Piramal Enterprises Ltd
NSE:PEL
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Piramal Enterprises Ltd
Earnings Call Analysis
Q3-2024 Analysis
Piramal Enterprises Ltd
The company reported a notable year-on-year growth in housing loan disbursements of 23%, with an average ticket size of INR 19,00,000. The disbursement yield for this segment stood at 11.2%. Additionally, loan against property (LAP) disbursements saw a robust near doubling on a year-on-year basis, with an average ticket size in this category reaching INR 23,00,000.
The consumer franchise expanded to 3.9 million, indicating a healthy acquisition of 3 lakh new customers during the quarter. This customer growth was complemented by improvements in asset quality, as evidenced by a significant reduction in 90-day past due (DPD) ratios, particularly in the mortgages sector.
The company's profit after tax (PAT) showed a significant jump to INR 290 crores in Q3 FY '24 from INR 48 crores in Q2 FY '24. Adjusting for one-off items, such as a tax refund and related interest income, the comparable PAT stood at INR 119 crores versus INR 113 crores in the previous quarter.
The company's leadership expressed confidence in sustaining growth and improving profitability in accordance with set goals.
Analysts inquired about adjustments to profits post one-offs and the impact of credit costs on profitability. The company acknowledged an increase in credit costs of about INR 60 crores, attributing the change to this metric without a substantial impact on after-tax profits.
Focus was directed toward the management of wholesale real estate assets as well as consumer and business unsecured loan books, with the latter totaling INR 10,000 crores. The company has taken measured steps to manage its loan book below INR 50,000 given the regulatory scrutiny, currently amounting to INR 600 crores. The company's fintech ventures are yielding approximately 14%-14.5% IRR, with a high percentage of the business being protected through first loss default guarantees (FLDG), favorably impacting operation and credit costs.
Efforts are underway to receive cash from the portfolio over subsequent quarters, with INR 700 crores already recovered in the last three quarters. Provisions for the quarter amounted to INR 250 crores, with about 30% coverage for INR 700 crores in cash flows.
The company aims to reduce operational expenses (OpEx) from the current 3.8% to around 3% and maintain borrowing costs with the potential for moderate reductions. Credit costs are expected to remain in the range of 1.5%-2% going forward; achieving the targeted return on assets (ROA) of 3% to 3.25% relies on these parameters being met.
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Ladies and gentlemen, good day, and welcome to Piramal Enterprises Limited Q3 FY '24 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ravi Singh from Piramal Enterprises Limited. Thank you, and over to you, Mr. Singh.
Thanks, Nirav, and hello, everyone. Welcome to our earnings conference call for Q3 FY '24. Our results material has been uploaded on our website, and you may like to download and refer to them during our discussion. The discussion today may include some forward-looking statements based on management's expectations that are subject to uncertainty and changes and must be viewed in conjunction with the risks that our businesses face.
On the call today, we have with us our Chairman, Mr. Ajay Piramal; Mr. Anand Piramal, Executive Director, Piramal Group; Mr. Rupen Jhaveri, Group President, Piramal Enterprises; Mr. Jairam Sridharan, CEO of our Retail Lending business and MD PCHFL; Mr. Yesh Nadkarni, CEO of Wholesale Lending business; and Ms. Upma Goel, CFO of Piramal Enterprises.
With that, I would like to hand over the call to our Chairman, and I would request him to share his initial thoughts. Thank you, and over to you, sir.
Thank you, and welcome to our earnings conference call for Q3 of FY '24. I will speak about the company's performance during the quarter. A significant development took place in December. The RBI issued a new circular on treatment of AIF investment by banks and NBFCs. Consistent with our disclosure immediately following the circular, during the quarter, we made full provisions against our exposure. This action impacted both our reported profit and AUM.
We are confident of full recovery of these investments as reflected in the payment record of the affected schemes. You will notice in our investor disclosure that we have split our lending business into 2 parts. I would like to introduce this classification to you. A major part of our lending business now is the growth business. This comprises retail lending and our wholesale 2.0 businesses. This segment is what we are investing into. And over time, you should expect this to be 100% of our lending business.
As of December 2023, the growth businesses formed 72% of our AUM, this growth AUM has grown at a CAGR of 57% since the end of FY '22 to almost INR 49,000 crores today. Within growth business, retail AUM grew by 54% year-on-year to slightly above INR 43,000 crores.
Our flagship mortgage business AUM now stands at more than INR 29,000 crores. These are growing at 27% year-on-year, cementing our leadership position in the affordable housing finance. Our granular wholesale 2.0 AUM has grown from a standing start 2 years ago to about INR 5,500 crores, benefiting from our revamped business model leveraging upon the industry tailwinds.
The rest of the AUM is our legacy business, comprising of wholesale 1.0 assets, security receipts and the erstwhile AIF investments. This is the portfolio we have been writing down. And over time, you should expect this to be minimal in size.
At the end of December quarter, the legacy portfolio was 28% of the AUM. The wholesale AUM are down by 37% year-on-year, excluding the impact of AIF book and by 47% year-on-year including the impact of the AIF book. In all, our wholesale 1.0 book is now down 57% since end FY '22 from INR 43,000 crores to less than INR 19,000 crores. Thus, the growth business now is in a driving seat with 72% AUM share and at critically large size of INR 49,000 crores and will dominate and drive AUM growth and earnings from here on.
We had some buckets of value in the balance sheet, which we would unlock over time. We have today announced the sale of INR 1,440 crores from our stake in Shriram investment holdings. We expect closure in Q4 of this year -- FY '24. The transaction is aligned with our focus on monetizing noncore assets. The carrying value of the stake was INR 569 crores. The gains from the transaction will further strengthen our balance sheet.
You might recall that last year, we offered some guidance of the contours of our lending business in FY '28. We had mentioned that in that time period, we intend to build an AUM of INR 1.2 lakh crore to INR 1.3 lakh crores with a retail-wholesale mix of 70-30 and an ROA of 3% to 3.3%. We are progressing strongly on these key metrics.
Our growth -- on growth and business mix, we are presently ahead -- slightly ahead of our guided base. On profitability and risk, we are on track with where we are hoping to be. Excluding the impact of AIF provisions, in Q3 of FY '24, our total AUM growth accelerated to 6% quarter-on-quarter and 9% year-on-year, leading to an AUM of more than INR 70,000 crores.
Our business mix across retail and wholesale, our AUM now is 64% retail and 36% wholesale versus 33% retail and 67% wholesale at the end of FY '22.
Moving on to profitability. In Q3 FY '24, we improved our interest margins, fee income growth and OpEx ratios to deliver core operating profit of INR 316 crores versus INR 237 crores in Q2 and INR 187 crores in Q1, an expansion in yield of AUM due to improving AUM mix and broadly stable cost of funds drove 28 bps expansion on our net interest margin, led by retail business, the fee income grew by 83% year-on-year and fee AUM improved to 0.9% versus 0.5% in the Q3 FY '23.
OpEx grew by 5% Q-on-Q and 25% year-on-year, implying a slight moderation in OpEx to AUM to 3.8% in the third quarter versus 3.9% in the previous quarter while increasing share of retail AUM has driven OpEx growth and improving operating leverage in retail itself should drive a moderation in overall OpEx ratio over the medium term.
Our PPOP to AUM ratio has improved to 2% in Q3 versus 1.1% in Q1. We remain committed to further raising our operating profitability by driving operating leverage in the growth businesses and reducing the contribution of the legacy businesses.
On asset quality. Our overall gross and net NPA ratios were down by around 35 bps Q-on-Q, each to 2.4% and 1.1%. In retail, our 90-plus DPD ratios were stable to down across all products. In wholesale, our Stage 2 plus 3 books is down 54% year-on-year and carries 32% provision coverage.
In Q3 of FY '24, our credit cost stood at 1.6% are still running lower than our longer than expected range of 1.7% to 1.8%. Q3 credit costs were higher than the first H1 credit cost of around 1.2%. The H1 credit cost benefited from much higher recoveries, recoveries tend to be lumpy, which can create slight volatility in the short term in the metric for us as we work on our resolution strategies.
Our PAT, excluding exceptional items, and one-off gains thus stood at INR 119 crores versus INR 113 crores in Q2 of FY '24 and INR 30 crores in Q1 of FY '24. We remain strongly capitalized with a net worth of INR 26,000 crores and capital adequacy ratio of 24.3% on a consolidated basis. Even after taking the full impact of [indiscernible] circular.
With these highlights, I will now hand over to Jairam, Yesh and Upma to discuss segments specific highlights. Over to you, Jairam.
Thank you. [Technical Difficulty]
Sir sorry, we lost your audio. Can you hear us?
Can you hear?
Yes, yes.
All right. Okay. Let's start with retail lending and retail lending, our AUM scaled up by 54% year-on-year. The growth with quarterly disbursement growth of 50% year-on-year. In the third quarter, our disbursement yield and the AUM yields were both stable at 14.2% and 13.2%, respectively.
Our flagship business, the mortgage business now stands at an AUM of roughly INR 30,000 crores accounting for 72% of retail AUM. The mortgage business, which comprises housing loans and LAP, is our core hook product in our branch-based business. When we start any new branch, we start with the mortgage business exclusively for some time before launching other products from the branch.
Our housing loan disbursements grew 23% year-on-year, with an average ticket size of INR 19,00,000 in the third quarter, our disbursement yield in this business was 11.2%. LAP disbursements almost doubled year-on-year. And here, our average ticket size is INR 23,00,000. Yields in LAP are about 150 basis points higher than housing loans.
Mortgages witnessed significant reduction in its already low 90 DPD ratios during the quarter, signifying continued strong asset quality. Our other secured loans, which are primarily used car loans continued to witness sharp growth with AUM up more than 3x year-on-year to INR 1,700 crores.
Our unsecured retail book has 4 products. And together, they stood at about INR 10,000 crores of AUM. Over the last 3 quarters through various measures to tighten credit underwriting, our disbursement volumes in this have been slightly controlled. Simultaneously, the risk metrics have remained benign. 90-plus delinquencies has been around 1.4% to 1.6% in the last 3 quarters.
We have also shared during this quarter a special analysis on unsecured lending, given all the interest in that segment about how our consumer unsecured business has done as opposed to our business unsecured loans. We have broken up the consumer unsecured loans, which are about INR 6,000 crores of the total INR 10,000 crores. We have split that up into loans above and below INR 50,000 ticket size. And we have also shown how that portfolio breaks up between salaried personal loans business then from branches and digital loans.
What you will find from those special analysis pages in our presentation, is that loans that are below INR 50,000 in ticket size have, in general, been 2x to 3x higher, 90-plus delinquency rates than that of loans above INR 50,000 ticket size. However, these loans are just about 10% of consumer unsecured. And the risk is here as well through a series of actions on our part has come down quite sharply. You will see both the risk chart as well as the contribution chart in our presentation in the special analysis slides.
We have launched and scaled up our branch originated salaried personal loans business, and this has led to its share in disbursements increasing to 39% of unsecured consumer loans versus 20% same time last year. We continue to make steady progress towards long-term operating profit metrics, which we have shared with you in the past. Yields and fee income have been stable at a fairly healthy level. OpEx ratios as well have been moderating from the highs seen in FY '23.
Our OpEx to asset ratio was down another 20 basis points during the course of this quarter. As we continue to expand our retail lending business, we are also investing in manpower, branches, technology and analytics of our retail lending business for continued strong future growth. We continue to add branches to our network. And during the quarter, we added 28 new disbursement active branches, aggregating to a total of 95 branches added over the course -- over the last 12 months.
With this, we today have a network of 470 conventional branches and 179 microfinance active branches.
Speaking of microfinance, we have also, this time, specifically shown delinquency trends of the microfinance business and of the unsecured business loans portfolio as well for you to look at as part of our special analysis slides.
Talking about our branch network for a minute. Last year, at the same time, we had 93 branches, which were less than 1 year old. Those 93 branches are today all in the 1- to 2-year-old category. That kind of mix shift implies that you should expect to see and we do see more than 2x the productivity at this vintage compared to what these branches had in the 6- to 12-month vintage. This will remain the key driver of improvement in OpEx to assets for retail segment as we move towards our target of 3.5% to 4% OpEx to asset ratio compared to where we are today, which is 5.6%, down from 5.8% last quarter.
Our consumer franchise today stands at 3.9 million. We acquired another 3 lakh new customers during the quarter. And our active customers out of the 3.9 million is today 1.2 million and this entire 3.9 million base continues to form a strong base for us to do cross-sell activities in the future.
That's the summary on the retail lending business and to walk us through our wholesale business, Yesh, I'd invite you to take it on.
Thanks, Jairam. In our wholesale 2.0 AUM, we are focusing on building the granular and high-quality portfolio. Our 2.0 AUM grew 24% quarter-on-quarter to INR 5,562 crores across real estate and corporate mid-market loans. 2.0 loans are performing well and are in line with or ahead of underwriting as reflected in prepayments in the portfolio, which stood at INR 980 crores in our new real estate books in some section, which illustrates the credit quality of the underlying borrowers. We disbursed INR 1,798 crores in quarter 3 of FY '24, of which INR 1,005 crores was disbursed in the month of December 2023.
The average ticket size is around INR 157 crores for real estate loans and INR 57 crores for corporate mid-market lending highlighting the granularity nature of the portfolio. We will further build this book in a calibrated manner while capitalizing on the market opportunity.
In our legacy business, we have achieved an accelerated rundown of wholesale 1.0 AUM, which is down 57% since March 2022 in line with our strategic focus. In the last few quarters, we generated gross liquidity of INR 7,100 crores. Wholesale 1.0 AUM, excluding nonyielding assets, such as Stage 3 assets, security receipts, land receivable assets and DHFL book put together, stood at about INR 11,197 crores with an average yield of 11.6%. Our Stage 2 and 3 AUM reduced 54% year-on-year to INR 4,721 crores with a provision coverage ratio of 32% combined.
Wholesale SRs have reduced by 6% since end Q1 of FY '24, led by cash realizations of INR 909 crores. As resolution process continues, we expect our SR portfolio to reduce in the near term by a combination of sales, enforcement and collections at our carrying value. For the AIF schemes impacted by the RBI circular, as alluded by Chairman, we are confident of full recovery from these investments.
We have received INR 1,137 crores as interest and principal payment on these units so far. That ends the update on wholesale, and I'm going to hand over to my colleague, Upma, to cover financial performance.
Thank you, Yesh. Now I'll talk about the financial performance. In Q3 FY '24, our NIM expanded by 28 basis points quarter-on-quarter supporting the NII growth of 11% quarter-on-quarter to INR 835 crores.
Fee income was up 23% quarter-on-quarter to INR 155 crores further boosted by one-off interest income on IT refund of INR 64 crores. Our other income was up 53% quarter-on-quarter to INR 251 crores.
Our OpEx was up 5% quarter-on-quarter to INR 697 crores led by growing retail business and our investments in distribution and tech platforms, which our pre-provisioning operating profit went up 55% quarter-on-quarter to INR 389 crores. If we exclude one of the incomes, which are dividend income and the interest income or IT refunds totaling to INR 73 crores. Pre-provisioning operating profit was up 33% quarter-on-quarter to INR 316 crores.
Credit cost was at 1.6% versus 1.2% in H1 FY '24, which is in line with our expected range for credit cost. We made provision of INR 3,540 crores, pursuant to the RBI circular on investments in AIFs. These pertain to 2 of our AIF schemes where we have taken full provision and also reduce time from our reported AUM.
Excluding the impact of AIF provisions, our Q3 FY '24 PAT stood at INR 290 crores versus INR 48 crores in Q2 FY '24. Excluding the benefit of one-off tax refund and interest income on it, totaling to INR 184 crores, our profit after tax stood at INR 119 crores versus PAT of INR 113 crores on a comparable basis in Q2 FY '24.
Now let me talk about the liability management side. We continue to focus on diversifying our borrowing mix, including securitization, our fixed to floating rate -- that mix improved to 51:49 and we'll continue to see further improvements over coming quarters.
Our cost of borrowings was largely stable at 8.7%. Our ALM is well matched with positive gaps across all buckets. To conclude, the performance of the company in Q3 and 9 months of FY '24, highlights the progress of the company which is better than the medium-term guidance on AUM growth and mix. The trends on operating profitability and asset quality are also aligned with our strategic road map. We are confident on the company continuing in the growth mode and improving profitability to our stated goals.
With this, I would like to open the floor for questions. Thank you.
[Operator Instructions] The first question is from the line of Avinash Singh from Emkay Global.
A couple of questions. The first one on your AIF investment. So for the 2 investments you have made a provision of around INR 3,500 odd crores. So if you can just sort of provide some color around the life cycle of the AIF and kind of tentatively when one can expect the recoveries to happen? That's one.
And the second one would be, if I look at Slide 12 where you have sort of given in one of the charts profit after adjusting for one-offs. So if I see there -- I mean, the jump from Q1 to Q2 hedging material. Now Q2 to Q3, like INR 113-odd crores going to INR 119 crores, that is just like a 4%, 5% sequential increase despite the fact that the pep-up level, the growth has been kind of a 33-odd-percent. So that is basically due to higher credit cost. And I recall you have been talking about slightly normalization of credit cost in the retail that was going. So does that mean -- I mean, if this is a sort of a trend that the underlying profitability emergence is going to be much slower because I mean the -- like Q3 seeing a normalized credit cost and then the PAT or the adjusted PAT is not growing in line with PPOP. So can you just provide some color how do you see that? I mean, with the credit cost normalizing going further, how sort of for your underlying PAT going to develop?
Thanks for your questions. This is Yesh. I will take your first question and let Jairam run with the second one. On AIF, just to give you a background on these AIF, these AIF actually came into being back in 2020. So this has been -- this have been in existence for 3-odd years now. When these AIFs were formed, the portfolio comprised loans, about 35-odd loans, which were headed by the AIF in which we had the exposure.
Today, out of 35 loans, 22 loans have exited and what's left is stocking loans. Proceeds of these 22 exited loans have been used to bring down the size of the AIF when they were found was roughly in the range of INR 8,000 crores to today, which is INR 3,500 crores, which is the amount we have as a prudent measure in response to RBI regulation taken through the P&L.
As far as the plan is concerned, it was always our intention to work on the underlying assets as part of 1.0 recovery of the strategic plan and bring this portion of the balance sheet down systematically over the next few quarters. That plan hasn't changed at all. We continue to work with underlying loans and underlying partners. We continue to expect liquidity of the underlying assets to occur as we go from here. These loans are all performing. We get paid interest and we get paid principle as they fall due, and we are quite confident that we will recover pretty much everything that we have taken a pin on this quarter as we go from here.
So I'll just take a pause here to make sure that you understood various aspects of what I just said. And if you have any queries...
I may add 1 other point to that, Yesh. Data point we have shared in the presentation, we have so far recovered INR 1,137 crores to our account, Piramal account from these AIFs. This is on Page 11 of our earnings presentation. You see the number INR 1,137 crores of cash recovery has happened to Piramal accounts from these over the last few years. In this current financial year, in the last 3 quarters put together, we have recovered INR 700 crores, so that gives you a sense that this is not kind of a one-off that suddenly you've got some money, but we continue to recover. Over the last 3 quarters, we have recovered INR 700 crores. So that's the pace at which is going. You can never be super certain about exactly the pace at which it will move forward. But let me just state the fact that over the last 3 quarters, we have cumulatively recovered INR 700 crores or receive INR 700 crores, recovery is a wrong word here. These are not stressed accounts.
So we have received INR 700 crores of cash flow from these accounts in the last 3 quarters. We would also like to reiterate that the INR 3,500 crores of adjustment that we have taken to our -- that we've taken through P&L into our network is an accounting adjustment. This absolutely does not change the economic characteristics of the underlying asset. So the cash flow that we have been receiving in the past, there is no reason to believe that anything much is actually going to change in that regard, except that because we have now written down the entire AIF to 0, everything that comes in, in the future in one form or the other comes through P&L directly. So that's the change that you will see that we will continue to see some extraordinary positive inflows coming in from these AIF flows, which would otherwise have shown us normal regular income. You will see them now as extraordinary item for the quarters to come. I hope that clarifies the part on the AIF side.
I could -- let me do the credit cost side or the PAT side thing as well, and then we will see whether you're -- whether you have any further follow-ups. On the -- on your point on profitability, you're absolutely right. Our PPOP increased materially during the course of the quarter. However, our profit after taxes did not materially change. The delta, of course, is caused by credit cost, which went up by about INR 60 crores. The core credit cost went up by about INR 60 crores during the course of the quarter from roughly INR 200 crores to INR 260 crores, give or take. So a INR 60 crore increase in credit cost happened.
The gross credit cost is about the same. Nothing much has changed here. What has happened is that there was -- there are recoveries that happen in our wholesale business which tend to be bulky. So sometimes you get big bulky recoveries, and sometimes you don't. And last quarter, it just so happens where we have had INR 140 crores of higher recoveries than we had in this quarter. So -- and that explains all of the difference and more of what you're seeing in credit costs.
So basically smaller recoveries pulled from wholesale 1.0 is what explains all of the different, INR 140 crores of extra came from there. So that's the reason why you see the PAT not growing as well. But this is -- this recovery suffers a bit bulky, especially in wholesale 1.0, it's bulky, sometimes it comes and sometimes when it comes to be a large number. So I don't think this changes anything with respect to our long-term profit trajectory. Our long-term profit trajectory continues to be strong, and you should continue to expect strong improvement in the profit profile in the quarters to come.
Yes. A quick follow-up, just the accounting perspective. I mean whatever income that will come from this [ INR 35 billion ] of -- yes, NPA declared, you like provided. So how will you account I mean whatever I mean, you are getting back the principal or the interest. How will it get accounted?
See, we don't know yet. It's the honest truth, like there will be some part of it, which will show up as interest. There will be some part of it will show as extraordinary income. There will be some part of it that will show up as other income. So we don't know. We need to work with our auditors. The one thing that is for certain is that all of it will come through P&L, because the hit has gone through P&L. So all of the inflow will also come through P&L, yes. And so we will continue to make disclosures which make it very clear how much of the income that we make from next quarter onwards is coming from this AIF too. We will try and keep it separate as much as possible so that you can see it clearly. We will try and make those disclosures. As that happens, the capital that has gotten consumed, we have consumed about 400 basis points of capital because of this AIF thing, that capital will also keep getting released as the recoveries come. We will try and be as clear about this as possible in our disclosures in the quarters from now.
Next question is from the line of Piran Engineer from CLSA India.
A couple of things, and I think I probably might have missed this in the initial comments. Our wholesale Stage 2 has seen a jump Q-on-Q. Have you all commented on that? Have I missed anything here?
No, no, you don't lose anything.
Okay. Can you then help clarify, please?
So we had 1 account which slipped into Stage 2, and that's what explains the increase in the Stage 2 bucket. And corresponding with that, we have obviously taken more provisions.
Okay. Any color on like the industry, et cetera, what is the, let's call it, time line that you're looking at for an upgradation? Or is that -- is this more a watch list account that would slip into NPL next quarter?
No, it's actually the mismatch in the cash inflow from the underlying asset, which caused this. And we have changed our ECL criteria where once the account slips Stage 2, we actually keep it there for 6 months at the very least, right, before reverting it back to Stage 1. So we don't see an upgrade happening for the next couple of quarters at least. But we don't see this slipping into Stage 3 either.
Piran, it is a wholesale 1.0 real estate asset. So there is -- the industry is the same. The real estate -- it's a real estate account.
Got it. Okay. Okay. Jairam just on unsecured loans. Now you've got a book of INR 10,000 crores. A couple of things. One is, how should we think about economic in the own channel versus the fintech channel? That's one. Because obviously, you mentioned yields of 18%, 19%. But through the fintech channel, I would assume it's actually much lower. And secondly, our sub INR 50,000 digital lending book is also quite large now INR 4,000 crores. How do we think about, given the RBI, let's call it, actions concerns over INR 50,000 unsecured loans, how should we think about your strategy?
[Foreign Language] We are less than INR 50,000 loan book AUM is only INR 600 crores. So if you look at Page 27 of our disclosure. The total -- so have a total unsecured book of INR 10,000 crores split that into 2 parts. Consumer is INR 6,000 crores, business is INR 4,000 crores. Within that INR 6,000 crores of consumers, about INR 600 crores is less than INR 50,000, and the rest, like INR 5,500 crores is greater than INR 50,000. So less than INR 50,000 consumers is only INR 600 crores of exposure.
Needless to say, that's much higher delinquency, the delinquency as again, you can see on Page 27, the delinquency, we have been able to bring down quite materially in the last 2 quarters through a series of actions that we have taken. However, it is still high. And it is -- this part of the book is essentially sort of a flywheel kind of business, you're going to originate a bunch of customers here and only a small part of them are going to flow through the funnel to become large ticket customers of us in the future. So that's the way to kind of think about it.
So Jairam, on your Slide 27, the digital loans average ticket size of INR 50,000, I know the average, so some will be above and some below, and that's about 38% of your total unsecured AUM.
Yes, yes. But digital channel, there are 2 ways to look at it. One is by channel and one is by ticket size. The ticket size uncovers the whole thing. It's digital, nondigital everything put together, INR 620 crores is AUM, which is the -- which is less than INR 50,000 in ticket size.
Okay. At disbursement, right? It's not that after a rundown, it comes below 50,000?
No, no, no, that is disbursements. It's all disbursement.
Okay. And then secondly on fintech and non-fintech. Yes.
Yes, yes. So the fintech business, broadly speaking, the fintech business is being done at roughly 14%, 14.5% IRR, right? But as you can see on -- where the fintech slide, Page 29, if you see Page 29, the fintech business is largely protected through FLDG. There's a new disclosure that we have added this time. Just to give people a bit of sense of how that digital business is going on. So we are currently about 90% of the fintech business is protected through FLDG, which essentially means I'm not taking any of the credit cost. I'm only facing record on that 11%, which is up there.
So essentially, I have a 14% IRR business with pretty much no OpEx and no credit cost. So currently, it tends to be very profitable. So that's kind of the way to think about the fintech business that we're able to originate a lot of customers, and we're able to do that at reasonably good economics without increasing your OpEx without really increasing your credit costs at all.
So right now, through partnerships kind of business, then through partnerships is better economics. However, in the long run, you do want to have your own channels, originating a lot of these businesses, so you will continue to see us invest in own channels and continue to bring that up.
Got it. Okay. Okay. This is useful.
Next question is from the line of Nischint Chawathe from Kotak.
Just 1 from my side. You mentioned that AIF, a has your exposure of INR 3,142 crores. I just wanted to know what is the total size of the AIF out here, including the other investors?
So at inception, the total size across both the AIF was about INR 8,000 crores, right, of which the first one was INR 7,260 crores. What's left now on our balance sheet is INR 3,500 crores. And all of that attributes to our investment of our holdings. So there is no third-party investor left in the AIF anymore. So all the assets and the cash flows that the assets generate are to our benefit going forward.
In the tranche and the senior has paid off. Sort of, I think whatever is now sort of in the AUM is completely at downstream.
That is correct.
And you said that you received around INR 800 crores in the last 3 quarters on this.
INR 700 crores.
INR 700 crores in the last 3 quarters.
But in all INR 1,130-odd crores in addition -- sorry, of which the INR 700 crores is part.
To say that, look, this is sort of run down over the next, whatever, 10, 12 quarters or so.
Our plan is to actually run it down more sort of faster and quicker than that. I think we don't give specific guidance in terms of the velocity at which this will, but all I would say is that these assets have been in the portfolio for some time they have been performing. Our partners as well as we have received cash coming from this portfolio, and our effort is going to be on receiving cash from the portfolio over the following quarters.
And we'd like to reiterate that INR 700 crores cash flow last 3 quarters it gives you a good sense of the pace at which stuff is coming, that should provide a decent sort of anchor for you to think about going forward. And everything that comes in here is directly to P&L.
Some color on the underlying assets. I mean, how many of these projects would be already completed under completion, via completion or anything else that you could share?
So these are 13 different loans. All of the loans are residential real estate project finance loans, and there are different stages of execution. One of these underlying loans are backed by undeveloped or early-stage land parcels. These projects have been in production for some time at [ differences ahead ] and therefore cash generation has been happening here.
Next question is from the line of Kunal Shah from Citigroup.
Yes. So particularly with respect to the Stage 2 assets, almost like INR 7,000-odd crores kind of increase. So if we look at it in terms of the provisioning which we were carrying on this asset and how much that would have actually impacted the credit cost? Because earlier you mentioned it was largely because of the over recoveries on account of which the sequential credit cost seems to be up. But was there any increase on account of the higher provisioning towards this particular asset?
The delta is INR 700 crores not INR 7,000 crores.
Sorry, INR 700 crores yes.
So a small part of it, it was due to this, but not a material one.
Total provisions that, Kunal, the total provisions in the quarter about INR 250 crores, right? If you see Stage 2 addition is about INR 150 crores, INR 170 crores. And the rest is write-offs. Basically, that's what has happened. And so yes, there is this INR 700 crores that has come in has gotten provided for at the rate of roughly 30%. So [Foreign Language].
Okay, okay. So there was nothing which was there in the Stage 1 as such okay, when it was in the Stage 1, it was still provided at the regular run rate of 3-odd percent or so it was...
Yes. [Foreign Language]
[Foreign Language] And then incremental you would have done -- okay. Okay.
[Foreign Language]
Yes. Yes. So INR 200 crores coming particularly from this and balance is coming from the write-off. And again, getting on to the write-off. So this is again getting into the lower ticket sales because we are seeing a sharp decline out there in terms of the 90-plus delinquency out there, what we have shared in our presentation, particularly the less than INR 50,000. It's coming up from [ 4.4% ], maybe that proportion is still quite low, in fact at INR 600 crores...
But you're right [Foreign Language] But it's not purely because the write-off that the ratio is coming down. If you see the denominator has been very flat, it be roughly [Foreign Language] denominator throughout for the last 5 quarters. That less than INR 50,000 crores -- INR 50,000. So the denominator is roughly flat, yes. It is just that these -- in these really fall ticket cases, you either do a very quick settlement with the customer, take whatever money you can and you go away or you take the write-off and actually close the account and move on. You can't actually sit with these accounts for long periods of time because it doesn't work. You're not -- never going to recover any money. If you don't recover it very quickly, you're not going to recover it at all.
Sure. And lastly, in terms of the increase in the borrowing cost and maybe the bank borrowings, how much is the increase that we have witnessed because we are not seeing much of the increase in the cost of funds, it's hardly...
So you've seen cost of funds have gone up at a stock level by about 10 basis points. Marginal costs are indeed high. I have to say, [ 8.70% ] is where we are at a stock level. But on a flow level, it's quarto [ 9.25%, 9.5% ] is kind of where margins are at. So margins have gone up by 25 basis points, roughly 20 basis points ever since RBI's NBFC risk-weighted thing happened. So it is -- yes, so it has gone up a little bit since then.
Okay. So 20/30, and that will get reflected in terms of the overall borrowing cost as well?
Let's see. Let's see. There's a lot that is going to happen. Let's see what RBI themselves do in the coming few quarters and the few policy meetings that are lined up. If, as we expect the second half of the calendar year sees RBI changing stance towards being a little bit more accommodative that will completely overwhelm all these small delta, and you should see cost of funds start to decline at that point.
Next question is from the line of Harshvardhan Agrawal from Bandhan Asset Management.
Just wanted to understand on the stake sale that we have done from Shriram, any residual stake that we have left -- we are left with in any of Shriram entities?
Yes, Harsh. All our ownership in the general insurance and life insurance businesses of Shriram remain intact after the sale. So those are not assets that we have sold yet. So we will -- you will continue to see the general and life insurance businesses on our book. They will be held at a total cumulative book value of INR 1,709 crores.
Okay. So to stake that you have sold, that was largely in the lending entity of Shriram?
No, no, it's not in the lending entity. It's a holdco entity. My colleague Rupen will -- can explain a little bit more. Just give me one moment.
Entity called Shriram Investments Holdings Limited, this entity held a bunch of their investments, including some stake via this entity into the main lending entity, called Shriram Finance. They also held their brand and associated cash flow of that group in this entity. And there are a bunch of other investments. So we just monetize this particular company. This company was spun out as part of the demerger that happened in December '22, which led to the creation of SFL, LI, GI and this company.
Sure. That helps. So just 1 last quickly. What is our stake in that in the insurance entity now as an the percentage?
On beneficial interest rate is about 13.3% on GI and 14.9% on LI.
The next question is from the line of Praveen Rathi from Praveen Rathi and Associates.
I have 2 questions for Jairam. First, what is our current position pertaining to deferred tax assets, when can we see it to be accounted for in our books of accounts? When the DTA availability will get time bar? And the second one, what is the status of [ undrilled ] land you bought a few years ago, when can we see it to be monetized?
What was your second question?
I couldn't hear your second question. Can you please repeat that?
What is the status of the [ undrilled ] land bought a few years ago? When can we see it to be monetized?
Got it. Okay. On the DTA, deferred tax assets, Q4, Q4 is the timeline. We will get to know, we are in active conversations with the tax authorities, everything will pass the time bar during the course of this -- in the next few weeks actually. And so in Q4, we will find out the final details. So you should expect to know that and see that. On land, Yesh, you want to take that?
Yes. So as we said earlier, land monetization is working progress, and we don't have anything material to report at this moment, but we will keep you updated as we make progress.
Can we see another risk adjusted discounting cash flow for that asset where we have done earlier?
Taking all the options, but as I said, nothing material to update on this at this moment.
You will see, by the way, that this quarter, we have made a new disclosure, which very cleanly and clearly shows you all the various aspects of our legacy business and how that has actually changed. This is Page 7 in our investor presentation, please take a look at that. That should give you a good sense of how all the various legacy assets have moved. As you can see, the legacy AUM has fallen very softly over the last 1 year, and we expect that level of monetization to continue in the quarters ahead.
Next question is from the line of Vinod Jain from WF Advisors.
My question relates to loss on derecognition of financial instrument. What is the nature of this net loss on derecognition of financial instruments under amortization cost category?
Vinod, sorry, we are losing your audio, there is slight disturbance from your line. .
Can you hear me now better?
We can hear you, but there's a bit of disturbance from the line.
Okay. I'll try 1 last time. My question relates to loss on derecognition of financial instrument.
Vinod sorry, but still the audio is breaking.
Vinod-ji, I think I got the essence of your question. So I think you were talking about our steady disclosures where we have a loss on sale of financial instruments. All this is, by the way, captured. This is 1 part of the overall credit cost picture that we shared. When we say that the overall credit cost for the quarter is INR 250 crores, all this is captured as part of that. This subpart is any losses that you take when you sell any one of the investment instruments that you might have. In our case, during the course of the quarter, there was some sale of security receipts that happened, which came with a little bit of a hit, which is incorporated here. However, I want to reiterate that all this is part of the INR 250 crores of credit cost that we mentioned. So you don't need to go beyond the INR 250 crores. Everything that is there in the semi disclosures will all tie up to the INR 250 crores eventually.
Okay. Understood. And how is this line item expected to behave in the coming quarters?
See, we have guided on credit costs overall as being 1.7% to 2% at the overall level. This quarter, we had 1.6%. And last quarter, we had -- last 2 quarters, we have been in the 1.2%, 1.3% kind of range. Let's see if we have -- in the quarters that we have strong recoveries in our wholesale business, you're in the 1.25% kind of range. And when we have slightly less recovery, we are in this 1.5% kind of range. You should expect us to be roughly in that range in the times ahead as well.
Next question is from the line of Arpan Agarwal, individual investor.
My question is on profitability on the interest-earning assets, so we can ignore the one-offs and the noninterest earning assets. And I'm already assuming that the long-term OpEx will be around 3% and credit cost will be around 1.5%, 2%. So my question is, do we expect profitability to increase in the long term, either due to borrowing costs going down or see it increasing?
Yes, absolutely, Arpan. And you're pointing out all the right things. What do we need to see for us to build a 3% to 3.25% ROA, like which is what we have guided, you need to see, first and foremost, OpEx needs to come down from its current level 3.8% to a little bit more like 3%. Number two, you need to see yields go up. Yields plus fees, I would put that together. Again, you're seen that happen but you need to see more of that take place.
And hopefully, a little bit of moderation in cost of borrowings. The 3 things if they happen. And even if credit costs stay roughly where they are right now, you will see us get to 3% to 3.25%. So those are the 3 things that fundamentally need to change. And the one thing that doesn't need to change is basically a credit cost, which needs to be somewhere in the 1.5% kind of range. And we have good line of sight on all 3 of those items.
I have a follow-up question. So is it possible to provide the average yield as a percentage of the interest-earning assets?
Yields. There is one disclosure. Look at page number -- sorry? Yes. Page 36 -- yes, Page 36, that will show you in our legacy business, what the yields are for the performing part of the -- or the loans part of the legacy business and everything else, of course, it doesn't contribute to yield. So 11.6% is the yield that we are getting on the loans and the rest of the book about INR 7,500 crores does not contribute to yield.
But this is on the legacy book, right? So on 2.0 new business is obviously different close to 14% and we retail is different.
Next question is from the line of Aagam from Flute Aura Enterprise.
Just wanted to check if there's any update in terms of the upgradation of the long-term credit rating of the company.
Nothing to report just yet. See the credit rating agencies, just like all of you in the equity market, watching our numbers, they want more clarity on things like AIF and credit cost trajectory and the -- and our legacy business, et cetera, as well. So some of our disclosures this time are also aiming at providing more clarity to some of these constituents. And we continue to have those conversations but nothing to report at this moment.
Ladies and gentlemen, we'll take that as a last question. I will now hand the conference over to Mr. Ravi Singh for closing comments.
Thank you, everyone, for joining this call today. If you have any further questions, please reach out to the Investor Relations team, and have a good day. Thank you.
Thank you very much. On behalf of Piramal Enterprises Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.