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Edited Transcript of ADTB.NS earnings conference call or presentation 2-Aug-19 12:00pm GMT

Q1 2020 Aditya Birla Capital Ltd Earnings Call

Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Aditya Birla Capital Ltd earnings conference call or presentation Friday, August 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Srinivasan

Aditya Birla Capital Limited - CEO

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Conference Call Participants

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* Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst

* Devansh Vajani;Vajani Securities Pvt. Ltd.;Director

* Keshav Binani;HDFC Securities;Equity Research Associate

* Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director

* Piran Engineer

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Prakhar Agarwal

Edelweiss Securities Ltd., Research Division - Research Analyst

* Saptarshee Chatterjee;Centrum;Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q1 FY '20 Earnings Conference Call of Aditya Birla Capital Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Ajay Srinivasan, Chief Executive, Aditya Birla Capital. Thank you, and over to you, sir.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [2]

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Thank you, and good evening, everyone. Thank you for joining us on this Friday evening for our quarterly call. I'm joined here by my senior team from all our businesses to answer questions that you might have at the end. The deck that we're going to be talking through has been circulated. I hope you have a copy of it. I'm going to be referring to the page numbers in the deck that has been circulated.

I'd like to start with Page #3. And basically saying, we've had a very strong all-around performance across all our businesses and all our pillars of protecting, investing and financing. If I start on the left-hand side of the page, which is our protecting vertical, you'll see our total premium has increased by 5% year-on-year. This number is muted because of our group business, especially in the life insurance business, which has actually degrown quarter and year-on-year as a conscious decision that I will be talking about subsequently. But the value-creating individual businesses in our life insurance and health insurance businesses have shown very strong growth.

In our life insurance business, you've seen a 30% individual AP growth, almost twice the level of the industry ex LIC. Our net VNB margin has improved by 157 basis points over the same time last year. And in health insurance, GWP has basically doubled since last year to INR 150 crores, with a retail mix of 64%. As I said, the individual businesses in our insurance businesses, both life and health, have shown very strong traction in the first quarter.

The middle section of this is our domestic assets under management for our AMC. And you can see that, that has grown by over 2% year-on-year. Our PBT in our asset management business has increased by 20% with PBT to AUM at 28 bps, which is 5 bps higher in year-on-year. Our SIP which has been a focus of ours for a long time, SIP AUM has grown by 34% year-on-year and now SIP constitutes about 34% of our domestic equity AUM. Our domestic equity mix is steady at 36%, with overall equity AUM at INR 1 lakh crore.

The financing column on the right-hand side includes our NBFC and our housing finance company. Total lending book is just under INR 62,000 crores. That's up 16% year-on-year. Our NBFC profit has grown 20% year-on-year, with NIM expanding by 50 basis points to 5.4%. Our housing business profit before tax has grown 3x year-on-year. And in a market which has been looking for liquidity, we have raised INR 4,000 crores of long-term borrowing. As I'll share in subsequent slides, we have a very disciplined ALM management across all buckets in both our businesses.

Let me now move on to Slide #4. Our key financials for the quarter. As you see from the left-hand side chart, our revenue is up 16% to INR 3,962 crores on a consolidated basis, and our profit after-tax after minority interest is up 27% to INR 270 crores. This performance is again underpinned by strong growth across all our businesses, which is visible on the right-hand side of this chart. You'll see our NBFC has grown profitability by 20%, asset management profit growth is 20%, our life insurance business profit has grown by 13%, housing business profit has tripled, our general insurance booking business profitability has grown by 60%, our stock and securities broking business has increased its profitably. So if you look at all our profitable businesses, the profitability is up by 25% year-on-year.

And then we have the items below the profitable businesses line. So our health insurance business has maintained its loss at the same level as it was last year. We suggested last year that we hit the peak loss, and therefore loss would now only come down quarter-on-quarter.

And if you look at the last line, which talks about the loss in other businesses, I think this shows the moves we've been taking to actually deal with the loss that we have in our loss-making businesses and looking at different approaches to actually minimize this.

Slide #5 is a slide that will take you back in time to show you our profit growth on a IGAAP basis over the last 5 years. As this slide shows, we have a CAGR in terms of PBT of 21% per annum between FY '14 to FY '19. As I have already indicated to you, Q1 FY '19 to FY '20 is a 29% growth, so it's higher than the CAGR we've seen over the past. But one reason I want to share this slide with you is that this CAGR of 21% per annum that you see on the top is in spite of making multiple investments in different businesses that I'm going to be talking about at the bottom of this slide.

So if you look at the bottom of the slide in the life insurance business in FY '15, we had a profit before tax of INR 286 crores, that in FY '19 came down to INR 158 crores, partly as a result of the exit of a partnership with Citibank, partly as a result of regulatory changes. But very clearly as you see from the discussion that I'm going to have on the life insurance business, this business is on track for a very strong rebound. The net VNB was negative in FY '15. As you know last year, we declared a positive net VNB of 9.5%. Our product mix is very different today than it was compared to FY '15, a much more higher-margin product mix than we had before. And we are investing in building really scale by [sub] channels. So the point is that as you see this number -- as we start building scale and profitable scale in this business, you will start seeing that reflecting in the growth overall of our numbers.

Similarly, if you look at the housing finance company, we set this business up in FY '15. You were losing INR 30 crores in FY '16. We broke even in FY '18. And in FY '19, we declared a profitability of INR 100 crores PBT. So partly, there is a loss in the above numbers. And as these numbers start turning, we'll again start seeing that impacting the overall CAGR of profitability.

And finally, our health insurance business, which we continue to invest in. We've said before that this is a business that we aim to break even in '21, '22. We've already hit the peak loss in Q2 of FY '19. So as this loss again starts decreasing, I think you should see the impact of that on the profitability of the business as a whole.

Moving on to Slide 6. I just want to talk a little bit about the ABC platform and what the ABC platform does to actually bring the separate businesses that we have underneath together and what value it brings to the table. I'm going to be talking about 7 things on this slide. The first I think is the platform actually is a set of diversified businesses, and that has 2 sets of benefits for us: one, there is obvious risk diversification because you have different businesses sitting under single platform; but second, these businesses actually need distinct customer needs and there is hardly any overlap between any 2 businesses. So this gives us this ability to meet the lifestyle needs of our target customers, something we think is a very unique proposition to Aditya Birla strategy.

Second, we have multiple businesses at very different stages of scale. I've already spoke about a health insurance business we're doing, a housing finance business that's really in its infancy. But in spite of that, today, we have about -- last year we would have ended with INR 8,000 crores of premiums, over INR 3 lakh crores of assets under management and more than INR 60,000 crores of lending. And these are by no means small numbers relative to the context of the market that we are operating in.

Third, I think our ability to transport best-in-class practices from one business to the other is facilitated by the platform that we run. So we don't have to reinvent the wheels. Anything that works well in one business has the ability to be transported into another business straightaway.

Fourth, I think from a people side, we have a world of opportunity for our employees. And this really means the ability to provide opportunities for our talent across the platform. So this allows us to both acquire and retain top-quality talent because they have a career opportunity now across multiple lines of business, not just a single line of business.

Fifth, the platform is inherently built for cross-sell, and we're driving cross-sell of products to various customers in the platform. And a good example of that is the bundling of our health and life insurance with other known products that we sell through our NBFC and housing finance company.

Sixth, I think there are significant benefits of cost synergy across the platform. Again, as I said, we don't need to reinvent the wheel multiple times, and we have the ability to create a central structure that is able to support the multiple businesses that sit underneath.

And lastly, I think this platform has the ability to leverage not just the individual companies that sit underneath the platform with various businesses that are within Aditya Birla Capital, but it also has the ability to access the broader ABG ecosystem, which we think is a very rich ecosystem where a lot of our business is to be able to capitalize on.

Let me now deep dive into our individual businesses and move to Slide 8 and start with NBFC Aditya Birla Finance. Aditya Birla Finance loan book year-on-year grew by 13% year-on-year. But within that, our SME and retail book grew by 25% year-on-year. As you know, this has been an area of focus for us. We've always talked about SME and retail growing faster than our overall loan book, and that is borne out by the numbers here, 25% growth year-on-year in SME and retail versus an overall loan book growth of 13%. Our NIM has expanded by 50 bps to 5.39% from Q1 FY '19 to Q1 FY '20.

Our PBT at INR 401 crores grew 20% year-on-year. And for the first quarter, our ROE is 14.9% and ROA at 2.1%. So I think a good set of results in the market conditions that we are operating in.

Moving on to Slide #9. I want to just walk you through the individual segments that we cater to through our NBFC. As I mentioned earlier, SME and retail together grew by 25% year-on-year. Within that, the SME business grew by 20% year-on-year, which accounts for about 27% of our total book. Our retail business grew by 36% year-on-year. Of course, it's a slightly lower pace. It now constitutes about 15% of our total book.

If you look at the bottom of Slide 9, you see our SME average ticket size about INR 7 crores. You see that the term loan and working capital loans that we do to our SMEs are backed by cash flows and adequate security cover of 1.75x. Our retail average ticket size is about INR 7 lakhs. On LAP, our LTV is about 50%. And 85% of the loans that we give have the borrower's office or residence as collateral. So we see that's good quality collateral. And the overall LAS book is actually reduced by about 10% in Q1 of FY '20.

Now move onto Slide #10. I just want to draw your attention to 2 points on this slide, which is really talking about our large and mid-corporate exposure. This exposure grew 6% year-on-year, but actually Q-on-Q is down by about INR 800 crores. So you'll see the book of INR 24,426 crores in Q4 of FY '19 is down to INR 23,615 crores in the Q1 of FY '20.

And if you look at the right-hand side of the chart, I'm not going through all these detail as I've talked about that before, but I think the important point to note here is how the average ticket size across each one of our products that we speak about has actually reduced since prior year. So whether you take the term loan or project loan or structured finance, you'll see the average ticket size actually dropping, which is an effort by us to actually work more granular level of exposure here and reduce larger exposures.

Slide #11 will talk about the quality of our loan book. As we've always said, we have a secured loan book of 80% of our total book and we are largely focused on cash flow-based underwriting. That's always been our approach from the day we started. We continue to maintain robust asset quality. Our gross stage 3 number for -- 1.24% for the quarter. Previous quarter number was 1.05%. There is an expansion in NIM even post the credit cost, which has been led by our pricing across segments, so we price our products for the ECL that we see and that we expect in those products, and therefore you'll see an expansion in NIM post the credit cost, which is really a function of the design of the product itself.

As we mentioned before, we have INR 220 crores of exposure to 4 IL&FS entities. These are in various stages of resolution. All of these are categorized as stage 3, and we've already provided for these on the ECL, I've discussed that before, so I'm not going to talk about it now.

Slide #12 talks about our borrowing costs and our NIM. So Q-on-Q, our borrowing cost is increased by about 2 basis points. I think we've done well to contain our cost increase in the interest rate environment we're working in. But as you'll see from this chart here, you'll see that the cost of borrowing as the NIM increases actually been greater than the cost of borrowing, and that is a function of our change in product mix, our ability to pass on our borrowing cost to -- the increase in cost to our borrowers and the prudent treasury management that we do, along with the diversified borrowing mix that we have at Aditya Birla Finance.

Slide #13 will talk about our ALM. And I think you'll notice, there's significant improvement even since the last time we spoke about our ALM on this slide. We used to be matched up to a year's time. Now we have actually matched across all buckets as you will see on this chart. We've raised long-term borrowing of INR, 3,500 crores in Q1. And I think this has helped in terms of swing the ALM as you see above. We have adequate liquidity to meet our growth requirements. In fact, we have undrawn CC lines of about INR 3,800 crores, which are not included in the ALM numbers that I have shown above.

In addition, we are actively pursuing overseas funding through EBC and have recently received a sanction of $100 million, which we'll be looking to draw down as and when we can. We continue to broad base our investor profile. Our investor -- our institutional investor base has increased significantly since the prior year, and we maintain very comfortable capital adequacy at 17.6%.

Slide #14 will just give you a sense of how we're navigating this business through the situation we're in currently in the economy, a lot of little stuff as we've already been doing, but I just want to reiterate what we're doing and how we're dealing with the issues that we are facing on hand. And the main 4 buckets I want to talk about here. The first is our product and customer strategy. As we've always said, we continue to focus on SME and retail sector to drive our growth. That focus will continue. We've recently launched several new products in the retail consumer loan segment. We will be scaling up each of these products to be able to grow our focus in the retail consumer space.

We're looking to build a broad-based sourcing engine. This will have several components to it. First, we will be looking to expand our physical footprint in smaller cities, which will lead to new customer base along with lower ticket sizes. We're also looking to grow our existing and build new partnerships, so that we can gain customers at larger scale. There is a program active across Aditya Birla Finance for cross-sell of loans and wealth products across all lines of business. And of course, we are always looking to leverage the broader ABG ecosystem.

Our technology investment has been a high area of focus at Aditya Birla Finance. We're looking to automate customer journeys now across all the various business segments that we operate in. And we're further strengthening our collection infrastructure, including automation of processes in collection.

And finally from a risk management perspective, while we've always focused on cash flow-based underwriting, what we're doing additionally in this market condition is really just strengthening our stress testing of cash flows to make sure they stack up from an underwriting perspective before giving any credit to any borrower.

Slide #15 will give you the key financials of Aditya Birla Finance. As I said, our lending book has grown by about 13% year-on-year, but our net interest income grew by 28%. That's the result of the expansion in margin. And our profit before tax has grown by 20%, which I've already referred to earlier.

Let me move to our second lending business, Aditya Birla Housing Finance, and I'll start with Slide #17. This business has a lending book of about INR 11,830 crores as of the end of Q1. That's an overall growth of about 29% year-on-year. Our affordable book within that was about INR 1,700 crores. The scale that we've built has given us significant benefits in terms of cost-to-income ratio, which as you'll see from this table on the right-hand side has come down from 73% to 47%.

We maintain a high-quality asset book in our housing finance company. Our gross stage 3 assets here are 0.67%, which is exactly the same level as it was in Q4 of last financial year.

Our profit before tax has grown 3x year-on-year. So Q1 PBT is at INR 39 crores versus prior year number of INR 13 crores. As a result of all of this, you'll see a significant improvement in our ROE and ROA, as you can see on the right-hand side of the chart on Slide 17.

Moving on to Slide 18. I just want to give you a little bit of a sense of the product mix that we have and the customer mix that we have at housing finance business. So if I look at the left-hand side of this chart, you'll see about 70% of our portfolio is actually home loans between what we call prime home loans and affordable home loans and the balance 30% is split between 23% LAP and 7% construction finance. In LAP, our ticket sizes have come down since last year, so ticket size now is INR 53 lakhs versus INR 69 lakhs last year. And here, we operate with an LTV of about 48%. Construction finance ticket sizes tend to be quite small at INR 19 crores as you'll see over here with the average ticket size on sanctioned projects.

On the right-hand side of this chart is our customer mix for both our home loans and our affordable home loans. Our prime home loans largely meet self-employed customer needs, although we have 30% salaried employees there. But in the affordable segment, the numbers are slightly reversed, so you'll see 60% of our customer base there are actually blue-collar workers to whom we're giving affordable housing loans. Our average ticket size is about INR 12 lakhs. 21% of our affordable home loan portfolio is actually backed by the guarantees, and 39% of our affordable home loan portfolios are eligible for the Prime Minister's subsidy. So we think we're building a very different category of customers here in different geographies of India.

Slide #19 will show you the geographic mix. So if you look at our geographic mix, it's broadly the same as it was last quarter, which, as I've always said, is roughly replicating the way income itself gets distributed across India.

On the right-hand side of this chart, our focus in terms of growing our branch network and building a nonmetro branch presence is yielding results because you see our nonmetro loan book is now at 51% of the total, prior year it was 43%. And this is on the back of a 60% growth in our home loan book in the nonmetros compared to a 16% growth in our book in the metros. As you know, we started this business, obviously, we started with the metros and we're now increasing our footprint, and that is showing in the way these numbers are actually panning out.

Slide #20 is similar to the slide I shared with you in our NBFC. Similar to our NBFC, we've optimized our borrowing costs in a volatile interest rate environment. And we've maintained margins across interest-rate cycles as you see on the bottom chart. This really demonstrates our ability to successfully pass on borrowing cost increases and manage product mix in the environments in which we operate. So you'll see our NIM is roughly the same as it was in Q4 of FY '19.

Slide 21 is, again, an ALM chart similar to the chart you saw for Aditya Birla Finance. As with Aditya Birla Finance, we are optimizing our ALM here for liquidity and cost. We have raised long-term borrowing here of about INR 800 crores in this quarter. Again, here we've received one sanction for $100 million through an ECB route, and we will look to continue to pursue other opportunities to raise money through offshore sources.

And again here, we have undrawn CC limits of about INR 1,500 crores, which are not considered for the ALM above. Our investor base in this business, too, continues to diversify, and we're getting now funding from 18 banks as well as getting refinance from NHB. And as with our NBFC, our capital adequacy ratio here is again very comfortable.

The financials of our housing finance business on Slide 22, you'll see our lending book has grown by 29%, where our cost-to-income ratio is down by 26% as the result of the economies of scale, which has led to profit before tax tripling year-on-year.

Let me now move on to our asset management business on Slide 24. Here, you will see we've maintained our domestic AUM market share, so -- over the previous quarter. Previous quarter market share was roughly 10.56%, 10.57%, and our domestic AUM market share is roughly at the same level this quarter as well. We've actually grown market share a little bit in our fixed income segment. That's grown quarter-on-quarter. Our domestic equity AUM mix is steady at 36%. And our SIP book, as I've mentioned earlier, is now 34% of our total equity AUM. Prior year it was 27%.

Profitability in this business grew 20% year-on-year to INR 175 crores. And on a margin basis, which is nearly our PBT as a percentage of AUM, we're actually at 28 basis points, prior quarter it was 29 basis points. But same time last year, it was 23 basis points. So we expanded about 5 basis points year-on-year and been virtually flat on a quarter-to-quarter basis.

Slide #25 will show you our focus on retail. Again, this is the slide we've discussed earlier. We continue to talk about our focus on retail in terms of growing retail penetration through geography, through increasing our investor folios as well as doing it through increase in our SIP book. To our HNI and retail, AUM is about INR 125,000 crores. Our retail AUM has grown about 1.7x over the last 2 years. We continue to focus our growth in the B-30 cities. So our market share there is actually increased. Prior quarter, our market share in the B-30 cities used to be 8.77%. It is now 9.11%. And B-30 contributes about 34% of our retail AUM.

Our investor folios have grown very strongly to 7.1 million folios. This is up 1.6x in the last 2 years. And our monthly SIP book is over INR 1,000 crores. It's grown about 1.6x over 2 years. And our SIP market share is roughly 11.5%, which is a very significant share in the industry in which we operate.

Slide 26 will talk about our distribution network. Both our overall numbers and in equity, I only want to call out one thing saying that we continue to look to grow the IFA share in our equity sourcing as you'll see that has actually gone up. So IFA used to contribute 44% of our equity in same time last year, they now contribute 47% of our equity in Q1 of FY '20.

We continue to strengthen our distribution network. We now are present in 300 locations. 75% of these locations are B-30 cities, and we continue to expand in these cities. We're also looking to increase our IFA network, so we've added almost 7,400 IFAs over the course of last year.

Slide 27 will talk to you about the financials of Aditya Birla Sun Life Asset Management Company. Domestic AAUM has grown by 4%. Profit before tax has grown by 20%. And as you'll see, our profit before tax in terms of bps has grown from 23 bps to 28 bps year-on-year.

Let me move on to our life insurance business and take you to Slide #29. Here, we have a very fast-growing franchise that is creating significant value in our view. Our individual FYP, as I mentioned at the beginning, grew by 30% year-on-year. That's significantly higher than the industry growth of 15% and the private industry growth of 23%. We have a very balanced distribution mix here. Partnership channels contribute about 50% of individual FYP and the balance is contributed by our proprietary channels.

Our market share, as a result of our growing higher than industry, has increased to just under 4%. And we continue to be ranked #7 in terms of individual business.

Our net VNB has improved by 157 basis points year-on-year to negative 7.8% versus negative 9.4%, which it was same time last year.

We've also made a shift towards a higher-margin product mix in our group business, which as I mentioned at the beginning and I'll mention, again, here. So we're shifting this business now to become much more a value business than a volume business because we see value being created in this. This is a value-created business for us and we're just trying to make it more value accretive as we go forward.

Slide 30 will show you one of the big drivers of our value creation, and that's the product mix. We believe we've got a very balanced product mix across different categories of products. But if you look at the trend here over the last 2 years, we've increased our protection mix from 5% to 8%, and we've reduced our ULIP from 35% to 32% and increased non-par from 23% to 35%. All of this has meant margins have increased. So if you look at the right-hand side of the chart, you will see our margins at 34.4%, which we think is amongst the highest in the industry. Our gross VNB grew by 19% year-on-year. I've already mentioned the net VNB number of minus 7.8%. I just want to highlight that Q1 of FY '19, our net VNB was minus 9.4%. We ended fiscal year '19 with a plus 9.5% for the year net VNB. So I think we are very much on track for a very good net VNB number this year as well, having started at minus 7.8%, about 160 basis points lower than where we were same time last year. There are various factors that have contributed to the improvement in net VNB, including the higher volume and productivity, the balanced channel mix and, of course, better product mix.

Slide 31, I want to talk to you about the distribution capacity and capability we've built at Aditya Birla Sun Life Insurance. We're driving growth through partnerships and operating leverage in our proprietary channel. We each have 9 banca tie-ups, including large banks, HDFC Bank being the largest and also DCB and KVB. We do have a pan India presence across 2,700 cities. We have 87,000 agents of our own. We operate through 7,300 bank branches and 400 branches of our own.

We are clearly looking to scale up the HDFC Bank partnership. The last year was the first year of the HDFC Bank partnership in the mode of scaling it up, and continue to see -- continue with large opportunity to be able to do that.

While that's happening, we're looking at our proprietary channel to contribute to margin improvement and be much more value accretive, which you can see from the bottom chart has been driven by the product mix. So you see the product mix for our proprietary channel is much richer in terms of protection and much lower in terms of ULIP, which just makes it much more value accretive for us. And we're also looking at increase in productivity. And all of this means that our proprietary channel is actually becoming much more value accretive for us in the business.

Slide #32 is an important slide because this focuses on all the efforts we've been making in terms of improving the quality of business. Starting with persistency. In fact, you'll see from this chart, persistency has improved in all cohorts by a fairly significant margin over the course of the last year. Our 13-month persistency is now at 78%. It used to be 72% last year. As HDFC Bank which will complete 13 months from July, as that cohort will start joining this, we think that the persistency will go up further because the HDFC Bank experience actually is better than the average that we currently have in terms of persistency.

We've also had a strong focus on customer retention. Our individual renewal premium has grown by 20% year-on-year and there is a continuous improvement in surrender ratio, which you'll see from this chart on the right-hand side.

We focused on reducing complaints, and complaints are down by about 50% over the last 2 years. We also focus on improving our claim settlement ratio that tells you the moment of truth for our customers. And as you'll see the claim settlement ratio has actually improved significantly from FY '17 to FY '19.

Slide 33 will talk to you about the assets under management in our life business, which is about INR 41,000 crores. And on the right-hand side, you'll see that basically across 1-year and 5-year, all our funds are beating the internal benchmarks. So we have robust performance against our internal benchmark despite some fairly volatile market conditions in which we operate.

Slide #34 will give you the financials of Aditya Birla Sun Life Insurance. Individual first year premium up 29%, renewal premium up 20%, OpEx up only 16% in spite of individual premium being up by 29%. So significant gain in productivity has been visible. And as a result, the profit after tax has increased by 16%.

Moving on to the health insurance business. This is a business that's growing very strongly. Our premium here has doubled with an increase in retail mix. Our retail mix now is about 64%. It used to be 61% same time last year. We're now covering almost 3.7 million lives in this business, and that's a very big jump from prior year number of 1 million lives. So we're really building a very significant franchise in this business.

Our retail claim ratio is down compared to last year, with 45% versus 46% that it used to be last year. Our combined ratio has come down significantly from last year. Last year same time, it was 190%, whereas this year it's 146%. And that gives us the confidence that we are on a steady path to breakeven. Our PBT loss for this quarter at INR 65 crores. And as we've said, our peak loss was Q2 of last year being INR 73 crores.

Slide 37 is very similar to the slide we showed you for our life insurance business. We showed you the capacity that we build up in terms of distribution and provider network in the health insurance business. We think this is a fairly significant capacity for any business operating in India. We have 10 banca tie-ups, including tie-ups with HDFC Bank and Axis Bank, which will go live soon. That gives us access to over 10,000 bank branches to our banca channel. We think that the monthly utilization of the capacity that we have still leaves us significant upside potential. This is a young business and the banks we're talking about are significant banks. So we think there's significant upside opportunity in this business as we leverage more of the distribution capacity that we have.

We also have one of the largest provider networks in the country today. We are tied up with over 5,800 hospitals across 850 cities, so our customers can basically access us across-the-board.

There's a big push in this business for both digital and wellness. So over 90% of our policies are actually issued digitally in this business. We are very focused on engagement and wellness. We've seen the customer app usage actually increase at 35%, and this allows us to engage with our customers much more often than traditional health insurance players who typically have "buy it and forget it" approach to their business.

In terms of servicing, we are an industry first in terms of adopting servicing via WhatsApp. And that allows us, again, to meet our customer requirements in a way that they would like us to meet their requirements.

Slide #38 is a slide that talks about the basic business model and proposition that we have in our health insurance business, which is really to expand the market through our customer value proposition. Traditionally, the market is a market that caters to people who are 30 to 50 years old, many people who are actually employed and get this cover through their employer. We are looking to expand this market because we see a big opportunity for health insurance in India. So at one end, we're looking at attracting a younger customer base through our incentivized wellness products. At the other end, we are actually being able to cater to the needs of nontraditional segments. This includes people who have chronic conditions as well as people like senior citizens, who don't traditionally get covered by the current industry. What this means is that we are today have an average age in our customer base which is 5 years lower than the industry, and that is one factor that has driven our lower claim ratio, but also we have a customer value proposition therefore that allows us to acquire customers at scale. And with our basic model being a model of engagement and holistic health, this allows us overall to lower claims and higher customer stickiness. So we think this is the core of our business model and the core of the value proposition that delivers the business model that we are running at our health insurance business.

Slide #39 will talk about the key value drivers for this business. The first is just the way the geographical reach actually works. So about 39% of our business comes from nonmetro. This was 32% last year. As I mentioned before, there's a lower cost of delivery in nonmetros, and therefore, as we increase the proportion of nonmetros, that is value accretive. We have a high share of fixed benefit products in our mix, and that is, again, value accretive.

The banca channel is driving scale for us. It contributes about 61% of our retail GWP. Last year, that number used to be 54%. I suspect this number will go up as Axis Bank gets active from this quarter. And all this is leading to improvement in our expense ratios, which you'll see on the right-hand side has come down from 133% to 82% year-on-year.

So Slide 40 will show you our -- the key financials for Aditya Birla Health Insurance. Our retail premium has basically doubled, our gross written premium has basically doubled, our combined ratio has come down significantly from 190% to 146%. And that's lead to a profit before tax broadly staying the same quarter-on-quarter.

Just the last slide in terms of our other financial businesses, and I'm talking about Slide 42. If you look at this slide, you'll see that our aggregate profit before tax from our other financial businesses has actually grown year-on-year from INR 3 crores last year to INR 21 crores this year. That is driven partly by the strong growth in profitability in the 2 businesses mentioned below, our general insurance broking business and our stock and securities broking business, but also had a reduction in losses in our loss-making businesses, which we -- as I've said, we're looking at different approaches to make sure we can curtail those losses.

So that's the presentation on the various businesses. I'll stop here, and be happy to take any questions along with my team. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Saptarshee Chatterjee from Centrum Portfolio Management.

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Saptarshee Chatterjee;Centrum;Equity Research Analyst, [2]

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My first question is on the NBFC business. So you are saying gross stage 3 some kind of uptick in this quarter over March. So from which segment it is majorly coming? And what is our stage 2 percentage?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [3]

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So your first question on stage 3, there's 1 mid-corp account which has flowed in. So that's -- and also, if you see our strategy has been to drive SME and retail business, which by nature and the risk/reward metric which we follow, that will -- that has increased. So 50% of our ECL is coming from our retail and SME segment. So that's how it has gone up by 20 bps.

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Saptarshee Chatterjee;Centrum;Equity Research Analyst, [4]

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Okay. And what is stage 3 for corporate segment individually, if you can share?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [5]

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So it's been flat. It hasn't gone up.

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Saptarshee Chatterjee;Centrum;Equity Research Analyst, [6]

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Okay. And my second question is on the insurance business. So I think we have seen some kind of heightened competition in the HDFC Bank branches. So I just wanted to have a sense on what kind of activation level we are working on? And to what extent we can increase that? So can we -- this kind of 30% growth level will be -- will it be sustainable for the entire full year? And what kind of net VNB we are targeting maybe next 1 and 2 years?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [7]

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So our activation are in the range of around 45% to 50% for the branches for HDFC Bank. And we -- our projection is that it will improve month-on-month as they are more in the system. What was your second question?

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Saptarshee Chatterjee;Centrum;Equity Research Analyst, [8]

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My second was growth...

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [9]

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Yes. So in terms of net VNB, last year we closed at around 9.5% positive. Our expectation is this year will be a better year than last year and we should be closing in early double-digits.

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Operator [10]

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(Operator Instructions) The next question is from the line of Ronit Ramesh from [Back to Back] Funded Managers.

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Unidentified Analyst, [11]

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I just wanted your view on the SME sector. What's happening right now in terms of -- are there any -- are we seeing any stress in the SME or retail sector right now based on how the economy is in the last 1 or 2 months?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [12]

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So there are certain sectors within the SME which is going through some challenges at this point in time, especially auto. Gems and jewelry was already going through its own challenges. Real estate is another. So there are sectors which are going through its own challenges at this point in time. We have been very, very cautious in terms of which kind of SME and which sector we want to really operate in. So our complete emphasis is on a very strong cash flows and the SME's ability to pay. So these are the things -- at this point in time you're right, there are certain sectors which are going through its own challenges.

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Unidentified Analyst, [13]

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And in SME, do we use any type of proprietary technology in terms of lending, like algo based or anything like that?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [14]

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No. We emphasize on the cash flows of the SMEs, pure cash flows. And that's how we really underwrite these SMEs. And in the given environment, what we are trying to do is that we are stress-testing the cash flows as well. And these are fully collateralized. These are all secured.

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Operator [15]

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The next question is from the line of Prakhar Agarwal from Edelweiss.

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Prakhar Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [16]

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Couple of questions. So when you look at your lending NBFC businesses, we have actually softened out on growth when you look at overall growth. So any target on that? And what is your ROA/ROE target, first?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [17]

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Your first question, if you look at in terms of the growth and I will answer that question. SME and retail, we have grown by 25% year-on-year, and we believe that we will be able to continue that sentiment in the same range of 25%. In terms of corporate and institutional, we will -- I think it will completely be driven by the risk appetite. So we should be in the same range.

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Prakhar Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [18]

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Okay. And sir, ROA/ROE that you're probably seeing over the period, so we have earlier guided for 2% and 14%, 15% ROE. So any change in that targets or probably we stand by...

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [19]

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So our H1 numbers, I think the way we look at, the H1 should be at around 14% ROE.

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Prakhar Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [20]

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Okay. Okay. And sir, anything on your structured finance book, if you could just elaborate on that? And what is your view on your construction finance? These are the 2 segments wherein if you could provide some clarity on that.

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Unidentified Company Representative, [21]

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So structured finance, like we said before, I think the people asked this question, I think the implicit question is whether there is real estate in the structured finance. There is no real estate in our structured finance. These are regular structured finance transactions, which are very well collateralized, and therefore, we have a very good experience with them, and they give us a yield pickup. Your second question on construction finance, we only deal with the top-level developers. In fact, the quality of our book has remained very strong through all of the cycles that we've seen in the last few years.

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Prakhar Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [22]

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Sir, any concerns that probably you'll see emerging any red flags that is emerging on developer side, at least in your book?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [23]

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Not in our portfolio.

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Unidentified Company Representative, [24]

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Our portfolio is relatively very, very small if you compare to our book size. Our developer finance is only 6% of our overall portfolio. And completely, as Ajay mentioned earlier, to the top developers, and it's quite under control at this point in time.

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Operator [25]

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The next question is from the line of Piran Engineer from Motilal Oswal Securities Limited.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [26]

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Congrats on the quarter. Most of my questions have already been just asked. But just one or 2 more, maybe if you could give us a sense of firstly the sectors that you lend to in corporate? And secondly, even give us maybe a mix of the loan book as per the credit rating of the borrowers. So how much would be maybe rated A and above or BB and below? So some such sense would be helpful.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [27]

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So our book is basically extremely diversified. I keep talking about diversification being a key strategy of ours, whether it be Aditya Birla Capital level in terms of businesses that we have or in terms of geographies, standard products, customers. So even in the industry, actually we are completely diversified in our NBFC book in every segment as well. So I think that's the answer to your first question. So we really don't have any large exposure to any particular segment.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [28]

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Okay. And just in terms of maybe the credit rating of the borrowers, some sort of flavor on that would be helpful.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [29]

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I mean, I don't have an answer overall because it's a very diversified book with all kinds of borrowers there. But I would say the quantity of the credit rating will be reasonably high for our large corporate book. So anybody more than INR 7.5 crores, INR 10 crores of exposure, if I look at it, the portfolio quality would be very high.

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Operator [30]

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The next question is from the line of Adarsh Birmecha from Bajaj Holdings.

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Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst, [31]

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Congrats on a good quarter. Sir, actually just wanted to get an understanding of our exposure to the Zee/Essel group basically in the mutual fund business that we have. I think as of June, the exposure was quite high. And what is your sense on what's going to happen in Zee as of September?

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Unidentified Company Representative, [32]

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Mutual fund, the investments are broadly into the 3 funds, which are credit-oriented funds and also have got approval in (inaudible). The total exposure that we have against Zee loan against shares is about INR 1,500 crores roughly. And road assets is about INR 1,000 crores, INR 1,050 crores. Zee resolution that they've announced last week as of that plan, we will likely to get 50% of money upon they selling the stocks to open IMS vertical, which should happen by end of this month. And to an extent, our exposure by the end of the month of August will get reduced by about 50%. And the balance, they have stuck with the 30th September deadline for balance of this whole and that would also come in September. As for road assets concerns, they are in the process of finalizing one of the road assets, and hopefully the announcement should come in by end of August for about 40% of the value of the assets and the balance should get settled in about 4 to 5 months time frame. I mean, they are on course with respect to selling of the assets either through a pension fund or the potential investors within India, and that will get reduced.

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Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst, [33]

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Okay. Sir, and do we see any stress in -- so we do not envisage any stress coming in our book in terms of Zee exposure as of September because I think in case of the resolution doesn't happen, then there is a possibility that the losses might have to be absorbed on the books?

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Unidentified Company Representative, [34]

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Yes. The way we are currently, we have one customer, we are assigning 0 probability of any.

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Operator [35]

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Members of the management, if you can hear us, we can't hear you.

(technical difficulty)

We have the management reconnected. Over to you, sir.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [36]

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Yes. So we just provided the answer to Zee, just want to know whether that was heard or not heard.

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Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst, [37]

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Sir, I'm actually sorry, I just lost you in the middle. Sir, I was not able to...

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [38]

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Yes. So Bala was saying that he assigned 0 probability to not getting the money back in the time frame suggested by the management.

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Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst, [39]

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Okay. And sir, just another question is that, in terms of the LAS book that we have, are we seeing any kind of a stress which is coming on the LAS book because prima facie there has been a lot of erosion in terms of the value which is there. So do we envisage any kind of a hit which will be coming there in this quarter or going forward?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [40]

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You're talking about the mutual fund?

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Adarsh Birmecha;Bajaj Holdings and Investment Ltd.;Analyst, [41]

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Not the mutual fund. On the NBFC book, which we have, LAS and LAP, both these segments that we have?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [42]

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No, we are not seeing anything specific on our both portfolios, LAS and LAP. LAP portfolio is behaving very well. Our stage 3 is under 1%. LAS is also -- the entire portfolio is quite, I think, standard and is in order.

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Operator [43]

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(Operator Instructions) The next question is from the line of [Ronit Ramesh] from [Back to Back Funded Managers].

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Unidentified Analyst, [44]

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I just had one question. Can you just tell me what was the disbursement growth quarter-on-quarter and year-on-year in the NBFC?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [45]

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So disbursement for the last quarter was close to around INR 3,100-odd crores. And the repayment was INR 4,200-odd crores. So that's the reason we see degrowth in quarter 1. And that's primarily coming from the corporate and institutional segments, which is down by INR 800-odd crores.

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Unidentified Analyst, [46]

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And in the housing finance business?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [47]

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In the housing finance business, we have grown by 29% year-on-year and the disbursement has been close to around INR 1,000 crores in quarter 1.

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Operator [48]

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The next question is from the line of Keshav Binani from HDFC.

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Keshav Binani;HDFC Securities;Equity Research Associate, [49]

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Just couple of data-keeping questions. What would be our group AP for this quarter in the insurance business, life insurance?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [50]

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So total group numbers will be close to INR 188 crores. This is the cash premium not AP, INR 188 crores.

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Keshav Binani;HDFC Securities;Equity Research Associate, [51]

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Okay, INR 188 crores.

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Unidentified Company Representative, [52]

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This was about INR 300-and-something crores last year, right?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [53]

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Yes. It was last year around INR 393 crores.

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Keshav Binani;HDFC Securities;Equity Research Associate, [54]

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INR 393 cores.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [55]

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Last year.

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Keshav Binani;HDFC Securities;Equity Research Associate, [56]

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Okay. And on the AMC part, I believe we have disclosed the revenues, which would, of course, be including other income. So how much would be the other income part of it?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [57]

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About INR 20 crores.

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Keshav Binani;HDFC Securities;Equity Research Associate, [58]

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INR 20 crores as against what would be last -- first quarter last year?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [59]

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INR 10 crores.

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Operator [60]

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The next question is from the line of Mayuri Yadav from Equentis.

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [61]

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Sir, my question is with regards to your NBFC business. There, the credit cost for the quarter has been upwards of INR 100 crores, which is almost double compared to Q4, wherein you did approximately INR 55 crores. So I just want to understand in terms of credit cost for the year, should we take this as a trend going forward for the next 3 quarters? Or will we see any improvement here?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [62]

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By trend, you mean 20 basis points per quarter, we clearly don't expect that. I think the delta -- as Rakesh explained, this delta was really due to 1 mix of account, and the rest is accounted by our retail business where ECL tends to be higher.

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [63]

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Yes. Because that strategy is to increasingly lend towards retail and SMEs, but my question is that -- approximately, therefore for the year, what kind of credit cost in terms of, say, you have done about 86 bps for the quarter. So for the year, what is it that we are looking at? What we will be comfortable at, given that the product mix itself is changing?

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Operator [64]

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(technical difficulty)

We have the line from the management reconnected. Over to you, sir.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [65]

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The last question on the ECL, which was there, and your question was how do we see this for the full year. I think, looking at the product mix change, we look at 5, 10 basis point ECL going up, stage 3 going up, but we also have to -- I just want to share with you that our recovery on our NPA account has been very, very strong. So if you look at from April 17 onwards, in the last 2 years, we have recovered close to INR 177 crores. And on our stage 3 pool of INR 600-odd crores if you look at, this is a very strong recovery. So we look at 5, 10 basis points of stage 3 going up.

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [66]

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Okay, sir. And say, in terms of the credit cost, we have done around 86 bps for the quarter compared to earlier trend of around 45, 55 bps. What is the level we would be comfortable at overall for the year?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [67]

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So what is this 86 bps number that you are referring to?

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [68]

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Say, around INR 108 crores of provisioning you would have done for the quarter Q1 '20.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [69]

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No, our provisioning is INR 96 crores.

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Unidentified Company Representative, [70]

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That will be including stage 1 and stage 2.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [71]

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Yes, that includes stage 1 and stage 2. All 3 stages, ECL is INR 96 crores.

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [72]

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Sure, sir. So in terms of credit cost for the year, what is the number that we are looking at, sir?

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Unidentified Company Representative, [73]

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So I think that's a difficult number to give you. I think what you need to look at is, if it's coming from retail for instance is already baked in. And therefore, it will continue to flow to a NIM as far as we are concerned after credit cost, which is why I made the point earlier that after adjusting for credit cost itself, our NIM has increased. So I think you should look it at that way because otherwise you're only looking at one line, not looking at the other line of the P&L.

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Mayuri Yadav;Equentis Wealth Advisory Services Private Limited;Associate Director, [74]

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Right, sir. And sir, my second question is with regard to your NIM, again, in the NBFC business has shown considerable improvement even quarter-on-quarter. Of course, the product mix -- it is a reflection of product mix change. So any -- it will really help if you can just throw some more light as to where do we see NIM settling immediate term -- say near term in FY '20? And going forward, if you can just give us some broad trend analysis, it will really help, sir.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [75]

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So as we keep improving our product mix, this margin will keep improving. Very difficult to give you a forecast on margins at this point in time. But as we do more retail and as was mentioned earlier, SME and retail is our focus, especially as we do more retail, this number will keep increasing because NIMs there are higher than the average that we have for the company.

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Operator [76]

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The next question is from the line of Steve John from [Adouin]. There seems to be no response from the line of Steve John. We'll move to the next question. The next question is from the line of Devansh Vajani from Vajani Wealth Management.

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Devansh Vajani;Vajani Securities Pvt. Ltd.;Director, [77]

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Congratulations for the quarter. I just wanted to know if the management is looking at demerging the 3 businesses into -- and listing them separately? Or is there any consideration on that?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [78]

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No, there is no plan for that in the near future.

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Devansh Vajani;Vajani Securities Pvt. Ltd.;Director, [79]

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Okay. And just if I could know the embedded value of the insurance business as of June quarter?

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [80]

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So we don't declare it on a quarterly basis. For the last year, it was about INR, 4,900 crores. But it will be declared half yearly, we will declare it in September.

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Operator [81]

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We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Ajay Srinivasan, Aditya Birla Capital Limited - CEO [82]

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So thank you very much for joining this call. If any of you have any further questions or clarifications, please feel free to writing to Pramod Bohra. Thank you.

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Operator [83]

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Thank you very much. On behalf of Aditya Birla Capital Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.