SRG Housing Finance Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Expansion is suppressing margins now, by design: Cost-to-income ratio has risen as the company added 28 branches in ~15 months and hired a team sized for a ₹5,000 crore AUM, well ahead of current scale. Management frames this as a necessary investment phase.
• NIM compressed to 2.73% as repo rate hikes flowed through, while the average borrowing cost was held roughly flat at 11%-11.25%.
• Disbursement run rate of ₹20-25 crore/month puts the ₹750 crore AUM target within reach in 12-18 months, per management, even before factoring in new branches.
• Asset quality is the non-negotiable anchor: LTV is capped at 40%, no location gets more than 50% exposure, and the company credits this discipline for its smooth exit from COVID.
• What to watch next quarter: Whether the election-related slowdown in disbursements proves temporary, the pace of new branch openings in South India, and any concrete signal on the timing or pricing of the planned ₹50 crore equity raise.

The Expansion Bet: Branches, Teams & the Margin Trade-Off

• Branch count nearly doubled: From 37 to 62 branches last year, plus 4 more this year in Rajasthan, with a new Mumbai branch and plans for 3-4 more by FY24-end, targeting ~70.
• Team built for a much larger balance sheet: Management stated the current hiring is for a ₹5,000 crore AUM, meaning no additional hires are needed until AUM crosses ₹1,000 crore.
• Cost-to-income ratio rose as new branches and teams added expenses before their AUM contribution matured; management expects a 4%-5% reduction next year, with possible 2%-3% fluctuation if expansion stays regular.
• 70% of business still comes from old branches, with 30%-40% from new ones, suggesting the legacy network remains the earnings engine while new branches season.
• Mumbai office opens April next year, housing the treasury and a PAN-India business team that management says will bring more experience to the expansion.

Vinod Jain: "Because the team we are hiring now is for 5000 crores AUM. Till the 1000 crores AUM, I do not need to hire even a single person for my team."

Margin & Funding Dynamics

• NIM declined from ~3% to 2.73% driven by repo rate increases, while the average borrowing cost was maintained around 11%-11.25%, only slightly up from 10.5%-11% previously.
• New lender relationships added: HDFC Bank, Utkarsh Small Finance Bank, Bajaj Finance, STCI Finance, and IDFC Bank joined, with a new sanction from LIC Housing in Q3 carrying a 10-year tenure.
• Rating improvement is a multi-year lever: Management noted that as the rating rises, borrowing costs fall, but the process typically takes one to three years.
• Equity raise of ~₹50 crore is planned either this financial year or FY25, but management declined to share any details on price, market cap, size, or the AUM threshold that would trigger it.

Vinod Jain: "We cannot tell you details like at what price, at what market cap, at what size, at how much AUM, when we will do it, but we understand where we should go."

Asset Quality & the Rural Moat

• Low LTV is the central risk control: Loans are written at a 40% LTV ratio, and exposure to any single location is capped at 50%, a discipline management says let the company exit COVID with minimal stress.
• Rural lending is treated as both mission and moat: Management argues no other finance company has the appetite to operate in rural areas, where only 3%-4% of people file income tax returns and formal credit is scarce.
• The cost of that moat is high: Manpower and operational expenses are elevated in rural areas, and election cycles slow disbursements as government offices, gram panchayats, and legal processes decelerate.
• Balance transfers average ~10% of the book, with only a 2%-5% differential after setup, suggesting limited churn pressure from competitors.

Vinod Jain: "In today's date no company has the guts to go in rural and work there... after understanding the difficulties of rural people we decided to lend them and we believe we are not only doing business there but also getting blessings of all those rural people."

Geographic Expansion: South & West

• South India entry is a measured experiment: A branch will open in Karnataka, Telangana, or Andhra Pradesh to test whether full-fledged operations are viable after a year or two. Kerala is explicitly excluded.
• Kerala exclusion is a community-mix call: Management's research indicated Kerala has a majority of people from one community and one caste, and the company's model prefers areas with a mixed community profile.
• Maharashtra push planned for next year, targeting Vidarbha, then Nasik and suburban Pune.
• MP has been slower than Gujarat due to less developed infrastructure, more extensive land laws, and slower judiciary and panchayat processes.

Guidance & Commitments

Key Metrics