Arman Financial Services Ltd
NSE:ARMANFIN
Arman Financial Services Ltd
NSE:ARMANFIN
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Ladies and gentlemen, good day, and welcome to Q1 FY '24 Earnings Conference Call of Arman Financial Services Limited, hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Akshay Jain from JM Financial. Thank you, and over to you.
Thank you, [ Smt. ]. Good afternoon, everyone, and welcome to the 1Q FY '24 Earnings Conference Call of Arman Financial Services. First of all, I would like to thank the management of Arman Financial Services for giving us this opportunity to host this call. From the management team, we have Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Aalok Patel, Joint Managing Director; and Mr. Vivek Modi, Group CFO.
I would now like to hand over the call to Mr. Patel for his opening remarks, post which we can open the floor for Q&A. Thank you. Over to you, sir.
Thank you, Akshay, and welcome, everybody. On behalf of Arman Financial Services, I extend a warm welcome to our Q1 FY '24 earnings conference call. With me on the call, we have Vivek Modi, the Group CFO, and representatives from the Investor Relations team. I hope everyone has had an opportunity to go through the results, press release and presentation for the quarter ended 30th June 2023 uploaded both on the stock exchanges and the company's website.
Over the past decade, the Microfinance industry has experienced noteworthy expansion and changes across dimensions, including consumer engagement, technology integrations and regulatory frameworks. Serving as a catalyst for advancing financial inclusivity objectives, this sector has taken on a pivotal role in extending financial services to the underserved or unserved low-income class in India as well as extending micro credit support to small and medium-sized enterprises, all while aiming to foster economic and social progress within the nation.
During FY '23, the Microfinance industry has demonstrated remarkable resilience and determination despite global and economic challenges. This indicates a complete rebound from the challenges posed by the COVID pandemic. With substantial growth of the industry and a positive first quarter, it highlights the path of progress supported by well-established regulatory standards that foster a fair and balanced competitive landscape.
As on 30th June 2023, the assets under management of the company stood at INR 2,147 crores, resulting in a growth of 54.5% year-on-year and 10.3% quarter-on-quarter. Of this book of INR 2,143 crores, our Microfinance business contributes about 84%, MSME about 13% and Two-Wheeler about 3%. Interestingly, it took us 30 years to achieve an AUM of INR 1,000 crores, but remarkably, we managed to double our portfolio to INR 2,000 crores in just 18 months. As we often emphasize, we have fared fairly well navigating through different types of crisis and emerge with increased strength and resilience. Our disbursement grew by 41.6% year-on-year to INR 537 crores. This expansion can be attributed to positive credit cycles, favorable regulatory policies and our geographical expansions that we did in the first quarter and also the last quarter of previous year.
Last year, we've entered into untapped geographies of Bihar and Haryana, both of which yielded positive outcomes. Building upon this, we have also now are expanding into Jharkhand for the MFI division and Telangana for the MSME division. In addition to this, we have also inaugurated a new zonal office for North India which will be located in Uttar Pradesh and Lucknow. In the quarter, we opened 7 new branches, bringing the total branch count to 343 with a workforce of about 2,900 employees and a customer base of almost 7 lakh across 10 states. We are dedicated to further expanding our presence within these new states and plan to open several new branches before this fiscal year ends.
In continuation with our branch expansion, we are committed to the ongoing technological investments through digitization, automation and process enhancements. Last year, we integrated new LOS and LMS systems and also transitioned to fully paperless operations, and this has improved our efficiencies and also, more importantly, enhanced our customer experience. We're also graduating MFI customers to cashless in collections in the new IBL segment. We'll be rolling out Aadhar-based digital signatures for all our customers in the coming to next quarter. We are positive that these efforts will make our company poised for the next stage of strong growth.
In terms of asset quality, our gross nonperforming assets demonstrated a notable decline of 115 basis points year-on-year and a contraction of 26 basis points sequentially and stood at about 2.5%. Simultaneously, net nonperforming assets stood at 0.14% or 14 basis points as on Q1 FY '24, signifying a 20 basis point year-over-year decline. As of June 30, our collection efficiency reached about 98%. This diligent collection endeavors of our team, coupled with rigorous underwriting procedures and advanced technology, are collectively contributing to enhancing our loan portfolio quality, nearly restoring it to levels comparable to almost -- almost comparable to pre-COVID period. Collection efficiency for our Microfinance business stood at 98.2%, MSME at 98.1% on for Two-Wheeler, stood at 96.6%.
For the quarter, cumulative provisions stood at INR 72 crores, which is about 3.4% of the total book. Of these provisions for our Arman stood at INR 15.5 crores and Namra stood at INR 56.5 crores. We also have a management overlay of INR 28 crores included in our cumulative provisions, which is over and above any regulatory or ECL required provisions. Of this overlay, INR 7.7 crore is for Arman and INR 19.9 crores is for Namra.
Coming to our borrowing profile, our total borrowing for 30th June stood at INR 2,161 crores, including the debt component of OCRPS and CCDs of INR 48 crores, as per Ind AS guidelines. The debt-to-equity ratio stood at 3.4x. The company has successfully been diversifying its funding sources. Last year, the company raised about INR 45 crores through marketing debentures. And during the quarter, we have done the INR 49 crores through listed nonconvertible debentures. Of the total borrowings, about 33% was through banks, 19% through NBFCs, 13% through NCDs, 11% was through PTCs, 19% was through DAs, or direct assignments, and the rest was borrowed from DFIs like NABARD and SIDBI.
On the liquidity front, the company has a healthy liquidity position of INR 294 crores, nearly INR 300 crores in the cash, bank balance, liquid investments and undrawn CC limits. Additionally, the company has another INR 42 crores of undrawn sanctions from existing lenders. As on 30th June '23, the company is well capitalized with a capital adequacy ratio for the stand-alone business at 31.64% and for the subsidiary Namra at 26.32%. After successfully raising equity funding last year, we are confident that these resources will play a pivotal role in achieving our targeted growth in the coming quarter.
Now throwing highlights on the key consol financial numbers for Q1 FY '24. The gross total income stood at INR 149 crores, registering a growth of 89% year-on-year. And the net total income stood at INR 85 crores on the back of AUM expansion and improvements in yields. The NIMs for Q1 FY '24 stood at 13.4%. Profit after tax grew at 154% year-on-year to INR 40 crores. This was, again, mainly on account of improved interest income, optimization of operational cost and, of course, lower provisioning requirements and improved asset qualities.
Cost to income for the quarter stood at 26% as compared to 37% over the same period last year. Yields for the quarter stood at 25.9%, registering a growth of about 170 bps over the same period last year. As on 30th June '23, annualized return on asset, AUM -- excuse me, return on -- average AUM stood at 7.8% and return on equity stood at approximately 37%.
To summarize, we are positive that the current credit cycle and regulatory environment is favorable to the industry and the company, and this growth momentum will continue. Our strategic emphasis remains on the technological advances and the expansion of our branch network to drive the next phase of growth.
With this, I would request the operator to open the floor for any questions or -- for any questions that anybody may have. Thank you so much for your kind attention, and opening the call up to Q&A.
[Operator Instructions] We have a first question from the line of Amit Mantri from 2Point2 Capital.
First of all, congratulations to the entire team on a great quarter. My question is Q1 tends to be seasonally a weak quarter for the MFI business, yet Arman has had a very good performance in terms of even sequential growth. So what's driving this strong growth that we are seeing even an otherwise weak quarter?
So see, the -- as far as the profits and stuff are concerned, that is reliant a lot on the business you have done in previous quarters. Very rarely does it impact specifically whatever disbursement you do in any single quarter, largely the income that we'll earn will be in the following 7 or 8 quarters. So as far as disbursement of course, we had a small -- I mean, a decline from Q4 to Q1, if you consider that. And that is for a couple of reasons. As you said that historically, of course, Q1 is slightly slower, demand is slightly slower. Of course, on top of that, we are doing a lot of housekeeping items, a lot of transfers, a lot of new branches, a lot of system changes and other aspects.
But largely also, the impact this quarter on the disbursement was due to the fact that renewals were much, much lower. And there's a very good reason for that. So during the second wave of COVID, which was in March of 2021, so we stopped disbursements in March, April and partially May. And so the renewals that you would expect as loans and then people come in for fresh disbursements, those were largely absent during the last quarter. So of course, that would also have an impact on the total disbursements.
Okay. And in terms of the geographic expansion into newer states, now you're already fairly diversified for the current AUM that you have. So now would the focus be on just increasing presence in the states that you're present in? Or would you still continue to enter new states even over the next 1, 2 years?
So the plan is to continue both, so expanding in existing states and also consistently evaluating or when it is the right time to jump into a new state, right? Because specifically Microfinance, now we are reaching a stage where you can visualize that in 4, 5 years, the growth might be tapering off and the penetration levels will increase. So I think it's important to strategically kind of plant seeds before it becomes very difficult to enter into new areas. It's probably a good idea. That wherever you can expand into, you do make that call for the long run and go into. So that being said, we are usually very, very careful about where we're going to. Usually, there are large discussions and a lot of analysis and data and visits that we do. So it's not that we only go any place on a will, these things are very sort of well planned before we do it. And a lot of discussions happen around it. So yes, I think to answer your question, in short, it's the combination of both.
Okay. And third, a data question. So of the disbursements that have happened post the second wave, what's been the collection efficiency on them? You mentioned from, say, May 2021 onwards, post that the [ disbursement ] that have happened, which are together probably around INR 2,000 crores plus. So what's been the collection efficiency on that?
About 98%. Essentially, most of the book which you are seeing has been generated post-COVID only.
In fact, Amit, if we kind of split the pre-COVID into two slices. First is the pre-COVID before March 2020, there is nothing that is left from March 2020 when it comes to Microfinance, in particular. And kind of second wave, first wave to second wave, the overall Microfinance portfolio is typically a 24-month type portfolio. What you have outstanding is less than 1% or 1.5% of the entire AUM of Microfinance.
[Operator Instructions] We have a next question from the line of Akash Mehta from [ Capaz ] Investments.
I had 2 questions on individual business loans. So we've seen a lot of traction coming in, in this. So in coming quarters, how much contribution will this make in our year?
So we start off as a -- it's about 2% overall micro...
[Technical Difficulty]
I'm sorry, sir, you're not clearly audible.
Audible now?
Yes, sir.
Okay. I think that -- Akash, can you meet your line, please? There's a lot of noise. Yes. So yes, to -- I think to answer your question, it's about 2% of the Microfinance book at the moment. So largely speaking on our INR 2,000-odd crore book, presently, it's about INR 40 crores to INR 50 crores. So it's not a very, very large book. The idea here is to, again, the -- we are basically getting future-ready. So what I mean by that is that overall, the prediction is that as Microfinance progresses strategically it will shift from more on a group-based loans to individual based loans. And in that case, we'll have to rely more on cashless collections versus the doorstep collection that we do right now. So while it is of strategic importance for us right now, it is not of business importance for us to expand on. The answer is that going forward in the next 4, 5 years or so, I think if -- my prediction is true, it will be a very large portion of the book. If not, anyway, it's not -- we are just being future-ready at this point.
Good sir. And just -- on the same front, what would be the average ticket size? And what are the kind of yields you would be charging?
So the yield is very similar to Microfinance right now. So it is about 27%. And the ticket sizes range anywhere from, I believe, 65 to about -- right now, on average, it's about 75. We are not going over 75. There is a desire to increase that as time goes on and as the experiment goes on.
We have our next question from the line of Rohit Mehra from SK Securities.
So my first question is, we have expanded in the new [ states ]. So how is the response from Jharkhand and Telangana? And also, how is outperforming? What kind of group contribution do we expect in the near term?
Yes. So I mean, we have just moved into Jharkhand and Telangana. It's too early to tell, to be honest with you. I mean, very few is -- I think in the MSME in Telangana, we have only made last month I think 12 or so disbursements, if I'm not mistaken. And in Jharkhand, I don't think we have made any disbursements or...
Last quarter, we haven't, in July...
Last quarter, we haven't. July, we started doing it. So it's a little too early to tell, to be honest. The ones that we went into before that, which is Bihar and Haryana. So Bihar has been performing extremely well. And Bihar today now stands at the largest concentration of Microfinance in India at this point. So earlier, it was Tamil Nadu, now it is Bihar. So Bihar has overtaken Tamil Nadu. And frankly, by the numbers, it is one of the best places in India to do Microfinance. I mean, going by both demand -- and COVID and post-COVID, the asset quality is phenomenal. But anytime something is good to be true, you always want to make sure that you pay more closer attention to it. And so that's what we are doing right now.
And while it's possible to open a lot more branches in Bihar, we are kind of waiting and watching at this stage. It sounds -- I know it sounds kind of like I don't have confidence on Bihar, and that is not true at all. Just what I'm trying to say that Bihar as a market has grown very quickly, very fast. And so it's prudent for us to kind of just take a breather and wait to see how the -- what the reactions going to be. So that is Bihar. In terms of Haryana, it's kind of mixed results. So the asset quality is good, but the volume of business being generated to disbursement is not as high as we had anticipated. But it is what it is.
Okay. That's perfect. In the same trend, with the current up cycle in the Microfinance industry. What kind of AUM growth do we target it.
We don't give out targets except to say that we typically have a CAGR of about 35% to 40%. That is -- that will continue to be our long-term target for the -- at least the next 3 or 4 years.
We have our next question from the line of Yash Mandawewala from Mandawewala Family Office.
Aalok, congratulations on a phenomenal quarter. So, Aalok, just a few questions from me. So firstly, one thing that I've noticed is that the average salary cost per employee for some of our peers, the larger MFI, NBFCs are significantly higher than us, almost 50%, 60% more. So can you elaborate on why this might be? Is it -- are our field force employee salaries not competitive with the market? Or is there something else?
I don't think so that is the case. I would -- I don't know where you are getting the data on the average salaries. But I would...
Sir, I just dividing the employee cost, you give the employee number and the employee cost as well. And most of your peers do as well.
Okay. I don't know, I don't think that is the case. Might be some nuances with the numbers on the reporting and other things. But certainly, there is not a 40%, 50%, 60% difference. There might be a 10% to 15% difference here and there from different companies. I don't know. I would be curious to look at the numbers, that you are looking at.
Sure. But on the field force, there's nothing sort of the salaries are not much different from the industry?
No, I mean, there are -- so our overall salaries might appear lower, but then for older employees, we have a fairly generous ESOP program, which creates a lot of wealth. So I mean, it's dollars and cents-wise, I think a lot of employees have done much better at Arman than they would have with our peers if you count the complete package. I would say that we are probably right around average or maybe slightly below average of what we pay out. But certainly, I would not say that we are 50%, 60% below. I don't think that, that is...
Maybe we can maybe connect off-line, and I can share the numbers from the deck and the other people's -- the other companies decks and we can have a conversation around that.
Sure.
Just another one. So on the Board meeting this time, there was a provision for a fund raise as well. So if possible, can you give some more thoughts on that and when we will look at potentially raising these funds?
No, Yash, this is something that we always do every year. Historically, if you look at, it will be the same that we always take enabling resolutions for both [ NCD ] raises and also for equity raises as much. So specifically for QIPs only as it is. For private placement, it's not possible to take enabling resolutions you have to go reach out to the shareholders as and when the time comes, which is, of course, a very time-consuming process. So the purpose of taking enabling resolutions is just essentially that if there is an opportunity usually, those opportunities come and go quickly. And it's convenient, administratively at least, to have those enabling resolutions and accruals in place.
Now speaking specifically of your question about fundraising or equity fundraising. I mean, we just raised, as you are aware -- well aware of, we have just raised about INR 115 crores about 11 months ago. And we are not -- we are at a debt equity ratio of what we make 3.7% or so, give or take. So we don't exactly need equity at this point. And of course, we are adding a lot of internal approvals to our network. So as long as those approvals can keep up with our growth we should be okay. Now that the disclaimer here is that right now is a good time. If there is an opportunity available, I'll probably consider it. So I think I learned the hard way in my own experience about that equity is rarely available when you need it. It's only available when you don't need it. So on a, lighter note, that's the life lesson over there. So we'll see. But nothing at the current juncture. Nothing on the table at this point.
Makes sense Aalok. And congrats again on a great quarter.
[Operator Instructions] We'll take our next question from the line of Amit Shah from ACE Investments.
Sir I have one question. Sir, currently, in Microfinance segment contributes a major chunk of the portfolio. So do you have any plans to diversify the order book?
So I mean, Microfinance has become a large chunk as a function of its growth potential. So I think people who know a bit of our history will know that for the longest time, our bread and butter was Two-Wheeler financing, which has now become about 3%, 4% of the book totally. So it is -- we don't have anything too crazy on the horizon right now. We would be considering products which kind of fit our overall rural strategy. So of course, I know I've been talking about like stuff like [ micro LAP ] and stuff for a while. So that is something that we can go into. And certainly, there is a desire to do it if it's feasible.
We have tried to do it in the rural in the past, to be honest with you. But the paperwork has been challenging, just its availability to actually do a mortgage in the rural segment has been a challenging part of starting the business like that. So let's see. I think as we go on and as Microfinance expands, what will happen is that the growth will start tapering off and the other businesses like MSME and individual loans will start growing. So in the long run, my guess is that the weightage which you'll see in Microfinance will naturally start trending downwards and be replaced by other higher-growth businesses.
We have a next question from the line of Savi Jain from 2Point2 Capital Advisors LLP.
I don't know if I missed it, but I just wanted to know about the senior management changes that you have announced. If you could just tell me something about that?
So I mean, I think this was a while back, right, the Chief Operating Officer?
No, no. The other one. HR Head and the internal audit.
HR Head is here only. So Ravi still here. He's going to be here a while now for at least the next 6 months. But he has expressed a desire to relocate to a foreign country. And so we are preparing for that. That's it. So there is no resignation from Ravi at the moment.
Okay. And I think there's some internal audit hiring...
We have hired. So basically internal audit was a function of the CRO. It fell under the CRO. We have essentially split that now. So CRO, whenever -- will do replace will be a separate function and audit will be separate. So this is all. So this is the brand-new position.
So these piece of program, these are aimed at till which level of employee? The new program that you have sir.
The employee that has been with us for over two years. So 700-plus employees would be eligible from anywhere from 40 shares to 4,000 shares at the highest level. The average would be about 300 shares. So we have made a very...
Okay. So this includes branch-level employees?
Yes, yes, it includes field offices also, includes office boys also.
[Operator Instructions] We have a next question from the line of Karan Mehra from [ Net Investments ].
A couple of questions from my end. Can you help with like how much -- how many customers are unique to Arman, that is new to credit and Arman plus one lender?
Yes. So I mean I can tell you that at the time of disbursement about between 20% to 30%, let's say, about 25% -- 20% or so, 20% to 25% are either unique to us or due to credit. But of course, once you give the loan, I have no idea that they may or may not borrow some. So I wouldn't know on a portfolio level. But at least on a disbursement level, that's where it stands today. So let's call it about 20%.
Understood. One with regards to provisioning. So will we continue with a stringent provisioning policy? And what are the total provisions that we have as of now?
INR 73 crores, right? Or 3.5% of the portfolio. So what our current provisioning is, which is slightly more than we need from both an ECL and regulatory -- kind of RBI. I mean there is a management overlay on that. So there is a bit of a slush fund. And I know people do like and appreciate creating provisions over and above -- I know people do like creating provisions over and above what is statutorily or what the [indiscernible] kind of require us to do.
But even, I mean, these are all from -- being an accountant myself, when you run into trouble. It's not going to be any accounting accrual reserves that is going to come to your aid, right? It's going to be cash liquidity and it's going to be equity. So I mean, to me, I'm kind of neutral about creating provisions because it's an accounting line, but then so is the reserve and surplus. You can always use that too against rightoffs. Of course, the main benefit is that it's smoothens out your P&L during crisis. But other than that, I don't think it helps you much besides that. But of course, I reserve my -- I mean, I'm in the minority of the opinion. But we'll continue to create management overlay also.
Okay. Can you help me with the write-off number that we took this quarter?
The laptop number?
The write-off.
The write-off numbers.
The write-off is approximately INR 10 crores.
[ Devoted yes. INR 10 crores to INR 20 crores ].
We have a next question from the line of Jigar Shah from AK Securities.
I have a couple of questions. So what would be the average cost of borrowing for the quarter? And in the MSME segment, we have deals of 36% plus. Are they sustainable in the medium term?
It's sustainable in the short term, probably in the medium term as well, unlikely in the long term. So I mean, as competition increases, you should expect that it will probably come down. With that being misheard that it's the few players that are operating in this segment, and remember, MSME is very, very broader. So even like certain loans that we take from PSU banks at INR 50 crores is also falling under SME or something. So the range is like between INR 50,000 to INR 50 crores, people classify sometimes as MSME. But at the level that we are doing it, our rates are not very, very different than you know that a lot of our competitors are doing. So I don't want you to get the idea that we are an outlier in terms of rates.
But probably on average. So this is a kind of a high-yield business. And it's high yield because it's a high OpEx business. The operating costs are much, much higher. In MSME than it is in Microfinance, for example. And you are doing doorstep collections on an individual level instead of on a group level. So that also increases your expenses. You are doing a much more stringent form of credit from a completely separate team. That increases your costs. The type of people you are to hire is obviously a lot more qualified. And theoretically, although I have not experienced it, but at least textbook-wise, it's slightly more riskier also, it is at least what they claim. So the yields are basically a function of all of that. Number one, low penetration and low competition; number two, it's high OpEx; and number three, higher risk apparently, but -- theoretically.
Got it.Got it. And I just had another question, like what would be the average cost of borrowing for the quarter?
Average borrowing cost, I mean, all-inclusive cost would be about 12.5% or so...
About 12.5%, in fact, this quarter since the larger part of [indiscernible].
PSU banks. So it's -- but the interest rates in the market have been going up. So I'm sure you are aware of that. We could borrow it at 22 versus what we can borrow at 23, even though our ratings are better overall cost in the market has gone up significantly for reasons that I'm sure you guys know better the I do.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments. Over to you, sir.
Well, thank you so much. Thanks to everybody for joining. It's good quarter. I think hopefully, we can keep going . And I thank everybody for their support and very insightful questions. Thank you so much.
Thank you, sir. On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.