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Edited Transcript of MAGMA.NSE earnings conference call or presentation 1-Aug-19 8:00am GMT

Q1 2020 Magma Fincorp Ltd Earnings Call

Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Magma Fincorp Ltd earnings conference call or presentation Thursday, August 1, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kamal Kishore Kailash Baheti

Magma Fincorp Limited - President & Group CFO

* Kaushik Banerjee;President & CEO, Asset Finance

* Manish Jaiswal

Magma Housing Finance Limited - MD, CEO & Executive Director

* Sanjay Chamria

Magma Fincorp Limited - Vice Chairman & MD

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Conference Call Participants

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* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* Nidhesh Jain

Investec Bank Limited (SA), Research Division - Research Analyst

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Senior Analyst

* Pradeep Agrawal

PhillipCapital (India) Pvt. Ltd., Research Division - Analyst

* Rohan Mandora

Equirus Securities Private Limited, Research Division - Analyst

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Magma Fincorp Q1 FY '20 Earnings Conference Call hosted by PhillipCapital Private Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Pradeep Agrawal from PhillipCapital. Thank you, and over to you.

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Pradeep Agrawal, PhillipCapital (India) Pvt. Ltd., Research Division - Analyst [2]

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Yes. Thanks, Steven. Good afternoon, everyone, and welcome to the Quarter 1 FY '20 Earnings Call for Magma Fincorp. To discuss the results, we have with us Mr. Sanjay Chamria, Vice Chairman and MD; Mr. Manish Jaiswal, MD and CEO, Housing and SME, Mr. Rajive Kumaraswami, MD and CEO, Magma HDI; Mr. Kailash Baheti, CFO; and Mr. Kaushik Banerjee, Adviser, Asset Finance.

I would now like to hand over the call to Mr. Chamria for his opening remarks. Over to you, sir.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [3]

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Thank you, Pradeep. Good afternoon, and thanks to all of you for joining the first quarter earnings call. The year -- financial year 2019 was a year of differentiated learning curves, especially for NBFCs, in ways more than any, with 3 large macro events playing out: the first, liquidity crunch triggered by [an entering NBFC] whose contagion impacted even to the retail NBFCs; second is Ind AS implementation; and the third one is the GST stabilization.

It has been 10 months, yet the dry liquidity spell which has started from the second half of FY '19 has yet not fully mitigated. The risk on balance sheet of retail NBFCs is very well managed. However, the sectoral risk aversion by the lenders has adversely impacted the liquidity tap. The pass-through financial sector crisis of 2008 and 2013 now appears short-lived for the witnessed reshaped liquidity recovery. The liquidity recovery around this time has been slow. Perhaps it is only now, after more than 10 months, that the green shoots are getting visible.

On macroeconomic level, there has been a conjunction slowdown across the primary markets. We believe that the [resulting] cash flows have so far been holding up, although there has been a gradual shift from conjunction to cogeneration. The sector will perhaps watch the momentum of delayed monsoons to pay out before committing deeper investments. In times such as these, business continuance and asset quality are primary imperatives.

We are pleased to inform that despite sectoral headwinds, Magma has emerged strongly as one of those few NBFCs that showed resilience of character by recording a strong operating performance, be it growth or more importantly, quality of growth. In the backdrop of primary sales flattening in larger economy, I'm pleased to inform that Magma's well planned liquidity runway of cash carrying off of INR 2,200 crores by end of FY '19 has allowed for qualitative growth in disbursals in Q1 by 12%, leading to growth in AUM of 9%. In these market conditions, we believe this is a standout number.

In times such as these, portfolio quality assumes paramount importance. The company has a strong [golden] presence in hinterland, and it's heartening to see that Magma's collections are holding up well despite political, economic and seasonal volatilities. Magma's transformation of the superior underwriting, strong portfolio management and deep rural collection trends showed up in resilient GNPA and NNPA which stand abated at 5.1% and 3.3% despite headwinds. These model well for future since the model is getting well tested in these tough economic cycle and portfolio quality improvement in these times bodes well.

Our OpEx has been well controlled and now stands at 4.1% versus 4.2% of AUM on a Y-o-Y basis. We are taking big steps for absolute OpEx reduction, which should be visible in Q1.

Coming to ABF, our strategy has stabilized over the last 2 years with clear focus on portfolio quality. Our Early Warning Indicators and Continuous Portfolio Monitoring Indicators are trending at multi-year lows, which augurs very well for the portfolio quality going forward. We have made suitable adjustments to our (inaudible) this will reflect in gradual improvement in our mix as well as the portfolio itself, it would be pertinent to mention that our API portfolio has door-to-door maturity of just 36 months, and the average maturity of the portfolio is less than 24 months.

Our strategy of focus on used product has been implemented in full glory. Given headwinds in the auto sector, this strategy has been in line with our conscious focus to ensure quality and profitable sustainable growth. We grew our used assets disbursement by 47% Y-o-Y, and used assets now contribute 30% of ABF AUM. We'll pursue our stated strategy to deliver deeper results. This strategy will help us grow our rate and (inaudible), both of which will serve well, choosing elevated environment of cost of funds.

Coming to mortgage. We are happy to announce another great quarter for our affordable housing finance business with 192% growth in the actual sourcing and 136% growth in overall business over the last year same quarter. In line with our business philosophy of Go HL and Go Direct, our incremental disbursals have 68% Home Loan portfolio, and we have closed 81% of the business Direct.

The ED & ID, the Early Warning Indicators are also trending significantly better. The same is also visible in the MHFL superior asset quality. The MHFL franchise have deep relations and established direct connect with its customers in 9 key states. Significant and diversified national players were 39% and 35%, 22% and 4% disbursement for the quarter coming from West, North, South and East, respectively. [Just mitigate] the geographic concentration just kind of establishes Magma Housing Finance truly as a differentiated national scale affordable housing finance company.

In SME business, we held on to our disbursal levels and exercised prudent asset quality over growth given tough macro conditions of stretched working capital cycles. The primary focus has been on quality origination. Your company has been able to secure 21% of the portfolio under government's CTG SME program. We have a sanction line up additional close to INR 500 crores from SEBI for utilization to provide collateral-free financing to SME.

Coming to the General Insurance business. It continues with robust growth rates vis-à-vis the industry growth rates. Magma HDI registered a growth of 54.7% in the gross premium in the first quarter of this year over the same quarter last year. The growth is driven by a strong momentum both in the retail and the commercial business verticals. The company continues to focus on building the retail franchise.

Motor continues to be a dominant portfolio for the company with the concentration being 76% in the quarter compared to 72% in first quarter last year. The company continues to enjoy one of the lowest Own Damage loss ratios in the industry. And the OEM relations and OEM relationship business is ramping up month on month, contributing to 15.4% of the GWP in the first quarter.

Health continues to be an area of focus with an objective of building a profitable portfolio comprising benefit and indemnity products both on the retail and group platform. Building blocks being put in place for new initiatives on health like branch cross-sell to walk-in customers, resells to existing customers with attachment on all underlying grade portfolio. Contribution of health in the total GWP is about 5% in first quarter, same as last year.

In summary, Magma has established tremendous credence with liquidity availability and business growth qualitatively as for brand. The cost of liquidity, however, has gone up significantly by over 100 basis points in the last 10 months. The increase in the cost of funds largely coming from 2 fronts as the liquidity -- liability strategy for the NBFC industry level is undergoing deep structural shift.

First, Magma saw almost the entire additional borrowing of INR 6,000 crores over the last 10 months to long-term loans and converted some of its existing short-term facilities into long term as a more stable source. While this helped in robust ALM matching in the short term, it has come at a higher price of roughly about 100 basis points. We chose the part of the ALM collection that have reduced our already low dependence on CPs to just 6% of our overall borrowings.

Secondly, we have an annual reset of price for all our long-term borrowings from the banks. And the majority, during each quarter, gets repriced with the higher risk given lenders' sectoral risk aversion and elevated risk perception. With 2 reported reductions by RBI, the [LCL] has begun to mildly cool off. We are sanguine about the cost of funds reduction as both [Express] and LCL are expected to return to normal scene in 3 quarters. While NIM compression will gain profitability in the short term, in the medium run, once the benign interest rate climate (inaudible) better liquidity, higher IRR and the fee income, the profitability will bounce back to its chartered trajectory as we referenced in the business model.

Another impact this quarter was on the net credit loss. FY '20 is the first normalized year post Ind AS implementation. We will see some volatility in the quarterly results due to seasonality of our business where bucket slippage in Q1 of each financial year would result in optically higher NPLs only to sequentially get lower as the year progresses and settle in the same normalized level of 1.5% to 1.7%. We believe that under Ind AS, the results need to be analyzed on an annual basis rather than quarterly as there will be some seasonality in the quarterly result under Ind AS.

The quarter in the review saw lower collection efficiency, which was at 96.1% versus 97.7% in similar quarter last year. This is attributed to election year and other macro disturbances during April and May. While the collection efficiency improved in June, the slippage in April and May have impacted the early-stage provisioning under Ind AS. While transiting to Ind AS, we have adopted a conservative provision and write-off policy. As for the policy, we now write off any asset over 730 plus for ABF portfolio. This has resulted in high-grade costs for the quarter over and above the ECM. This is as far as seasonality, and there will be linear improvement in subsequent quarters.

Thirdly, we had significant reduction in NPAs last year. The flow from NPAs to PA was higher due to significant stock available for resolution. This year, while we have 29% lower fresh flows into NPA, the absolute flows from NPA to PA has been lower than Q1 of last year as the stock of the overall NPA has decreased significantly during the year. The same has impacted our overall ECL provisioning.

We believe that under the current headwinds, the company has registered a strong operating performance on growth, asset quality and optics. We are addressing NIM expansion in three-pronged strategy. First, we have adjusted our ABF product portfolio from May onwards with even larger focus on used assets. This has resulted in savings expenses of 30 bps in June. And we expect this expansion to further improve by another 30 bps in the second quarter and stabilize at that.

We've also been able to improve our fee income with improvement in the cost trend. We also increased our direct business, which has resulted in lower payouts and therefore higher NIM. The impact of these initiatives will be reflected in subsequent quarters. As I mentioned earlier, we are taking deep steps for absolute OpEx reduction, which should be visible in upcoming quarters. We are strengthening our balance sheet with a superior asset quality, better ALM with more long-term and stable borrowing. I'm confident of our trajectory towards profitable growth and remain committed to our medium- to long-term guidance.

So Manish, Kaushik, Rajive, Kailash and myself will take any questions that you may have. Thank you.

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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 [Rohit Ramesh from Panama Fund Managers].

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Unidentified Analyst, [2]

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The first one, can I have your view, first of all, on the rural market and how have the repayments been in the last, say, 3 months?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [3]

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So the rural market, as you know, is dependent largely on the cash cycle. And during the month of April and May, wherein the elections were held over 7 phases, the cash cycle generally slows down. And then in the month of June, the cycle has improved in the rural. And we have over 70% of the total portfolio in the customers based of the rural market, be it in the commercial vehicle, tractors or the passenger vehicles. And so we have seen that April and May, the collections were impacted, but they bounced back in the month of June.

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Unidentified Analyst, [4]

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And how has July been?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [5]

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So far, July has been somewhat better than June. And June was actually the best month in the first quarter. So as I mentioned, that the slippage of April and May could not be recovered fully in June. And now we are hoping that July, like the way it has gone, if August and September also there are more macro disturbances, then we should not only be on budget, but we should be able to grow back some of the slippages of April and May.

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Unidentified Analyst, [6]

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Okay. And how are the SME businesses doing according to you right now? Who would you lend to?

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Manish Jaiswal, Magma Housing Finance Limited - MD, CEO & Executive Director [7]

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Manish Jaiswal here. So on SME business, we certainly see that our corrections in bucket 0 are holding up. We continue to see on the bucket 0 around 99% of collection efficiency. But certainly, these are the moments when we know that there is a cash flow stretch in the larger economy. So what we have done is have a deep focus on quality of origination. So these are the times where we will -- we are tracking our customer selection. And we believe that if we handle the process of customer origination, good quality underwriting and portfolio management, I think it's a good quality business, which we are bullish about. And we continue our optimism in this business.

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Unidentified Analyst, [8]

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And in the SME business, which type of business will you be lending to the most? Like what type of -- which sector will it be?

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Manish Jaiswal, Magma Housing Finance Limited - MD, CEO & Executive Director [9]

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We are largely sector-agnostic. But certainly, within sectors, what we do is that we -- in our retail business, we have the methodology of sectoral eliminations. It could be either a negative or a toxic sector or it could be a negative or a toxic profile per se. So in terms of selection of a segment, within that segment, how to choose the right customers is really the art. So we have employed great digital efficiencies through building algorithms and model based on last set of data. And so we employ not only the human judgment but also the digital judgment coming in from our algos, which are data-derived models. And these put together, which have been launched from 1st of April under a model called MScore, they really are helping us in terms of good quality customer selection.

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Unidentified Analyst, [10]

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Got it. And what will be your view right now on the commercial vehicle market, especially the second hand and the lower end of that? If you could give some more information.

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Kaushik Banerjee;President & CEO, Asset Finance, [11]

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This is Kaushik here. I see your question in 2 parts. One is the overall commercial vehicle market, and I presume you're talking about new. And the second part of the question is about the used vehicle segment, right? So in terms of how the new vehicle is behaving because this a double-digit decline across 3 categories in commercial vehicles. And that's obviously effectively industry TIV. And one of reasons for this obviously is to increase the load capacity that was kind of (inaudible).

But we still believe in FY '21, there could be some uptick. Maybe in the second half of this financial year. But right now, there is no clear indicator. And it's not limited to commercial vehicles. We declined in terms of TIV. Has happened across all segment results. So we clearly see this is impactful in used vehicle department. And then it's also affected in terms of Magma having 46% growth Y-o-Y. And what we have traditionally believed is that the used segment in terms of (inaudible) returns as well as operate economics is at a pace better over time than new commercial vehicles, and that's what is pending right now. And I think the focus on used will continue.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [12]

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So in addition to what Kaushik has mentioned, I can also share that today, almost 40% of our used comes from our existing customers by way of cross-sell. And we have the customers who have had a good payment track record and therefore are eligible for a second loan. And they are compliant in all respects. So therefore, the quality of business is also quite superior.

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Unidentified Analyst, [13]

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Okay. And we've seen in the ED lending business, there is a lot of competition. So is there anything that differentiates you from competition in terms of underwriting scale or product -- and product offering?

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Kaushik Banerjee;President & CEO, Asset Finance, [14]

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Yes. So if you recall, we've been highlighting the fact that we have developed a provisioning platform where the system will generate a go or no-go decision. And we also have a branch and product grading in place. So the combination of the product grading along with the credit platform actually allows us to take superior credit position at the time of sourcing, and that's clearly reflected in the EWI and CPMI patterns of the business.

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Unidentified Analyst, [15]

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Okay. And last question, are you seeing stress in any sector, in the revenue line, any geography or any sector?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [16]

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So you are referring to any particular business or all business?

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Unidentified Analyst, [17]

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No, not all the businesses because like if there is a slowdown in the economy, which sector, according to you, which can get affected even more going forward right now? Where do you see the stress coming up in repayment?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [18]

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We are completely retail and granular. So our average ticket size has rather been falling. 2 years ago, in the Vehicle Finance business, our ticket price were over 5 lakhs. Last year, it came down to 4.65. This year, in Q1, it has further fallen to 4.35. Similarly in mortgage, our ticket size, which used to be about 31 lakhs, fell down to 12 lakhs, 13 lakhs. And now last year, it is at about 9.5 lakhs. So we are so granular that it is difficult to ascribe that due to the economic slowdown. This particular sector, we get impacted, even in SME, as Manish mentioned, that we are sector-agnostic. What we do is do the position of customers based on the underlying cash flows in their respective business, and that's how we fund.

So I think there is a widespread economic slowdown as our country is witnessing. That said, we see that across the board, there will be stress in terms of collection efficiency. And as the normalcy returns, like in the month of July, we saw that we improved. So we improved across geography, and we also improved across product segments.

What I would suggest now is that if you have any more questions, maybe we can take it separately and Jinesh will follow up with you because we have so many people on the call.

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Operator [19]

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The next question is from the line of Kunal Shah from Edelweiss. Please, go ahead.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [20]

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Yes. So firstly, in terms of the...

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Operator [21]

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Mr. Shah, can you speak closer to the handset, please? Your voice is not audible.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [22]

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Yes, sorry. So firstly, in terms of the entire credit cost of INR 128 crores, if you can just give some further breakup in terms of what -- particularly on the write-back side, which we see from a relatively higher pool of NPLs, which was there last year, which is not there this time. So where this delta is coming in from in terms of almost 3% credit cost? Because finally, when we look at it in terms of the Gross Stage 3, I think the overall incremental provisioning requirement was only INR 20-odd crores. So there is almost INR 110 crores, which has come over and above that without any major increase in the coverage. So how is this particular thing? And maybe in terms of volatility, if you can help us gauge that also in terms of Q2, Q3, Q4, [how we foresee]?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [23]

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Okay. So there are 3 components, Kunal, as I was talking as far as credit losses. And to your specific question about Stage 3, I think it's roughly about INR 20 crores. So as I mentioned, that when we transited to Ind AS, one other thing that we did was also to do a complete write-off of the portfolio that will get into 730 plus. And so this is over and above that, this over and above INR 20 crores because that -- what has happened is our GNPA and NNPA is pretty stable. And despite the relatively flattish book between March and June, and it is at about 3.1, the -- so this is one. The second is...

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [24]

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Sorry, just one here in terms of write-off. How much would that have been this quarter?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [25]

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I would not really know that number right away. Maybe Jinesh can subsequently provide it to you. The second thing that has happened is because this quarter, the cash flows have been lower, what we have seen is that upon repositioning in the (inaudible). So last year, we witnessed that (inaudible) repossessed vehicles was about 56%, which was down to 45% in this quarter. The other impact of that is when we sell, there is obviously a loss, which is the loss on sale. So while we continue our recovery efforts against those customers where we have booked a loss on the sale, but in the books, we do a write-off.

And so therefore, the delta of INR 45 crores that you see also includes the loss on sale of repossessed assets, which again, as the cash flows will improve, we will see that the [repo/release] ratio will again improve to about 55%, 60%. Actually, in good economic conditions, this is about 65% to 70%. But in the general scenario, it is about 60%. And last quarter, it was 45%.

And the third is in the higher buckets, while we have a provisioning, so when we do a settlement with the customers, there's always a loss that you book. And the loss percentage has gone down. And we have incurred lesser reverse on the accounts that we have settled in the deeper buckets. But in order to control the NPAs, and which we have been able to control, we have actually done more aggressive settlements. So whenever you do a settlement, also your losses will go up. We thought that in times like this where the cash flows are tough, rather than allow the toxicity to build up in the NPAs, rather we will take the upfront loss. And that's the reason we said that going into the next few quarters, and the trend of July also that is visible, then it should be better.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [26]

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Okay. And this complete write-off is there on the entire portfolio, not the product specific?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [27]

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So in case of SME, anyways we do the complete write-off at even much earlier, which is 450 plus. And in 90 plus, for example, we make a provisioning of 75%. And if it crosses 450, then we do a complete write-off. In ABF, we do a complete write-off at 730 plus. There is no need for us to do a write-off because the underlying technology is very strong and there is realizable value. And therefore, there is no write-off policy that we follow unless if we find that there is a fraud or defect in respect of the title. And therefore, there is a question on the salability of the mortgage asset. Then of course, we will do a write-off.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [28]

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Sure. And secondly, again, in terms of margin movement, so almost 59 basis points decline quarter-on-quarter and 108 year-on-year. So we are given this breakup in terms of disbursement yield delta and book yield delta. So finally, when you look at it, yield per se, actually, it should have benefited to the extent of 15-odd basis points quarter-on-quarter. And the decline in margins, which is there, that is on account of the funding costs. So how has been the funding cost movement?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [29]

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So I'll let Kailash take the question on the funding cost movement. I will answer the question with regard to the NIM. That takes into account the grosses as well as the cost of fund and therefore the net margins and the spread. But you see, mortgage is a business where we have a floating book. And in fact, the [money's] price in the last 6 months has repriced the book, factoring in the -- our internal benchmark floating rate, which is as per the contractual covenants with all the customers that we have. However, that is only 20% of our total book. 80% of our book, which is SME and ABF, that is fixed rate.

And the other thing, what has happened is in housing, we have been able to increase the pricing because of the demand/supply situation. However, in case of ABF and in case of SME, the ABF, for example, the demand itself has significantly slowed down and the vehicle sales are at multi-year low, whereas in case of SME, we were already charging at about 18.5%. There will be a further increase of pricing a little bit. So therefore, the germination of the price increase has a very limited scope, only in 20% of the business, which is mortgage.

So what we have done is, as I mentioned, from the month of May, we started adjusting the product mix in order to cushion the increase in the cost of funds. So like hedges for the disbursement, in first quarter, it's 15.9%. But actually, if I give you the breakup, then it was 15.6% in the month of April, 15.8% in the month of May and 16.1% in the month of June. So gradually, without tinkering with the portfolio quality, which is up almost in our mind. And in these times, we believe that we will sacrifice growth but not the portfolio quality.

So therefore, we have been improving the -- keeping a very close watch on all the Early Warning Indicators across 3 businesses. So this is what has resulted in the further reduction in the NIMs in the first quarter.

Now I'll let Kailash take the question on the cost of funds.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [30]

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Yes. Kunal, the cost of funds movement has been like this. In the first half last year, our cost of funds was about 8.9%. In the full year last year, the cost of fund was INR 9.25 crores -- 9.25%. And end of the year, it was 9.7%. So we started the year with about 9.75%, 9.8%. And we are right now at 10%. Average for the quarter has been 9.9%. And I would also like to say that while most of the liabilities have got repriced and we are now at, I would say, peak in respect of the liabilities, cost of funds rate is in the range of about 10.5%.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [31]

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Okay. And just last one. So given that Magma is coming from a low base this entire consolidation phase and there is a lot of structural activities which have happened, how should we be positioned in the current environment with respect to growth? So would we get impacted the way the industry is doing? Or would we see ourselves in a much better position given the lower base and maybe slightly more aggression as compared to that of other players?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [32]

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So you see in first quarter, we have actually grown our disbursal by 12% on a Y-o-Y basis. And this is, as you rightly said, coming off a low base. And that is why the AUM is up 9% on a Y-o-Y basis and about 1.6% on a quarter-on-quarter basis. However -- so from a business standpoint and asset quality standpoint, we are not on the back foot. We are actually on the front foot and we will be able to grow the business. The entire issue of the growth is now ranging on the liquidity. And bankers and the debt market is releasing funds in the sector. And so therefore, the entire guidance on the growth will be limited to that, not in terms of our ability to maintain the asset quality and (inaudible).

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Operator [33]

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The next question is from the line of Rohan Mandora from Equirus Securities.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [34]

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So coming back to the question on credit cost, so if you could indicate what is the split between the SME business and the vehicle business of INR 128 crores.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [35]

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So right now, we have the consol numbers. Maybe separately, Jinesh can call and provide you the individual business, vertical-wise numbers for mortgage and vehicle business.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [36]

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Okay. But broadly, was it mainly coming from one of the businesses or...

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [37]

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So I can tell you at a macro level, the overall book composition, SME is just 12% of the overall book and housing is about 18%. So that's the -- in terms of asset quality. And if you can look at the ED/ID ratios, you will see that SME actually is respective of the seasonality and mortality over various quarters. It's actually been rock steady. And if I'm not wrong, the number of ED is at around 1.4%. 0.4% is ID and 1.43%. Actually, it's one of those rare businesses where the numbers have fallen despite the market mayhem in last quarter. So technically speaking, the business is fundamentally the drop performing well, and we see no adverse movement on the credit losses.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [38]

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I think qualitatively, I can say the NCL is higher in the ABF business. But then exact breakup, I don't have now. But it is higher in the ABF business relative to mortgage and the SME.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [39]

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What I was trying to understand is in the ECL model, I really -- the reasons that you indicated about write-offs beyond 730 plus are some changes in the provision rate. Some of those factors are captured in the provision that we were already carrying on the balance sheet. So certain activities happened. What led to that is still not clear.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [40]

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So let me explain it, and this is more in their phenomena. And this should be, in my opinion, visible across the vehicle financing NBFCs, which is that in the first quarter, the bucket usually bulged. Well, it is 1 to 30, 31 to 60 and going up to maybe 30-plus also where we very conservatively write off 100%. This is one factor. Now second factor is that under IGAAP, we used to provide a bid of 0.4% for our 0 to 90 bucket. Now you will see that is at the rate of 2%. So there is significant difference when the bucket is done. Usually, and I am giving you a ballpark number, the provisioning in the first bucket, 0 bucket, will be a rate of 1%. Next bucket is 4%, then 8%, then 12% and going on to 35%.

So each upward movement brings with it significant amount of credit loss, and this indeed happened in the first quarter. This is not only for this quarter but in future quarters also. Conversely, you will see that the credit losses have significantly dropped in quarter 2, quarter 3 and quarter 4. Overall, we have said that our credit loss last year was at 1.6%. We should not be significantly different at the end of the current financial year.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [41]

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And so what was the Stage 2 asset as of 1Q FY '20?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [42]

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Sorry?

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [43]

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Stage 2 asset?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [44]

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Stage 2.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [45]

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I think we have given the breakup of a 68...

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [46]

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Stage 1 and 2.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [47]

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So Stage 1 and Stage 2 assets, okay, we have the coverage ratio there. Okay. Stage 1, Stage 2 assets, they stand at INR 15,282 crores out of -- and stage 2 is INR 814 crores.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [48]

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In terms of the breakup, I think you can reach out to Jinesh for the breakup.

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Rohan Mandora, Equirus Securities Private Limited, Research Division - Analyst [49]

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Sure, sir. So is there any guidance on the disbursement, premium growth for the year?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [50]

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I just spoke to the previous question that in terms of the growth from an asset quality and from the ability perspective, we are absolutely there. It will now be a function purely of the liquidity and nothing else. And staying on that point, our cost of funds, this is a significant parameter of how much liquidity you would like to have in the disbursement we do because the cost of funds, as I mentioned earlier, right now, for an incremental cost of fund, that is 10.5%, and that we feel is pretty limited.

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Operator [51]

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The next question is from the line of Shubhranshu Mishra from Bank of Baroda.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [52]

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I have 2 questions. One is with regards to your used vehicle financing, which has gone up significantly. So I just wanted to check, what is the comfort level in terms of our AUM mix from here? How big can it grow as a proportion of the AUM? And also, what is that sweet spot in terms of the vintage of the vehicles that's refinanced? So that's my first question, sir.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [53]

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So in terms of the vintage, as I mentioned, that almost more than 40% of our used asset business comes from our existing customers. And so therefore, the vintage is about 3 to 4 years in that case because these are the new assets that we have funded. And when the contracts mature, then we will do a refinance. Second is even in the balance assets where we are funding, we are funding a good proportion of the cars. And there, actually the average vintage would be about, again, 5 to 6 years. And typically, as a policy, and this would be a very small percentage of the business, that co-terminus with the expiry of the contract, the vintage of the vehicles will not be more than 10 or 12 years. So this means at the time of funding, it would be about 70% to 80%. But that also will be a very small percentage of the total portfolio.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [54]

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Great. And so what would be your comfort level going forward? What proportion of AUM are we targeting this year?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [55]

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So comfort level is not in terms of the composition. Comfort level is in terms of the asset quality. And as you know that we measure the asset quality as well, Early Warning Indicators, which is 0 plus in 6 months and 3 months and 60-plus at the end of 6 months, 12 months, 18 months and 24 months, which we call it Composite CPMI. So we have a benchmark based on the last 30 quarters of data in the country.

But it gives me pleasure to share with you all that in used assets, we are currently at about 40% lower than our tolerance benchmark for the 2% per annum credit losses, which means, based on the total portfolio that we have today, and which should be roughly about 30%, the EWI and the CPMI indicator indicate that our trade losses over the lifetime should be 40% lower than our benchmark. So therefore, as long as these benchmarks have kept intact and they are monitored month-on-month, and as Kaushik mentioned, that we have internal branch grading, so therefore, if a particular branch could bridge these indicators, the business will stop there irrespective of the fact that a nearby branch or that region may be achieving it. So that every branch needs to imbibe the portfolio first culture in the country.

So therefore, as long as somebody is maintaining that, we would be okay, growing it. But to be -- but to be shown, I think, in AUM, it's maybe about 50% or so over a period of time. And then we will evaluate because we have 5 products in our basket. So we have cars, CVs, CEs, tractors, and then we have used. And within used, again, we do all the 4 categories, which is cars, CVs, CEs and tractors. So it's fairly granular portfolio.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [56]

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Right. So how much you said, sir, 50% in FY '20? That's it -- I can't recall it...

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [57]

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It's FY '20. I said we can go up to 50% and then probably evaluate because you see the ground also still isn't the same. It is never constant. But the underlying principle for us, it is only in case of SMEs where we said that we being the unsecured business, we would not like it to grow more than 15% of our overall AUM. Now we have the other government-sponsored guarantee scheme also for lending to the SMEs. But beside that, we right now stick to 15%. But so far as the other businesses are concerned, we will be comfortable growing as long as we find the opportunity and the asset quality we like.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [58]

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Right. And what is the portfolio yield of the used vehicle, sir?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [59]

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So on an overall basis, all the 4 sub-segments put together, it could be close to 18%. And you will see some of our peers would have 21%, 22% also. But then there's the vintage of the asset would be about 8 to 10 years average, whereas in our case, it would be about 4 to 5 years.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [60]

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Right, sir. Second, sir, I wanted to check on your borrowing mix. A very large portion is coming from the banks. What is the risk? Remember they are charging over the MCLR right now. And has it decreased in the last -- decreased or increased in the last 8 to 9 months, since September 2018?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [61]

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The risk premium, it was earlier being talked to be between 25 to 50 basis points. Now it has gone up to about...

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [62]

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100 basis points.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [63]

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Right. And any likelihood or indication from the banks of this tapering off?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [64]

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The banks -- very close to what (inaudible). And that's the problem which the entire NBFC segment is facing right now. On this basis, I think the rate has to reduce. The margin has to reduce. But right now, we do not see that it will happen in this quarter or in the coming quarters.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [65]

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So there are no fillers from the banks that the MCLR would come down in the next 2 quarters. Is that a correct assumption, sir?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [66]

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I think the filler is coming more from the government and the RBI to increase the flow of money to the sector and we see that on 5th of July. There was, I think, a statement. And after that, there have been statements from the regulators. However, it has not resulted in transmission of credit to the sector. Therefore, what I would be rather looking forward to is that first in this quarter, which is second quarter, July, August and September, if the -- that opens, if there is a flow of credit to the fundamentally sound companies. And that is a stored normalcy in the sector. Right now, we are going through extraordinary times. Then I think in the third quarter, because we didn't see that pricing also getting adjusted, but right now, it's not an equitable scenario where we can talk about pricing.

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Operator [67]

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The next question is from the line of Nischint Chawathe from Kotak Securities.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [68]

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This is -- first question is pertaining to your cost of funding. Now you mentioned that the average funding cost for the quarter was 9.9% and incremental funding cost is somewhere close to 10.5%. So I wanted to kind of confirm that. And if that's going to be the case, I guess, your cost of funding over the next few quarters should increase in a significant manner. And in that backlog, how should we really think about margins? I mean I understand the asset side benefits, but still on a net-net basis, where are we really heading?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [69]

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Nischint, the numbers which you reported are absolutely right. There are, of course -- and when I'm talking of the cost of fund, I can also share with you that a large part of it is from the private sector. And if we are to get funds from the public sector, which that somehow has dropped right now, the rates will be significant -- will be significantly lower, meaningfully lower. So until this public sector drop opens, there would be some more increase in cost of funds because I'm growing at about 10.5%. Do I see it -- it will just have a significant impact. I think we are talking of the entire book. And there is about 50%, 60% book which is at a lower price. You know that we have a significant amount of funding from banks, which is at a lower rate, but new funding is somewhat at a higher rate. We would expect that there could be an increase in the current quarter of maybe about 10 basis points.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [70]

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I will add on to what Kailash -- we (inaudible) the average cost, and I will add on to what Kailash mentioned by answering that on the newer lending in Q1, that's 15.9%. But that was 15.6% in April, 15.8% in May and 16.1% in June. Now with the product mix change, keeping the asset quality access pretty much in mind, we have grown the contribution of the used. And even in mortgage, as I mentioned, that we have passed on the price increase fully, whereas in SME, we have passed on the price increases.

I think the other asset class, what we have done is remove the low-rating product segments like the heavy commercial vehicle to this retail customer because there, we don't really get paid. As a result of that, in the month of July, we are at close to 17% yield. So our idea is that the main compression which has happened in this first quarter, going forward, in the coming quarters, it should not further get compressed if the dollar should get expanded some bit so that whatever additional parts that we borrow and additional cost that we incur, the lending that we are doing is fully compensated.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [71]

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Sure. The next one is really on credit costs. And if I look at it, your provisions on balance sheet, the outstanding provisions on balance sheet including Stage 1, 2, 3 has gone up around INR 24-odd crores. So very -- mathematically, what it tells me is that you had a write-off of roughly around INR 100-odd crores, INR 104 crores to be precise. Now I'm just trying to understand, I believe this is [DTR] loans which are kind of really crossing 730 days. So what we are really seeing is that you're almost INR 100 crores of loans crossing 730 days. And if I look at all the other indicators in terms of GNPL ratios or Stage 1, Stage 2 coverage, which essentially means the breakup between Stage 1, Stage 2 and the Early Warning Indicators all seem to kind of indicate that asset quality is sort of very much on track. But it just looks like what happened beyond 730 days is there was a very large debt -- sorry, very large bump. So I was just trying to kind of understand as to what's happening out here.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [72]

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So Nischint, earlier on, when you say the total write-off is INR 104 crores, so absolutely correct number. The second point is slightly different because we have loss on sales. We have loss on settlement. And then we have loss on account of movement, about 450 in case of SME and 730 in case of ABF. I've also given this point to you that there has been a significant movement from sub-730 to 730-plus. And this happens for all the buckets. So INR 20 crore, INR 30 crore, INR 40 crore bucket movement is -- that happen across all the buckets. At 730-plus, of course, we need to move there. We -- it is 100%.

The next point which I'd like to -- which I have mentioned earlier is that there is a significant difference between how the Ind AS accounting happens and how the accounting usually happen on that in the IGAAP. IGAAP, 0 to 90 at 1.4%. Now we are at 2%. So we were at 1.9%. And then also, again, your point is absolutely right that our total portfolio has now seen a reduction in this quarter because 0, 90 pricing has not even moved by 0.01. These are at 1.97. We are at 1.97. The impact on credit growth has been higher because the move in 0, 90-plus, it is very significant.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [73]

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No, that's fine. So Stage 1, 2, 3, I think that's coming in the INR 24 crores. So we're just looking at the last INR 105 crores and -- I mean the next INR 105 crores. And if you only could give more color in terms of how much of the loss on -- I mean how much is the hit because of 730-plus.

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [74]

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So I think I can give you, definitely, but you can talk Jinesh. I do not have the number right now. But it will be a lot of settlement fees and funds and movement to 730-plus and 450-plus.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [75]

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Sure. Any guidance that you would like to give on this, I mean, how this kind of plays out? I understood, I got the fact that obviously, things will be coming in the second half of the year as we move towards the fourth quarter. But do your settlements and loss of sale or basically (inaudible) also pick up towards the second half of the year? Or how should we think about it? Because some of the other NBFCs prefer to do write-offs and settlements in the third, fourth quarter. So that's the question.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [76]

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Yes. So this was -- like I was answering some time back, we have taken a call that we want to hold the 90-plus and the total asset quality. And no matter if there is a change, then we'll rather recognize it upfront and then drive it to the third or the fourth quarter. And therefore, we are fairly confident. And I was sharing that June, we got back some part of April and May is replaced. But the April and May that's replaced was higher for the industry as a whole. So we could not grow back fully, and therefore, we also did a certain loss on settlement and the loss on sale. And that is why our GNPA and NNPA positioned maintained intact.

So going into the second, third and the fourth quarter, and July is an indication, we suspect that there will be a lot less losses on account of one of the [RF] to 730 as well as the bill off on 7 settlement. But then here, we assume that there will be no further macroeconomic deterioration from where we are presenting.

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Operator [77]

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The next question is from the line of Nidhesh Jain from Investec.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [78]

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So again on the write-off, what -- my understanding is that you are [operating by Ind AS] results. In your write-off, there is no P&L impact because the corresponding rate is close to 100% provision on those effects. And that's got the floor back, if CPI drops, and P&L remains insulated when you write it off. But in our case, we have reported INR 100 crores impact on our P&L and there also on Ind AS. So how do we explain that? And secondly, I believe these loans must be 3, 4, 5 years old loans and which we have reported as write-off. So we would not have written these loans up as (inaudible) have been much higher, right?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [79]

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No, I think I need to explain this again. We used to provide a rate of 100% on movement to 7 (inaudible) years. Now we do not provide the write-off. So that was the policy, which had happened sometime in the last year. So now if something moves (inaudible) and if we are telling a provision of 35, we'll certainly move to 100%. So 65% is the loss. And that INR 100 is coming as write-off and then the 35% was provision. So that's how the accounting happens.

So the second point is -- and this is where I -- Sanjay mentioned earlier and I would again like to re-emphasize that we have gone absolutely business as usual in terms of settlements and (inaudible) and booking loss. We have not slowed down there. We are doing business absolutely as usual. We are not waiting for third and fourth quarter. We want to keep our quality of book absolutely intact. And therefore, whatever then comes, we are immediately taking it. We are not letting our NPA increase.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [80]

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What I would also add on to what Kailash said, that compared to 1 year ago, the brand bucket to 730 is what we call 451 to 730. That has actually shrunk by 40%. So if that bucket has shrunk by 40%, therefore the [RF] to that extent would be lower. So what our entire endeavor is to restrict the flow forwards to the higher bucket and keep it as lower as possible.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [81]

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Sure. And I believe that this IND 100 crores impacted customers. So this is not national like provision so it is customized or not that we have reported? Or do you think there will be write-backs from this over the course of the year?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [82]

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So we do have local settlement. There, we will not realize anything. But wherever it is (inaudible) and 450-plus and 730-plus, we do not stop our recovery efforts. We continue with the recovery efforts as usual. And we do get flow back from this.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [83]

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Now there is a steady scheme of cash flows from the contracts which are either provided at 100% or which are written off because it's not that the recovery efforts were settling down and we have seen that there are recoveries. So that flowback will happen through the P&L and then will also impact in reduction in the [LCL] because it will be netted out going forward.

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Nidhesh Jain, Investec Bank Limited (SA), Research Division - Research Analyst [84]

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Sure. And lastly, on the guidance on ROA for the full year, any number that you would like to do?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [85]

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Right now, we would not give any guidance on this given the extraordinary times that we are in. And what we would rather like to do is first to ensure that we maintain the asset quality where it is, we maintain the NIMs because these are the 2 things which have impacted the result in the first quarter. And the NIMs has been completely out of our hands and because of the increase in the cost of funds, given the liquidity scenario in the market.

So we hope that, one, this will abate and help us to return to normalcy, if not in one quarter, then maybe at just about 2 quarters or 3 quarters. But so far as the [LCL] is concerned, there we are fairly confident that the seasonality of Q1 will now remain (inaudible) and going forward as well. So therefore, the total NPL, we still maintain the guidance of sub-1.75%, while in the Q1, it is 3%. So that is certainly not a steady-state scenario, and then we can give the guidance. Last, I think we will wait to see how Q2 goes and then give the guidance.

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Operator [86]

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Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Pradeep Agrawal from PhillipCapital for closing comments.

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Pradeep Agrawal, PhillipCapital (India) Pvt. Ltd., Research Division - Analyst [87]

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Thanks, Steven. On behalf of PhillipCapital, I would like to thank Mr. Chamria and the entire senior management team of Magma Fincorp and thank all the participants for joining us on the call today. Thank you, and goodbye.

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Operator [88]

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Thank you. Ladies and gentlemen, on behalf of PhillipCapital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.