Analyst Call For Bharat Financial Inclusion Ltd.

Transcription

1 Analyst Call For Bharat Financial Inclusion Ltd. Note: 1. This document has been edited to improve readability. 2. The information contained in event transcripts is a textual representation of the analyst call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the discussions held in the analyst call/meet. 3. This document may include forward looking statements, including discussions about the management's plans and objectives and about expected changes in revenues and financial conditions. Forward-looking statements about the financial condition, results of operations, plans and business are subject to various risks and uncertainties that could cause actual results to differ materially from those set forth in this document. You should not construe any of these statements as assurances of financial performance or as promises of particular courses of action. Page 1 of 9

2 MANAGEMENT: Moderator: MR. M. R. RAO - MD & CEO MR. ASHISH DAMANI - CHIEF FINANCIAL OFFICER MR. R. PRATAP - CHIEF RISK OFFICER & DEPUTY CHIEF FINANCIAL OFFICER MR. VIKAS MUTTOO SENIOR EVP. OPERATIONS MR. ASHISH PIPALIYA- SENIOR EVP. INVESTOR RELATIONS & NEW INITIATIVES MR. RITESH CHATTERJEE - CHIEF PROCESS & QUALITY OFFICER MR. SRINIVAS PEDDADA - CHIEF INFORMATION OFFICER MR. SRINIVAS VUDUMULA - CHIEF PEOPLE OFFICER MR. J.S. SAI - CHIEF MARKETING & COMMUNICATIONS OFFICER Ladies and gentlemen good morning and welcome to the Bharat Financial Inclusion Limited Analyst Conference Call. As a remainder all participants lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * and then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. M. R. Rao- CEO and MD, Bharat Financial Inclusion Limited. Thank you and over to you sir. M. R. Rao: Good morning all, thanks for joining this early morning call. I will start with the highlights of this quarter and then leave the floor open for questions and I have the entire management team with me to answer your questions. Operational Highlights To begin with, Last quarter we have seen the customer acquisition run rate picking up and this quarter We had highest ever customer acquisition in a single quarter (Q3FY18), which is about 8.6 lakhs. Loan disbursements of Rs. 4,712 crores, which is a 10% quarter- on- quarter growth. Gross loan portfolio is about Rs. 11,466 crores. We have seen demonetization and the after math as a onetime impact and glad to report that impact of demonetization is behind us now. 89% of our portfolio now constitutes of loans disbursed (81 lacs) post January 1 st and the collection efficiency of these loans is 99.8%. January customer acquisition run rate is much better than last quarter. This only reinforces our argument that the demand supply gap continues to be high in this space. However, we continue to be conservative than the rest of the industry in terms of ticket sizes. We also continue to focus in the rural space. Page 2 of 9

3 Financial Highlights Net NPA continue to be lower at 0.2%, as we have fully provided for the demonetization impact last quarter itself. Marginal cost of borrowings reduced to 8.5% in Q3 down from 8.9% in Q2. Profit for the quarter is Rs. 163 crores and the 9 months profit is about Rs. 245 crores. Capital adequacy is about 31%. As we guided in the last quarter call, we have issued ESOPs to the employees and that cost has come up to Rs. 16 crores for this quarter. This additional ESOP cost has contributed to an increase in cost to income. FY17 Guidance We reiterate our profit guidance of Rs. 435 crores that we set ourselves to achieve in the beginning of the year. Merger Update As reported, we have received CCI approval. We are awaiting RBI approval, probably, we expect it to come in the next days or sooner. Other Updates Lastly, we gave a stock exchange notification, our Chief Operating Officer K. V. Rao, who has been with the company for close to 11 years, has decided to resign on account of health reasons. He was with the company, when we were at 6 Lac customer base and today we are close to 6 million. Senior management and the Board thanked him for his contribution and wished him good luck and good health post his retirement. K. V over the last few months has been handling new initiatives like housing loans and twowheeler loans, which are in the pilot stage, and those few initiatives will start reporting to me for the time being. I now leave the floor open for questions. And as I said, we have the senior management team here to answer the questions. Thank you. Moderator: Thank you. Ladies and gentlemen, we will now begin with the question and answer session. The first question is from the line of Kunal Shah from Edelweiss Securities. Please go ahead. Page 3 of 9

4 Yes, congratulations sir, good set of numbers. So, firstly given that now things are settling down in the MFI industry and this quarter we had seen almost like addition of 60 odd branches as well and almost say 120 odd branches in the first 9 months so now how do we look at in terms of increasing the penetration and expanding, given both the industry outlook as well, merger is in process with IndusInd Bank, so how should we look at it in terms of the expansion? M. R. Rao: Our expansion plans will continue. Our focus will continue to be in rural areas. Our strategy has always been that we penetrate deeper in places we exist through contiguous planning. We use population density data, route maps and so on and so forth for our planning purpose. Now that operations have stabilized post demonetization in terms of center discipline, there will be a relentless focus on improving the efficiencies at loan officer level. Hence, the plans will continue once the merger happens, we will look at adding new products from the IndusInd product offerings. Ashish Damani: Hi Kunal, just to add, we have mentioned this in the past that we will like to add about 200 branches in a year. Hence, branch addition is also in line with that thought process. Branches have been added in geographies where we are already present, contiguous planning was used and this should continue in the next financial year as well, because our target on the growth side of 45-50% would have a healthy contribution of 30% from new customer base addition. And to add to that Kunal, on the current basis we are generally focused on North, Central and Eastern parts of the country. Majority of this growth of branches has happened in Punjab, Chhattisgarh, Rajasthan and Haryana. Northern and the Western. Yes. Okay. we had done 120 odd in the first 9 months, so 200 is this fiscal end will we continue with somewhat a similar kind of a run rate in the next year as well? As Ashish said, we are planning to add about 200 branches every year. We are staying on course on that. And secondly, broadly in terms of the mix between IGL, MTL and LTL and even in terms of the average upticks which has been there so that is around about Rs. 20,000, very near to the gross loan portfolio. But this time there is not too much of an uptick in MTL, it is largely coming in on IGL so do we see any kind of a change in terms of may be the ticket size going up post getting comfortable with the environment and that should get back to Rs. 23,000 to 24,000. Kunal focus in the first half of the year focus was on recoveries, trying to stabilize the operations and this quarter, we had highest ever customer acquisition of 8.6 lakhs in a quarter, All these loans to new customers are translated into the first cycle ( IGL1) loans. MTL is only given after Page 4 of 9

5 6 months of IGL, Hence in terms of percentage basis you see MTL contribution lesser but MTL disbursements on absolute basis is also growing QoQ basis. So, may be as the cycle may be as and when we get into this we will see higher contribution of MTL and higher ticket size as well. Yes Kunal, If we are doing 40% of disbursement to new customers, obviously MTL as a percentage will look lower, but it is not lower in terms of numbers. It is not that MTL is degrowing, MTL is growing, but because IGL1 is growing faster the percentage looks a little lesser. Moderator: Thank you. We have next the next question from the line of Ritesh Jain from Investec. Please go ahead. Ritesh Jain: Sir, I noticed that the CB reduction rate and hit rate for our products have come down in this quarter. So, is it an reflection of we going into new geographies where the competition is less or generally all across the board, competition has reduced in the sector? If you see slide 26 of the investor presentation, you will see that in the last quarter the rejection rate for all loans was 28%. This quarter on a gross basis, the number is same. This quarter, we have reported it on a unique client basis i.e. 19%. Difference between two is the approach, there is no change in the data quality. For example, if the customer applies for IGL or MTL, LTL and each of these loan applications were considered and counted as three loan applications, while the new approach considers them as one. Apart from this, loan officer does a Credit bureau check of existing client base and tells the customer that she can apply for a loan. While taking a loan application, he does a second CB check. Hence, we were counting same client twice, But, if you do it on a unique basis and you count it as only one, then the number is 19%. Hence, this is the mathematical number, but otherwise there is no change in terms of behavior or quality of the data. And secondly sir on the asset quality, we have noticed that the gross NPA have reduced more than account of write-off and as well as we are seeing gross NPAs reducing because of better collections. Can you give some color on what are your expectations in terms of recovery from the portfolio which is under gross NPAs, as well as any color on how is the collection efficiency in the State of Maharashtra? Gross NPAs has reduced from Rs. 441 crores to Rs. 411 crores in Q3FY18. This is reduced by Rs. 30 Crs, out of this ~Rs. 12 crores on account of recovery and movement from substandard to standard, as well as recovery in substandard itself and the remaining Rs. 18 crores is just technical write-off, without any hit to the P&L. Page 5 of 9

6 Now moving forward, we have always said in the past that it is very difficult to guide in terms of how much would be the recovery going ahead but there will be some recovery. We wouldn t able to really guide you on amount. However there has been some improvement in collections in U.P and Maharashtra. Just add to what Ashish is saying, one of the highlights of the last quarter probably is that the recovery cycle has turned positive in our favor ~Rs. 12 crores have been recovered, and these are from hard buckets. These are difficult customers from whom we have to recover, so we are very positive and we should have the trend continue. As regarding the largest opportunities from where we have got the recoveries U.P continues to lead and we see some green shoots in Maharashtra also. You also asked about our collection rate in Maharashtra. It is hovering in the range of 95% because of the previous loans which still continuing for the recovery. But on the new addition that we have done after January we are at 99.8% collection efficiency. Digant Haria: I have two questions; one is how many centers or Taluks or Districts would have become black in the post demonetization event for us or maybe for the industry. If you can throw any light on that like everyone has just decided to come out of those areas? On a blacklisted level, some pockets of Maharashtra continue to be in stress. These are not blacklisted in that sense, but we have districts which are always under watch where we do not source, do not expand, but try to maintain the existing portfolio. So, there are about 114 branches across the country, which are on the maintenance mode where we just watch the portfolio and keep focus on collection. 50% of this continues to be in Maharashtra, and then it is followed by Karnataka, Madhya Pradesh and U.P. Hence, the mix has not changed from the way it was at the demonetization time and since the collections on the new portfolios are perfectly fine, we have not seen any new hot spots emerging, barring few incidents of flood and all that which are natural causes. And just to add to that, in Q3FY18 even with some branches under watch or I will say growth neutral, we were still able to expand portfolio by ~8% QoQ and were able to add 8.6 lakhs customers from the growth branches. Digant Haria: Alright. The second question is it is almost 6 months that we have again gone back in that growth mode. So on the ground is there any difference, I think we are doing business in the same way before, but has the aggression or has the method which are being used in terms of over leverage of the customers and bureau reporting have they undergone any change with respect to the competition? M. R. Rao: No, I think the demonetization had its impact on the industry and as we have been saying in the past, the smaller ones probably fell by the wayside. The ones who have got badly affected have Page 6 of 9

7 gone slow in terms of their growth and partly some of them have transitioned to SFBs and with their preoccupation in terms of becoming a full-fledged bank, I think they kind of slowed down. Hence, we see the intensity of the competition coming down in the last 6-9 months. A quick question, since the, you know there is an impending merger; I just wanted to understand how the underwriting machine is going to change post-merger? Is there any early communication that you can kind of tell us? M. R. Rao: No, it is too early. We are waiting for the merger to happen before we start taking these decisions. But at the high-level, understanding is nothing on the ground will materially change. They believe in this model, management and staff, so I don't anticipate any major changes happening on the underwriting front. But that needs to be worked out as the merger process is on. Okay, so but if there is a system that you have in place, is the same system going to be imported under IndusInd Bank or given that I think the understanding is we will kind of evolve into more individual products. M. R. Rao: No, as I said there is not going to be a material change into the strategy. But as we have been communicating in the past, that we want to go cashless in our operations where one leg i.e. disbursement has been taken care of and loan collections is where we were looking for someone to partner. One of the advantages of this merger is, if we can go cashless on the repayments as well over a period of a couple of years, we will have an enormous data of customers who are paying on time through their bank accounts and we will have an insight into their savings habits etc. Hence, we can graduate some percentage of the customers to individual level based on the analysis of their bank accounts and savings pattern and so on and so forth. But at the customer acquisition level at the micro-finance base we think JLG works best and it has proven itself once more post-demonetization and that is the strategy that we will continue with. And any early thoughts on the subsidiarization, if you can talk about any employee loss that has already happened? M. R. Rao: There has been no employee loss except as we said the Chief Operating Officer has resigned on health grounds and that has nothing to do with the merger. Our senior management team continues to be with us and everybody is supportive of this merger. Okay and any early thoughts on the strategic components and salaries, how it will be postmerger? M. R. Rao: No, as I said it is too premature to talk because we have lot more approvals to get in place, the Reserve Bank of India approval, NCLT etc. But to just repeat what I said at the understanding with the merger happened was that there will be no material change in the way we operate and will be running as we were doing before. In terms of salaries and stuff like that there has been Page 7 of 9

8 no discussion at all with them. Current discussions are more towards the BC arrangements, which we have on loan side. There has been no big discussion on the post-merger scenario at all because we need to still get the regulatory approvals, before we start engaging. Under the BC model our existing set of employees are going to function as cross-sell for the other IndusInd Bank products is that how it will be? M. R. Rao: Yes, if you see that access to small saving products like Recurring Deposit is a big need of this segment and that is something we have piloted in Gulbarga successfully. We might also offer other products going forward. Moderator: Thank you. We have the next question is from the line of Ritesh Jain from Investec. Please go ahead. Nidheshh Jain: Can you give some color on the liability experience that we have seen in our pilot projects that we were doing with Kirana Bank with IndusInd? M. R. Rao: We are currently doing 2 pilots one is Recurring Deposit (RD) and the other is RDSP. Recurring Deposit - During the time of demonetization, we have seen a significant difference in repayment rate amongst the clients who have opted for RD vis-à-vis non-rd clients. Referring to slide #4 of our investor deck, what we have observed that the clients who have RD have less propensity to default vis-à-vis client without RD. This helps in containing the impact due to external events such as political interference etc. We believe that Recurring deposit (RD) is going to add to the quality of the portfolio. We are slowly improving the penetration of RD amongst the clients, about 10 days back I think the percentage penetration on Recurring Deposits was about 50% in pilot branches. We anticipate this will go up to 70-80% over period of time. RDSP - We are continuing to pilot the cashless collections model, but it is still at pilot stage as we still have to get a grip around the processes. We are fine tuning the processes and as and when we get insights into the model, we will roll out to other places and this will continue for some more time. Ritesh Jain: Sir if I hear you correct 50% is the penetration with clients in respect to RD? M. R. Rao: Yes. In the pilots, where we are doing Recurring Deposits 50% of our loan clients have opted for the Recurring Deposit. Ritesh Jain: And what is the average size of the RD or average number? M. R. Rao: RD is for Rs. 50 per week. It is not about the quantum of RD and this is not going to generate huge liability in the books of bank. It is more to give access to the customers to park their small savings, for which today they do not have from a formal financial institution. Let's say the nearest Page 8 of 9

9 bank branch for them would be ~5 Kms. Today we are telling them, you may park the deposit in your bank a/c at your village through the loan officer. As I reiterated that customer with RD have better repayment rate, so the idea is to have more such customers. Thanks for taking time out to participate in the call. Please feel free to reach us for any further queries. Thank you. Kindly click the below link to play the Audio File Page 9 of 9