Muthoot Capital Services Ltd

NSE:MUTHOOTCAP

Q2-2026 Earnings Call

[Operator]

Ladies and gentlemen, good day, and welcome to Muthoot Capital Services Q2 FY '26 Earnings Conference Call hosted by Elara Securities. [Operator Instructions]

I now hand the conference over to [ Mr. Mohit Urza ] from Elara Securities. Thank you, and over to you, sir.

[Unknown Analyst]

Yes. Thank you, Ikram. Good morning, everyone. On behalf of Elara Securities, we welcome you all to Q2 FY '26 Earnings Conference Call of Muthoot Capital Services Limited. From the esteemed management, we have with us today Ms. Tina Muthoot, Executive Director; Mr. Mathews Markose, CEO; Mr. Ramandeep Gill, CFO. We express our gratitude towards the esteemed management of Muthoot Capital to provide us with the opportunity to host the conference call.

Without further ado, I now hand over the call to Mr. Mathews Markose, the CEO, for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.

[Mathews Markose, executive]

Thank you, Mohit. Am I audible. Can you confirm?

[Unknown Analyst]

Yes, sir, you are.

[Mathews Markose, executive]

Okay. Thank you. Good morning, everyone, and thanks for joining the earnings call of Muthoot Capital. Our Q2 was a mixed bag for us. When I say mixed bag, the reason I call it a mixed bag is because while we are able to reverse the trend of loss that we had done in Q1 and get back into profits, many of the macro fundamentals were not so conducive for business. So I'll cover it one by one.

Overall, in Q1, the retail vehicle sales, and I talk about two-wheelers here because that's our principal business. So their overall retail sales in Q1 was 48.12 lakhs, which fell down drastically to 40.16 lakh, which is a 16% drop in overall numbers in Q2. And that mirrored our numbers as well. So we had the total disbursement of INR 623 crores in Q1, which came down to INR 521 crores in Q2, which is exactly 16%.

However, the silver lining on this is that our own NPSL business was down only 12% from INR 504 crores to INR 442 crores. In fact, those are dip in our co-lending share from INR 119 crores to INR 79 crores, which was 34%, which led to a larger dip. And that dip is because we have now sequentially reducing the number of partners. Now we operate with only two partners. And that's a conscious decision that we have taken because of our own business growing and now being at a sustainable level. So that was a dip in the overall numbers.

Another fundamental that was not so conducive was that across Q2 and across most of the country and especially in Northern parts, there were heavy rains, monsoon continued unabated, and that reflects across a lot of the important markets in the country like UP, et cetera, and even in the East and Rajasthan. But having said that, we were able to improve or reduce our slippage by 6% but, more importantly, increase our collection and normalization from the NPA to by about 69%. I will leave Raman to give you the larger details of these numbers. But our issue which we had seen in Q1 of having a not so good collection was addressed totally in the Q2.

So coming to the other initiatives that we did. So company almost ticked all the right boxes in Q2. So as I had mentioned in the Q1 earnings call, we had made changes in our credit policy. We did dealer categorization and location categorization based on delinquency and perceived risk and all that. And we categorized locations into A,B,C,D and E categories, E being severe risk where we completely stopped business and the other categories where we had kept restrictions. So the A and B category where the delinquencies and the portfolio has been be doing very, very well, we continued with our normal credit norms. Whereas in the C and D category, we made certain restrictions, certain changes, some additional documents, et cetera.

So we were expecting a slight sip in the numbers. However, the impact has not been as much. So the impact has been as per the market going down only, we have in fact being able to improve our market share slightly from 2.36% in Q1 to 2.47% in Q2. This is on the overall pan-India numbers. However, in the locations that we are present, our market share dipped slightly from about 7.67% to 7.24% in Q2, and that is something which we had factored into in our business.

On some of the other initiatives, on digital, I think one significant change that has happened or movement at a positive moment that has happened is that our [indiscernible] penetration has jumped from the 75%, 80% levels to 92% level. So now for the last 2 months, we are clocking 92% penetration. And this has consequently had an impact on our overall collections also. So today, we have collected about 77% of our overall collections come through digital more. And 23% happens through cash collections by the collection agents or executives and through MSL branches.

Also on the average IRR or the yield, we have seen some slight improvement in the average yield. Looking forward, I think we also did a comparison on -- because of the impact of GST or the customers who are waiting for the GST announcement, September has been highly muted. Overall numbers came down to 12 lakh units in September. And of course, that saw some impact on our overall disbursement in September as well. But the last part of September, which is from 22nd when the Navratri started, we did a comparison of last with Navratri versus this Navratri, and our numbers have been up 26% Y-o-Y during the same 9 days' period.

And that trend is continuing. We are seeing very, very good momentum in October, and we see a very good Q3. That's the estimate. So we made two kinds of projections. On an aggressive note, we hope to things go right, continue to be -- as the trend is showing in the first 15 days of the month, we should end up disbursing anything around INR 1,100 crores in Q3, which would be fairly close to what we have budgeted for. However, if this trend is not retained for long after Diwali, maybe we will have a conservative number of about INR 800 crores, INR 850 crores in Q3, but still look poised to meet our overall commitment that we had given for the year.

So I think that is broadly from my side. I'll request Raman to give further details on the presentation on the Q2 numbers. Over to you, Raman.

[Ramandeep Gill, executive]

Thank you, Mathews, sir. Good morning, everybody. So we'll take you through a few numbers and the analysis part of it and then we can move on to move on to questions.

In this quarter, we did as far as the sourcing is concerned, the new business, we have closed this quarter with INR 35 crores of business while acquiring 51,288 as our new customers. This has taken our customer base to 5,70,000 plus now. And this has also taken our AUM to INR 3,284, marking a year-on-year growth of 40% to our AUM. This has helped the company to take the total balance sheet size to INR 3,731 crores now.

The overall GNPA and the NNPA, we will talk. So we have splitted this GNPA and NNPA first into two parts now. One is basically on the [ POS ]. Second, it's a bit the interest accrual. On [ POS ], we have reported a GNPA of 5.94 percentage, whereas with infrastructure, we have reported a 6.46 percentage. While the NNPA is concerned, on costs, we have reported 2.46 percentage, whereas interest accrual -- with the interest accrual, we have reported 3.7 percentage. The PCR remains the highest, which is 60 percentage. It remains impacted.

Whereas the CRAR of the company, we reported 22.02 percentage, debt to equity is at 4.56x the profitability of the company, which we have explained and which we'll be explaining now is now INR 3.31 cr, which is PAT, profit after tax, for Q2 alone. Yes, we did have a bad Q1, but now we have been able to overcome in many ways, specifically as far as the recoveries of the NPAs are concerned.

The borrowings of the company stood at INR 2,995 crores. The positive part, which we have received from our rating agencies, that A+ stable has become A+ with a positive outlook now, so which means that it's met with the 1 or 2 quarters ahead with good results to go, we'll be able to increase our rating size by a notch.up.

As far as the portfolio is concerned, product-wise portfolio of the company is, if we compare, the two-wheeler portfolio of the company, which was INR 2,173 crores in last year has been moved to INR 2,936 crores, marking our growth of 40 percentage. Whereas four-wheeler used car has been growing from INR 50 crores to INR 118 crores. Our CV portfolio, which was last year at the same time was INR 8.7 crores that, has been drastically moved to INR 140.12 crores. Whereas loan, which we are doing, that has moved from INR 11 cr to INR 44 crores.

The overall growth in the AUM as compared to the Q1, it remains flattish. It has just grown by 1 percentage. But year-on-year, it has grown by 40 percentage.

Talking about the portfolio analysis now, As we said, the GNPA inclusive of interest, it counts at 6.46 percentage, which is INR 212 crores is there in the NNPA inclusive of interest, INR 191 crores in terms of principal outstanding of those cases. The standard pool of the company stood at 93.5 percentage. As far as the breakup of this is concerned, the two-wheeler has contributed 7.10 percentage from this NNPA, whereas dealer channel out of it contributed 8.84 percentage, with outlet channel, 7.7 percentage and others are contributing 0.30 percentage. The GNPA on my four-wheeler portfolio is 1.72 percentage, whereas on the portfolio, it's coming at 0.31 percentage.

Talking about the slippages, which Mathews sir has told, I would like to take you in detail. There in last quarter, as far as the slippages are concerned, the total slippages when we see addition to the NNPA was INR 46 cr in Q1. That has been dropped down to INR 42 crores. Whereas the book has also been increased but by a small margin. The slippages, which used to be 0.99 per percentage of my standard pool has now been dropped down to 0.67 percentage of my standard pool, number one.

Number two, the recoveries which used to be in -- for recoveries from this tool, which is to be around INR 3 crores, INR 5 crores and INR 6 crores, that has been substantially gone up in Q2, which is INR 8 crores and INR 7.73 crores, respectively, for the 3 months of Q2. So therein, the company has been able to bring down its slippages and company have been able to uptick its recoveries from the NNPA in this quarter, which a good sign. And we are expecting a good trend to follow in Q3 as well.

Talking about this, as we have already said, the PCR of the company, it is at 60 percentage. And this asset quality of the company is concerned, that I have already told. The impairment cost of the company, which was 3.43 percentage in Q1 on a very higher side and 3.2 percentage in Q4, that has been brought down to 2.03 percentage, which we are expecting to be in the same range or lower than that in quarters to come. The company is following an ECL methodology in order to compute the impairment. Therein, we -- if we compare our ECL versus the IR provisioning norms that have been submitted by RBI, we are still carrying a INR 64.02 crores as an excess impairment in our books, which brings our ECL to 4.14 percentage as compared to the requirement of 2.2 percentage from the IR norms.

The good part about this Q2 is that our total yield, which was 19.4 percentage, which we used to call it an interest income in Q1, that has been grown to 20.32% in Q2. Rest of the sectors, we have been able to bring good results in my impairment, which was 3.4 percentage, that has been brought down to 2.5 percentage. There is an increase in the finance cost as an absolute expense as we have planned to do higher numbers in this quarter, but unfortunately we were not able to do in the month of September.

As far as the NII of the company, we have seen upticks as far as the quarter 1 is concerned right from the interest income, which has grown by 6 percentage to my NII, which is gone by 3 percentage as well. So we are expecting the same trying to continue in this interest income as well. And as far as the Q3 business is concerned, it would be a higher number. We are expecting around INR 800 crores to INR 850-odd crores, which will ultimately help us in amortizing so many costs plus, at the same time, my total NII and the top line will grow at a faster rate.

The specific yields, so company at a blended yield was operating at 20.35 per percentage until Q2. Whereas only from the quarter 2, the overall yield of the company has increased from -- as far as two-wheelers are concerned, this yield has gone up by 22 percentage, whereas royalty loan yields have gone up to 25 per percentage. CV is opening at 18 percentage, so is used cars. So we are expecting some 1 to 1.5 percentage of yield increment starting Q3.

The EBIT LTVs, which company was operating 84, 85 percentage until Q1, that is now we are operating at 80.22 percentage.

Now talking about the funding side of the company. In terms of my co-lending business, the company is still carrying the co-lending business with four parties: MANBA, Credit Wise Capital, Greaves and evfin. Whereas we are operational more with Credit Wise and evfin as we speak. The promoter shareholding is continued to be at 62.62 percentage, whereas 28 percentage of this chunk -- of the remaining chunk has been with the retail. The bankers and the funders have continued to show the interest where we have been able to receive a lot of interest in the form of term loans, in the form of NCDs, securitization and CP markets as well. The good part about this Q1 and Q2 is that we have been able to attract more term loans from the banks, which the company was taking NCDs from the market and have higher costs last year. So that we have been able to bring it down, and more term loans we have been able to attract.

When we say the additional facility of the companies which we have taken in Q2, it was INR 504 cr, wherein the overall cost, which used to be 9.9 percentage has been brought down as an ROE percentage to 9.66 per percentage. So which means that there is an overall rate advantage from the banks and from the other contracts which the company has been able to receive. In LCV market, the company has been able to bring down its rate to 0.24 percentage, whereas NCV market, the rates have been bringing down to 0.12 percentage.

Whereas as far as the working capital demand loan or the term loan from the bank, the rate has been brought down by 0.2 percentage. The fixed deposit book of the company started to increase now. We are at INR 46.07 crores. The company has been able to take new fixed deposits at 7.5 -- a new fixed deposit of INR 7.52 crores in Q2, whereas renewals stood at INR 2.91 cr.

So that's it from the overall analysis and the overall numbers of the company. Happy to take questions now.

[Mathews Markose, executive]

One thing which I missed mentioning is the fact that during the quarter, CRISIL has given their outlook on rating from stable to positive while maintaining the rating at A+. So that's a positive thing which I missed been mentioning, Raman.

Yes. Over to you, Mohit.

[Operator]

[Operator Instructions] The first question is from the line of Metri Shah from Sapphire Capital.

[Unknown Analyst]

Am I audible?

[Operator]

Yes, you are audible.

[Unknown Analyst]

I have a few questions, a few on the co-lending side. So we mentioned now we are reducing our partners. Any sort of reason for that, why are we taking that step going forward?

[Mathews Markose, executive]

Yes. Metri, so this Mathews here. Yes. Thanks for the question. The reason why we are doing it is because yield on the co-lending has been low, and we thought that it was not a very good effective use of our capital. So that's the conscious call. However, we continue to engage with partners on the EV side, where our own business is not that high, and we've been able to generate borrowings in form of bonds and other means for, in fact, something for EV and anything related to green funding. So therefore, we continue the partnerships on the EV side. But partnerships on the ICE has been consciously reduced as a result of not being a very effective use of capital.

[Unknown Analyst]

Going forward, are we seeing -- are we going to see a more harder dip quarter-on-quarter happening on the co-lending side? Or it's going to stabilize? Or it is...

[Mathews Markose, executive]

It's going to be stabilized to the extent that whatever reduction is happening on the ICE is more or less getting occupied by -- covered by the EV side of the business. However, there will be a reduction in the portfolio because the runoff with entire book or co-lending has been -- or largely has been two-wheeler and the runoffs are barely high. So since the current disbursements don't match up to that, the book will slow down.

[Unknown Analyst]

Secondly, on the -- so we are expecting a 1% to 1.5% increment. Is that going to happen quarter-on-quarter? And will that start in the next quarter, like quarter 3? Or are we expecting that to happen over...

[Mathews Markose, executive]

1.5%, what? I didn't understand the question.

[Unknown Analyst]

Yield increment I think you mentioned that.

[Mathews Markose, executive]

Yield increment, we've already seen an uptick in the yield. And Q3 will definitely see a 100 bps increase in the yield.

[Unknown Analyst]

And maybe where is this yield kind of helping out? What sort of loans are helping us with the yield increment happening from now?

[Mathews Markose, executive]

So two things. One is that our share of the used vehicle business is going up, which is both car and CV is increasing. Two, we applied risk-based pricing on our two-wheeler portfolio wherein we are able to price customers differently earlier. We have a business model where 50% of our customers are new to credit. And they invariably fall in the slightly higher risk bucket. We were -- previously when we were in our scheme-based model, we would price everybody same irrespective of their risk profile. But now with the implementation of risk-based pricing, we are able to differently price the lower risk customer from a medium or a higher risk customer. And therefore, that will see an uptick in the yields.

Going forward, I think by November, we should be able to launch our used two-wheeler business also, which will then again help us increase our yield. We were supposed to launch used two-wheeler by September. But because of some other priorities, we had to -- which were largely due to the change in credit policy, et cetera, we had to make those stages in the [ BRE ]. So we have to approach the vendor for that, the same vendor who does that. So we postponed the two-wheeler, used two-wheeler development to the end of Q3. And that's why it did not take off. But otherwise, we should have launched used two-wheeler. So that gets launched sometime in November or December. Then Q4, we'll see another increase in the yield because of that business growing. Maybe the impact may be very small because the results will still take time, but going forward, it will improve. .

[Unknown Analyst]

Okay. So 100 bps improvement in 3Q and then maybe a 50 sort of improvement in 4Q. Is that what we're expecting, the yield?

[Mathews Markose, executive]

Yes.

[Unknown Analyst]

Okay. And how confident are we on disbursing the INR 1,100 crores in the third quarter?

[Mathews Markose, executive]

So INR 1,100 crores is a very aggressive number. It will depend on various factors like we're playing out the way we expect. But I think that's why I gave you two numbers, everything between INR 800 crores to INR 850 crores on the conservative side and INR 1,100 is our wishful number which based on the projection. Because usually festive season is a bonanza, but this time, festive season is clogged with the GST impact. So OEMs are pretty bullish. We've seen huge uptick in numbers of Maruti and all that. But that's not exact because we are not into the new vehicle space. The uptick in the OEMs on two-wheelers will definitely impact our overall numbers. So we need to see it under that light. So I think INR 800 crores, INR 850 crores on the conservative side and INR 1,100 crores on the...

[Unknown Analyst]

Are we including in the number the new two-wheeler used loans as well that we will be launching?

[Mathews Markose, executive]

No. As I said, used will not contribute in Q3. There's no festive season boom as such. So we will just be able to put up the product by Q3.

[Unknown Analyst]

Makes sense. Any sort of guidance on the AUM growth that you're expecting this year and also FY '27?

[Mathews Markose, executive]

So we had initially given a guidance about INR 4,000, INR 4,200 crore. So we will reach close to the INR 4,000 number. We will fall slightly short in the light of very subdued Q2 and some of the credit collections, but we are still hopeful on reaching close to that INR 2,000 number.

[Unknown Analyst]

Okay. And what sort of target ROE or ROE do we have for the next 1 or 2 years, that question?

[Mathews Markose, executive]

Raman, you want to take that question?

[Ramandeep Gill, executive]

Yes, yes. So target ROE that we have taken in an internal as a 3-year targets, we want to operate at 4 percentage. As far as next 1, 1.5 years, we are expecting -- first target is to reach to 2% to 2.5 percentage, which we want be there in the next 12 months. And then after that, we want to scale it up 2.5 percentage to 3, 3.25 percentage after that. So it's the kind of plan we want to follow.

[Unknown Analyst]

And was that like the plans that we are taking into closest ROE, I mean like, quality.

[Ramandeep Gill, executive]

So ma'am, yes. So as we said, as our team has already answered, and I would like to emphasize is that the kind of yield that we are increasing, as I told in Q2 also, we are expecting some -- our yields have started to increase. It's a very good sign. Second thing is my impairment cost is going down. So these two factors will help us in reaching and help us in achieving a number of 2.5 percentage, first.

Then there are various sectors like corporate selling and all, which we have just started this financial year. right? And that insurance income as we are also an agent -- or corporate agent as well. So these incomes will is also some part of my ROE. But that the effect of this income will come when the business will start scaling. So therein, we also expect a good number from this.

[Operator]

[Operator Instructions] The next question is from the line of [ Prakash ], an individual investor.

[Unknown Analyst]

This is Prakash. Am I audible?

[Mathews Markose, executive]

Yes, Mr. Prakash, you are.

[Unknown Analyst]

Yes. So it looks like a good set of numbers compared to Q1. I had a question on OpEx. So is the OpEx in Q1 -- Q2 is higher than OpEx in Q1. So is anything being done to reduce OpEx? And can you share some details on what is being done?

[Ramandeep Gill, executive]

Sorry, I was on mute. So I'll take it. And so there are two components through which we can say that the OpEx of the company has gone up. One is basically the incentive, which is we call the sourcing incentive that we know that business -- the season is going to come. So there are various incentive schemes, which we have already launched in Q2, wherein we are expecting on that. So from those -- so that has gone up by around -- we can say that around 40 percentage as compared to the Q1. So that is forming the major part. This is number one.

Number two, there are basis -- I'll not say there are other things. But this -- and then our cost of agencies, wherein if you see my agencies recovery until Q1, it used to be in the range of INR 16 cr. That has been increased to INR 21 crores in Q2 on that. So yes, we have launched this incentive scheme to agencies. That has actually helped us in bringing down the NNPA. The effect will come in the next quarter, and it has also come now in the form of impairment cost. So it is basically the shifting of costs from OpEx to impairment, we can say like that. Because once we have been able to save our impairment because INR 5 crores have been increased from INR 16 crores in Q1, and that has gone up by INR 5 crores in Q2. So therefore, the agency cost and all, that has been increased.

So these were the two specific reasons for the increase in OpEx.

[Unknown Analyst]

Right. But is there anything you've done on OpEx reduction? Because that was one of the things I talked about in Q1 con call.

[Ramandeep Gill, executive]

Yes. Sir, we are expecting productivity in terms of Q3 onwards in order to increase so that -- by the same margin which the OpEx is growing, so that at least at the same margin or 2 weeks, our top line will also grow. Because we know that all the hiring that we have done in the Q2, the results of it will come from Q3 onwards. So there in Q2 OpEx, it might -- it seems to be on the higher side. But yes, it will be able to amortize itself while the top line of the company will start getting increased from the Q3 as we are able to -- we will be able to scale from Q3 onwards in terms of business numbers.

[Unknown Analyst]

Right. Do you have any guidance for credit cost for the entire year FY '26?

[Ramandeep Gill, executive]

So we'll start with Q3, sir. As of now, we are expecting on a very conservative side, as our CEO has already told. We are expecting INR 800 crores to INR 850-odd crores, which is already 50% percentage higher than the Q2 in terms of the business number. But we want to touch INR 1,000 cr mark in Q3. If you are able to do that, then all our income with the yields which has already been on the higher side now and with the cross-sell income. So we're expecting a good number by the end of Q4 from this Q3 business. So this is where we will be able to comment more on that once we are able to see our Q3 number, sir.

[Unknown Analyst]

No, no, my question was on credit cost for the year.

[Ramandeep Gill, executive]

Sorry for that. I missed it. I've taken it to some other sides. So credit cost, as of now, it is 2.05%. Expecting the same number in Q3 or lower than that. Why I'm saying lower, because we have seen the higher agency recoveries in Q2, and that is not something which I'm comparing only from the Q1. I had the data from last 5 quarters, and this is the highest number that we have been able to push. So we are expecting the same numbers there and credit costs, though from -- as far as the competition of ROE is concerned, I will be taking the same number for Q3 onwards for Q3 also, which is approximately in the range of 2 to 2.01 percentage.

[Unknown Analyst]

Right. And so what do you expect the ROE for the entire year, for the full year?

[Ramandeep Gill, executive]

Yes, yes. For the full year, we are -- so right now, I'm expecting since the scaling of the business will be done from now onwards, in next 6 months, I am expecting somewhere around 2 percentage, sir, on a very confident side, right

[Unknown Analyst]

Okay. Right, right, right. So that will translate at about a total profit of INR 6 crores or something for the year.

[Ramandeep Gill, executive]

Yes, yes, yes.

[Unknown Analyst]

Okay. That would mean that you have to do INR 30 crores in the next 2 quarters profit.

[Ramandeep Gill, executive]

And also, yes, I'll tell you one more thing too which we wanted to do. We are also exploring personal transaction, which we were very active until 2.5 years, 3 years back. And now we wanted to -- just now, we wanted to increase our AUM. So we are exploring those as well. So right now, we are on the verge of closing those pools as well with a large investor, which will help in exponentially increasing our top line. So based on those numbers, I have told this number of around 2 percentage.

[Unknown Analyst]

Right, right, right. But when you do a DA deal, I think your AUM would go down actually, right?

[Ramandeep Gill, executive]

Yes. Yes, sir. So we -- that is the reason that we -- the AUM target, if we are able to do, say, INR 1,000-odd cr, still where we will be able to grow. So as far as the year-end AUM projections which we have provided, so that will be met for sure. So we are not going to do sales like INR 500 crores, INR 600 crores. We are just expecting INR 100 crores to INR 200 crores. That would be located between 2 quarters.

[Unknown Analyst]

So the full year AUM target is still about INR 4,200 crores.

[Ramandeep Gill, executive]

Yes, yes, yes, as of now.

[Unknown Analyst]

Right, right, right. And one more question. So you had a plan to raise capital sometime in Q3 or Q4. Any updates on that?

[Ramandeep Gill, executive]

So yes, so in Q2, we have already closed our debt capital in the form of Tier 2, right? So that we have closed with Tier 2 capital, right? So as of now, if you see my CRAR, it's quite good. right? And then by increasing the reserves and surplus by doing transactions of DAs and all, it will help in bringing down my overall debt to equity, which is around 4.5x. So we'll be operating somewhere around 4 to 4.25. If we are able to meet plan in Q3, then I think we should not go until Q4 as well as the reraising of new capital is concerned, and then we can have a plan by Q1.

[Unknown Analyst]

You are saying that if we can do the DA deals in Q3, then we can push the weighting of new capital in Q1, right?

[Ramandeep Gill, executive]

Yes, yes, yes, because that will ultimately increase the reserves and surplus and we'll be able to leverage more on the existing capital. And that will be advantage for everybody then. It will have an ultimate effect on the ROA and ROE.

[Operator]

The next question is from the line of [ Ranej Zaveri ] from JNJ Holdings.

[Unknown Analyst]

I just have a broader question in terms of basically since Tina also available on the call from the promoter family, so what is their vision in terms of this company? Because we've seen a very large group, the listed company is very small among the group which is there. So what is the vision for this company going forward? Because when I see from last 3, 4, 5 years, you are pretty languishing in terms of our profitability. So if you can just throw some light, that will be very, very helpful.

[Mathews Markose, executive]

Okay. I'll take that question. So the longer term vision, if you have read, our motto, turning wheels and changing lives. So our vision is to be able to do eventually everything on wheels -- to be able to finance everything on wheels, from two-wheelers -- back then, we were just a two-wheeler loan company. From there, we today already have a series of products like we have a used car, we have commercial use, commercial vehicles. You're launching construction equipment this month. But after the end, we have launched a construction equipment and, by December, we have launched use two-wheeler. We have a unsecured product called loyalty loan.

So the number of product lines we have increased over the last 1 year. I think we wish to be a company which does everything on wheels. As we have mentioned very explicitly in our strategic objectives, we want to be a INR 10,000 crore AUM company by 2028. And that's the direction which we are moving into. I take your point about languishing on AUM. But if you look at our last year's performance, we grew our AUM by 16% from INR 2,000 crores to INR 3,000 crores. We exited much at INR 3,000 crores. We are already at INR 3,300-odd crores now. A brief setback happened because of Q2 where both business was low as well as we made some changes in the credit policy. But we are on track on our overall perspective.

We will continue to scale up on product, scale upon services, scale up on the offerings. So Muthoot Capital Services will be one of the very, very strong constituents of the overall MPG Group, which itself is a very, very diversified conglomerate offering, everything between from gold to microfinance products, to [indiscernible] and lab and vehicles. So we will continue to have a very significant role in the overall growth of the group. .

On the profitability side, yes, we agree that we've not been able to meet the ROA targets over the last couple of quarters. But as a part of our strategic objective, again, our objective is to when we hit that INR 10,000 crores mark, we want to be at 4% ROA. How will we reach that number? There are multiple things. There are certain set of tangibles, certain set of intangibles. Tangibles, of course, are the things which we already mentioned. And at the risk of being repetitive, I will again repeat.

Our yields are going up by virtue of various initiatives. One major factor which was pulling our yield down was the fact that last year, 50% of my book was co-lending. Now it has come down to 20%, 25%. And sequentially, as we go, it is coming down. So that will be one impact, which will increase our yield. Two, the application of risk-based pricing, which has already seen a positive impact in the net yield. And going forward, it will continue to impact the yield positively. Three, the introduction of used two-wheeler. And we are not looking at very small numbers. We are looking at fairly decent numbers which will be close to about anything between 30% to 40% of the overall new two-wheeler numbers. So that will significantly impact on the wheel side.

One of the other reasons why our ROA has been subdued is because you need to appreciate the fact that over the last 2 years, we have made a huge amount of investment on technology, on people. So all the new lines of businesses that we have added, which is a used car, CV, construction equipment, all that is being subsidized by our core product which is two-wheeler. We are not making profit stand-alone. None of these businesses that we have started are making stand-alone profits. So two-wheeler is doing the heavy lifting and subsidizing all those products. And therefore, our OpEx seems to be -- and it not seems to be, this actually impact higher.

If you look at the number of interventions that we have done on the digital side, it's huge compared to a company of our size. For a INR 2,000 crore company, when we started making those investments, and even today, we are just a 3,300-odd core company, the amount of investment that we have made on the digital space is today comparable to any large NBFC industry, and that I can say with a great deal of confidence. So our LOSs on both two-wheeler and the CV used car side are state of the art and can be comparable with the best-in-class. The BREs that we apply on the respective LOSs are comparable with the best in class. we are setting our data lake platform through EY, which will again be best in class, which will leave a lot of [indiscernible].

All the interventions on the origination side, which is CoreCard on the collection side in form of bot-based calling, you signed up with one platform called Resolve to have a strategy around collection then. Until now collection strategy used to be defined by the collection team from hence forth, which will move to a platform which is digitally run. We participated in the GSF recently, and we've got several cases that we will be implementing over the next to 12 months on that.

All of this is eating into my profitability, but I don't see it as a cost. I see it as an investment, which will be required for me to hit those 4% when I reach that INR 10,000 crores. So it's like the bamboo story, which is like growing deep inside and not coming out much on the top, but it's growing strong. And that I'm really confident of the fact that we are doing it. As a part of my data lake, when I said we have tangibles and intangibles. On the intangibles, what I want to say is, today, our P&L is made at the enterprise level, okay?

So the people who contribute don't have much visibility on their P&L. And therefore, when they ask something from head office to deliver, whether it is in terms of payouts, [ recent days ] or whatever outflow, they are not cognizant of what they are asking and how it is going to impact. With the implementation of data lake, an ASM or RSN or the front line, they would be able to see his P&L and then he will be conscious of what he's asking. He's going to ask a higher payout or a collection is asking for a higher agency payout. He will look at his P&L and then ask. So wherever the P&L doesn't support, we will not be entertaining those.

So those are the intangibles which will then eventually contribute. So in my previous stint, we run this model very, very successfully, where until the grassroots level guy knows what his P&L like, he will not be able to contribute. And if he continue to ask for whatever, he will look at what competition is doing and start asking the same thing as long as he is not aware of what a P&L is looking like. So as of now, we have with handicap where it is at an enterprise level and people don't know how it looks like, and that's why they start asking all that.

So when we do implement the data lake and then people have access and they will know what they are asking for, they will be restrictive, they will have their ROA target. So this 4% doesn't happen with me and Raman working towards that. 4% will happen when the last mile starts looking at a 4% ROA. And that's what we want to drive as a culture down the organization.

[Unknown Analyst]

That was quite elaborate. In order to reach the 10,000...

[Operator]

Sorry to interrupt, [Operator Instructions].

[Mathews Markose, executive]

We are happy to connect with you even off-line on anything if you want to ask.

[Operator]

The next question is from the line of Raj from Partners.

[Unknown Analyst]

Hello? Am I audible?

[Operator]

Yes, you're audible.

[Unknown Analyst]

Sir, I just skipped the call on the figure you said about INR 800 crores to INR 850 crores. So what exactly is that?

[Mathews Markose, executive]

Disbursements in terms of new business.

[Unknown Analyst]

Disbursement of INR 800 crores to INR 850 crores, you are expecting.

[Mathews Markose, executive]

Q3, Q3, yes.

[Unknown Analyst]

Q3 onwards, all right. Is there any other figure?

[Mathews Markose, executive]

No. So I said we are talking about two numbers, an aggressive number of about INR 1,100 crores because we don't know how the season is going to pan out. But otherwise, on a conservative note, we should INR 800 crores, INR 850 crores.

[Operator]

The next question is from the line of Tejas Khandelwal from Prudent Equity.

[Tejas Khandelwal, analyst]

Am I audible?

[Mathews Markose, executive]

Yes, Mr. Tejas, you are.

[Tejas Khandelwal, analyst]

So sir, what I'm not able to understand is that how come are you expecting third quarterly PAT for coming quarters when you are expecting around 2% credit cost?

[Ramandeep Gill, executive]

Yes. Okay. I'll just like to tell a few now. First of all, I am expecting -- I was expecting for the whole year to operate on a 2 percentage ROA, which is a minimum basic requirement, right? Then the second thing is in order to operate that, the basic number is that, yes, we have to achieve at a PAT of around INR 60-odd crores, okay? This is second. Third thing is when our credit cost, it used to be more chunk-like. INR 26 crores was the impairment cost as a stand-alone cost in Q2. That has been brought down to INR 16 crores in Q3 -- sorry, in Q2. In Q1, it was INR 26 crores. And in Q2, it is INR 16 crores, right? This is one.

Second thing is we are expecting 1 percentage of the overall yield has also been increased, and we are expecting at least 50% of the business to go up from Q3 onwards as compared to the Q2. Third thing, in light of my DA transactions, which we are going to do, we are expecting income to be booked from that. So these are three cumulative reasons where we are expecting some good numbers to follow, which is my operational numbers and then followed by the lower impairment costs, which we have already started to see the reflections from Q2 onwards. And third, yes, we want to do DA as well now for the company in order to bring down -- sorry, in order to bring up my top line.

So these are the three numbers on which we will be relying, and there is no other thing wherein the basic math on which I will be working on from Q3 onwards.

[Tejas Khandelwal, analyst]

Okay. Okay. Got it. And sir, second question was on the asset quality side. So sir, from -- since last 2 couple of -- in past couple of quarters, so our asset quality keep on worsening. And in each con call, you were confident about asset quality. So when can we expect some meaningful profits and improvement in asset quality? So our gains and net NPAs are very high right now.

[Ramandeep Gill, executive]

Okay. Okay. So I'll tell you, so there are two ways to answer this question. One, you're talking about the GNPA, NNPA. GNPA and NNPA, if you see, yes, this has increased. But if you see, the AUM has also been flattish from Q1 to Q2. So the denominator effect has not come to my GNPA and NNPA. And then there is another answer to this question, wherein I will be specifically talking about the asset quality. These slippages from Q1 to Q2 has been reduced by at least INR 4 crores, number one. And the recoveries from these slippages have been gone up by INR 67 cr in Q2.

So which means that once the NPA flow is going down, second, the recovery from the NTA is going up. So asset -- and third thing, which I already told in percentage terms, on my standard AUM, the slippages was 0.9 percentage in Q1. That has been brought down to 0.67%. So yes, as far as the asset quality is concerned, we can see an improvement, but we are not happy with that. As compared to the Q1, it's a very good improvement that we have seen in Q2. Definitely, this improvement is going to be big in Q3 and the Q4.

Then on the GNPA and NNPA side, I hope I have already answered. Because of the asset side, the AUM remains flattish. That's a reason the denominator effect has not come in order to compute the GNPA percentage of the company.

[Operator]

The next question is from the line of [ Anant Mandara ] from MyTemple Capital.

[Unknown Analyst]

Sir, I just wanted to fundamentally understand that our gross slippage number seems quite high and were growing at a really fast pace. So what is giving us the comfort at such high gross, which is why are we growing at such a high rate? Are we comfortable with the quality of underwriting that we are doing?

[Mathews Markose, executive]

I'll take that question. So I think this is exactly what Raman was explaining. The gross slippages have reduced in Q2 over Q1 and Q1 was an aberration. So Q1 was a clear aberration, and Q2, we have been able to recover. Q3 and Q4, generally, as an industry, trend slippages reduce and collections improve, and we are hopeful that it will continue.

[Unknown Analyst]

Sir, if I looked it as a percentage still, see, it's about INR 42 crores is the gross slippage on AUM of about INR 3,200 crores, which I think about 25% is co-lending. So the direct book is about INR 2,400 crores. So the annualized gross slippage number is about INR 160 crores on INR 2,400 crores, which is about 6.5%, 7%. So that number still seems quite high. I'm not sure if this is what is there as per our model and, I mean, this is how we modeled our business model. So just wanted to understand on this.

[Mathews Markose, executive]

Our slippages month on month over the last 24 months, about 24 months back, our slippages on monthly basis used to be about 1% of the AUM, which has come down to about 0.6%, 0.65% currently. And Q1 was an aberration where it jumped to about 0.85%, 87%. And Q1 was clearly, also the time when our plan from the pool was lower. And both of these, coupled together, resulted in that loss which we had in Q1. But since then, we've been able to bring down the slippages month-on-month again to that 0.6% level. Raman, if you want to add on that?

[Ramandeep Gill, executive]

Yes. On the same page, sir. And as far as the slippage are concerned, sir, we do have a trend of slippages, right, from 2 to 2.5 years back wherein we have completed our slippages on my AUM. The percentage on the percentage of the slippages on the standard AUM remains the same. Yes, quantum wise, we may say that because our AUM has increased, the slippages amount is showing us an increased amount. But as a model, the business model, we are on the same path where we were at 2 years back itself. Yes, the recoveries were slowed down. On that, we have already explained, and we have already started working on that. And because of that, we have seen a good improvement in Q2.

[Unknown Analyst]

Okay. So sir, when we get to a 4% kind of an ROA, is this the strain slippage rate that we factored in, in our model?

[Ramandeep Gill, executive]

Sir, no. I'll tell you. rate cost, we are expecting when we build that ROA model, we have expected a rate cost of 1.65% to 1.85 percentage. Right now, we are at 2.5 percentage. So yes, as I said, the improvement is there. But yes, we have to improve a lot in order to bring this cost of credit to 1.65 percentage so as to achieve that right numbers.

[Mathews Markose, executive]

And I want to add to that, when we are talking about 4%, we are also talking about a INR 10,000 crores AUM. And at that stage, we are not talking about two-wheeler as a product alone. We are talking about 2-wheeler being about 50% and used car CV, et cetera, being balance 50%, 55%. And those businesses today, my used car is having a GNPA of 1.2% and CV is at 0.31%. These two products which will come with a much lower GNPA than a two-wheeler business.

Two-wheeler, typically -- and it's not that it is unique for us. In fact, today, my bounce rate on two-wheeler stands at 40%, which I think would be on the left in the industry. Industry bounce rate or anything between 20% to 25%. Okay. So two-wheeler generally the product, by the nature of the product itself, it has a slightly higher GMP. But we are not talking about two-wheeler being the only product for us. We are talking about completely taking the portfolio already in terms of having a equal split between the larger ticket customer products. And therefore, the average will be much lower.

[Unknown Analyst]

Got it. Got it, sir. And sir, one final question was on the asset quality and provisioning slide. So it's mentioned that the impairment cost has gone down from INR 26 crores to INR 16 crores. But a lot of it has come actually because of the additional management overlay, which has gone down from INR 14.4 crores to about INR 3 crores. So there's a INR 11 crore reduction there, and that is quite discretionary. So it's not that the ECL model has thrown up a lower credit cost for us. It's the management overlay lever that has worked in our favor this quarter.

[Ramandeep Gill, executive]

Sir, I'll answer this. So what happens is, if you see from last 4 quarters onwards, so there are three stages to ECL. And on Stage 3, we have decided that PCR of the company will be at 60 percentage provisioning. That is basically a combination of the ECL plus the overlay, right? If we are able -- if tomorrow, we are doing bad, then the PCR has to be at 60 percentage only, which means that tomorrow, my NPA has become INR 300 cr, right, as a hypothetical example, which means I have to provide INR 180 cr on that NPA for sure. And if I am in provisioning existing, which is the including of overlay, INR 120 cr, then I have to provide INR 60 cr additional.

Tomorrow, the organization is doing good. The NPA which is now INR 200 crores has become INR 100 crore only. Then I have to provide INR 60 crores on that NPA, which means any excessive impairments that the organization has provided has to be reversed. The major concept is 60 percentage which remains impacted.

[Unknown Analyst]

Sir, on the [ first ] itself, we provide 60%?

[Ramandeep Gill, executive]

Yes. This is not something -- until day 1, the account is becoming NPA, the 1 lakh is the aim of that account, INR 60,000 we have to provide on the day 1.

[Unknown Analyst]

Okay. Got it, got it, got it. And so on this one note, there's a loss on repossession is about INR 8.5 crores. So given that we are providing 60%, still why is there a loss on repossession? Instead there should be a recovery?

[Ramandeep Gill, executive]

So this is a very good point on your side. What we are doing, you see, our recoveries from the repossess account, it used to be only 40 percentage as of now until now. So that is something which we are working on. We are trying to improve. And there are many cases which we are calling it on an accidental cases or the asset is not a good condition still. So this is something which we are working on it. We are trying to improve some of our repo numbers from Q3 onwards.

[Unknown Analyst]

Got it. Got it. And how confident -- just one final question. How confident are you ending the year on a 2% ROA that you had initially guided for at the start of the year? And again, I think you repeated that once during the call as well. Is that contingent with anything? Or it's something that we should be able to comfortably achieve with how things are going at present?

[Ramandeep Gill, executive]

No. So I'll tell you, see, there are two factors. So one is basically is the business numbers in the Q2, we are around INR 100 crores shortfall that we have seen. But if in Q3, we have to achieve other numbers, once we are able to achieve the business number, and that is point number one. Second, the recovery efforts which we have done in Q2, that has to be multifold in Q3. And this is what we are expecting because the teams have already been set up, the teams are in place. Both will be tied on the side of sales and recoveries. And then third, the set on a DA deal as well. So these three deals, which we had to do in order to achieve these numbers, we are expecting to achieve it, right, and we hope for the best, sir.

[Unknown Analyst]

So when you mentioned recovery, that's the -- in the gross NPA, the NPA movement like that recovery number, right, the INR 7 crores...

[Ramandeep Gill, executive]

Yes, yes. We're talking about the recoveries because we are already seeing the slippages are going lower. If you're able to bring our recoveries up as well on those NPAs, then it would be win-win for all of us.

[Operator]

The next question is from the line of Prakash, an individual investor.

[Unknown Analyst]

Am I audible?

[Mathews Markose, executive]

Yes, Mr. Prakash, you are.

[Unknown Analyst]

Mr. Raman, you mentioned that in Q2, the OpEx went up because of collection fees. You spent more money on collection to try to recover the bad loans or something. So it is not about Q3 but about FY '25. So if I look at FY '25 numbers, about INR 300-odd crores are collected in the entire year by Muthoot FinCorp and external agencies, right? And the collection fees paid out is about INR 35 crores. So we are paying out 12% on collection fees, 12% on the collection by Muthoot FinCorp and external agencies. And how do we -- so we can't make money when we are -- when our NIM is 9%, and we are paying 12% on collection alone.

[Ramandeep Gill, executive]

No, no. Mr. Prakash, just one [indiscernible]. All the recoveries which we are receiving in the Muthoot FinCorp, the branches, right, on that, we are paying only 0.50 per percentage, not more than that. I don't know where this number of 12% comes. So 0.5 percentage we are paying to Muthoot FinCorp, number one, right?

On the agency side, I have already explained, the last 5 quarters, we used to operate at a number of INR 8 crores, INR 8.5 crores to INR 12.64 crores in Q4 to INR 15.6 crores in Q1. Now that has gone up to INR 21.60 crores in Q2. So Muthoot FinCorp, payment wise, it remains 0.5 percentage only.

[Unknown Analyst]

Okay, fine. Yes. So even -- are we paying a lot of money to external agencies and recovering better then, what you're saying?

[Mathews Markose, executive]

Prakash, this is Mathews here. One small correction. The NIM is on the total AUM, whereas this 12% you quoted is on the collection amount.

[Unknown Analyst]

Yes, I agree with that. But I'm just saying, are we paying -- right. Are we paying INR 35 crores of collection fee to outside the agency. The recovery is actually lesser than that? I mean, I just want you to check your numbers. So if you're recovering INR 30 crores, and we are paying INR 35 crores as collection fees -- I'll take off-line the details.

[Mathews Markose, executive]

Yes, yes.

[Unknown Analyst]

Okay. So one more question on the data lake that you mentioned being implemented by EY for you, how soon will that be online?

[Mathews Markose, executive]

November, should be online because still we start with a couple of departments like HR. So it will -- it's an all encompassing -- all departments will be covered. We'll have that go to various departments, maybe start with HR and operations, credit, et cetera, by November. And then it will take another maybe 3 months -- 2, 3 months for us to go at an enterprise-wide level.

[Operator]

Thank you. As there are no further questions from participants, I now hand the conference over to management for closing comments.

[Mathews Markose, executive]

Yes. So thank you very much, all of you, for participating in this earnings call. And as usual, it's always a pleasure interacting with you your questions and the challenges that you pose on us encourages us for the next quarter and the way forward. So please continue to engage with us and please continue the challenges and please continue to support us. Your support and encouragement means a lot to us.

And we will, on behalf of the management and the entire Muthoot, MCSL, I assure you that we are and we will be working hard to make every penny that you invest in our count and give you the return that you expect of us and much more. Thank you so much.

[Operator]

On behalf of Muthoot Capital Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.