Capri Global Capital Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Disbursals rebounded, led by Gold and Housing: After a lean Q1, disbursal momentum picked up strongly in Q2 FY24, with Gold and Housing together contributing 66% of the incremental volume.
• Spread compressed 40 bps QoQ to 6.6%: Yield on advances fell 13 bps on Construction Finance prepayments and competitive pricing, while cost of funds rose 21 bps, squeezing NII growth.
• Gold Loan is the swing factor for profitability: The business is still loss-making and suppressed ROA to 2.8%, but management expects most branches to hit breakeven by Q4 FY24, unlocking a substantial profitability uplift.
• A new car loan subsidiary signals ambition and investment: A separate entity now houses the car loan platform, with dedicated technology and data science leadership, pointing to a brand-building push next year even as near-term fee income stays soft.
• What to watch next quarter: Whether the Gold Loan branch pause actually improves the cost-to-income ratio, the pace of PCR build toward the 37–40% target, and any further spread erosion as borrowing costs reset higher in H2.

Spread & Margin Dynamics

• Yield decline driven by Construction Finance: Faster inventory sales triggered prepayments in the Construction Finance book, while new loans in that segment are being written at lower rates due to competitive pressure, dragging the portfolio yield down 13 bps QoQ to 15.58%.
• Cost of funds still climbing: 87% of borrowings are MCLR-linked commercial bank lines, so the 21 bps QoQ increase was mechanical. Management expects cost of borrowing to rise further in H2 FY24, though by not more than 10 bps, and believes it can pass the increase through to all incremental lending.
• Spread floor at 6.6%, with a potential uplift: The current 6.6% spread is called sustainable, and management sees a slight improvement as Gold Loan AUM scales from ₹2,000 crores to ₹3,000 crores, improving the mix toward the highest-yielding product.

Sharma: "6.6%, definitely sustainable. We still expect this to slightly better because our current AUM of INR2,000 crores Gold Loan has become to INR3,000 crores."

Gold Loan: The Breakeven Bet

• Branch expansion paused to let operating leverage kick in: The network reached 742 branches against an initial H1 target of 750. No further branches will be added in H2 FY24, which management expects will start improving the cost-to-income ratio as existing branches mature.
• Breakeven timeline is Q4 FY24: Most branches are expected to achieve breakeven and begin contributing to profitability in the last quarter of the fiscal year. Excluding Gold Loan losses, ROA and ROE would have been 2.8% and 9.5% respectively, so the profit unlock is material.
• AUM growth target set without new branches: Even with the branch pause, management expects Gold Loan AUM to reach ₹3,000 crores by March 2024, and then grow 30–35% annually for the next two years from that base, purely from existing branch throughput.
• Co-lending adds a capital-light lever: Co-lending under Gold Loans began in Q2 FY24 with two commercial bank tie-ups. The target is to place at least 20% of the ₹3,000 crore Gold Loan AUM under co-lending arrangements.
• Next year's branch plan is still undefined: Management will deliberate on how many branches to add and where only in the next quarter, with implementation targeted for Q1 of the new fiscal year.

Asset Quality & Provisioning

• Credit cost elevated by a single construction exposure: Accelerated provisioning of ₹16 crore was taken on three client exposures to one entity in Construction Finance, which was restructured and classified as NPA. This pushed credit cost higher than Q4 FY23, though it remained marginally below Q1 FY23.
• PCR on Stage 3 assets rose to 32.3%: The increase was driven by productive provisioning, and management is inclined to keep improving it. The stated target is to stabilize PCR somewhere between 37% and 40%, built quarter by quarter.
• Construction Finance PCR now at 87%: Provision coverage on the Construction Finance and indirect lending portfolio was strengthened, and recovery efforts on the stressed accounts are underway.

Car Loan Business Restructuring

• A separate subsidiary now houses the platform: Capri Loans Car Platform was incorporated as a new subsidiary. All bank impanelment and partnerships will shift to this entity, which has its own business head, acquisition head, network and technology leadership, and a dedicated data science team.
• Origination volume is strong, fee income is not: Car loan originations are on track to cross ₹10,000 crores in FY24, but net fee income is expected to remain soft due to costs and intense competition. Insurance distribution to car loan customers has begun as an ancillary revenue stream.
• Brand-building push deferred to next year: Enhanced effort on building the car loan brand separately is planned for the following year, once the technology platform and team structure are fully in place.

Sharma: "This business requires a separate trust on the technology side... to bring more focus on that business and to build the distribution around that, the separate SPE had been carved out."

Operating Efficiency & Technology

• Cost-to-income ratio ticked up to 66.9%: Excluding the Gold Loan business, it stood at 51%, broadly stable. The adjusted ratio was marginally higher than the 48% reported in FY24, and management expects improvement as earnings pick up faster than operating expenses during H2.
• Technology overhaul targets April 2024: A new technology platform is scheduled to go live by April 2024, with additional modules completing over the subsequent three to six months. By September 2024, the full technology stack, including revised mortgage tech, should be operational.
• Oracle FLEXCUBE goes live by March 2024: The new loan origination system and Oracle FLEXCUBE as the core element system are expected to be fully operational by March 2024.
• Efficiency gains promised for next year: Management expects a remarkable difference in the cost-to-income ratio next year, once the technology investments are complete and the Gold Loan branch pause feeds through, though it declined to commit to a specific target range when asked about 35–40%.

Guidance & Commitments

Key Metrics