Capri Global Capital Ltd (CGCL) Q1 FY23 Earnings Concall Transcript

Capri Global Capital Ltd  (NSE:CGCL) Q1 FY23 Earnings Concall dated Aug. 10, 2022

Corporate Participants:

Ravikant Bhat — Senior Vice President of Investor Relations

Rajesh Sharma — Managing Director and Chief Financial Officer

Analysts:

Prashant Kumar — Sunidhi Securities — Analyst

Shweta — Elara — Analyst

Jay — Dolat Capital — Analyst

Gautam Gosar — Perpetuity Ventures — Analyst

Ritu Kana — Growth Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Capri Global Capital Limited Q1 FY ’23 Earnings Conference Call hosted by Go India Advisors. As a reminder all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ravikant. Thank you, and over to you, sir.

Ravikant Bhat — Senior Vice President of Investor Relations

Thank you, Seema. Good afternoon, everyone. Welcome to the Capri Global’s Q1 FY ’23 Earnings Conference Call. I will quickly read out a disclaimer before we start with the opening remarks by our Managing Director. This conference call and the discussion herein is for information purposes only and does not constitute any offer or invitation, directly or indirectly, in any manner or inducement to sell or issue or any solicitation of any offer to purchase or subscribe for any securities of the company in any jurisdiction. And no part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever.

No offering of securities of the company will be made except by means of a statutory offering document containing detailed information about the company. This earnings call should not be considered as a recommendation that any investor should subscribe for or purchase any securities of the company or its subsidiary, collectively, the group, and should not be used as a basis for any investment decision. None of the group or any of its affiliates, advisers or representatives accept any liability whatsoever for any loss howsoever arising from any information presented or discussed on this call. The detailed updated disclaimer is available on slides number two and three of our Q1 FY ’23 investor presentation.

With this, I will now hand over the call to our Managing Director, Mr. Rajesh Sharma, to present his opening remarks. Over to you, sir.

Rajesh Sharma — Managing Director and Chief Financial Officer

Yes. Thank you, Ravi. Good afternoon, friends, and a hearty welcome to Capri Global’s Q1 FY ’23 earnings call. We announced our reviewed consolidated results for Q1 FY ’23 yesterday evening. I hope you had an opportunity to go through our investor deck.

Our results discussion this time happens in the backdrop of filing for our rights issue. You may recall, our Board had approved INR1,200 crores rights issue when it met to approve the FY ’22 audited results. We took the first step towards the same by filing a draft letter of offer with SEBI on 20th July 2022. The same has been placed by SEBI in public domain on its website. Given this backdrop, there are certain restrictions on forward-looking statements and guidance that we can make. I’m aware we had set out certain goals for FY ’23 and the medium term in the previous earnings call. I would like to state that we are fully committed to a sustainable and profitable growth. As a rule, we shall refrain from giving any guidance on medium-term strategy and shall restrict this discussion to analyzing our results.

Please note, we have made changes to how we report second performance ratios. This has been done to align with the requirement of the rights issue and disclosures in our offer letter we filed with SEBI. Such changes have been highlighted in the relevant place in the investor presentation at the footnote.

I shall now discuss our earning performance during Q1 FY ’23. We reported a consolidated net profit after tax of INR461 million, which is a flat year-on-year and higher 10% over Q4 FY ’22 net profit. Although our net income declined 12% quarter-on-quarter, a softer increase in operating expenses and a sharp 57% fall in credit cost help us post sequentially slightly better profit. Adjusted for INR77.5 million one-off income in Q4 FY ’22, our NII is flat Q-on-Q. The one-off gain in Q4 FY ’22 was relating to the upfront recognition of unamortized fees and forfeited accounts.

Secondly, we have begun incurring costs in our gold loan business, while the business is yet to commence operation. We have already onboarded the entire team out of the 1,000 people there. We incurred about INR69 million overall operating cost for gold loan business in Q1 FY ’23. Adjusting for same, our opex would have actually declined 3% quarter-on-quarter. Both these items negatively impacted operating profit by INR147 million in Q1 FY ’23.

Our net interest income was also impacted by negative carry as we drew down all new sanctioned facilities in April 2022 to the first week of July 2022. This is seen in the bank balances in the balance sheet, which were heavier by 40% or INR1.4 million in Q1 FY ’23 over Q4 FY ’22. Since we have drawn our new sanctions, our MCLR is locked for six months to one year.

Our net interest margin completed at a ratio of average net advances at 8.4%, lowest in trailing five quarters and reflected the weaker net interest income. We have begun resetting yields on new as well as existing loans, and it could have a positive rub off on admin going ahead. Approximately 55% of our loan book comprise 14-week advances and the remaining comprises semi-fixed loans that convert to floating rates after initial period of fixed rates. Our cost-income ratio was 51.1% in Q1 FY ’23. Adjusting for the operating cost of gold loan vertical, which is yet contributing to AUM, the cost-income ratio comprises 400 basis to 47.1%.

With — already on recent quarter loans and gold loan AUM yet to become meaningful, we believe there is a higher probability of the cost-income ratio improving than worsening from current period. It may also be noted that our earlier cost-income ratio target of 40% was set prior to the launch of our gold loan business. As of now, we don’t have a specific target in cost-income ratio.

To reiterate, we firmly believe a strong branch network is central to our business. Therefore, we shall continue to roll out branching in the traditional gold loan business. We have continued with the write-off in Q1 FY ’23. While we had expected the write-off to taper off post Q4 FY ’22, we felt it is necessary to continue provisioning and writing off in Q1 FY ’23 as well. However, the credit cost per se has declined by 57% Q-on-Q to INR246 million and among the lowest in trailing five quarters.

We are looking at the credit cost in aggregate irrespective whether it is a write-off or ECL provision. Currently, our strength is to ensure we provide more than adequately. This could be in the form of ECL provisions, or if necessary, write-off. We expect write-off to recur in the remainder of FY ’23. Our asset quality declined after showing steady improvement between Q2 FY ’22 and Q4 FY ’22. The stage three assets in absolute as well as the percentage terms have increased, primarily driven by the retail segment. The wholesale segment continues to perform well and GNPA remained close to them. The consolidated Stage three assets were 2.71%, up 31 basis quarter-on-quarter. In absolute terms, GNPA increased 18% quarter-on-quarter. Detailed trend in discussion on the NPA ratio is given on the slides 23 and 24.

Our standard restructured assets accreted INR1,776 million or 2.6% of the AUM. We have maintained — we expect 22%, 25% of restructured assets to slip. On the outstanding assets, around 50% shall be out of moratorium period in Q3 FY ’23 and the rest is fully in Q4 FY ’23 and Q1 FY ’24 currently, standard restructured assets are classified under Stage 2.

In November ’21, the RBI circular on asset quality became effective from Q2 FY ’23 onwards. However, if you were to adopt the circular in Q1 FY ’23, our GNPA would have been higher by INR145 million and we have added another 21 basis to our Stage three ratio. Coming to the business, although it was a slower quarter, we did maintain healthy momentum, the year-over-year comparison may not be accurate [Phonetic] because of near standstill we had in the business during the COVID second wave. However, on a sequential basis, we have expanded our overall AUM by 5%.

Although we are yet to launch our dedicated IT setup for co-lending, the arrangement has already set the pace with outstanding co-lending portfolio growing 72% quarter-on-quarter to INR2 billion. Housing trends, too, showed a healthy trend, increasing 7.8% quarter-on-the-quarter. MSME, including co-lending, was up by 2.6% quarter-on-quarter. We remain convinced of the strong growth opportunity afforded by the MSME segment, given its substantial 30%-plus contribution to GDP. Similarly, affordable housing, as well — we have said in the past, will remain a key driver for our consolidated AUM. And occasional weak quarter only reinforces we’re able to focus on growth from these segments.

We are gearing up for formally launching our gold loan business. Currently, we have done a soft launch and are testing the systems and processes. We already leased 52 premises with exclusive gold loan branches. We have budgeted INR560 million as capex for the vertical for FY ’23. Our car loan distribution business continues to grow from strength to strength, surpassing previous quarter origination milestone. The vertical achieved INR11 billion in new car loan originations and contributed INR186 million in net fee. To offer you perspective, the vertical contributed INR276 million in net fees in the entire FY ’22. This is an entirely new income stream that has come up in a year in the form of pure fees, and therefore, not subject to any regulatory capital requirement. This diversifies and strengthens our earning profile.

I am also happy to share that both CARE Ratings and Brickwork have reaffirmed our long-term issuer rating. CARE reaffirmed our A+ rating and Brickwork has reaffirmed our AA- rating. Further, both have upgraded the outlook from negative to stable. With this as an affirmation of our strong balance sheet, our consistent and conservative AUM [Phonetic] management practices and robust capital ratio.

We reported a capital adequacy ratio of 29.9% for CGCL and 39.5% for CGHFL. Since we already filed offer letter to raise INR12 billion through a rights issue, we have mentioned in the offer letter that the object of the capital raise is to augment the long-term core equity capital of the company. Our fast-paced growth in the last one year relate to a consumption of almost 750 basis in the capital with CGCL. Hence, the right issue has been tied to support our growth. I would also like to clarify that we are open to exploring inorganic opportunities, but that is something we don’t talk about and only internally evaluate.

Last but not the least, I cannot conclude without highlighting our work toward digital initiative, some of which we continue to share in our corporate presentation. We have in-house coding team of 20 additional support staff with 39 in the tech team. Our business is evolving very well in the retail segment, and our IT initiative shall further add consumer.

With that, I will conclude my opening remarks. We shall now take questions.

Questions and Answers:

Operator

Thank you very much. We will now begin with the question-and-answer session. [Operator Instructions] We take the first question from the line of Prashant Kumar from Sunidhi Securities. Please go ahead, sir.

Prashant Kumar — Sunidhi Securities — Analyst

Yeah, thanks for the opportunity. And my question is on operating expense side as it is continuing to remain elevated. And is it because of the branch expense and just like you were entering into the new segment, gold loan, so a specific branch may be required. So could you give some color on this?

Rajesh Sharma — Managing Director and Chief Financial Officer

So one is that our gold loan vertical, where we already onboarded about 1,000 people and about roughly INR7 crore expenses we incurred in the Q1. That is the one reason that which has not contributed to any earnings on the AUM, but the expenses have been booked. So rather than capitalizing, we are booking these expenses and property to account. Second is that there was 26 new branches we opened in MSME also. So the branches take some time to get to breakeven and they start becoming profitable. So that is another reason that our cost-income ratio is slightly higher. But AUM growth returning, too, in the rest of the quarter. We believe that this should remain now at these levels hopefully.

Prashant Kumar — Sunidhi Securities — Analyst

So sir, if I think like this is like one-off type of operating expenses, so when it will normalize, especially on the fixed expenses, right? I mean on a yearly basis when it is going to be normalized?

Rajesh Sharma — Managing Director and Chief Financial Officer

So I think the entire year, our gold loan branches will keep opening. We intend to open about 200 branches this year, which we have told earlier in the last earnings call. So these expenses will remain elevated during this year because of the gold loan. Gold loan vertical will not contribute because of the expansion. We had told earlier we intend to open 1,500 branches in three years’ time. So first year, we have estimated about INR53 crores of cost from the vertical on capex. So there will be a little contribution on the income side. So cost to income ratio will remain elevated during the entire year. It may not increase from this level, but it will remain at around this year.

Prashant Kumar — Sunidhi Securities — Analyst

Okay. I mean the cost will be increased and the latter part the income will — the realization on the income will be later. Okay, okay. And on the asset quality side, it is also increasing sequentially. But the other, like the financial segment, most of the — I mean, especially on the bank side, they have — the asset quality improves at least sequentially and MSME also getting traction. So recovery is also improving. So what is the color, if you can give some on this?

Rajesh Sharma — Managing Director and Chief Financial Officer

So if you see, our NPA, in fact, was declining until Q4 FY ’22 both absolute and in percentage terms. So this is the first quarter of increase after three straight quarter of decline. While I will not comment about other players who have — earlier have done those write-off and all, I would like to reiterate we run a fully secured business.

Our business is not anything unsecured, whether it is MSME, whether it is home loan, that is having the collective security of hard proper — hard collateral by way of property. And recovery pursued through takes about 18 months to 24 months’ time and recovery per se gets underway. It will also have a positive effect on the overall NPA as well as P&L. We shall also correctly look at problem accounts to either provide higher [Indecipherable] recovery process. Around INR3 crores [Phonetic], INR4 crores [Phonetic] of standard restructured book of INR1,776 million to come out of the moratorium this year and the remaining in FY ’24.

Currently, our provision coverage on restructured efforts is about 21%, reflecting our loss expectation from the book. If needed, we shall provide higher. So — and our collection efficiency has been improved to about 98% plus. Since last three quarters, we also had some control. So even though we provide the write-off, that is not a credit loss. The reason being there are collateral and there is a process to recover. So in over 18 months, whatever write-offs start happening, they will start showing more of the recovery and they start showing a positive impact in the P&L as well.

Prashant Kumar — Sunidhi Securities — Analyst

Okay, thank you so much, sir. That’s it from me.

Rajesh Sharma — Managing Director and Chief Financial Officer

Thank you.

Operator

We take the next question from the line of Shweta [Phonetic] from Elara. Please go ahead ma’am.

Shweta — Elara — Analyst

Thank you, sir. For the opportunity to have couple of questions please. If I look at your CF as a percentage of overall AUM composition, then has it increased? It has definitely increased over past one year sizably. So is it by design or is it by demand? That’s question number one. Question number two is, sir, you had a recent ratings, I mean, outlook upgraded from [Indecipherable] right so how much — so does it give any benefit on the cost of funds and by how many bps? And third is I was looking at your segmental disposal momentum. So definitely, quarter-on-quarter basis, that has slipped. So is it because of the seasonality element? Or how is it like? And what is your guidance on overall growth outlook? Yeah, these are my three questions.

Rajesh Sharma — Managing Director and Chief Financial Officer

So our growth last year, we grew about 37% and that is the result of, of course, the increase in the demand and there is enough demand in MSME and affordable housing segment. There is the large opportunity for everyone. And that is the reason on the back of the demand, we are expanding the client network also. So to cater this demand, I think we are seeing our growth, our expansion and resultant AUM growth.

In regards to your question on the rating upgrade to positive, whether it is showing some decrease in the cost of funds. It is basically a step for the next rating upgrade because we are seeing the positive trend in the company’s performance and stability and everything else. However, cost of fund has not come down because of this because at the moment we are seeing the rising interest trend, and so there’s no cost of funds have come down. And if — with regard to disbursement guidance, as you have stated earlier, that will continue to grow between 22% to 27%. We maintain the same and that growth momentum we hope to achieve.

Shweta — Elara — Analyst

Sir, on the CF front, the composition as a percentage of overall AUMs have actually gone up sizably?

Rajesh Sharma — Managing Director and Chief Financial Officer

So overall, CF composition in one quarter might have gone up slightly. But overall basis, it will be demand in the overall range of 20% in consolidated basis.

Shweta — Elara — Analyst

Sure. Thank you, sir.

Operator

Thank you, ma’am. [Operator Instructions] We take the next question from the line of Mr. Jay [Phonetic] from Dolat Capital. Please go ahead, sir.

Jay — Dolat Capital — Analyst

Hi, sir. Thank you for the opportunity. Like mentioned — I have two set of questions. First is how do you see the impact of banks aggressively lending to retail and MSME segments? Would it impact the margins and pricing for the NBFC? And second question is also do you see fintech challenging you in the housing and gold loan segments?

Rajesh Sharma — Managing Director and Chief Financial Officer

So the very reason the banks have entered into co-lending arrangement with the NBFCs including the Capri, that the NBFC and Capri cater to the segment which banks do not cater. That is the reason co-lending partnerships are being — getting promoted by RBI and by the banks. So this is an entire different segment to which banks cater to and which NBFC caters to. So if bank is increasing their retail will not going to impact in a larger way NBFC because we cater to entirely different segments where customers are smaller, unorganized and do not suggest adequate income through people [Phonetic] and paperwork.

Yes. Your second question was? Can you repeat it, please?

Jay — Dolat Capital — Analyst

Yes, sir. And my second question was, do you see fintech challenging you in the housing and gold loan segments?

Rajesh Sharma — Managing Director and Chief Financial Officer

So I think in every emerging that fintechs are going to become originator, they still do not have that balance sheet. So fintech may become the origination partner in some time — at some point of time, but in no way fintechs are going to become a large lender in these segments. So, so far in gold loan, we have seen that fintechs are only originating. We are not sure whether they can do the large volumes or not. We are going in a big [Indecipherable] model, where we are going to open the branch network, exclusive to the gold loan branch network this year [Indecipherable] we intend to do about 1,500 branches strictly that year. And we see this fintech do not have the balance sheet. So they are not going to compete in [Indecipherable] cases. We may become a collaborator with them, but not a competitors.

Jay — Dolat Capital — Analyst

Okay, that’s helpful. Thank you so much.

Operator

Thank you. [Operator Instructions] We take the next question from the line of Gautam Gosar from Perpetuity Ventures. Please go ahead, sir.

Gautam Gosar — Perpetuity Ventures — Analyst

Yeah. Thank you for taking my question. So I have two questions. Firstly, in terms of disbursements for this quarter, we have disbursed majorly towards the consumption finance and indirect lending so while we were focused more on MSME and housing finance. So why the shift is my first question? And secondly, on your product mix. So whether you focus more on the gold loans going forward? And would it be a significant part of the overall product mix, given that it’s a high ROE business with better margins? And how will you be competing with the existing players, both banks and NBFCs? Yes.

Rajesh Sharma — Managing Director and Chief Financial Officer

So whether we have reduced our focus on the home loan or MSME, answer is no. Our home loan has seen a growth of about 7.8%. And our MSME has been relatively — has seen no growth because there were a lot of foreclosures we have seen, whereby it means that account underwritten by us has been taken over by some other lender at a much lower rate of interest, which speaks about our good underwriting standard. However, this MSME should come back to the growth from the next quarter. In any case, the first quarter always remains slightly muted kind of a quarter. And construction finance is grown about 11%. But overall, if you see construction finance portfolio is about INR6,900 crores, is about INR1,400 crores. So it remains in the 20% overall range and that is what it is. Our key growth driver going forward is going to remain MSME and home loan. If you talk about gold loan, in the next five years, it may have about 25% of AUM on overall basis and that is [Indecipherable].

Gautam Gosar — Perpetuity Ventures — Analyst

Okay. Thank you.

Operator

Thank you, sir. [Operator Instructions] We take the next question from the line of Ritu Kana from Growth Capital. Please go ahead.

Ritu Kana — Growth Capital — Analyst

Thank you for taking my question. Regarding the growth in incremental yields and with more rate, right, this will go up as well. So [Indecipherable] rate do you think the industry and the customers can take without impacting the growth?

Rajesh Sharma — Managing Director and Chief Financial Officer

Can you repeat the question, madam, your voice was little breaking.

Ritu Kana — Growth Capital — Analyst

Yes, sure. Am I audible now?

Rajesh Sharma — Managing Director and Chief Financial Officer

Yes.

Ritu Kana — Growth Capital — Analyst

Yes. So with the growth in our incremental yield and with more rate hikes, which will go up as well, so how much more rate hikes do you think the industry and the customers can take without impacting the growth?

Rajesh Sharma — Managing Director and Chief Financial Officer

So as far as our customers are concerned, which I’m assuming affordable housing side, which are basically small and the loan ticket sizes between — average ticket size is 17 lakhs in MSME, about 12 lakhs in home loan. These are the customers who are more interested to give their timely fund then 1% or 1/2% here and there. So I do not think that increase in the rate of interest is going to impact the demand in any case. In any case, this smaller business model of MSME and these home loan borrowers run on return on their first shop and return on equity. So this availability of funds is more critical to them. And whatever interest rate hike that we have as we have seen in past, I think more or less interest rates have stabilized and at the most maybe 25 basis another hike may happen, I’m not very sure about it. But we shall be able to pass on at least all the floating rate customers the entire rate hike.

Going forward, already our interest rate card has changed already. So if it is a new loans are booked maintaining our same net interest margins. It is going to impact us in some way for the only spaces where loan has been given on a semi-fixed basis. But that is a cycle we see when the interest rate is going down. Those loans are not reducing rate. When interests are going up, those loans are not doing any hike. So that is a very balancing factor in long term.

Ritu Kana — Growth Capital — Analyst

Got it. Got it. And how [Indecipherable] are we done under co-lending both in MSME and housing finance? And any plans of tying up with private banks as well?

Rajesh Sharma — Managing Director and Chief Financial Officer

So we are seeing that rate of interest advantage lies with the PSU bank. They are able to offer the effective rate of interest. And we have tied up with the largest bank of the country, which is SBI and then Union Bank. Both banks are giving attractive terms. In the first quarter year, we booked about INR2 billion under co-lending. And as we have told earlier, we’ll continue to do this, about INR600 billion in the entire year. That is our target. So co-lending will give us a good ROE, about 25% kind of ROE, this co-lending arrangement on the account because we have to provide very less capital to it.

Ritu Kana — Growth Capital — Analyst

Okay. Got it. And what will be the total amount of top-up loans disbursed during this quarter? And what amount of the loan disbursed to the existing customers versus the whole customers in this quarter?

Rajesh Sharma — Managing Director and Chief Financial Officer

This detail may not be available at the moment. And if you can write an email to us, we can give it to you.

Ritu Kana — Growth Capital — Analyst

Thank you so much sir for taking my questions. That’s all from my end.

Operator

Thank you, ma’am. [Operator Instructions] Ladies and gentlemen, that was the last question for the day. I now hand the conference over to Mr. Rajesh Sharma for closing comments. Thank you, and over to you, sir.

Rajesh Sharma — Managing Director and Chief Financial Officer

Yeah thank you, Seema. So as we have said, we have continued to remain in the retail lending side. Our 80% portfolio is going to remain secured retail lending. And on that path, we’ll continue to grow. And we see MSME affordable housing and gold loan, all these segments where we are in are a huge opportunity, there’s a huge gap exists. So next five years is a big runway for us, and we are quite confident of good times ahead. Our field, the car loan origination is generating very good fee income for us and that will be in an add in equity.

Overall, we are quite confident that, yes, we are on a growth path and that is the reason we have decided to bring the rights issue with notice and 75% stake. And we’ll be committing this kind of capital. The right issue size is about INR1,200 crores, and that will take care of our future next five-year growth requirements. Thank you. Thank you so much.

Operator

[Operator Closing Remarks]