Capri Global Capital Ltd Q2 FY2023 Concall Summary

Key Takeaways

• AUM surged 47% YoY, but mix shifted: Growth was front-ended in wholesale construction finance, pushing the retail loan share down to 74.3% from 76.2% in Q4 FY22, though retail disbursals are now accelerating.
• Gold loan launch is the quarter's defining move: 182 branches opened across 7 states since August, consuming upfront opex that pushed the cost-to-income ratio to 60.4%; management calls this an 18-month investment phase before branches break even.
• Fee income is becoming material: Non-interest income jumped 180% YoY to ₹61 crore, contributing 29% of net income, driven by the car loan distribution business and co-lending assignment income.
• Credit cost collapsed to near-zero: Net credit cost fell to just ₹4 crore from ₹24.6 crore in Q1, helped by a ₹13.8 crore recovery from a prior write-off; Stage-3 ratio improved 35 bps QoQ to 2.36%.
• What to watch next quarter: Whether the gold loan AUM build stays on pace toward the ₹10,000 crore ambition, the timeline for the ₹1,200 crore rights issue, and whether the cost-to-income ratio begins to ease as guided.

Gold Loan: The Big Bet

• Scale of ambition: Management targets a ₹10,000 crore gold loan book in a ₹4-5 lakh crore market growing at 10% annually, believing it can capture a 2% share profitably even in a competitive landscape.
• Branch rollout plan: 108 exclusive branches launched in August, expanded to 182 by quarter-end; the plan is to reach ~550 branches this fiscal year, a similar number next year, then slow after hitting 1,500 branches.
• Investment phase economics: Each branch takes 12 to 18 months to break even, so the current expansion is a deliberate drag on consolidated cost-income; adjusted for gold loan expenses, the cost-to-income ratio would have been 49% instead of the reported 60.4%.
• Competitive positioning: Management acknowledges strong competition and potential margin compression but believes an opportunity exists in North and West India where coverage is less deep than in the South; the strategy targets customers not served by banks, consistent with the MSME and affordable housing philosophy.
• Credit confidence: In a secured portfolio, management is "very very confident that the credit loss is not going to be surprising," and even a 16-17% ROE on the gold loan vertical is considered acceptable on the conservative side.
• Cross-sell is upside, not the thesis: While some overlap with existing MSME customers may emerge, management is not targeting that way; the gold loan vertical must deliver on its own standalone economics.

Rajesh Sharma: "I think this model is not something about great idea. It is going to be about efficient execution."

Core Lending: MSME, Housing & Construction Finance

• MSME disbursement momentum: Disbursements grew 71% QoQ to ₹312 crore and 30% YoY, confirming MSME remains a key growth driver even as its share of overall AUM declines due to faster wholesale growth.
• Construction finance front-ended: The wholesale CF segment achieved its full-year FY23 AUM target in H1 alone, driven by a strong sanctions pipeline; management now plans to sustain AUM at current levels, which should allow the retail loan share to improve in H2.
• Rate action flowing through: Lending rates were increased in both retail and wholesale segments during August 2022, with wholesale passing through faster at an average hike of 25 to 30 bps; NIM improved 49 bps QoQ to 8.87% as a result.
• Semi-fixed portfolio repricing ahead: As semi-fixed rate portfolios become eligible for reset, the company will consider re-pricing yields on these loans, offering a further NIM lever.
• Top-up loan discipline: Top-up loans are extended only to existing customers with excellent track records and property value cushion; currently less than 10% of MSME customers take them.

Fee-Based Engines: Car Distribution & Co-Lending

• Car loan distribution scaling fast: Loan originations touched ₹1,363.4 crore, up 4x YoY and 44.7% QoQ; H1 FY23 originations of ₹2,305.5 crore already exceeded the entire FY22 figure of ₹1,702.2 crore.
• Pure fee play with PSU banks: The business partners with PSU banks where pricing is lower, generating fee income without balance-sheet risk; management expects ₹100 crore gross fee income this year with ₹30 crore bottom-line contribution from this vertical alone; the car loan distribution business is going to contribute almost 1-1.5% to ROE.
• Co-lending book building steadily: The co-lending book has crossed ₹350 crore and is growing ₹30-35 crore per month; Punjab and Sind Bank was added as a new partner and activated in the previous month.
• Technology interface pending: The pace of co-lending growth is expected to pick up once the fully technological interface with partner banks is developed, a work-in-progress that currently acts as a governor on the run rate.

Asset Quality & Credit

• Stage-3 improvement: Stage-3 assets declined to ₹178.1 crore from ₹184 crore in Q1; the Stage-3 ratio improved 35 bps QoQ and 89 bps YoY to 2.36%.
• Recovery drove near-zero credit cost: Net credit cost decelerated sharply to ₹4 crore from ₹24.6 crore in Q1, driven by a net write-off of ₹5 crore offset by a ₹1 crore ECL provision release, plus ₹14.5 crore in recoveries from previously written-off cases, including a single ₹13.8 crore recovery from a Q3 FY22 write-off.
• Restructured book status: Standard restructured assets stand at 2.3% of AUM; approximately 50% (₹90 crore) have exited the moratorium, with 75% of that pool servicing EMIs regularly; the remaining pool is expected to exit moratorium by Q1 FY24.

Rajesh Sharma: "To reiterate, our stance in this regard, our approach to write-offs is one of prudence. We have firm and adequate collaterals that should help us recover our dues."

Profitability & Capital

• Profit suppressed by gold loan investment: Consolidated net profit grew 22.1% QoQ and 7.3% YoY to ₹56.3 crore, but this absorbed approximately ₹24 crore in gold loan business losses; without those, profit would have been about ₹75 crore.
• Operating leverage at work: Operating profit increased 4.3% YoY despite a sharp increase in operating expenses, demonstrating incremental profitability even while carrying the gold loan drag.
• Cost-income trajectory ex-gold: The cost-to-income ratio excluding gold loans fell from 59% to 49%, driven by operating leverage in the core lending businesses; management does not see much pressure on cost-income going forward because of AUM growth in core segments plus the capital infusion via the rights issue.
• Capital adequacy declining by design: CGCL's CAR declined 978 bps during the year to 26% as the company set itself on a growth path; a ₹1,200 crore rights issue is proposed to replenish capital, with the timeline to be communicated in the near future.
• Liability franchise strength: Competitive cost of funds is supported by NHB lending at less than 4% for housing finance and relationships with more than 25 lenders for MSME/NBFC, with some lending costs better than peer companies.

Rajesh Sharma: "So, cost income ratio while it is coming down, overall is looking higher. But gold loan also start contributing the way the AUM is growing. Every branch breaks even and starts contributing after 18 months of time. So, this is an investment phase."

Growth Outlook & Strategy

• 25%+ growth trajectory: Management targets 25%+ growth; barring the COVID year, all years have delivered this, and the five-year growth rate excluding COVID would still be 25%+.
• Core drivers intact: MSME and affordable housing remain the primary growth drivers; gold loan is a new addition that will contribute to spread and free revenue in H2 FY23.
• Branch network deepening: Non-gold loan branches expanded to 145 from 117 in Q4 FY22, with new branches in Uttar Pradesh (13 from 5), Uttarakhand (3 new), Rajasthan, and Madhya Pradesh; car loan distribution presence expanded to 322 locations across 29 states and UTs.
• Senior talent build-out: The company recently hired senior leadership positions in data analytics and digital partnerships, signaling investment in technology-enabled origination and efficiency.

Rajesh Sharma: "I still believe that many players who were doing (gold loan business) earlier, if you find some new ways to reduce costs with the help of technology, with the help of other measures, there still is a large business (potential). To build a book of Rs10,000 crores in a Rs4-5 lakh crores market, which is still growing at the rate of ... we can do it profitably, I believe that."

Guidance & Commitments

Key Metrics