Five Star Business reported a strong set of numbers for the quarter ended December. The NBFC posted a 43.55% increase in net profit at ₹216.76 crore compared to ₹151 crore in the same quarter last year. Net interest income (NII) increased by 36% YoY to ₹441.3 crore, with a net interest margin (NIM) of 16.80%. Disbursements for the quarter stood at ₹1,208.9 crore, up 32.8% YoY.

We caught up with the company's CFO Srikanth Gopalakrishnan to gain more insights on the company's quarterly results and the outlook for the coming quarters.

Q3 In Rearview

“I think it’s been a robust quarter for us, as you would have seen from the results. Nothing different that we did. It’s the same as what we have been doing efficiently,” said Gopalakrishnan about the company’s results.

However, he acknowledged that the company had to face some challenges during the quarter that impacted the results to some extent. “There was a little bit of impact primarily due to the floods, especially in two major states, Tamil Nadu, and Andhra Pradesh. Not the one that hit Chennai, but the second one that hit down south, had a few days of impact for us. We are back from that impact, but those few days were lost. So that’s why if you see, our disbursals are flat as compared to the previous quarter.

But barring this, I think it’s been a fairly routine quarter for us. Everything went well. Our branch openings are robust. I think we added 24 branches during the third quarter of this year, which cumulatively has taken the branch count to 480 branches. For this year I think we have added 107 branches.

Across the various lines, be it the profit and loss, the balance sheet, or the liability franchise, I think it’s been a very good quarter for us. Hope to repeat the momentum or maybe make it a little better.”

The Outlook

When asked about how the company plans to continue the strong momentum, Gopalakrishnan told Benzinga India, “We are looking at a 35% to 38% growth for this year. In fact, YoY for Q3, we have delivered 43-44% growth and quarter-on-quarter it’s at 8%. So we are expecting the disbursals will be better than Q3.

Both in Q2 and Q3, we disbursed a little over ₹1,200 crores. I think that we should at least clock 8% to 10% growth, or maybe a little more than that for Q4, which will lead to an AUM growth of close to 38% to 40% for the full year. Those are the estimates that we are working towards. So hopefully we’ll get there.”

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NIMs Under Pressure?

The company’s net interest margins saw a contraction during the last quarter. NIMs for the December quarter came in at 16.80%, compared to 18.55% in the same quarter last year. So we asked the CFO about the reasons behind it and if the company expects NIMs to improve going forward.

“So, two reasons. One is that NIMs will obviously come down, which is something that we’ve been guiding. It’s a very mathematical principle. As your leverage goes up, your NIMs will have to come down. So our leverage has gone up to 2.2x last quarter. So because of this nims contracted a little bit. The second point is also that leading from the leverage that happened, we also maintained a little higher liquidity on the balance sheet than what we would have normally liked, primarily because the regulators came out with that risk wage circular.

We were not very sure in terms of how this will impact, whether it impacts the availability of funds or it will impact us from a cost perspective, given this uncertainty, especially during the month of November, we took some sanctions that otherwise we would have probably pushed to the end of December or maybe even to Q4. So some of those we took it by mid of quarter, which has also pulled down the NIMs a little bit. Our liquidity on the balance sheet was about ₹1,800 crores as of December. Ideally, we would have liked this number to be at about ₹1400 crores or so, broadly at around 15% of our AUM. So we are slightly higher on the liquidity. So higher liquidity means higher leverage and higher leverage means lower nims.

There will continue to be a contraction in NIMs and RoAs as we increase our leverage, as we borrow more from the market. But what is also important to note is that our return on equity during this quarter has gone up by about 65 basis points. We are almost at 17.74% from about 17.08 or 17.1% as of last quarter. So you will see a contraction in nims, you will see a contraction in roads, but you will see expansion in both leverage and return on equity. So that’s the maths for the shareholders.”

NBFCs And Borrowing

When asked about the company’s plan going forward in terms of borrowing funds, especially considering that the rate cuts from the regulator seem a little far for now, Gopalakrishnan said,” For NBFCs borrowing is the raw material. So whether we like it or not, we have to keep borrowing money in order to lend. And then you earn the spreads, NIMs and consequent profits. So we will continue to keep borrowing money from banks, and financial institutions, and do capital market transactions like issuance of NCDs, and securitization transactions. We are also in talks with large developmental financial institutions, both Indian and international to see if they can subscribe to our NCDs. So clearly, building the liability franchise borrowing money and increasing our leverage are one of our most important focuses in terms of delivering returns to our shareholders. See, from a cost perspective, I take your point partly, yeah, there is no near-term drop in rates that is being envisaged.

But I think over a period the drop in rates will have to come through, especially with better numbers coming on inflation and the need for the economy to grow. So our belief is that at some point in time, maybe in the next couple of quarters or thereafter, we will start seeing interest rates coming off. But even the cost of incremental debt that we are borrowing today is coming in at fairly attractive rates. It’s coming in at, let’s say, 9.57% for the last quarter, even if that number is another 10-15 basis points higher. Our yields are about 24.2% on our balance sheet. So the ability to absorb minor shocks is not at all a problem for us.

Our focus today, in fact, the last 12 to 18 months, we were heavily focused on getting the right set of lenders to lend money to us at the right cost. So if you look at it, our incremental cost has been steadily coming down, and our cost of funds on the book also has been steadily coming down. Today, the focus has shifted a little bit. Obviously, the right lenders, the right quantum, and the right pricing are important. But what has been added to this is the right mix of borrowings. So 66% of our money comes from bank term loans today. What we are also seeing, especially with the regulator saying that NBFCs will have to start reducing their reliance on banks. So we are also trying to see how we can diversify our funding sources, and do more capital market transactions to non-banks.

You have insurance companies, you have mutual funds, and you have developmental institutions. How do we diversify our funding source? Even if that comes in at a little premium than what we are borrowing today, we should be okay with it. So the intent is to see how we can reduce our reliance on bank funding and push this more towards non-bank funding. So that’s one of the factors that have actually gotten added to our liability strategy as we go forward.

Regulatory Landscape

In the past few years, RBI has been tightening the rules for financial institutions, especially NBFCs, so we asked Gopalakrishnan how is the company working towards navigating the ever-evolving regulatory landscape of the country.

“Any change in life is difficult. We’re all used to our comfort zones, so any change in life is difficult, but changes also come for the good. So from our perspective, we see some of these steps that the regulator is taking, and some of these guidelines that the regulator is coming out are good for the industry in the long term. Our belief is that some of these things are good for the industry, and if you’re able to keep up your compliance-first culture, while you may have short-term pains, I think navigating this is not going to be a challenge. The classic case in point is the implementation of the new NPA norms that came in about a couple of years back.

Our only problem with that circular was that it got implemented with immediate effect. But thankfully, RBI understood the concerns of the market, and the concerns of the players and then deferred the implementation by six months. And that gave us enough period to sort of stabilize our operations, sensitize them to the new guidelines, and ensure that we came out unscathed from that. So regulations are always good, but you cannot have knee-jerk reactions. And more often than not, RBI has been more measured in its approach in terms of coming out with some of these things. So we do welcome these regulations. We don’t see any big impact coming on our operations or on our business.”

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