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Edited Transcript of MANAPPURAM.NSE earnings conference call or presentation 13-Aug-19 11:45am GMT

Q1 2020 Manappuram Finance Ltd Earnings Call

Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Manappuram Finance Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 11:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* A. L. Bindhu

Manappuram Finance Limited - CFO

* Jeevandas Narayan

Manappuram Finance Limited - MD of Housing Finance

* K. Senthil Kumar

Manappuram Finance Limited - EVP

* Raja Vaidhyanathan

Manappuram Finance Limited - MD of MFI

* Salil Bawa

* Vazhappully Padmanabhan Nandakumar

Manappuram Finance Limited - MD, CEO & Director

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Conference Call Participants

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* Aarsh Desai

Vallum Capital Advisors - Analyst

* Anitha Rangan

Hsbc Asset Management (India) Private Limited - VP of Fixed Income

* Ashish Sharma

ENAM Asset Management Company Pvt. Ltd - Analyst

* Digant Haria

Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research

* Parag Mehta

* Pranav Tendolkar

Rare Enterprises - Investment Analyst

* Pratik Kothari

* Rajeev Agrawal

* Sudhanshu Mishra

* Abhishek Murarka

IIFL Research - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to Manappuram Finance Limited Q1 FY '20 Earnings Conference Call hosted by IIFL Securities Limited. (Operator Instructions) Please note, this conference is being recorded.

I now hand the conference over to Mr. Abhishek Murarka from IIFL Securities. Thank you, and over to you, sir

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Abhishek Murarka, IIFL Research - VP [2]

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Thanks, Vikram. Good evening, everyone, and welcome to the 1Q FY '20 conference call for Manappuram Finance. We will begin with the disclaimer and opening statement and then throw it open for questions.

From the management team, we have Mr. VP Nandakumar, the MD and the various business heads. So the MD for Asirvad, Mr. Raja Vaidhyanathan; the CEO for Vehicle Finance, Mr. K. Senthil Kumar; the MD for Home Finance, Mr. Jeevandas Narayan; the CFO, Mrs. Bindu; and the Head of Investor Relations, Mr. Salil Bawa.

We thank the management of Manappuram to give -- for giving us the opportunity to host the call. And now we hand over the call to Mr. Bawa for the disclaimer and the opening statements. Thank you, and over to you.

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Salil Bawa, [3]

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Thank you, Abhishek. During the discussions, we'll be referring to the Q1 FY '20 investor presentation, uploaded to the exchange and also on our website.

Before we begin, I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainty. A detailed statement in this regard is available on the results document shared with you earlier.

With that, I would like to now invite Mr. Nandakumar Ji to begin the proceedings of the call.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [4]

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Thank you, Mr. Salil Bawa. Ladies and gentlemen, welcome to Manappuram Finance Limited Q1 FY '20 Conference Call.

As you are aware, over the past 3 quarters, the Indian financial sector has been going through a phase of turbulence with liquidity a challenge. Moreover, over the last quarter or so, there has been a perceptible slowdown in the Indian economy, with key industry sectors reporting a fall in demand.

Against this backdrop, I am happy to report that our Q1 performance represents a strong beginning for the current fiscal year. We have achieved good increase in business volume and profitability, and we have also crossed some significant milestones. The performance highlights for the current quarter are as follows: One, our consolidated AUM has crossed INR 20,000 crores milestone. Consolidated AUM is up by more than 20% year-on-year and nearly 4% quarter-on-quarter.

We are reporting consolidated net profit of about INR 270 crores, which is a 35% increase over the year ago quarter. Growth in gold loan was in line with the poor -- the result of this prior guidance, as gold AUM grew by 2.6% on a sequential basis. Growth in gold loan was driven through a combination of increase in gold holdings, which grew by 3.6% year-on-year and higher gold price. Average LTV on the gold loan book now stands at 62%. We are finding that customers are not necessarily borrowing the entire 75% against the value of their gold holding. We expect growth in gold loans to pick up substantially in Q2, driven largely by growth in tonnage. We continue to maintain annual growth guidance of 10% to 12% in gold AUM.

Our Microfinance subsidiary, Asirvad Microfinance, continued to be an interest-free outperformer and achieved another milestone. Its AUM crossed INR 4,000 crores mark to close at nearly INR 4,200 crores, a sharp increase of 72% year-on-year and 9% quarter-on-quarter. The growth was driven mainly by customer additions as average ticket size continues to remain close to the historical level of 21,212 per loan. As discussed previously, we are evaluating a primary fund raise of $85 million to $100 million in Asirvad, and we will take a final call on this very shortly.

The internal controls at Asirvad have been tightened over the past few years, and we have made significant investments in technology and (inaudible). Our diversification in these niche issues are going well.

India's automobile sector is in midst of a slowdown. But our commercial vehicle finance business, which has now completed 4 years, has performed quite strongly, with low early delinquency and attractive unit economics. We expect the vehicle finance to be the third major driver of growth for the company after gold and microfinance. Vehicle finance AUM grew by 10.1% on a Q-on-Q basis and GNPA was 2.5%. We expect GNPAs to remain below 3% on a service case basis as this book matures.

Housing portfolio is small and has been steady in terms of asset quality. During the quarter, the company consciously chose to reduce its online lending portfolio, that is, launch to smaller NBFCs and the amortized given the times of stress in the macro environment. Overall, non-gold AUM now stands at 34% of the total AUM. And it is our intent to increase this proportion to 50% over time without losing focus on the core gold-loan products.

On the liquidity front, the company has not faced any issues. We continue to receive funds from all verticals. CP rollovers are continuing. We are getting funds from our bank and (inaudible) partners. And we have recently raised $75 million from IFC. We have committed undrawn bank lines of INR 1,070 crores to backstop (inaudible).

We plan to diversify our liability today and are in the process of raising money from both retail NCD and foreign currency bonds. We do not expect any funding challenges to come in the way of our growth plan and are monitoring ALM closely.

In terms of unit economics, we expect our spreads to sustain. There is potential for operating leverage across all businesses. Over the last 1 year, our cost to assets has been declined from 8.15% to 7.8%. And we believe there will be further reduction going forward. We are carrying INR 80 crore surplus provision on the consolidated balance sheet, as the company provides higher RBI-mandated provisions and in there for which -- for each business line.

During the current quarter, the company transitioned to IndAS 116 which had a net positive impact of INR 4 crores from PBT.

Lastly, I'm pleased to announce that Mr. Abhijit Sen, former CFO of Citi Asia-Pacific, has joined on our Board and Audit Committee. The Board is proposed to be further enhanced going forward. Our company is taking several steps to further improve governance. It will share with you during the coming quarters.

Thank you. Now it is over to our CFO, Bindhu, for a detailed look at the numbers.

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A. L. Bindhu, Manappuram Finance Limited - CFO [5]

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Thank you, sir. For the quarter ended June 2019, our consolidated AUM stood at INR 20,186 crores, an increase of 3.8 percentage Q-on-Q and 21.5 percentage year-on-year. The consolidated profit after tax after minority interests, INR 269 crores, grew by 5.2 percentage Q-on-Q and 35.3 percentage year-on-year. ROE on a consolidated basis was 23.3 percentage and ROA of 5.1 percentage for quarter ended June 2019.

Our gold holdings were 68.4 tonnes as at the period end of June 30, 2019. The holding increased by 1.3 percentage Q-on-Q and up by 3.6 percentage year-on-year. Our total number of gold loan customers stood at 34.62 lakhs. The gold loan book at INR 13,292 crores, which is up by 2.6 percentage Q-on-Q and up by 6.6 percentage year-on-year.

Auctions during the quarter were INR 47.5 crores. As you are aware, we follow the policy of making regular auctions on overdue accounts. Our weighted average LTV stands at INR 1,946 per gram or 61.9 percentage of current gold price. Gold loan disbursement during the quarter at INR 26,396 crores.

The online gold loan book is steady, which is accounted for 37 percentage of total gold loan. Net yield on gold loan improved during the quarter as the company was able to successfully pass on the increase in its funding costs and reduced the rebate scheme. The overall number of gold loan branches stood at 3,380.

Asirvad had a closing AUM of INR 4,198 crores, an increase of 9.3 percentage Q-on-Q and 72.2 percentage year-on-year. For Q1 FY '20, the company made a profit of INR 49.42 crores compared to INR 40.92 crores reported in Q4 FY '19.

In IndAS transition, we provided 100 percentage for loans due over 90 days. We have provided INR 27.7 crores excess provision as compared to RBI Prudential Norms, thereby following a conservative approach. 100 percentage of disbursements were made in noncash manner, Asirvad had 18.93 lakh customers, 961 branches and 5,065 employees. We are now present in 22 states, and it is the fifth largest NBFC-MFI in the country. The company has a capital adequacy ratio of 26 percentage.

Strong traction in Vehicle Finance business with AUM of INR 1,227 crores, which is up by 10.1 percentage Q-on-Q and up by 70.6 percentage year-on-year, with stable asset quality of 2.5 percentage as of June 2019. Business is now carried out of 198 branches across 21 states, which was 141 branches across 20 states 1 year ago. And we are seeing early signs of successful cross-selling.

The home loan business had a total book of INR 542 crores, which is up by 4.4 percentage Q-on-Q and up by 33.2 percentage year-on-year. It operates from 35 branches.

Loans to corporates has reduced by 11 percentage Q-on-Q to INR 827.4 crores. This book consists of loans to small NBFCs, MFIs, HSEs, et cetera. The quality of this portfolio is very high, retail NBFCs with high-quality teams, strong capitalization and investor risk. We have loans confirmed despite the macro environment. The new businesses contributed 34.2 percentage of consolidated AUM and remaining 65.8 percentage at gold loan. Average cost of borrowing during the quarter increased by 7 basis points to 9.34 percentage.

We benefited from significant operating leverage as overall OpEx has come down, while the AUM grew by 3.8 percentage during this period. We had communicated to the market about the significant savings in security cost a few quarters ago. We are pleased to announce that security cost has come down to INR 15.6 crores from INR 35.5 crores reported in Q1 FY '19. We expect to continue to drive benefit of operating leverage going forward.

Our employee cost increased by 1.6 percentage Q-on-Q to INR 197 crores for the quarter. Our consolidated head count increased by 375 to 25,985. As you are aware, in line with the direction from Ministry of Corporate Affairs, we adopted Indian Accounting Standards with effect from 1st April, 2018 and transitioned to IndAS 116 from 1st April 2019. We followed a very conservative approach in this quarter. Because of 116 adjustment, there is rent reversal of INR 30.54 crores. And this has happened because we applied IndAS 116 leases to all applicable lease contracts, existing on 1st April, 2019 using the modified retrospective method.

Similarly, our finance costs and depreciation, gone up by INR 6.18 crores and INR 20.33 crores, respectively, during the quarter due to IndAS 116. There is 1.9 percentage Q-on-Q decrease of administrative cost to INR 147.78 crores on a comparable basis.

Provisions and write-offs for the stand-alone entity during the quarter were INR 18.58 crores. Our gross NPAs stood at 0.71 percentage as of June 30, 2019, compared to 0.72 percentage as of Q1 FY '19.

Lost business due to theft, spurious gold, et cetera only amount to 0.05% of AUM.

The company's consolidated net worth stood at INR 4,715 crores. The book value per share stood at INR 55.9 of diversified business. The Board has declared an interim dividend of INR 0.55 for this quarter. The capital adequacy stood at 23.25 percentage. The total consolidated borrowing stood at INR 16,166 crores and the proportion of CPs has come down to 19.2 percentage from 21.5 percentage Q-on-Q.

Thank you. The floor is open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Sudhanshu Mishra from BoB Capital Markets.

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Sudhanshu Mishra, [2]

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Sir, the first question is with regards to the ticket size for your online gold loans versus the gold loans that you give out. Why is there this difference on -- the normal ticket size is around INR 32,000 versus online gold loan, which is at around INR 50,000. So how do I understand the difference, sir?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [3]

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This online gold loan are used by those who are in the -- slightly above level in the economy. So because of that, their average ticket size is higher.

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Sudhanshu Mishra, [4]

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Okay. So they're still getting used by retail customers, however.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [5]

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Yes, all retail only, but the class of customers is slightly up. That's the difference.

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Sudhanshu Mishra, [6]

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Right, sir. And what would be our credit cost guidance for fiscal '20 and '21, sir?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [7]

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So we hope to maintain at this level, at this percentage.

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Sudhanshu Mishra, [8]

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Sure, sir. And just one data keeping question, sir. If I can have the accrued interest for 3Q, 4Q '19 and this particular quarter, sir?

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A. L. Bindhu, Manappuram Finance Limited - CFO [9]

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So it remained around 3 percentage. So as on 30th June, 2019, 3.2 percentage.

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Sudhanshu Mishra, [10]

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So it was 3% in 3Q and 4Q and 3.2% in 1Q of this year, correct?

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A. L. Bindhu, Manappuram Finance Limited - CFO [11]

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Yes.

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Operator [12]

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We have next question from the line of Anitha Rangan from HSBC.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited - VP of Fixed Income [13]

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I just wanted to know about your bank lines, funding from banking channel. Are you getting like incremental new funding from the banking channel? And are you able to avail your existing sanction facility without any difficulty? Because we're hearing that some market participants are telling us that there is a challenge in terms of getting funding from banks.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [14]

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So in my opening remarks itself, I have mentioned about (inaudible). We didn't face any challenge here maybe because of our positive ALM we have in our product. We continue to get the CP rollovers and funding with some additional funding like funding from IFC, NABARD were also available to us. So overall, will lead to liquidity comfort.

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A. L. Bindhu, Manappuram Finance Limited - CFO [15]

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And in the (inaudible) liquidity, during the quarter, we (inaudible) crores.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited - VP of Fixed Income [16]

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Okay. And what would be your kind of like liquidity policy which you are maintaining currently as a policy?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [17]

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No the -- see the liquidity policy is -- we always maintain around 5% in liquid assets all the time. So it is there. Then our liability side is -- that also is well diversified. So we plan to raise funding from or increase borrowing also. We plan to have -- those actions are already on, like getting ready, the tender (inaudible), they have been approached, the process is going on. Yes, we hope we will be able to get overseas fundings.

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Operator [18]

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We have next question from the line of Rajeev Agrawal from DoorDarshi Advisors.

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Rajeev Agrawal, [19]

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The first question is the extensive flooding in different parts of the country. Any impact any of your businesses have because of that?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [20]

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See the-- yes, there has been extensive flooding but our portfolio exposure, AUM exposure in these areas may not exceed 2, 3 percentage. So during flooding also what is our experience in the past is there could be only -- used to be only a lag, maybe 1 month et cetera, et cetera. There are still because there is -- there will be flurry of activities after that, because of that, our customers are able to get their money, so they used to repay. So last year, Kerala flood as well as the Gaja cyclone, Orissa cyclone, et cetera, these are still the case. But our exposure this year is around 2%, 3% only.

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Rajeev Agrawal, [21]

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Got it. Okay. Second question is, given that the gold prices are going up, and when we look at your gold AUM growth, and your guidance are 10% to 12% gold AUM growth. So can you break it down in terms of how much will be the tonnage growth versus how much will come from the price growth for the year?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [22]

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We expect the tonnage growth to be around 10% this year; maybe the AUM growth, around 12% to 15%. The reason is, with the increased LTV with the -- commensurate with the gold price, the customers don't borrow. Currently, our average LTV is only 62% as against the regulated cap of 75%. That means all the customers do not take the advantage only, we say customers take the advantage. They borrow whatever money they want and only let's say, 10%, 12% customers borrow the highest LTV.

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Rajeev Agrawal, [23]

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Got it. And if a customer is borrowing at a lower LTV, do you -- is your interest rate different for those customers versus people who are borrowing at the full 75% LTV or is it the same?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [24]

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No. The interest rate is the same. We offer some subsidies -- rebates based on their regular transaction.

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Rajeev Agrawal, [25]

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Got it. Now on the gold tonnage, you mentioned 10% growth. I know that your competition is doing better in terms of the tonnage growth. So I mean, what are some of the reasons why our tonnage growth is lower than the competition? Anything that you have thought about and anything you are looking to do to improve that?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [26]

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See, overall -- first of all, we don't have any aggressive growth plan. We target a consolidated AUM growth of around 20%, which we hope we'll be able to achieve. And ROE of around 20%, which we hope we'll be able to achieve. So we don't go for an aggressive growth path because we need to manage our liquidity also. So far, we were able to have liquidity comfortably, and we hope to maintain that going forward.

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Rajeev Agrawal, [27]

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Got it. And then my last question is on the housing finance. So the GNPA there continues to be high. I know in the past, we have talked about bringing it down to 3%, right? Any sort of outlook you can give on that business in terms of the asset quality as well as the growth of that business?

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Jeevandas Narayan, Manappuram Finance Limited - MD of Housing Finance [28]

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Yes, I'll take that one. In fact, that has been -- asset quality has been a challenge. But then, there are -- there's a 2-pronged approach here. One is in terms of trying to set right some of the legacy assets in terms of trying to sell the assets and bring down the assets which are stressed.

Another approach has been that we have progressively reduced the ticket prices and progressively reduced the LTV. And we also come out with the micro home loan product where the LTVs are as low as around 30%, and our yield is around 21.5%.

So with this combined approach we are, on one hand, reducing the overall LTV on the portfolio; we are increasing the yield; at the same time trying to contain the credit cost on the new portfolio. So that whatever is there in terms of the legacy issues, we are able to sell it over a period of time and bring it down to below 3%.

And we also found that interested especially in affordable where the other players also, the credit cost around -- ranges from around 2.5% to 3.5%. This is what the -- most of the companies are converging on who are purely in the affordable segment.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [29]

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I would add on. See, these are some resumption of the lending space during 3 years back, 2 years back, et cetera. During the last 2 years in lending, the credit quality remains good, but the NPA is well below 1%. So the old assets through that phase, we have reprocessed many of these assets. So during the -- because of the liquidity is first in the economy, we were not able to sell it fully. We are liquidating slowly. Once these are liquidated, which we hope we'll be able to do, it will come to somewhere around 2% towards end of this year.

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Operator [30]

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We have next question from the line of [Omkar Kulkarni], individual investor.

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Unidentified Participant, [31]

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I wanted to know the capital consumption for this quarter?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [32]

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We have a very high capital adequacy ratio. Capital consumption is not too much, because we have the plowback of the profits. So the capital adequacy level remains more or less the same.

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A. L. Bindhu, Manappuram Finance Limited - CFO [33]

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23.2%

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [34]

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23.2% even now.

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Unidentified Participant, [35]

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Okay. But approximately how -- what's the consumption rate? Like, even if you give it for a year, that will be fine. For the last year, how much it was -- for the whole year?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [36]

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Last year, it was -- the reduction is [21%] now.

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Unidentified Participant, [37]

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[71%]?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [38]

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Yes, I don't -- nearly 2% reduction in the [CRAI]. Actually, we want to -- our intention is to bring down that to around 20% level this year. Then only we get the advantage of a better leverage. We want to bring it down slowly.

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Unidentified Participant, [39]

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Yes. Either there has to be growth or otherwise the capital will remain unconsumed, so it's...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [40]

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Well, we hope it will come down slowly, get to our expected target level of 20%.

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Unidentified Participant, [41]

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Okay. Otherwise, if you have pending capital, then better to distribute via dividends, if there is lack of growth -- I mean, of higher growth, I mean to say.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [42]

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Yes, you are right.

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Unidentified Participant, [43]

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Okay. And I wanted to know about the current situation the company is facing while disbursing in Kerala and likewise cities where we are facing floods? And how much is the contribution to the overall revenue of the company?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [44]

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No. Before, I told -- our exposure in this area, AUM exposure may not be 2, 3 percentage of a consolidated year.

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Unidentified Participant, [45]

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Okay. You are talking about Kerala state?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [46]

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Yes. Kerala and other places, all put together.

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Unidentified Participant, [47]

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Okay. Only 2%, 3% exposure you have.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [48]

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Yes. Yes. AUM exposure.

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Unidentified Participant, [49]

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Okay. And then sir, for other businesses which you are having, what is the likely growth for, say, next 3, 5 years? I believe it will be around 50% of the overall...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [50]

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See, what we expect is -- what we wanted to achieve is around a 20% CAGR. This is what we want to achieve every year. All depends on the market conditions.

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Unidentified Participant, [51]

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Yes. But this includes the gold loan or it excludes it?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [52]

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No, the consolidated. This is what we are aiming it. But -- well, there is a play of many conditions no, in the economy.

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Operator [53]

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We have next question from the line of Ashish Sharma from ENAM Asset Management.

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Ashish Sharma, ENAM Asset Management Company Pvt. Ltd - Analyst [54]

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Congratulations on a good set of numbers, sir. This one question on the growth of the Microfinance business. Do we see a need to calibrate the growth in the MFI business because it's going very fast and it's already 20% of the overall book?

And secondly, you had mentioned that second quarter -- I mean from the second quarter, we will see some bit of inch-up in growth for gold loan segment. What was the reason for that? These are the 2 questions, sir.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [55]

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Yes. I'm offering this to Raja.

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Raja Vaidhyanathan, Manappuram Finance Limited - MD of MFI [56]

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Yes. Sir, I think he is asking about the group's strategy on MFI.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [57]

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Yes. The group's strategy will allow the company to grow and to make use of the opportunities available in the business. So with regard to our capital allocation, I think we have allocated our capital already. For the next growth phase, we want to tap capital from the market. We have a clear consensus for that. And we are in discussion with some of the investors. We hope that it will be closed without further delay.

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Ashish Sharma, ENAM Asset Management Company Pvt. Ltd - Analyst [58]

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My question was actually basically do we need to sort of focus on bringing down the -- I mean the mix of MFI in the non-gold is getting a little higher. I mean do we need to sort of calibrate the growth? Is that what we are trying to do? Or are we saying that at this moment, there is no need? I mean it is already 20% of the overall book.

And then on the funding part, you had mentioned that you were looking at $85 million to $100 million fund raise. So is it going to be a stake sale? Or is it going to be new money coming in?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [59]

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It is -- it will be the new money coming in. So this will be used for further growth. And for the next phase of growth, the funding expected to come in plus the accumulated profits will be enough to take care of the capital requirement.

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Ashish Sharma, ENAM Asset Management Company Pvt. Ltd - Analyst [60]

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Okay, sir. Perfect. And on the gold loan segment, sir, you...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [61]

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Gold loan, yes. Your question was why do we expect higher growth during the second quarter, right?

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Ashish Sharma, ENAM Asset Management Company Pvt. Ltd - Analyst [62]

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Yes.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [63]

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See, gold also, there used to be cycles. If we do not achieve growth during one quarter, we used to compensate through the growth in the other quarter. So the second quarter, we see some good signs of growth. So we believe that things will be better.

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Operator [64]

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We have next question from the line of Parag Mehta from Edelweiss.

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Parag Mehta, [65]

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Two, three questions, sir. One will be on the core business, which is the gold business, right? In this, I mean if you look at our growth both from a Y-o-Y and a Q-o-Q basis, in spite of a good environment but in gold, prices have gone up and the LTV is automatically coming down. Our growth still has been below someone like the Muthoot, which is off a much larger period. I wanted to understand what is the thought process moving forward? Are we going to continue to remain conservative as far as the gold business is concerned and focused primarily on the non-gold business? That's the first question.

The second question is effectively on the other businesses, which is the Housing Finance business, the Vehicle Finance business and the Microfinance business. Sir, I just wanted to understand: a, our exposure to the categories in each of them from a product perspective and a state perspective. Like in case of Vehicle Finance, we do primarily commercial vehicles. Which are the states where we have exposure to? And where do you see these deals and gross NPA going forward?

Similarly on the Housing Finance business, what -- which are the states where we have most of the exposure to? And where do you see that moving forward given the gross NPAs are right now close to 4.5%?

And Microfinance, as someone else also highlighted, if we could get a sense as to the states where we have an exposure to primarily? And how do you see that from an asset quality perspective especially in the current environment wherein there has been a series of floods and, at the same time, potential repayment issues in the short term?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [66]

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So growth in gold loan business is -- the growth was less than 2% base. I think we'll be able to achieve our targeted growth rate of 10% to 12% towards the year-end.

So regarding our capital allocation in each of these businesses, over a period of time, our capital allocation plan is 50% of the capital will be for gold loan. And another 20% gold loan will be for -- against micro mortgages, which include affordable housing as well as the SME lending. Another 15% will be in vehicle segment, which include commercial vehicles or used passenger cars and 2-wheeler. And 10% of our capital allocation will be for Microfinance. This is our capital allocation plan.

Now Microfinance, yes, our capital allocation comes to about 12%. Yes, my hope with a new fund raising, capital raising there and also accumulated profit (inaudible) so the company will be able to grow on its own. As far as the capital adequacy is concerned, it will be -- capital adequacy will be taken care of. So this is our -- what we've based our -- the capital allocation is, but we have good capital in the business.

Housing Finance, our presence is mostly in the West and South. Yes. The business is growing at a reasonable pace. In the last 2 years, businesses have been good. Initial -- some initial NPAs were bad but we don't have much worry because the NPAs are around 4.3%. What was -- these assets are mostly self-constructed houses. These have been repossessed. And these have been lined up for sale. But those sales are happening slowly. But things are happening but slowly. But once it has happened, the NPA level will be coming down nearly 2%, which is expected, 2% of this year.

Vehicle Finance, we have around 196 branches across the country. So the dispersal stuff is happening. We have mostly introduced commercial vehicle where the average yield is around 18%. And the used cars also, the yield is more or less the same. And 2-wheelers is around 22%. This is the yield. The NPA level is -- the NPA is around 2.5%. And on a stable basis, it will be maintained around 3%. So still, we expect an ROE of around 3% on a sustainable basis.

In terms of (inaudible) our yield currently is -- incremental yield is over 15%. Yes. So we'll be able to maintain an ROA on a substantial basis which will be -- ROA will be over 2%.

Yes. Microfinance is...

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Parag Mehta, [67]

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Sir, one follow-up question on the CV side, on the vehicle portfolio side if that's okay, is effectively how much of this is used versus new CV? And on top of that, basically what is our exposure to some of the tariffs? How much does South form a part of this?

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K. Senthil Kumar, Manappuram Finance Limited - EVP [68]

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Yes, sir. Thank you for that. See, in terms of Vehicle Finance, we have 70% of our book which is in commercial vehicles and around 25% in 2-wheelers and 5% in used passenger cars and farm equipment, that is basically tractors. If you split the commercial vehicle, we have around 85% of our book which is in the used commercial vehicle, and around 15% forms -- it is new commercial vehicle. In this 85% of used commercial vehicle, the majority of the used commercial vehicles are heavy commercial vehicles.

In terms of our presence, we are present across the country. We're present across 21 states and in 12 -- 198 locations. And the South portfolio should be around -- it is around 40% is the contribution of South portfolio.

And in terms of floods, which you asked sometime back, I think we have a very -- our exposure in Kerala is mixed and is around [4%] of our portfolio. I feel like we have a constant engagement with customers to tide over their issues. We did not face any issues last year also when there were large floods. And this year also, I don't foresee any major issues coming across.

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Parag Mehta, [69]

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Understood. Understood. And on the Housing Finance business, what is the thought process covering what has been broadly flat to moderate growth? It's around at the similar levels where you were much -- I mean slightly higher than where we were as far as March '19 was concerned. And the gross NPAs are 4.5%. So what is in the plan moving forward?

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Jeevandas Narayan, Manappuram Finance Limited - MD of Housing Finance [70]

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As I mentioned earlier, in fact, the CAGR last year was 38%. And this year also, if you see the first quarter, if you annualize, it comes to around 15% plus. Well, what we have done is that having realized that maybe the (inaudible) ability and also having a strong technical vertical, we have actually worked on 3 aspects to see that we have a really sound base for future growth. One is over a period of time, we have reduced the ticket sizes, which at one point of time we used to do. The average ticket sizes used to be much higher than around 13 lakhs to 14 lakhs. It has come down to 8.42 lakhs now. And in terms of LTVs also, from last year, it was 56% plus, to 49% LTV, overall LTV. So this way, we are derisking the book.

Secondly, we are also going in for smaller micro home loans. And as of now, in fact, one thing you will see that we have been growing. And we achieved a growth of 39% last year and 15% in the first quarter on an annualized basis only through the existing branches. That is 33 branches. There are 2 branches we have also merged and then we have rationalized, so 33 branches.

So now we have actually identified 2 states. That is Rajasthan and Madhya Pradesh. As of now, our book is mostly Maharashtra, Tamil Nadu, Gujarat and Karnataka, followed by Kerala which construed about 90% of the business.

So we have also identified 2 states. That is Rajasthan and Madhya Pradesh, where we will be opening branches. These branches will be on a spot model mostly co-located with the main [pattern]. So the initial cost hopefully will be much lesser. And once we establish a foothold in the micro home loan sector, we will be slowly increasing the ticket sizes to around, say, 8 -- 7 lakhs, 8 lakhs, 9 lakhs, 10 lakhs. So that is the growth plan we have.

So once these things take -- start sort of paying dividends and we have followed a policy of prudently trying to grow the top line together with the sound growth in the bottom line as well in the sense that we don't believe in too much of expansion or a cash burn formula. So this has been the plan. And of course, the other challenges, the macro challenges are well known for (inaudible).

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Operator [71]

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We have next question from the line of Pranav Tendolkar from Rare Enterprises.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [72]

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Can you just repeat what is the average size of the business (inaudible) you're giving loans to?

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A. L. Bindhu, Manappuram Finance Limited - CFO [73]

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The averages in terms of gold loans?

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Salil Bawa, [74]

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No, no, on lending.

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A. L. Bindhu, Manappuram Finance Limited - CFO [75]

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On lending, around INR 10 crores.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [76]

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No, no. So that is the lending that you have done, but I want to understand what is the size of the organization that you lend to.

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Salil Bawa, [77]

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Average size?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [78]

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Yes. Well, the average size may be around INR 300 crores.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [79]

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Okay. Okay. So sir, do you perceive a greater risk in this because typically, the smaller organizations (inaudible) growth presented 20 years after?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [80]

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No. We don't foresee because we are very selective. We have an exposure of around INR 850 crores to around 56 companies. So yes, the -- with these companies, are joined with investors waiting. They have the investments including -- they have -- well, yes, foreign investments also. The investments also, they have them all. All these are looked into. And we have been reviewing their performance regularly on a monthly basis. So all the companies are doing well. And we don't have any worry about their ability to sustain the business.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [81]

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Okay. Okay. And then what is the majority of (inaudible) this portfolio (inaudible) are related to? Is it housing? Is it...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [82]

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Yes. The majority, our Microfinance company. And they're followed by Vehicle Finance company and then also, our Housing Finance company.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [83]

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Okay. Okay. Okay. Sir, that is one. And second question is so what is -- how is the risk management function structure gold organization? So there is Vehicle Finance and the rest Microfinance and gold loan and other (inaudible)?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [84]

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Sir, I have answered this in terms that -- about the capital allocation plan and capital raising plans to individual businesses is also going forward. So it's 50% funding. You have 50% of capital allocation. In the medium term will be for gold loan business followed by small mortgages like affordable housing and SME. Over a period of time, it will consume around 50% of the capital and 15% capital for Vehicle Finance and 10% from Microfinance. This will be our capital allocation, but it doesn't mean that they will...

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [85]

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I'm asking our risk management functions, risk management. Not capital, risk management.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [86]

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Yes. The risk management function, yes. We have a Chief Risk Officer. They are evaluating the enterprise for the various levels (inaudible) background, (inaudible) qualities are regularly captured and [performed asset] is on the Board also. We have like a Board committee also is digging into the roots, et cetera, et cetera. Accordingly, we will fine-tune our operation.

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Pranav Tendolkar, Rare Enterprises - Investment Analyst [87]

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Right. Right. Because this is the first time in last 10 years when economy will probably see a growth rate in any case because previous cycle of NPAs was just overinvestment or malinvestment. And this is the first time when it will be a growth-related NPA spot. So I think the Board and you are seeing this cycle first time in your -- so almost 4 out of your 5 lending, you are seeing the first cycle, right? So...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [88]

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I may not be. I was seeing on direct basis -- you're seeing on direct basis. So when I was on -- I was a promoter and on the Board of Asirvad Microfinance, we have seen that.

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Operator [89]

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We have next question from the line of Digant Haria from Antique Stockbroking.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [90]

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I heard that -- in your opening comments, that there is a scope for a lot of operating leverage across all the businesses. So sir, across -- in this gold loan business, I understand that last 5 quarters, we have successfully reduced the security costs. But where in the other businesses especially do you see this scope for operating leverage? And are there scope for internal efficiencies? Or would growth be the only answer to this operating leverage playing out?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [91]

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Yes. Yes. The operating leverage comes from the operational efficiency. Operational efficiency will come through the performance. That's a better utilization of special interest, special -- et cetera, and, for instance, increasing the productivity. So this is how this is achieved.

With gold loan, we have the introspective. Any increase in the portfolio will definitely help as it will translate that into operational efficiency.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [92]

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Sir, my question was more around, let's say, the housing business or the CV business or the MFI business because I believe in CV business, we use the gold loan branches. So we anyway don't have replication of costs there. So...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [93]

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Yes. So no, that is very clear. Yes, with all the increase in the business, so definitely yes, it leverage the actual infrastructure and team. So -- but we have to bring in better efficiency here. So what is needed is with the growth -- the average performance per employee. Many of them are new, they're also -- the newly organized (inaudible) employee.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [94]

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Okay. Okay, sir. And last one data keeping question is sir, what are the lending rates in Microfinance and gold loan, the peak lending rate?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [95]

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In Microfinance, our average yield, it comes to nearly (inaudible). Microfinance, you have (inaudible).

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A. L. Bindhu, Manappuram Finance Limited - CFO [96]

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Microfinance...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [97]

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No, gold loan. Gold loan.

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A. L. Bindhu, Manappuram Finance Limited - CFO [98]

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Yes.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [99]

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Yes. I'm talking about gold loan, yes. Microfinance, it is around 21%, slightly lower than 21%.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [100]

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Okay. Okay. And incremental bank funding cost for the current quarter would be like kind of those...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [101]

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It will be...

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [102]

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(inaudible) 10?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [103]

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No. It is around 9...

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A. L. Bindhu, Manappuram Finance Limited - CFO [104]

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7 basis points, which increased during the quarter. Incremental borrowing costs also at similar levels, so 9.25 basis points this quarter.

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Operator [105]

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We have next question from the line of Aarsh Desai from Vallum Capital.

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Aarsh Desai, Vallum Capital Advisors - Analyst [106]

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My question was related to the gold loan growth. So year-on-year (inaudible) gold prices, will have seen a 20% growth. And even if we assume that (inaudible) remains constant, shouldn't the ticket size in gold loan move up by at least 10% odd? And you should -- I mean leaving aside the 10% tonnage growth that you're talking about.

And I'm talking about this especially because of the liquidity crunch in the economy where gold finance would become the lending of the last resort. So I mean I'm trying to understand why this year it would be (inaudible) 16%, 17% sort of a growth just purely because of the rise in the gold price and the higher digitized lending that we can do in gold loan.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [107]

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See, even when the gold price is going up and the LTV is going up, the customers -- all the customers want -- take 75%, which is the maximum LTV. Now the average LTV is 62%. People -- most of the people take money according to their requirement. So if the gold price again moves up by (inaudible), the LTV will further come down. So there is -- the linkage is less.

You're talking about the other resources that are going down. So there'll be a greater scope for gold loan. So we are not experiencing that so far. We are targeting a growth of 10%, 12% this year with regard to [AUM], the market can give us growth in tonnage also. So we hope we can achieve that.

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Aarsh Desai, Vallum Capital Advisors - Analyst [108]

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Okay. And my next question was can you give me the ROE profile for Housing Finance, Vehicle Finance and lending to SME business?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [109]

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ROE, right. So the ROE of the Vehicle Finance is around -- yes, we hope it will be around 5% this year because we have -- we've started making profit only. Vehicle Finance that was a -- (inaudible) Finance is a small portfolio. Maybe around that towards the year-end. These are our expectations. Next year, the -- by a better leverage of people and technology, better capital [asset base], we'll be able to do better. So far, these are the individual basis. But our strategy really.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [110]

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Okay. No, because what I was trying to understand is that our ROE in the gold portfolio is around 19%. ROE in the Microfinance is around 25%. So how does the consolidated ROE come to around 23.1% when the Housing and the Vehicle Finance books have such low ROE?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [111]

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Majority of the portfolio, that is 65% in gold loan, 20% of the portfolio is Microfinance, so this constitutes around 90%, no? And the Vehicle Finance portfolio is around 6% only. Microfinance constitutes -- Housing Finance constitutes only 2.7%.

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Aarsh Desai, Vallum Capital Advisors - Analyst [112]

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Correct. But gold loan, which is 60% or 65% of our portfolio is a 19% ROE portfolio, correct?

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A. L. Bindhu, Manappuram Finance Limited - CFO [113]

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So the lower ROE businesses (inaudible) consolidated. AUM is comparatively small. And making ROE (inaudible) gold loan is 19.7%.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [114]

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Yes. Gold loan is 19.7%.

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A. L. Bindhu, Manappuram Finance Limited - CFO [115]

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And the MFI is 25%.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [116]

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Yes.

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Operator [117]

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We have next question from the line of Pratik Kothari from Unique Investment.

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Pratik Kothari, [118]

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There is a statement in the FY '19 presentation, you had mentioned in terms of business diversification. The company is evaluating a foray into insurance manufacturing business. If you can enlighten me (inaudible) out some INR 200 crores for the same. So if you can just talk about that?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [119]

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No. We are preparing ourselves for the application for that. We need to recruit a team, a senior team which are all prepared. We have also identified people. Hopefully, towards the end of this year, we will submit the application at the level 1.

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Pratik Kothari, [120]

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So is that third-party insurance? Or we'll be doing our own?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [121]

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These are life insurance concentrating on credit-life insurance.

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Pratik Kothari, [122]

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Okay. But we already are doing some part of it, right? So...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [123]

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Yes. We feel we have introduced distribution now, which is doing very well. So that's one reason why we thought of it entering into manufacturing kind of makes sense for us given our natural business.

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Pratik Kothari, [124]

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Okay. Okay. And sir, regarding this OGL, the online gold loan. So I mean how do we calculate this, sir? What comes under this OGL?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [125]

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No. By OGL, the customer can keep his hold in the branch. And 73% of that -- the market value (inaudible) the LTV, which he can use anytime and could use that 24 into (inaudible) their product. But I mean you have in the company through his bank account or he can submit the loan also at any time.

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Pratik Kothari, [126]

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Okay. Okay. And sir, my last...

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [127]

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(inaudible) 68% now.

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Pratik Kothari, [128]

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Okay. Okay. Okay. And sir, my last question, I mean before the FY '14, 15 years to give out gold loans which are off say in 10, 12 months of tenor. And then that's come down to 3-odd months now. So how has the customer profile changed over the past 4, 5 years?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [129]

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Customer profile is the same. Customer profile is the same.

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Pratik Kothari, [130]

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Okay. No, but earlier, when you used to give out the loan for 1 year. And now we're giving it for 3 months.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [131]

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See, what needs to be understood here is the contract is for a period of 3 months. So upon the expiry of the contract, within another 3 months, the loan has to be reset (inaudible) interest and our customer has to bring the LTV to that percent level. So every 3 months to about 6 months, there has to be a reset, at the new LTV when the customer wants. That will be done. So the real tenor will be decided by the customer because this was purely collateral-based lending. It's not a cash flow-based lending. So as soon as the collateral value doesn't exceed the individual, then we can continue lending to him.

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Pratik Kothari, [132]

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Okay. Sir, will most of the customers be resetting every 3 months?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [133]

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No, no. See, I told -- the average life of a gold loan is around 72 days. Many customers, the average number of customers are closing the loans within the durations there.

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Pratik Kothari, [134]

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Okay. Sir, when you say 72 days, it does not include if someone has reset their loans for another 2 or 3 months?

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [135]

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These are included. All are included.

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Pratik Kothari, [136]

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Okay. So to answer my question, if someone resets every 72 days, then that average life becomes longer for a particular customer? I'm just trying to understand how many of the customers will be resetting their loans.

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Vazhappully Padmanabhan Nandakumar, Manappuram Finance Limited - MD, CEO & Director [137]

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See, around 2/3 of the customers will be closing that. And 1/3 will be resetting for another 3 months (inaudible) 15% resets about the same time as the (inaudible).

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Operator [138]

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Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Sir, over to you.

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Salil Bawa, [139]

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I want to thank all of you for being there. It was truly happy to interact with all of you. I'm grateful that all of you have taken time. Also, not only based on this call but even off-line, giving us your input, asking us questions. And I would hope that we continue this entire interaction and continue to hear from you.

Please do contact us or any of us in IR or otherwise. And we will be very happy to get feedback from you but also answer your queries whenever you have. Thank you very much.

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Operator [140]

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Thank you very much, sir. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.