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Edited Transcript of MAGMA.NSE earnings conference call or presentation 31-Jan-20 10:30am GMT

Q3 2020 Magma Fincorp Ltd Earnings Call

Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Magma Fincorp Ltd earnings conference call or presentation Friday, January 31, 2020 at 10:30:00am 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

* Mahender Bagrodia

Magma Fincorp Limited - Chief Credit Officer of Asset Backed Finance

* Sanjay Chamria

Magma Fincorp Limited - Vice Chairman & MD

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Conference Call Participants

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* Anish Jobalia

Banyan Capital Advisors Private Limited - Senior Research Analyst

* Jignesh Shial

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Pankaj Murarka;Renaissance Investment;Analyst

* Praful Kumar

Pinpoint Asset Management Limited - Portfolio Manager

* Pratik Chheda

IIFL Research - Associate

* Priyankar Sarkar;HSBC Global Asset Management;Analyst

* Udit Kariwala

AMBIT Capital Private Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Results Call of Magma Fincorp, hosted by Emkay Global Financial Services. We have with us today, Mr. Sanjay Chamria, VC and MD; Mr. Manish Jaiswal, MD and CEO, Magma Housing, and CEO, SME business; Mr. Kailash Baheti, Group CFO; Mr. Deepak Patkar, Group CRO; Mr. Kaushik Banerjee, Advisor, ABF; and Mr. Mahender Bagrodia, CBO, ABF. (Operator Instructions). Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Jignesh Shial of Emkay Global. Thank you, and over to you, sir.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [2]

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Yes. Thanks, Ayesha, and good evening, everyone. On behalf of Emkay Global, I would like to welcome the management of Magma Fincorp and thank them for giving us this opportunity.

I would now hand over the call to Mr. Sanjay Chamria for 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, Jignesh. Before speaking about the performance for the quarter, I'd like to speak on 2 important matters. First, I'm happy to share with you that the Board, after evaluating a set of external and internal candidates with assistance of experts, has decided that an internal candidate with the broader and diverse industry experience is best suited to fill in the position of CEO of ABF business.

Accordingly, the Board has appointed Deepak Patkar as the CEO of the ABF business. Deepak has been working with us since September 2018 as a group Chief Risk Officer and the member of the Strategic Leadership Committee for our finance businesses. Deepak has over 2 decades of professional experience across multiple disciplines, including sales collections, audit assurance and risk management across multiple industries, including banking and nonbanking financial services, manufacturing, and IT. Deepak has deep understanding of how urban and rural segment operates in the lending business for products like commercial vehicle, mortgage, MSME, microfinance, credit cards and other secured and unsecured loans and is a hands-on professional with deep expertise. Immediately prior to Magma, Deepak was with Fullerton India for 11 years, where he was part of the Strategy and the Leadership team, which navigated the company through many industry events, including the sub-prime crisis of 2008/'09 and demonetization in 2016/'17. He will take charge of his new role with effect from tomorrow, that is, February 1, 2020.

Second, I'm happy to share with you that our wholly-owned subsidiary, Magma Housing Finance Limited, has been performing exceedingly well. And in order to support the further growth of the company, Board has decided to further infuse an equity capital up to INR 100 crores, taking the total net worth of the company close to at least INR 500 crores by end of March 2020.

I now turn to Q3 performance. We are passing through a challenging economic scenario. The GDP is at a multiyear low. Credit demand is subdued even while the liquidity is abundant and farm income is stressed even though agricultural produce is healthy. Uncertainty in the economic environment is impacting consumer sentiment, which is visible in the consumption slowdown. The government and the RBI actions led to visible increase in availability of funds for credit -- credible NBFCs after a period of severe liquidity crunch. The risk conversion for NBFC softened in Q3, leading to a decrease in the incremental cost of funding.

Amidst the [ever] challenges, Magma has exhibited resilience. We have had our share of positives and negatives during the quarter. One of the major positives has been the liquidity. We had comfortable liquidity during the -- during and at the end of Q3, with a robust pipeline of sanctioned and undrawn facilities, providing good liquidity comfort for 2 quarters. Our entire borrowing now comprises of only long-term sources.

To strengthen the ALM, our focus during the earlier quarters was to chase long-term liquidity, and our focus in the Q3 has shifted to the cost of liquidity. We have comfortable ALM position with all the time buckets, being in surplus liquidity.

Our cost of funds, which is currently at 10.2%, is expected to come down from the first quarter of FY '21, and we expect the overall cost of funds in the next financial year to be lower by 30 to 50 basis points.

The next positive has been the disbursal momentum. With liquidity improvement, we bounced back to normal disbursal in Q3. We made disbursals of INR 2,000 crore-plus in Q3, which is in line with corresponding period last year. We expect our AUM at the end of current financial year to be at similar levels as at the beginning of the year.

We continue with our strategy to grow in focused products, namely, used assets, affordable housing and SME. Disbursement contribution of focus products increased to 81% from 59% in the same period last year. And the AUM of the focus products grew by 19% Y-o-Y.

Our customer relationship platform has been successful, and cross sell to the existing customers increased by 64% on a YTD FY '20 over the same period last year. Though net credit loss has been sequentially lower, the collections didn't pick up as well in the normal times or as per the historical trends.

I would like to share a few key trends and indicators. Generally, the forward flow into the stage 3, that is the NPA, reduced Y-o-Y. However, for the CV portfolio, the forward flow worsened, clearly showing a stress in the cash flow in the customer hands. Roughly 63% increase in the NPA assets, which is stage 3 has been contributed by CV, which contributes only 16% of the AUM.

Reduced cash flows with the customers had substantial impact on the resolution of the NPA accounts and the rollbacks trade 600 to 900 basis points across buckets Y-o-Y. Under the circumstances, our approach was to have proactive settlement with the customers, and we intensified our collection efforts. We took sharp policy action in 5 estates to curtail severe disbursals.

We have secured the exposure to the SME clients to the extent of 75% of future losses under the credit guarantee scheme of the Government of India. Thus, the SME portfolio is ring fenced from future credit losses.

Overall GNPA/NNPA percentage had been controlled quarter-on-quarter, though Y-o-Y shows marginal worsening. The PCR remains steady. With the improvement in the credit cycle, we hope to claw back from the NPAs as has happened in the past.

Now on OpEx. We have kept relentless focus on the OpEx, which is reflected in the OpEx amount staying flat year-on-year on absolute amounts. With the growth in the AUM, we will strive to achieve visible improvement in the OpEx ratio.

We've taken steps to automate and digitize several of our processes, which has and shall lead to the improvement in team productivity. We are introducing various fintech innovations in our customer onboarding processes. Our customers have voted us as one of the most customer-friendly financials based on independent surveys conducted. We are tracking our net promoter score on a monthly basis through an independent survey agency and continuously focusing on key work areas to continuously improve our net promoter score.

We have enough capital to grow at annualized rate of 15%. Our objective is to normalize the net of spreads and maintain the asset quality while achieving a growth of 15%.

Now coming to business-wise. ABF asset-backed fund, given the persistent slowdown in the vehicle sales and drop in the load utilization by the customers, resulting in tightened cash flows. We have pivoted the first disbursals towards used assets and to our existing customers with proven track record. It has resulted in increasing contribution of the high-yielding products there to 75% during Q3 on Y-o-Y basis, and first disbursals now comprise 33% to our existing customers.

The used assets earned similar cash flows, while the EMIs are 35%, 40% lower than the new assets, and it helps customers to pay their installments on time. Consistent with our product strategy, used assets disbursements grew by 36% CAGR in the last 3 years.

The ever product strategy has helped us maintain disbursal momentum while improving the yields and restore the NIMs despite higher cost of funds. The high-yield products now contribute 48% -- 49% in the ABF AUM in Q3 of this year versus 44% in the Q3 last year. The contribution to the AUM is expected to increase to about 65% by end of FY '21. We're also confident to restore our net spreads on the entire book by Q3 FY '21.

The contribution of the direct business in ABF has increased from 35% in Q3 last year to 47% Q3 this year. The share of direct sourcing has steadily increased on the back of improved cross sell volume.

Coming to the housing business. The affordable housing finance had a robust quarter with loan disbursals of INR 455 crores, Y-o-Y growth of 57%. Assets under management grew by 29% Y-o-Y. In line with the strategy of building an affordable housing franchise with a focus on direct contribution, 66% of the incremental disbursals were the home loans and 80% of the business was sourced by the in-house sales team.

From a financial inclusion perspective, 53% of the customers sourced during the year are new to credit, and the women homeowners availed 53% of the loans originated during the year.

Digitalization of CLSS subsidy, namely PMAY, claim process by NHB has smoothened claim processing and enhanced PMAY penetration through 46% of the fresh home loan origination.

We continue to facilitate government's objective of Housing for All (inaudible) PMAY facilitation itself. This not only includes customers' cash flows but also includes the portfolio monitoring.

Over the last 12 months, 12,572 new customers were sourced and only 65 customers have 1-plus delay, reflecting collection efficiency of 99.7% for 12 months' onboard loans.

The Magma Housing Finance franchise has evolved to national scale, and the company has deepened its presence, establishing direct connect with its customers in 11 key states. This differentiates us as affordable housing finance player with business distribution of 33% from west, 41% from north, 21% from south and 5% from the east. That's insulating us from the risk of geographical concentration.

Amidst the slowdown, which has led to stress working capital cycles, we relentlessly focus on building a high-quality loan book. We disbursed INR 391 crores in the SME versus INR 419 crores in the same period last year. The AUM in SME is down by 8%, largely due to the impact of slowdown in the disbursal in Q2. As for the Bureau data, early vintage delinquencies of Magma are lower than our peers. This is largely due to the adoption of the risk-based model, automated call, Mscore, for underwriting in this year.

Our zero bucket collection efficiency in the quarter is better at 98.66% and continues to be among the top quartile with the peer group. The key focus area in next quarter would be to enhance our SME product suite and improve customer fulfillment through best-in-class digital capabilities scorecard that we're underwriting and embarking on SME direct and SME secured vision.

General insurance business in MHDI has registered a growth of 30% in the gross written premium in third quarter over the -- third quarter of this year over same period last year and 41% growth during the 9 months this year versus last year. The investment portfolio of the company crossed INR 2,000 crores during the third quarter with the portfolio at INR 2,115 crores as at 31st December.

During the quarter, the company has also been awarded the Golden Peacock Award in the Risk Management and Insurance sector and the Best BFSI Brand in 2019 by the Economic Times.

Now myself and my colleagues would like to take any questions that you all 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 [Manish Shah], who is an individual investor.

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Unidentified Participant, [2]

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And congratulations for holding yourself in such a strained environment. My question is related to the credit cost. When do you think the credit cost will peak out?

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

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So credit cost, in my view, is already at a peak level. In fact, we expected the credit costs to start coming down from the third quarter because typically, the second half of the year is better than the first half of the year. And the first half of the year, we had elevated credit costs. However, in the third quarter, we saw that October continued to be tough in collections, and November and December, we started seeing the softening of the situation. So I would say that we are at the peak level, and the stress that we are finding is largely into Commercial Vehicle segment to a larger extent. And the movement in a couple of quarters, as we see the economic activity improve, we would expect that the clawbacks will start happening because today the customers who are in the NPA bucket, they are not able to roll back as we used to see earlier because for rolling back, they need to pay more than 3 installments. So that is the issue that we are currently having.

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Unidentified Participant, [4]

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Sir, another question. Sir, any development on the -- for the IPO of the home finance or the general insurance business?

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

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No, right now, we are investing capital into these businesses, as both the insurance and housing business have been doing quite well. And once they scale up to a size, then probably we could look at unlocking the value through an IPO or any other route.

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Unidentified Participant, [6]

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Sir, our -- the general insurance business, is there any chance for foreign partner increases the stake?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [7]

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No.

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Operator [8]

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(Operator Instructions) The next question is from the line of Praful Kumar from Pinpoint Asset Management Company.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [9]

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Sir, what was the disbursement for the quarter?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [10]

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Sorry?

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [11]

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Disbursements for the quarter, sir?

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

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About INR 2,000 crores.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [13]

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That is something that you guided us last quarter [and did] close to INR 2,000 crores to INR 2,500 crores.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [14]

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Sorry, your voice is not very clear. Can you be, please, closer to the phone?

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [15]

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Can you hear me now? Is it better?

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

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Yes.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [17]

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Okay. Sir, second question is on the CV portfolio owned, 16% of the book is contributing more than 60-odd percent to the credit losses. Can you throw some more light that what is the key reason, which states are these or it is pan India in CV that you are seeing such stress?

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

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So we are largely seeing this stress in 4 to 5 states, which is UP, Bihar, Bengal, Maharashtra. So these are the key states where we are seeing the stress in the commercial vehicle, which is more pronounced than the other regions. However, overall, there is a stress in the commercial vehicles because the load utilization is about 50% to 60%, and the freight rates are also not higher, they are rather lower. As a result of that, the earning capability of the customer is highly impaired.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [19]

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So are you repossessing these vehicles? Or you are giving them some more time? What is the strategy you are, as management, following for this?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [20]

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So of course, on a proactive basis, we intensified our collection efforts and we are repossessing. What we have experienced is that the release upon repossession has dropped to about 35% from around 45%. And therefore, what we do is end up selling those repossessed vehicles. And obviously, because of the dull market conditions, the realization of the repo-ed vehicles is lower, resulting in the higher-grade losses.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [21]

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So sir, in terms of now going forward, Q4, so do you expect these -- how do you expect them to clawback if you are booking losses on the repossessed vehicles? So just want to understand how things get better here. Is it just that macro picks up and the margin will get better? Or there is substantial clawback sitting in the balance sheet today?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [22]

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So one, as I mentioned to the previous question that, October continued to be bad like the second quarter. In November and December, we found that the roll forwards were lesser. And -- but then the contracts, which are already sitting in the NPA bucket, those are not rolling back because once the customer has defaulted and gone into higher bucket, he doesn't have so much of money where we can pay us 3 or 4 installments together to bring the contract in below 90 dpd. And therefore, in commercial vehicle is where we are booking the higher amount of losses and that we would expect that it will continue for, maybe, a couple of more quarters till the time the economic scenario improves.

So far as the other asset class is concerned, there we have seen that the situation is much more moderate. And also, in the last 6 months, lendings in the commercial vehicle segment, we have reduced very, very significantly. And it is more in the used assets where even in the CV in the used assets we have seen the stress is a lot lesser than the new CVs. And our other business is coming from the passenger vehicles, tractors and the construction equipment. So that's how we are tackling the scenario.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [23]

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Any guidance now you're offering for the credit cost for the year or maybe next first half? Anything that you can deliver? Clearly, there's been a disappointment for all of us because we expected Q3 to have much better credit losses for you.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [24]

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Yes, that's right. In fact, I mentioned that the guidance that we had given for Q3 and Q4 was premised on 2 things that the second half of the year, we always have a much better experience in terms of the collections and the NPA situation. And there is no further worsening of the economic -- macroeconomic scenario. But what we have found that even during the third quarter, with the onset of the festive season, normally, which results in better cash flows in the rural markets, it has not really happened. And across the board, when you look at the companies in terms of the results, the Commercial Vehicle segment has reported increase in the NPAs, whereas every other year, we find that third quarter, the -- there is no increase in the GNPA if there's no reduction. But we have got an increase of almost about INR 57 crores, INR 58 crores in the overall GNPA position in the third quarter, which is though lower than the second quarter, which was at about INR 125 crores. So fourth quarter, typically, we see a much larger reduction in the GNPA. So right now, it is difficult, but that is what we will strive for is to have a reduction in the GNPA in the fourth quarter.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [25]

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So the pushback here is that this is the new book. So since Kaushik came on board, we clearly said that the first thing is portfolio first and underwriting would be much more superior. But the kind of credit losses we have seen are a bit disturbing here. I understand the macro picture here, that it's a difficult environment, but still, versus the expectations, this was a bit higher than expectations, that's all.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [26]

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You are right. The expectation was to have much lower credit losses. And even the early warning indicators that we have been sharing on practically every quarter business in our deck and also in the interactions, till March 2019, we were tracking so well. But then with the worsening of the credit cycle and with the lesser cash flows with the transport operators, we have seen that the customers who are paying 12 installments on due date on the trot, they have defaulted in the last 18 months and have moved up. And once they have moved up, they are not having enough cash flows to rollback. So I would say that in terms of the underwriting standards and in terms of the sourcing, there has not been a flaw. Because if that was the case, then in case of the EWI and the CPMI, which tracks the delinquency levels for the first 18 months of sourcing, it would have shown up these trends. But those trends are not visible. Therefore, we believe that this is more cyclical, and therefore, once the scenario improves, we should see a significant rollback.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [27]

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Sir, what we're picking from the ground today is that rural at the margin is improving due to agri inflation. The crop has been extremely good. They get money in March and April in terms of their cash flows. This is something we have picked from Mahindra and other peers as well. So going into next year, assuming that what we are picking on the ground is true and your cost of funding now should improve. Earlier, you said Q1, we should normalize in terms of cost of funds. Now you said it pushed by a couple of more quarters. So if you look at next year, we, at least, should gain 50 basis point from the costs, and at least maybe much more on beside cost. So can we confidently, at least, look at next year as a close to normalizing year for Magma?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [28]

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No. I will do one thing. I'll let Mahender, who has been dealing with the underwriting and the collections largely in the ABF business, comment on this one and Kailash to comment on the cost of funds. And then probably we'll come back to your question with regard to the normalized year for next year.

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Mahender Bagrodia, Magma Fincorp Limited - Chief Credit Officer of Asset Backed Finance [29]

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So Mahender here. So you're right actually that we are seeing some green shoot in the market in terms of the cash flow. And even actually across the product category we are dealing into, we actually are not seeing stress in any other asset class other than commercial vehicles.

Even in commercial vehicle, I will say that in November and December, we have seen actually the collection to be -- is improving. And in Q3 itself, the commercial vehicle collection has improved by 470 basis points in spite of a bad October, so largely it recovered in November and December. It gives us some confidence in terms of cash flow improving in this quarter. And we are able to see that movement in January also.

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

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And on your point of the cost of funds, we have seen some softening of cost of funds in the new borrowing which we have done in the current quarter. But it is expected that the trend shall continue because now the liquidity is abundant, and we are also -- especially, Magma has a lot of liquidity, almost about INR 2,700 crores, Magma Fincorp and Magma Housing taken together as on 31st December. And that provides us the opportunity to pick and choose the kind of borrowings we would like to have. And that should give us further release in cost of funds, whether it could be 50 basis points for the entire year, we will have to wait and see. But it will definitely be a significant reduction in cost of funds in the next financial year.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [31]

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Sir, what is your incremental cost of funds for you so far? How much -- at what rate are you raising now?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [32]

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So it varies between, say the cheapest I would've done, would be close to 9.2% and the worst I may have done would be just sub-10%.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [33]

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Okay. And which is say 100, 120 basis point lower than what we did in say 2 quarters back?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [34]

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Yes, 100 points lower than what we may have done. If we take the highest and then compare. If we look at our 10.2% as the cost of funds, then I would say, more like 50 basis points, 50 to 70 basis points lower because our April cost of funds is just about 10.15%, 10.17%.

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Operator [35]

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(Operator Instructions) The next question is from the line of Udit Kariwala from AMBIT Capital.

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Udit Kariwala, AMBIT Capital Private Limited, Research Division - Research Analyst [36]

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Yes. I have 2 questions. One is, it's more like a housekeeping question. You said 60%, correct me if I'm wrong, 60% of your incremental slippages in the quarter came from your CV segment. Am I right in my understanding?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [37]

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Yes, you're right.

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Udit Kariwala, AMBIT Capital Private Limited, Research Division - Research Analyst [38]

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Okay. And sir, I mean, it's a fact that the whole industry is going through a downturn and the delinquencies are increasing. But to increase your used CV exposure in this environment, do you think this could cause a problem in FY '21? Because I understand that the EMI for a used borrower would be much lower. But looking at the macro, I don't think sir, it's going to revise in a quarter or 2. So would it be a right thing to just grow the used book at the current pace?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [39]

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To see, actually, when we say the used asset category, it is not only the used commercial vehicle. So these are 4 asset classes we have present, which is used car, used commercial vehicle, used tractor and used construction equipment. Out of the total used segment, which we are funding, the larger price is coming from used car in a product class. And this product class is behaving quite well in this year also in a tough time. A portion, obviously, of the total used asset is coming from the used vehicle. So used car actually is ticking up by -- to larger in business, it's not coming from used commercial vehicle. It is hardly 15% of the total used asset what we are doing.

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Udit Kariwala, AMBIT Capital Private Limited, Research Division - Research Analyst [40]

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And who would be our prime competitors in the used personal vehicle space?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [41]

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Mahindra will be there. Mahindra is one of the big competition, AU is there, so these are the few competition, actually, which are there in the market.

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Udit Kariwala, AMBIT Capital Private Limited, Research Division - Research Analyst [42]

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Sir, the cost of fund is meaningfully different for you compared to those companies, right? So how does it stack up in terms of underwriting?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [43]

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See, the gig for this customers are 18%-plus for all the finance that be actually it, Magma or other peer competition. The trick is actually is that how we keep your credit cost under control with the cost of fund which we are having, we are still finding this asset class to be quite profitable.

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Udit Kariwala, AMBIT Capital Private Limited, Research Division - Research Analyst [44]

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Okay. And just one last question on the housing segment. I mean the growth looks handsome. But looking at -- we've looked at 2 or 3 large HFCs, and some of them, ticket size is not very large, seeing incremental delinquencies coming in the individual housing segment. So what's your sense on that? I mean this book is on a ramp-up phase, so we don't expect delinquencies to come in immediately. But any comments or color on this?

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

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So you have heard Sanjay touch upon onboarding of about 12,000-odd customers, and the 1-plus delay is only of 65 customers. The onboarding of fresh customers the last 12 months shows 99.7% collection efficiency. And also if you look at the zero data at the industry level, this compares to the best-in-class. So -- and also, our GNPA is actually, when contrary to the industry, which has moved up by 10 to 15 basis points has actually gone down from 2.2 to 2.1. And we are reasonably confident that by the end of this year, it should go down further from here. So I think it's largely about our diversified risk profile of a lower ticket size with customers who have their own equity and also they're getting support from the government PMAY scheme. All put together, perhaps, is helping good customer selection, and we really hope to maintain this asset quality in the future.

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Operator [46]

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(Operator Instructions) The next question is from the line of Pratik Chheda from IIFL capital.

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Pratik Chheda, IIFL Research - Associate [47]

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Yes. Sir, just like Magma, if you look at other competitors also, everybody is being very aggressive in the used vehicle space. And what I understand right now, the yields in the used vehicle space is slightly higher. So given the high competitive intensity here, I mean everybody chasing the same customers, be it 2-wheelers or a used car, do you see any pressure on the yields coming in this segment in the next around 12 months or so down the line?

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

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So if you look at our own disbursal experience, then we have actually, in the current year, reduced the disbursal in the new assets by more than 50%, but our overall disbursal in 9 months is only down by about 19%, which means the segment in the used has grown with a CAGR of more than 36%. And if there's a Slide 25 that you have in front of you, you can see that our disbursal in the third quarter is close to about INR 800 crores, which is roughly about INR 275 crores per month. So here, out of this, almost 45% of this disbursal is to our own existing customer with a credit tested behavior who are in all -- ever zero bucket for the minimum period of 18 months. So this one acts as a natural hedge against the delinquency.

The second part is that the used segment, the ticket size is lower and the collection cost or the operating cost is higher, and therefore, there's a price barrier. And that is why Mahender sometime back mentioned that for most of the players, the lending rates are about 17.5% to 18.5%, we're also lending at the same rate. And it is difficult for someone to operate below. And the point that you mentioned that some of the other companies are also aggressively pursuing, this is happening on the back of 2 reasons. One, there is a degrowth in the new asset segment, and therefore, people are trying to achieve growth through the used. And everyone is trying to cross-sell to their existing customers as we are doing.

And second, with the increased cost of funds and the increased operating costs, the propensity to reduce the rates are lesser, and therefore, this remains a profitable segment so far. Now what happens in the next 12 months, I think we will have to see it on a quarter-on-quarter basis.

And we are also deepening our -- apart from cross-selling to our existing customers, we are also deepening our channel network because this business is also done by referral mode from the individual freelancers. And there are several thousand of them operating in the market. So as we improve our touchpoints through the distribution network, we will be able to maintain the growth rate.

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Pratik Chheda, IIFL Research - Associate [49]

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Okay. Okay. And secondly, sir, I mean, disbursements have come back to that level of around INR 2,000 crores per quarter. So I just wanted to understand what is the sustainable level going forward? And what kind of AUM growth are you targeting in the next year?

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

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So this is one area where we are maintaining our guidance. And we had mentioned at the end of Q2, in the Q2 call, that we would arrest the decline in the AUM in the third quarter and our endeavor would be to end this fiscal year at the same AUM as last year, which was INR 17,000 crore, and we are currently at about INR 16,500 crore. So we are looking to have a growth of about INR 500-odd crores in the AUM in this quarter, which will give us roughly about 3% increase in the quarter. But for the year, it will be at least restored. Then we will look at our growth in the next year, and that guidance, we will sell once we complete the year.

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Operator [51]

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(Operator Instructions) The next question is from the line of Anish Jobalia from Banyan Capital.

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Anish Jobalia, Banyan Capital Advisors Private Limited - Senior Research Analyst [52]

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Yes. Sir, I just wanted to understand on your Slide 16, so the substantial part of our credit cost is write-off and the repossessed sale on assets. So just wanted to understand that, as you mentioned, the increase in the gross NPA has been because of the CV. So -- but within the write-off on this repossessed assets, which are -- which products are responsible for this, and my question is like what is the difference between the 2? Because as you would be repossessing assets once they become NPA, I mean I'm assuming that, so why are we having such high amount of credit costs related to each of these?

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Mahender Bagrodia, Magma Fincorp Limited - Chief Credit Officer of Asset Backed Finance [53]

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Yes, Mahender here. See -- but in terms of the asset class what we mentioned which asset class is giving a higher repo loss, it is commercial vehicle which is giving a higher repo loss. And there are losses because you must actually do a repo after 90-plus with -- that is after GNPA. The amount of provision which you do in this asset and the sale price actually are not matching, and you need to take an extra hit, which comes as a loss. And which is being shown as the repo loss in terms of loss of settlement and repo. To that actually, you get a loss.

What was your second question, actually, if you can repeat?

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Anish Jobalia, Banyan Capital Advisors Private Limited - Senior Research Analyst [54]

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No. And I also wanted to understand the write-off because the write-offs are also, I think, quite high. I mean -- so if you can give some idea about what is your pipeline in that one bucket before 730 days as of today. What is the amount of assets which have gone through that kind of level? So that will help us understand how the future is looking in terms of the credit cost. Because the write-offs, I think, have been quite high for the company. And if I were to just look at it in terms of percentage like 1.4% of the assets, like 1.36% approximately over the 9 months, so when is this write-off going to taper off for the company? Because I mean, it's already almost 2-year kind of asset, so it can't be just related to the macro environment. I mean why is there not -- I mean the -- what's the repo we have to understand?

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

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We have understood your question. Let me just try and rephrase the answer. There are 3 parts to your question. One is that the repo loss and the loss on settlements, these are 2 different things. Today in a depressed market when you repurchase a cell, you have a loss that you incur because net of provisioning and your OD cost is always higher than the sales realization that you do. The loss on settlement is where you are not repossessing, but you are entering into a settlement with the customer where he makes the lump-sum payment in cash and you don't repo. There also you incur a loss, but because it is a mutually negotiated settlement, therefore, the loss is much lesser as compared to the loss on the repossession. So therefore, these are 2 different types of losses. One is the loss on settlement, which is mutually agreed with the customer or is in the NPA bucket, that percentage is lower; and the loss on the repo claim which higher because of the depressed market condition. The third one is actually we follow our policy that any contract, which goes beyond 730-plus in the ABF business, which is the core business, and 450-plus in the SME business, which is unsecured business, we do a full provisioning and the write-off. That doesn't mean that there is no recovery from the contracts, which gets into 450-plus or 730-plus but that takes longer time, and the percentage of recovery is better, and therefore, as a prudence, we do a write-off.

Coming to your third question that why is this amount increasing? So on a 9-month basis, we have seen that this amount is lesser in the ABF business by about INR 14 crores. So therefore, FY '20, April to December, this amount is lesser compared to FY '19. Now if you have any more questions, I think separately, Jinesh can coordinate a call with the respective guideline. We can provide the answer.

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Operator [56]

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The next question is from the line of Pankaj Murarka from Renaissance Investment.

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Pankaj Murarka;Renaissance Investment;Analyst, [57]

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I have 2 questions. On the quality of the book and on the credit cost. You built a completely new book 2 years back with much better trade standards, underwriting standards, improved processes. The true test of the quality of a book is when you go through a downturn, and we have the first downturn after you built a new book and we've again seen significant spike in your credit costs. While credit costs have spiked for the industry as a whole, but you're an outlier. So how does one reflect on the -- whatever process changes and tightening of credit standards you've done in the context of how your book is behaving?

And secondly, if it is not even showing any early warning indicators, then what are those indicators supposed to do?

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Mahender Bagrodia, Magma Fincorp Limited - Chief Credit Officer of Asset Backed Finance [58]

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So I take this question, Mahender here. So see, in Commercial Vehicles segment, we are funding to our customers who are first-time buyers, who are actually elevating themselves from a driver to an owner. And these are earn-and-pay assets. And if this customer, if had paid for 12, 15 months, and after that, actually, if they go for a default, so they are not the bad underwriting. And these are the customers actually who are facing difficulty at that time. And once this market improves, this customer, though maybe a GNPA in the books, actually how -- the way we qualify, they actually rollback. And we have seen this cycle earlier also when there was a cyclic nature of commercial vehicle in '13/'14 and '14/'15. And once the market improved, we found a lot of customer actually who went to 90-plus, they paid their -- the money and came to a lower bucket.

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Pankaj Murarka;Renaissance Investment;Analyst, [59]

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No. Then, can you share -- see, that's the nature of the CV business, it's a cyclical business. Can you share what is your risk-adjusted ROE for the commercial vehicle business across the cycle? And is it the kind of risk you want to assume in your book or you want to improve your standards? Because I'm very sure your risk-adjusted ROA and ROE on this book now adjusting for all this credit cost, adjustable cycle will be below your cost of capital. If that is the case, then why do you want to do such kind of business?

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Kamal Kishore Kailash Baheti, Magma Fincorp Limited - President & Group CFO [60]

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So Pankaj, Kailash here. I will take this question. What you have said is right that for CV book today if you calculate, it will be a negative ROE business for us. No, 2 ways about it. Having said that, I do not agree with you that we are an outlier in terms of cost of funds. I think we are outlier in terms of our cost of -- sorry, cost of credit. We are outlier in terms of our cost of funds. And that's where the difference is in today's market conditions. If you'd look at somebody who had similar book as ours and compare the credit loans, it will not be very significantly different.

Having said that, whether commercial vehicle book makes sense for us or not, is also answered in the way we are navigating our business and the disbursements in the current financial year. We do realize that in some of the new asset categories unless we have the cost of funds advantage, which was earlier there, which was just about 50 basis points, we cannot compete with some of the peers in the new asset books class and that's where we have changed our product mix.

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Pankaj Murarka;Renaissance Investment;Analyst, [61]

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And the second question on EWI. How come that your -- whatever these indicators are supposed to do, those EWI and all of that, they didn't show up this kind of stress that has emerged. If that is the case, then how does those indicators help us, or mainly help both you and the management and as investors like us?

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

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So the kind of cycle that we have gone through, and you said that it is a cyclical business. But this down cycle, which has prolonged already for about 16 months, is unprecedented. So the EWI and the CPMI, which are the early indicators that we developed, was based on the previous 30 quarters of our experience of doing this business, wherein based on the tolerance of the credit losses that we expect in each of the asset category we defined as to what should be the tolerance. And till March 2019, as per the early warning indicators and the superior underwriting processes, the portfolio was built and it was showing the trends which were acceptable. But the kind of deterioration that has happened in the last 16 months, the indicators, obviously, could not be stress tested in advance for that. Because we never experienced this kind of a prolonged cyclical slowdown in the industry. And no amount of indicators can do justice to have a credit loss, which can still correspond to your original benchmark if the slowdown is so deep and prolonged.

Having said that, the point which was mentioned by Kailash, so we saw that in this 16 months of severe slowdown, there were certain asset categories, which are still -- withstood the pressure. And therefore, we have now pivoted, from July 2019 onwards, our disbursals in those asset categories. So that when the cyclical slowdown is so deep, then also you're able to withstand it for much longer.

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Operator [63]

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The next is from the line Praful Kumar from Pinpoint Asset Management.

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Praful Kumar, Pinpoint Asset Management Limited - Portfolio Manager [64]

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Just one question, sir. You have seen now finite growth in home finance. You also have significant traction on the insurance business. Any plan in CY '20 this calendar year to benchmark of one of these businesses in terms of valuations? Or any plan to get some valuation benchmarking done in these businesses?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [65]

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Yes, so we are gradually scaling up these businesses and these -- both these businesses are doing exceedingly well, both in terms of the growth in the fresh business and in case of housing growth in the AUM and also on the operating benchmarks. So we are also investing capital, and we are doing the capital allocation on the basis of the businesses, which are reporting better performance and the ROEs. And once the businesses reach a certain scale, obviously, we would then look at the options that you are talking in terms of setting a benchmark for the valuation and maybe also creating a price discovery.

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Operator [66]

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(Operator Instructions) The next question is from the line of Priyankar Sarkar from HSBC Global Asset Management.

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Priyankar Sarkar;HSBC Global Asset Management;Analyst, [67]

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Sir, just a quick bookkeeping question. What is the total amount that has been infused in the Affordable Housing segment?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [68]

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So till date, we have not infused any capital in the housing finance subsidiary post the acquisition that we did in February 2013. And at that point of time, the company had about INR 250 crore of net worth. And over the last 6, 7 years, with the retained profits, it is now reaching close to INR 400 crores. And now we are putting in another INR 100 crores, taking it to close to INR 500 crores.

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Priyankar Sarkar;HSBC Global Asset Management;Analyst, [69]

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Okay, sir. And sir, I just wanted to understand the old book when you had acquired it in Feb 2013. All that has exhausted and it's a new book which you have created?

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

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So of the old book, my last memory serves, it is below INR 150 crore amongst the -- in the current overall AUM of around INR 3,200 crore.

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Priyankar Sarkar;HSBC Global Asset Management;Analyst, [71]

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Okay. And the tenure would be for 5 to 7 years in this book?

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [72]

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We are yet to really compute the actual life. Our estimates are 7 to 8 years.

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Operator [73]

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As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

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Sanjay Chamria, Magma Fincorp Limited - Vice Chairman & MD [74]

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So thanks a lot to all of you for your joining this call and asking the questions. It has been a pleasure for me and my colleagues to answer, and we look forward to having an interaction with you at the close of the fiscal year. Thank you very much.

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Operator [75]

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Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.