Sanghvi from Prospero Tree.
Yes. Am I audible now?
Yes. Go ahead.
Yes. So a couple of questions. First, congratulations on the loan book, on the mortgage side increasing substantially now. Yes. So first is on the retail mortgage side. So when we see the disbursements, they are generally far more than the net increase in the loan -- the net loans outstanding. So is it because of competition taking away the customers and getting it refinanced or some thoughts on that line?
Yes. That's right, Dhruvesh, Manish here. That's exactly right. We are getting by BT outrate what we thought at the beginning of the year was 1% a month, that is around 2% a month. That means we are actually underwriting a good credit and which is being taken over by the banks. While the CIBIL has been under correct credit is to being created all these banks, and they take it out at like 8%, 9% rate, which is filed under 12%, 12.5%.
I mean that what has happened is -- our NPA levels have been extremely low in this business, right? So what has happened is that anybody who's a good customer and not a fragile customers through COVID. And even in our financial institution lending business, we have seen this that a lot of the banks have literally blindly just taken those customers away who've been basically good through COVID, right? And they are offering at very, very low rates because that is just such a phenomenal data point that in the last 2 years, you were not being able to default and you manage your cash flow completely on time with the business volatility as well as the volatility generally in market, I think they are very, very good credit. So I don't know, but I don't think we will see the same level of BT going forward, which we've seen just coming out of COVID in this year. But that's my guess. I could be wrong. I think we'll have better data points on this next year same time.
Okay. And second thing, when we look at the history, a lot of companies did small ticket retail lending. And initially, it went very well in over 5, 7 years, some or the other big mistakes happened and we have cases where underwriting was poor or recovery was poor. All these learnings are being embedded, and would you like to talk a little bit on that area to highlight that how are we entering and what are the strategies here?
Yes. So I will request Manish to give a 5, 7 minutes sort of download on what he is doing and how he is thinking about building the business.
Yes. So basically, the example what you gave are all those who actually kind of aggressively -- so some of the HFCs are affordable side bid portfolio of around INR 4,000 crores in 5 years' timeframe. And although they were doing only retail, but it was basically a builder tie-up kind of wholesale financing in a retail format.
Secondly, like if you understand the credit side of that business was not verticalized, meaning it was a branch banking concept where the branch manager himself was originating, underwriting and disbursing. So these are some of the mistakes of others, which we have invited. What we have done is a typical branch of our -- we'll have a separate sales vertical, separate credit vertical, there is an operation, there is a collection guy already sitting there and on top of it, legal and technical.
So what we do is once we get a file, there are 5 customer touch points basically before we disburse the loan. Sales pickup of file credit independently goes and underwrite, although we have not delegated a single power down to the branch. Every reason has been centralized at an HO level of all these 9,000 customers, what we are talking about.
Apart from credit, we have a third-party legal and technical vendors who independently go and do their own inquiries and give directly a report to HO. And lastly, a customer with a family actually comes to our brands to pick up a check. So in our business, the most important thing is to avoid a fraud and which is what last 5 years, we invested heavily in terms of people, in terms of processes and in technology.
So although to my mind, we were slow because we were spending a lot of time on building this entire infra out, but now we are changing the gear. We are at 75 branches as we speak. By year-end, we would be at around 90-odd branches. And next year onwards, we will see a growth. So to answer your question, yes, there were some mistakes. We have understood from the others mistake. We have put all the barricades in place. And now after 5 years of our license, now we will kind of change the gear.
And in -- one more question on that side is, let's say, by next 2 years, FY '25, this INR 1,000 crore could be some number, if you can help us understand, I mean, if you have some thoughts on that either?
We already said by end of FY '24, we will be at around INR 3,000-odd crores.
FY '24, INR 3,000 crores, right. Yes. So that is all from my side on the retail side. On the AWS part, when we see the profitability -- and I hear you that there is a lot of investments going on. Is it because of those investments that the profits of AWS divisions are down for the last 2, 3 quarters. Is that a correct reading?
No. There are 2 reasons. So one is, we started the investments way back almost 18 months ago. So it was literally in April of last year when we had started investing heavily. There is also some amount of IPO funding income in Platform AWS. And that income is not there this year because, as you know, that both because of SEBI and RBI that product is almost discontinued.
So that is the reason why there is both sort of a decrease in revenue and more investments. But having said that, even if you ignore IPO funding, I think our brokerage and distribution business has performed exceedingly well. They've grown in the last 6 months. And that is a function, again, a function of deeper penetration as well as more hands on sales and distribution. To give you the exact number, I think this half comparable half last year discussed PAT, profit after tax from IPO financing activity was INR 57 crores. And for FY '22, the full year was INR 123 crores. So literally, that INR 123 crores for the full year and INR 57 crores for half year is 0 this year.
Right. No. So where I was coming from is that now that is 0 and that has gone. And I mean, we probably cannot count it, maybe it can come in some other form at some point in time. However, if I see AWS today, in the half year, the net profit after taxes are INR 15 crores. Is that -- I mean, is my reading correct? Or where am I missing? I mean if everything is so good why the numbers are so less?
Yes, because that's exactly the -- because the IPO funding income is completely missing, right? And that was almost a 70% margin product, which is not there. So assuming, for example, if the IPO funding product was there, as I said, we started our incremental investments almost 18 months ago. This number would still be lower than last year's PBT and PAT, but won't be as low. So I can't really give you a number, but assuming we'd have put through at least 2 months of the last 6 months at decent IPO activity, but 3, 4 months did not have as much IPO activity. So we would not have had that much profit from IPO funding in any case. So the number would -- anyway would have been lower.
Also, there is a big loss in our asset management company, specifically because the investment in people, technology, processes, systems have been even higher there. So that the mutual fund asset management business is running a loss of almost INR 14 crores. So that itself is a big number. So even if -- those investments were not made, for example, the INR 8 crore number that you see here, INR 15 crore number that you see here would be INR 30 crores.
Fine. So coming back to the base investment bank side, which is running at a run rate of almost INR 100 crores now, of course, markets and mandates and everything are good. But what is your sense on investment banking from INR 350 crores, INR 400 crores range? Can we potentially go to INR 700 crores, INR 800 crores over the next 5, 7 years? Is that the kind of possibility and some thoughts on that area, please. That is my last question.
Again, again, a good question. And let me just -- I must tell you that last quarter, we only did 1 IPO, and there was only 1 M&A assignment. So it was 1 of the worst quarters from an investment banking perspective because we had FI outflows right through May, June, July, August and we also had a lot of interest rates going up. So ECM activity, part of DCM activity, M&A activity, private equity as we think kind of was on hold. And despite that, we've been able to report pretty good numbers because we did do some syndication staff on the debt side, where we made money. Our bespoke book grew nicely, which basically made up money. Our FI book grew nicely, which basically made up money.
So despite a dramatic slowdown in the core sort of industrial banking division business, we've kind of still maintained our PBT at INR 122 crores, which was at INR 134 crores for quarter 1. So I think this last 6 weeks, we have closed 5 right deals. We've signed 2 M&A transactions, which should get closed hopefully by 31st December. So if you have the financing business and you have the noninterest income fee business growing then we can easily hit those INR 700 crores to INR 800 crore number in the next couple of years. And the idea is to give more stability to the investment bank business, we want to grow out the portfolio of lending.
And we want to make sure that at any point in time between 45% to 55% of revenue as well as sort of profitability comes from a very steady lending base. And as I updated all of you in my March earnings call that we are even demerging our private wealth management business are absolutely high-end private wealth management business and bringing it in the investment bank. There are phenomenal synergies between what we're going to do in that business and the broader investment bank, which also will add to a deeper penetration of promoters and the businesses that they run both from advisory AUM and a lending sort of angle.
So I'm actually very excited about this business. It's a very profitable business, makes 6% sort of good ROA. Good 15% to 17% ROE at barely any leverage. I mean, we are not even like that 2x leverage in this business. The NBFC heard JM Financial product has an extremely well-diversified book. It's going to get even more diversified even when Manish mentioned about his HFC book, the HFC book actually is not INR 1,000 crores, it's almost INR 1,400 crores because we have INR 350 crores, INR 400 crores of loans that we have bought and securitized certain finer rates to keep AUM with us, and they're going to securitize those loans, repackage them after 6 months and sell them in the mutual fund space.
So the whole idea is to build a lot of traction with institutional customers, wealth customers, corporate customers and we sort of the leading player, and this is really -- this is really our edge. We know this business extremely well. So yes, in short, we will be targeting the number INR 700 crores to INR 800 crores in the next couple of years in terms of profitability in this segment.
Also, see, broadly, when you just -- you look at our franchise and what we are doing. So lot of investments in Investment Banking and the Mortgage Lending business are already made. I mean these were anywhere to largely build out businesses for us. And we'll keep adding people there. That's most important to get good talent. It's sometimes a challenge, considering market circumstances. But I think with our brand, we're able to attract good quality talent. And here, we're completely in a growth phase.
In our Platform AWS business, we are completely in investment phase, both physical, digital infrastructure, and we're going to aggressively keep building out. And in the alternative credit space, which is basically a ARC, we are basically in recovery sales. Growth has already restarted. We've added almost INR 600 crores of assets in the last 6 months. I must say that the asset pools available to be purchased are lower, which also reflects that generally asset quality currently in India is in top shape, at least on the wholesale side.
But we are seeing some retail portfolios, we bid for a few, we won a few, we lost a few. But having said that, ARC is still in recovery phase. Our goal is that over the next 18 months, we want to collect INR 1,000 crores, such that our net debt to equity is almost down to a 0.5% level. And by then, again, the asset addition would have started and post-2023, '24, we'll be again in a growth phase for the distressed and alternative credit.
So that's the broad plan. Investment Bank, Mortgage Lending already in growth phase, investments made, Platform AWS in full form investment phase building our infrastructure, physical as well as digital and alternative credit in recovery phase and growth will restart in '23, '24.
Can I squeeze in a couple of queries more? Or should I come back?
Yes.
Yes. So basically, when you say ARC because I remember there was something connected to that banks cannot buy in equities in the sold projects by the banks kind of a thing and which was the bottleneck for ARCs like us. Is that sold? And I mean because I hear you that you are looking to grow again there, there was certain...
What we're doing is so banks -- so we basically have no bank lending because, as per Reserve Bank, I mean, banks have to be very careful when they are lending to ARC from -- the ARC especially who bought assets from them. And ARC of our size, where we have INR 11,000 crores of assets, we have a relationship and we have bought something from every single bank in the country. So that's okay. What we are doing is we are partnering. So we are partnering with lots of international funds, and we are partnering with lot of Indian corporates. We're showing this to our wealth customers. So we'll use the partnership model. Our contribution, again, will be restricted to between 15% and 20%. And we'll use syndication efforts through our investment bank again, syndicate the balance and make fees on the same.
So yes, our model will drift over the next 3, 4 years to a more heavier fee-based model compared to an investment-led model, which we've had over the last 10, 12 years. But from a risk-adjusted basis, having seen what I've seen in the last 5 years, I think we'll be in a much better shape having almost a 50% fee-led model and a 50% investment-led model as compared to 100% investment-led model.
Sure. And again on ARC, suppose if we have to understand because there was a lull period of 2 years. So just theoretically, it's all the past assets gets cleared over the next 2 to 3 years. From a cash flow perspective, will it all lead to only INR 1,000 crores or INR 1,000 crores is out of...
No, the INR 1,000 crores is just the target for the next 18 months. We have INR 11,000 crore book in which we've already invested INR 3,000 crores. So it is roughly -- it is INR 1,000 crores will be less than 1/4 to 1/5 of what we finally have to collect over the next 3 to 4 years.
Sure. So even if you recover the past INR 53,000 crores money.
Our total debt on the ARC currently is around INR 2,500 crores, our net worth is roughly INR 1,800 crores. So we want INR 1,000 crores to come from collection so that we bring debt equity under one. We don't want to increase the ARC debt equity more than 1x to 1.2x. And we want to correct this debt equity by bringing cash flows. We also want to demonstrate to all our lenders that cash flow has come in and cash flow has paid you down. And that's not that we are constantly refinancing our assets.
So the kind of cash flow that we are going to have, I don't think we'll require any capital even if our mortgage loan book or any type of loan book goes 2x to 3x from here? Is that understanding correct?
No, we are not interested in any form of dilution at least for the next 4 to 5 years.
Okay, okay. Is there any possibility of a buyback or something like that?
We don't want to dilute. We have enough capital. We are well capitalized. Our gross debt equity is only 1.2x. Our limits are allowed until more than 3x. And plus, we are accreting net worth of almost INR 750 crores to INR 800 crores last year. Same number, hopefully, we do this year, maybe even more. And definitely a larger number next year because of the loan book growth. So simply, if you look at our total net worth it is INR 10,900 crores, and we add even INR 2,000 crores of profit over the next, say, 2 years to 2.5 years. We are talking about INR 13,000 crores of net worth. INR 13,000 crores, 3x debt, which we can take is INR 39,000 crores. So I don't think we're going to be a INR 60,000 crore book in the next 4 years. So there is absolutely no need for equity.
Why don't we look for some sort of a buyback?
Yes, we can. But I think we will be more dividend. We've already announced a much higher interim dividend. The reason we are not doing a buyback is because, see many of our businesses may not require external capital. But we have a good decent amount of cushion of cash sitting in our holding company. This allows us to basically borrow at very, very fine rates in our NBFC because all the lenders are very comfortable looking at our cash balance in the holding company. The rating agencies are very comfortable. And I'm very paranoid about my rating being AA. In fact, my goal is that over the next 3 to 4 years, my rating has to go to AA+. So I don't want to reduce capital. I want to use the capital to grow and also improve my rating. So that is my clear focus, and therefore, we'll pay higher dividends from profits. And I don't want to commit that we'll do a buyback.
As a promoter family, we have creeped. I mean we've taken our holding in the last 18 months from almost 54.4% to 56%. So whenever we get a chance, we are creeping. So that's another way of us increasing our holding. We don't want to resort to things like buyback to do it. I mean buyback should be done only if it's in the interest of all shareholders and not 1 shareholder.
We have our next question from the line of Rajat Setiya from ithought PMS.
Sir, with regards to asset quality, on this DCCO book, under what categorization do we -- are we holding these assets at the moment? Are these standardized or restructured?
No, these are all restructured as DCCO, but DCCO is not a typical COVID restructuring because it is already permitted under RBI rules that if there is a project which has faced delay outside of a normal delay in terms of approvals or any material adverse event, then you can provide a principal restructuring on the same. So to give you a clear perspective that before March 31, 2020, JM Financial across its entire portfolio had 0 DCCO, literally 0 DCCO. So our entire 19% DCCO of last year, which is 13% today is because of COVID. And as I said that of that 13%, I think almost 10% is on track and we are very carefully watching around 3%, and we'll keep watching it very carefully.
Sure. So this will remain in restructured category? Or there can be some regulatory overhang in terms of...
No, no, no. If this 3% were to slip, it slips into NPA. If it slips, it slips into NPA because it's -- the principle is due and the account has to service the principle. So if he's not being able to service the principle, there is no choice but to qualify them as NPA.
So either they get the active refinance because there's enough of collateral and maybe you need a 6-month to 1-year further maturity, but we will not be able to provide it. So yes, to either raise the money from the market or he has to sell the asset to a competitor or somebody else, or he has to do presales, for example, if we have, say, 80 or 90 units, you should get an investor and just sell 30, 40 units off and pay us down. So there are multiple options available to developers in various accounts. And it depends on what is more suitable to them, they will choose that action.
And sir, what has been our LGD since the time we started lending?
So I think overall LGDs have been low, but there have been 2 or 3 fraud accounts, where I think LGDs have been high. I would be anywhere between 30% to 40%. And there have been -- there's been 1 account that the LGD was almost more than 50% where there was a big issue in the approval. This was earlier on almost 2 years ago, we already made provisions for it. It also written off of our books now. And after that, that 1 incident actually made us strengthen our entire assessment of approval. We thought we were very good at doing this. After this incident, we've to strengthen what we do in terms of approval assessment and how we make it stronger in terms of our systems. And we've already gone through that process, and I think we're in even better shape than we used to be on that account.
So if we have to look at the LGDs over a period of time, what has been -- you have mentioned how it has been in some of the cases, how high it has been. But on an average on our history so far...
On the good cases, LGDs are 0, literally 0. Because it's just about getting time to find a buyer. And once you find the buyer, then I think most of the loan is fully recovered.
Okay, understood. And when it comes to provision coverage, our provisions have been coming down from probably 6.5% a year earlier to...
Our DCCO book has come down from 19% to 13%, 6% has been refinanced, right? So we obviously had created some more provisions on those books. So those provisions obviously have come off. And incrementally, when we see the new loans that we've added in the last year, 1.5 years, I think they're performing very well. Sales has been strong. There is no real need to create further provisions. I think we're at a healthy 4%, and I think that's good.
Okay. Understood. Just -- sorry, just one more thing. What have been our -- what is our aspiration to grow our overall loan book in the next 2, 3 years?
Yes. So I think we've given that target out for our retail home loans, FY '24 being INR 3,000 crores wholesale being around INR 12,000 crores. And on the investment bank side, I think we are giving more and earnings growth target and our ROE target. But I think you can safely assume that the book there will not slip below INR 4,000 crores in terms of bespoke lending where it is today. And I think on the FI side, we are currently at close to INR 1,000 crores. I think we should be growing that at least 4x -- 3x to 4x in the next 3 years.
INR 4,000 crores and then INR 3,000 crores here and then another INR 4,000 crores bespoke and...
INR 15,000 crores plus INR 6,000 crores, INR 21 crores, plus another INR 4 crores. So INR 25,000 crores will be our target by FY '25.
We have our next question from the line of Anuj Sharma from M3 Investment.
Yes. Just a question on -- based on our portfolio, what is the pricing assumptions we are making on the wholesale portfolio in terms of final realization movement over the next 2, 3 years?
Sorry, pricing in terms of the yield we will generate?
No, no, the end user realization change, so let's suppose from the wholesaler or the...
We don't assume any increase in pricing when we model our portfolios. We assume real estate prices to be flat over a 3-year period.
All right. And -- but what is the expectation? So I understand we are not building into the model, but what is the expectation?
Now right now, frankly expectation also is flat because I don't think people have realized what the impact on EMI is going to be with the increase in home loan rates today. So I think it's difficult to imagine a scenario where next year real estate prices will be higher than this year. But next year, the interest rate scenario may be very, very different. So I think we'll have more clarity over the next 6 months to a year.
All right. My second question is based on the pipeline. Could you just give some color on the top 2 or 3 cities based on the outlook in real estate?
Yes. I think Bangalore will be number one. Hyderabad will see a significant pickup over the next 1, 1.5 years. Chennai will be flattish. Mumbai will be flattish, and we'll see some more pickup in NCR.
We have our next question from the line of Vivek Kumar from [indiscernible]. Mr. Vivek Kumar? We've lost his connection. We'll take the next question from the line of [ Varun Banka ] from Bryanston Investments.
Can you hear me?
Yes.
Yes. Just 2 questions on JM Credit Solution. So what we see is there is unsecured loan book of 4.1%. Can you explain the nature of these loans as it wasn't there in Q1 '23 -- Q1 FY '23?
Yes. So this is an extremely high-quality borrower and it's not strictly unsecured. But from a regulatory perspective, it's classified as unsecured because it's the primary collateral here is unlisted shares of the company, but it's a very, very high-quality borrower. I cannot share the name, unfortunately. Many of our borrowers have requested us now to stop sharing names and giving data on how much money we've given to whom.
All right. And despite strong growth in JM Credit Solutions, the GMP has moved up. So how concentrated are these nonperforming assets? And what is the outlook or resolution plan here?
Yes, yes. This is all the slippages from SMA2 to gross NPA. In fact, I had highlighted the same in my March call that we'll be expecting some amount of movement as our DCCO book matures. And we are very well aware of all the gaps. So we already have a resolution team fully focused on making sure that we can address many of these increases coming from our SMA book. So the earlier stress, as I said, the 19%, 6% of that stress is already out of our books. The team has done a great job in making sure that they were refinanced, but sales were strong and that we get repaid. So as I explained, that the balance, 13%, 10% is under control and 3% is sort of on the watch list.
We have our next question from the line of Manoj Dua from Geometric Securities and Advisory.
As you said, the borrower in wholesale has become better quality and that the yield is down. Now as a process because the borrower is strong, can we go more higher debt equity in this on a longer period, not in particular 1 or 2? What -- can you give some color on that?
Yes, you're absolutely right, and that is the intention. I think the debt equity levels that you're seeing that you have seen in the last 2 years, which have been around 1x. I think it's history. I think now almost every quarter, you will be seeing an upward movement in debt equity ratio because they're growing the book, we don't need equity capital, we are very well sort of capitalized. So I think almost every quarter, every 6 months, you will see an increase in debt equity.
And what is the opportunity size for us? It looks huge. Are you excited same as bespoke on investment banking in this wholesale mortgage?
No, no, absolutely. In fact, the -- I'm actually excited about each and every business that we have. I think we've built absolutely franchise businesses. We have a great team, great people, and particularly in the mortgage lending, both wholesale retail, Platform AWS as well as investment bank, I think the opportunity over the next year, 1.5 years, 2 years is just superb, but even the longer-term opportunity is fantastic.
But having said that, lending is always a tricky business. One has to consider risk first. There will be a quarter or 2 in the next 8, 10 quarters where we don't grow, we don't like risk, and we want to basically go slow and that's the nature and sort of philosophy at JM. But on a longer-term horizon, we are very, very excited. Even on our ARC business, we want to make sure that we recover another INR 1,000 crores over the next 18 months. And once we do that, hopefully, we'll be able to even bring that business back on the growth path.
Okay. My last question. So who knows the equity market better than you? I'm a shareholder for the last 6, 7 years so with INR 800 crore profit could you see in investment banking, debt equity is low in wholesale, which can grow up your AWS excited. Why market is asking something? I know market can be inefficient for some period, but that much disparity and that for a much longer time, what do you see in it? And anyway, we have ruled the buyback because -- rightly so because of rating. What do you -- what the market is selling, which we are not able to understand? Do you mind me able to give some color into that?
I think the common feedback we do get is that our structure is a bit complicated because we have 2 businesses where we have large minority shareholders. So I do get questions from institutional investors that what is your plan? How are you going to deal with these minorities? Are you going to list these companies? Is there going to be a further holding company discount.
Second, when we talk to a couple of analysts, we have 2 or 3 very smart analysts who understand the business, and I thank them for taking the pain to have gone through the complexity of our businesses and to understand them. But because of the nature of 4 diverse businesses under 1 group, it's also becoming a little bit of a pain to get analysts to write and appreciate and understand the business.
So -- we have thought about it. It's been discussed in formally at management and at a Board level that should we do a demerger at some point in time between some of our lending businesses and our fee-based businesses, should we segregate out the mortgage lending into a separate unit. And we are very conscious and aware of this. It's just that the timing to do it today is not right. Right now, the whole organization is focused on growth.
Let's get to that INR 20,000 crore, INR 25,000 crore number, let's get to a INR 1,500 crore profit before tax. And once they -- once we see larger sizes in each of these units, I think we definitely can think about whether we do a demerger or not to simplify the business. And I think that will be very highly rewarding for shareholders.
So I would be very naive to suggest something because you know everything better. I think if we can have some able to create predictability of the growth of some way, these analysts would like to understand the complex thing also, they do so much complexing, which you don't believe you also know that. So can you create some element of predictability of growth? Is our capital market based in India growing capital market because business, it can show that it might not be there as volatile as you think as the mortgage was the reason, somewhere, can we have a predictability creation so that market -- I'm sorry if I have done the wrong thing.
No, no, not at all. I think if you see, for example, Page 18 on our presentation deck, right, it will tell you that most people always told me a couple of years back that investment banking can never have a predictable business. And if you see, we literally are -- if our profit before tax last 4 quarters is between INR 120 crores, INR 130 crores, right? This is our ROA and ROE, right? I mean -- I mean, of course, quarter 2 FY '22 was exceptional, but generally, we've maintained 5% to 6% ROA, 16% to 17% ROE, right? And -- this is -- the way we mix the business, the way we put it together is not because of earnings. We've actually put this business together to be able to serve the institutional high net worth and corporate customer in the best way possible. But we are seeing the reward also in the numbers, right? Again, if you look at our mortgage lending business right from almost 2007, '08 to when we started it, all the way till ILFS for almost 11 years, we've seen secular growth.
It's just the event of ILFS and rapidly followed by COVID where like for India, they were -- ILFS go once in a 30-year time line. The last time the NBFCs blew up was '96, '97, right? So literally, it happened after 30 years and -- 20 years. And COVID is once in a 100-year history. So I think -- if you look at our Mortgage Lending business, it's going to be back on track. You're going to see secular growth of almost 15%, 20% for a significant period of time in that business.
Platform AWS, we are investing, right? It's not that -- I mean if we don't invest, we'll still grow at 10%, 15%. The reason we are investing is that we want to grow at 30%, 35%. We see the opportunity being so big and we want to make sure that JM Financial's brand name and franchise gets its due in the next 6 to 8 years in that business. So it's really a longer-term horizon from where we are investing. And our ARC business, I mean, this is a business of distressed credit. If you put it through ILFS and COVID is bound to get hurt, right? I mean, the value of a distressed asset in stress times goes down even further. And therefore, rightly so as management, we decided we want to focus on recovery for these years. We want to make sure that they're not just adding assets and forgetting about where we have to collect -- so let's focus on collection and a time will come back to regrow.
So barring that, the other 3 are already in flat for growth. I mean, revenue growth in Platform AWS will be very, very visible in the next 3 to 4 years, even if you don't see profitability growing because we're elastic.
Great. Great. Maybe 1 year or took a couple of year at the things are still not there. We should ask questions, how we can do things differently, maybe in some way or another in terms of creating a buyback or something to have some respectable multiple.
Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to Mr. Vishal Kampani for closing comments. Over to you, sir.
Yes. Thank you very much, all of you, for taking the time and attending our quarterly and half yearly results call for FY '23. If you have any further questions, please reach out to our IR and finance team. We will be very happy to answer those questions. Thank you again.
Thank you. On behalf of JM Financial Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.