MAS Financial Services Ltd Q3 FY2023 Concall Summary

Key Takeaways

• 30%+ AUM growth, fifth straight quarter: Consolidated AUM grew over 30% YoY, extending the post-COVID recovery streak, while standalone PAT rose ~28% and asset quality stayed benign with net Stage-3 at 1.60%.
• Own distribution is scaling fast, lifting both OpEx and yields: Contribution through own centers hit 61% as the branch network expanded to 149 locations, a deliberate shift that raises operating costs but is matched by higher-yielding retail assets, protecting ROA.
• NIMs held above 7% despite rising borrowing costs: The company passed through rate hikes on SME, SRTO and SPL products while managing its liability mix, keeping NIMs at 7% plus even as cost of borrowing rose to 9.15% for the quarter.
• Housing finance subsidiary is inflecting: The HFC crossed ₹400 crores in AUM with 31% growth, and Q3 PAT jumped 52.75% YoY; management expects it to contribute meaningfully to group AUM from here.
• What to watch next quarter: Whether the first phase of end-to-end digitization completes by March/June 2023 as targeted, the trajectory of excess liquidity drawdown toward the ₹400-500 crore band, and any early signals from the newly entered salaried personal loans segment.

Growth Engine: Distribution Expansion and Product Mix

• Branch network build-out: The distribution base reached 149 branches covering potentially 7,900 centers, with a target of close to 200 branches and 10,000 centers within two years, a pace that may vary by a few quarters depending on opportunity.
• Own origination share rising: Contribution through own centers increased to 61% this quarter, up as the branch network expanded rapidly; this shift raises employee and other operating expenses because own origination incurs OpEx that NBFC partner origination embeds in the interest charged.
• Two-wheeler loans benefit from a base effect: Strong growth in this segment reflects two-wheeler sales returning to pre-COVID levels in both urban and rural areas, with sales expected to cross pre-COVID levels within a quarter or two, creating more financing opportunities.
• CV portfolio growing off a low base: The commercial vehicle book grew ~27% QoQ, directly linked to consistent economic growth, and is expected to contribute more to overall AUM if that growth continues.
• Personal loans entry is cautious and capped: The company entered salaried personal loans on the consumption side, a product it had previously managed but deprioritized; it is not expected to exceed 10% of the portfolio and will not be extended to self-employed borrowers for now.

Gandhi: "over the years we have always believed, and that to at the initial stage of the product that the growth opportunities will not be decided, it will be discovered as we go along depending upon the risk adjusted returns, we get from time to time."

Margin and Yield Mechanics

• NIMs sustained at 7% plus: The company maintained NIMs above 7% through a combination of product mix shifts and rate hikes, with the stated focus to keep NIMs around that level going forward.
• Sequential margin expansion explained: The improvement came from product mix changes and the exercise of enabling agreements with borrowers to increase rates, a step management describes as a last resort forced by unprecedented consecutive RBI rate hikes.
• Yield changes by product: SME yield moved from 14.75% to 15%, SRTO from 16.75% to 17%, SPL from 18.5% to ~19%; two-wheeler yield decreased from 16.5% to 15.5%; MEL yield remained stable at 17%.
• OpEx yield varies with product mix: Higher OpEx corresponds with higher yields from retail assets originated through direct distribution, so ROA is not negatively affected; the consolidated OpEx ratio is expected to settle between 2.5% and 3%, factoring in a lag effect on efficiencies from continuous distribution expansion.
• ROA target intact: Management targets ROA between 2.75% and 3.25% and is optimistic about improving ROAs on scale, with the ultimate aim of maintaining 7% NIM within that ROA band.

Gandhi: "we have enabling agreements with the borrowers to increase the rate as and when we need to. So, that is our last priority because to be we would like to be consistent on our offerings on rate, but as you know that this was a very unprecedented situation in terms of a very consecutive rate hikes."

Asset Quality and Credit Approach

• Stage-3 assets remain benign: Net Stage-3 stood at 1.60% of total AUM, while gross Stage-3 improved to 2.23% in December from 2.26% in September 2022.
• 1-30 DPD fluctuation is routine: A 25-30 bps QoQ movement in early delinquencies is within the normal course of business and carries no significance.
• Fintech-originated loans performing in line: Experience with fintech-originated loans has been encouraging and consistent with direct origination, because all cases are filtered through MAS's own credit screens.
• AI will be an enabler, not a replacement, in credit decisions: AI will be introduced selectively depending on the product and availability of documentation, and will not be the sole criteria for extending credit, especially for informal-category borrowers where credit assessment must be derived through various means.
• AI opens access to a new borrower segment: Within existing products, AI use can help serve debt-sensitive borrowers at the upper end of credit assessment, such as SME borrowers accessible via account aggregators and personal loan borrowers via banking analysis.

Gandhi: "AI use will depend on product-to-product and from time-to-time. Gradually AI will be introduced as an enabler for credit decisioning and will not be the only criteria to extend credit because the borrowers will be so, largely depends to the informal category where we need to derive the credit assessment through various means."

Liability and Capital Management

• Cost of borrowing rose to 9.15% for Q3: The 9-month average was 8.92%; management expects the medium-term cost of borrowing to settle around 9.25% to 9.50%, given the RBI's 2.25% repo rate increase.
• Liquidity buffer being drawn down deliberately: Excess liquidity reduced from ~₹1,000 crores to ~₹700 crores, with an unutilized cash credit of ~₹400 crores; management expects it to settle around ₹400-500 crores, or 4-5% of AUM, within the next quarter or two.
• Liability actions during the quarter: Rolled over ~₹1,450 crores of short-term working capital loans, raised ~₹670 crores in term loans, and raised ~₹35 crores in subordinated debt qualifying as Tier 2 capital.
• Capital adequacy strong at 24.47%: Tier 1 stood at 21.21%; growth is expected to be mainly fueled through internal accruals.
• Off-book AUM target set at 20-25%: The off-book percentage declined from ~40% pre-COVID to ~20% now, driven by a strategic decision that no liability source should exceed a certain percentage of the overall configuration, and by excess liquidity preventing optimal tranching of direct assignments with banks.
• Sanctioned but unutilized lines: More than ₹800 crores sanctioned for direct assignment and more than ₹500 crores in term loan sanctions are on hand to be utilized in coming quarters.

Jain: "given the increasing interest rate scenario whereby RBI has already increased the repo rate by 2.25%. We see that, in the medium term, cost of borrowing will be around 9.25% to 9.50%."

Technology and Partnerships

• End-to-end digitization trial nearing completion: The first phase, covering all processes, is expected to complete by March or latest by June 2023; the next phase, involving credit analysis through AI, will take its own time.
• Co-lending partnerships added: The company tied up with three banks: Bank of India, Bank of Maharashtra, and South India Bank.
• Fintech partnerships are credit-screened: Loans originated through fintech partners are filtered through MAS's own credit screens, and experience so far has been encouraging and in line with direct origination.

Guidance & Commitments

Key Metrics