Cholamandalam Investment and Finance Company Ltd
NSE:CHOLAFIN
Earnings Call Analysis
Q2-2024 Analysis
Cholamandalam Investment and Finance Company Ltd
The company's partnership portfolio stands at INR 2,000 crores, which represents a modest 1.6% of the total AUM of INR 133,000 crores. In the recent period, income at the company level has seen a slight increase to 14.3% from 14.2% in the previous quarter.
The company observed a 10% sequential growth in disbursement for used vehicle financing, despite experiencing a flat cost of funds at the company level, contrasting with a reduction of 20-25 basis points in cost per segment. The outlook for the used vehicle sector remains positive over the next couple of years.
Credit costs are anticipated to be slightly elevated this year, ranging from 1.1% to 1.2%. However, improvements are expected in the latter half of the year, potentially lowering credit costs to the guided range of 1% to 1.2%.
The company predicts single-digit growth in the commercial vehicle sector, expecting an improvement from the current 1% to a range of 5% to 8%.
With indications that the cost of funds may have peaked, the company is optimistic about a reduction, potentially enhancing Net Interest Margins (NIMs). This could translate to a 5-10 basis points benefit. Concurrently, the company aims to maintain a Return on Tangible Assets (ROTA) within the range of 3% to 3.5%.
A proactive approach has been highlighted, with write-offs in the first half (H1) of the year being lower by INR 100 crores compared to the previous year's H1. The company is targeting an effective collection and write-off strategy, particularly in the upcoming quarters.
The company has reported an increase in headcount year-over-year from Q2 of the previous year to Q2 of the current year. The increase in staff costs is attributed to the annual increments and the transition from outsourced to on-roll positions. The total headcount now includes off-roll staff.
The company is exercising caution in the heavy commercial vehicle sector due to increased prices and operating costs, including insurance and driver wages, despite stable fuel costs.
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Ladies and gentlemen, good day, and welcome to Cholamandalam Investment and Finance Limited Q2 FY '24 Conference Call hosted by Kotak Securities. [Operator Instructions] I now hand over the conference over to Mr. Nischint from Kotak Securities. Thank you, and over to you, Mr. Nischint. Go ahead.
Good morning, everyone. Welcome to the earnings conference call of Cholamandalam Investment and Finance Company Limited to discuss the Q2 FY '24 performance of Chola and share industry and business updates, we have with us the senior management of Chola represented by Mr. Vellayan Subbiah, Chairman and Non-Executive Director; Mr. Ravindra Kundu, Executive Director; and Mr. Arul Selvan, President and CFO.
I would now like to hand over the call to Vellayan for his opening comments, after which we'll take the Q&A.
Ladies and gentlemen, we have lost the management line connection. Please stay connected while we reconnect them.
Ladies and gentlemen, thank you for patiently waiting. Good day, and welcome to Cholamandalam Investment and Finance Company Limited Q2 FY '24 Conference Call hosted by Kotak Securities. [Operator Instructions] I now hand over the conference over to Mr. Nischint from Kotak Securities. Thank you, and over to you, Mr. Nischint.
Good morning, and sorry for the technical glitch. Just continuing, we're discussing the 2Q FY '24 performance of Chola. We have with us Mr. Vellayan Subbiah, Chairman and Non-Executive Director; Ravindra Kundu, Executive Director; and Arul Selvan, President and CFO. I would now like to hand over the call to Vellayan for his opening comments.
Nischint, thanks so much, and sorry for the delay. The key financial results for the quarter, we'll just go through, and the half. Disbursements for the quarter were at INR 21,542 crores, which is up by 47%. And for the half, it's up by INR 41,557 crores -- it is at INR 41,557 crores, which is up by 49%.
Total AUM stood at INR 133,775 crores, which is up by 46% year-on-year. And net income was at -- for the quarter was at INR 2,367 crores, which is up 39% year-on-year. And for the half, it's up at INR 4,493 crores, which is up by 35% year-on-year.
The PAT for the quarter was at INR 762 crores, which is up by 35%. And for the half year, it is INR 1,489 crores, which is up by 32% year-on-year. So just the Board of Directors of CIFCL approved the unaudited financial results for the quarter and half year with some quick highlights. Both disbursements and AUM was robust in Q2 due to overall growth in demand. We're seeing a pickup in replacement demand from end-user segments in the auto sector, and that supported the growth for Vehicle Finance.
The loan against property business witnessed a healthy revival due to growth in demand from the SME segment. And home loans continue to register above-average growth due to revival in earnings of self-employed nonprofessionals. The new segments of SME, CSEL and SBPL also continue to register growth though on a smaller base. And in Q2, CIFCL launched a composite QIP issue of equity shares, INR 2,000 crores at a price of INR 1,180 per share and compulsory convertible debentures, INR 2,000 crores at a face value of INR 1 lakh, overall aggregating to INR 4,000 crores. The funds from the investors were received in the first week of October '23, and the allotment has since -- has been since completed on 5th October, 2023.
Some quick performance highlights. The aggregate disbursements in Q2 we just talked about, which is basically INR 21,542 crores as against INR 14,623 crores in the same quarter, which is a growth of 47%. Vehicle finance disbursements were INR 11,731 crores in Q2 as against INR 8,502 crores in Q2 of FY '23, which is a growth of 38%. Loan against property disbursed INR 3,192 crores in Q2 FY '24 as against INR 2,246 crores in the comparable quarter last year, which is a growth of 42%.
Home loans, affordable home loan and affordable LAP disbursed INR 1,575 crores in Q2 FY '24 as against INR 743 crores in Q2 FY '23, which is a growth of 112%. And obviously, the percentage is normally high because of the smaller base. SME disbursed INR 1,945 crores, registering a 32% growth over INR 1,473 crores in Q2 FY '23.
CSEL disbursed INR 2,853 crores as against INR 1,579 crores, which is a growth of 81%. And SBPL disbursed INR 246 crores for the quarter. AUM stood at INR 133,775 crores compared to INR 91,841 crores, a growth of 46%.
So the PBT growth in Q2 was at 35% and for H1 was at 31%. And the PBT ROA was at 3.2% for the quarter and for the half year it was at 3.3%. ROE for the half was at 19.8% as against 18.3% in the previous year.
The company continues to hold a strong liquidity position with INR 11,000 crores of cash balance at the end of September 2023, including INR 1,500 crores each invested in GSEC and TBills, which is shown under investments for the total liquidity position of INR 13,569 crores, including undrawn sanctioned metrics. The ALM is comfortable with no negative cumulative mismatches across any time buckets. Consolidated PBT was at INR 1,065 crores as against INR 762 crores, which is a growth of 40%.
In terms of asset quality, Stage 3 was reduced to 2.96% as of September '23 from 3.06% as of -- in June '23. GNPA as per RBI norms reduced to 4.07% as against 4.3% in June '23. And NNPA as per RBI norms has dropped to 2.59% for September as against 2.82% in June. NNPA is below the threshold of 6% prescribed by RBI as a threshold for PCA.
Capital adequacy as of September 30, 2023 was a 16.62% as against the regulatory requirement of 15%. Tier 1 was at 14.66%, and Tier 2 was at 1.92%. Post the capital raise, capital adequacy is above 20% effective 5th October, 2023.
Nischint, we'll stop with that, and we'll be happy to turn it over to you for questions.
Sure. We can start the Q&A.
[Operator Instructions] The first question is from the line of Puneet from Macquarie.
Vellayan, this is Suresh Ganapathy from Macquarie. So let's address the elephant in the room, which is the new business loans, NPLs, Vellayan, because it's gone up from INR 28 crores last year -- last quarter -- last year, last quarter from that level to INR 190 crores. I know there is a base effect here. But if I were to look at this number on a lagged AUM basis, it's 4% Vellayan, So stupendous increase. Are you guys not worried about this pace of increase in this segment?
Yes. So 2 things, Suresh. Obviously, just to give you a sense, there are 2 things happening here. One is the reporting format has changed, right? Because what used to get loved as FLDG and how we've loved kind of that before. So Arul, why don't you explain kind of on the...
Yes. See, the NPAs are increasing in the CSEL a little bit. But still, they are very much well within industry norms. We have always said in the earlier quarters, the NPAs were much lower and were even lower than our secured businesses. So that's where -- it will increase, but in the overall scheme of things, these NPAs are much lower, and we have already provided more than 70% for this and the net NPAs [ when we were ] much lower. So we will continue to watch this portfolio and do this.
But Arul, this number is 66% of Q-on-Q, 4% on a lagged AUM basis. Are you still telling it is in line with your expectations? Because it really looks like going a little bit out of proportion?
No, it is within our expectations and within our planned number.
So you feel these numbers have peaked? Or they will further go up from current levels?
It may not go up. We are doing a certain corrective actions with regard to -- the 2 segments, as you know, Suresh, one is the fintech partnerships, and then we have the traditional line. So in the traditional line, we are very much within control, and that is around 0.82%.
Yes. Suresh, that's the way we should look at it, right? We should kind of break it down into 2 lines.
And the partnerships as well.
Yes, the traditional line, we're at 0.82% in terms of Stage 3 gross assets. In the partnerships, the partnerships has gone up. Yes, go ahead Arul.
And the proportion of the book is the traditional line is 3/4 of the book and the partnership is 1/4 of the book. On an INR 8,000 crores book, we have INR 6,600 crores in the partnerships -- sorry, the traditional line, which is having an NPA of 0.82%. and in the partnership, which is the INR 2,200 crores, we have an NPA of around 4.7%.
So, Suresh, to your point on how we're going to react and how we're going to manage this. Obviously, we are concerned on the partnership side, right? And obviously, we will kind of be more cautious on the partnership side, which is what has run up.
The partnerships at 4.7% is the highest Stage 3 that we have in the overall book. And therefore, we will be cautious on that and how we manage, including growth on that. But on our regular, which is like Arul said, which is 3/4 of our book. On our regular, we are seeing 0.8%. So even on a lagged AUM basis, on the regular, it's okay. But the partnership is what is of concern.
The partnership is protected by FLDG.
Correct. The partnership is currently protected by FLDG, but it's still of concern.
So it is protected by FLDG only to the extent of 1%, right? .
No. FLDG has a different event. .
FLDG will be at 5% as per the regulatory norms. But we will also have certain hold on them with regard to continuing or extending businesses and service costs, et cetera.
So Suresh, you are right in that, that the partnership business is what we've been cautious about, and we will continue to be very cautious about that.
Sorry, last question on early vintage delinquencies. The recent civil report talks about the fact that in the early vintage delinquencies that is delinquencies within 3 months or 6 months of disbursing of a loan has really shot up in certain small-ticket loans. Are you seeing that kind of a trend because if early vintage delinquencies is one of the lead indicators of test forming in the portfolio. Are you seeing that happen in any of your business norms within 3 or 6 months by default?
So, Suresh, the early default and non-startups are under control, and these kinds of delinquency in the fintech business is there from the beginning as well. Earlier, the FLDG accounting was different, therefore, that was not coming up. And therefore, that is not a concern for us. And early default and non-startups are [indiscernible].
The next question is from the line of Avinash Singh from Emkay Global.
Two questions. First one, again, continuing on that your FLDG arrangement with the partners. So technically, I mean, from accounting perspective, as, I mean, asset quality develops, depending upon your Stage 3 or different stage developments, you will provide the credit cost. And whatsoever FLDG recovery that will come into your other income line. So is my understanding correct there? That's number one. .
Yes, you are right. Go ahead.
And second one is more, if you can provide some color on the yield development, not from the external factors. Because, of course, externally, it all depends how the interest rate are going to be here. But I mean based on your product mix, I mean, growth across different channels at a different stage, a bit of a product mix change that will happen over the next 3, 4 quarters. I mean, of course, our housing typically will be slightly lower within vehicle also, I mean the growth outlook will be different. How are you seeing sort of -- you will yield movement due to product mix changes stepping up over the next 3, 4 quarters?
If you see that quarter 2 of the last year was 13.6% in terms of total income, and that has gone up to 14.3% now. So this income has not increased in the line of the increase in the cost of fund. That's the reason we did drop in the NIM from 7.6% to 7.4%, that is correct. But what is happening is that in the vehicle finance, we are having a marginal book yield significantly higher than the booking yield of, say, 14.3%, maybe 15.3%, we are now acquiring the book. But the effect of the 15.3% come with a lag, and that will start showing up after 2 to 3 quarters. So we will -- by the end of this quarter, we will start hitting the number what it used to be in the past in terms of the NIM because the income has to go up to the extent of the cost of fund going up.
Now coming to the product mix. The product mix is 3 types of product mix. Within the company, we have a product mix of let's say, vehicle finance LAP one of the product. So there are 2 types of products, which we are doing it one is the fixed rate and the floating rate. So all the floating rates book, which is pertaining to loan against property or housing loan or [indiscernible] have been already been increased to the extent of what is required to be done.
Now within the vehicle finance product, the mix is depending on the used and new. And now our use business has gone up to, say, 33% as against the 25% of the mix which we used to do it in the past. So that is going to increase the overall yield of the book of vehicle finance, which at the end will increase the total income book of company. And it will take another 2 quarters.
[Operator Instructions] The next question is from the line of Ashwani Kumar Agarwalla from Edelweiss Mutual Fund.
Two questions here. How do you see the growth in the vehicle finance industry, especially in tractors, HCV and LCV because we have seen very good traction in the last 3, 4 years. And don't you think we are at the peak of the cycle for all these segments. Even your disbursement has gone down -- has slowed down.
So in tractors, if you see that in Q1 was like minus 2% growth and then Q2 has come with minus 6% growth. And so as of now, in fact, on half yearly, we are minus 4% growth. And in the month of October also, we have seen that tractor is actually declined by 4% further. So now we are hoping that November onwards things will improve. But whatever it improved, it cannot go beyond, say, 3% to 4% of the growth in the current year or maybe it will be a flat growth.
So what about HCV, LCV?
Heavy commercial vehicle now half yearly it has reached to the 10% growth. Light commercial vehicle has reached to 3% growth. We are project -- and the current one, in the month of October, HCV has done very well. It has gone up 14% plus, and light commercial vehicle also has gone up.
So considering HCV and LCV and small commercial vehicle is still degrowing in the month of October, it is a flat growth. So at the industry level for the entire commercial vehicle as on September 30, it has been 1%-plus over the last year same time. So we are hoping that the industry will be having single-digit growth, maybe a higher growth up to 7% and 8% max or between 5% to 7%, 8%.
Sir, now just 1 question related to this only out of total more than 60% is in the vehicle finance, which where growth is an issue. So we have talked about AUM growth of roughly 25% to 30%, more than 30%. So how is that possible that the growth slowdown in the main segment?
Vehicle Finance, if you see that the commercial vehicle grew by 1%, we grew by 6%. Our total disbursement has grown in commercial vehicle by 15%. So a little bit market share growth, a 5% plus market growth plus the ticket size growth is giving us 15% growth in new segment, but the major growth is coming from used vehicle, as I mentioned, that we are growing, our disbursement mix has gone up to 34%. And there are other products like 2-wheelers, 3-wheelers, and cars and MUVs. So put together, we have grown 35% with the help of those products.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Congratulations on a good quarter. Sir, I think just briefly touching upon the newer businesses and the CSEL segment, you've already explained that a large part of it is coming from partnerships. Sir, somewhere during your commentary, you also said that you're taking some corrective actions. So just wanted to understand, have you made any changes in our approach or strategy in the CSEL segment?
Abhijit a large part of the business of CSEL is actually coming from the traditional which is 78% and 22% is only the partnership. And partnership, as we mentioned even in the last quarter call also, that we are not adding any new partners as of now and we're continuing to do it. And we are also helping the partners to correct their [ return ] so that the NCL can go down further, although it has been protected by the FLDG.
Abhijit, what you're seeing, a large part of the issue is coming from partnerships. So the large part of the portfolio is coming from partnerships.
Large part of the issue coming from partnerships?
That's right. Okay. So you're right. Okay. So now -- sorry, now -- yes. So what is your question around that?
Sir, I mean, you were saying that you're already taking corrective actions in the CSEL segment. I wanted to understand, I mean, how have we changed that approach or strategy?
So there are 2 things, like Ravi said, we're kind of -- we're slowing down that segment, right, the partnership segment significantly. And we are also going to constantly evaluate which partners we continue to have in our portfolio. And then basically, obviously, we're not seeing good performance on the loans, whether we should continue this partnership. So those are the 2 things, slowing down and reducing the number over time.
Got it, sir. Sir, my last question is maybe 2 parts questions. First is for Ravi, sir. Sir, how has the festive, Dussehra demand been? The second one is for Arul sir, how are we thinking about the provisioning cover on Stage 3 loans going ahead?
Dussehra, last month we celebrated, has been good for the commercial vehicles, passenger vehicles, 3-wheelers, and construction equipment. 2-wheelers and tractor have actually not done well. Tractor and 2-wheeler likely to improve from November month. And for the second half, we are expecting better growth in commercial vehicle, as we've seen that there is minimally 1% growth in the first half. As against that, the second half has been double-digit growth, which will help for commercial vehicle to reach between 5% to 8%, as I mentioned. Passenger vehicle is growing at the rate of 7%, and the growth in the October month is also good, which is going to support to take passenger vehicle growth to double digits.
So that is the growth. And as I mentioned that when you gain a little bit more market share in the case of commercial vehicle and passenger vehicle, what we have achieved now, like for example, now we are up by 20,30 basis points in terms of market share in commercial vehicle and passenger vehicle. Our disbursement growth is coming to 20%. And the additional growth, which is coming up to take this overall growth to 35% is being met by the 2-wheeler, used vehicle and 3-wheeler and construction equipment. And what is your second question?
Provision coverage.
The provision coverage, as you would have seen Abhijit, has been improving. And we are now at around 47%. My view is it will hover between 45% to 50% as we move forward in the next few quarters. It will depend on the PD, LGDs and the product mix.
The next question is from the line of Prashanth Sridhar from SBI Mutual Funds.
So the yield in these new businesses seems to have gone up significantly from 22% to around 27%. One, if you can explain this? And now that you've been conservative, should we expect this to go down?
See, what we are saying is that in the case of the soft partnership which is 1.5% of the total portfolio. We are actually evaluating the partner, where the NPAs are higher. So in spite, we are basically protected, we are [ writing ] them to ensure that their filters are [ tight ]. So not that -- 1.5% disbursement will go down and it will impact the overall yield. That is what is...
No, but I think his point is the yield is going up, he is saying the yield is going up in those businesses. How much has the yield has moved up?
[indiscernible].
So you are concerned that the overall yield will come down if we slow down the partnership business? Or are you saying that the yield in the partnership business has gone up?
No. So I'm saying that the total yield in the other businesses seems to be increasing. And now that you plan to be conservative, where should we sort of expect the average yield in this businesses stand at?
So again, right, I mean, I think your over-indexing on the fact that like we're saying, our total partnership portfolio is at INR 2,000 crores, okay? That's INR 2,000 crores on an AUM of INR 133,000 crores, which is about 1.6% right? So definitely kind of us slowing down in that business is not going to affect overall yields or swing overall yields at all. So I think if that's your question, than that is the response. That's the answer.
So the yield on the other business, we would expect at around 25%, 26% on average. Is that fair?
No.Where are you getting your yield data from, right? Because we've not shown any yield...
Income at the company level is around 14.3%. And it has increased from 14.2% in the previous quarter, this Q1.
And that will go up only vehicle...
It will go up, yes, only because of vehicle finance...
Okay, sure. So maybe if you can just help us. So in the other businesses, how would the yield have moved in the last 2 or 3 quarters?
The other businesses, we have not started disclosing the yield and the line item. As we said we will...
Directionally, we can tell.
Actually, the page number -- if you go to the loan against property page number, the yield is Q1, 11.7% to 12.7%. So there is an increase in 100 basis points.
You're asking for new businesses or what are you asking?
Right, right. New businesses.
The new business is a mix of 2 different, one certain high-end businesses, like CSEL and SBPL, high yield but low volume. SME, high volume, but low yield. So it's a mix, and it will all come to the similar levels of around 14%...
We will start disclosing this for the next financial year. I think till that time independently each businesses we are not disclosing .
So just give you the -- yes, go ahead. Go ahead. What's your question?
So the way we arrived at it is, so you've given the gross income on vehicle LAP and home loan, and we have the total. So I'm just taking the balance as others and then taking it as a percentage of...
This is the same mistake even last time somebody did with regard to the provision...
Credit costs, yes.
That is also we have treasury income there. So don't assume that all of the income is only from the new businesses. So treasury, we have a transfer price model, anything beyond the transfer price is considered as treasury income. So I think can you wait for us to disclose the details without getting into...
Sure. No. Fair enough, sir. And out of the 13%, 8%, I think is CSEL. How is the NPA on the remaining business? Anything over there for us to worry about?
Actually, SBPL volume is so small. It's around [indiscernible] SME is 1% and SBPL is 0.2%.
The next question is from the line of Abhinav Anchal from SBI Life.
Sir, I have 2 questions. One, when we are showing the segmental information, we are seeing a decline of 20 to 25 basis points in cost of funds across the 3 lines but at the company level the cost of funds are flat. So can you help us understand what is happening when you are showing the segmental cost of fund. And the second part is the...
Sorry. Go ahead, go ahead. Please go ahead.
And the second part is that we have seen very strong traction in the used vehicle side, almost 10% sequential growth on disbursement. So can you give us some color on the used vehicle category that which class of vehicles we are financing? What is the vintage of vehicle led financing? And what is the outlook here for, let's say, the next couple of years?
First point I'm answering and then pass it to Ravi for the second point. First point is that the pricing to the individual businesses goes based on the transfer price, which is declared at the beginning of the month. So the transfer price we will be giving based on the -- what is our -- the treasury's assumption in the market.
So that is the transfer price and between that and what is really incurred, there will be some differences, which goes into the treasury gain side as well as other investments. So whenever we have surplus funds because we are holding cash for LCR purposes, et cetera. Those things are investment income that comes under the treasury pool. So these are the ones which get into treasury income. So that transfer price from that is -- the cost of funds what you're seeing in the segmental is based on that transfer pricing. So that will be different. So overall cost of funds in the -- reported for the company is the actual cost of fund incurred by the company. I'll request Ravi to now answer the used vehicle part.
Used vehicle, we mentioned in the past that we will be focusing on that. And this year is a market of the used vehicle because last year new vehicle purchase went up and then -- now people are selling their vehicle and then the replacement demand will pick up and that will help the industry to basically see new vehicle also getting sold.
So the used vehicle is coming from HCV and LCV predominantly then followed by passenger car and then used tractor and used construction equipment, all put together it is 34% of the total disbursement close to INR 8,400 crores. And these businesses are going to go up only and the growth momentum is very good, and it is going to be maintaining this way.
Now we have always clarified that we have been doing the business of used only for the vehicle, which are less than -- so major vehicle which are coming to us for buy-and-sell or refinance are 5 to 10 years old vehicles.
The next question is from the line of Shweta Daptardar from Elara Capital.
Congratulations on good set. I just have 1 question. So this quarter, we saw credit cost around 1.3%, and given the fact that there has been addition to NPAs from the new business segments, you also mentioned we raised the PCR there, what is the normalized credit cost for the overall book going forward?
We had already indicated that in earlier calls that our overall cycle, we would be in the range of 1%. So maybe this year, we could be in -- land slightly higher at around 1.1% or 1.2%. But we expect in Q3, Q4 good traction on the vehicle finance and the other portfolios to reduce this percentage. And sales should be in the range of around 1% to 1.2% this year.
Okay. And just 1 question. I just want to confirm. Did you mention CV volume growth to be 80% for the full year FY '24?
What volume growth, we couldn't hear you. What was your question?
CV volume growth, what is that 80% growth improvement for full year FY '24?
CV, we have mentioned that the industry is likely to grow in single digits because as of now growth is 1%. So it will improve over the period in the second half and it'll go between 5% to 8% is our expectation.
That's the volume growth, right, for the full year, the industry volume growth? Okay.
Industry number growth.
[Operator Instructions] The next question is from the line of Saptarshee Chatterjee from Groww AMC.
Sir, if you can give some ballpark indication what would be ROTA for the new businesses. And if someone -- like if we assume that the like ROTA -- as you have said earlier, that the ROTA for the new business are higher than the company level ROTA. Then if I see pre-COVID also, pre-COVID we are making around between 3.1% to 3.5%, 3.6% ROTA. Now also even after -- sorry.
Go ahead.
Yes. So now if you see after like new businesses is now around 11% of our AUM, still lower. But we have achieved some bit of diversification, but our ROTA has not improved much. And going forward, like one can expect only credit cost to move up from here as the book matures. So I wanted to know your perspective like whether the structural ROTA improves as we grow our new businesses or it will be remain in the similar line?
The comparison between COVID period and now, there are 2 important elements. The cost of funds was very low, and we had also [ filled ] some benefits on the yield, especially with the auto vehicle finance book. We spoke about it we can't -- we cannot correct the yield on the fixed rate book.
So that correction will happen. So that is going to be NIM accretive and therefore, ROTA accretive. Our expectations are we have sort of bottomed out on the -- or peaked out on the cost of funds. So here onwards, there should be reduction in cost of funds so that should also be NIM accretive. I'm not wanting you to build too much expectation on that but this could be in the range of around 5 to 10 basis points of each of them contributing.
The credit costs will come lower. If you again go back to pre-COVID, you will always see Q1 and Q2 of the quarter, especially in vehicle finance, where you will see higher credit costs because these are months where activity levels are much lower and especially for vehicle operators. And they tend to have better earnings in Q3 and Q4, where we will have better traction in collecting overdues as well as regular EMI. So that's where I am giving, when I spoke on the earlier question also, it is -- from current 1.3%, it will come down to 1.2%, 1.1% in the overall credit costs we are expecting. So we are confident of keeping the ROTA at around 3% to 3.5%, which is what we always say that we are endeavoring to reach at, and we are confident that this year also we'll reach the 3.5%.
Understood. And, Selvan can you ballpark like indication that you can give on the new business ROTA?
No. We -- I told again in the earlier question that the new businesses break up we'll start disclosing from next year. So we will do that, kindly wait.
Understood. But still, like even if those are higher, it will still remain around 3% to 3.5% ROTA guidance?
[indiscernible] Indication, it is like there are no businesses which are lower yield or lower ROTA like SME business and there are other businesses. So we will have to break down...
The SME business is lower than the overall company ROTA, and it is going to be like that. And our CSEL business and SBPL businesses will be much higher than the company ROTA, what we are still looking at now. But if you take [indiscernible] in terms of people -- and once the AUM goes up then we start getting that kind of ROTA. And it will take another 6 months to 1 year time.
Understood. Very helpful. And just one clarification. This quarter, we have seen that the employee cost growth has been Q-on-Q very high even on Y-o-Y basis. Any one-off in this?
No, no. See, we moved a lot of people who were under an off-roll arrangement into our own employee cost. So we'll see some reduction in other costs and employee costs going up. If you compare both together and consider the increase in AUM as well, normally, the increments and promotions happen in Q2. So there will always be some increase on account of that. Factoring in all that, that's what is the reason for these increases. Over the next 2 quarters, we will see the difference between employee costs and the other costs [indiscernible] next Q2.
[Operator Instructions] The next question is from the line of Bhavesh Kanani from ASK Investment Managers.
Going back to the fintech partnership, where we are looking to take corrective actions. Just wanted to understand the manner in which the entire arrangement is structured that is do we -- I'm sure we would be giving them certain filters of the kind of loans we want to sold through them. And on top of that, they would be doing their own evaluation. How does it work really in terms of exact or specific aspects of the arrangement when it comes to underwriting aspect with partnership model?
So all the fintech partners who actually start proposing the norm, can meet -- actually go through our underwriting team and also the risk rate is also [ evaluated ]. Then we approve it for filter, which is acceptable to us.
Then after getting the early default and non-startups we start recommending to basically tighten the credit so that further the ability for non-startup can come down. And that is what we mentioned that wherever there is a slight increase in the NPA. We are trying to basically reduce it by including more filter, and that is a continuous process because 1 is in the partnership, they come with the FLDG.
But secondly, we have to also ensure that we should not depend on only FLDG, with our NPAs are lower. So our endeavor is to basically provide data analytics and risk department services to them to ensure that they end up sourcing good quality of proposal, that is one type. Second is that we also review their collection mechanism, Like for example, what is current roll forward and then what is the roll forward into the subsequent bucket.
We identified that, their entire focus of this vintage partnerships is in the current only. We're able to basically do much more role for a higher collection efficiency in the current. But when it comes to the roll forward from the bucket 1 to bucket 8 -- higher bucket, they are not able to put that kind of effort. So we are helping them to increase the collection efficiency and higher bucket so that the NPAs can come down. So that is also the services we are providing and then guidance for them.
Okay. And you shared that the GNP levels for the fintech book is about 4.7%. And we are still considering that as within the original expected levels. At what level would you kind of reconsider this entire fintech as a root of origination, what level of NPA would trigger that kind of reevaluation?
I think we've already discussed that we're basically -- obviously, we're evaluating and slowing down, right? So kind of obviously, even at this level as people continue, right? We won't be basically growing partnerships that are basically contributing to NPA at these levels.
[Operator Instructions] the next question is from the line of Kaitav Shah from Anand Rathi.
First of all, congratulations on a good set of numbers, sir. Mr. Vellayan this question essentially since you are the larger shareholder. Do you see this business in terms of risk, given that we're hearing a lot about smaller ticket size loans turning bad. Do you think that you will be easing of some time in terms of growth? Or are you comfortable in terms of the data that you're seeing coming from your own company?
Are you talking about the partnership loan? Or Are you talking about the overall?
Overall, not the partnership loans. [indiscernible].
But overall, maybe I'm trying to understand the question because obviously, overall, our book does not have a lot of small ticket personal loans, right? And Overall, our book is 60% focused on vehicle, about 20% on loan against properties. So just want to understand, overall, I mean, over 90% plus our portfolio is secured lending, right? So, yes -- so I'm just trying to understand the nature of the question because those...
So Sir -- is the -- so the nature of the question is in the fact that is the problem kind of [indiscernible] from partnerships and the other business aspects are doing fantastically well. Do you see this kind of continuing? Are you also looking at risk now more closely than, let's say, 1 year ago is kind of -- across the other businesses as well?
So I mean, obviously, we have and continue to monitor risks in all of our businesses. And I don't think anything changes there. And I would say that we have a fairly mature and well-developed systems that we continuously improve on. We're continuously working on what we can do for vehicle, what we can do for LAP, what we can do for housing loans to improve credit models, underwriting models, collection models, all of that, right? And so that process continues and the analytics capability.
And that really gets me more and more confident overall about the business for us going forward. I think the specific question, and I understand that there have been questions, quite a few questions relating to our partnerships business. We are obviously kind of looking at that and looking at what kind of corrective action we want to drive in that business.
But overall, I would say that my confidence level is very high because -- we see good growth from the other sectors, good performance and significant, I would say, even medium- to long-term growth opportunities in those segments.
[Operator Instructions] The next question is from the line of Umang Shah from Kotak Mutual Fund.
Congratulations to the team on good quarter. Just 1 question from my end now. In the past also, the management has discussed some of these new businesses will take some time to stabilize. And by nature itself, they might have slightly higher NPLs on the face of it. But my question is that, should we assume that on a long-term basis, the headline NPA and the credit cost number might look a little elevated, although we might be able to deliver the kind of ROAs and ROEs that we are looking at the overall console level. Is that the right understanding?
Yes. See, that would be -- that is the whole point of the diversification, right, Umang. Because we will have books which will run at much lower credit costs, and we'll have some more which will run at a slightly higher, elevated credit cost. And they will also change the quantum on the percentage over cycle. And the well-diversified book helps us to manage this and keep it within the target, as I was telling you earlier, in the 1% to 1.2% range. I think we still hold that, and we will -- we are confident that we should not cross that, given...
Yes. So, Umang, the answer to your question is no, we don't think it's going to kind of increase out of this range.
The next question is from the line of Preethi RS from UTI AMC.
So if you look at -- my question is on the asset quality in vehicle finance. If you look at the provisions, it is trending at around 1.6% for the first half, which is higher compared to pre-COVID trend. And even the growth stage 3 on [ absolute ] basis is higher than 17% compared through March '23. And if you do some back calculation, it suggests, we have written off INR 400 crores on an overall portfolio basis. So which segments within vehicle finance are contributing to [ this provisioning ].
See, vehicle finance, first of all, from June to September, and if you see that, our NPAs are flat between 0.35% to 3.32% in absolute value to [ come ] growth but provision has gone up by almost INR 100 crores. So that is the additional provisioning we are creating for the higher bucket from this financial year. You Would have heard that RBI is talking to everyone to improve the provision coverage.
So we have brought one particular [ name ] which is over and above the ECL. And that is the reason for the higher entry for this. Second is that this first quarter is always -- first quarter and second quarter is always the lean period for the vehicle finance, especially in September, it was fully waiting as against the August. So little bit collection did not happen in the month of September as it was expected, which is going to happen in this quarter.
Last year, if you see that our numbers are much lower from the Q1 -- Q2 to Q2 and H1 to H1. And we are expecting that we have closed the number close to 1.1%, 1.2%. And with the help of the Q3, Q4 performance, we will reach to the level.
So is it fair to say it's the tractor segment that is of concern?
It is not a tractor segment alone. It is all across segment across the markets. There is no concentration with respect to geography and the product.
Okay. And could you confirm if the write-off number is right for the Q2 or H1?
Pardon?
What is the write-off number for H1?
H1 write-off numbers are actually similar to what last year number.
Actually, it is lower by INR 100 crores.
Last year, it's INR 500 crores, now it is INR 400 crores. At the company vehicle and even vehicle finance also...
It is INR 110 crores. Most of it is coming out of [indiscernible].
The next question is from the line of Kunal Shah from Citi Group. .
Sir, the question is on OpEx. So even if you do this adjustment in terms of outsource [indiscernible], but still at the overall OpEx level, the sequential rise seems to be quite high. So where do we see OpEx to assets and we see it across the segments, particularly, across the [indiscernible]. So what would be the outlook on that? And if you can just add the number of employees who have now been on the on roll because it doesn't seem to include in this 51,000-odd employees, which we [indiscernible].
No, we still keep it at 3% average, at that level. That is what is our stated. And we are confident it should be within that as we grow payer this year. This quarter increase is because of the increment that normally happen in Q2 because all our employees get their annual increment as well as promotions, et cetera, effective July. So the full hit of that comes, that is one thing, as well as there has been incremental people...
So ex of employee overhead also seems to be high if we adjust for this transfer. Okay. So what if it's a decline, but if we just...
Yes, there is a disclosure in the number of employees also.
So that includes off roll?
This is extra employees, it's in the other overhead.
Other overhead is because branch expansion is there and other overhead does not move that much.
Okay. And the off roll to on roll?
That overhead is the reason for the shift between employee costs and other expenses. So you look at it [indiscernible] and take out the employee cost across the 3 comparative quarters that it is Q1 of current year or the Q2 of previous year.
We'll see that there is a manpower increase of our own [ 12,000 ] numbers. I'm talking Q2 of last year versus Q2 of this year. Plus, that increase in headcount, plus the cost increase because of the annual increments. And then if you [indiscernible]. So outsource movement from off roll to on roll, is the shift in line item, not shift or increase in cost.
And this 51,000 does include off roll, which you have disclosed. You have 50,980, that doesn't include...
That includes off roll.
Okay. Okay. So it's not more than 2,000.
Correct.
The next question is from the line of Nidhesh from Investec.
There's 2 questions. First is what is the comfort level of unsecured exposure on AUM basis that we had from a medium- to long-term perspective? And second is, if I look at yields on the housing loan segment, these are quite high at 15% plus. Most of the affordable housing finance companies, the tracks are operating at around 13% yield. So how should we think about the sustainability of the yields and profitability of housing finance business?
So unsecured 10% is what we would kind of view comfortable over the next 2 years, right? And I'm not saying that we will go there. But if you're asking for a cap, then that is the cap.
In India affordable housing, as you know, that now we have started moving from south to other markets, smaller markets where Tier 2, Tier 3, Tier 4 pricing are slightly higher than the normal and that need to be maintained. Because to that extent, we need to check whether what kind of risk is there. So we have priced it slightly higher than that in this one account. And that's the reason overall yield has gone up. And also yield has gone up because of the [ rate we set also ].
The next question is from the line of Piran Engineer from CLSA.
Congrats on the quarter, I'm just referring to your sector outlook on Slide 33. What really makes you cautious on HCV and SCV at this juncture? Especially for HCV, you mentioned increase in operating costs. So I just wanted to understand that better.
Heavy commercial vehicle, actually, you know that we -- for us, the problem is that if our cost of fund is high, we don't participate in and if we are not able to participate there is a formalization happening in the heavy commercial vehicle business. I think what we are trying to [indiscernible] exclusive as of now is 7%, and we are treading carefully in this segment due to the increase in price and operating cost of the vehicle because cost of vehicle goes up when our customer segment is not in position to acquire the vehicle and operate that because our customers are small road transport operator, who don't have the contract of the load, and they need to look for the load and therefore, the productivity goes down. Having the [indiscernible] and beside a large fleet operators, they have a contract. And therefore, we can manage in spite of the cost of vehicle goes down.
Sir, but why do you say operating costs are up because fuel prices have been -- which is the largest cost, fuel and toll are the big costs. I don't know about toll, but fuel prices have been stable now for more than a year.
Driver and [indiscernible] then the insurance cost. All those costs are also going up significantly. Fuel cost is constant, but the rest of the costs have also gone up .
Got it. Got it. And just quickly on your other income, which used to be like INR 40 crores, INR 50 crores per quarter. Now last 2 quarters, it's been tracking more than INR 100 crores. This time, INR 140 crores. Can you just give us a sense of what exactly is included in this other income?
This quarter, there is a dividend income into it. We have given that in the notes, if you can see that. Normally, the other income should be in the range of around INR 30 crores, INR 35 crores, INR 40 crores here. In last quarter, we had the FLDG coming in which was [indiscernible]. This quarter we saw that [ FLDG ] is much lesser but there is dividend income coming. This will stabilize into the INR 40 crores, INR 50 crores levels.
The next question is from the line of Bhaskar Basu from Jefferies.
Just 2 questions. I think one you partly clarified. So on these variable commission structure with fintechs, et cetera, is the variable fee or commission netted off in the yield level? And so to some extent, is that FLDG or quasi FLDG embedded in the yield. That was number one.
And secondly, if you look at your unsecured portfolio, which is about INR 8,000 crores, I think you talked about INR 2,000 crores being fintech partners. So as you kind of calibrate your fintech book, what are the steps you are taking? I mean, do you expect the whole book to slow? Or are you building or are you taking any steps to kind of build your traditional channel so that the growth there continues to sustain. These are the 2 questions, sir.
There is no variable commission and all. What happens is that you -- the share of yield is differentiated based on the portfolio based on the FLDG, based on the volumes. So many factors run into it. So what is the ultimate yield and what is the share in the fintech partner retails? And what is the share which we are in. So this will change partnership to partnership, and this cannot be disclosed as confidential it is all of them. And we also don't want to disclose these things right now. So that is what is there over and over the FLDG, which will protect us. Correct.
That [indiscernible] concern, as you mentioned is right. The 75% is basically a traditional book and 25% is partnership book. And in the partnership, as you ask that what are we doing out of 10 or 12 partners we have today, there are a few partners. We have seen that. There is a requirement to and calibrate their underwriting now. But at the same time, the others are doing well.
So those who are doing well, we will just renew their number and probably they might increase also. So what we are saying is that as of now, we are focusing more on traditional to increase our share of 75% to higher than 75%. But that doesn't mean that the INR 2,000 crores number will go down. And that INR 2,000 number crores, [ we will maintain ] as it is. But it is coming from the better partner who are having a good quality and the lower NCL and lower ECL.
Right. So just a clarification there on the first part. What I was referring to with performance weighted commission where there is a whole structure, where a new kind of the commission is linked to performance of the portfolio. So I was basically referring to those. I mean, FLDG is very clear, right?
[ It used to be ] earlier, but now we don't pursue that.
Okay. Okay. And so FLDG is now reflected in the other income is what I understand, right?
On write-off, it will reflect it. Till then it will be outside the book because we keep providing for that book. And once we know that like whenever crosses 90,000 or 180,000, we get a confirmation that this is not collectible. Then we invoke the FLDG. And the moment FLDG is received, we will show it as income there, as I just said. We will show it as write-off here in the segment.
The last question is from Mr. Nischint from Kotak Securities.
My question actually pertains to the release that you have done to the exchanges on the family arrangement. Without getting into the specifics because it's a family matter. But is there any implication for the listed company and its shareholders [ comes off ], the shareholding pattern changing or any changes in management or anything of that sort that listed shareholders need to be aware about?
Nischint, I think we've clearly stated in the statement itself is that there's no impact related companies or shareholders. So just to give you a sense, the transaction is fairly simple in that we have a holding company, which is Ambadi Investments Limited, that then holds equity in all the underlying kind of companies, right?
And that family member owned a percentage of Ambadi Investments Limited, which we have now basically effectively bought back from that family segment, right? So basically now, it's the only transaction within the holding company. But all the rest of the members of our family continue to hold equity in the holding company. And we brought back portion of it. I mean not her but her segment's portion of it. So there's no implication on anything else in public companies and no implication for other shareholders at all.
That was the last question for today's call. So thank you, everybody, for attending this call, and thanks a lot to the management for giving us an opportunity to the host this call.
Thank you. Thank you, Nischint.
On behalf of Kotak Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.