Rural and retail housing to lead growth in FY21: Dinanath Dubhashi, L&T Finance
We expect rural demand to pick up in this festive season, especially in FY21
There was NII growth of 21% but profits were impacted by one time DTA reversal. What were the growth drivers for this quarter’s performance?
I am very satisfied with this quarter’s result. The quarter was full of doom and gloom for the NBFCs after these defaulted and were downgraded. In this quarter, we have been able to show excellent results with our focussed book has grown by 19%. We have successfully managed to run down the de-focussed book and year on year, it has reduced by 45%.
The NIIs are well protected in a climate where cost of funds for NBFCs is generally going up. We have been able to maintain our cost of funds at a good level and at the same time, keep the net interest margin plus fees at good level of close to 7%.
Another driver, has been that the expenses are well in control. The credit portfolio quality has improved substantially from last year and there is a slight deterioration from last quarter largely due to seasonal factors. Farm NPAs normally go up in September and March and come down in June and December. All this has resulted in a good profit growth and before this one time impact on profits have grown by about 15%.
Disbursements have been down 42% year on year. Which segments are showing signs of higher stress, what is the outlook like now on disbursements when it comes to the second half?
Overall numbers are minus 42%, out of which the big negative is obviously the de-focussed business of structured finance and DCM, wher we are doing zero disbursements. So just by math, the disbursements will be down. But I would like to talk about a few sectors which are important.
In rural, our overall book is up 24% but disbursements are down by about 2% overall. You would know that generally the sectors which are underlying, tractors, two-wheelers are showing negative growth in the first half at least. Our strategy there is to maintain our strengths, maintain counter shares and make sure that we do not suffer more than the market. We make sure that our strength, our market share is kept and that is what we have been able to do and while the market has lost much more, our disbursement de-growth has been just about 2%.
I would like to talk about this sector specifically because we are expecting H2 to be substantially better than H1 in rural and we are in a good position to take full advantage of that. Other than that, of course we have seen positive 7% growth in home loan disbursements which shows that our strategy is going well and we have been fairly conservative in lending to loan against properties, real estate and infrastructure.
What about your NIMs because they have contracted on a sequential basis. How are you seeing the funding cost and consequently the margin trajectory going forward?
We always like to maintain our NIMs plus PEs because we do not see NIMs as our only source of income. NIMs plus fees because fees that you get from advisory, from underwriting for processing fees and most importantly cross selling, is a very important part of our model.
In fact, we take pride that our entire operating expenses are fully paid by the fees that we get. We must be one of the couple of NBFCs in the country where just the fees pay for entire opex and that is our strength. Having said that, NIMs plus fees are fairly steady, 5 or 6 bps quarter on quarter.
Cost of funds has over the year gone by up about 30 bps. We have moved more to long term. We have reduced commercial paper from 18% of the balance sheet to just about 10% of the balance sheet and we are also diversifying by raising retail NCDs, ECBs, etc. We have been able to use this priority sector on lending allowed by the government in this quarter. We borrowed close to Rs 1,400 crore there. As a whole, our cost of funds were limited to about 8.6%, which is about 30 bps increase over last year and we have been able to pass it on almost completely to our customers and maintain our NIMs plus fees at a very healthy level.
We always like to maintain NIMs plus fees in a narrow range of 6.6% to around 7%. We have been very successful in doing the same. To answer your question specifically, we expect cost of funds to go up by about 10 to 15 bps maximum in the second half. We do not see it affecting NIMs negatively in any way.
What is your AUM growth guidance for FY20-21 and which segments will you be focussing on with regards to growth?
Our overall focussed book growth has been about 19% in the second quarter. We expect this kind of trend to continue for the rest of the year. Largely, it will be rural and housing which will be having around 20% or so AUM growth and infra having around 10-11% average, 18-19% AUM growth is what we see in this second half. This is the early estimate.
I normally do not give very precise growth estimates but I would definitely like to state that what we are seeing in the rural areas right now is excellent water tables. All the water tables and irrigation dams are full. We expect a late kharif crop no doubt, but a bumper rabi crop coming before the next financial year and hence we expect rural demand to pick up in this festive season, especially in FY21. We are seeing an uptick in disbursement growth as well as book growth overall definitely but especially in rural.
As the rural demand picks up, the formidable strengths that we have built up in our rural would grow faster than the market in the rural sector. Very clearly, the book growth we expect in FY21 would be better than FY20 and would be largely led by rural and retail housing.