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Edited Transcript of L&TFH.NSE earnings conference call or presentation 22-Jul-19 5:30am GMT

Q1 2020 L&T Finance Holdings Ltd Earnings Call

Mumbai Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of L&T Finance Holdings Ltd earnings conference call or presentation Monday, July 22, 2019 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dinanath Mohandas Dubhashi

L&T Finance Holdings Limited - CEO, MD & Whole-Time Director

* Sachinn Joshi

L&T Finance Holdings Limited - Group CFO

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Conference Call Participants

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* Aditya Jain

Citigroup Inc, Research Division - Assistant VP & Senior Research Associate

* Girish Achhipalia

Morgan Stanley, Research Division - VP

* Karthik Chellappa

Buena Vista Fund Management, LLC - Investment Analyst

* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* Piran Engineer

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Renish Bhuva

ICICI Securities Limited, Research Division - Assistant VP

* Saurabh S. Kumar

JP Morgan Chase & Co, Research Division - Senior Analyst

* Umang Shah;SAIF Partners;Senior Associate

* Shiv Muttoo

Citigate Dewe Rogerson Ltd. - Investors Relation

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the L&T Finance Holdings Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Shiv Muttoo from CDR India. Thank you, and over to you, sir.

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Shiv Muttoo, Citigate Dewe Rogerson Ltd. - Investors Relation [2]

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Thank you, Rael. Good morning, everyone, and thank you for joining us today for L&T Finance Holdings' Q1 FY '20 Earnings Conference Call. We have with us today Mr. Dinanath Dubhashi, Managing Director and CEO; and other members of the senior management team.

Before we proceed, as a standard disclaimer, some of the statements made on today's call may be forward-looking in nature, and a note to that effect is provided in the Q1 results presentation sent out to all of you earlier.

I would now like to invite Mr. Dinanath Dubhashi to share his thoughts on the company's performance and the strategies going forward. Over to you, sir.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [3]

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Thank you, Shiv. Good morning, everybody. There are, after a lot of thinking and introspection, looking back to the 12 years of my experience in NBFC space, and as much as I can remember even before that, I think I can say that Q1 FY '20 was perhaps the worst quarter that the NBFC sector in general has seen.

I must say that after due consideration, after considering all the majority of things that happened in the sector, we are really happy with not only the results we have been able to produce but with the fact that we have strategically as well as tactically handled the issues facing the sector, and more importantly, the robust business model we have been able to build.

Very simply put, when in 2016 perhaps, when the sector was perhaps at its highest, we were at 9% ROE and the quarterly profit of about INR 170 crores, INR 180 crores. And today, when I think everybody talks on about mitigating about the sector, even now our ROE is around 16% this quarter and profit of INR 550 crores after taking some onetime hits. So yes, I mean, I look at these results as a good indicator that we have put in place a robust model.

The sector has severe challenges in 4 areas: liquidity issues continuing to affect the sector in general; downgrades and solvency challenges for some of the NBFCs, HFCs, et cetera; demand slowdown across various basic sectors. NBFCs and banks fund that basic sectors, and one of the other hit sectors has seen demand slow down. So that's real. There have been lots of easy explanations for that, saying that these slowdowns are because of NBFC liquidity. It is far from true. It's -- there are just less customers walking into the dealerships. So we have to look for deeper reasons why the slowdown is there. It is definitely not because of NBFC liquidity. That's sure. And finally, a lot of negative mindset coming from rumors, What's App, social media, everything.

I will, during my talk, express my surprise as to 1 or the 2 few things that I heard about as in the last 2 days, things that we did during this results showing that -- showing our positive intent of doing it and the certain rumors, fears, that it has started. I am here today, and my management is here, to answer your questions on all of that. I will utilize my time today to talk about each of these challenges thrown at us by the environment and how we have dealt with them. Of course, I'll leave it to your judgment whether we have dealt well or badly, but what I am sure is we have certainly dealt them decisively as we've always done.

So let's just stay firstly on the liquidity. As you all know, generally speaking, liquidity, even though government has put a lot of liquidity, RBI has put a lot of liquidity in the system. Much liquidity flowing into NBFC has been very limited for many reasons. NBFCs who have been selling retail assets for getting liquidity, perhaps have sold most of their good retail assets. We have stayed away from that completely. Yes, there have been downgrades, there have been some solvency issues. Generally speaking, NBFCs spread, our government paper has only gone up. So even though the government yields, different yields have come down, NBFC yields, generally speaking, have not come down.

So various issues, how we have dealt with it? I must admit in the beginning that our rating, AAA rating, and most importantly, our strong parentage has definitely helped us tremendously. We have done the basic things like, like in the last 8 quarters, we have maintained positive liquidity in every bucket, up to 1 year.

Actually, even in stressed scenario, as we define it; and also as (inaudible) we define it, we had positive liquidity in the first one month, in the first 30 days. In addition to this, we continue to maintain close to INR 5,000 crores of high-quality liquid assets. I'm not even counting the undrawn line for the L&T line, all those details have been provided in the presentation. But this is actual liquid assets held on balance sheet.

So I can say that as of today, we are completely in line with the RBI's rough guidelines. It become just like that into -- it become actual regulations. What this means actually, future-looking, I will keep saying this -- and for that when you make models, it will help you and it will not cause any difficulties, this means that there is no negative -- further negative on profitability when the guidelines actually come into existence because we are already in line with the guidelines.

Raising of money certainly has not been easy as it was -- as easier it was 9 months' back. Large lenders -- especially large lenders to NBFC do a lot of preventive amount of due diligence. So a loan which used to get 15 days to sanction perhaps take 2 to 3 months to sanction. But we look at that also as positive because every time you buy -- you borrow from somebody like IFC or something like -- somebody like AIB or even large pickets from local lenders. A large -- a good amount of due diligence on the book is, one, gives us assurance about the book, and it's one way to give you guys the assurance about the book. As I said, the NOI strategy rolled out last quarter. We have started a drive to diversify funding sources about a quarter back. So we have also given a slide showing the total amount of long-term resources that we raised. INR 6,500 crores approximately were the long-term resources that we raised during this quarter. About INR 3,000 crores out of that came from new sources like retail NCDs, about INR 1,000 crores, and $275 million of ECB. My ECB is totally covered, 100% principal, interest and currencies, okay? And the cost of funds that you see is full landed costs fixed in rupees.

I may sound a little bit going into details, but that's so that there is no further speculation on any of this. So I want to just give a lot of clarity. And more importantly than that, INR 3,500 crores has come from the old resources. So in between, actually, I have seen some reports saying that some of NBFCs are going abroad because they are not getting funds internally. So just to clarify, almost 50/50 split out of what we have raised from domestic as well as from old resources, old sources, as well as some new sources showing that we can raise money from both.

Our CP percentage is down to about 13%, though our ALM supports close to 22%, 23%, okay? We are doing this so that people should be absolutely sure of our liquidity, Okay?

All this now has happened at just 6 basis points increase in costs, and this has happened without affecting the margins. Our NIMs continue to be at around 5.2%, and NIMs plus fees continue to be around 6.8%. This is always the guidance that we have been giving. I believe that clarifies the liquidity issue.

The second issue which has been troubling this sector is various solvency-specific accounts, first IL&FS, then certain housing finance companies. Lots of issues around that. So I will clarify now both these cases.

As you would know, about 3 quarters back, we announced that we had about INR 1,800 crores exposure to IL&FS, so SPV -- specific road SPVs. All of them were operating; 4 of them were annuity, 2 of them were toll. And we always mentioned -- maintained that we believe that SPVs (inaudible). As we moved, NCLAT actually classified all these SPVs into 3: red, amber and green, I think the definitions of that were pretty clear. Two of our SPVs were already in green unfortunately but a very small same amount, less than INR 200 crores. And about INR 1,600 crores were in amber.

What it meant for amber, for the time being, from 1st of October 2018, the total exposure came to a standstill, here the companies are actually sold. As you all know, 1 quarter back, we actually very conservatively deferred interest of about INR 84 crores, INR 32 crores per quarter. And we had said that until this is solved, we will keep deferring it and glad to report that our tremendous efforts to work with government, with IL&FS, has resulted now in a route opening completely for converting amber into green. We have taken a little bit of interest cuts on those, and IL&FS has actually restructured their dues -- bond-secured dues and has passed the 1-year solvency test, which specifically was for this classification.

So now 5 out of my 6 accounts, which is 93% of the exposures, INR 1,700 approximately out of INR 1,800, stands green. What it means is once all the loan documentation, et cetera, is signed, we will start actually receiving money according to the schedule.

Also to tell you one fact, which is not in the public domain so much, is at this point of time, these 3 companies were about INR 300 crores to all our lenders who've taken it, not only to us. And in the escrow accounts, there is, of course, some INR 900 crores. So we don't see any difficulty here. Our intent, we have been able to reverse or rather reinstate the INR 84 crores deferral that we have taken in the last -- in the second half of last year.

What I would like to paint here also is that there are -- so there is one more which is remaining, which is just about INR 100 crores, and we are being very hopeful that we will be able to convert that also to green. In fact, using the 3 NCLAT have pushed IL&FS to try and convert all the 13 road SPVs from amber to green. To work with lenders, we are bearing forth the very fact -- for this, according to me, I can claim 2 things confidently: one, that our estimate has come right. I'm not saying always it will come right, but our estimate on the losses that we will eventually take has come right, showing that we have a reasonable amount of confidence in our underwriting and our estimates and our project monitoring.

Number two, the teams in work -- and there is a very specific team which works on -- aside to that we are indeed working. What I can say is this shows their tenacity, their push in making sure that difficult assets are indeed resolved. Just 3 out of total 13 becoming green and all 3 being ours are not coincidence. It's definitely not a coincidence. In fact, I believe with that, IL&FS is definitely behind us.

I also would like to talk about our exposure on the housing and finance company. This was -- these are basically securities which were exposure taken as a part of our DCM disk. This were AAA at the time of taking and were rated B in June. All of our payments until then were on time. In fact, there was a small amount of about INR 40 crores due in April -- June -- 5th of June, which was received in total. After that, the company has defaulted, not to us but to someone else, some other people. We, as a prudential measure and conservatively, are now taking the 50% onetime provision immediately and believe that this is very conservative and adequate even in the worst case. Lots of measures are being taken by bankers and other lenders. Also, there are some measures being taken for the company to change owners. Under all these conditions, we believe that the final loss will be lower than what we have taken. Even in case it is a little bit higher, we will not hesitate to take it. But I'm sure that 50% is more than adequate.

This quarter's profit have to be seen after taking into account these -- both these onetime adjustments, both for IL&FS, which is positive; and this housing finance company, which is obviously had a negative impact on this quarter's profit.

Now we'll come to, according to me, what is the most important issue. It's growth in many of the sectors. These are times that industry -- upper industry is showing a degrowth. At these times, we drive our teams to go back to fundamentals. We go back to principles.

Number one, our Right to Win. We have always said you would all remember me saying this again and again, but Right to Win means you will gain more than others when the market is up. And when the market is down, like it is today, you lose less than others. I can confidently say that every market that we are in, we have maintained or increased market share.

Second principle that in the troika of portfolio quality, margins and growth, growth always comes after taking care of the other 2. Our improving asset quality and steady margins indeed shows that we have practiced the principle. And I will always drive my team to practice this principle. Growth will eventually come when the market does. But right now, it is for us to invest in our core businesses more and more in footprint, quality people, most importantly, our analytics strength. We have since been able to increase market share, and I will go into details of each of the business. We have also used our analytics strength to be able to hedge the market drop by concentrating on refinance as well as old vehicle financing, et cetera.

Let us talk briefly about each of the business, and I will then come back to the overall story.

Tractors. If you remember, we were the first to call out a possible slowdown in the tractor market. In this quarter, the overall tractor market was down by 15%. Vis-à-vis that, our disbursements are down just by 5%, and we have actually marginally increased our market share even in new tractor market.

Two-wheelers. The overall market is down by 13%. Various reasons: tractors have (inaudible) the reasons; obviously, delayed monsoon; and lots of inventory push that had happened in Q4 of last year has resulted to this. Yes, there are certain green shoots in terms of, for example, monsoon has started even though it had not been uniform. More importantly, kharif crops swing has caught up. But whether it will lead to a positive growth without -- especially because the festive season was unprecedentedly positive festive season last year, it is very unlikely that tractor market will show a positive growth at least in this quarter. What we can say is we will maintain or increase our market share, as we always, always believed in doing absolutely precision bonding and we have the tools for it.

As far as two-wheelers is concerned, the market has degrown by about 13%. Yes, obviously, general drop in incomes, one; increase in two-wheeler prices both because of -- mainly because of technological development like ABS/CBS, et cetera, have led to these drops; also movement more wherein the slowdown in scooters is far higher than the slowdown in motorcycles. I mean you guys are experts in this. You know it well. What we have done has been able to again maintain our market share here. Our disbursements are actually up by 14%, okay? If the market continues like that, this 14% may not continue. But what we will do definitely is maintain or increase our market share.

Micro loans. Once again, the industry disbursements have been down. We have -- ours is down more or less in line with the market. I would like to give a little bit color to this. There are markets, especially in East -- especially West Bengal, some markets here in South, where we believe -- where we have called this before, Orissa, where we believe on our data, from our detailed data analytics, that there is increasing amount of overlending happening. Our rejection rates have reached 53%. From close to 45% to 50%, we reject 53% now. We will be absolutely clear that no amount of -- we will sacrifice growth if need be, but nothing will induce us to lend to our customer who is already overborrowed. We believe that in this market, there is a lot of scope for financial inclusion, and growth will come -- and it will come eventually from lending to finding new borrowers, new-to-credit borrowers and lending picks up.

It is always the interplay between credit cost and OpEx as you go deeper. We believe that with our data analytics and with our IT and digital platform, we believe that we can manage this interplay very well. We will be expanding in North. We will be expanding in Punjab and Haryana. We are setting up a network there. As this start growing -- we have done this before. We have gone to Bihar. We have gone to Northeast. And as we have slowly reduced dependence on East especially, we have been able to keep up our book growth based on this. So that largely explains Micro Loans.

Home loans. Yes, our home loan continued to grow at 12%, and our move to salaried and direct sourcing continues unabated. Our salaried disbursement is up by 49%, and direct sourcing is now close to 75%. So we are actually very confident that very soon, we will cut off the DSA staff maybe in a year or so. So we will be 100% direct as we go ahead, a very good model of working proudly with builders and being the fastest in the market for sanctions using complete

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If we come to real estate. You will see that our real estate book is constant over the last 1 quarter despite INR 1,200 crores of disbursements. And what it means is we have got INR 1,200 crores of requirements, more or less. The book is largely there about INR 15,000-odd crores.

Out of the INR 1,200 crores of disbursements, close to 50% has been, as we said, for completing our existing projects and remaining 40% is towards the LRD, which shows that just 10% is for new customer for transaction only. That is around just about INR 100 crores, INR 120 crores. And this has been done obviously extremely, extremely selectively. It's anyway a very, very small amount. We will continue like that. As I always said, we are very proud of the strength that we have built in this business. We do believe we have differential strengths like we have in infra or any other business that we have built, and we will use it. Of course, we are being selective at this point of time because yes, as according to me, in the whole country, there are about 50 developers even worth doing business. And even within that, we have been extremely, extremely selective. Okay?

Then we come to infra. Infra business also continues to be well. Nothing majorly different there. We maintain about 25% market share. Most importantly, even in this almost impossible conditions, we have continued to -- we are downsold, of course it is below what we used to do before just the loan downsell. From about INR 1,200, INR 1,300 crores, it is down to INR 650 crores, INR 700 crores now. But INR 650 crores, downselling of loans, our infra loans, is perhaps INR 650 crores more than what anybody else in the market has. So we chose our ability to downsell. And obviously, the fees that we continue to gain comes from this.

Now let me clarify one issue, which has apparently caused a lot of confusion for us today. And I wonder frankly why because most of the data is there in the presentation, and we did it actually to reduce confusion. Unfortunate things (inaudible) effects that it has caused confusion.

We have always worked for strengthening our Right to Win in businesses where we can. In 2016, we acknowledge businesses where we had no Right to Win and reclassified them as defocused. We all ran that down successfully and moved capital from these businesses where we believe that we are Right to Win, where ROE is good and the overall ROE has gone up. So we have done this before.

I will draw your attention, that throughout last 3 quarters, we have concentrated on the rural, housing and select infra sectors where we clearly have a Right to Win and are further centering the same. You have to only look at my last 3 presentations to see we have hardly done any business in structured finance, structured profits and DCM and supply chain. In fact, supply chain business, we sold in Q3 FY '19.

This quarter, the remaining book of this business is nearly been reported as defocused. From the chart on Page 26, you will see that even under this new definition, the SFG or DCM book had actually been running down for the last 1 year. One year back, the SFG/CDM book was INR 10,600 crores. And today, it's at INR 8,600 crores. So it is nothing new.

So why have we then reported it separately now? Okay. Whether we should have or we should not have, okay, there will be -- jury will always be out. But why have we reported now? Largely because I actually thought of it now. If I ever thought of it 1 quarter back, maybe I would have reported it that time. But what is the reason for this? Since there have been new disbursements in this 2 business over the last couple of quarters, it is better to report them separately so that the disbursement growth, book growth, all other ratios, and more importantly, the speed with which we are doing utilization is not seen around me. Because if I keep showing this in Wholesale, Wholesale book will come down even more rapidly than what it is actually coming, and you will think that my retailization is happening faster. We want to show the real picture, the peer set which retailization is happening, the real book growth, the real disbursement growth. Everywhere, if we keep showing in Wholesale and these numbers, 0000, all sorts of confusing numbers will be seen. So we believe that just removing any business that we are purposely not doing any business separately helps very clear number analysis and putting things in perspective.

Internally, teams can do both things in a concentrated manner. The teams which are far doing business can do business now in a concentrated manner, and teams which are in charge of running this book down can bring them down efficiently while rapidly releasing capital for usage in other businesses, where we can generate consistent returns. This has worked before and we have no doubt that it will work again.

There is a lot of speculation whether this is a good book, bad book, et cetera. It is nothing like that. It is the overall book. Let me clarify. It has nothing to do with asset quality. Other than this housing and finance company, the next Stage 3 of this book is just INR 166 crores, which is just 3%, which is more different than actually the overall book. In fact, if you see the infra book, it is a little more than that, right?

So it has -- once again I'm saying, it has nothing to do with asset quality. It has no other meaning in this concept than proper reporting and rapid reallocation of capital. More importantly, it is nothing new, and we have been doing that for the last 3 quarters. In fact, let me state this. Other than this onetime booking, our credit cost has always been in the range of 1.6% to 2%, and we do not expect it to exceed that level in the near future.

Let me also clarify that our steady fees from Wholesale comes from underwriting and advisory and selldown. Even, in fact, the DCM fees were up in 1 quarter, down in 1 quarter. There will be MTM positive in 1 quarter, negative in 1 quarter. Now there is more steadiness. The fees come from underwriting and delivery and selldown, which is intact. As you see this quarter, we have not done any DCM business for the last 3 quarters. And you can see the fees. This quarter, it is unchanged, even intact.

There are a couple of more issues that I would like to clarify before I come to the conclusion, and then I will just give my concluding remarks and open it for discussion. There is apparently a new issue, which is AP, Andhra Pradesh issue. When Jaganmohan Reddy government came into quote, in May, the PM in June announced that there will be renewable tariffs, will be renegotiated and then they sent letters to some other -- to some of the projects to reduce tariff to INR 2.44. By the way, INR 2.44 was the lowest discovered tariff ever in this country under completely different circumstances, under a solar park and things like that. So INR 2.44 is not comparable when it is not solar parking. But anyway, that's...

Now let me just tell you before we all get into panic reactions that we have been there before, right? I will quote some general proof from 2017. There is a Supreme Court judgment in October 2017. And let me again tell you, in each of these things, we have been in the forefront of each of these issues. We have been large in solar and wind and renewables right from that time and have been in forefront, like we have been in forefront of the IL&FS mess in resolving some of these issues, and we're in the know.

So let me just give you some facts. In the case of GUVNL, which is a particular solar developer, Supreme Court has settled in its judgment in October 2017 that sanctity of PPA entered into between parties by mutual consent cannot be allowed to breach. ERC can't force either a generating company or licensee, okay, to enter into a contract -- reenter into a contract based on some of their tariff. This was the Supreme Court judgment in October 2017. But that didn't stop other fed governments from doing -- trying the same things in 2018.

In 2018, UP, even AP and in AP also it is not happening for the first time. And Karnataka tried this, and the particular regulatory authorities, electrical regulatory authorities in those particular states actually ruled against this. So all those -- I mean many of you who have been following know that this is not the first time and every time it has been ruled in favor of continuing the existing PPA.

In March 2019, Karnataka High Court, again, held up continuation of PPA in one of the cases in Karnataka.

And now, we come to AP. So yes, these letters have been assured -- issued. As you would know, on July, as recently as July 18, APTEL has put a stay on these letters issued by the discom at least to one of the developer, to Greenko. And it is likely that they will issue the stay on others as well. So as we speak, there is a stay.

SECI and the Government of India power department have issued very strong letters to the AP government saying that this cannot be allowed. This affects the confidence of investors in the country and this cannot be allowed. So we do believe, like we believed in the past, that this is the storm in the teacup, it will settle now.

What is the negative of this? There is one negative. Still all this is settled, it is possible that the discom will delay some of the payments. It is already delaying some of these payments to the developers, to the operators, right? That can happen. And hence, at that point of time, you're underwriting, your choice of operators is what is most important.

Our book right now is largely owned. The developers are largely owned by funds, foreign funds like GIP, Brookfield, GIC, ADIA.

And one simple proof of the pudding: in spite of AP government delaying payments, our entire book until the last rupee is at 0 DPD and our (inaudible) is not even touched. And what it means, that the developers, the operators are actually repaying on date from their own funds. Now this comes out of knowledgeable sector, the confidence that these things will be solved. But most importantly, by choice of developers, knowing the strength of developers. And hence, we can confidently state that we do not expect any [bond] here. At this point of time, clearly our whole book in AP is at 0 DPD and even the (inaudible) is not touched by INR 1 also. Now I hope that all -- we have answered sort of all the questions.

So now let me talk a little bit about the future and that would be my conclusion.

I will again think that we look at these results positively as these results are reported amongst very negative environment. Gaining market share, a 24% book growth in core businesses, a 6.8% NIM + fees, ROE of about 2.1% and ROE of 16% even after taking the onetime charge for housing finance company exposure makes us believe in our model. Moreover, our capital (inaudible) stands at close to 18.5%. And we believe that we have adequate capital to fund our growth for at least 18 months from now, so we are not looking anywhere in near future to come to the market for any equity raise. We believe we have enough capital to fund our growth for the last -- next 18 months or so, which is the same period that we talked out at the time of our (inaudible).

Our model of staying liquid, strong underwriting, having very strong early warning signals and using analytical ability to the (inaudible) has helped us stay strong in this time. While recent rainfall is showing some silver lining, growth as a whole in various segment's stays muted to negative. Our concentration will be on use of our strong rating and (inaudible) to stay liquid, putting risk management and portfolio quality before growth targets and keep concentrating on building and maintaining business tricks, so that we are ready to ride the growth wave when it comes.

Management concentration will be on maintaining positivity in the team which is becoming very difficult. The team also has access to WhatsApp, and every day some imaginary stuff comes up. So management concentration will be completely on maintaining positivity in the team. Making management intent extremely clear to the team in this (inaudible) environment.

We will always put portfolio, quality and margins first, and growth will be the result. Growth will come, no doubt, but not as a target, but as a result of doing things right and doing the right things always. While we need to be careful and help build the ship which will not only see us through this storm, but will in fact emerge stronger on the other side, we also need to maintain our positivity throughout (inaudible).

I would just conclude by saying we definitely need your support and faith in this journey.

Thank you very much. I will be open for questions.

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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 Piran Engineer from Motilal Oswal Securities Limited.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [2]

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Sir, congrats on the quarter. I just have a couple of questions. So firstly, I must have probably missed it because I dialed in late. So on SFG and DCM businesses that we have exited, what factors made us being these businesses as defocused? Because in the last 3 years, we were doing well. We were one of the largest DCM players. Even in structured finance, you're seeing some banks exit this market or go slow. So at this time, what was in the management's mind that made us sort of exit these businesses?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [3]

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Yes. Thanks, Piran. I went into this at the beginning, but I will repeat again. So this is nothing new, right? We have been actually reducing the -- not reducing actually. The disbursement on both these businesses has been practically 0 for the last 2 to 3 quarters. I have been verbalizing this for the last 2 to 3 quarters that our concentration in wholesale is on our core business.

So I think -- I will take your question in 2 parts. Why did we decide to do this 3 quarters back? Second is why are we reclassifying it this quarter? So I said this, so -- but let me again repeat.

So why did we decide to do this 3 quarters back? One, what are we saying, that we will retailize fast. To retailize, obviously what we will need is to transfer capital from wholesale business to retail business. Now either we can do it from all wholesale businesses or we can do it proportionately furnish all the wholesale businesses or we can do it from businesses where we don't have obvious Right to Win. And Right to Win doesn't mean right now banks are (foreign language) that is why we will -- that is opportunistic, right. So we clearly believe that in infra, especially in renewables, roads, transmission, we are very clearly built Right to Win close to 25% -- 20%, 25% market share especially in renewables. And as we -- hence, if we look at not starving these businesses of capital, maintaining our market share, all you have to see is actually see the ROE of the infra business now. Of course, it is 19% now because of that INR 84 crores write back. But even if you to take that out, the ROE will be close to 14%. And so clearly, that business, where we have Right to Win, is showing consistent ROE and that's the reason where we thought (inaudible) businesses where DCM for example, profits go up and down.

The question will be why we entered it is, we obviously have to try a few things to see whether we can do it. And more importantly all the while can you then exit it without big losses to the P&L and then move capital back? So this journey, which has started 3 quarters back, was (inaudible) And I would -- when this big issue, liquidity issue happened in the third quarter of last year, that is the first time I had actually said that these businesses are getting 0 profits, because we will use capital and liquidity, not only capital, to make sure that the other businesses grow, right? So this is a very, very strategic move we started 3 quarters back and will continue.

As far as why we decided to report it separately, I don't know. I mean, as I said, jury will be out always whether (foreign language) or not. But we did it for two reasons. One, so that all the ratio numbers, growth numbers ratios are seen clearly and not affected because of these 0 0 0 0 disbursements. It was just looking strange in the numbers, so good that it is moved out.

Second, always, when you're trying to run down a business, okay, sorry for coming to Hindi because this explains it very well, behind the truck it is written (foreign language). So it's always good that when you're running down the business, a separate specific team looks after it and not the mix of business and the rundown team. So concentrated effort on running down which you have been doing for the last 3 quarters anyway. And you will see these 2 books came down from about INR 10,600 crores to INR 8,600 crores over the last 1 year, so almost 25% rundown already, okay?

Once again, because this question is asked, the (inaudible) in this entire book which is close to INR 9,000 crores is just about INR 160 crores. So -- and my overall credit costs are going to be ranged down, we don't expect anything coming, so don't read any worse in this move. Because this has worked for us before, we believe that this is a way of allocating capital properly and thus maintaining ourselves on top line and which we will continue to maintain even in these (inaudible).

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [4]

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Okay. But has the RBI been asking industries to cut down on structured finance exposure? Or is this just very specific to us?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [5]

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Not at all, this has nothing to do with RBI.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [6]

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Okay. Okay. And just one other data point question, what is the average tenure of loans in roads and renewables financing?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [7]

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Sure. Our actual tenor will be about..

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Unidentified Company Representative, [8]

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4.5 crores.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [9]

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Yes, because once you do so -- let me answer this question in many ways, right? Because contractual tenor will only be 17, 18 years all the time. But normally when you do development financing, after the project becomes operational, it all becomes refinanced always because the (inaudible) a good 100 basis points cut in the interest rate once it becomes operational. And there are many times that we also do arrange further increments. After the project is 2, 3 years in operations, it becomes (inaudible). So then either ours or some other ideas also, we give the seldom. So if you take actual prepayments and we keep doing that, 4 years, 4.5 years max is what will be the actual tenor at any point of time.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [10]

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Understood. And just one last question. The undrawn lines from banks and L&T, is that included in our ALM description, that INR 8,000-odd crores?

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Unidentified Company Representative, [11]

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Yes, it is included.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [12]

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Which INR 8,000 crores?

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [13]

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So I think INR 6,000-odd crores of undrawn lines from banks we have and another INR 2,000 crores from (inaudible).

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [14]

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As Page number 10 says, so INR 13,000 crores of liquidity is maintained through the following: INR 5,000 crores from cash, these are other liquid instruments, INR 4,855 crores to be exact. That is completely liquid instruments held on the balance sheet. Undrawn bank lines, INR 6,300 crores.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division - Research Analyst [15]

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Correct -- no, I meant the one on Page 9. That INR 14,600 crores of cumulative inflows, that does include INR 8,000-odd crores from undrawn lines, right? I just wanted to confirm that.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [16]

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It does. It does.

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Operator [17]

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The next question is from the line of Saurabh Kumar from JPMorgan.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [18]

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Sir, three questions from my side.

Sir, firstly on the real estate book, what is the share of LRD and on the construction finance book, if you can share what is 0 DPD?

The second was essentially on the -- your cost of funds. Are you seeing any reduction in incremental cost of funds? Or is that the (inaudible) is not like transmitting to you?

And thirdly, just on growth. So quarter-on-quarter, your AUM growth is flat. So I mean what should you -- what would you build up for F '20?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [19]

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Sure. I'll try and answer one by one. So we talk about LRD. LRD, at this point of time, is just about 1% hardly (inaudible). About total 10% -- 10%, 15% in the commercial?

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [20]

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Commercial, 10%.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [21]

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Yes. About -- yes, 10% to 12% in commercial, rest is residential, okay, as far as this. Out of 115 projects that we have, 109 are 0 DPD. Six projects keep going from 0 to 30, 40 and keep coming back. So 109 projects are always 0 DPD. And these are not -- normally moratoriums are for project construction. And those moratoriums are normally put out of proportion -- pulled out of proportion. But normally, every project, right from ICICI, IDBI days, there is always project -- during project construction there is moratorium. But we see to it that interest is serviced regularly and actually found it. As you would see, INR 1,200 crores and now numbers have showing. And we will show these numbers every time. INR 1,200 crores is actual repayment which has come into the portfolio, approximately INR 1,200 crores in this quarter, okay? That is number one.

Your question on growth was for -- only for real estate or for everything?

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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For the entire book. But just on prepayment, this INR 1,200 crores is strong sales, there is no refinancing in this.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [23]

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Do you know anybody who will do refinance at this point of time, you can refer them to me. I would love it.

Just on -- just other item note. Mostly it is sale. It is also -- we also, in many cases, hold other assets. And on the project, unrelated assets. And in some cases, we actually force the promoter to sell those assets and bring equity. So it is not only flat sales, apartment sales.

But one way or the other, we have book (inaudible) so you do INR 1,200 crores of business. You have got -- income out of that. You have got ease out of that. And not increased exposure.

Okay. Now your second question is -- I will use it to give a little bit of our theory on this, okay. I think at this point of time, giving a growth target is perhaps the most dangerous thing. That doesn't mean I'm trying to avoid your question, right? But very clearly, I don't know when many of these sectors are going to turn around. Much more importantly, much more importantly, when I say and when I tell internally, more (inaudible) internally and externally, that you should take care of building our strengths, doing the right things first, making sure that our portfolio of quality remains paramount, making sure that my NIMs remain paramount. And the market is falling down, this is the most dangerous time to give a growth target to internally team members. And what I view externally is what I have seen internally also.

History and replete with models which went after a growth target in bad times and have suffered. And also with models which have never gone after a growth target and growth has come. So we believe that this is the time -- World Cup is just over. I keep saying this to the internal team that there are some batsman who can hit sixers. There are some batsman who can stay on the pitch, right? And how many times Sunil Gavaskar and all were champions because they would stay on the pitch. But a good batsman is always who knows when to do what. At this point of time, hitting sixers is not necessary. At this point of time, we believe that if we keep our strengths, our muscles intact, whenever the growth happens in the sector 6 months from now, 9 months from now, like we have shown in the past, we will beat the market again in growing.

So that's -- I know I have successfully avoided giving you a number, but genuinely, I believe that we should not target a number at this point of time.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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Internationally, your cost of fund?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [25]

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So cost of funds, yes, it is about 6 basis points up. And we don't believe that it will go anywhere substantially up. We have done lots of -- okay, I will tell you all internal numbers.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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In the wholesale market we are seeing reductions.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [27]

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Yes, yes, I'm coming to that. So we have done lots of, what do you say, scenario analysis. So if we go more and more and more into retail -- so it is again same risk-return paradigm, like it is on the asset side, it is on the liability side. We believe that if we don't increase retail now, the rates can actually come down by the end of the year to close to 8.4% also, right? I mean you go aggressively retail, it can increase by another 6, 7 basis points to 8.7%, right? So based on our tactics that we do, strategy always is to move on to retail. But based on the tactic, and I am more in favor of, yes, increasing retail slowly continuously. I have told that about INR 10,000 crores we will raise this year from other sources. We stay on that idea right now, we caught the ECB cycle well. Our landed cost will be what? 8 point...

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [28]

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8 point -- it's in the range of 8.2% to 8.7%.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [29]

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Okay. So landed cost of this entire fund of 275 million is between 8.2% to 8.7%, depending on how it was covered, when it was covered, et cetera. It is between 3 years and 5 years. IFC Washington funds are for 5 years. The remaining banks are for 3 years. Just to make a point, I see Washington giving their own funds as well as doing syndications is indeed a big deal. And this due diligence (inaudible) we were wondering whether we are doing the right thing. But finally I believe we have done the right thing. And now there was a news item about AIIB also. This was actually issued by AIIB, not by us. So it is in principle sanctioned by that. We have to look at the terms and everything before accepting the sanction. That is why (inaudible) . But yes that hundred million also is worth taking and extremely good hit. So AIIB also shows that.

So to answer your question, yes, we -- the fundraising will be tactical, no doubt, but also will be strategic to manage our risk-return properly.

Also, some show and tell here. Let me be very frank. 13% CP is largely show and tell. And I have been very frank. Because I know that my ALM supports much higher percentage. I've got a retail book. I've got INR 2,000 crores, INR 2,500 crores cash coming in every month. Generally every month, month after month it comes. And in fact higher quarter end. So there is no need for me to keep CP book at 13%. But we will keep it.

So based on how these things go, it will be between 8.4% to 8.7%. What you can take from us is we will make sure that the margins, the NIMs will remain steady at these levels. We always talk about a narrow range of 6.6% to 7%, 6.6% to 6.9% for NIMs plus fees. We will keep it there.

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Operator [30]

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The next question is from the line of Aditya Jain from Citigroup.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [31]

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Really good to see the IL&FS resolution coming through. On the other name, which (inaudible) could you comment on the status of (inaudible) loans, what you're seeing in terms of servicing, constructions and sales progress? And have you seen any change in the view of the NIM?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [32]

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Sure. So no change in view, either positive or negative, okay? I must be very honest. But the only problem here is there are lots of things happening and we putting it in public space may actually affect the speed of those things happening or the (inaudible) of those things happening. But I will try to be as clear as possible.

So the progress is happening quite well. They have applied for 12 of their towers they have applied for OC. We are actually expecting the OC coming in this month itself. There has been some change in officials -- authority officials in UP. But we are actually quite sure that it will come either this month or early next month. It has -- OC has already been applied for another 5 towers. This is expected in August. What it shows actually is construction is progressing quite decently. Sales actually are happening even better. We are actually in charge of sales. We are in charge of maintaining their accounts also. So we have appointed one of the big force as their -- almost as the CFO for these projects. Every account, every check is done by us.

I will give you some numbers which -- so actually they have received close to 52 -- about INR 50 crores of cash inflows this quarter. Our numbers of inflows and outflows from our accounts and disbursements are about -- just about INR 10 crores for funding some requirements. And we have received prepayments of another about INR 20 crores. Now INR 10 crores and INR 20 crores are not great numbers, I realize that. But yes, there is small improvement now.

Now the most important thing is that even at prices that the sales are happening today, our receivable power is 1.77. So it was at around 2, if you remember. It is 1.77 as prices where sales are happening?

Now when do we see fairly large reduction in our exposure? It will come out of sale of 2 office assets. I will not put those assets, name those assets on a call. But sale of 2 office assets. We have actually got the buyer and the seller together. Conversations are happening. You know nowadays at whatever situation the promoter still believes that these assets are more valuable than what everybody else believe. So that's happened, that's what it takes time. But we believe that over the next couple of quarters, exposures can come down sizably by around 25% or so from today's levels which will then make all the ratios, et cetera, so comfortable. But we should be okay and supportive. Even today, we don't believe any large given default and support it. We continue to be 0 DPD likely because we keep getting prepayments.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [33]

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And then on the defocused business, could you tell us over what period this will run down?

And secondly, if you could -- you already touched upon this, the asset quality of the book (inaudible) give the sense of what is the constitution of the DCM book, what sort of loans or investments are there in that? And if there are any expectations of delinquency there?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [34]

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See, it's over what time it will come down, we don't know. I mean, of course, if it just has to come down by its maturity, then the structured finance book will take 3 to 4 years to come down. And the same book can take 7, 8, 10 years also to come down. But it won't work like that. We will -- now there is a specific team looking after it. And we will -- the problem is how to get the money back when there is no event of default, right? So in none of these there is actual event of default. So in any way, we have tons of events of default in -- not only just actual default. Some covenant default here and there, et cetera. Unfortunately, there is nothing obvious by which we can actually go and ask for early repayments. But this team will be pushing, convincing the promoters to pay increasing interest rates. We will have our own way of running them.

I can only show you our previous record. Previous record is that we have reduced our previous defocused book of about 8,000 crores to close to 0 in 3 years without any visible damage to the P&L. So we believe that, that's what would happen. This book, if you actually take out this book and I think this answer is very important, if you -- this is what, FY '19?

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [35]

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FY '19.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [36]

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Okay. During FY '19, if we just take out this book, the profit for this book was about INR 230 crores and the ROE on this book is around 14%, okay? Even this quarter, even this quarter if you take out this INR 250 crores big write-off -- not write-off, provisions that we are taking for the housing finance companies, this book is equally profitable. So it has nothing to do with profitability, it has nothing to do with asset quality. It is just that we believe that capital can be better used in many other businesses which have steady returns, what was my strategy.

And by the way, and this was 3 months back when we put our strategy, you can go and refer to that and we will say that -- we have said that this is -- we didn't use the word defocus. What was the word we used? We used the word deprioritizing. It is Page number 6 of the last time presentation. And we said we are deprioritizing structured corporate finance and DCM. So again, it is nothing new. It's just that because we have put it in a separate line in the P&L that it is causing lots of speculation. There's really nothing to say for it.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [37]

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Understood. Just last thing for me. If you can give a sense of the 10 years across segments. So in rural and housing and...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [38]

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It's actually there in the presentation, Page #52 of the presentation.

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Operator [39]

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The next question is from the line of Umang Shah from SAIF Partners.

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Umang Shah;SAIF Partners;Senior Associate, [40]

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(inaudible) set of numbers. Sir, wanted to get a better understanding of the Two-Wheeler AUM? If you look at HDFC bank, their Two-Wheeler AUM has grown by 9%, whereas we have grown by 55%. So would like to hear commentary from you why that divergence and some forward-looking commentary on the growth in the Two-Wheeler AUM going forward.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [41]

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Base effect. This is just base effect. If you would remember, last year, in the second half was the major growth where we grew our market share from about 6% to about 10%. Whereas we captured market after market. We expanded -- we were 62% -- almost 65% Honda till one year back. And today we are still dependent on Honda, but up to the extent of 40%. We have expanded into Bajaj. We have expanded into TVS. We have expanded into Suzuki. These are large Bajaj (inaudible), of course Bajaj Finance (inaudible) but we do a lot of Bajaj. And that's the reason why the growth came in the second half last year. This year also, you will see, disbursements is only 14% up. But book will have that impact. And as we come to the second half, if the disbursements continue at the rate that it is today, this growth rate will come substantially down. So there is no divergence. It's just that we are at different phase in last year first quarter than what HDFC was, I mean HDFC had a 20% market share last year first half, and we had a 6% market share. So it's just numbers. We are being made to look better than what we actually are because of this base rate, this basic activity (inaudible) in this business and they will continue to be there for a long time.

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Umang Shah;SAIF Partners;Senior Associate, [42]

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And have we gained market share at the expense of (inaudible) HDFC Bank or how do we look at it?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [43]

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(foreign language) details, I don't have -- we -- by the way we haven't really gained market share this quarter. We are just about maintained. So I would say that this quarter, there is no gaining market share to expect.

See this also, I would say there is another reason for increase in disbursements. So number of Two-Wheelers we funded were in line with the market. (inaudible) remained have same at around 70, the prices of Two-Wheelers are sharper. The prices of Two-Wheelers are sharper but close to 20%, 22%, right? So that also comes into the disbursements. So (inaudible) good you asked this question otherwise again I'm looking way better than what I am quite good in Two-Wheelers. But perhaps, the picture is looking more rosy because of these 2 things. It's not that rosy. We are gaining market share, we are gaining strength, but not this dramatically as it has been seen. Another 2 quarters (foreign language) numbers.

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Umang Shah;SAIF Partners;Senior Associate, [44]

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Do we expect to gain market share moving forward? Or will it be more like industry growth kind of levels? And some commentary on growth going forward.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [45]

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So we hope to maintain market share. But as I said before, in these markets, because there is one big shift happening, okay? Scooters are going down and motorcycle's are going up. We want to understand this shift more in details. It is not as obvious as (foreign language) what has happened before. The scooters down means and motorcycles are up means the rural demand picking up. This was the analysis (inaudible) happened 3, 4 years back. But now rural scooters are so much that this analysis will be very simplistic. So at this point of time, really, I don't know the details of why this is happening, how this is happening, et cetera. Honda, for example, losing share tremendously. I don't know whether it is a cause or a effect of scooter growth down because Honda has lost market share, seriously market, lost market share, as Honda is Activa, right? So we don't know whether it is a cause or a effect. But we will study more in detail.

Right now, let me sound more sage and actually say what we are practicing internally. Let's do the right things. Go deep, find new customers, try and find new-to-credit customers, whom we can and we have our new models actually construct look-alikes. 40%, 50% of our customers can be new-to-credit customers. And we have the ability to construct look-alikes and lend. Keep improving our data analytics, our digital to be the fastest in the market. We used to sanction loans before the test drive was over. Then we started sanctioning loans before he finish selecting his Two-Wheeler. And now the loan sanction is almost instantaneous, right? We will, subject to the (inaudible), we will come to a stage where we can sanction loan based on a fingerprint. Now these are rules that we are spending much more attention to rather than worrying about whether 0.1%, 0.2% market share will be gained or what will be the growth in the short term. Growth will come.

But genuinely, FY '20, I want to spend in making my company so strong both on capabilities, balance sheet, P&L, market presence that when the market, that is the time to kickstart growth. Right now, if we can maintain market share, maybe marginal increase, it's already very good.

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Operator [46]

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The next question is from the line of Karthik Chellappa from Buena Vista Funds.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [47]

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My first question is essentially on a point that you just raised. If I like to look at ticket size for both Two-Wheeler and Micro Loans. Sequentially, that has gone up a fair bit. Micro from INR 31,000 to INR 33,000 is about 6.5% and the rise is steeper for Two-Wheeler. So for Two-Wheeler, you need to explain that the steep price increases that the OEM have taken, adjusted for the mix, has resulted in some degree of tickets size increased. What about the case for micro especially when rural is actually slowing down?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [48]

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Okay. So micro -- we -- I will just explain our philosophy, yes? And you can say whether you agree with or not, that is up to you.

Our philosophy doesn't go on our ticket size. We believe, and that's why we are a bit of, what do you say, maybe outlier in the industry, you can call. I have stronger words, but fine. If we believe that this thing of giving INR 10,000 or INR 12,000 in the first cycle and then INR 17,000 in the second and INR 25,000 the third and so on is just basically stupid. I mean there is no theory -- or there is no logic which supports that. What is important is first to judge that a particular profession of a person, how much indebtedness that the person can take, okay?

I admit that it is not a exact science, that exactly this profession, how do you make sure that, that lady is exactly doing that. It's not an exact science. But generally, our understanding is INR 75,000 to INR 80,000 of total indebtedness of the person is what we can take. And -- or what the person can take. And hence our ticket will always be that person's total indebtedness if it is less than INR 80,000. So INR 80,000 minus their indebtedness at that point of time will be our ticket. Right?

So this is our philosophy. Not based on cycles, not based on fourth cycle. It's not the second cycle, it will increase third cycle. In fact, most cases, our second cycle we actually reject. Because what happens? Is suppose the person is INR 50,000 indebted and we give INR 30,000. And then that person somebody else who doesn't have that rule, use that either 6 months or 1 year down the line, gives more loan to that person. And at the time of renewal or even months before that, based on early warning signals, we come to know that, that person has already gone beyond INR 80,000, we actually reject the loan.

And our renewal rate of our existing books is horrible. You have just 25%. I would like to do more business with my existing people, existing borrowers, if sales are a lot of cost firm. Unfortunately, I'm not able to do that. I don't know how, because the industry sometimes takes the indebtedness of my borrower way beyond that 80,000 because RBI norm says INR 1 lakh and which is actually increasing now. So there is nothing to stop people from going up to INR 1 lakh or INR 1 lakh 20, et cetera. There are people who actually okay, INR 1 lakh is a joint liability. So then people will give some loan against property or individual loan or something like that. We have tools for seeing the overall indebtedness of the individual, and with some amount of accuracy, of the family as well of the household. And we will not plan beyond the norms that we are put. We will adjust that with inflation. 18 months back, we were talking about INR 70,000, INR 75,000. We are now talking about INR 80,000, but we will stay there.

Now as the result of that, as we go deeper, as we go into new areas and new geographies, we will find less indebted people and the ability for us to learn maybe slightly higher. So just to tell the INR 33,000 is incremental during this quarter and it is not the average of the book. So average for the book will be much lower. If the orders are much lower, meaning it will be a total of that INR 30,000, INR 31,000.

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [49]

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Yes, book is 21,000.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [50]

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21,000. Now that is average book, but average ticket...

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [51]

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Incremental will be less...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [52]

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Okay. So average book today is just about INR 20,000, INR 21,000 outstanding per person.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [53]

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Got it. Sir, just 1 follow-up on that comment that you made on your opening remarks specifically on that West Bengal and Orissa where your rejection rate has actually gone up.

We're getting some kind of mixed signals from these markets, because one of your peers which reported last Friday, which has a sizable exposure in West Bengal did not allude to any kind of risks and there seems to be growing at a very fast pace, to be fair.

And now we are hearing from you that you actually stepped up your rejection rate there.

So could you be able to share some granular data points on what you saw in this Bengal and Orissa, apart from the floods or so that made you become very conservative at -- specifically with these 2 things?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [54]

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Okay. I will answer it without referring to the peer you talked about. Very, very respected elder, I think very highly of the gentleman. So we will not get there, okay?

We will -- I will always explain what we believe. So I will take you 2 quarters back. When we took INR 150 crores provisioning of our Orissa portfolio, okay? And we saw something which, perhaps the industry didn't see or didn't acknowledge at this point of time, which was the presence of some bad practices in the Orissa portfolio, and in some areas of West Bengal, okay? This was the practice of having middlemen. And when you have middlemen or what we call center ladies, you don't know really, you have no way other than audits, of finding out how much money actually reaches the final borrower. We have no practice, no sanction, no wish to have center ladies or middlemen in our business. And hence, when we saw that, at that point in time, we have brought our business in those areas, those particular areas in Orissa to a grinding halt, okay?

And because of that, naturally, there were some collision of all these people against us and we actually just provided INR 150 crores. And we're glad to tell you that slowly recovering of -- from there also are coming back. That's -- so Orissa we had called 6 months back or maybe 6, 9 months back...

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [55]

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9 months.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [56]

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9 months back from the cyclone Fani. Let me go on on record on saying, we believe that natural disasters do not cause any sizable problem to micro finance loans. It can cause delays, but people don't default after natural disasters. People default because of 2 things: political intervention; second is people -- lenders have been stupid and when somebody can repay INR 80,000, have lend INR 2 lakhs in one way or the other, right?

Today, their finance may be toss of cyclone, flood, et cetera. We don't believe that, that will affect portfolios. Portfolios will be affected by 2 things. One, over lending; second, political intervention or perhaps fear or anticipation of political intervention.

Right now, West Bengal, we are just being extremely cautious because we don't see a logic in some of the things that the government there does. So we are just being cautious at this point in time.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [57]

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Got it. And sir, just one last question. The exposure to the HFC that we have taken for provision from, what was the yield that we were earning on that?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [58]

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Well, it was a DCM book. So what if -- I -- it's a good question. I don't know but (inaudible). So there was 1 -- so I will tell you, that the -- it was 2 parts. One which we had done as a part of our DCM business. We were managing one of the issues, so that the yield will be, I think around, 9%, okay? The second one was the -- was something quite stupid that the (inaudible). So it was a AAA security, which -- hence there were limits in place. This is on 21st of September. So this exposure was sold by one of funds and bought by the DCM desk at 11% yield. So the person is no longer here in the company. When a AAA security is available at 11%, lots of internal control should come forward. They did but the desk ignored this. So we have taken the measures. It won't happen again.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [59]

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Okay. Sir, the reason I asked that question is on your presentation, you have disclosed an interest accrual of INR 14 crores and a principle of INR 525 crores which worked to about 8% interest. Does this mean that this DCM instrument of less than a year old when you bought it?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [60]

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Yes, it was bought on 21st of September, I told you.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [61]

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Okay. 21st of September. And on this you have now provided 50%, and you think this is more than profession?

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [62]

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Yes, correct.

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Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [63]

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And it is still a standard asset?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [64]

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Yes. It will be standard until it is due this particular thing is in due September...

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [65]

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(inaudible).

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [66]

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And so we will see.

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [67]

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After that (inaudible).

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [68]

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(inaudible). Before that, there is a lot of restructuring or sale of the company will happen.

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Operator [69]

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The next question is from the line of Kunal Shah from Edelweiss.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [70]

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This is (inaudible). So a couple of questions, one is in terms of a red flag that we're probably seeing on that portfolio that has made us cautious over the last couple of quarters if you could enlighten?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [71]

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Of course. It is less of a red flag, more of a business model that we are building. So we believe that what this SME, LAP, et cetera, just lending it because of a security is not a good thing to do in the current circumstances.

A more detailed analysis of the repayment capabilities based on a lot of data analytics is required. Hence, we are building it in the SME business that we hope to launch somewhere in this financial year -- we -- I still don't want to promise until we get the real algorithm. When we do SME business, it will be largely starting with L&T ecosystem, definitely.

It will not be a supply chain business but SMEs within the L&T ecosystem. It will be straight through, it will be paperless, it will be completely digital, totally straight through processing. It will be a very different type of SME that we are planning to do.

Hopefully, we will be all the -- what is it called -- the proof of concept and pilots will be successful. At this point of time, we don't know but we would like to keep it as an upside. With that working, lending with our security, when possibility and selling the security at a good price is coming -- is low. Doing it at LTVs which are -- because now if I do LAP, LTVs will not be more than 40%, 45% and at the maximum, 50%. At that point of time, you are not competitive yet. That's why we are not doing that business. (inaudible) doing other things.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [72]

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Yes. So if I look at last 2, 3 quarters, you're essentially not merging into this last segment.

So what is the possibility that if this continues, we will not make this book defocused in next 2, 3 quarters?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [73]

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Good question, good question. Thanks for asking it. It's not likely that it will be more merge into the SME business where we will launch. Right now, there is no question of being focused. It is -- basically, we are -- we have a team. We keep looking for good business. There is less good business and the way we define now good business is the less than 50% LTV, has a good margin. Less and less is available. As more and more people do what they call retail housing and LAP is a part of that.

So at this point of time, it's just not -- a lot of good business is not available. Why it will not be defocused is because it will be part of a focus business that we will launch, which will be SME.

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Operator [74]

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The next question is from the line of [Supra Shulmistra] from Bank of Verona Capital.

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Unidentified Analyst, [75]

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The first question is with regards to your -- you've alluded to the new businesses, SME business and consumer loans. If you can give us the architecture of the individual businesses, how they're going to shape up. And the targets, the LTV, the client base, the market side that you're looking at and yes -- given the architecture of these new business.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [76]

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Usually I will tell you and not that I am trying hide anything, I just don't know at this point in time. We are doing a lot of lab tests. As I said, we will be hopefully able to launch in some segments. Personal loans will be launched initially with our own client base. And we have a large client base, all of the businesses put together. And the SME loans will be launched in a linked ecosystem.

So these are the 2 individual segments, that's perhaps all that we will do in this financial year and maybe in the first 2 quarters of the next financials also. We will be very careful in upping the ante or speed in this -- any new business that we do. The one thing about the construct. Everything else is under study.

There is one of the top-notch consultants working on it. We are working very closely. There is a very specific project team working on it. By the way, we know how to do things we put in project. Both these will be paperless, they'll be straight through totally analytics-based and especially in SME that is quite tough and we are working on that. We are working. It will be almost FinTech type but not exactly FinTech, but FinTech type. So I'm not saying the acquisition will be necessarily online, perhaps it will not, but the processing, the credit, everything will be completely paperless and IT and digital-based. So that's what we can tell right now largely because everything is in proof of concepts stage.

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Unidentified Analyst, [77]

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Right. Sure. And the budget removed the DRR effect on the private -- on the public entities. So that could have an effect on your network. What is that effect, sir, if you can quantify that.

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [78]

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Minor, no.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [79]

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It won't be anything significant straight off. Now that you asked the question. Now that you asked that I think it's fair game in the future. But now that you asked this question, I think you can contact (inaudible), he will do the calculations and give you.

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Unidentified Analyst, [80]

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Sure, sir. And you alluded to around 40% market share in Honda. So which implies that your volumes is around 50,000 units per month -- on a monthly basis or...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [81]

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No, no, no. It is not 40% market share in Honda. It is 40% of my business (inaudible).

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Unidentified Analyst, [82]

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Okay. So how do you finance in Honda on a monthly basis?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [83]

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So with total Two-Wheeler we finance how much? Yes this quarter, we are financed close to 2 lakh, 1 lakh 90,000 vehicles, okay, which is down.

In Q3, it was some 2 lakh 80,000 vehicles as I told it. It was unprecedented festive season. We are generally at around 2 lakh vehicles for 40% of that we loan.

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Unidentified Analyst, [84]

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Okay. Sure, sir. And any kind of increase in LTVs that you...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [85]

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In line? No. Not LTV percentage but ticket size in line with price of vehicles.

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Unidentified Analyst, [86]

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Right. Sir, because the feedback that I've got is a lot of lenders have gone into markets and they're sourcing not to be sourced customers. So I'm assuming that we have an anonymity like...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [87]

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So it's like this, okay? Not to be sourced (foreign language). So I can first of all say, no, we have not done anything of that kind, okay? But I will just put this in perspective. What happens is there are times when things are "crazy" and I'm not necessarily defending us, I am just defending maybe some imaginary people. So number 1 is when you -- so our customers, 40%, 50% are new to credit. Now that is our model, and we believe we have the right digital and data analytics techniques to be able to lend to them without having the credit bureau record.

Non-credit bureau customers, how do you construct look-alikes of them with credit bureau customers? It's data analytics and analytics science, right? And we believe we are in now gen 4 of that science and we believe that our previous experience of using that for underwriting and more importantly, early warning signals has helped us.

We go here up to -- and I always say, precision (inaudible) we go up to pin code levels for doing this science. So there are pin codes that we blacklist, pin codes that we bring back so it's well into that.

Now when I say 70% LTV, mine is a very narrow range of something like 67% to 70% to 73%. There will be vendors who will be at a wide range from 50% also to 80%, 90%.

And there are lenders who are doing that to almost 100%, right? Now is it a fair practice? I don't know. If 90%, 100% is being done to everybody, it's a bad practice. If 90% to 100% is done to you, for example, it is a good practice. I will give to you without hypothecation, right? So it all depends on the customer profile and how data analytics is able to capture the customer profile and how you can do very nuanced and micro product design based on that.

Now when rumors reach you, they reach at 30,000 feet giving away -- taking away all these nuances something (inaudible), that somebody, some foreigner is financing at 90%. We know who is financing at 90% and we also know that large part of that lending is quite okay. No problem. Does that answer your question?

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Unidentified Analyst, [88]

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It does. So 1 small data point about Two-Wheeler business mix. What percentage is bikes? And what percentage is scooters?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [89]

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I don't have the figure here so we'll get back to you. But as I said, 40% Honda will be entirely scooters, Yes. Hello? So more or less, it will be total 50/50, but I will get back to you with the exact numbers. Yes, go ahead.

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Operator [90]

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The next question is from the line of Girish Achhipalia from Morgan Stanley.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [91]

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Maybe I missed this and you've already covered it. In your opening comments, obviously, you mentioned about the sanctity of renewable contract with reference to what are -- is happening in Andhra Pradesh. I just wanted to understand your exposure on the overall book that pertains to Andhra Pradesh. And if you have some sense around what could be the average tariff for your portfolio.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [92]

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Okay. So we -- our overall book is about INR 2,500 crores in Andhra Pradesh entirely -- almost entirely owned by foreign funds. So our borrowers ultimately from the inside are different. Of course, active energy, green core, GIP, et cetera, Vena. The ultimate owners will be Brookfield, GSC, RDR, GIP. These are the ultimate owners. So most of our portfolio is to these developers, which makes us pretty sanguine.

Average tariff will be 3.5 to 4.2 -- there is one at 4.5. Around that.

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Operator [93]

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The next question is from the line of Renish Bhuva from ICICI Securities.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [94]

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In the basic press release...

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Operator [95]

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Mr. Renish, we can't really hear you. If you could speak a little louder.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [96]

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Am I audible now?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [97]

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Yes, yes.

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [98]

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Yes.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [99]

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Just a small clarification on the basic press release. So in the press release, there is a one line item called a net loss on fair value changes. So it used to be around INR 100 crores in Q4 SLS up Q1 FY'19 and this is 0 in this quarter. So what that line item pertains to? What is explained?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [100]

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What next one? Sorry, can you repeat? Is it complete (inaudible) is coming, right?

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [101]

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Yes. So in your basic press release, these are consol result. On that expense head, there is a item called net loss on fair value changes, which used to be like INR 132 crores in Q4. It was INR 101 crore in Q1 '19, which is INR 0 in this quarter. So I was just...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [102]

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Yes, I will request my CFO to answer this.

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [103]

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Yes, so the net loss what -- you understand last year, it was a first year of transition. So the fair valuation, there was a big gap between IGAAP and IND AS (inaudible) and since now we have already (inaudible) now it is all settled down, now the differences will be very minor.

Because every quarter...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [104]

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It is the first year of IND AS last year.

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Unidentified Analyst, [105]

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Okay. So it was linked to the portfolio? Because I mean, what it pertains to, basically?

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Sachinn Joshi, L&T Finance Holdings Limited - Group CFO [106]

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It will be investments that we have made, which would be part of some of the DCM portfolio then.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [107]

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Okay, okay, okay. Got it. Got it. And just a follow-up on that. So in this quarter, P&L of roughly INR 550 crores, there are a couple of item which are sort of gone of (inaudible) thing like this INR 100 crore, which is not in this quarter, but obviously since it will not be there going forward also, plus INR 84 crores of recognition, INR 235 crores of provision. So what will be the sustainable kind of type run rate you see going forward? I just think for all these one-offs kind of...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [108]

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That is for you guys to calculate, yes?

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [109]

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But sir, there are so many moving parts. So your take on that would help us a lot.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [110]

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It is my job to tell you everything that goes into the results, right? I can't tell you how results will be...

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [111]

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No, no, no. I'm not saying about the (inaudible) next year ROA, ROE sustainable...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [112]

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Yes. Sure, sure, sure. I will come to that. (foreign language) because normally, and it is quarter-to-quarter, things change, things happen, so it is difficult to see. But we try always to maintain our ratios in particular ranges.

So by means trust fees. We have always said we will range down between 6.5, 6.6 to 6.97. So when I mean trust fees, there will always be a trial to maintain it at that particular rate.

Expenses will always be at around 1.7 to 1.9, okay? And in this quarter, nobody has said, but this quarter the expense ratio is high. Why? It is very simple. That I am maintaining my muscle somewhere and I will just give you a very simple thing. That in a particular dealership, suppose I am getting 18 factors, right? From 1 person and that 1 person is there. Today, if I am getting 12 factors, I can keep 0.66%, right? So that -- just very simple, connection has (foreign language). So these are few things but these are generally temporary around that range of expenses. Credit costs. We have always maintained it between 1.6% to 2%, it should range that. But yes, of course, whether all this will be at the middle most range, it won't happen or all this won't happened in positive most ranges. Right, I am giving you these ranges which should normally work out to between 2.1 to 2.3, for sort of ROE. And hence, ROE between 16 to 17, 17.5. So that's what we believe.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [113]

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So sir, whatever ratios we have -- you have just shared, is it including the run down in the focus groups?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [114]

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Yes, yes. Absolutely.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [115]

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Everything included, right? So there will be no one-off kind of a thing in these ratios?

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [116]

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Not that we anticipate with it.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [117]

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Yes, I mean, obviously. And sir, the last question, if I may, is you just mentioned something about the Bengal West from the political standpoint. So if you can just elaborate what you are just trying to highlight? I just missed that part.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [118]

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No, no. I was not trying to highlight anything. I was just signed in various unrelated issues to be aware of the state government (inaudible).

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [119]

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Yes. I mean in what sense? I mean...

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [120]

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(foreign language) on some Chief Minister getting down on the road and shouting at people. (foreign language) so don't make me say all those things.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [121]

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But I don't know. I am saying there is nothing specific to micro finance.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [122]

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Nothing at all. But it's best to be careful, no?

Yes. So I think you are done with the questions.

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Operator [123]

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Yes, we'll take that as the last question. (Operator Instructions) I would now like to hand the conference back to the management team for any closing comments.

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Dinanath Mohandas Dubhashi, L&T Finance Holdings Limited - CEO, MD & Whole-Time Director [124]

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Yes. I think from my opening comments and from the questions, we believe that as you learned, we have clarified most doubts. When L&T Finance being a part of the L&T Group, we make a statement. We like to be totally upfront, totally transparent. And I would request you to take it like. If you have any doubts, please contact me, my team. We will be very happy to clarify those points.

What I would like to end with is a -- on the positive note, is this is a company which was reporting less than INR 200 crores per quarter when the situation was best for all the investors and when the situation is really (expletive) for the sector, we are reporting INR 550 crores after taking a onetime charge. It is a sign of the strengths that we have built, it is the strength of the models we have built.

Yes, definitely, growth in sectors right now is going to remain modest, maybe even degrowth in many other sectors this year.

What we are sure of is we will maintain a gain of at least maintain market share in each group. And finally, when this term is over, when all this negativity is over, we will emerge on the other side, stronger and ready to take advantage of that.

The management, I can promise my colleagues sitting here and all of you that we on one hand will be extremely, extremely careful and risk-aware of everything that we do. But we will not get into negative mindsets. We will make sure that the team is motivated, the team is very clear of what needs to be done and as always, clear management intent drives the team into not only dealing with this start but emerging on the other side stronger and being able to take care and take advantage when the sectors start growing.

It has been a pleasure. Thank you very much. We look forward to interacting with each one of you in the near future for making any more clarifications. Thank you very much.

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Operator [125]

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Thank you very much. On behalf of L&T Finance Holdings Limited, that does conclude the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.