Capri Global Capital Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Seasonal softness, structural story intact: Disbursals fell 5% QoQ in a seasonally weak quarter, but excluding the new Gold Loan business the 31% decline matched Q1 FY23 patterns.
• NIM elevated at 9.6% on equity funding: The high NIM is a function of the Q1 balance sheet being largely equity-funded; management expects it to mathematically decline as leverage builds through the year.
• Gold Loan is the swing factor for profitability: The vertical is not yet profitable and dragged consolidated ROA to 3.0% (vs 3.0% ex-Gold Loan); management targets break-even by FY24-end, which would unlock a step-change in returns.
• One construction finance account drove credit cost: Accelerated provisioning of ₹16 crore on three exposures to a single entity pushed credit cost above Q4; recovery proceedings are underway with ₹3 crore expected.
• What to watch next quarter: Whether Gold Loan branch costs begin to decline from September-October as guided, whether non-interest income recovers as promised, and any further slippages in the construction finance book.

Gold Loan: The Build-Out and Path to Profit

• Branch network nearing pause point: Active branches stood at 680 with staff onboarded in another 60 locations; expansion will pause after reaching ~750 branches by Q2 FY24, after which incremental cost intensity should steadily decline from September-October 2023.
• Per-branch economics improving: A branch achieves break-even once it reaches a base of ₹3.25 crore in AUM; anything above contributes directly to profitability. All branches are expected to turn profitable by year-end.
• Yield shift executed: The company launched with low-rate gold loans in August 2022 to create awareness, then shifted to high-yield, lower-value loans from the January quarter. Average onboarding yield is now 16.5%-17%, with effective yield upwards of 19%.
• Competitive moat via branch investment: Public sector banks have entered as low-rate competitors but focus on higher ticket sizes (₹30,000-₹50,000). Among NBFCs, gold loans carry entry barriers requiring branch investment, unlike unsecured lending.
• AUM target: Gold Loans AUM expected to touch or cross ₹3,000 crore by end of FY24, potentially reaching 20% of consolidated AUM assuming 50% momentum in overall AUM growth.
• Multi-product hubs in design: City-wise, Gold Loan branches will also source business and leads for MSME and home loans, creating a distribution flywheel beyond gold.

Sharma: "We aim to turn Gold Loan vertical profitable by end of this financial year."

Asset Quality: Secured Book with One Concentrated Stress Point

• GNPA up 15bps QoQ to 1.89% but sharply lower YoY: The Q1 FY23 GNPA was 2.7%, so the year-on-year improvement is substantial despite the quarterly uptick. Net NPA also declined sequentially.
• Construction finance drove the provision spike: Three exposures to a single entity were restructured and classified as NPA, triggering accelerated provisioning of ₹16 crore. Recovery proceedings initiated on two exposures; ₹3 crore recovery expected, with the remaining ₹13 crore under exploration. Additional recoveries anticipated in Q2 or Q3 FY24.
• MSME and housing finance NPAs edged up: Marginal increase in MSME NPA and a sharper increase in housing finance NPAs were noted, but management sees no structural issues.
• No unsecured exposure: The entire loan book is secured with comfortable loan-to-value across all segments, retail and wholesale. This underpins management's comfort with a 28-30% PCR, which follows RBI regulation rather than the ~45% some larger NBFCs maintain.
• Construction finance underwriting philosophy: The company funds smaller developers with average ticket size below ₹20 crore, takes clear mortgage of property, and only backs projects that complete within three years. Cash flow control and security cover serve as safeguards.

Sharma: "Nevertheless, let me reiterate that we are not present in unsecured lending. Our lending is secured with very comfortable loan-to-value across all segments, whether retail or wholesale. This gives us comfort on managing our asset quality."

Margins and Profitability Drivers

• NIM at 9.6% is a Q1 artifact: The balance sheet was strongly equity-funded in Q1 FY24, inflating NIM. As leverage improves through the year, NIM shall mathematically decline.
• Spreads improved 66bps YoY and 35bps QoQ to 7%: Yield on advances improved 55bps QoQ while cost of borrowing rose only 20bps QoQ, as the lag effect from FY23 rate actions became visible in segmental yield graphs.
• Cost-income ratio declined to 66.0% from 68.2% QoQ: Excluding Gold Loan, the ratio at 50% is marginally higher than 48% for FY23, partly because Q1 opex includes partial costs for 60 additional Gold Loan branches where staff are onboarded but branches are not yet operational. This is expected to reverse as earnings pick up.
• Non-interest income dipped to 25.4% share: Lower car loan fee income (one-off adjustments) and lower fee income tied to MSME and housing finance balance sheet due to softer Q1 disbursals. Recovery expected from Q2 FY24.
• ROA and ROE ex-Gold Loan tell the story: Excluding the Gold Loan loss, ROA would be 3.0% and ROE 9.6%. As Gold Loan approaches break-even in H2 FY24 and one-off adjustments are absent, profitability should substantially increase.

Segment Growth and Product Mix

• MSME growing 30%+ with a long runway: Strong demand observed in Rajasthan, Madhya Pradesh, and Gujarat where branch density is higher. India has over 7 crore MSMEs with only 20% of credit demand met by formal lenders. Management expects to sustain 30%+ growth for the next 3-4 years.
• MSME yield repriced upward: The long-term reference rate was increased by 50bps in the first week of April; the increase was passed on to almost 60% of MSME customers, with 40% remaining on semi-fixed rates. Incremental lending is maintaining targeted spread at close to 15.5% yield.
• Housing finance growing at 50%+: The standalone housing finance subsidiary is growing at over 50% and, on the back of branch expansion, is expected to continue at a 40-50% pace. A maiden direct assignment transaction of ₹56.9 crore was concluded with a leading HFC at a competitive yield.
• Construction finance capped at 20% of AUM: Management follows a strategic plan of 20% construction finance and 80% secured retail loans, and is comfortable growing as long as underwriting parameters are satisfied and the share stays at or below 20%.
• Two-year product mix vision: Gold Loan composition will be about 20-25% of overall AUM and MSME will be about 25-30%.

Sharma: "If we look down the line, two-year scenario, the Gold Loan composition will be about 20% to 25% of overall AUM and MSME will be about 25% to 30%."

Co-Lending and Distribution

• Existing bank partnerships: Tie-ups already in place with Union Bank, Punjab & Sind Bank, Bank of India, and UCO Bank. Gold Loan tie-ups are also in progress.
• Co-lending volume catalyst: Once the Gold Loan business takes off, co-lending volume is expected to further increase.
• Technology integration is the unlock: Co-lending in the real sense will pick up for the entire NBFC segment once technology integration happens with the public sector banking system.
• 1,000-branch RBI threshold: After reaching 1,000 branches, the company will apply to RBI and does not foresee any issue in obtaining approval.

Sharma: "Our core philosophy will remain that we should serve the customer who are not catered by the banking system. So, we complement the banking rather than competing with them."

Guidance & Commitments

Key Metrics