Cholamandalam Investment and Finance Q Earnings Call 21 Jan 13

Transcription

1 Cholamandalam Investment and Finance Q Earnings Call 21 Jan 13 Ladies and gentlemen, good day and welcome to the CIFC's Q3 FY '13 Earnings Conference Call hosted by JM Financial Institutional Securities Private Limited. As a reminder, all participant lines will be in the listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Amey Sathe from JM Financial. Thank you and over to you, sir. Amey Sathe, Analyst Yeah, thanks, Marina. Good afternoon, everybody, and welcome to Cholamandalam Investment and Finance earnings call to discuss third quarter FY '13 results. To discuss the results we have on the call, Mr. S. Vellayan, Managing Director of the company; Mr. Kaushik Banerjee, President, Asset Finance, and Mr.. May I request Mr. Vellayan to take us through the financial highlights, post which we can open the floor for questions? Thank you, sir. Thanks, Amey. Thanks a lot. Good morning, everybody. Good afternoon, actually. We just want to go through first Q3 performance highlights and then Y to date December performance highlights. Q3 has been a good quarter overall. Disbursements in vehicle finance has grown by 34% versus the same quarter last year. And in home equity, it has grown by 43%. And so overall, vehicle finance disbursed 2,574 crores and home equity disbursed 525 crores. We also disbursed about 14 crores in gold loans. And the company also launched its home loan business where we've just disbursed 0.6 crores in the last quarter. The total aggregate disbursements for the company were 3,114 crores against 2,283 crores in Q3 of for a growth of 36%. Also, the total income is 666 crores compared to 471 crores in Q3 of That's a growth of 41%. And PBT is 122 crores against 69 crores, which is a growth of 77%. Finally PAT is 81 crores against 41 crores for a growth of 98% and PBT and PAT are not 100% like for like, so given that the personal loans, but coming in going forward quarters and years, it will be a like for like comparison. And finally, for the quarter, the company has also prehended approval from the Board to raise Tier 1 capital to an extent of 300 crores on private placement basis by QRP and the posting ballot for seeking approval from the shareholders for this issue is in progress. In terms of year to date performance, the company has disbursed 6,742 crores in vehicle finance and 1,523 crores in home equity and gold loans has been 45 crores to date. The total disbursements in the company are 8,311 crores and that's been a growth of 38%. Total income is 1,830 crores, which is a growth of 45%. PBT at 328 crores, which is a growth of 65% and PAT 221 crores, which is a growth of 86%. The company has in terms of overall summary, the company has expanded its presence to 506 branches as of 31 December 2012 compared to 375 on 31 March. And almost all the additional branches are in Tier 3 and Tier 4 locations. The company also raised Tier 2 capital of 593 crores during the period ended 31 December by a way of subordinate debt and PDI, perpetual debt instruments. And our capital adequacy ratio is now at 18.12% compared to 17.78% in December In terms of our performance of subsidiaries, the wealth management businesses, constituting Chola Securities and Chola Distribution, made a loss of 0.13 crores compared to a loss of 5 crores in year to date December '11. And Cholamandalam Factoring made a profit of 1 crore compared to a loss of 57 crores in year to date December '11. Again, that loss related to personal loan's book losses. Consequent to the approval of the Boards of both companies of amalgamation of Cholamandalam Factoring with the company, Cholamandalam Factoring has filed a scheme of amalgamation and other relevant applications with the honorable High Court at Madras for necessary orders. Basically, given that Cholamandalam Factoring was predominantly a vehicle for where we had kept some of our toxic assets and doesn't have continuing operations, we felt it's probably in the best interest to merge that entity with Cholamandalam, the parent itself.

2 And so in terms of consolidated results, the consolidated PAT for the period ended 31 December, 2012 was 221 crores as against the PAT of 108 crores in the previous year, registering a growth of 104%. The Board has also recommended an interim dividend of INR250 per share or 25% of the face value of INR10 share to its equity shareholders. And Amey, I will conclude with that. I'll be happy to answer any questions from the floor. Questions And Answers Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. ( Instructions) The first question is from Sanjay Shah from KSA Securities. Please go ahead. Sanjay Shah, Analyst Good performance, remarkably good performance. Can you throw some light to which factor you would like to attribute this growth? Means, I would in words, I would like to say that, the performance was due to the extension of festive season or you could you were able to control, bring down the operative expense ratio? That's a good question so basically to I think like we've been telling you in the previous, obviously I can say that the festive season helps in third quarter for us especially when all the holidays come in the third quarter, the festive season does help. But to go back to your question, as we have been doing in the past few calls, our approach has been three pronged in terms of our areas of focus in both vehicle finance and home equity. First of all, increased reach increased our overall presence in the market and thereby improve our market share. And that's obviously allowing us to grow at above market rates. So that is one factor that is helping us. Sanjay Shah, Analyst Right. And sir, how do you see the future? And in the future, we continue to guide like we have in the past, which is we do see good potential in both our vehicle and home equity segments. Sanjay Shah, Analyst How do you see about gold loan? Is that growing from here? Gold loan, as you know, sir, the KUB Rao draft report has come out now, the working committee report. Sanjay Shah, Analyst Right. We will not be growing that book till that actual report, till we have some finality on whether that report is becoming guidelines from the RBI or not. Yet to see that. Till then we are still basically lending at 60%, which is below where the rest of the market is lending at, at an LTV of 60%.

3 Sanjay Shah, Analyst We are not that competitive in that business right now, sir. But if the KUB Rao report does come out and is made actual guidelines by the RBI, that will definitely help that business. Sanjay Shah, Analyst Right, sir. Thank you, sir. Thank you all from my side. Thank you. Thank you. Thank you. The next question is from Ritesh Nambiar from UTI Mutual Fund. Please go ahead. Ritesh Nambiar, Analyst Hi, good afternoon. I just wanted to if you could touch, please, upon your the increase which we see in the gross NPAs, what is it on account of actually for the past two or three quarters some? The gross NPA is on two accounts. One, as you know, the gross NPAs of vehicle finance has also moved up a bit though not, I would say, well within the overall limits of the industry. This is we had some stress on the Orissa portfolio though the portfolio size in there is only 3% of overall portfolio. And more importantly, we also had gross NPA coming out of one particular loan against share exposure, which we have provided to a great extent at by end of this quarter. So that is the other major thing at the company level having an impact on the gross NPAs. Otherwise, the rest of home equity is well within the norms. And if you see, the vehicle finance is at 0.79% gross NPA, which is again well within the industry norms. Ritesh Nambiar, Analyst Okay, okay. Sir, one thing within your portfolio mix, if I look into vehicle finance and home equity, in fact home equity makes just about 20%, 25% odd of vehicle finance, but in profitability terms, it's one third of vehicle finance. So if you could help me understand is the profitability of home equity quite high for you in fact? The ROE in home equity has moved up in the previous quarter, the ROE for home equity has gone above that of vehicle finance. And we actually have that data in the Investor Presentation as well, but basically the ROE for home equity to answer your question is at 3.16% versus the ROE for home vehicle finance, which is at about 2.85%. So that's what basically to explain that difference, Ritesh. Ritesh Nambiar, Analyst Okay. Sir, this proportion or this ratio is sustainable by any chance? Well, so I think the good thing is that you actually have two businesses competing on the inside. So we do believe that vehicle finance also has opportunity to push up its ROE over time. And like we discussed in the past, we have a fairly systematic plan on what we are doing to improve the ROE of each of our businesses.

4 Also vehicle finance being a fixed rate book, reducing rates, (inaudible) the yields on that vehicle. Ritesh Nambiar, Analyst Okay, okay. And sir, lastly, if you could help us understand this uplift in your off book assets, what kind of securitization happened this quarter and the revenue on account of same? We have done around 800 crores during Q3 and we have done these are on our securitization transaction, which is a B2C transaction under the new guidelines. So there has been no upfronting of profit because the new guidelines was very categorical about it. So this is a normal amortization over the period of the over the period of the asset loans drawn. That is purely on priority sector assets. These are priority sector assets sold to banks. Ritesh Nambiar, Analyst And the spread on the same, if you could help me. We won't disclose specifics on the spreads. Ritesh Nambiar, Analyst But obviously they are attractive enough for us to do them. Ritesh Nambiar, Analyst Okay. Thanks a ton. Thanks. Thank you. The next question is from Arvind Subramanian from IDFC Mutual Fund. Please go ahead. Hi, this is just to in reference to the balance sheet which is shown in your presentation page 40, in that your total current assets as on December 2012 is coming to 6,371 crores, but in your ALM, if I add up all the assets in the one year bucket, it comes to a number of 8,288 crores. So I'm wondering how is this difference in classification in the ALM and in the balance sheet? In the ALM, we will have the NPAs and the data spread as per the RBI norms.

5 Okay. So there will some shift in the method which is followed for ALM versus what is mentioned in the (inaudible). But just based on maturity, both should be one year because even the No, there will be certain assets which we will have to take it to five years also in the ALM, three years or five depending on the maturity of the business. Up to one year, up to one year it is Just to add on to it. Yeah. If you basically add up the ALM numbers up to one year, it's coming to 8,288 crores whereas the? Yeah. Okay. There see, in this again in the ALM, we would also be considering some sanction limits in hand. No, but this is the asset side I'm talking about. Yeah, so that includes, so it includes. So we wherever there is shortfalls and wherever (inaudible) committed lines You had some uncommitted lines, so it's not It includes ALM of your balance sheet. That will include committed lines, these are not as per RBI.

6 Okay. ALM format in RBI statement, it allows you to consider working capital lines. Okay. So wherever there is a shortfall in buckets, you add up all We will consider the available limits or committed term loans or committed drawdowns, which we have got complete sanctions in hand. Okay. Because again if I just see the balance sheet, your current liabilities from December 2012 is The same thing will be those which have been considered as drawdown will be considered as payout in those respective periods. Okay. That is how we manage the mismatches in between buckets, because we will always use working capital limits to sustain a shorter tenure gap. Yeah, fair enough. Because the We have a INR3,000 crore working capital conversion limit, of which we have not drawn more than INR600 crores, INR700 crores. Okay. The rest of it is available to use up for your Okay, okay. Got it. So even in your previous ALMs which you used to show in the presentation there also you used to include

7 Yeah, everywhere it will be. Current, okay. All periods it will be there. It will be ranging between INR1,500 crores to INR2,000 crores, which we will have to consider, but the tenure up to three years. Okay. Fair enough. And just finally one more thing on the rationale behind the interim dividend given that you're also looking to raise capital and that your Tier 1 is already below 10%, so the rationale behind the interim dividend? Rationale, see [ph] actually there are two things, right, when you look at it one is that we have benchmark to see what all the other financial services players do, including other NBFCs like Mahindra and Mahindra Financial Services and HDFC and Sundaram and all the other guys in our space. And so what we actually did was arrive at a payout ratio based on an average of what the other guys are doing as a payout ratio. Okay. Actually it became pretty standard in this business to have payout ratios. Actually Mahindra and Mahindra and all so far are like 24%, 25%, if not higher. And HDFC a lot of the other guys that we look at has kind of growing benchmarks in the space have higher payout ratios. Okay. So when you look at the other industry guys, all of them have payouts. So basically we can't be kind of a total anomaly in that space. And second is obviously from a group perspective also we have payout norm, but we stay here well under that. I mean, basically this year, for example, we're looking at about a target of about an 18% payout. Okay. Which is well below kind of what we see the average of our peers and the norms (inaudible) these norms as well. All right. Fine. Great. Okay. That's it from my side. Thanks.

8 Thank you. Thank you. The next question is from Kaitav Shah from Anand Rathi. Please go ahead. Kaitav Shah, Analyst Congratulations on the good set of numbers, and thank you for taking my question. I just had a couple of bookkeeping questions. So what would be the absolute level of gross NPAs during the quarter? 202 crores. Kaitav Shah, Analyst 202 crores? And what was it the similar number previous quarter? Hello? 180 crores. Kaitav Shah, Analyst Yeah. No, so basically when you look at there, there are two things, right. Like we've said, we continue to work on our operating expenses to see what opportunities we have to kind of keep those operating expenses under control. And we so that definitely has kind of has helped us. And so, that will be kind of one of the driving factors, and Kaushik, I don't know if you want to add anything else on that front? Kaushik? Kaitav Shah, Analyst So that would be the key Yeah, yeah, yeah, yeah. So here basically from the vehicle finance side, the increase in the field headcount has been about 15% over last year, 15% to about 18% whereas the increase in number of units funded is up about 40% over last year, 30 odd to 40% over last year. So your cost per transaction has come down quite dramatically. So the productivity is up about 35% over last year. Absolutely. This is one of the things that Vellayan was talking about earlier about what are the key initiatives we're undertaking is productivity enhancement. Kaitav Shah, Analyst

9 Okay. So, no, the question was largely that, are we paying out less payouts are less, something like that, that's what Payouts are more or less flat. Kaitav Shah, Analyst Flat? Okay. Okay fine. About 20% of our customers are existing customers. Okay. Okay. Okay, thank you, sir. That's it from me. Yeah. You're welcome. Thank you. The next question is from Prashant Shah from Vantage Securities. Please go ahead. Prashant Shah, Analyst Yeah. Good afternoon, sir, and thank you for the opportunity. Hello? Yeah, yeah. Prashant Shah, Analyst Yeah. Sir, just one question on your plans for amalgamation of your Factoring subsidiary with your parent company. Just wanted to understand, initially you all took that assets off the CIFCL's books and now you all are considering to take it back on books. So just wanted to understand your thought process behind this occurrence, behind this strategy. See, the top three assets right now are totally kind of doing so well, provided for or written off in some cases or collective. Prashant Shah, Analyst Okay. Those are no longer assets that exist. So right now one of the things that we constantly get from investors is why we have three subsidiaries that are so small, right. And so the actual kind of operating complexities that are happening in our subsidiary we just feel are kind of don't kind of really justify the existence of the subsidiary. Prashant Shah, Analyst

10 Okay. Actually the Factoring case where it has no operations as such today. Prashant Shah, Analyst Okay. Okay. And so will you be getting a tax benefit from the past entities that you all have I mean from the past, delinquencies that have occurred in this book? Yes, because then it is still a provision number in the subsidiaries book. Prashant Shah, Analyst Okay. So we can expect to see your tax payout to be lower in '14 onwards? No, tax will not be lower. Cash flow will be lower. Deferred tax will be the same in considering the deferred tax, it will be the same. Prashant Shah, Analyst Okay, thanks. And sir, just one data point. Your balance sheet in your presentation shows that your current investments are about 450 crores. Could you just throw some light on what were these investments? That is purely a mutual fund. See, we did securitization at the fag end of the month. Prashant Shah, Analyst Okay. Just parked it for the Prashant Shah, Analyst Okay. So it's just basically parked for a short term? Prashant Shah, Analyst Okay, fine. Okay, got it. Thank you very much, sir. Thank you. The next question is from Ashish Sharma from ENAM Asset Management. Please go ahead.

11 Yeah. Good afternoon, sir, and congratulation on a good set of numbers. Sir, just wanted to get some granularity on vehicle finance growth. What are the sub segments which have grown done well? And also in terms of collection efficiency, have you seen any, I mean, decline in collection efficiency in any of the segments? Kaushik, will you take it? Okay. We've actually seen a growth across manufacturer categories in light commercial vehicles, small commercial vehicles and to some extent in heavy commercial vehicles because it's actually given us the ability to kind of outgrow the market cycle. So on a Y to D basis, last year we had about 8.65% under the market share at the overall level and we achieved about 9.45%. Okay. So we've seen a as we've seen an 80 basis points improvement in market share over last year same period, that's one. The results on the (inaudible). I am assuming largely if there is it largely happened also because of the fact that we've increased our branch network. Yes, sir. So all your untapped market today are within the purview of our branches and therefore, our CIB access has gone up. That's something that has happened. And on the collection efficiency side, the collection efficiency has remained more or less constant as we had last year. The only two challenges we have faced is because the book size is bigger. Yes, sir. Even if you maintain the same efficiency of collection, that's lower (inaudible) absolute value than financing. Okay. And your book was INR100crores last year. We have a 75% collection efficiency or close INR25. Yeah.

12 All right, but your book is INR150 this year. Yes, sir. And we maintain the same percentage of collection efficiency, but now the value (inaudible) the net profit is higher. Sure. Okay. And also last year we didn't have a we had a fairly low impact in Orissa, which Arul had pointed out earlier, has added to our overall GNPA for the current year. Okay. Okay. Having said that, the percentage of repossessions that we see in the current year is in line with what we've seen last year. So it's more of a higher percentage of situational defaults due to the overall market (inaudible) situation, than any behavior irregularity on the customer's part. Okay, okay. And in terms of your you mentioned about higher ROAs for your home equity vis a vis vehicle finance and currently as on AUM, I think it is around closer to 23%, 24%. Where do you see this ratio going forward, sir? Could you repeat that which ratio, again? Sir, AUM mix in vehicle finance versus home equity. I mean, currently it is around 23%, 24%. I mean it's home equity is 23%, 24%. And as you have mentioned earlier that ROAs are higher in case of home equity. Do you see this ratio improving towards home equity or this is a sort of optimum mix as of now? Right. I do think it can move, but it's not going to be a significant swing in home equity's favor. As you can see from the disbursement growth in both, they are not very asimilar. Sure.

13 Similar, but obviously the advantage of home equity assets is the assets stay on the book for long run. Okay. That will favor home equity's growth to a certain extent, so I think it can move a few bps, but it's not going to be a massive swing. My point is that we are focused on improving the ROAs of both, vehicle finance and home equity. And where do you think this vehicle finance ROA can move from 2.8%, sir? So I believe that over three years it can potentially move. It obviously depends on interest rate as well given that is a fixed rate book. Sure. Over three years, it can move to the in excess of to closer to three almost by 100 percentage points depending on how the economy [ph] is. Closer to 3.75 sort of a number from 2.85, 100 bps you are saying? That's right, yes. That is correct. And just last question, on the Tier 1, you have taken I mean, will you be able to do it before this year end or will it be sort of next year, sir? Yeah, actually that's something that we're having internal discussions on right now. Our preference would be to do it sooner rather than later.

14 Sure, sir. Thank you and all the best for the next quarter. Hello? The next question is from Abhishek Nair from L&T. Please go ahead. Hi, this is Vikas [ph] here. Just a follow up question on the previous question asked by a colleague of mine. On that from ALM profile, which you just discussed, so as I understand that on the liability side, you in fact, on the asset side, you also include those lines which have been sanctioned and utilized as of now by you from the banking sector. Just a clarification, do you also include those cross disbursements which you will be doing in a course of the next line [ph] while calculating this ALM profile? No, no, that will come under the dynamic liquidity, this is structural liquidity statement. Okay. Okay. So just to put the things in perspective, we are getting the benefit as of now of the unutilized bank lines in the ALM profile, but we don't actually give some kind of charge on the cost disbursements which we would be doing going forward. No, the format itself are completely different. For the dynamic liquidity, you will also consider the interest earnings as well as any of your expenses over the next few quarters and you will also consider such borrowings that you are proposing to take. That will come in the dynamic liquidity statement. If you could refer to the RBI format, this is allowed and you can check this, both the structural liquidity format and the dynamic liquidity format. Okay. In the structural liquidity format, to announce small variances between the time bucket, you are allowed to use the lines of credit. Okay. Sir, can you please give me the number of that unutilized bank lines as of now that you may have with you? I don't think we share. Actually there are very few guys who will share the ALM in public, right? Yeah. So I don't think we share that data at that level in kind of public.

15 I'll take it offline. And second question is on your Tier 2 investment, basically, in a year, so I think that number is some huge at 2,000 crores or something, in terms of the Tier 2 borrowing. So, can you please give me some broad indication on what kind of investments are there? Are these retail or there would be the institution kind of a thing? These are subordinated debt and perpetual debt. It's all institutional. I mean, some of the perpetual debt can end up in retail hand, because in the second week, it is getting straighter. Okay. Okay. So, it's all listed and It is listed and it is, it was placed as private investment and subsequently it should have been traded. Okay. Okay. And sir, last question on the capital front, so you have indicated that 500 crores would be the (inaudible) the forthcoming issuance is coming from your side. I understand the timeline is not yet known, but in terms of the investors sir, the question is basically, the promoters would be holding their current status current stake holding in the company or there would be a dilution over there? Well, in effect it does I mean if we we are not the promoters will not be putting in additional funds. So from that perspective, there will be a dilution, right? But, we're not the promoters are not going to be selling any of this, Okay. Thank you very much, sir. That's it from my side. Thank you. Thank you. Thank you. ( Instructions). The next question is from Anand Laddha from HDFC Mutual Fund. Please go ahead. Anand Laddha, Analyst Hello, sir.

16 Hello Anand. Anand Laddha, Analyst Hi. Sir, could you just clarify in terms of how big you could be your Orissa exposure? Has it been fully recognized? Orissa exposures Kaushik, you want to talk it? Kaushik. Arul, Arul, I would suggest you take the call. You take this particular question, yeah. Yeah. As far as whether it's not yet been has been fully recognized, right, yes, for the most part, we do think it has flown through to 180 day to the 180 day bucket. And we think at this levels, it's beginning to stabilize. So, that will be the quick answer to your question. Obviously kind of, if there is further deterioration at what happens in mining, that can affect that portfolio. How big could be the exposure? I mean How big is Anand Laddha, Analyst Is what's their exposure is like for us or how big is the mining exposure for us? That's what I'm saying, so basically the Orissa NPAs had gone up to almost 30% of that book, right? We're getting the exact number. Okay. So, basically the, just so you have a sense, the GNPAs on the rest of books were at about 43 crores. The gross assets of about 182 crores. That's 140 crores remaining has continued to perform and performing fairly well. So we don't expect any kind of degradation in their performance. Just as you know also Anand, the Orissa book is then comprised of various product segments, right? There's heavy, there's light commercial vehicles, mini light commercial vehicles so on and so forth. And it's only in the heavy the tippers that have really been affected by the mining slow down, right? So do we think a lot more of our book can be exposed to it? Our current feeling at this point is no. Anand Laddha, Analyst Okay, right. Sir, second question, sir. What sort of minimum Tier 1 capital you would like to maintain all the time? See, it depends now on what's happening on (inaudible) right, and if it does come in, then we would obviously kind of use those norms as a guidance for us in terms of how much minimum we will maintain. In general what you see, Tier 1 plus Tier 2 has been at about 18% is what we have.

17 Anand Laddha, Analyst Right. But suppose in case if that comes into form of the current guidelines of 10% Tier 1? We should maintain around 100 bps beyond the on the Tier 1 side. Anand Laddha, Analyst Okay. Sir, also of the total Tier 1 this quarter, how much will be perpetual Tier 1 in that or what could be the core Tier 1? I think it's 15%. 15% of the previous year's net worth. That should be somewhere around 200 crores, 212 crores to be precise. Anand Laddha, Analyst Okay. So what percentage could be it will be of a Tier 1 capital in terms of like Tier 1 is right now at 10%, I believe. What is the total Tier 1? Total Tier 1 is Anand Laddha, Analyst It's 9.95%, sir. It will be around 13%. 14%. 13%, 14%. Anand Laddha, Analyst Pardon. 13% of the total Tier 1.

18 Fine. Sir, this Tier 1 of 9.95% includes the nine month profit or this is excluding that? It includes. Anand Laddha, Analyst Okay. That's from my side, sir. Thank you. Thanks Anand. Thank you. The next question is from Srinath Krishnan from Sundaram Mutual Fund. Please go ahead. Srinath Krishnan, Analyst Hi, sir. Congrats on a very good set of numbers. My query was on your net NPAs. We have seen a sharp spike actually on an year on year basis and despite a very strong AUM growth even in percentage terms, your net NPAs have gone up 0.3 to 0.7. Just wanted to know, what kind of collection trends are you seeing, especially towards the fourth quarter where a lot of the collection intensity actually happens and what are you sensing in terms of the net NPA number by the end of the year? Yeah. So actually, there are two contributors to that, right, kind of like we've said, there has been an increase in the vehicle finance business and then we've had the one, we've had a couple of pertinent issues which come on from the loan against shares as well. Right? The loan against shares is really a one time event, but if you take vehicle finance, basically we've moved from about 0.3% to about 0.45%. And that last time when we were in 0.3% Srinath, another thing that we have said including on investor meeting was that we felt that it was at the low point of the cycle and we did not feel that we could sustain at such low level. And so, we are seeing a bit of a, more of a move towards the norm. And so that is what we're effectively seeing over there, in the move to 0.46% and I do think that 0.46% level or perhaps even a tad bit higher are to be expected over the cycle in vehicle finance. In terms of collections in the we're actually just beginning to see I would say, a slight improvement, definitely in the October timeframe we had to pay more visits to the customer on average statistically to collect. But we are seeing a slight improvement in that norm right now. Srinath Krishnan, Analyst Kaushik, do you want to take that or do you want me to take it? I think you can take the call, you can take the points Vellayan, sorry. Yeah. So basically we are looking at overall pricing. Yes, we are seeing new entrants jump in. Yes, we will see pricing pressure because of that. I think one of the things we've always maintained Srinath in the past as well is that in our NIM calculations, we basically assume about a 25 bps learning curve that we will lose every year because of increased competitive pressure in our

19 segments. And we will see some of that the pricing pressure come in. I will also say that we've been through the cycle in the past where basically in light commercial vehicles, we see a lot of people jump in because things get bad in the M&HCV space. But often it is not kind of a sustained entry into LCV, it's more an opportunistic jump in. And often it's difficult for those players who come in to develop long term relationships in the LCV space. Srinath Krishnan, Analyst Sure, sir. Thanks and all the best. Thanks, Srinath. Thank you. The next question is from Gurvinder Wasan from Principal Mutual Fund. Please go ahead. Gurvinder Wasan, Analyst Yeah. Most of my questions are already answered, but one question, sir, you seem to be one of the few NBFCs who have two different ratings from different rating agencies for long term, especially. You do have a long term rating from CRISIL as well? Yeah, CRISIL we have it is not in the public domain. We have it in the private domain. Okay. So is there any chance, any probability in your view to get a A AA rating from all the rating agencies? I mean, it's been We are working on it. It will take some time. The rating agencies are more right now worried about industry rather than the company's performance. Considering the volatility in the retail region [ph] as well as the slower or a lower growth in the CV portfolio as a whole. We have been talking to them and that seems to be their concern rather than the company's performance. Hopefully they will have, once they see a sustained performance from our end, they will come out with a positive grade. Gurvinder Wasan, Analyst Got it. Thanks. Thank you. The next question is from Nischint Chawathe from Kotak Securities. Please go ahead. Nischint Chawathe, Analyst Yeah, hi. This pertains to the operating cost ratio and I believe last quarter we discussed that the operating cost ratio should come down from around 3.6% odd level to around 3% levels over the medium term. In this quarter, we see that the operating expense ratio has already improved quite significantly, it's already down to around 3.4%. So I was just wondering whether it is something that just because of the business was just because it was the third quarter, the volumes were or the growth was very high this quarter, that ratio has gone down so sharply or is it something that you will see the ratio just continuing to go down from here on?

20 Yeah, I would say that the third and fourth quarters obviously helped. I don't kind of think that majority of our assets in the third and fourth quarters. But we are also beginning to see some evidence of the actions we are starting to see. If you go back to Q3 of last year, it was at 4.11% and obviously you've seen an improvement of about 3.52% right now. Year to date December, that number is at 3.64%. And like I said, we continue to maintain it, really a three year journey. Some kind of the thing is that we don't expect kind of a radical drop in it, but I do think we have taken a sustained effort to push it down for that three year period. Okay. Great. That helps. Thank you very much and all the best. Thank you. The next question is from Ashwani Agarwalla from BOB Pioneer Mutual Fund. Please go ahead. Good afternoon, sir. Good afternoon. Ashwani Agarwalla, Analyst Sir, do you plan to enter into any new or other business segments? So I think, like I articulated in the beginning, we've got into the home loan business, and it is our intent to basically kind of grow that vertical. Right now, we are targeting self employed customers in the home loan business. So we're not kind of going after the standard HDFC kind of stuff yet. And I do see that that vertical itself offers enough opportunity for growth and it's basically kind of we just continued on the segments, we've talked about business finance and SME. That business, we've basically been focus on and launching and will likely start adding a bit to that book in this current quarter. Besides those businesses, there is nothing else at this stage. Ashwani Agarwalla, Analyst And sir, what's the total loan growth which you are expecting for the system and for yourself for the FY '13, the remaining quarter and for the next year? We have never we've not guided on kind of loan growth predictions. Obviously, you have a sense that all the numbers are done thus far, and like you know, the fourth quarter tends to be a fairly good quarter for most NBFCs. Ashwani Agarwalla, Analyst Sir, I'll just question because we have seen stress in the CVs across all the companies, or whatever the companies have declared the results. And most of them have drawn down their expected loan growth. So are you expecting the same? I think to that question, and I think perhaps Srinath from Sundaram asked the question, but in a different way. Most of the people, what they are seeing is stress in the medium and heavy commercial segment, which for us is a fairly small part of our mix. And in the books that we are in, we are not seeing kind of any additional stress, any significant amount of additional stress crop up. If

21 anything we've seen, the portfolio begin to improve a bit. Now some of that is obviously dependent on the budget and how things kind of look going into next year, but we don't see that or we don't see any immediate need to kind of pull back significantly on growth in our book at this stage. Okay. And sir, many people have touched upon your ALM. So your assets are replacing faster than your liabilities. So we expect your NIMs to go down from now? Expect I think the question is do we expect our NIMs to go down further. No, obviously we've got a fixed loan book, right? So if you take it depends on what you think is going to happen to interest rates. 70% of our book is fixed loan, which is our vehicle finance book and then another 23% is variable, which is our home equity book. So obviously if interest rates drop a lot, it benefits the fixed loan book. If interest rates go up a lot, then it affects negatively our names on the fixed loan book. So it depends on what you think is going to happen to interest rates. Ashwani Agarwalla, Analyst Sir, but your asset is replacing faster than falling interest rates and assets are replacing faster than your liabilities. Assets are? Ashwani Agarwalla, Analyst Sir, assets are replacing faster than your liabilities because you've got more inflows than the outflows. No, no, the what you call, the sanctioned limit is considered on both sides. And I think I am confused by the question are you saying that there is a duration gap. Our asset duration, and I hope there are no duration at any point in time. Our asset duration will be around 13 months and our liability duration will be around 24, 25 months. Ashwani Agarwalla, Analyst Okay, sir. Okay. That's fine. That's from me. Okay. Thank you. Thank you. The next question is from Praful Kumar [ph] from Birla Sun Life Insurance. Please go ahead. Hi, everyone. Thanks for taking my question. I just want to get a sense on the LTV ratios for the last two, three quarters in your vehicle finance business, how they have moved?

22 LTVs have stayed more or less constant in vehicle finance. And Praful, so we have not seen much of a movement there at all. Obviously our vehicle finance book is then broken down into new and then our used products. Sure. And in our used product, our LTVs tend to be more conservative than our new. That's basically that mix also affects the overall LTV, but in each of the segments, the LTVs have stayed more or less the same. Sure. And how For that in on the Tata Aces in specific, a couple of companies, especially one was running a scheme where they were pushing the LTV a lot Correct. actually caused our Tata Ace volumes to drop because we didn't push to those levels. Sure. So you think this kind of scenario, since we are seeing a slowdown, will hamper growth for the next, say, three, four quarters because industry is reeling under some pressure in terms of sales as well? Yeah. The reason why we've been pushing more into the used product is to basically kind of diversify and therefore kind of reduce the impact of new vehicle production in this country taking a hit, right? Sure, sure. And that has begun to create evidence already this year in terms of the mix that you see there, we've been able to grow at above market because of that.

23 Correct. We've also successfully increased market share and I think, Praful, when we started talking the first time, we had about 200 branches across the country Sure. or 250. We significantly increased our geographic presence and that's then and then taken a fairly systematic process to how we develop relationships with dealers and started managing that relationship, I think, a lot more systematically than we had in the past. And that kind of efforts have also helped us increase our market share. And those two things in combination are helping us grow at slightly above market rate. So now really it depends on whether the lights and mini lights get hit very significantly next year. And even in that scenario, we have to continue our focus (inaudible) to offset some of that loss, if it happens. Thanks. Praful. Thank you. The next question is from Kunal Agrawal from Franklin Templeton. Please go ahead. Kunal Agrawal, Analyst Good afternoon, everyone. My first question is about two asset classes. If you could give us some update on what is happening on the Shubh asset class? How much is it comprised of the vehicle finance segment and how has been the asset quality? And second is on the business loan segment, we see there has been a significant fall in the total AUM on the business loans. So how do you see this going forward and what has been the if there has been any specific reason for this particular fall? Yeah, so let me answer the second one first and I'll get into Shubh. In terms of business finance, as you likely know, (inaudible) working committee has raised their risk weightage on those assets to 150%. Kunal Agrawal, Analyst Right. Which will apply to us. So we basically have been de growing that book and strategically kind of our intent is to continue to de grow that book. Kunal Agrawal, Analyst

24 Okay. Because we do not see at least with 150% risk weight that's coming in, we don't see risk adequately being priced into assets in that asset class. Okay? So we will be and so that as a strategy, we will continue to kind of reduce over time. Your second question on Shubh, Shubh currently comprises about 12% to 13% of our overall assets. Yeah, so Shubh comprise about 12% to 13% of our overall assets in vehicle finance, right? So just in our vehicle finance asset. And the Shubh performance continues to be good, and it continues to be become very good for and some key opportunities to improve that percentage over time. Kunal Agrawal, Analyst Okay. And in terms of asset quality, how are the Shubh assets performing? So the assets are at about at an NPA level about % is what we Yeah, it is in terms of NPA in that asset value. Kunal Agrawal, Analyst Okay. So it is broadly in line with the other vehicle segments? No, it will be almost double But it is compensated by a much higher yield. Kunal Agrawal, Analyst Right, sir. Okay, okay. And in terms of the business loans, do you see this portfolio as amortizing portfolio or you see it going at a little lesser pace? No, it's going to decrease. It's going to continue to decrease. Okay, okay. And my other question is on capital adequacy ratio, I think in some form, this question has been addressed. What I basically want to know is that from 18.1%, what is the minimum capital adequacy ratio you see going forward? And offshore, Tier 2

25 of around 1,800 crores, what is the composition? How much is sub debt and how much is perpetual? Yeah. So like we have said, we basically intend to keep that at 18%. In terms of the perpetual sub debt split 700 is perpetual. 700 is but some of that will be Tier 1? Some of that will be Tier 1. So about 700 is perpetual and the rest is subordinated. Kunal Agrawal, Analyst Okay. And on capital adequacy, you said it will remain broadly at 18%? That's right. Kunal Agrawal, Analyst And the split between Tier 1 and Tier 2 also is likely to be similar at 10 and 8? Yes. For now, yes. Kunal Agrawal, Analyst Okay, okay. That's it from me, sir. Thank you. Thank you. Thanks a lot. Chetan Thacker, Analyst Thank you. Good afternoon, sir. I just had a question on the branch expansion trend from a medium term perspective, how many branches are we likely to add? So I think basically if you look at it various competitors and like Shriram Transport operates about 750, and we are at 500. So I think we'll slow down our growth rate a bit, but I do think that over three to four years, we should be hitting that 750 line. Chetan Thacker, Analyst

26 And sir, what would be a sustainable cost to income ratio going forward from a medium term perspective? So actually we showed it as a number and kind of our focus was more on OpEx to average assets. That question was asked before. We're running at 3.64% year to date and we've given more a three year view on where we like to take it, but we do see that kind of we do we are focused on trying to push that number down from 3.64%. How that kind of gears down over the next three years is really going to be the question. Chetan Thacker, Analyst Sure. Okay, sir. Thank you so much. Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. Amey Sathe for closing comments. Amey Sathe, Analyst Yeah. On behalf of JM Financial, I would like to thank Mr. Vellayan and other management team of Cholamandalam, and all the participants for joining us for the call today. Thank you. Thank you. Thanks a lot. Thanks, Amey. Bye bye. Thank you very much. On behalf of JM Financial Institutional Securities Private Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.