SBFC Finance (NSE:SBFC) Q1 2027 Earnings Call

0:00 Ladies and gentlemen good day and welcome to the SBFC Finance Limited Q1 FY twenty seven earnings conference call hosted by ICIC 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. Should you need assistance during this conference call, please signal an operator by pressing star then 0 on your touch tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. From ICICI Securities. Thank you, and over to you, sir. Yeah. Thank you,. Hi. Good evening, everyone, and welcome to SBFC Finance q one FY twenty seven earnings call. On behalf of ICICI Securities, I would like to thank SBFC management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of SBFC represented by mister Singh Dhru, executive Executive Vice Chairman Mr. Mahesh Dayani, MD and CEO Mr. Sandeep Agrawal, Chief Financial Officer and Mr. Rajiv Chakkar, Chief Risk Officer. I will now hand over the call to Assim for his opening remarks, and then we'll open the floor for Q and A.

1:17 Over to you, sir. Thank you, Ramesh, and good evening, everyone. So as of a standing in credit markets with lenders has improved over the years, we have been able to avail new loans at better interest rates as well as diversify our lenders. Aided by the transmission of repo rate cuts, our cost of funds has come down by about 90 basis points year on year. Cost of operations have been calibrated in a downward sloping curve, and we continue our guidance of a 25 basis point reduction this year over the 150 basis point reduction we have delivered since listing. Cost of credit will remain range bound. The U. S. Ten year bonds may force Fed rates on their hand to for a rate increase.

2:02 Indefinitely, India's currency market situation could also force RBI's hand sooner. Independent of repo, deposit rates have performed up and as bank deposit growth continues to lag lending, interest rates in India will have an upward bias and we could arrive sooner if crude continues to push $100 and stays about it longer. One thing is abundantly clear, it is impossible to crystal gaze into what will happen. We are living in a strange world. If you look at the thirty year, The U. S. Bond market is sitting in a 2008 crisis level, even as the stock market continues in a bull spread. Geopolitical uncertainties and India's mother of all problem oil, one doesn't know directionally what to pencil it. So the only clarity we have is that we have to prepare for what cannot be anticipated.

2:51 In our anti fragile approach, Bill, we always remain cautiously optimistic. We have taken steps needed to ensure that we keep walking the guided path with metronomical consistency. Our premise at SBFC from the start has been that acceleration and deceleration both put load on the engine and create heat and fuel waste. What's important is steady momentum. For thirty quarters, we have delivered this through system shocks created by successive failure of financial companies, COVID waves one and two, interest rate rise up and down. When we did our strategy meeting charting out of our growth from INR 10,000 crores to INR 20,000 crores, we concluded that the risks ahead never remain the same. The external challenges change, the internal challenges also change, but we will endeavor to keep a steady pace through all the cross currents we face.

3:42 Our approach continues to be learning from our mistakes using analytics and technology and on boarding better customers, managing risks better and keeping a superior provisioning, which is currently 2x regulatory minimum. As we have in the past and in the future, we also remain focused on spreads, NIMs, ROAs and ROEs, as we believe that consistent profitable growth is our North Star. With that, I hand over the call to Mahesh. Thank you, Arthi. We entered the first quarter of twenty twenty seven with multiple headwinds. Interest rates were volatile in March increase in in the the 2026, resetting eligibility norms, quarter. The loan amount landing was in customers' hands came down accordingly.

4:40 Less shine, less size, so to speak. Third, the regulator circular mandating banks not to accept collateral security for MSME customers within the 20 lakh ticket size had a direct bearing on our core origination, which accounts for roughly 20% of our dispersal and book. Lastly, a few words straight on the badminton court, by which I mean competitors showing up with competitive pricing or generous loan amounts, which simply made us adjust our footwork. Despite all this, the underlying business held its ground. AUM grew 6% for the quarter at 27 odd percent for the full year at INR 11,922 crores. MSME disposals rose 3% quarter on quarter to INR $80.09 crores.

5:28 Following the revised guidelines, the core origination mix reset to 10%. This has since stabilized, and we expect a return to the usual run rate from this quarter onwards. On the household side, the incomes haven't materially changed over the year, but inflation has quietly eaten into the disposable income, denting repayment capacity. We've seen this show up in our log in to dispersal conversion, which moderated to 34% from 42%. This isn't just our anecdote. The RBI's FSR report June 2026 echoes the same pattern, noting that nearly 60% of lending is now flowing towards consumption rather than asset creation.

6:14 The sub INR 10 lakh segment in particular is showing signs of leverage stress and warrants close monitoring. We have the distribution and gunpowder to push the pedal right now, but we'd rather scale this the right way than rush it. We were deliberate about pricing through the quarter, which meant walking away from some business rather than chasing it at any cost. Capital allocation discipline helped us protect spreads, which improved by 39 bps at 9.4%, driven by both a lower cost of borrowing and better pricing on the asset side. NIMs moved up by a similar basis point as spreads and stood at 10.6% even as absolute borrowings increased, proof that growing the balance sheet and protecting the margin aren't mutually exclusive, just occasionally in tension.

7:06 OpEx came in at 4.29%, down 30 basis points year on year, though sequentially higher than March, largely on account of increments and full year cost impact of branches opened over the last two quarters. As a result, our PPOP improved 7.3 quarter on quarter and 34.4% year on year. On asset quality, zero plus rose by 70 bps during the quarter, and that's our homework for the current quarter. The momentum on rollbacks is better, and we should stabilize here for a quarter before a pullback in the subsequent quarters. NPAs improved 12 bps year on year to 2.66%, though up five bps sequentially. As flagged in our last call, we took Stage two ECL up to 16% from 6%, bringing total provisioning to assets at 1.91, the highest we have taken to date and roughly twice the regulatory requirement.

8:02 We'd rather overinsulate the P and L now than explain a surprise later, call it prudence with a margin of safety. In a secured book, this level of coverage appears to be among the highest in our peer set. PAT stood at INR 130 crores, up 6% quarter on quarter and 29% year on year, marginally outpacing book growth. That gap reflects the combined efficiency of risk adjusted pricing, disciplined borrowing costs and distribution, each working together. We closed the quarter at 14.7% ROE, and our guidance for the coming quarter remains unchanged on all fronts. No surprises there, birds on the badminton court notwithstanding.

8:49 With that, I'll hand it over to Sanket to walk through the detailed financials for the quarter and the year on year performance. Thank you, Mahesh. Good evening, everyone. In terms of business, our total AUM for June 2026 is at INR 11,922 crore with a growth of 27% on year on year basis and 6% on quarter on quarter basis. Our MSME AUM is at INR 9,271 crore, which has increased 4.5% on quarter on quarter basis. Our MSME disbursement for the quarter stands at INR $80.09 crore, which has increased 3% on quarter on quarter basis. The loan against gold AUM is at INR 2,631 crore with a growth of 11% on quarter on quarter basis. We added five branches during the quarter, bringing the total branch count to two fifty six as on June 2026.

9:39 In terms of yields and margins, our yields for the quarter is at 17.9% with a reduction of nine basis points year on year and an increase of 29 basis points on quarter on quarter basis. Our cost of borrowing for the quarter is at 8.42 percent, which has reduced 90 bps year on year and 10 bps quarter on quarter. Consequently, our spread for the quarter is at 9.48% with a growth of 81 basis points on year on year basis and 39 basis points on quarter on quarter basis. In terms of borrowing and capital allocation, capital position, we have upfronted borrowings in the macro environment and thus having a closing liquidity of INR $18.64 crore. As we grow towards INR 15,000 crore, we intend to keep higher liquidity on the balance sheet. Given the movements in bond yields during the quarter, the CD rates and the overall cost environment, we think we should now stabilize on the cost of borrowing at current levels.

10:33 Our capital adequacy ratio is sufficient at 32% with tangible net worth at INR3613 crore as of June 2026. In terms of cost, our OpEx for the quarter is at 4.29%, which is 36 bps increase on quarter on quarter basis. This is largely due to increase in branches in the last quarter of FY twenty twenty six and the impact of increments rolled out for the year. As the AUM grows on these set of branches, you will start to see the cost to average AUM coming down and we should be closer to 4% or below at the end of the year. The guidance for the year of '25 bps reduction remains unchanged. In terms of asset quality, our GNPA range bound at 2.66%, which has reduced by 12 bps year on year and increased five bps quarter on quarter with a PCR of 42%.

11:21 Our credit cost for the quarter is at 1.45%. We expect it to remain in this range in the short term. In terms of return ratios, our return on average AUM is 4.53% with ROE at 14.73% for the quarter. Our path for the quarter is INR130 crore growing 29% year on year and 6% on quarter on quarter basis. With this, we open the floor for questions and answers. Thank you, sir. We will now begin with the question and answer session. May press star and then one on the touch tone telephone. If you wish to remove yourself from the question queue, you may press star and then 2.

12:08 Participants, you are requested to use handsets while asking a question. Ladies and gentlemen, please wait for a moment while the question to your sim. A reminder to all the participants, you may press star and 1 to ask a question. We have the first question from the line of Renish. Please go ahead. Yeah. Hi, sir. Sir, congrats on a good set of numbers.

12:54 Just two things. One, you know, on the... My last comment about, you know, the over the bridge position in sub 10 lakh with the ticket size. So where do we stand in terms of cycle in the particular product? Are we in this kind of the cycle or we are in the middle of the cycle? Sorry. We missed you in between. Can you just repeat the question? Yeah. Yeah. So, Mahesh, you did mention that, you know, stop 10 lakh rupees ticket size. There is still some sort of all leveraging, which is visible and sort of which requires close monitoring. Yeah. So according to you, where do we stand in terms of cycle? And, also, how it should impact SBFC's growth plans or maybe the overall profitability metrics in FY twenty seven?

13:45 Yeah. So I think, from our earlier commentary and what I had articulated in the call earlier today, we've not seen the situation improve in the sub-ten lakh category. And even on the new origination front, if you probably look at our presentation, you will see that most of the Sybil scores are now more than 700 and almost 90% of the portfolio have a score of more than 700. But despite that, our throughputs have dropped from almost 42 to 35. So effectively, which means that a lot of these customers where bureau scores are more than 700 are still not passing through the filter. One strange thing that's actually emerging is that you have scores, but eligibility is not passing through your filters, which effectively means that you might have a score, but the amount of credit that's been seeked is still extremely high.

14:46 So that's the reason we are a bit watchful on that segment. And if you would see that our average ticket size is inched up compared to last year or last quarter versus this quarter, and that's largely because of the shift that's beginning to happen from that segment. Actually, you see, Rinesh, if you have seen the latest CLSA report, on the household DSR in India are now almost touching 14%, which is one of the highest in the world. So while people look at retail to GDP, which also is now pushing 45% plus and they're they're really high. But what is concerning is the DSR. So clearly, you know, the the the signals are saying that you'll be watchful. It is not that we are seeing anything that worries us or concerns us. This is part of the business we do and our job is to be a little worried. You know, that's part of our job description, you know. But if if we are not worried, we should be very worried. So... Absolutely.

15:46 So so, you know, we we have to be careful because, you know, we don't know when cycles turn. We really don't know if you're on the start of the cycle, the middle of the cycle. These are all guess works. You know? So in in reality, you you have to be watchful. And if you're seeing signals in your customers that there is a buildup of leverage, you know, then you better be watchful rather than be sorry later. Got it. Got it. And so my second question, I think, this, you know, the journey from 10,000 to 20,000. So you're... Till now, you have been stuck to two products. Right? The small ticket type and whole loan. Do you feel that over the next maybe twelve, eighteen months, we need to think about adding new products, you know, to build the most different. Just do you think there is enough white space at least in these two products in which we operate and hence, it's not right time to think about new products?

16:39 No. No. We keep doing what we are doing. You know, we have to get better at what we are doing. We still have a lot of work to do in that. So we will keep focusing. We learned something over the last eight years. And once you have learned it, hopefully over the next eight years, will better it. So we don't want to at this stage look at anything different on you. We will continue doing what we are doing. Hopefully we will do it better than what we have done so far. Got it. Got it. So that is from my side sir. Thank you and best of luck. Thank you. Thank you. A reminder to all the participants, you may press star and one to ask a question. We We have the next question from the line of Meghna Dutra from Incred.

18:05 Congratulations for a good set of numbers. I just had a few questions. One is around the the employee cost. Is the increase in employee cost largely based on increments and bonuses, or is there anything else to read in it? So, Mitra, so there are two things that have happened during the quarter. One, obviously, is the rollout of increment that has happened that has one impact. The second is that the last quarter, we opened close to 20, 25 branches. Again, this quarter, we've added five. So all that employees that we hired, full blown cost has come in, in this quarter. So both put together is the increase in that cost. What will happen over a period of this next nine months is that once those employees become productive and we added on the AUM, we will tend to see the cost to AUM starts to coming back where we intend to.

19:02 Got it. And the second question was on the yield front. Although we have just in stock market sizes marginally during the quarter, our yields have improved by 30 basis points. Do we see the customer is that because of we are incorporating higher risk and that's why we are increasing our yield on on... Because of the risk? So, see, what happens is that we... In our model has baked in a spread of 9% since last one year and said that this 9% something we have to hold to ensure the return matrices makes sense for us. To that effect, what happens is between products, there are some yields improvement, some reductions. So gold in this quarter has done a better job in terms of yield.

19:47 So that has added to the yield improvement of 29 basis points. But the range that we are looking at should be in the range of 17.5% to 17.75%. That's our range where the yields generally stabilize. One good quarter of either product gives us 10 bps, 15 bps up and down. So that's the range we will be at and which ensures that, let's say, current cost of funds 10 bps up and down will give you a spread of more than 9%. So that compensates more than enough for your risk adjusted pricing and gives you the desired return ratios. Okay. So it's largely the gold portfolio that we are seeing spike during the quarter. There's no one offs, right, in the yield?

20:35 Yes. It keeps moving slightly up or down on the gold front, but the stable yield, what we can see is between 17.5% to 17.75%. That's the company yield, which is largely we bake in internally. Got it. Got it. And what would be the branch expansion plan during the year? Supposedly, we up fronted a lot of it in the last... H '2 of last year. So we will go slow this year. We will be in the range of, say, 10, 15 branches, not beyond that. So all the branches that we have opened in the last quarter has to become productive. Those employees have to become productive and start giving us the returns that we expect. So we generally base our expansion on profitability matrices and once those returns comes in, that's when we do further expansion. So this year should be between 10, 15 branches, three, four up and down based on what the supervisors generally request you to and you approve.

21:37 That's the plan. Yes. Just to add, if you look at our distribution mix, you'll see that our branches, which are more than INR67 crores, roughly around 60% of that distribution is more than INR67 crores. And this number was substantially higher because largely because most of these 52 odd branches that we opened in the last one year. I think the whole idea is that we will consolidate at these increased branches that we've opened. And we follow a policy of growth and consolidate and then start to grow. Now the addition of branches have to actually start delivering the required return before we add in any more branches.

22:26 Got it. Got it. Got it. And and lastly, sir, on the credit cost for the year, do we see a 1.4 sort of a range stable for the full year. Right? Yeah. So we are penciling in that it will be range bound in this current range. So 1.4 or 1.5, this is the range that we're looking at for at least next 0.5. We are at 1.45, should be in this range. Got it. Alright. Thank you. Thank you. We will take the next question from the line of Madhan Shah from Madhan Investments. Please go ahead. Hi. Good evening. Congratulations on a good set of numbers. My question is regarding the OnePlus DPD. So we have seen a slight uptick compared to the last quarter.

23:20 So if you could throw some color on that. Yeah. So first in the first quarter, you know, there's been a slight increase and this was pretty much similar what we experienced last year in the first quarter as well, and then it stabilizes. In fact, and that was my opening remark as well. So that's a bit of our homework to do, but the rollbacks have been pretty within our required control. So we should be able to roll it back or stabilize in this quarter and roll it back in the subsequent quarter. But we're not seeing any red alerts from the slippages that we've seen. You.

24:08 We will take the next question from the line of Nishanth from Kotak. Please go ahead. Hi. Just two questions. One is, what is the incremental yield in both the segments? So we generally don't call out product wise. Incremental yield is in the same range. So that's what we answered previously as well that it will remain the overall yield for the company will remain in this 17.5% to 17.75 range. Incremental yield is also in the same range, it's slightly uptick because of the gold yields, but otherwise it will be in the same range. So, Nishit, think the way what we've seen in the last twenty four months that our focus is largely on spreads and that's what we've called out is that whichever way the market moves, we'll at least ensure that our spreads are upwards of nine. You may have a season where you accelerate on gold or you accelerate on core origination or the non core origination, but the whole idea is that we land at the spreads.

25:15 So you if you look at our yields, probably they're lower than last year by 10 basis points, but probably higher than the previous quarter. So you will see these movements, but I think the only parameter that one should probably look at is whether we've been able to maintain our spreads. But obviously, gold is higher than the MSME yield. And directionally, do you see gold yields going down? My sense is that the 25, 30 basis increase, you shouldn't pencil in and extrapolate the numbers from here. My sense is that it's going to be pretty range bound. I mean, you could see marginal reduction, but not a very sharp fall.

26:02 Okay. And on the disbursement side, is this kind of the trend this quarter was sort of a little more technical because of the co lending norms? Or is it something to do with the fact that, you know, in terms of demand, there was a challenge or or maybe you chose to lie a little low? So, you know, probably let me, you know, give you some sense as to, you know, where it is. So one, obviously, we'll see an upside because of the core origination reset, which happened. And that run rates come back to normal. So you'll see that upside coming in this quarter. But I think the larger question that has to be answered with respect to the pass through of the customers.

26:49 So we log in roughly, say, 21,000 applications a quarter and a 7% drop is roughly around INR 1,400 crores. So that's roughly around INR 140 crores, which probably was going through earlier, but what's not going through now. Now that's some bit of that reset has come back or that part has to come back or we need to originate a lot more. But clearly, the whole idea is that we will not really push through if it's not passing through the filters. As and when it starts passing through the filters, we we will see that improvement come through. So there's going to be some marginal uptake which is going to come from core origination and some betterment with respect to better... Higher logins, but we expect that the login to dispersal to might be maintained at the similar level of 35 odd percent.

27:44 But but maybe in an environment where you probably, you know, see things getting a little tougher or or probably the, you know, the screens getting... Or or or loans getting difficult to pass through the screens, would you not want to spread yourself wider so that, you know, you can continue to maintain the growth momentum, you know, in the future? No. So I think, you know, our insights have been... So let's see what's changed over the last one year. Over the last one year, I think when we called out that, you know, the segment below five or below six was not looking too good. Now it's more to do with below 10 is not looking as attractive as they were. But you have a separate segment across geographies. There is an opportunity for us to deep dive in these geographies and make up for the numbers. And I think from a growth perspective, the numbers that we have to roll out is not extraordinarily high. So we really don't have to push ourselves very hard to achieve on the guided range that we've already called out for.

28:50 So I don't think there's a pressing need to add a particular product or add additional geographies to deliver what we've called out for the full year. Got it. Got it. And just one last clarification. The reset because of the the coordination side is done, right? So from next quarter onwards, think things get better. Yeah. Yeah. The numbers are going to come back this quarter. Perfect. Got it. Thank you very much. Thank you. Thank you very much. Ladies and gentlemen, that was the last question. I now hand the conference back to the management for the closing comments. Thank you, and over to you, sir. Thank you so much for joining the call. Have a happy weekend. Thank you members of the management.

29:37 On behalf of ICSI Securities, we conclude this conference. Thank you everyone for joining with us today and you may now disconnect your lines.