IIFLNSEQ2 FY23November 03, 2022

IIFL Finance Limited

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12analyst exchanges

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Management on call

Nirmal Jain

MANAGING DIRECTOR.

Rajesh Rajak

CHIEF FINANCIAL OFFICER.

Monu Ratra

CEO, IIFL HOME FINANCE

N Venkatesh

CEO, IIFL SAMASTA FINANCE

Kapish Jain

DEPUTY CFO & HEAD INVESTOR

Key numbers — 40 extracted

rs,

e to reach out to all the needy borrowers and there’s a growing realization amongst the policymakers, that banks and NBFCs have to work together to achieve the goals of financial inclusion quicker and

32%

rtner with banks through co-lending and direct assignment. Last quarter, our co-lending book grew 32% quarter-on-quarter. This quarter is a watershed quarter in my opinion, because our differentiated

Rs.397 crore

Finance profit after tax before non-controlling interest for the quarter was the highest ever at Rs.397 crores which is up 36% up on a year-on-year basis and 20% up quarter-on-quarter. This was driven largel

36%

before non-controlling interest for the quarter was the highest ever at Rs.397 crores which is up 36% up on a year-on-year basis and 20% up quarter-on-quarter. This was driven largely by volume growt

20%

the quarter was the highest ever at Rs.397 crores which is up 36% up on a year-on-year basis and 20% up quarter-on-quarter. This was driven largely by volume growth and lower credit cost. We recorde

Rs.685 crore

ven largely by volume growth and lower credit cost. We recorded pre provision operating profit of Rs.685 crores during the quarter, which was again up 23% on a year-on-year basis and 2% quarter-on-quarter.

23%

e recorded pre provision operating profit of Rs.685 crores during the quarter, which was again up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% qua

ng profit of Rs.685 crores during the quarter, which was again up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cor

25%

ter, which was again up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cores. Our core products grew faster at 28%

up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cores. Our core products grew faster at 28% year-on-year and 5%

Rs. 55,302

basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cores. Our core products grew faster at 28% year-on-year and 5% quarter-on-quarter to Rs. 52,221 c

28%

25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cores. Our core products grew faster at 28% year-on-year and 5% quarter-on-quarter to Rs. 52,221 crores driven mainly by low ticket home loan

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Guidance — 20 items

Nirmal Jain

opening

“This is where investors can expect visibility of earnings growth, political and economic stability, favorable demographics and something that is not talked about much is the fact that India has leapfrogged the rest of the world to build the best-in-class digital India for a billion people to ride on.”

Rajesh Rajak

opening

“With affordability index at a decade high we believe that the dip in the rate, it will be well absorbed by the customer with marginal hiccups.”

Rajesh Rajak

“We have adequate liquidity to repay that and with that slightly higher-cost borrowing going off the books, we should see more stability going forward.”

Harsh Shah

“But considering how strong your ROA was in this quarter you think for the balance of at least H2 you will maintain it or is there also further scope of increase in this ROA?”

Nirmal Jain

“We should target to maintain it, given the fact that there’ll be upward pressure on interest cost and liquidity has tightened significantly in the system now.”

Nirmal Jain

“The full impact, of cost comes in this quarter, but going forward should plateau and should start coming down as we slow down the pace of branch expansion.”

Nirmal Jain

“So, either you compromise significantly on yield or your loan growth will be muted because of intense competition from banks.”

Nirmal Jain

“So, I think the sense has already started to prevail in terms of the competition, in terms of banks also, we try and target the regions, and geographies which are not easily accessible to bank.”

Nirmal Jain

“Now, with a new branch, our focus will be on that.”

Nirmal Jain

“Maybe from next quarter we will start or maybe we’ll try and figure out how do we disclosure it separately.”

Risks & concerns — 15 flagged

We should target to maintain it, given the fact that there’ll be upward pressure on interest cost and liquidity has tightened significantly in the system now.

— Nirmal Jain

If you look at last 10 or 12 years, what happens is many times we have seen that the NBFCs and Fintechs basically jump in because optically it looks like the NIM is very high and very attractive for a relatively zero risk kind of a business.

— Nirmal Jain

But in case of assignment based on IndAS accounting policy, you make up some conservative estimate and because the risk is off the balance sheet, we end up up-fronting the discounted value of the income.

— Nirmal Jain

So, they are flattish it is not that there’s not much basis point decline, the yield on an overall level has gone up because interest rates have gone up, also so the portfolio yield is 15.5% for the quarter as compared to 15.3% so steady basis point increase in the yield.

— Nirmal Jain

In the cost of funds, there was a decline of around 10 basis point decline there.

— Nirmal Jain

Sorry to harp on this, but to the earlier question on co-lending lending, when this 80% of the book gets transferred to banks, I understand that the whole risk also transfers from our book to their book, if that’s correct, and that in which case the accounting of income will then be similar to what we do for assignments.

— Kashyap Javeri

So, you see it in Stage-2, but normally there’s gold collateral and the risk to the customer also, so they don’t go beyond 90.

— Nirmal Jain

It’s just a question of collection efficiency and putting a little bit more pressure on the system to track it carefully.

— Nirmal Jain

So, does it impact your ability or are there any repercussions on asset quality or credit cost side for us, I know it’s fully risk off.

— Jigar Jani

But on the co-lending side, are there any clauses wherein if the asset quality deteriorates especially for book that we have originated, we need to provide more or share more of the risk or something of that sort?

— Jigar Jani

So, at this point in time, I don’t see any stress or any challenge there because this is something which not worse than the rest of the industry, or the banks their own portfolio typically so that is how we look at it.

— Nirmal Jain

Till we fully redeem the book, which maybe another two- three years it will be very difficult to take any guess on that.

— Nirmal Jain

So, at this point in time, it’s a very difficult question What happens is if there are ten investments, some will do very well, some will not so well and we’ll discover the entire thing when the full book is liquidated completely in another two, maybe two and a half years.

— Nirmal Jain

Secondly, the risk is priced in so, I won’t give a price also and risk cover also.

— Nirmal Jain

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Q&A — 12 exchanges

First question is on the opening remarks that Rajesh just said, you had mentioned that the overall cost of fund has gone down, can you just explain how?

Rajesh Rajak

Three things which are responsible for this. Number one is, we have bought back approximately $100 million worth of our overseas bonds and replaced them with low cost rupee financing, under ECB. So, basically, we have had a gain on that and if you remember, our second lot of buybacks were done at a lower than par also. And increasingly our off book loan assignments, which was 35%, last September has now become 39%. So, that also gives us a significant advantage, because the direct assignment of the stronger asset comes in at a lower cost of funds. So, it’s really a combination of all this. Als

My first question is on gold loans. As this is one of the core segments that you highlight for growth, there was sort of price competition that we saw last year between NBFCs that has abated a little bit, you do see banks, especially HDFC Bank saying that they want to expand gold across our branches, let’s say Maharashtra, they want to take gold from 1500 branches to 3000 branches in the next two years. So, this will have an impact on NBFCs and there has been a discussion in the past where you say that banks can’t do gold loans like NBFCs can, but when a large bank comes and says that they wan

Nirmal Jain

Actually, your point is valid. That is what is seen in the gold loan business results so far and in our gold loan as well. So, if you see our growth is very modest, given the fact that we expanded our branch network by 40% in the last 18 months, but quarter-over-quarter we have been able to manage just 4% growth. So, either you compromise significantly on yield or your loan growth will be muted because of intense competition from banks. If you look at last 10 or 12 years, what happens is many times we have seen that the NBFCs and Fintechs basically jump in because optically it looks like the N

I’m saying how do you see growth panning out for the balance part of the year?

Nirmal Jain

The balance part of the year growth should be equally good or better, we should be able to sustain the growth and margins both. Right now the environment looking very positive in terms of demand for credit, and the bank’s willingness to partner and the economy is doing well. So, actually most of the businesses are coming back on track and they take in a business loan as well as gold loan. Even a real estate sector the interesting thing is while the interest rates might have gone up, but they have not slowed down because builders have kept the nominal prices down or they have not increased the

So, I just wanted to understand over all on the credit cost front and now excess provisioning that we have been doing for last couple of quarters driven by the RBI policy. So, we are through with that?

Nirmal Jain

So, actually we are pretty close to our guidance, so credit cost is coming down, we should continue the trend on a relative basis, relative to the portfolio or relative to the loan book. So, we are on the right track there. We have a loan book of more than Rs.35000 Cr and for a quarter if you take 50 basis point it’s 135, but our credit cost this quarter is 196. So, we’re pretty close so guidance, it has to actually be anywhere between 150 to 200 basis points in a year and over next two, three quarters we should move towards that. 150 to 200 basis points credit cost and this number is built on

Nirmal Jain

Exactly, so here it gets amortized over the life and whatever we do is based on the IndAS accounting and auditors’ guidance, so I believe that all the company will do the similar way. So, what is happening in case of assignment, supposing you have a seven-year loan, and I say you’re going to make a margin of 10%. So, you will basically say 10% for seven years, you will discount to present value. Then you reduce the operating cost and we might get repaid before seven years and then you take only for four years and you discount and you reduce the cost and then you upfront it. But in case of co-l

Sir my question is on the microfinance segment, it is contributing around 12% to the AUM and we have seen a year-on-year growth of 49% and we have come in from probably Rs.840 crores in FY18 to Rs.6000 crores of AUM in FY22. Sir, do you see this number more getting up, contributing more to the revenues because, the market opportunity is very big as we have mentioned in the investor presentation, and we are putting up well, so, where do you see this number going on sir?

Nirmal Jain

This year growth is basically because of the lower base of last year, last two years it has not grown, so in a way it is catching up and also we expanded the branch network. So, we would like to be a meaningful player in the industry. So, we are amongst top 10, but we like to be amongst top five or top three for sure. So, business will grow, the 49% or 25% -30% that is all matter of depending on how they do businesses. But our objective will be to grow a little faster in the industry not too much faster and not too slower. Right. And sir also something on this gross GNPA and NNPA? About the mi

My question is on the investments books; we have Rs.1400 crores of investments in this quarter. Can you explain the terms of this investment and what is the collections, repayments status and recovery that we can get in this investment book?

Nirmal Jain

Yes, so actually we got an Andhra bonds of Rs.500 crores which is part of our liquidity Andhra state boards and then there are SR of some assets that are transferred to ARC and there is an AIF. So, all these assets are valued every quarter based on the recoverability only and marked to market wherever required is provided for. So, we get them valued and rated every quarter by the auditors. Rating agencies like CRISIL also does the assessment and based on that we provide from mark-to-market so value that you see is all recoverable. Okay and what is the interest rate and the return we can expect

My question is on the stage two assets, that especially in the gold loan side, so starting from Q4 onwards if you see stage two assets on the gold loan side they have gone from 4.9% of the gold loan book to almost crossing 11% now. Any particular reason why we are seeing such a sharp rise especially gold loan from the stage two side. Even on an overall basis that is pushed up our stage two effects of 5.5% in Q4 to almost 7%. So, any color on that why there is such an increase. Also same is seen partly in home loans, to some extent not as sharp as gold loans but quarter- on-quarter we are seein

Nirmal Jain

The stage two in the gold loan has gone up from Rs.662 crores to Rs.843 crores in a quarter-on- quarter, partly because of the book growth and partly even as in festival time sometimes the collection gets a little bit delayed. So, there’s some psychology in customers and industry, the way it operates, they try to collect it in 90 days. So, you see it in Stage-2, but normally there’s gold collateral and the risk to the customer also, so they don’t go beyond 90. It’s just a question of collection efficiency and putting a little bit more pressure on the system to track it carefully. But it’s gone

Sir, what is the return that you would be expecting from your AIF book, CRE book which was sold to AIF given the fact that the real estate sectors has been improving. What are the basically terms of profit sharing, for that side?

Nirmal Jain

Till we fully redeem the book, which maybe another two- three years it will be very difficult to take any guess on that. So, at this point in time, it’s a very difficult question What happens is if there are ten investments, some will do very well, some will not so well and we’ll discover the entire thing when the full book is liquidated completely in another two, maybe two and a half years. Okay. And sir you said that you have still $270 billion of bonds on your book which are high cost. So, those bonds might come up for re-pricing is this fiscal. These bonds are fixed rate bonds. Okay. So, w

I wanted to understand, the valuation basis for selling 20% stake to ADIA. When I compare it with other listed housing finance companies, it looks very cheap. So, if you can share your thoughts on this?

Nirmal Jain

So, I think it very difficult question to answer but what has happened is that the listed companies when you compare there are some outlier and valued significantly higher but most would be a long tail in the housing finance will be generally much lower. If you really look at the valuations for what we got, and based on historical book value, it was at maybe 3.5-4 times, but if you really look at the entire housing finance universe, there are one or two companies where the valuations are higher that is one. Secondly, what happened that, to be very candid there was also overhang of the parent c

Just a clarification on the earlier question on default protection that we might have to provide on the co-lending book that we originate, so did you say that the banks have not asked for any such default protection. So, in future they might or there is no such thing here?

Nirmal Jain

There is no such thing possible as per the RBI policies and guidelines. See what happens is the banks take any default protection then they can’t claim it as a primary sector asset because RBI is very clear. When you are doing private sector, the loans and the risks would be with the bank. Secondly, the risk is priced in so, I won’t give a price also and risk cover also. So, the way all these transactions happen, they are without any recourse in terms of risk and structurally there’s no other way to do this based on RBI policy also. See RBI is encouraging co-lending because banks have a balanc

Thank you very much ladies and gentlemen for joining us for our Q2FY23 results call. It was a very interesting discussion with all of you, and for any further query that you wish to have, please reach out to us separately with our investor relations team and we will be happy to connect and solve your queries. Thank you and Happy Diwali to all of you.

Management

Speaking time

Nirmal Jain

Moderator

Sukriti Jiwarajka

Anusha Raheja

Harsh Shah

Rajesh Rajak

Darshil Pandya

Nikhil Agarwal

Jigar Jani

Kashyap Javeri

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Opening remarks

Rajesh Rajak

Good day everyone. I am Rajesh Rajak – Chief Financial Officer. Thank you all for joining us on this call. On behalf of the entire team at IIFL Finance I would like to extend best wishes for Diwali and a very prosperous New Year ahead to all of you. On this call I’m accompanied by Mr. Nirmal Jain – our Managing Director, Mr. Monu Ratra – CEO of IIFL Home Finance; Mr. N Venkatesh – CEO, IIFL Samasta Finance and Mr. Kapish Jain – Deputy CFO and Head Investor Relations. I’ll hand over to our Managing Director – Mr. Nirmal Jain to comment on the economy and the group’s overall strategy and plans. Over to you sir.

Nirmal Jain

Thank you Rajesh. I hope all of you had a good Diwali and I wish you and your family and loved ones a very Happy New Year. So, to begin with, I think India’s macroeconomic fundamentals are very strong. India stands out as the bright spot in a gloomy world. This is where investors can expect visibility of earnings growth, political and economic stability, favorable demographics and something that is not talked about much is the fact that India has leapfrogged the rest of the world to build the best-in-class digital India for a billion people to ride on. And the sector that is most impacted and is crucial for economic growth is financial services. India has come a long way on the agenda of financial inclusion. Still, finance and credit have not reached several millions. All the banks’ branch network still is not able to reach out to all the needy borrowers and there’s a growing realization amongst the policymakers, that banks and NBFCs have to work together to achieve the goals of financ

Coming to IIFL Finance

We are in the sweet spot to seize the opportunity and participate meaningfully in India’s financial inclusion drive. Besides in house team driving digital innovation and innovative solutions, we have brand balance sheet and branches. I believe that we are at the cusp of unprecedented growth opportunity and we augment our organic effort to acquire new customers through partnerships such as OPEN and very recently ZestMoney to reach out to the underserved customers and access their data with consent for instant loans. We continue to look for alliances and innovative partners and for balance sheet we continue to partner with banks through co-lending and direct assignment. Last quarter, our co-lending book grew 32% quarter-on-quarter. This quarter is a watershed quarter in my opinion, because our differentiated strategy of retail on one end and the partnership on the other end is getting vindicated by the performance and perceptible potential. Our vision is to be the most respected non-bank

Rajesh Rajak

IIFL Finance profit after tax before non-controlling interest for the quarter was the highest ever at Rs.397 crores which is up 36% up on a year-on-year basis and 20% up quarter-on-quarter. This was driven largely by volume growth and lower credit cost. We recorded pre provision operating profit of Rs.685 crores during the quarter, which was again up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to Rs. 55,302 cores. Our core products grew faster at 28% year-on-year and 5% quarter-on-quarter to Rs. 52,221 crores driven mainly by low ticket home loan, gold loan and microfinance loans. Our non-core loan AUM primarily construction and real estate financing shrank by 9% year-on-year in-line with our strategy. 95% of our loans are retail in nature and 69% of our retail loans are PSL compliant, which is excluding gold loans which are not classified as PSL loans under extant RBI regulations. Lastly the retail and PSL complian

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