Capri Global Capital Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Profit held flat despite income dip: Net profit was flat YoY and up 10% QoQ even as net income fell 12% QoQ, because a softer opex increase and a 57% drop in credit cost offset the revenue weakness.
• Gold loan build-out is compressing reported metrics: The new vertical consumed ₹6.9 crore in pre-operative opex with zero revenue, inflating the cost-to-income ratio by 400 bps to a reported 51.1%.
• NIM hit a five-quarter low at 8.4%: Negative carry from undrawn sanctions sitting as bank balances, plus MCLR locked for six to twelve months on new loans, compressed the margin.
• Asset quality buckled after three quarters of improvement: Stage-3 assets rose in both absolute and percentage terms, driven by the retail segment, while wholesale GNPA stayed near nil.
• What to watch next quarter: Whether the yield reset on new and existing loans lifts NIM, whether MSME growth returns after a flat quarter of high foreclosures, and how much of the ₹177.6 crore restructured book slips as moratoriums begin expiring.

Gold Loan Vertical: The Margin Story Hiding in Plain Sight

• Pre-operative drag: The business is yet to commence operations but already incurred ₹6.9 crore in opex during Q1, all booked through the P&L rather than capitalised.
• Branch rollout underway: 52 exclusive gold loan branches already leased, a team of roughly 1,000 people onboarded, and a soft launch completed to test systems and processes.
• FY23 cost budget: Management has budgeted ₹56 crore as capex for the vertical this year, with an estimated ₹53 crore in opex and little income contribution, meaning the cost-to-income ratio stays elevated through FY23.
• Long-term ambition: The vertical could reach roughly 25% of overall AUM within five years, with a plan to open 200 branches in FY23 and 1,500 branches over three years.

Sharma: "So rather than capitalizing we are booking these expenses in the profit and loss account."

Asset Quality: The First Cracks After a Clean Run

• Stage-3 reversal: After three straight quarters of decline in both absolute and percentage terms, Stage-3 assets increased in Q1, driven entirely by the retail segment while wholesale GNPA remained close to nil.
• Restructured book timeline: Standard restructured assets stood at ₹177.6 crore, or 2.6% of AUM, with management maintaining its expectation that 20–25% will slip. Around 50% of these accounts exit their moratorium by Q3 FY23, with the remainder split equally between Q4 FY23 and Q1 FY24.
• RBI circular impact: The November 2021 RBI circular on asset quality becomes effective from Q2 FY23 onward. Had it been adopted in Q1, GNPAs would have been higher by ₹14.5 crore, adding 21 bps to the Stage-3 ratio.
• Write-offs to continue: Management expects write-offs to recur through the remainder of FY23 and maintains a stance of provisioning more than adequately, whether through ECL provisions or write-offs.
• Credit cost fell sharply: At ₹24.6 crore, credit cost declined 57% QoQ to one of the lowest levels in the trailing five quarters, even as proactive provisioning continued.

NIM & Yield: The Reset Has Begun

• Five-quarter NIM low: NIM compressed to 8.4% as net interest income weakened under the weight of negative carry: all new sanction facilities were drawn down between April and early July 2022, leaving bank balances heavier by 40% QoQ at ₹140 crore.
• Yield reset underway: Management has begun resetting yields on both new and existing loans, which could have a positive rub-off on earnings going forward. MCLR on new sanctions is locked for six months to one year.
• Rate pass-through conviction: Management expects to pass on the entire rate hike to all floating-rate customers, with new loans being booked at the same NIM. Only semi-fixed-rate loans may see some impact.
• Rate outlook: Management believes interest rates have more or less stabilised, with at most another 25 bps hike possible.

Sharma: "With NIMs already at recent quarter lows and gold loan AUM yet to become meaningful, we believe there is a higher probability of the cost-to-income ratio improving than worsening from current levels."

Business Momentum: Slower Quarter, Intact Conviction

• Sequential expansion of 5%: Overall business grew 5% QoQ despite a slower quarter. YoY comparisons are distorted by the near-standstill during Covid's second wave.
• Housing finance led: The housing finance book grew 7.8% QoQ and remains a key driver of consolidated AUM. Construction finance grew roughly 11% QoQ but stays within the roughly 20% overall portfolio range.
• MSME flat but not abandoned: The MSME portfolio was up only 2.6% QoQ including co-lending, held back by high foreclosures where Capri-underwritten accounts were taken over by other lenders at much lower rates. Management calls this a sign of good underwriting and expects growth to return from next quarter.
• Car loan distribution surged: The new car loan origination business surpassed its previous quarter milestone, originating ₹1,100 crore in new loans and contributing ₹18.6 crore in net fees in Q1 alone, versus ₹27.6 crore in all of FY22. This is a pure fee income stream with no regulatory capital requirement.
• Co-lending scaled fast: The co-lending portfolio grew 72% QoQ to ₹200 crore with SBI and Union Bank, even before the dedicated IT set-up has launched. The full-year disbursement target is roughly ₹600 crore.

Sharma: "...account underwritten by us have been taken over by some other lender at a much lower rate of interest, which speaks about our good underwriting standards."

Capital, Ratings & the Rights Issue

• Rights issue filed: The draft letter of offer for a ₹1,200 crore rights issue was filed with SEBI on July 28, 2022, with the stated object of augmenting long-term core equity capital to support growth. Management says this will take care of the next five years' growth requirements.
• Capital consumed fast: Fast-paced growth over the last year consumed roughly 758 bps of capital at CGCL, making the raise timely.
• Rating outlook upgraded: CARE reaffirmed its A+ rating and Brickwork reaffirmed AA-, with both agencies upgrading the outlook from Negative to Stable. However, cost of funds has not yet come down because of the rising interest rate trend.
• Inorganic optionality: Management is open to exploring inorganic opportunities but evaluates them only internally and does not discuss them openly.

Guidance & Commitments

Key Metrics