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Edited Transcript of MUTHOOTFIN.NSE earnings conference call or presentation 14-Feb-20 11:30am GMT

Q3 2020 Muthoot Finance Ltd Earnings Call

KOCHI Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Muthoot Finance Ltd earnings conference call or presentation Friday, February 14, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Oommen K. Mammen

Muthoot Finance Limited - CFO

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Conference Call Participants

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* Amit Jeswani

Stallion Asset Private Limited - Founder

* Amit Mantri;2Point2 Capital;Co-Founder

* Ashish Kumar

* Deepak Lalwani

* Digant Haria

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

* Kislay Upadhyay

Abakkus Asset Management, LLP - Research Associate

* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* Nirmal Bari

Sameeksha Capital Private Limited - Equity Research Analyst

* Ravi Naredi

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

* Utsav Gogirwar

Investec Bank plc, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Muthoot Finance Q3 FY '20 earnings conference Call hosted by Antique Stock Broking (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Digant Haria from Antique Stock Broking. Thank you, and over to you.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [2]

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Yes. A very good evening to all of you. We have us the management from Muthoot Finance. So I'll just hand it over to them. I'll hand it over to Oommen for give some opening comments and comments on the Q3 performance, and then we can open the floor for Q&A.

So Oommen, over to you.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [3]

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Thank you, Digant. Good evening, everyone. So hope you have received the press release as well as a copy of the financial -- offical financial statements as well as the quarterly earnings presentation.

Today, unfortunately, MD Mr. George Alexander could not join the call, so I'll be leading the call. However, we have the senior management. We have Mr. Alexander George, who's Whole-Time Director in Muthoot Finance Limited; Mr. Eapen Alexander, who's the Whole-Time Director in local subsidies, Muthoot Homefin as well as Muthoot Money; Mr. [George Alexander], Execute Director in Muthoot Finance. KR Bijimon, Chief General Manager; and Ms. Shanthi, DGM, also is present on the call.

So in terms of the business in Muthoot Finance, consolidated loan assets under management increased by 21% year-over-year at INR 43,436 crores as on December 31. Consolidated long-term plans increased by 49 percentage at INR 2,321 crores for the 9 months. Stand-alone assets under management increased by 19 percentage year-over-year and reaching INR 38,498 crores as of 31st of December. Stand-alone profit after tax increased by 15% year-over-year-over-year at INR 2,191 crores for 9 months ending December 31, 2019.

In terms of business of Muthoot Finance, Muthoot Finance achieved a net increase in net profit of 15% and INR 2,191 crores as against last year INR 1,461 crores. Loan assets stood at INR 38,498 crores as against INR 32,400 crores as of December 31, 2018. That is a growth of 19 percentage. During the quarter, we have achieved an increase of gold loan portfolio of INR 2,783 crores. This is the highest-ever quarterly growth we achieved in the last several quarters or probably the first time in the history of the company, we have achieved this level of quarterly growth.

Muthoot Homefin increased its loan portfolio to INR 2,025 crores as against previous year of INR 1,835 crores. That is a year-over-year increase of 10 percentage. Processed revenue for Q3 and the 9-month stood at INR 80 crores and INR 240 crores rupees as against previous year of INR 57 crores and INR 160-odd crores. That should have [rose] INR 11 crores and INR 13 crores, respectively.

Belstar Microfinance, where we hold 70 percentage, grew its loan portfolio to INR 2,285 crores as against last year of INR 1,563 crores, an increase of 46 percentage. During the quarter, its portfolio increased by about INR 78 crores. That's (inaudible) INR 26 crores for the quarter as well as a 76 percentage growth for the 9 months.

Muthoot Insurance Broking, there was a total premium collection of [INR 75 crores] and INR 217 crores for the quarter as well as 9 months as against last year of INR 62 crores and INR 100 crores. We generated long-term tax of INR 5 crores and INR 12 crores for the quarter as well as 9 months.

Our Sri Lankan subsidiary where we hold 72.92%, increased its loan portfolio to LKR 1,301 crores as against last year, LKR 1,163 crores. We generated long-term tax of LKR 300 rupees 4 crores for the quarter and LKR 9 crores for the 9 months.

Muthoot Money, which is a latest subsidy addition to Muthoot Finance engaged in [working] finance business, has increased its loan portfolio to INR 492 crores. Its total revenue stands at INR 18 crores for the quarter and INR 49 crores for the 9 months' period.

So in terms of important developments in the company, during the quarter, we did an -- made an offshore bond issuance. We raised INR 3,200 crores. We are currently rated by international rating agencies, Fitch that will give us rating; S&P, BB; and Moody's at BA2.

On the domestic front, CRISIL -- domestic CRISIL has revised their long-term rating outlook from AA stable to AA positive. Also, during the quarter, we did there 2 public issuances of long-term loan debentures. We raised close to INR 1,200 crores.

I think that's our general business performance. I think we should now -- we can take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Ashish Kumar from Infinity Alternatives.

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Ashish Kumar, [2]

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Congratulations for a fantastic set of results. A couple of questions. One is the growth that we are seeing in the gold loan business in this quarter. Is -- do you see that kind of continue in the next couple of quarters? Or in this quarter, are you seeing that growth?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [3]

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So in the -- in fact, we had (inaudible) the first quarter of the current year. Second quarter, because of the resource constraints, we had to slow down. Otherwise, we would have had continued our performance in the second quarter as we had done in the first quarter. Now we have raised resources, we are able to grow. So we are seeing a good traction for gold loan business. And that's why we are able to drive good growth. In fact, the growth which we could not do in the second quarter, we have made in the third quarter. So the trend in growth, we are seeing in the fourth quarter also.

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Ashish Kumar, [4]

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Okay. And in terms of the resource raising, how is the general environment? Are you able to raise resources? You had indicated that you would like to do another tranche (inaudible) note? Where are you on that? Is it likely that you may do that soon?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [5]

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So I don't want to comment anything on the future issuances. We may or we may not being doing a future transactions. But in terms of resources, resource raising, we have now multiple avenues. We have borrowings from banks, right, they're slowly improving their willingness to take additional exposures. So that is one positive thing that has happened in the headquarter. Second thing is that Muthoot has been in this business for so long, we have built retail branches in terms of (inaudible) products. Because of this, we are able to do regular issuance of retail equities. And for third quarter, we have done 2 issuances in terms of retail equities. And we have done -- we have raised at almost INR 1,200 crores through incentives. We are also placing these bonds with -- the inquiries that we are able to place it with mutual funds also.

Apart from that, we have the new avenues of raising external commercial borrowings. In fact, the bonds are -- to our understanding, the bonds are traded at a good rating as of now. We had initially done at an issuance of 6.1 to 5 percentage. Now we want to understand that today, now it is trading at around 4.38 percentage. So there is a good appetite among foreign investors. I think the benefits of bringing an issuance is slowly coming to us. So that is also another opportunity for us. I think building a good book with a proper resource is critical for us. I think we have been successful significantly over the last 3 quarters.

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Ashish Kumar, [6]

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You are saying resources is not -- currently, you don't see resources as constrained for growth in this quarter and next quarter?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [7]

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Yes, correct.

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Operator [8]

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The next question is from the line of Deepak Lalwani of Unifi Capital.

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Deepak Lalwani, [9]

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Congratulations for wonderful numbers. Sir, on your credit cost side, can you help us (inaudible) duration this quarter? So what's happening and for which segment related? Is it for microfinance or for gold loans or housing finance?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [10]

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Sorry. Come again, which item?

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Operator [11]

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(Operator Instructions)

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Deepak Lalwani, [12]

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Yes. So in your stand-alone P&L, if we were to see, impairment is -- impairment consists of...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [13]

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Yes. Okay. Sure. So the impairment consists of generally 2 pieces. One is the write-offs and second is incremental [portions] required on the loan assets. Now since we have grown our book by [INR 2,777 crores], we need to make an extra portion on those assets. So that is one piece. Second one is that we had 2 burglaries of our branches this quarter. So the impact is about INR 33 crores. We have also made some additional proceeds also of INR 14 crores. So that comes to about -- for the (inaudible), we had -- INR 33 crores, we have returned on and INR 14 crores additional [portion] we have made. So that is the reason why there is an adjustment. Of course, now we have filed insurance claim and some recordings were made by the police. However, as a prudent measure, we have decided to write out this loan portfolio. So that is the reason why there's an impairment. Hello?

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Operator [14]

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(Operator Instructions)

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Deepak Lalwani, [15]

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Hello? Am I audible?

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Operator [16]

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Yes, sir.

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Deepak Lalwani, [17]

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So I wanted to understand other expenses. There's a sequential jump of INR 52 crores to INR 206 crores from INR 154 crores September ending quarter. So what would be the driver of these other expense increases?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [18]

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So this is primarily because of 3 reasons. One is employee expenses. So in terms of other expenses, it is primarily because of 2 reasons. One, there is an increase in rental expenses. Second, I think there is an external commercial borrowing we have done (inaudible). So there is an unrealized foreign exchange loss because we need to do a mark-to-market. So to that extent, there is a INR 21 crores of impact on '18 other expenses.

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Deepak Lalwani, [19]

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Last question. We have seen a lot of fintech lenders now doing doorstep delivery of gold loans by tying up with banks. So how are we preparing ourselves for this kind of emerging risk? I don't see a big risk, but maybe 4, 5 years, it could be. So how are we preparing ourselves?

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Unidentified Company Representative, [20]

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Yes. So yes, we are aware of some fintech companies who have come into the market recently. So this is our business model that we have also been piloting in certain regions. And we have seen initial successes. And we are also going through a learning curve in order to how to more streamline the process and also give customer convenience as well as make the product more attractive to this set of customers who necessarily would not be the same type of customers who are walking into our branches. So we are also having similar products. And we will be scaling up this, let's say, vertical offering to our customers in the next few quarters.

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Deepak Lalwani, [21]

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And the impairment charges are going up. So it indicates the subsidiaries. Also, we have had either higher provisions or impairment. Can you comment a bit on that as well?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [22]

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You mean consolidated impairment has also gone up? Are you asking about the consolidated impairment?

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Deepak Lalwani, [23]

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Yes, yes. So you explained about the gold book where you mentioned INR 33 crores is the write-off, INR 14 crores is additional provision. So in the control book, can you give us a sense which part of the business? Is it the microfinance? Is it the housing finance? Where is this additional impairment coming from?

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Unidentified Company Representative, [24]

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Yes. So on both our portfolios for our vehicle finance as well as the housing portfolio, we have been a little cautious given the emerging market sentiment to be a little more cautious on the provision side. So we have actually increased the provision coverage ratios in both these entities.

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Operator [25]

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(Operator Instructions) The next question is from the line Shubhranshu Mishra from BOB Capital Markets.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [26]

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The first one is with regards to your resource mobilization. Now when I look at the cash as a percent of balance sheet, you've been maintaining close to 6% to 7% in the last 4 or 5 quarters. So if we do not have any resource mobilization constraints, why are we maintaining this kind of liquidity in that case? That's the first question.

Second, I wanted to understand your growth guidance for gold loans and your credit cost guidance going forward in FY '21, sir.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [27]

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So after these NBFC prices, we used to keep our [nominal value] levels. Now we are not keeping any [nominal] levels. We are growing all the limits and keeping as liquid cash. Now we are moving to a situation of maintaining a liquidity coverage ratio. So I think we need to start doing that by December 2020. So because of this, we are maintaining a higher liquid cash in the balance sheet.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [28]

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So that is going to be the normal in the next foreseeable future?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [29]

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Yes, yes. So that's going to be -- it's going to be a normal...

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [30]

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So we will keep our bank lines always drawn, fully drawn?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [31]

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Yes. Bank lines -- today, we have -- banks are incrementally moving to a tough loan structure. So we need to -- in order to sanction, we need to keep them away.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [32]

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Right. Sure, sir. And if you could please help me with your growth guidance in gold loans in FY '21 and your credit cost guidance in FY '21.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [33]

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So in terms of the growth, we had initially guided the market for about 15% growth for the full year. Certainly, we are going to achieve 15% growth and probably we are going to be slightly more also for [5 months, 31st]. It will be good.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [34]

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No, sir, I'm asking for '21, sir.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [35]

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So generally, we have been driving the market for about a minimum growth rate of 15 percentage, depending upon how scenario is emerging, the dividend. But I think minimum 15% is something we are looking and consistently achieving.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [36]

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Right, sir. And credit cost guidance, sir?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [37]

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So we make a standard of -- we still [gross] up around the 1.3 percentage. And in terms of write-offs, generally, it is around 10 to 15 basis points of the loan and sales.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [38]

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Right, sir. Sure, sir. You said 15 basis points, sir, is it [a one time]?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [39]

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Yes, in terms of the write-offs, 10 to 15 basis points.

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Operator [40]

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The next question is from the line of [Druwe Fanri] from [Prospereto].

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Unidentified Analyst, [41]

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Hello?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [42]

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Yes.

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Unidentified Analyst, [43]

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Yes. Sir, just when can we see another rating upgrade for you? I mean is this 3 to 5 years away based upon your assessment? Or some thoughts on that.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [44]

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I think -- note this, you should ask as a rating agency.

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Unidentified Analyst, [45]

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Yes, sorry.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [46]

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See, we keep interacting with them. So...

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Unidentified Company Representative, [47]

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(inaudible)

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Oommen K. Mammen, Muthoot Finance Limited - CFO [48]

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So we keep interacting with them. Finally, they have to do it. We can only present our case.

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Unidentified Analyst, [49]

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Yes. Sir, the reason I am asking this is even in this kind of an environment, Muthoot has come out very strong and even stronger, I would say. And even in the debt markets, when we see -- as you yourself said, sir, that you issued a bond at 6.1%, which got eventually listed at around 4.2% or 4.4% or something you said. And I think similar is the case when in the retail market or even in the NSE and BSE where your bonds are listed, they are barely available at 10%. So the market itself is understanding the quality of balance sheet that you have. But if this translates into better ratings, can it not help you to reduce your costs permanently or at least for a very long period of time?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [50]

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Certainly, you are right. Certainly, a rating upgrade is long overdue. But for some reason which is not known to us, it has not happened. Certainly, it will bring a lot of benefits in terms of the rate of interest. And I think we should be able to do much better with the rating upgrade. In terms of all parameters, we have done in terms of business growth, in terms of profitability, asset quality, et cetera. But I think they are also taking time to decide. One good thing which has happened recently in January is that this business shown between us to raise our outlook to positive. Some positive change could happen and very soon.

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Unidentified Analyst, [51]

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Right. Sir, and one more aspect. Considering this year was a phenomenal growth period, considering the category doesn't grow too fast in unit naturally, but the operating -- I mean, the other expenses has also increased substantially. And can we see it from here that other expenses will not grow by more than 5% to 10% a year? Or is that a current way to think? Or some thoughts on that.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [52]

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See, in terms of other expenses until now, the major variable expenses is advertisement. So advertisement exhibitions business suddenly will be increasing our loan book, certainly that has to go. Because this is a retail business, we need to reach out to the customer, no, customers and -- so that customers, the first name of recall should be Muthoot Finance. So advertisement expenditure will keep on increasing according to the business increase. One new item that has come in, that is -- at least should have gone into finance costs because it is pertaining to the [INR 15 crores] cost of external commercial borrowings. But because of the accounting retirement, we have to classify this as other expenses. So that is coming to about INR 30-odd crores. We have treated this as our [prelim] for exchange loss. So otherwise, we should see only a normal increase in all the other types of expenses. Employee expenses certainly will increase according to the present business because there is available component to their compensation. So depending upon increase in business, the variable costs also will keep decreasing.

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Unidentified Analyst, [53]

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Okay. And one more question, last one. In terms of branches, over the next 5 years, what can be our potential maximum branch that we can go up to? If there are any thoughts around that.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [54]

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See. Right now, we are looking at somewhere 100 to 200 branches in India. So we are also partly doing certain rationalized spending in terms of unviable branches. Depending upon that rationalization, we are -- because we are -- every year we are increasing the profitable number of networks. So I think more than this addition in the branch, we are also trying to improve our top branch business. So today, if you look, as of December, our top branch business is about INR 8 crores-plus, whereas competitors has maybe about 1/3 or less than half of our top branch business. So that is very critical because we want more and more customers to come to our branch and available services.

Going forward, the increase in the business will be primarily driven by the inflow of more customers. The number of branches, of course, we will add new geographies. That will keep on happening.

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Operator [55]

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The next question is from the line of Amit Jeswani from Stallion Asset.

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Amit Jeswani, Stallion Asset Private Limited - Founder [56]

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Congratulations on the set of numbers. My first question is, sir, the spread this quarter has been about 15.6%, and we've been charging 24.58% interest rates this quarter. What -- is this sustainable?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [57]

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So our yields this quarter has been good. I think last few quarters, yields have been good. That is primarily because we are able to do a better collections. So the yields are better. In terms of our NIMS, it is slightly on a higher side because our gearing is quite low. The capital is almost like INR 11,400 crores on a book of INR 38,000 crores. So that is also adding to the NIMS. So that is the reason why the NIMS are higher.

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Amit Jeswani, Stallion Asset Private Limited - Founder [58]

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Right, sir. Right, sir. Sir, then our cost of borrowing right now, incremental cost of the borrowing is 8.98%, am I right?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [59]

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So the borrowing cost will be slightly higher. As I said, if you add that foreign exchange loss, et cetera, we should come in, lie around 9.1, 9.2 percentage. I think we should see that somewhere closer to 9.5 percentage going forward.

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Amit Jeswani, Stallion Asset Private Limited - Founder [60]

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Yes. Sir, my last question is, sir, what kind of growth do you expect on the housing book? And what ROE do we target there?

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Unidentified Company Representative, [61]

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So on the housing book, probably this year, we would end up with a AUM of roughly maybe INR 2,200 crores. And we forecast also probably we will disburse around INR 700 crores to INR 900 crores in the coming financial year. That's FY '22 -- sorry, FY '21.

On the ROE side, we hope to maintain or bring it up to roughly around 2% of ROEs for this business, which seems quite...

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Amit Jeswani, Stallion Asset Private Limited - Founder [62]

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So sir, we sell the home loans at our own branches?

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Unidentified Company Representative, [63]

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Yes. The home loans are sold through our own branches as well as through outside open market. We don't rely on DSAs, but we have our own feet-on-street of salespeople. Incrementally today, we disbursed around 10% of monthly disbursements through our own goal on branches.

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Operator [64]

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The next question is from the line of Amit Mantri from 2Point2.

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Amit Mantri;2Point2 Capital;Co-Founder, [65]

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In the last quarter, you had mentioned that around INR 200 crores was kind of like one-off income because we were able to charge interest even on overdue accounts, and even penal interest you were able to charge. So in this quarter also, have yields benefited because of your adjusting (inaudible). And can you quantify that one-off kind of income that has come this quarter?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [66]

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See, it is not -- we don't want to say it as a one-off kind of thing. So you have -- once the loans cost is 12 months, you have all the penal interest, the bombarding effect, et cetera, will come in. And you follow those investment in terms of penal interest, et cetera. So when you have a better recovery, you've always -- have always come at a collection, which does not yield benefit, which is what has happened. And because the cost of funding has gone up, of course, with the NBFC crisis, we have increased our rates also in the -- I think from the latest, June onwards. June onwards, we had increased our [trading] rates also. That is also partly the reason why there is a higher fee.

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Amit Mantri;2Point2 Capital;Co-Founder, [67]

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Sir, can you quantify on -- because of penal interest, what would have been the additional revenue that you are generating, interest income that you have generated this quarter?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [68]

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I think I don't have -- done that as I said. So I have not looked at it, [probably show you that.]

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Amit Mantri;2Point2 Capital;Co-Founder, [69]

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Sure. Understood. Second question, on the tonnage growth of -- so on a Q-o-Q basis, it's around looking at more than 1% on the gold finance business. So while AUM growth is quite good, or that has come because of higher gold [rand] rates. So what is the approach on tonnage growth you are working at? Do you think even tonnage growth will continue to be robust as it used to be earlier?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [70]

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I think that -- we don't monitor the tonnage growth because tonnage growth is a direct outcome of the watch rate at which we are going to let. Now when the gold prices go up, actually, the company decides to increase the advance rate per gram of gold. Customers need not pledge more gold to take the same -- the amount he wants, [supposed that the customer will return those rupees]. And the price of the gold, those are -- we need not -- for the same amount, we need to pledge only a lower quality of gold. So we don't monitor. So gold tonnage, we are just showing this because to show the quality of asset book and how good we have collected this loan book. So beyond that, for our business purposes, we don't monitor the growth in the tonnage.

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Amit Mantri;2Point2 Capital;Co-Founder, [71]

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Okay. Last question, your current entity are -- they are around 61%, right? And is that as for the December gold price -- [December 18] gold prices or as of current gold prices?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [72]

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So that should be as of December 31 prices.

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Amit Mantri;2Point2 Capital;Co-Founder, [73]

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So after that, gold prices probably have gone up another 5%. Your current LTVs will be even better than on the December book basically?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [74]

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Yes. Of course, we also lend at a higher advance rate depending upon the increase of the gold price. So on a daily or on an average, our average LTV on the total book should be somewhere around 70 percentage. Of course, now if there's a sudden increase in the gold price, it tends to come from that, so it is 61 percentage. So on a stable price level, it should be somewhere around 70 percentage.

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Operator [75]

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The next question is from the line of Utsav Gogirwar from Investec Capital.

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Utsav Gogirwar, Investec Bank plc, Research Division - Analyst [76]

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Just a couple of questions from my side. What percentage of active gold loan customers and retail NCD customer overlap with each other?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [77]

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No, no. I think -- no, a very negligible item. Maybe some NCD customers might take gold loan. But certainly, pure gold loan customers may not come and invest in the NCDs. Because the NCDs average ticket size itself is around 2 lakhs, our asset gold loan borrowing is about 40,000. But of course some NCD customers might take a gold loan.

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Utsav Gogirwar, Investec Bank plc, Research Division - Analyst [78]

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Okay. And sir, second question is with respect to the acquisition. So I just want to understand our thought process. Are we looking at further acquisitions in any specific segments? Or any color you can provide on that?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [79]

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As of now, we are present in almost all the businesses, which we have -- can be linked to our branch network as -- which can be linked to our core business. So there is no plans for any organic growth as of now. And right now, currently, we are not looking at any other acquisitions other than what we have already mentioned.

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Operator [80]

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The next question is from the line of [Sangeet Chirag] from [B&K Securities].

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Unidentified Analyst, [81]

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(technical difficulty)

Hello? Is it audible now?

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Operator [82]

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Yes, sir.

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Unidentified Analyst, [83]

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Yes. So I just wanted to understand what led to a sharp investment in our asset quality this quarter.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [84]

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So I think we have been explaining this every quarter. See in our own business growth, see we have said already, [fee asset] is not something which -- what may not be concerned. In terms that we are giving some extra time to customers (inaudible) safety numbers go up. Today, we are having better collections. So we are able to obtain the loan portfolio just going beyond the 15 months. So other than that, there's no specific reason. One needs to be attributed to the movement in terms of the sale.

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Unidentified Analyst, [85]

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Okay. Okay. And sir, in case this gold price is more of like INR 30,000 to INR 40,000. On INR 30,000, suppose you would be lending around INR 20,000 [will be earnings to gold, whereas more] to INR 40,000. Do you provide an option to the borrower of borrowing some more money if it needs to maintain a same LTV?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [86]

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So just because the gold price has gone up, the regulatory ceiling certainly goes up. But that doesn't mean that we are going to let. If we are comfortable with the price or the trends in the price. As per our internal loans, we can take it for the [fiscal lender] to increase price. So if we decide to give it, certainly, we can do a drop-off. If we don't give it, somebody else will give this drop-off. If we decided not to increase the run rate, then certainly, that benefit will not be available.

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Operator [87]

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

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [88]

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Yes. Congratulations on a good set of numbers. Sir, 2 questions. Sorry, again, getting on to the operating expenses. Many times I had to look at breakup of the operating expenses which you had given. In that, the other operating expenses, now that's growing quite significantly. Sir, you mentioned the -- maybe the -- or maybe INR 21-odd crores because of the foreign exchange borrowing, which we raised. But what would be the other component? Because that seems to be quite high in this particular quarter. So is there anything else as well in this other operating expense, which is moving up from, say, INR 55-odd crores to INR 120-odd crores?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [89]

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So if you look at the -- see I think in the presentation, the details are there. So the advertisement expenditure is INR 44 crores, whereas in Q2, it is INR 21 crores.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [90]

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No, no. I mean not in -- no, no I'm ignoring advertisement. I'm just looking at the breakup of operating expenses. So in the last line, which is the other, okay, which INR 120 crores. So if I look at that run rate of INR 120-odd crores, so in that the breakup of operating expenses, ignoring brand, ignoring advertisement, everything, that other component is extremely high. And if I look at it, that's almost like [23%] of the overall operating expense. I'm not able to get what is this INR 120-odd crores. Because normally, it's like INR 30 crores, INR 40 crores.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [91]

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Just give me a second.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [92]

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On Slide #36.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [93]

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So no, it should be the ECL portions as well as [products] portion, products .

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [94]

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So yes, sir, ECL provision, that's coming into this other line item?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [95]

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Yes.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [96]

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Okay, okay, okay.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [97]

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So looking from the results which we have declared, so if you add up that, it will come to that. So we have compiled everything in that others.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [98]

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Okay. Okay. And the entire delta, which is there in this provisioning, that is getting reflected in others?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [99]

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Correct. Correct.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [100]

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Okay. And this ForEx, which we have raised, so now -- maybe we had seen some -- maybe some loss on product exposure. Sir, is that unrealized loss? Or maybe is this hedge, unhedged? And should we see any kind of a volatility or -- with the exchange rate changes?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [101]

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No. This is completely have still material both in transaction similar to the hedge. But because of the accounting, we need to go aftermarket every reporting base. So no, there could be small variations happening on this on a regular basis. Ideally, this cost should have gone through the -- it should be a part of the finance costs for understanding purpose. But because of the accounting adjustment, it is coming as a part of our expenses.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [102]

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Okay. Okay. And then lastly, in terms of the housing finance, so there, the GMPs have also gone up and the disbursements have slowed down. So is this still normalized level? Or we are seeing a higher spread, and that's the reason we have decided to go slow on the housing finance and profitability is also sequentially lower? So how should we read into this entire maybe AUM being up and our own disbursements being down and GMP is being up in housing finance ?

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Unidentified Company Representative, [103]

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So yes, this should be around the level of the NPAs. So I think given the stress that I think some of the markets that we are operating in, especially the segments that we are operating in is going through, we have seen some NPAs increasing. So I think going forward, this should be around the number.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [104]

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Okay. And in the disbursement of INR 10,000 per month, so the pay-out would be 12 months for all the disbursement? Or there are any shorter tenor as well?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [105]

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So no, our products are all for 12 months.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [106]

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So then in terms of this INR 8,000 crores of monthly collection, so our overall AUM was nearly INR 36,000 at end of Q2. And I think monthly collection is INR 8,000. So if I look at quarterly collection, then it's almost like INR 24,000 on INR 36,000 of AUM being collected. So I'm just not able to get it. So this is like only gold one or this includes MFI, everything into this INR 8,000 maybe monthly collection?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [107]

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Just look at the previous -- no, no, no. Just look at the previous years. It is almost similar. This is what some of you always used to say. If you look at the next slide, there you can make out 60% of the portfolio comes from the 6 months itself. So there is a regular disbursement as soon as collection happens. Of course, there will be a small amount of rollovers, but in our case, there's no need for a customer to do a rollover for 12 months because he's not getting any benefit by doing a rollover. So don't we deserve profit on our product? Customers will have to do a rollover every 3 months. So in our case, it's -- this is actual disbursement as well as collection. So (inaudible) customers, which will be doing a [drop-off]. So most customers will have to close a loan and take express. To that extent, there will be some variations.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [108]

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So is it more refinancing which is getting reflected in this number? Because see, if I look at INR 36,000 crore of AUM and say 60% coming in first 6 months, and if I look at INR 24,000 of these collections in this quarter, so it's rare. It seems to me more like a refinancing of the same loan because -- and maybe in this quarter is giving more than 60-odd percent, 70% in quarter.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [109]

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You have been studying gold loan sector for so many years. I now refrain to this question from you.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [110]

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No, but sir, it's substantially higher in this particular quarter so I'm not able to make it.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [111]

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If you look at for so many years, we haven't said that our balance sheet serves almost like 3 to 3.5x in a year. Because that is the -- why should I look at the next chart, no? If you look at the smaller buckets, if I disburse 100 loans in a month, 10 loans get repaid the same month itself, so you get loans get repaid in the second month. So in the first 6 months, 60 loans get repaid. So it's not a new -- not the same customers. Why should a customer given a period of 12 months? Now why should a customer close a loan and take it first? At least for [2] months, he may not do that, right? What is the benefit he is getting by that? So these are all repayments. So today, they might be taking a loan, they might be repaying it. Tomorrow, they might be taking a loan and they might be repaying it. So that's the way that business works. I think that we have explained in several forums.

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Operator [112]

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(Operator Instructions) The next question the line of [Kripthi Agrawal from Vital Capital].

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Unidentified Analyst, [113]

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Congratulations on an excellent set of results. I have 2 questions. The question on the yield, which the other participants have also asked. I just want to know whether this percentage, which is almost like [23.5%] in this quarter, is this sustainable even for the coming quarter given that you will have increased the rates and perhaps would not roll back? That's my first question.

And my second question is I would like to know your comments on the CP market. Because we hear that there is some revival in that market. And given our track record and credit rating, can we expect you to access this market and benefit from the low cost of funds? Can you comment, please?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [114]

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In terms of the first question, the yields are higher, one. We are able to collect all this penal interest, et cetera, once the loans cross beyond 12 months. So whether loans you collect the full amount, because the price of gold is higher, so you are able to recover more. Second thing, we have increased the interest rates last year, so that benefit also should be coming in.

The second part which you are asking is about the CPs. See, we have been placing CPs throughout. We never faced any challenge even in the midst of NBFC crisis. We have increased our CP rating in over 2018 from INR 4,000 crores to INR 5,000 crores. There is tremendous demand for our CPs, and we are able to place it on a regular basis.

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Operator [115]

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The next question is from the line of Kislay Upadhyay from Abakkus.

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Kislay Upadhyay, Abakkus Asset Management, LLP - Research Associate [116]

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Congratulations on the quarter. On the statement of borrowing costs, including the having [MTM] hit being around 9.1, 9.2. Is it going there, that it can be 9.4, 9.5?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [117]

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They are not -- might be possible. Of course, this quarter, certain portion has gone to the other expenses. So I estimate that's about 9.2 to 9.3 versus -- when you do an averaging, there is an averaging effect also. I think my cost should be somewhere around 9.2 to 9.3. Perhaps it can go to, again, go to 9.5, let's see how it is evolving. CP rates are also significantly up. So those benefits are also coming to us. So I think, currently, it should be coming around 9.2 to 9.3. And there is a possibility that it can move to 9.5. It can be lower also. So it should range between 9.2 to 9.5.

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Kislay Upadhyay, Abakkus Asset Management, LLP - Research Associate [118]

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Yes. But I actually wanted to -- why did you believe that it can go further up? I would have expected the other way, actually.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [119]

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No. So the CP rates play an important role. I don't think that out of this quarter, the CP rates are going up. So I think we should have this benefit in this quarter also. And the rates are also declining. Since you asked, I said, currently, the rate is around 9.2, 9.3. There could be small variations in terms of the borrowing cost. I'm not expecting it to go beyond 9.5, the overall increase.

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Operator [120]

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(Operator Instructions) The next question is from the line of Nirmal Bari from Sameeksha Capital.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [121]

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Okay. Congrats on the very good...

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Operator [122]

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(Operator Instructions)

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [123]

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Yes, am I audible now?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [124]

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Yes.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [125]

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My question is on the yields again. They've been ranging in a very high range, which had not been there in the past. So are we looking at -- or are we in the process of reducing interest rates? Or there is nothing siting on the table?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [126]

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No. So these are part of the loans. So we generally increase our loans, depending on the cost structure we take a view on this. So as of now, there's no plan to reduce the rates. Of course, in between -- see, this is more a shorter term than long. So when there is a low investment in a particular geography, we try to migrate that particular geography through lower rate schemes. So that keeps happening on and off. So there's no particular area otherwise. Generally, we have not taken any quarter to reduce the rates.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [127]

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Okay. So we can expect similar yields to continue in the coming quarters?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [128]

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I think this quarter also, it should -- we should do well. But we don't have any plans to have a general reduction in interest rates.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [129]

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Okay. And sir, for the [MTN] note, you said that the MTN notes are trading at 4.38%. So what would be the all-in hedging cost for this note?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [130]

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See, we had issued at [6.125] percentage. So combined, the hedging cost is in double digits. But going forward, we should see that coming down to single digit. Minor issue, we had to take that call.

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Operator [131]

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The next question is from the line of [Lucio Guatalia] from Kotak.

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Unidentified Analyst, [132]

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All of my questions have been answered, so you can move to the next question.

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Operator [133]

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The next question is from the line of Ravi Naredi from the Naredi Investment.

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Ravi Naredi, [134]

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Some disturbance was going on in Kerala about former employees or current employees. How is the situation? And how is the MD now? Some manhandling was there, so I'm just asking for that.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [135]

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Okay. So see, Kerala is notorious for these activities. That is the reason why in Kerala, no industries have survived. No industry wants to come together to setup factories. Unfortunately, that's why all you'll see Keralans everywhere on that cross the globe. So here are some service industries that are there, which is somehow balancing. You cannot expect any different story, at least in the near term in terms of the industry. Because the past several decades it has been like that. It is not going to change.

Now coming to us, our business is in Kerala is just 3%. That is about INR 1,200 crores. You see the growth during this quarter itself is around [INR 2,300] in India. So for us, Kerala business is immaterial. Earlier, we had set up -- we had opened, I think, around [900] branches plus. And over a period, although we had reduced that because of -- main reason is that earlier we used to take these NCDs at a private placement to all branches. So a customer could walk into those branches, give a check, didn't have to [fill a form], ultimately gets collected, and they're not used to come to the branch for collection of interest, principal, renewal and the loan value certificate [current] rate, et cetera. So a lot of servicing was happening through the branches. And finally, this collection was a bit (inaudible) in Kerala branches because that time, the size of the company was quite small. Today, we are doing everything to be materially strong and through public issuance.

Now with (inaudible), we don't need any -- with all the servicing done by the registrar or assistance given there. So no servicing is happening at the branch other than the initial application. For collection of application, we don't need this kind of branches. So -- and Kerala, many of you might be aware, the credit uptick in Kerala, because of this interest rate environment, the credit uptick in Kerala is quite low. Kerala is somewhat risky because of a lot of risks and inherent risk happening. So gold loan business is not very high in Kerala. So the need for so many branches in Kerala is not there. So it is not going to adversely affect our business. I know that at our business outside Kerala, these are around INR 5 crores, Kerala is at about INR 2 crores. So the need for these so many branches is not there in Kerala. So that's the background.

So this situation might continue. I'm not expecting the people here in Kerala to change overnight. They have not changed in the last 50 years, so they're not going to change in the next 50 years.

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Unidentified Analyst, [136]

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Yes, yes, yes. And sir, one more thing, you...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [137]

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You are also asking about...

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Unidentified Analyst, [138]

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Yes. MD. MD. MD.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [139]

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All right. MD has been attending office [for the next day onwards], so there's no issue there. Luckily, it's a [bit fit on his head] , so thanks to board for protecting us. So MD is all right. Unfortunately, he could not join the call today.

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Unidentified Analyst, [140]

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I see. We wish all the best to MD and all over your staff. And sir, you are maintaining a very high cash balances. So what is the reason? And what is your -- how you are doing the hedging against the bonds?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [141]

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So as I said earlier, today, we are maintaining a lot of cash balances because, one, going forward, we need to have a liquidity coverage, et cetera. So we are maintaining everything in liquid investments or else deposits or else cash balances. So that's going to be the approach we are following. And in terms of the hedging, we can -- we did the forward as well as low-cost currency swaps.

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Operator [142]

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

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Oommen K. Mammen, Muthoot Finance Limited - CFO [143]

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So thanks, everyone. We had a good attendance today for the call. And we hope to continue our performance in the coming quarters. And last year, we had about 18% growth. We want to adhere to that or better than that. So let's have -- meet again in April, May, and thank you.

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Operator [144]

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