MAS Financial Services Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Steady 20-25% growth, AUM milestone in sight: The company delivered its 113th quarter of consistent growth and expects to cross the ₹10,000 crores AUM mark by Q3 or Q4, calling it a striking distance away.
• Asset quality is a tailwind, not a constraint: Net Stage 3 below 1.5% and an improving 31-60 DPD bucket (1.13 to 0.86) give room to sustain growth, with the dominant MSME portfolio driving the improvement.
• A deliberate shift to direct distribution is underway: Direct sourcing is growing faster than the NBFC channel, with a medium-term target of 70-75% direct, a move that will lift yields but also push credit costs onto the book.
• Liability cost pressure is peaking: The majority of the MCLR reset has occurred, and management expects the cost of borrowing to settle around 9.75-9.85%, with only 5-10 bps of movement left if the repo rate holds.
• What to watch next quarter: Whether the personal loan book resumes growth after a static Q1, the pace of the direct distribution mix shift, and confirmation that borrowing costs have peaked.

Growth Engine & AUM Trajectory

• Consistent compounding: The company has demonstrated over six quarters of 20-25% plus growth post-COVID while maintaining a strong balance sheet, a track record management is confident it can sustain going forward.
• AUM doubling cadence: Management expects to double AUM every three to four years, with robust asset quality and profitability underpinning that pace.
• Housing finance subsidiary: The housing finance arm is well-capitalized at close to 40% with Net Stage 3 assets around 0.50%, and is poised to touch ₹1,000 crores within the next two years.

Kamlesh Gandhi: "we are poised to cross a very important milestone of crossing INR10,000 crores maybe by Q3 or Q4. That will be a very important milestone in the journey of this company, and I think we are a striking distance away from it."

Distribution Mix Transformation

• Direct vs. NBFC channel: Direct distribution is increasing at a faster pace than distribution through NBFCs. The NBFC channel currently stands at 37% and is expected to settle at ~30% within three years, and 25-30% on a five-year horizon.
• Medium-term target: Direct distribution will constitute 70% to 75% of the mix, a shift that improves unit economics through higher yields on direct retail distribution.
• Off-book strategy: The company aims to maintain around 20% to 25% of AUM as off-book through direct assignment and co-lending transactions, limiting assignments to that range for diversification.

Kamlesh Gandhi: "our direct distribution is increasing at a faster pace as compared to our distribution with NBFCs. So if I give a medium term view, our direct distribution will consist of anywhere between 70% to 75% will be direct distribution."

Asset Quality & Credit Cost Evolution

• Portfolio performance: The 31-60 DPD bucket improved from 1.13 in March to 0.86 in June, indicating rollback from higher buckets. Overall NPAs reduced, with the major contribution from the MSME portfolio, which constitutes 82% of the total book.
• Write-off composition: Total write-offs of ₹10.47 crores were primarily from MSME (₹7.63 crores), with smaller amounts from SME, two-wheelers, and SRTO. The new SPL product had zero write-offs.
• Credit cost trajectory: Current credit cost is ~1%. As direct distribution increases, credit cost will rise because partners currently absorb part of it. At ~70% direct distribution, credit cost might reach 1.5% to 1.7%, but ROAs will be maintained at 2.75% to 3% due to higher yields.
• CV portfolio outlook: The CV portfolio was previously under-allocated due to poor risk-adjusted returns, but with the economy returning to ~6%+ growth, the company sees good growth and asset quality ahead, expecting 25-30% growth.

Kamlesh Gandhi: "So when the direct distribution increases, that credit cost will come on the books. But at the same time, our users also increase maintaining our ROAs anywhere between 2.75% to 3%."

Personal Loan & New Product Strategy

• Quarterly fluctuation is by design: The personal loan book was static or down QoQ because the company does not set quarter-to-quarter targets for new products; fluctuations stem from on-street staffing, rejections versus log-ins, and other operational factors.
• Cautious scaling: No stress is being seen in the portfolio, but credit screens are continuously adjusted as a cautious approach for a new product. The salaried personal loan portfolio is targeted to reach 5% to 10% of AUM, based on encouraging experience over the past year.
• Yearly contribution target: Personal loans will constitute 5% to 7% of total AUM going forward on a yearly basis.

Kamlesh Gandhi: "When we start any new product, we don't have a quarter-to-quarter target. It is on a yearly basis."

Margins, Leverage & Liability Management

• NIM and ROA resilience: Efficient liability management has maintained NIMs and ROAs despite rising rates, with the operating expense ratio controlled partly due to AUM growth.
• Opex normalization ahead: As retail distribution increases, the operating expense ratio is expected to settle between 2% to 2.5%, but overall unit dynamics will improve yields on direct retail distribution.
• Leverage target: Post the ₹10,000 crores scale, the company aims to maintain debt equity between 4.25x to 4.5x.
• Liability configuration: The company is well-capitalized at ~25%, with assignments at 20-25%, cash credit limit at 15-20%, term loans at 35-40%, and capital market bond placement at 12-15%.
• Borrowing cost peak: The majority of the MCLR reset has happened; cost is expected to peak out with maybe 5-10 bps movement remaining. If repo rates stay static, cost will stabilize around 9.75% to 9.85% in the current year.

Digitization & FinTech Partnerships

• Tech stack progress: The company is continuously digitizing its loan origination system and loan management system, moving towards BRE projects for credit decisioning, and using APIs and account aggregators, with more than 25 integrations in place.
• FLDG recalibration: The company reduced disbursement to FinTech partners in the last quarter where those partners had more FLDGs due to loss anticipation, aligning with the new 5% FLDG guidelines.

Guidance & Commitments

Key Metrics