Poonawalla Fincorp Ltd (POONAWALLA) Q2 FY23 Earnings Concall Transcript

Poonawalla Fincorp Ltd (NSE:POONAWALLA) Q2 FY23 Earnings Concall dated Oct. 21, 2022

Corporate Participants:

Hiren Shah — Head, Investor Relations

Abhay Sureshkumar Bhutada — Managing Director

Manish Jaiswal — Managing Director And Chief Executive Officer

Analysts:

Sameer Bhise — JM Financial Institutional Securities — Analyst

Shreepal Doshi — Equirus — Analyst

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Kaitav Shah — Anand Rathi — Analyst

Hena Vora — Systematix — Analyst

Kunal Shah — ICICI Securities — Analyst

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Sagar Jethwani — PhilipCapital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY 2023 Earnings Conference Call of Poonawalla Fincorp Limited. [Operator Instructions] Please note that this conference is being recorded. I’ll now have the conference over to Mr. Harish ahead Investor Relations, Poonawalla Fincorp Limited. Thank you, and over to you, sir.

Hiren Shah — Head, Investor Relations

Thank you, Ritika. Good evening, everyone. And thanks for joining this conference call. It’s our pleasure to welcome you all to discuss Poonawalla Fincorp’s business and financial performance for the quarter ending September 2022. We will take this opportunity to update you on the recent developments in the industry as well as Poonawalla Fincorp during the quarter. To discuss all this in detail, I’ve got with me our Managing Director, Mr. Abhay Bhutada; Managing Director of Poonawalla Housing Finance, Mr. Manish Jaiswal, and other senior management officials and myself, Hiren Shah, Head of Investor Relations. Now I would like to request hour Managing Director, Mr. Abhay Bhutada to brief you all about our company’s operational and financial performance along with developments for the quarter ending September 2022. Over to you, sir.

Abhay Sureshkumar Bhutada — Managing Director

Thank you, Hiren. Hello, everyone. I welcome you all to the Poonawalla Fincorp Quarter two FY 2023 earning conference call. Trust you are all doing good. On behalf of entire Poonawalla Fincorp team, I wish you are very happy Deepavali. Let me take you through the key highlights for the quarter. Quarter two has been an excellent quarter with differentiated strategy and execution excellence leading to all-round performance across business growth, improved credit quality, and profitability. It was a quarter marked by highest-ever organic disbursement, customer acquisition, lowest GNPA and NNPA, and highest ever PAT and RoA. Also our long-term rating was upgraded to AAA/Stable by CARE rating agency. This sets the momentum for an even exciting second half and beyond.

All this is a testimony of leadership team’s relentless effort and focus towards achieving the management vision and creating value for all are stakeholders. During the quarter our PAT increased to INR163 crores, up 71% year on year; 16% quarter on quarter. Our RoA reached highest ever level of 3.6% at a consol level, an improvement of 102 bps year on year, 24 bps quarter on quarter. Our AUM stood at INR18,560 crores, up by 22% year on year and 5% quarter on quarter. The focused AUM growth was even higher at 56% year on year, 11% quarter on quarter, as fresh disbursement grew by 44% year on year and 8% quarter on quarter to INR3,721 crores. NIM was at 9.8% in Q2, increase of 77 bps year on year and 35 bps quarter on quarter. NII stood at INR446 crores, an increase of 33% year on year and 12% quarter on quarter, while the average cost of borrowing was contained at 7.12% for the quarter, despite the 190 bps cumulative repo rate hike since May 2022. In terms of asset quality, we aligned Stage three classification which revised NPA definition as per the RBI.

The aligned GNPA reduced to 1.52%, down to 59 bps year on year and 67 bps quarter on quarter, while net NPA reduced to 0.83, down 118 bps year on year and 13 bps quarter on quarter. I’m happy to share that this is the lowest GNPA and NPA levels in last 38 quarters for us and amongst the lowest in the NBFC space. This is given by our chosen customer segment, the high credit bureau score portfolio, superior collection infrastructure, close monitoring of early warning signals, coupled with proactive credit policy changes. At Poonawalla Fincorp standalone level, our PAT increased to INR130 crores, up by 76% year on year and 5% quarter on quarter. Also our AUM grew by 17% year on year and 4% quarter on quarter to INR13,161 crores. RoA standalone was at 4%. This is the highest ever RoA for the standalone — for the quarter ending September 2022, which is an increase of 131 bps year on year. The focused AUM, which is 88% of our total AUM, grew at 68.5% year on year, 12.5% quarter on quarter. The entire disbursement during the quarter was through organic route, which grew by 42% year on year to INR3,110 crores for Poonawalla Fincorp at a standalone level.

The NIM stood at 10.4% with an increase of 55 bps year on year, three bps quarter on quarter. GNPA was at 1.77%. It’s a reduction of 302 bps year on year, 91 bps quarter on quarter, while net NPA stood at 0.94% with reduction of 132 bps year on year and 17 bps quarter on quarter. The affordable housing finance subsidiary PAT grew by 75% year on year and 8.3% quarter on quarter to INR33 crores, while the AUM stood at INR5,612 crores, which is up by 31% year on year and 6% quarter on quarter. Poonawalla Housing Finance Limited disbursement stood at INR611 crores, which is up by 57% year on year and 14% quarter on quarter. Now let me now elaborate on our execution strategy during the quarter, starting with business growth. We focus on developing diversified disbursement engine that has aided growth of organic disbursement. Organic disbursement rose 180% year on year, 32% quarter on quarter. Over the course of last one year, our organic disbursements have increased 2.8 times. We ended September at a monthly organic disbursement run rate of INR1,300 crores against given guidance of INR1,000 crores.

With the focus on the Direct Digital Program, the disbursement growth has been accompanied by lower customer acquisition costs compared to traditional distribution model and has also accelerated the customer acquisition. The DDP mix has risen to 47% in Q2 FY ’23 from 34% in Q1 FY ’23 and 17.5% in Q4 FY ’22, led by strong data analytics, cross-sell, upsell has also seen good traction contributing to overall growth and profitability early on. Our focus from day one has been on instilling the culture of building digital-first technology-led organization. I’m happy to share that we have now fully operationalized inhouse technology center dedicated to our digital, tech, analytics, and other agenda. On liability side, despite the rising interest rate environment, our cost of borrowing increase was largely contained. As highlighted earlier, CARE upgraded our long-term rating to AAA/Stable and this would further help us contain the increase in cost of borrowing despite rise of 190 bps in benchmark rate in this fiscal year so far and further rise. We are still carrying almost INR1,300 crores of our legacy borrowings at 9.5%. We recently started our capital market borrowing. We raised around INR1,200 crores in the last quarter via CP and NCD route. Otherwise, we are again amongst the lowest in terms of cost of funds if you do apple-to-apple comparison.

Having had a fantastic first half, let me take you through to what we can expect over the rest of financial year. While we are in a rising interest rate and liquidity-deficit environment, the market segment in which we operate, that is consumer largely and MSME, continue to grow. The ongoing technology disruption in lending, several digital-first, tech-led players like us. With the full-scale operationalization of our technology center, we will accelerate digital offering in our rapidly growing areas of embedded and contextual lending. In the upcoming quarter, you will see us leverage of our technology, digital, and customer service capability to further enhance our superior customer experience and thereby build a competitive moat, with a monthly organic disbursement run rate of INR1,300 crores in September 2022, we have a strong business momentum for the upcoming H2 FY ’23. We are confident that we will continue to have among the best asset quality in the NBFC space, and we will maintain net NPA less than one with our Management Vision 2025. Our current opex to AUM stands at 5.9% since we continue to invest in capability building and technology, invest in people.

Also, we have given ESOP to more than 400 people which is almost manager and above more than 35%. And our total employee population of 3,200 on-roll people, it almost cover 15% which is the highest in the industry. With this reduction of ESOP charge going forward, we expect a sequential decline in this ratio from next financial year onwards because there is a INR35 crores to INR40 crores ESOP charges last two quarters which will be there for the current year. But despite of that, there is an increase in the pre-operating profit as well as onetime cost and huge investment in the team as well as building digital and other capabilities. Now we are expecting drastical reduction — drastic reduction in terms of opex from next year onwards. With the leadership team in place, best-in-class digital infra, and other technological capability, highest credit rating, expanding our product suite, and the best-in-class asset quality, we are confident of a strong growth trajectory FY ’23 and beyond. And now considering this exceptional performance, son. Trajectory in a pot 23 and beyond. Find. Now considering this exceptional performance, which is in line with our Management Vision 2025, I assure you that whatever guidance we have given till date we have achieved, and we are going to achieve as per our stated vision.

Thank you, everyone. And now we can start the Q&A session.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sameer Bhise from JM Financial Institutional Securities. Please go ahead.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Hi. Thank you for the opportunity and congratulations to Abhay and team for a superb quarter. Wanted to get a few data points before I ask other questions. Can you elaborate on the AUM mix on the focused business right now across products?

Abhay Sureshkumar Bhutada — Managing Director

Yes. Thank you, so much Sameer. So right now, we have more than INR2,300 crores in terms of preowned car. Auto lease, we are approximate INR286 crores. And unsecured personal loan, business loan, loan to professional, we have INR5,135 crores. Then we have other products, which we acquired last year, the DA book, which is outstanding at INR2,609 crores, and the existing legacy book is around — including a few other products, INR1,540 crores. And now we have housing INR4,927 crores and PHFL acquired DA INR686 crores, which is approximate INR18,560 crores.

And if you want to focus on a monthly number, then we have crossed INR180 crores on a monthly disbursement basis on our POC, preowned car, then we are doing around INR30 crores per month on auto lease. We are doing almost INR300 crores on the business loan side. We are doing almost INR200 crores, including digital ecosystem, more than INR250 crores per month on the personal loan side. We are doing more than INR130 crores on the loan against property side. We are operating at 30 locations in loan against property. Other all products we are operating at 110, 120 branches. So I think this is one of the best numbers in the NBFC industry because as of now, considering our monthly run rate of INR1,300 crores, we are just operating at 110 locations, Sameer.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. Okay. This is helpful. Some details on the kind of customers acquired maybe in terms of number of customers or profile will be helpful.

Abhay Sureshkumar Bhutada — Managing Director

Yes. So more than 70% of — more than 80% of our customers, they are 730-plus CIBIL. And this quarter, we have acquired closer to 4.65 lakh customers.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Across all product lines?

Abhay Sureshkumar Bhutada — Managing Director

Yes. Across all product lines. This is the highest-ever customer acquisition. And now we are expecting this number will increase drastically over the period of next few quarters.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. And where does the written-off book stand at this point in time?

Abhay Sureshkumar Bhutada — Managing Director

Sameer, what do you mean written-off books?

Sameer Bhise — JM Financial Institutional Securities — Analyst

Previously written-off book. You just wanted to get a…

Abhay Sureshkumar Bhutada — Managing Director

So legacy — Sameer, legacy write-off book, we have closer to INR1,100 crores. So we have a write-off policy since acquisition of 90 and 180. We have done a lot of write-off against that as per the policy. So we are at INR1,100 crores. And considering the past trend of 40% to 45%, and because of the early write-off, even you can consider 45%, we are going to recover over a period of next 12 to 18 months.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. I think for now this is helpful. I’ll probably get back in the queue for the questions. Thank you so much and all the best.

Abhay Sureshkumar Bhutada — Managing Director

Thank you, Sameer.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shreepal Doshi from Equirus. Please go ahead.

Shreepal Doshi — Equirus — Analyst

Hi sir, good evening and thank you for giving me the opportunity. The question was with respect to the discontinued book. You said it is close to INR1,100 crores. I suppose last quarter it was INR2,000 crores. And I think the coverage there last quarter was close to 9%. So, is there a write-off there or entirely it’s broadly due to repayments? So if you could just give some color on that.

Manish Jaiswal — Managing Director And Chief Executive Officer

Yeah. Hi. So yes, there is a write-off. The total write-off is about INR364 crores which we have done. Including policy write-off, it would be about INR460 crores. So the discontinued book, yes, has been written off. So as we speak, the discontinued book has come down significantly to INR1,540 crores, which Abhay has talked about. But if you take only the on-book, the discontinued book is down to about INR1,270 crores.

Abhay Sureshkumar Bhutada — Managing Director

So if you remember, last quarter we have informed that we have created a management overlay of that onetime insurance stake sale profit, which we have utilized for the legacy book, which was created only for the legacy book.

So right now, we are not expecting any whatever on-book legacy book is there, except from the policy write-off, we are not expecting any additional write-down. However, we want to come out of this legacy book so that there will be a proper comparison. And by end of March, legacy book will be below INR500 crores of whatever will be there on-book.

Shreepal Doshi — Equirus — Analyst

Okay. Sir, the second question was with respect to the newer segments that we have entered in the last one year. So while you did give some color that during the quarter, you’ve acquired 4.65 lakh customers with more than 730 CIBIL.

If you could give some details on the bounce rates for these segments and one plus DPD number, so some of the asset quality indicators that you would be tracking, if you could give some color on that will be very helpful.

Abhay Sureshkumar Bhutada — Managing Director

Sure. So on that side, I think we are maintaining our 60-plus is less than 0.4%. And since we do write-off — we are the very few amongst the NBFC who do write-off at 90-plus unsecured and secured at 180 plus, so there are no write-off in the newly acquired book, and our 18 months of experience in Poonawalla Fincorp and the existing track record of Poonawalla Finance the group wherever two, three years personal loan, professional loan, business loan, we all — whatever experimentation was done, and there also we used to write-off at 90-plus. We carried the same overall learning. And right now, the 30 or 60-plus is less than 0.5%.

Shreepal Doshi — Equirus — Analyst

And sir, what would be the bounce rate in some of the segments like MSME and personal loans?

Abhay Sureshkumar Bhutada — Managing Director

So here in personal loan — 30-plus personal and professional loans, 30-plus is less than 0.10 because the segment which we are targeting because of the low cost of fund and the digital acquisition, we are able to give a very fine rate as compared with any other larger NBFC.

And I want to give you some additional data point here. Whatever initial assessment done by internal team members, I think we are getting first choice of rejection in terms of personal loan and the professional loan. The entire process is digital. There’s no single signature required, 100% digital.

Of course, we have gone all 100% digital across all our products, including pre-owned car. But in personal loan, professional loan, there is no DSA, so we are saving straightaway 3% to 3.5% the DSA acquisition cost. We have stopped DSA Four, five months back, and this is completely direct and digital acquisition.

Shreepal Doshi — Equirus — Analyst

Okay. Okay. Sir, so we pay a DSA fee of — how much do we pay to the DSAs for these loans?

Abhay Sureshkumar Bhutada — Managing Director

So personal loan, professional loan, there is no DSA. In case of business loan, we have some DSAs, and loan against property and preowned car, depends on the product-to-product and channel-to-channel.

Shreepal Doshi — Equirus — Analyst

So what would be the payouts?

Abhay Sureshkumar Bhutada — Managing Director

So payout, again, it varies, but that is as per the industry standard.

Shreepal Doshi — Equirus — Analyst

So if you could give some range, maybe say 25% to 75%, or if you could give some range there.

Abhay Sureshkumar Bhutada — Managing Director

So, for example, for business loan, we give payout anything between 2.5%, 3.5% range, depend on the volume and slab. But there the IRR is 19%, they get upfront processing fees of 2% and additional other cross-sell income. In case of pre-owned car, again, we give around 2% to 2.5%, depending on the slab. And in case of loan against property, we give between 1%, to 1.25%, depending on the slabs.

Shreepal Doshi — Equirus — Analyst

Okay. Okay. Got it. And sir, in the housing business, so I read in the presentation that we have initiated the IPO, I suppose. So what is the timeline and what is the thought process?

Abhay Sureshkumar Bhutada — Managing Director

So as of now, we’ll not be able to give much detail. We have appointed the investment banker. The process is going on. Maybe in couple of months, in two to three months, we’ll be able to give you more detail on that. As of now, the process is going on as per the plan.

Shreepal Doshi — Equirus — Analyst

Got it sir. Got it. Thank you so much sir. If I have more questions I will come in the queue sir. Thank you and Happy Diwali to the entire team. Thank you.

Abhay Sureshkumar Bhutada — Managing Director

Thank you. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Harshvardhan Agrawal from IDFC Mutual Fund. Please go ahead.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Thank you for the opportunity. Sir, just wanted to understand the line item that we have this time, net gains from de-recognition of financial instruments, what does this pertains to?

Abhay Sureshkumar Bhutada — Managing Director

So basically, as per our stated objective from the last quarter onwards, we have decided to come out of that existing Magma legacy book. And apart from the write-off, whatever was the zero DPD and because of that different customer segment in nature, we started selling that book as well.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Okay. So, sir, this is the — we have sold down some book and this is the — whatever the fee that we have got…

Abhay Sureshkumar Bhutada — Managing Director

We got from the legacy sold out book, yes.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

So is this — this INR33 crores will recur every quarter or this is a onetime income.

Abhay Sureshkumar Bhutada — Managing Director

No, no, this is a onetime income. And again, whatever is the additional recovery we will get, maybe in next one to two quarters because, as I have discussed just now, we want to keep legacy book INR500 crores by end of March. And maybe by June 2023, we’ll be out of legacy book. So one is a policy write-off or additional write-off, and second is we are selling because we are not able to do cross-sell on the existing Magma, agri, CV, CE, tractor kind of customer. So we decided to sell that book, and now to balance legacy book is less than INR500 crores, whatever is on-book.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Right, right. Got that. So, sir, if I — since because this is a one-off income, if I were to take off this income from our revenue line item and then see the quarterly growth between the AUM and the quarterly growth between our NII, seems like our NII was trailing the AUM growth. So how do I read it? Is it the incremental book coming at an over yield, or the cost of fund is increasing at a rapid pace? How should one read into that?

Abhay Sureshkumar Bhutada — Managing Director

Initially acquired book which was at a lower rate and now we have increased the rate from last two months. Initially we started to focus on our lower rate. But now we have enough scope, still we are offering the lowest rate as compared with any other larger NBFC. We have still scope to increase 150 basis points. So we have increased 100 bps rate from last two months after the RBI rate hike, and now you will see further increase in the yield going further.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Sure. And sir, one last thing is about the credit cost line item. Due to the excess provision that we have done in the past, we are able to do some writebacks over the last previous quarters. So how should one really build in the credit cost if you were to look at, say, FY ’24 or even FY ’25, just in terms of modeling the credit cost line item?

Abhay Sureshkumar Bhutada — Managing Director

So basically, because of the still write-off book available, you will not see actual P&L charge on the same. But, however, credit cost, anything you can consider in the range of 0.5% to 0.7%.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

And how long we will have this flexibility of writebacks on credit cost?

Abhay Sureshkumar Bhutada — Managing Director

So basically, whatever — though we have done early write-offs from the legacy book, but we need to recover that, right? And we are going to recover almost 45% to 50% of that. So that will take 12 to 18 months. So that is additional cushion available against the balance legacy book available. So that’s why we are not expecting any losses from the balance legacy book. In fact, we may expect writeback of INR150 crores to INR200 crores over a period of next 12 to 18 months.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Right. So, sir, just to understand that, is it for next four quarters, we may still continue with some of this negative credit cost line item for fair assumption to make?

Abhay Sureshkumar Bhutada — Managing Director

Yes, at least for next two to three quarters.

Harshvardhan Agrawal — IDFC Mutual Fund — Analyst

Sure, sure. Thanks a lot. I’ll get back in the queue for more

Operator

Thank you. The next question is from the line of Kaitav Shah from Anand Rathi. Please go ahead.

Kaitav Shah — Anand Rathi — Analyst

Hi, am I audible.

Abhay Sureshkumar Bhutada — Managing Director

Yes, you are audible.

Kaitav Shah — Anand Rathi — Analyst

Congratulations for good set of numbers. My question is more related to your customer acquisition. If you can give us more detailed understanding about how much is new to bank, how much is customer profile in terms of own source — organic sourcing and how much is DSA acquired, if you can break it up along those lines?

Abhay Sureshkumar Bhutada — Managing Director

So, basically, if you see out of our acquired total customer base, so our Direct Digital Program is running well. We have crossed 47% for the total disbursement. And more than 90% is directly acquired customer under Direct Digital Program with our digital ecosystem partners. And only 5% of the total customer count is via DSA route. And here more than 95% are credit-tested customers, DSA tested customer. And hardly there are less than 5% new-to-credit customer that too under a partner ecosystem wherein we have done two or three co-lending wherein we are getting 10% FLDG. So there is no actual loss to us.

Kaitav Shah — Anand Rathi — Analyst

Fair enough. I think that was my broad question. Thank you.

Abhay Sureshkumar Bhutada — Managing Director

Thank you so much.

Operator

Thank you. The next question is from the line of Aniket Jain from ABFL. [Operator Instructions]. Mr. Jain, you may please proceed ahead with your question. Mr. Aniket Jain, you may please proceed ahead with your question. Mr. Aniket Jain, may be request you to please unmute yourself, just mute it from your handset. As there is no response, we’ll move to the next question, which is from the line of Hena Vora from Systematix. Please go ahead.

Hena Vora — Systematix — Analyst

Hi. Good evening. Can I just know the AUM mix. I messed up your numbers?

Abhay Sureshkumar Bhutada — Managing Director

Can you please speak loudly?

Hena Vora — Systematix — Analyst

Can I know the AUM mix. I missed the numbers then?

Abhay Sureshkumar Bhutada — Managing Director

You are talking about secured or unsecured AUM mix?

Hena Vora — Systematix — Analyst

No, the focused business AUM mix?

Abhay Sureshkumar Bhutada — Managing Director

Product-wise

Hena Vora — Systematix — Analyst

Yeah

Abhay Sureshkumar Bhutada — Managing Director

We have already stated, but I will just give you a idea. Housing, we have INR5,612 crores, and Poonawalla Fincorp at standalone, we have more than INR13,000 crores. Out of that, professional loan, personal loan, business loan, and other digital unsecured products we have INR5,135 crores, loan against property INR1,241 crores, then existing acquired DA INR2,609 crores, our existing legacy book INR1,540 crores, auto lease around INR286 crores, and preowned car which is INR2,317 crores. And on a monthly basis, I have already, can you hear me?

Hena Vora — Systematix — Analyst

Yeah, yeah. I can. Thank you.

Abhay Sureshkumar Bhutada — Managing Director

On a monthly basis, we are doing INR180 crores, INR185 crores on preowned car, auto lease around INR30 crores, business loans INR300 crores, personal loan around INR250 crores, loan against property around INR130 crores. Housing side, we are doing around closer to approximately INR200 crores per month.

Hena Vora — Systematix — Analyst

Okay. Thank you. Yes. That was my question. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.

Kunal Shah — ICICI Securities — Analyst

Yes. Hi. So firstly, sorry, with respect to this INR33 crores, and overall when we look at it in terms of the provisioning writeback of almost INR41-odd crores. So cumulatively, maybe from the return of book, would it be fair to assume that maybe on a net basis, the recoveries are more than INR70-odd crores? I didn’t get the difference in terms of the provisioning writeback and what’s there in CND fair value? Yeah.

Abhay Sureshkumar Bhutada — Managing Director

So Kunal, recovery from the write-off book for the quarter was INR75 crores.

Kunal Shah — ICICI Securities — Analyst

Yes, it was INR75 crores. Okay, perfect. Got it. And when we look at it overall, in terms of, say, Stage one and Stage two PCR, which is also coming off on a quarter-on-quarter basis, particularly on the PFL side, so this is largely because maybe there was some write-off book out there also, which is — or maybe something which was written off from that pool as well, which is leading to this kind of a decline in PCR?

Abhay Sureshkumar Bhutada — Managing Director

Yes. So basically, we do write-off of unsecured at 90-plus and again secured at 180 for legacy book as well as for the new book. And considering the latest — last 18 months performance, there are no early delinquencies also in the new book. However, yes, PCR will — because of the write-off of the legacy book, it will get reduced going further because we require Stage three provisioning only and only for the secured book.

Kunal Shah — ICICI Securities — Analyst

Got it. Got it. And on the restructured side, so out of INR467 crores, INR211 crores is zero bucket and the balance also we are quite comfortable because I think it’s slowly coming up, but entire thing is not yet out maybe out of the moratorium. So maybe any expectations on maybe the slippage from that pool or that’s performing well?

Abhay Sureshkumar Bhutada — Managing Director

So that book is performing well. As we discussed, out of the INR467 crores, now INR211 crores, which is into zero book, almost 45% of the restructured book. And against the pending restructured book, again, we are getting EMI. And whatever we wanted to write-off, we have done the write-off in the last two, three quarters from that pool as well, because this is 100% the legacy book.

Kunal Shah — ICICI Securities — Analyst

Okay. So there also the write-off is done. So there shouldn’t be any further provisioning coming in from the restructured side?

Abhay Sureshkumar Bhutada — Managing Director

Yes. Because if you see, Kunal, this GS3 number also, we have aligned to this new RBI norm. That’s why our GS3 and NNPA numbers are reduced drastically. But at the same time, if you are GS3 and NS3, that is much lesser as compared with the GNPA and NNPA.

Kunal Shah — ICICI Securities — Analyst

Sure. And given now maybe the experience over the past few quarters, the run rate which you have highlighted on a monthly basis with respect to, say, BL, PL, LAP as well as maybe on the pre-owned side. Do we see that maybe either of these segments would do relatively better because we have still been, say, on an investment phase and that is yet to scale up? No doubt, there will be overall business growth, but in terms of the proportion wherein they are, do we see couple of them significantly outperforming the other?

Abhay Sureshkumar Bhutada — Managing Director

I think at overall consol level, we are maintaining 70:30 secured and unsecured mix. However, if you see whatever product we launch, preowned car, business loan, personal loan, professional loan, and loan against property, as I told you, we are operating at only 30 locations in loan against property and other all products at 100 locations. So do peer-to-peer comparison, then I think we are in the top two or top three in most of the products. And this is just a start. Now we have completed the whole consolidation phase. Now since last two quarters we are in growth phase.

So you will see a good monthly — the closing run rate will be much, much better as compared with our first half. Second half will be much better. And the actual growth is also more. Because of this legacy book write-off, on paper quarter-on-quarter, the overall AUM growth looks on a lesser side. But because of the legacy book write-off and discontinued book run down so far, the actual growth is much more in all the newly-launched products. And the segment which we are targeting, we are not expecting any early delinquency or credit cost, whatever, we have given the guidance of 0.7% to 0.9%, I think we’ll be able to maintain that.

Kunal Shah — ICICI Securities — Analyst

Sure.

Abhay Sureshkumar Bhutada — Managing Director

And Kunal, as we discussed in the last quarter also, this time also, we want to give this — that opex will get reduced drastically in the next year. See, we have covered more than 400 — almost 430, 450 people in ESOP and the RSO. So that is a notional charge on the P&L. So last quarter, it was almost approximate INR40 crores. This quarter also is INR44 crores. If you see our PPOP, it would have been higher by almost INR40 crores, INR45 crores. So actual profitability is much. much higher. But despite of that, yes, there is an increase in the PPOP and across all other parameters.

Kunal Shah — ICICI Securities — Analyst

Yes. So this INR160 crores to INR180 crores would be there for this fiscal and then maybe next year onwards, this should run down.

Abhay Sureshkumar Bhutada — Managing Director

It will get reduced by maybe around INR55 crores, INR60 crores. And third year, it will be around INR20 crores, INR30 crores. Because in the first year itself to retain the top talent, we have covered the larger population till the junior level, middle level, and our entire senior leadership we have covered, Kunal.

Kunal Shah — ICICI Securities — Analyst

Okay. So INR160 crores, INR180 crores in this fiscal and coming down to INR55 crores, INR60 crores next year, and then INR20 crores to INR30 crores in a year after that in terms of the cost.

Abhay Sureshkumar Bhutada — Managing Director

Yes.

Kunal Shah — ICICI Securities — Analyst

Okay. Okay. Great.

Abhay Sureshkumar Bhutada — Managing Director

There are a lot of onetime costs as well, since we are largely investment in technology and team we are building, so there are a lot of onetime costs in the last two quarters or maybe next one quarter — one to two quarters, but that also will get reduced in the next financial year.

Kunal Shah — ICICI Securities — Analyst

Sure. Got it. Yeah. Thanks. All the best and wish you a very Happy Diwali to you and your entire team.

Abhay Sureshkumar Bhutada — Managing Director

Happy Diwali, Kunal.

Kunal Shah — ICICI Securities — Analyst

Yeah. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line Dhaval Gala from Aditya Birla Sun Life Asset Management. Please go ahead.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Good evening, the top management team of Poonawalla. Congratulations on good set of numbers. A few questions. First being, Abhay, if you could articulate around AUM growth, and basically, we do understand right now we were in restructuring or reorganizing phase, because you were running down some book, which you did not want to grow, and you were growing personal loans and other segments. If you could talk about is, how do one look at sustainable growth? Also, what is — basically, if you could provide some more color on customer profile also and how sustainable the growth would be in the medium-term?

Abhay Sureshkumar Bhutada — Managing Director

Sure. Thank you so much. So Dhaval, in terms of growth, if you see September ’21, the focused AUM was INR10,900 crores. Now within one year, we have reached INR17,000 crores in terms of our focused growth and discontinued book at INR1,545 crores, the total comes to INR18,560. So, I think almost — more than 80% growth in terms of the focused AUM growth in one year. But as per our Management Vision, three time AUM of March ’21 to March ’25, so we’ll be able to grow considering the current monthly run rate, considering the capability we have, considering the market opportunity available, we’ll be able to grow anything between 30% to 35% over a period of next three years to achieve our three years growth by March 2025.

And on the customer profile side, I think mostly we are targeting the bureau-tested customer. Data, technology, and the overall tech center is more than 200-plus team now. GST cases customer, TDS. So a lot of in formal income segment wherein people are paying scheduled dues on time, PDF banking is available. Almost everyone is focusing on the same. But at the same time, in terms of TAT, in terms of customer service, in terms of product proposition, I think we are far better as compared with other large competitors. Basically, what feedback we got from lot of customers that we are the only NBFC at a larger scale who is offering zero prepayment charges across all our products if we pay from the own charges. At the same time, of course, we will charge some penalty if there is a balance transfer. But in terms of product proposition, no hidden charges, rate, processing fees, TAT, overall customer product proposition, and the digital user experience, 100% digital, so customers are giving clearly first choice of rejection in most of the products. And of course, the Poonawalla brand and brand equity is there as a trust factor.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Sure, sir. Just a couple of more questions. One on the customer franchise, if one has to understand, I do understand how you’ve been — your articulation around new segments of growth. But what is cost of acquisition in the real sense? And when you mentioned about operating leverage, a couple of questions back somebody asked, how do one consider what type of customer base you are building? And do you have any analysis that how much of cross-sell you’ll be able to do over a period of time, long-term, and therefore, operating leverage can come down — can come down and you can have higher operating leverage?

Abhay Sureshkumar Bhutada — Managing Director

Yes. So out of our total monthly disbursement, Dhaval, total 47% is our DDP, which is direct digital ecosystem, wherein our total customer acquisition cost is less than 1%. And in case of the other DSA cost and a few other costs, the customer acquisition goes to around 1.5% to 2% on an average basis. And in terms of cross-sell, I think whatever data analytics we have done, we will be able to do a lot of cross-sell. Already we have started cross-sell. We will start giving numbers in a quarter or two. But on a steady state basis, one year down the line, I think we’ll be able to cross 30%, 40% of the existing database in terms of cross-sell.

Now we are launching the EMI card, credit card or the consumer loan, because we keep getting inquiries on the call center calls from the customer that they are looking for most of the services from the Poonawalla, reason being the existing customer. So I think whatever early signals we have, you can expect, I think we’ll focus on loyal customer base. And the reason I told you just now to Kunal also, about the trust and first choice of rejection we are getting because of the no hidden charges and product proposition what we have.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Okay. Could you also mention about — right now, I understand when everyone is very improved asset quality coming from a higher base of COVID. And even for us, we were also in a process of merger and therefore, we had done a lot of high provisions last year. Now if you could talk about what is the likelihood of sustainable credit cost for our company? And when you build different products, what type of credit cost you build or estimate when you underwrite? So it means if you could talk more about underwriting skills and also what type of asset quality and credit cost would be sustainable?

Abhay Sureshkumar Bhutada — Managing Director

So basically, the segment which we are targeting, whatever analytics we have done on the existing customer and the proposed customer base, next year you can consider the credit cost around 0.5%. But on a steady-state basis range, I can give you anything between 0.5% to 0.8%.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Okay.

Abhay Sureshkumar Bhutada — Managing Director

Actually, we are doing write-off at 90-plus, so we have to control the credit cost at the time of onboarding itself because we have not changed policy. It is not only we are falling only for the legacy unsecured book or legacy secured. This policy we have decided in March ’21 at the time of acquisition for both secured and unsecured. So we do all the secured product write-off at 180-plus and unsecured at 90-plus. So to control the credit cost, I think whatever was the first-time collection and the onetime match we collect, that is our main trigger. So we follow first-time collection and 30-plus as our main trigger.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

And your management overlay provisions, when does that get kicked in? When do you use them? Any policy around that? And how long do you continue to provide mean creating — what type of proportion you want to create?

Abhay Sureshkumar Bhutada — Managing Director

So basically, we have created this buffer only on the legacy book. We have not utilized any of the management overlay towards the new book. New book is performing quite well, better than our expectation. And this management overlay, I think now, as I told you, by end of March will be less than INR500 crores. We have started either selling the legacy book or writing off the legacy book. And still, we are carrying INR1,000 crores because of the early write-off — the total write-off book. And out of that, we will recover INR450 crores to INR500 crores. So you can expect there will not be any additional management overlay we will create going further for the legacy book because we can expect write-back, but not losses out of the legacy book.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

And basically, the entire management overlay would be used for the legacy book?

Abhay Sureshkumar Bhutada — Managing Director

Yes, that’s created only for that purpose. We have not utilized any of the management overlay for the newly book. It is only for the legacy book.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

And when does, according to you, our legacy book becomes — basically runs down to zero?

Abhay Sureshkumar Bhutada — Managing Director

June 2023.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Okay. So by then whatever is not required to provide, you could write back in the ensuing quarter or you will choose to keep the buffer as it is?

Abhay Sureshkumar Bhutada — Managing Director

Yes. So I think we cannot use that buffer. We’ll have to write back whatever with the balance provision as per the law and as per the rule as well. And whatever the write-off book is there, that INR1,000 crores, that, of course, we can utilize towards the legacy book. And as and when required — like for example, we have recovered INR75 crores last quarter. So you can expect that — over a period of maybe 18 months, you can expect the quarterly write-back from that book.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Okay. Abhay, last question on the treasury side. If you could talk about our cost of funds and also if you could talk about what is incremental cost of funds and what according to you would be basically the benefit because of upgrade in the rating profile and the name Poonawalla, what type of repricing is already done and whether our cost of funds are now on a like-to-like basis to our rating or there is room to improve more?

Abhay Sureshkumar Bhutada — Managing Director

Yes. So right now, cost of fund is at around 7.12%. And we can expect 20 bps or maybe 40 bps, depending on the RBI, quarter-on-quarter basis, you can expect that hike. But however, we just started capital market borrowing, and there is a scope to borrow more via CP route as well as we are carrying INR1,400 crores of legacy book at 9.5%, which will get close over a period of next 11 to 12 months. So considering that, I think the effect will be very gradual. And we have started increasing the rates since the last two, three months.

So I think we will not face an issue due to the cost of — already we are amongst the lowest in terms of cost of borrowing. And if you see recent, all the other PSU bank sanction, first time we have received almost seven-year — money at around 7.25% rate.

And now we’ll have to see any further increase from these banks. But again, in all the AAA-rated NBFC, around 5, six AAA-rated NBFCs, we are amongst the lowest in terms of if you talk about the bank borrowing.

So now with the increase of CARE AAA rating, you can expect 20bps to 25bps additional benefit via capital market borrowing as well as 10bps to 15bps more benefit in terms of bank borrowing.

Dhaval Gala — Aditya Birla Sun Life Asset Management — Analyst

Sure. Thank you, Abhay. Thanks a lot for patient answering.

Abhay Sureshkumar Bhutada — Managing Director

Thank you. Thank you so much, Dhaval.

Operator

Thank you. The next question is from the line of Sameer Bhise from JM Financial Institutional Securities. Please go ahead.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Yeah. Thanks for the follow-up opportunity. Just wanted to understand the movement on the focused…

Abhay Sureshkumar Bhutada — Managing Director

Sameer, you are not loud enough.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Yeah. Hi. Is this better?

Abhay Sureshkumar Bhutada — Managing Director

Yeah, now this is better.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Yeah. Yeah. So the discontinued book has reduced by INR760 crores or INR740 crores on a sequential basis. Can you just give a split between how much was sold down? How much has been a normal repayment?

Abhay Sureshkumar Bhutada — Managing Director

So INR227 crores of legacy, all the agri, tactor, CV products we have sold out, and remaining — we have collected, and remaining around INR330 crores, we have done a write-off of — additional write-off as well as the policy write-off.

So this is the breakup. INR330 crores, we have done a write-off, INR226 crores we have sold to one of the private bank, and remaining was a policy write-off of only legacy book. So this is a breakup, Sameer.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. And what was the interest reversal for the quarter, if at all?

Abhay Sureshkumar Bhutada — Managing Director

Can you please speak loudly? I don’t know what was.

Sameer Bhise — JM Financial Institutional Securities — Analyst

What was the interest reversal for the quarter?

Abhay Sureshkumar Bhutada — Managing Director

Interest reversal?

Sameer Bhise — JM Financial Institutional Securities — Analyst

Yeah. Must have been a small number given…

Abhay Sureshkumar Bhutada — Managing Director

Yeah. Yeah. I guess it was around INR5 crores.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. Okay. Sure. And just coming back to the opex part, just wanted to get a sense on how the number of employees is shaping up, given the large collection team you had inherited at Magma, and how things are moving there with respect to a number of employees?

Abhay Sureshkumar Bhutada — Managing Director

So I think we have around 3,200 on-roll people and around more than 2,000 people off-roll basis. So as we speak, we have 5,200 people. And out of that, Sameer, we have more than 50% on the collection side.

And this is the best part, we have — that was the main reason behind Magma acquisition because we wanted to start with our existing experience of Poonawalla Finance, now in Poonawalla Fincorp, consumer loan and a lot of other products, wherein you require some collection.

So now we have good enough strong collection infrastructure available and on-roll as well as the off-roll. As we move forward, we have done a lot of reskilling and retraining. Out of that, lots of people are willing to move to the sales also. And remaining, we will continue in the collection side. On the legacy book.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Okay. This is helpful. And

Abhay Sureshkumar Bhutada — Managing Director

On-book of INR1,300 crores and the write-off book of INR1,000 crores, so almost still we are carrying INR2,300 crores of legacy book, including write-off. So for that, we need the collection infrastructure, which we have because in the existing Magma legacy book, maximum 50%, 60% is the cash collection.

Right now, in the new book, there is no single cash collection and 100% onboarding via digital route. And 100% match, 100% digital disbursement, and 100% digital collection. So here, the 60-plus itself is less than 0.5%, and we are not expecting more than 0.9% credit cost.

So we will not require much of the field collection. But at the same time, now we are moving towards a high-yield product, small personal loan, consumer loan, EMI card, credit co-brand card. Over a period of next three to four quarters, we are going to launch a few high-yield products.

And again, until that time, next 12 months, when they will complete all the legacy book collection, they will be all useful because we have done the fresh assessment, and this is all desired population.

Already there was much more attrition, and we have allowed them to go because they wanted to focus on CV, CE, tractor there as per the interest area. So now already headcount got reduced by more than 1,500, 2,000, which you will see a good amount of opex reduction in that as well in the coming quarters.

Sameer Bhise — JM Financial Institutional Securities — Analyst

Thank you, sir. That;s all from my side, All the best.

Abhay Sureshkumar Bhutada — Managing Director

Thank you so much, Sameer.

Operator

The next question is from the line of Shreepal Doshi from Equirus. Please go ahead.

Shreepal Doshi — Equirus — Analyst

Hi, sir. Thank you for giving me the opportunity once again. Sir, just on the DSA sourcing front, I wanted to understand what is the responsibility, as in like is it only with respect to lead generation or they are also responsible for some other, say, documentation and verification aspect also. So that’s the first question. And the second question is if you could give us the pricing range for our nondigital products, that is, preowned cars, machinery loans, auto lease loans? And what would we be paying to these DSAs for these products?

Abhay Sureshkumar Bhutada — Managing Director

Yes. So if you see the IRR, I think on the business loan side, we are maintaining an IRR of around 18.5%, preowned car around 15.7%, loan to professional and personal loans we are able to match average rate of 13.5%, the segment which we are targeting. And so coming back to your DSA question, I think we are — their responsibility is to just login the file as per the requirements. Since our entire process is digital, we have given them all the apps and whatever required login process, we have given them enough training.

And now they are only logging the file. Wherever required, our field sales people and wherever we have the branches, they help them with training as well as in terms of login. And going further, our focus is more and more on the digital. If you see, we just started a pilot in Q4 of last financial year, and in the last quarter itself of the last financial year, we did almost 17.5% of our direct digital ecosystem, which almost increased double to 34% in quarter one. And now in Q2, it is almost at 47%. So going further, you will see more and more focus on the direct and the digital rather than the DSA.

Shreepal Doshi — Equirus — Analyst

Got it. Sir, but currently, like what would be…

Abhay Sureshkumar Bhutada — Managing Director

If you see loan against property, preowned car, or business loan this is the industry practice, I think this is largely driven by the DSA. But yes, our focus will be more and more on the digital.

Shreepal Doshi — Equirus — Analyst

Got it. And currently, as you like — in my earlier question, you had said that you paid 2% to 2.5% as a payout to these DSAs, right?

Abhay Sureshkumar Bhutada — Managing Director

Yes, in case of business loans.

Shreepal Doshi — Equirus — Analyst

Right. Got it, sir. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Sagar Jethwani from PhilipCapital. Please go ahead. Yes. My voice is audible?

Abhay Sureshkumar Bhutada — Managing Director

Yes.

Sagar Jethwani — PhilipCapital — Analyst

Thank you. Sir, I missed it, sorry. You mentioned that you will see a lower FX lower opex next year. What is the reason for that? I missed it completely.

Abhay Sureshkumar Bhutada — Managing Director

Yes. So a very good question. See, basically, one, we are investing largely on the technology side in the current year, we are investing largely on the team as well, strengthening the leadership team, and most important, we wanted to retain the people. We wanted to focus more on the ESOP for the lower-level management. So out of my 3,200 on-roll employees, we have covered almost 450 people via terms of ESOP. And we have 1,000 people, manager and above, wherein this count comes to 45%, which is the highest in India.

So from that perspective, I think the first — the current year, the ESOP charge itself is INR40 crores per quarter, it’s almost INR160 crores in the current year, which will get reduced to INR50 crores, INR60 crores in the next year, and again, it will get reduced further. This is, again, a notional charge on the P&L. But despite of that, if you see, there is a year-on-year and the quarter-on-quarter increase in the pre-operating profit, there is an increase in the revenue, and this onetime cost of technology, team, and ESOP will get reduced drastically from the next year, so you can expect a 1% to 1.5% reduction in terms of opex to AUM from next year onwards. But on a steady state basis, two years down the line, I think, we will be able to maintain a level of, I can give it the range 3% to 3.5%, two years down the line.

Sagar Jethwani — PhilipCapital — Analyst

Okay. And what is the mix between secured, unsecured, and also between urban, semi-urban, and rural loan book?

Abhay Sureshkumar Bhutada — Managing Director

I think, we are focusing on urban and semi-urban. I think more than 60%, 70% is urban and remaining is semi-urban. In terms of secured and unsecured, as on September, 72% of AUM mix is secured and 28% is unsecured.

Sagar Jethwani — PhilipCapital — Analyst

Yeah. And also, we are on track to achieve INR21,000 crores of AUM prices. And by FY 2025, the plan is to get there to INR40,000 crores to INR45,000 crores of AUM. How can we see FY 2024, I know it’s a little bit early to ask, but still, if you have any target in mind maybe.

Abhay Sureshkumar Bhutada — Managing Director

So you can assume from here on, the quarter-on-quarter growth, anything between 6% to 8%. On a year-on-year basis, next three years, you will see growth in the range of 30% to 35%.

Sagar Jethwani — PhilipCapital — Analyst

That’s helpful. Thank you so much.

Abhay Sureshkumar Bhutada — Managing Director

Yeah. Basically, I just want to add here, we have a capacity to disburse INR3,000 crores per month. We are far, far — right now, not a well utilized our capacity. We have just crossed a monthly run rate of almost INR1,300 crores from September. On the basis of the last six months and the basis of last six month to nine month consistency in terms of organic number, we are pretty confident of H2 and beyond as well.

Sagar Jethwani — PhilipCapital — Analyst

That’s very helpful. Thank you, sir.

Abhay Sureshkumar Bhutada — Managing Director

Thank you, sir.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Hiren Shah for closing comments.

Hiren Shah — Head, Investor Relations

Thank you, everyone, for joining this earnings call with us. For any further queries or communication, please write to us at investor.relations@poonawallafincorp.com. Thank you.

Operator

[Operator Closing Remarks]