This looks like a case of learning on the job which is not the way to do it in lending

Vintage curves evolving which can increase overall GNPAs beyond 2% going forward.
Ticket size and other product level details still not finalised

I couldn’t ask some follow up questions in yesterday’s concall as they had run out of time. Mr. Nath had asked me to write to IR or take it offline.

I have sent the following list of follow up and additional questions: (My comments for VP in brackets)

1. I think RBI has capped FLDG at 5% for each FinTech. Your presentation still states 5 – 15% FLDG cover. So how much does this impact your growth and existing partnerships which are >5%, have they been changed to 5% FLDG?

2. How do you ensure FLDG is 5% at the FinTech level and not for each partnership that the FinTech has?

3. We seem to be the preferred player for secured MSME co-lending among PSU Banks. When do you think PSU Banks will open the flood gates for unsecured lending? Is any other NBFC doing co-lending for unsecured loans for PSU Banks?

4. Is 100% of our collection digital? Or do we still have some cash transactions? When will we become 100% digital in terms of collections?

5. You said the GNPA in prime unsecured to stabilise at 4.0%. Previously you had stated 3.0% – 3.5%. What is the normalised GNPA in this segment?

(The GNPA goal post for unsecured seems to be trending higher with every quarter. Looks like the Mgmt themselves aren’t sure?)

6. Say, Unsecured is 30% of mix with GNPA of 4%, and Secured is 70% with GNPA of 1%, is the overall GNPA of ~2% (1.2% + 0.9%) a decent assumption?

(But currently, the secured itself is trending higher than 1% and increasing. So, 0.31.2% + 0.71.5% = 2.25% is where GNPAs will settle at?)

7. How much of micro enterprise is unsecured? Do you want to start giving the breakup of the micro enterprise as well similar to Prime?

8. In Supply Chain Finance, what is the proportion of loans to Anchor Customers vs total supply chain finance AUM?

9. Asset quality deterioration in supply chain finance is basically default by large anchor customers but scale is achievable ONLY by onboarding more anchor customers with risks cascading. How do we see the risks in this business going forward? Do we have anchor level caps? Or anything else?

10. You said in call that you want to keep the Supply Chain book granular and hence dropped ticket size from 1 Cr to 50 Lakhs. But if I check Q4 FY22 ppt, the ticket size is only 42 Lakhs. Q4 FY23 PPT, the ticket size is 95 Lakhs, Q1 FY24, the ticket size is 103 Lakhs, Q2 FY24 it is 49 Lakhs. Why this volatility? Even the tenure dropped from 0.5 years to 0.25 years. What is the existing book ticket size and what is the ticket size going to be for new loans? Looks like we are learning lending on the job which is not the right way. Either that, or we wanted higher growth and hence we started disbursing higher ticket size. We should be learning from other lenders and their past track record. Say someone like CUB.

(Was Mgmt chasing growth at the cost of risk and now course correcting? In one slide in H1 FY23, they have even mentioned 5 Crs for LAP and 3 Crs for Supply Chain. Now they have removed these slides.)

11. How does our ticket size compare with SG Finserv? What do we do differently than SG Finserv, CSL Finance and other MSME or supply chain lenders?

12. How many anchors do we have currently? How many are we planning to add in H2 FY24 and FY25?

13. A dumb question. In Q4 FY23 PPT, Slide 10 where you talk about Default rates across score bands – the disbursed default rate of D & E is higher than not-disbursed A and B. So why even disburse to D and E? You can disburse to only A, B and C?

And in 6 months, Q2 FY24 PPT, Slide 11, now the disbursed default rates for D and E are much lower than not-disbursed B and C. What changed in 6 months since this data is “all customers since inception”? Does it mean significant deterioration of not-disbursed customers and that the UGro score is working to tee?

More importantly, why has C’s disbursed default rate declined from 1.2% to 0.8% and D&E from 1.7% to 1.4%? Is this being skewed by new customers who don’t have any default at least for first 3 months?

Please give cohort level data.

Q4 FY23:

Q2 FY24:

14. What are the approval rates in each of your products and score bands?

15. D and E score, which loan product is the major contributor? Unsecured or Secured?

Not the right time to enter this trade as per technical analysis. As per financial it’s ok but charting is saying some other story . Keep close eye but it says wait.

Here is the latest report on GATI

Hope this helps
dr.vikas

Update on Axis Fund House after Jinesh Gopani’s exit

Background

For those who are not aware, Jinesh Gopani – Head of Equity for the Axis mutual fund left the fund house couple of months back. Gopani was instrumental in defining and executing ‘Growth + Quality’ investment philosophy at Axis. This departure comes after underperformance which started in late 2021 and got exacerbated in 2022. Shreyas Devalkar who joined Axis in 2016 is in charge of managing the fund and also promoted to Head of equity now

With these events, I think its a good time to revisit the thesis

I would like to divide this post in 5 parts

Part 1 – My thoughts on strategy canvas

Part 2 – whats the best combination for portfolio. My thoughts

Part 3 – why Axis over other options within same strategy

Part 4 – changes in portfolio strategy at Axis in last 6 months and its implications

Part 1 – My thoughts on MF investment strategy canvas.
Please note – i like to invest in categories where fund manager has complete freedom to implement strategy across market segments. Therefore small and mid cap funds are not part of this discussion

Axis, MOSL, UTI FLEXI CAP, DSP FLEXI CAP

buy high roe and high growth companies (compared to benchmark) even at higher price. Very high focus on Management capabilities and integrity. Usually fund comprises large and larger mid cap companies with above average concentration in allocations. Stock selection is bottom up with very less overlap with benchmark

PPFAS, Mirae

Buying high ROE companies at reasonable price usually when there are some issues around company or sector. PPFAS prefers compact portfolio while Mirae prefers large diversified portfolios. Inclination is towards large cap companies.

HDFC and ICICI

Taking top down sectoral bets based on macro/ cycle/ valuations. Focus on relative position across ongoing cycles and subsequent mean reversion.

BANDHAN

Stick to benchmark for sector allocation. Bottom up selection of stocks within each sector. Usually individual allocations are capped. Large sector diversification and smaller allocations makes natural inclination towards small mid cap