Fedbank Financial Services (NSE:FEDFINA) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Q2 FY 'twenty seven Earnings Conference Call of Fedbank Financial Services hosted by Equiris Securities. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to mister Shripal Doshi from Equities Securities. Thank you, and over to you, sir. Thank you, Alaric. Good evening, everyone. We welcome you all to the earnings conference call of Fedbank Financial Services to discuss the q two FY twenty seven performance of the company.

0:53 Today, we have the management of the company represented by mister Parvesh Mula, MD and CEO Mr. C. V. Ganesh, CFO along with other senior members of the management. I would now like to hand over the call to Mr. Lokeesh Parikh, Investor Relations Head at Fedbank Financial Services. Over to you, Lokeesh. Thank you. Thank you, Shepal. Good evening, everyone. I would like to welcome all of you for joining our Q2 FY 'twenty seven results earnings call. Before we start, I would like to highlight that some of the statements made on this call may be forward looking in nature, including those related to our financial performance, business strategy and growth plans.

1:39 These statements reflect our views as of today and may evolve with changing business and market dynamics. With this note, I now hand the call to RMD, Mr. Parvish Moola for his opening remarks. Thank you, and over to you, sir. Thank you, Shripal. Thank you, Lakesh. Good afternoon, everyone. I would like to extend a warm welcome to all of you for joining the Q2 FY 'twenty seven post results earnings call. I'm accompanied by Mr. C. V. Ganesh, Mr. Taglis Rao, Mr. Shardul Kadam, Mr. Suresh Kumar, Mr. Vikram Rathi and Mr. Lokeesh Parikh. For the last six quarters, we have articulated the same set of priorities and they remain unchanged.

2:24 We continue to allocate capital to businesses that are on a strong and consistent return, to continue to grow a fully secured book, to scale our twin engines of gold loans and lab, to grow our core income even as we consciously reduce our reliance on direct assignment, to transition to an efficient cost structure and to hold credit costs below one percent. This consistency is the foundation on which we have built this business over the past two years. Against these priorities, the quarter has progressed well. Our total disbursements grew 28% Y o Y to INR 6,676 crores and our AUM grew 37% Y o Y to INR 22,035 crores. On the business front, our gold loan business continued its growth trajectory.

3:13 Disbursement stood at INR5822 crores, a growth of 31% Y o Y, and the gold AUM grew 77% Y o Y to INR11917 crores. Our doorstep gold loan offered offering maintained its momentum with AUM growing to INR1851 crores. Our AUM per branch after the branch opening stood at INR16.9 crores and the gold tonnage grew 16% Y o Y. We continue to maintain a prudent risk profile with 68% LTVs well within the regulatory limits. We have opened 74 branches this quarter, taking our total gold branch count to eight thirty one total branch count to eight thirty one. We expect to continue our expand our branch network in H2. H2.

4:05 This quarter also marks our entry into Eastern India, expanding our geographical footprint into newer and promising markets. The revised gold lending LTV framework continues to work its way through the system. Our gold GNPA at 0.5% reflects this transition, not a structural credit concern. Our mortgage business delivered steady progress this quarter with disbursements growing 12% Y o Y to INR $8.55 crores and the AUM grew 13.5% Y o Y to INR 9,982 crores. Our focus remains on disciplined underwriting and portfolio quality. Within mortgage, our medium ticket lab disbursed INR $6.45 crores, reflecting 16% Y o Y increase, while maintaining the yields at stable levels. Our small ticket lap and housing business disbursed INR $2.10 crores as our investment in credit policy leadership and BRE driven underwriting engine begins to translate into lower credit cost.

5:01 Our on book portfolio remains fully secured with the unsecured loans constituting less than 1% of our on book assets. Turning to profitability and asset quality. Credit costs for the quarter came in at INR 27 crores, approximately 0.6% of the average total assets as on an annualized basis, continuing to track well within our guided range of around below 1%. The quarter concluded with a profit after tax of INR130.8 crores, a Y o Y growth of 63% and ROA of 2.8% and an ROE of 17%. On the asset quality, our JNPs stood at 1.8%, moving from 1.6% in Q1. The movement is primarily attributable to the ongoing transition in whole lending practices and the flattish AUM as we did our direct assignment and core lending business normalized in the quarter.

6:01 NPA stands at 1.2% with the provision coverage ratio at 35.4%. On a Y o Y basis, both the JNPA and NNPA have improved. The capital adequacy stands at 21% and book value per share stands at 84.4%. Taken together, the quarter reflects a business that is growing well with improving asset quality, resilient core earnings, our highest ever ROE at 17%, the foundation we have built over the past two years, a fully secured book, a scaled gold loan franchise, a stabilized mortgage business and a strengthened collection organization is now in place, and we believe it positions us well for the quarters ahead. I will now hand over to our CFO, Mr. C. V. Ganesh to take you through the numbers in more detail.

6:50 Thank you, Parviz. Thanks everyone for your participation on the call. Before we begin with the financial highlights, I would like to extend my warmest Navaratri greetings to all of our equity and debt stakeholders as well as all the participants on this call. Wishing all of you a joyful and successful festive season ahead. In spite of the turbulent headwinds over this quarter and lack of momentum in gold prices, we continue on our theme of building resilience across business cycles. Quarter two twenty seven has been our strongest quarter to date in terms of profitability and operating metrics. Over the last eight quarters, we have been on the journey of building a business model, which results in consistent, noncyclical and predictable earnings.

7:42 The linear upward trajectory of ROA and ROE expansion over the last eight to nine quarters is a validation of the resilience in that model. We shared last quarter that we had crossed the interim ROE milestone of 15%. I will reiterate four headline numbers that summarize our performance for quarter two. The first one is on the ROA. The ROA expanded sequentially quarter on quarter by 24 bps to 2.8%. The last nine quarters have seen ROA slowly but steadily inching up from 2.1% to 2.8%.

8:27 The ROE expansion sequentially has been 153 bps quarter on quarter to 17% in Q2. This also represents a steady increase from 10.9% ROE to 17 ROE over the last nine quarters. We remain optimistic on continuing on this trajectory. We started the fiscal with an AUM of a little over INR 20,000 crores. We crossed the milestone of INR 22,000 crores in September, representing a 9% increase in the first half of the year. The credit cost shrunk by 18 bps from 0.78% to 0.6% of total assets.

9:14 As the flows from the mortgage book have materially improved in aiding and lowering credit costs. Our growing ROE enhances our ability to fund the loan book expansion through internal approvals and puts us on an accelerating journey of book value compounding. Let me now walk you through a little more details on the numbers. First, on the P and L items. Core NII grew 5.2% quarter on quarter to INR 404.8 crores and 40.9% year on year. Pre operating profit of INR 205.1 crore is up 9.4% sequentially quarter on quarter and 47.5% year on year.

10:03 Our credit costs declined to INR 27.1 crore in quarter two, down 20.5% quarter on quarter from INR 34.1 crore in quarter one due to improving collection efficiencies on the mortgage book. Consequently, the PAT came in at INR 130.8 crores, up 14.3% quarter on quarter and approximately 63.1% year on year. Now on yields and the cost of borrowing. Our overall yields on the core loan book remained constant in quarter two compared to quarter one at 16.40 levels. The optical increase in yields by 29 bps is because the last quarter had a higher DA unwinding impact of around the same magnitude.

10:49 On the cost of borrowing, in spite of headwinds, we were able to keep our weighted average cost of borrowing for quarter two flat at the same level as the previous 0.75 at INR 7.80. This is represented in the funding profile slide in the deck. Our fixed rate borrowings form 33% of the book. This, coupled with the MCLR lead loans, which constitute another 24% of our borrowings and have had a lesser magnitude of transmission historically, give us some insulation against headwinds of increasing interest rates. We did direct assignments of approximately INR 700 crores of the gold loan book to deleverage.

11:35 This, aided by higher co lending in the gold portfolio, helped in bringing down the debt equity ratio from 4.9 to 4.6 and improved capital adequacy to 21%, up from 20.7% in quarter one. Now on asset quality. Our mortgage delinquency numbers across stages are flat to better than the previous quarter. On the gold side, we had guided in quarter one that the shift to the periodic interest view model instead of the earlier bullet loan model was likely to result in technical delinquencies across stages going up as customer behavior may take some more time to adjust. The increase in Stage two from 2.7% to 3.6% and in Stage three from 1.6% to 1.8% are entirely on account of this change construct in gold loans.

12:34 We are sufficiently collateralized and do not see these optical indicators as indicating any enhanced risk on the portfolio. We have had a record low level of net slippages in the mortgage book. It has been our best quarter till date. The decrease in PCR from 38.4% to 35.5% is due to a higher proportion of gold loans in Stage three. These gold loans carry a much lesser provisioning coverage per ECL. Our mortgage PCR continues at similar levels. Now on the operating leverage. OpEx as a percentage of average total assets in the ROA tree stood at 4.9% in quarter two compared to 4.8% in quarter one, reflecting the full quarter impact of the branch and headcount additions.

13:27 This is materially down from 5.5% in FY twenty twenty six and the structural reduction in cost intensity over the medium term remains intact. Our cost to income came in at 52.5% in quarter two, marginally better than the 52.8% in quarter one. For context, the annualized cost to income in FY 'twenty six was 57.2%. The step up in operating expenses this quarter is primarily driven by the branch expansion program. In addition to the 74 branches we added in quarter two, we propose to add at least another 150 branches in the second half of the year. While this will add to the investment OpEx, we are hopeful of containing any material increases in cost to income over current levels by focused effort on our BAU OpEx.

14:18 To summarize, our expanding ROAs and ROEs and our focus on the productivity and operating leverage levers provide us with shock buffers to potential headwinds on the interest rates or any insurance distribution related changes. We remain deeply grateful for the continued support of our investors, both old and new, and all of you on this call who have been with us thus far on this journey. With that, I now hand it over to the floor for Q and A. Thank you. We will now begin with the question and answer Anyone who wishes to ask a question may press star and 1 on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star and 2.

15:07 Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Shivranju Mishra with Philip Capital. Please go ahead. Hi, Praveen. Hi, Ganesh. So one quick question. Sorry. There are two questions. One is about the gold loan growth. How do we manage the growth plus the yields, because the competitive intensity, not just from our peer NBFCs, but also from banks, including PSC and private. Both are increasing by the day.

15:54 Couple of peer NBFCs are resorting to very low rates in multiple states. So that is point number one. Point number two is, do we have a product ready for income generation loan and gold loans? And if yes, how what is the product rollout timeline? And what are the various features of that particular product? Thanks. Thank you, Subramshu for your question. As far as the growth and yield is concerned, specifically because of the competitive intensity in the gold loan market. We've been conscious of this for the past three quarters.

16:42 In fact, this quarter, the competitive intensity in the gold loan market has played out. Q1 was the intensity was there, but Q2, the intensity was a heightened one. All the kinds of yields, growth strategies, lending practices, everything was played out across geographies. So you will see that most of the NBFCs would have operated with different strategies in this particular market. What we believe is we have given a growth considering all those competitive intensity, considering all the yield pressures, we have given a particular growth in this quarter. And we will continue with our guidance in Q3 and Q4 as well because we have dealt with this kind of competition, and we believe it is a healthy competition to play with. The market is big enough.

17:35 Definitely, it shows in the first year and second year when the intensity is high. But we've done this over the past ten, twelve years. We have certain pockets where we go aggressive, certain pockets where we do the yield play. If you notice, our quarter one and quarter two, we might be one of the few companies which are in the gold loan business where our yield has dropped only by 10 basis points. Whereas if you compare many other companies, you can compare what is the strategy that they are playing. In spite of that, we've given a growth. If you see the LTV, we are still operating at 68%. So our strategy has been to focus on our growth, our yields, our markets, our target segment, and we operate in certain markets where we believe the growth is still possible.

18:27 We will continue to guide to a decent growth in Q3 and Q4. Strategically also, our Q1, Q2 numbers, usually we beat them in Q3 and Q4. Our seasonality is more in Q3 and Q4. So you will see that happening as we go forward. We already have an IGL product. We have been operating with it in Q2 also. So we had got it ready in April itself, and we are operating with it. As far as banks are concerned, the competitive intensity is in the NBFC sector. The banks play in a different orbit with a different yield segment. Maybe the larger players feel the bank presence.

19:13 We operate in segments and geographies where our competition essentially is with the NBFC segment. And I think we're doing decently well there. But Q2 is a good indication for you to see how each of these players have operated, who's focused on growth, who's focused on yield, and what are the practices each of the player has played in the gold loan market and what the strategic focus each of the player has played. Q2 is a good indication for you to see how Q3 and Q4 will play. I'll just add to what Paveh said. See, in addition to the new branches we added, historically, the second half of the year is a much stronger period for us, which is giving us confidence that in spite of the headwinds you mentioned, we would be able to perform to our guidance, which we have been giving in the earlier quarters for this year on AUM growth.

20:16 So just to summarize this, we don't expect much of a spread compression despite the competitive intensity and the rate hikes. Is that a fair understanding? Second is that if you could explain what our income generation loan has? What kind of LTVs we are offering? What kind of ticket size we're doing in the income generation loan? Thanks. See, as far as the yield is concerned, we for Q3 and Q4, we will all use all levers possible, whether it is yield, whether it is LTV and growth, it will be a combination, it will not be a single lever.

21:01 The objective will be to maximize certain deliverables that we have. But as our guidance has continued, finally, it is the ROA number that we are guiding on. If there is some level of pressure on the yield, we'll figure out where we need to get it from. And we've done that over the past eight quarters. You've seen our trajectory on how we've managed the ups and downs of yields. And we still have multiple levers to play to give you a good So that's how we will play it. I don't want to specifically give you a guidance because it is a dynamic market. Q3 will be an intense market. It will be wrong of me to give you a guidance that we will play with a flattish yield.

21:49 It will be played according to the market dynamics. Geographically, we will play it very, very differently in each of the geographies. So that's how we will continue. As far as the IGL product structure is concerned, I will request Jagdish to just elaborate. Yubdish, you want to give a flavor how we are doing IGL? Yes. So on the income generating loans, we have multiple products. One is for Agri loans and for the MSMEs and priority sectors. And on the LTV side, we structure it based on the cash flows. We don't go with only the LTV, but there is a capping of 85%. But when I say 85%, the loans that are structured at 7578%, 8085%.

22:34 That's how the product structure is, yes, and purely based on cash flows. Understood. Thanks. I'll take the rest of the questions offline. Thanks. The next question comes from the line of Ramesh with ICICI Securities. Please go ahead. Yeah. Hi. Hi, team. Congrats on a good set of numbers. So just two thing again, sorry, coming back to the same question on the stage two, stage three increase in this quarter. So we understand that the bulk of this is being driven by the gold loan. So just wanted to understand, in a steady state basis, does one can assume the current Stage three and Stage two in the gold loan business will be a new normal?

23:27 Ranish. Thank you for your question. See, you understand this business. You understand that there has been changes which have happened in the month of April. Are also aware that we had guided. In fact, we were one of the first few companies to guide that the stage one, stage two will be different for the year. And we have continued to stick to that guidance. My piece of comfort to you is the mortgages Stage one and Stage two as well as Stage three is steady or in fact declining for us. So my slippages, as CVG vehemently pointed out, are the slippages have gone down. The buckets have been going reducing. So we have a definite advantage on the mortgages side because of the investment that we have done on the collection infrastructure, and we are seeing those results there. As far as the gold piece is concerned, this is a move Stage two is technical in nature. You are aware, most of the gold loan product is a three month or two point five month behavioral tenor product.

24:39 This will not translate into a credit cost. It's only technical in nature. Customer is going through a behavioral change. NBFCs for the first time are calling the customer and telling them that, look here, you've taken a quarterly product, why don't you pay you my quarterly. The customer is saying, for the last ten years, I have not paid quarterly. It's okay if I pay fourth month. And then there is definitely a different interest rate that the customer starts paying. So actually, it's not at all a piece which is worrying for us. The Stage two, we think, is in a managed range. The guidance that we have given is the credit cost that we will manage will be way below 1%. We've directionally also showed you how it is going to go.

25:33 And if you remember last year as well as the start of the year, I told you that the GNPAs will also be below 2%. So I'm giving you a guidance on the GNPA, I'm giving you a guidance on the credit cost. Between those stages, think we'll have to let see, some of these things are some of the levers which companies will use to operate in a very, very highly competitive Q2 gold environment. And each of the company will operate like this. We are one of the few first companies to give the results. So there will be some element of questions. But as you see more gold companies coming up, you will see similar kind of numbers and results. So I think it's just technical in nature. The summary is that the G and P and mortgages and the stages and mortgages are doing well.

26:26 And mean, I'm pretty happy with the numbers. Got it. So, Praveen, just a follow-up on that. I mean, since this new regulation being implemented from April and now we are in September. So it is fair to assume that even the q two numbers, you know, fairly captures the change of customer behavior. And if that is the case, then, you know, the stage two and gross NPA ideally, you know, is picked out at current level and maybe in q three, q four, there will not be further deterioration? I don't think like that, Ramesh. It won't be a deterioration. I won't call it a deterioration. It is just a behavioral pattern because, see, what will happen, Ranish, is the volume of business which happens in Q2 is very different from the volume in business which happens in Q1 plus the early part of Q3 also the business will pick up. So there will be some numbers which will happen on the Stage two side. So again, I'm telling you, directionally, don't want to hold a number on the Stage two side because it will constrain the business. But it is not a number which one should worry about.

27:43 Has nothing in the sense because, see, it's very easy for a gold loan company or any company which is doing gold loan business to easily get the recoverable through the auction process. We are fully geared for that. And just optically showing you a better number is not in the entire business interest of most of the companies. That is And So where we will look at optimizing what are the deliverables. The deliverables are clearly maximizing profit, maximizing customer interest, maximizing ensuring that we are doing within the regulation. And we are going through a transition of customer behavior. So I think it may take one or two more quarters before customer behaviors change. So I'll add to what Prade said, Ranish.

28:29 Basically, these indicators, you should I would urge you to look at this in comparison to the peer gold loan companies, right? So in absolute, if you try to make sense out of it, I would try to indicate that these would be optical optically misindicators rather than indicators. We have never had an auction loss on either principal or interest in the last six years. There is no intention to break that record. So management team is in control, and we are sure that we will not have any loss in terms of principal or interest. These are levers we will keep playing with. And I think to that extent, I would urge you not to hold us to any numbers.

29:14 No, no. I think you're absolutely right, sir. So when we look at the credit cost and then when we look at the Stage two and Stage three, it clearly suggests that what the publisher is trying to highlight, that it's just a change in customer behavior and not necessarily to result into credit loss. So that is pretty much understood. Mean, no good job on that thing. Just my second question is on the small ticket lab. You know, so when we look at the ticket size trends, you know, it really suggest that we are moving to higher ticket size lab within small ticket lab segment. So the the drop in meals is because of that or it is just because of Internet cycle, you know, the the the segmental yield is coming down. It's one ticket left. And also, you know, are we also switching to a better customer segment and hence ticket size is inching up?

30:14 Thing to notice, Ramesh, thank you for that question. Small ticket business on the ticket size. See, we moved to the we were earlier a 5 lakh above ticket size company on the small ticket lap. We moved it up towards a 7 lakh and 8 lakhs. You remember that we guided you. And that has played out in the average ticket size slightly moving up because now we are not doing anything below 8 lakhs. So that has moved a little bit off the needle. The yield drop is just a Q2 scenario in certain geographies. It is not related with the ticket size per se. It has coincidentally looking like that.

31:00 Just that in some in Q2, my lower yield state has done better business than my higher yield state. So I have different yield states. Say, for example, state A does at one particular yield, state B does one particular yield, till the time my other state picks up, state did a better business. But as far as indications are concerned, as we had guided you on the small ticket lab business on the credit cost, It took us three, four quarters to stabilize it. And today, we are proudly telling you that we are going on the bucket negatives on the credit cost on the small ticket lab side.

31:47 So similarly, on the growth side, on the small ticket lab business, we've picked it up. We've not been the pickup has not been that great, but it will definitely pick up in Q3 and you will see further better yields as well as the ticket sizes in the normalized range. So the average ticket size could be in this range, but you will get a better yield and better disbursement in Q3 because now we've got the credit cost side normalized on the ST Lab. The pedal will be pressed on Q3 and Q4. I didn't tell you that in Q1 and Q2, but in Q3 and Q4, we will press the pedal. So you will see a different growth trajectory on ST Lab there.

32:34 Got it. Got it. Very helpful, sir. Thank you for detailed explanation. You, Thank you, Ramesh. The next question comes from the line of with GreenEdge Wealth. Please go ahead. Yeah. Hi. Thank you and congratulations to all of you. It's good to see this trajectory of ROE just keeps improving. And and there's a two questions from my side. In this gold loan, no, at at the industry level and at FEDFINA level, like, you know, what percentage of new loans probably happen at full LTVs, you know, which we can say at 75, 80, or 85. And then what percentage of loans, you know, happen at... In the bullet structure where you cannot give those full LTVs, you have to give some discount, you know, to that LTV. If if you can just highlight, you know, where the industry is moving, where we are moving, because I think the stage two, stage three question is also related to this.

33:36 I'll take that question, Vikram. So gold, there is no differential LTV for an existing customer or a new acquisition. The customer demand, whether he is an existing, he comes for a refludge or a second loan or a new customer walks into the branch, his requirement is higher LTE. 90%, 95% of the customers' choice is to get maximum loan for his maximum value for his loan. So there is no such discrimination. The LTV is decided based on the exposure of the customer. The momentum exposure of a customer is capped at 75%. He opts for maximum LTV. Similarly, if it is 80%, he opts for maximum LTV. There is no differentiation between a new customer or an existing customer.

34:26 So I think the change is that 20% of disposal, which is happening in income generating loan. There, there is a choice for the for FEDFINA to go into the capital assessment and based on capital assessment and purpose to decide on the differential LTV for a new customer. So that's it. Yes. So, Jagdiri, as you say, most people will opt for the highest available LTV. So then, you know, they will have to pay interest regularly or at this stage two will go up at an industry level. That is the right understanding. Right? Because if they don't I don't think... That's the right understanding. Okay. Okay. So it is just a technical thing which will like come up, but obviously, it has no implications economically or on our ROAs. But what happens, Digant, is as you are we are operating in the market, and I am when we are operating in the market, we are conscious of this. So if I'm giving a quarterly product, even though there is no reason for me to so I'll minus a 2% and play with that LTV and see how much of a take is happening for that LTV there.

35:33 So the business growth happens and we you try and push as many customers at that LTV. And that is why your portfolio is a mix of that 73%, 72%, 74 in that way. So it's not everybody at that highest one. So you will try and first pick up as many compositions as possible in each of these markets. So wherever you don't have heightened competition, you play with a 71% also. Right. Okay. Okay. Got it. Thank you. That's very detailed. Second question is, Parekh, you mentioned that competition did play out. It was extreme in this quarter. Like if you can just give some more color, you are just busy that this competition, is it playing unfair in terms of just don't value the jewelry correctly, or is it just that, you know, they they give higher LTVs than mandated?

36:26 Because, you know, just playing fair, you know, competition cannot really affect, you know, strong and, you know, intense players like us. So so just wanted to know that, you know, is there is there an element of unfairness in the game? You know, people are being very aggressive because most new entrants often make that mistake. Yeah. Digant, very, very tricky question, but what I will answer to you is most of the existing and old players who have been in this business for a long time and who's been in the gold loan industry for eight to ten years and who've been operating will play fairly and will do according to what is right as far as the regulation is concerned and the other things are concerned. I can't talk about the others, but as far as the existing are because they've seen what happens when you do that.

37:14 The industry has been there for some time. Five years ago, six years ago, it went through a yield cycle. So there are consequences for that. So the existing players know this, and they know these particular practices what it leads to. Yes. Thanks. And then last question is, we have done fantastic on the operating leverage front. It been going down for each of the last four quarters, the cost to asset or cost to income. So just wanted to know if there is more juice left or like should we stop here and probably increase more branches to capture more areas of gold loans or how are we thinking on this? So definitely, there is double work happening. So we are not stopping our focus on expanding our gold loan branches.

38:05 If you see, we've done about 75 in the next quarter, you will see us pushing for a 100 branch number in the Q4. Again, we'll push for more number. So as far as branch is concerned, it is not constrained by the cost to OpEx ratio. That is a number which we will continue to do because we believe that the gold business is a business which requires that distribution muscle and we will do that through our branches. Secondly, we are one of the few companies which believes that our ST Lab business and gold loan business go hand in hand. You also are aware that last quarter Jagdish is handling both the ST Lab business and Gold business. So he is pushing both these businesses through these branches. So that increases our distribution muscle.

38:50 So we are bullish on the branches. Our branches are not just announcements. We are not making announcement that we will be putting so many branches. We are making announcement that we have already put these many branches, and those are the branches which have started giving us business. So there will be no constraint on putting money behind branches. As far as the OpEx ratio is concerned, we will continue our trajectory of reducing OpEx on the other side. Like, for example, if I'm telling you that Satish is going to head both the verticals, he will try and optimize both these verticals to see where the benefit is going to come. He is going to push for certain verticals where the gold loan business will aid our small ticket lab business. And those the synergies which will help us. In the past two years, we have shaved off a lot of costs, which have given us the value add.

39:45 Going forward, we will continue on that trajectory. And when we are trying to guide to a particular ROA, directionally, you know that we are targeting a three ROA. And in spite of the yield pressure, we will try and leverage through the OpEx ratio and the credit cost to reach that three ROA. So there is definitely within the company a heightened focus on reducing the OpEx, which is non branch investment related and trying to use it as a lever to ensure that we get the money to put the branch OpEx. Perfect. Perfect. Thank you so much for the detailed answers. I can already see Navaratri and Diwali in our results. I hope it happens in our stock also. So thank you and all the best for Veer and the team.

40:35 Thank you, Digan. Sir, you understand this gold business. So thank you for your support. The next question comes from the line of Pawan Kumar with Edelweiss Public Alternatives. Please go ahead. Pawan Kumar, please unmute your line in case if you're on mute. Yes. Hi. Thank you for that. Thanks for the opportunity, Parvez and Ganesh, congrats on the good numbers. One couple of questions. On the yield strength, right, particularly on the STLAP, we have seen over last five, six quarters, the yields have gone down from 16.1% to 14.9%, the origination yields of STLAP.

41:30 So it's kind of matching with the rate cut cycle, but how much of it is rate cuts and how much of it is competition rate? And as we are going into the rate hike cycle, how much we can expect the yields will go up? That's one question. Second question, there's a meaningful increase in the ST Lab disbursements. You have kind of alluded in the earlier questions also. How can we what are the kind of numbers we can think about in H2 for the ST Lab pickup? Yes, those two. Thank Thank you, Pawan. Definitely, you will see us putting a good set of numbers on the ST Lab side. I can't give you a definite guidance, but I can tell you so much that it will be among the last eight or nine quarters, it will be the best quarter compared to the last eight or nine quarters.

42:30 Secondly, as far as the yields are concerned on the small ticket lab pointing out, but you will see that trajectory also changing because it's not only about the ticket size. As I told you, there were we operate different see, we operate in about six states on a major basis and about 17 states otherwise. So, six states contribute majorly to the small ticket lab business. And some states we operate and each state we operate different yields because these are markets which determine that. So, one or two state compositions increase in a particular dispersal in a particular quarter, the yield has changed that way.

43:17 The last four quarters, we were getting out of the woods in terms of the quality as well as we were putting guardrails and we were changing the manpower and all that. That is where the yield has gone. But you will definitely see a different yield trajectory in Q3. Definitely, it will be more than Q2 as well as the disbursals will be more. So both you will see, we definitely live up to your expectations in Q3. Thank you, Bhavesh. No other questions from me and all the best for the upcoming quarters. Thank you. The next question comes from the line of Meghna Luthra with Incred Equities. Please go ahead.

44:04 Hi. So thank you for the opportunity. A few questions. One is on the borrowing piece. Can you be help with what proportion of our borrowing book is floating and fixed? And within bank borrowings, what is linked to repo and MCLR? Yes. Thank you, Meghna, for that question. Our fixed rate borrowings are 33% of our total borrowings, right? Of the balance, 67%, 24% is MCLR linked. So the residual is only EBLR linked, right? And so that gives us, we believe, some insulation against transmission. Also what also helps us is that majority of our book, now about 58% of the loan book is very small tenor gold loans, which means that there is an opportunity to reprice them on maturity.

45:05 So technically, they are fixed, but only So as I said, the whole attempt over the last eight, nine quarters, what you see in terms of the ROA and ROE expansion is not by accident, it is by design. We have very painfully built a lot of resilience across each of the parameters. And even the mix in borrowings reflects a certain element of resilience there. Obviously, there will be headwinds. We will watch it. We have some levers. We will evaluate them, yes. Got it. So is it fair to assume that any sort of compression on the cost of funds will be easily passed off?

45:52 And you should not see any investment compression in the coming quarter? No. So I think the way I will rephrase that is after eight quarters of ROA and ROE expansion, we wouldn't want to show you a different trajectory. So I will just allow us to play with our levers without holding on to any. We will play in the respective markets, as Parvez said, depending on so we would not want to be bound down by any particular line item in the ROE tree. If there is a NIM compression, we will handle it by enhancing some other operating lever. Got it. On tonnage growth, do you see that panning out in the second half?

46:45 Yes, Meghna. If you see our pattern last year also between Q1 and Q2, we had depleted our tonnage. In fact, this year, our tonnage has slightly been on the positive side in H1. So we are happy about that. Last year, we had a depleted tonnage because Q1, Q2 is usually a tough quarter for us in tonnage. And Q3, Q4 is our tonnage quarter. So you will see a different trajectory in H2 for tonnage. The next question comes from the line of Devansh Dhruv with Equintus.

47:32 Please go ahead. Hello, sir. Thanks for the opportunity, and congratulations on the great set of numbers. So I think probably my question was answered, but just to summarize or get the understanding, right, is... So if if there is a 50 base... 50 basis point rate hike, we we might... Look. How how do you see our spreads, you know, going forward? Because, like, would we would we pass on... Would we hike our yields and do, you know, a set of our cost of funds hike. How do you see spreads spanning out? You might, you know, kind of balance it out from other line items, but how do you see the the spreads spanning out in the next h two?

48:22 See, if obviously, there'll be a limitation to how much we can pass it on, right? So we would not want to maintain that all of what happens, we will be able to pass on. But the focus over the last seven, eight quarters has been on building a model with a lot of shock absorbers. So we will absorb that shock, but still deliver a superior ROE and ROE to you. The lever that you would assume that would offset this would be family OpEx per our credit curve? All of it. See, the whole shift to a fully secured lending construct about six quarters ago was to have a very benign and predictable credit cost. The whole team has been resilience and predictability, right, and a minimal or a no surprise kind of quarterly earnings cycle.

49:22 So there are so it could be a combination of all of what you said. Great. Thank you so much and congrats and all the best. Thank you. The next question comes from the line of Yash with Danti Equity. Please go ahead. Yeah. Hi. Am I audible? Yes. Yes. Please go ahead. Yeah. So congratulations on a great set of numbers. I just wanted to know since the branch addition that we've been doing is pretty aggressive, what is the timelines to scale up a particular new branch? How long does it take? Can you give us some operational understanding on how that happens? Because you said in h two, you'll be adding around one fifty branches more.

50:19 So just want to know at... How much time does it take for a particular branch to reach optimum levels? Typically, a branch, if it reaches about INR 6 crores to 7 crores of AUM, it turns profitable for us. And in a very, very when the price is going on upward trajectory or the price that is even the price that is there today, we in twelve to thirteen months, the branch starts touching that number. In our past branches also, last year, we put about 150 branches. Most of them have showed that kind of trajectory. They've touched INR $6.07 crores.

51:05 They've crossed some of them have crossed even more than that. On an average basis, we see INR 6 crores, 7 crores crossing in about twelve to thirteen months. Understood. And my next question is mostly regarding your ROE. Since your ROE is already at 17%, what is the kind of trajectory that we'd be seeing? And also on the AUM growth, I think you've guided for around 25%, if I'm not mistaken. Could you also give the guidance for H2, H2 in terms of AUM growth and H2 in terms of ROE? I have not revised the AUM guidance or the ROA, ROA guidance for the last time when I had spoken.

51:52 We had given ROA guidance that last year we had an ROA of about 2.4. We said we will improve that ROA by 30 to 40 basis points. And that time itself, I had said that our AUM growth will be about 20 to 25%. This is what I had said in the month of March, then I continued saying that in the month of July. It was Q4 guidance was the same. Q1 also, I gave the same guidance. We will continue to give the same guidance in spite of the gold prices being almost flat. So we will give AUM growth of about 20% to 25% for the year. And the ROE, you might see because of the numbers that we have given in Q2 and Q1, there might be an upside to the guidance that we have already given. Our target ROE we are trying to reach is three and correspondingly try and touch an 18 ROE.

52:52 That is the objective and we want to keep it steady at that being a franchise which is predictable and trying to get a three ROA and ROE has been what we had envisioned about two years ago. And that's where we are heading. And we seem to be going closer towards it. Yes, but conservative, don't you think, I mean, we are entering H2, which is generally 60% to 70% of your generated business in a particular financial year and you're already at an AUM growth of 36%, if I'm not mistaken. Don't you think your AUM guidance and your ROE guidance can be upgraded at this point of time? See, you are looking at a see, we've if you notice what we've guided in our last eight quarters, you've seen we've been very, very consistent irrespective of the environment.

53:57 And Yash, what happens is when you are trying to guide in a very, very volatile environment, you have to be conscious about everything because the guidance is not just about giving a number because you will only remember the number and not remember the environment. If you remember, two quarters ago or three quarters ago, we could have not even visualized the kind of environment that has happened now. But irrespective of that, we had given a guidance of 20%, 25%. That time, it was a very, very surprising guidance. Today, I don't know how the entire environment will play out in Q3 and Q4. If the gold prices pick up in Q3 and Q4, you will definitely get a better guidance you will definitely get a better performance.

54:43 I'm talking about a guidance where if the gold prices remain flat, then in spite of the gold prices remaining flat, we will still give you a 20% to 25%. If the gold prices move up, then obviously we'll do better than that. Understood. I really appreciate your time, and I really appreciate your sort of guidance. Thank you so much. The next question comes from the line of Rahul Kumar with Vakaria Fund. Please go ahead. Yeah. Hi. Thanks. Just a question at the lab. If I look at the... You know, how is the competitive intensity actually evolved over here, you know, versus, let's say, last year? How does it evolve now, especially in the major six states where that represents?

55:38 You are asking on the gold side? No, no, ST Lab. ST Lab yes. The smart ticket lab business, the competitive intensity the players' intensity has not increased in the sense the players are the same. But definitely, the requirement for business has the appetite business has been very, very aggressive. There are the same players are operating in a similar market. That is why the intensity has increased. There is definitely a pressure on the yield. There is definitely a pressure on certain markets, which provide you a better geographic better delinquency number and better yield.

56:25 So certain pockets, yes, the intensity has been very, very high. And the small finance banks are also into this particular business. The housing finance companies also look at this particular business. And then there are specific companies which are into a lab business, which are looking at it. So in certain geographies, definitely the competitive intensity has been higher. But it also this market operates at very, very different yields in very different geographies. Like for example, we operate in the 16% to 17% yield market, and there will be one set of competition. There is a different set of competition in the 20% to 22% segment, which is in a deeper geographical belt.

57:12 So that is again a nuanced competitive intensity for that. So there will not be competition for us. So that's how it plays out. Okay. Understood. Understood. And so for the ST Lab business, how are approval rates moved versus last, let's say, two, three quarters? So approval rates for earlier when we were coming out of the woods had dropped down to about 30% levels. Now steadily, they have moved up to the mid-forty or the early-forty levels. Okay. Okay. And this is despite the competitive intensity which you spoke about?

57:59 Yes. Because we have tightened our BRE engine over the last few quarters, plus the numbers that we have been doing. If you notice, one of the questions which we were asked is that on the ST lab picking up substantially more, We've just done about INR210 crores. So that for that, we are very happy with that approval rate. We think the dispersal numbers for us, once they pick up, we will be steady at that kind of an approval rate. Okay. Okay. Understood. Last question is on the empty lab business, the large ticket lab business. How do we think about that business going forward, Amir?

58:51 See the medium ticket lab business is a profitable business for us. We make a good ROA on it. It is one of the business which is a steady business for us. We've been doing well over the quarters. We hold a yield of about 11.5% to 12.5% in that business. This business is a partner driven business, but still we've managed to operate it in about 15, 16 geographies that we are operating. And we have a steady growth engine going. We have a vintage team. It is led by Mr. Suresh, who's been a vintage lab veteran and he drives the business with a very, very good cost to income. That is why we make good money on it. And that business also has been a steady delinquency business for us. So it's a good balance sheet business for us. And going forward, we will continue to on our growth trajectory with that business.

59:55 Okay. Okay. Thank you. The next question comes from the line of Aditya with Securities Investment Management. Please go ahead. Yeah. Hi, sir. Thanks for the opportunity, and congrats on a good side of the charge. Sir, my question was on ROAs, and these are more on longer term basis. So one of the reasons for our ROAs improvement is also because our share of gold loans have increased. So at... By the end of the year, I believe they will be around 55 to 60% of our overall loan book. And gold loan being a higher ROE for that, our company level ROE have also improved. But going forward from next year onwards, how do you see ROE standing out when the growth in our mortgage business increases?

1:00:43 So if the mortgage... The share of mortgage increase in our overall loan book, would that have an impact on the overall ROE of the company? No. Two things. One is as we've taken about four or five quarters to update on our small ticket lab business and our medium ticket lab business. Our medium ticket lab business does a very, very decent ROA. And our small ticket lab business will pick up its ROA. And as the growth trajectory comes in, the productivity kicks in, the ROA metrics for our small ticket lab business will definitely be different in Q3 and Q4. And the composition for it to change will take some time. And by that time, we believe that the ROA of that small ticket lab business will start touching the gold business ROE.

1:01:40 So the way I see it is, we will go through another cycle A, where the small ticket lab business will start picking up. It will move its ROA up, but the composition of gold business will not drop during that cycle A. When cycle B happens, when the small ticket lab business is doing a decent ROA, that is when the composition of gold loan will start going the mix will go differently. So you will still continue to see at an entity level the trajectory on the ROA in a similar range as we are targeting. Understood. Understood. And just ROE from the gold product. So last one, one point five years was pretty good for the gold industry in general, considering the kind of loan growth which we have witnessed and which would have benefited our OpEx ratio and the kind of yields which we got.

1:02:37 But now going forward, now most of our groups would have to come from gold tonnage growth and with increasing competitive intensity as well. Do you think the goal on ROEs, which we have enjoyed in the last year or so, would that have a would that take a negative rate going forward? See, there are two ways to look at it. We when we guided in this particular year, we had assumed that there won't be a price growth on the gold business. And we have been a company over the past five years giving a tonnage growth. We've given a tonnage growth of about 10% to 12% every year.

1:03:22 We will continue that. So you will see a tonnage expansion happening and because of that, a particular growth happening. So on a yearly basis, between tonnage, even if the price doesn't increase, we will still give you a 20% to 25% growth on the AUM, which is what we were guiding. In fact, the previous call, Yash asked me why that guidance is less. This is precisely why I was guiding on the 20% to 25% because we are assuming a benign environment where it will be the price of gold might not move, and we are operating on a tonnage growth and the competitive intensity, which will happen. As far as the ROA is concerned, we still believe the ROA will be maintained there because we have now with the AUM coming in, our cost to income also will start going down on the gold side. See, if you see my trajectory on the AUM per gold branch, it has moved from INR 8 crores per branch to INR 16 crore per branch. If as it moves, it becomes double, the cost to income halves.

1:04:28 So that starts playing in. So we are operating at a healthy ROA in Gold branch and that will continue to do so because I will get that lever from the OpEx side as the AUM expands. So even with a 20%, 25% expansion in AUM and with a flat price, we will continue to get a same ROA. We are not talking about expanding the gold ROA. We are talking about maintaining the ROA in a very tough environment. So that will continue there. Understood. Okay. And lastly, what was the contribution of insurance income for us in FY 'twenty six? No, it was a nominal sum. So we don't do insurance on our gold loans. The insurance is sold to our ST lab and medium ticket lab customers.

1:05:26 So I think so there was a certain so from an ROA tree perspective, I would put the number at about 0.1 in the ROA tree from an income perspective, a little over 0.1. So from for us, if whenever that happens, we are confident that we should be able to substitute whatever is the reduction in that through some other income streams. Understood. Got it. And sir, just lastly on the co location of branches. So now going forward, the gold loan branches we are opening, are they also are they also selling the ST lab business as well? I would say it will depend on the market.

1:06:14 Some branches, as I told you, Jagdish looks at the small ticket lab business and the gold business. The primary focus is on expanding the gold branch footprint. And if he evaluates that in this particular market, we feel that the ST Lab business also needs to coexist, then we do that. We don't do it compulsory in every branch, but we are doing it steadily as we expand, looking at the market potential there for that particular business and looking at the delinquency patterns in that particular market. So we will expand it in that manner. But definitely, the gold branch expansion will lead to the footprint expansion for the ST Lab business also. Understood. Sure, sir. Thanks for answering the questions.

1:07:02 Thank you, sir. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for the closing remarks. Thank you so much. The entire investor and analyst community. Happy Naprathri to all of you. We have been promising a particular deliverable over the last eight or nine quarters, and we have stuck to that. In spite of the vagaries of the environment, we have guided you with certain numbers and we have stuck to that. We had a very, very tough competitive quarter in Q2. In spite of that, the gold business has done well and we continue to see that in Q3 and Q4.

1:07:52 Competition is real and we will continue to play the way our strategic focus is. Our small ticket lab business should pick up in Q3 and Q4 and you will see a different trajectory. And we are committed to the guidances that we have given to you on our credit cost as well as AUM growth. And the main guidance remains that we are targeting a ROA of three and we should see it sooner than we had promised you earlier. Thank you so much. Thank you, sir. Ladies and gentlemen, on behalf of Equiris Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.