Cholamandalam Investment & Finance Company

Limited Q1 FY-15 Earnings Conference Call

August 01, 2014

MANAGEMENT:

MR. VELLAYAN SUBBIAH MANAGING DIRECTOR,

CHOLAMANDALAM INVESTMENT & FINANCE COMPANY
LIMITED
MR. KAUSHIK BANERJEE PRESIDENT - STRATEGY &
CORPORATE AFFAIRS, CHOLAMANDALAM INVESTMENT &
FINANCE COMPANY LIMITED
MR. ARUL SELVAN CHIEF FINANCIAL OFFICER,
CHOLAMANDALAM INVESTMENT & FINANCE COMPANY
LIMITED

MODERATOR:MR. SANKET GODHA ANALYST, JM FINANCIAL INSTITUTIONAL

SECURITIES PRIVATE LIMITED

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August 01, 2014
Moderator

Ladies and gentlemen good day and welcome to the Cholamandalam Investment & Finance
Limited Q1 FY15 Results Conference call hosted by JM Financial Institutional Securities
Private Limited. As a reminder all participants 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 the conference call, please signal an operator by pressing * then 0 on
your Touchtone phone. Please note that this conference is being recorded. I now hand the
conference over to Mr. Sanket Godha from JM Financial. Thank you and over to you, sir.

Sanket Godha

Good afternoon everyone and welcome to Cholamandalam Investment & Finance Earnings call
to discuss the first quarter FY15 results. To discuss the results we have on the call Mr. Vellayan
Subbiah Managing Director of the company; Mr. Kaushik Banerjee President - Strategy &
Corporate Affairs and Mr. Arul Selvan CFO. May I request Mr. Vellayan to take us through
the financial highlights post which we can open the floor for question and answers. Over to
you, sir.

Vellayan Subbiah

Thanks Sanket. I think we have had a decent quarter given kind of the basic market conditions
we have seen and broadly I say it kind of as a headline NPAs continue to be our primary
concern. The company basically disbursed Rs. 2,300 crores in vehicle finance again it is about
Rs. 2,600 crores in the same quarter last year and home equity grew a bit we disbursed Rs. 716
crores there again Rs. 662 crores. But basically we have taken a more cautious stand to
disbursements at this stage. The aggregate disbursement for the company stood at Rs. 3188
crores as against Rs. 3278 crores in the same quarter last year.
Our income grew by about 14% to Rs. 869 crores. Like I said our primary concern is the
continuous stress in the commercial vehicle segment. Our overall GNPA has risen to 2.4% and
NNPA to 1.1% on 30th June 2014. We are taking a tightest stands and approach to credit and we
do believe that that is resulting in lower disbursements but we do believe a combination of
these actions plus hopefully an improvement in the overall market will basically help improve
portfolio quality over time.
Our PBT for the quarter is at Rs. 141 crores versus Rs. 138 crores in the comparable quarter
last year and PAT at Rs. 93 crores versus Rs. 91 crores. We have raised Tier-II capital of Rs.
270 crores and I will come to the equity bit we have just announced an equity raise as well. And
Rs. 270 crores came as a combination of sub debt and perpetual debt and our capital adequacy
were at 18.05%. Our subsidiaries given kind of a whats going on to the securities market have
also started making money in this quarter and Chola Securities and distribution together made a
profit of Rs. 2.5 crores for the quarter versus Rs. 0.87 crores in the same quarter last year.
Our consolidated PAT was at Rs. 96 crores against Rs. 92 crores for a growth of 4%. One other
point I would like to talk about is our equity issuance where basically we had a board meeting
on July 26th and we have approved an issuance of 50 million compulsorily convertible
preference shares of 100 each for the total capital raised at Rs. 500 crores and this was fully
subscribed by funds of APAC partners who will now then the CCPS is converted in to equity at
the end of the year and then they will become an equity holder after that. This will basically
help meet both business growth and augment our Tier-I capital.
So I would like to stop with that and then turn it over to questions from your end. Thank you.

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Moderator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer
session. We have the first question from the line of Rohit Shimpi from SBI Mutual Fund.
Please go ahead.

Rohit Shimpi

My question is on the home equity book so any particular reason why we are seeing slower
growth in that segment right now I mean is it that there is a competition or the risk that you are
seeing on the asset quality there if you could elaborate please?

Vellayan Subbiah

Rohit, thanks for the question. Basically it is not a challenge from an asset quality perspective
though usually what we do in our home equity I mean usually the first quarter on home equity
tends to be weaker and we have seen some of that kind of move in to the home equity business
but it is actually seemed to be more a reflection on kind of the overall business that market
predominant caters to SMEs. And SMEs willingness to kind of open up their pocket books
appears to be kind of being hit a bit.
Now what we are hoping is that this is temporary and kind of as some of the other it is bit of a
trickledown effect Rohit where once the larger companies start to spend then kind of in general
there is more of a mood to spend in the overall market. And we have seen the SMEs taking
much more cautious stand especially in this quarter. That is one of the things. So that is part of
what we will need to kind of watch for how that plays out in the next quarter as well.

Rohit Shimpi

And on the vehicle finance just wanted to get your sense of when exactly do you see the NPA
ratios peaking and then growth coming back and what are the things you are seeing on the
ground in that segment?

Vellayan Subbiah

Yes, it is tough Rohit to predict when it is going to come back. The positive thing is that all of
the vehicle manufacturers are extremely bullish but we have not seen any positive fronts play
out in the market. When we look at most of the data that is coming out. So you did see small
improvement in heavy commercial vehicles but that is about it. So the thing Rohit is one of the
things where broadly if you take the mood the thing should be getting better. If you take some
of the actions people are talking about things should be getting better. But it just does not seem
to have hit the ground yet. So it is pretty difficult to say when we like to think that it is going to
be in the next couple of quarters but I do not want to kind of I do not want to take a guess on
when we think it is going to happen.

Rohit Shimpi

And just given the trends which we are seeing in your own buckets on this delinquent or
overdue loans is it your sense that gross NPAs have still some room to go before they peak or
you think that most of it has come in now?

Vellayan Subbiah

Yes, you could see it moving a little more up, yes.

Moderator

Thank you. We have the next question from the line of Rahul Bhangadia from Lucky
Investment Managers. Please go ahead.

Rahul Bhangadia

Sir, I just wanted to know a little bit more on the capital raising front for how long do you think
or for how long do you think this money that you have raised suffices your requirements
depending upon whatever growth you foresee?

Vellayan Subbiah

Rahul, thank for the question. Our belief is that this will take a three years including obviously
kind of the fact that we will continue to bulk up on Tier-II.

Rahul Bhangadia

And three years based on what growth assumption on the overall balance sheet side?

Vellayan Subbiah

In general we model somewhere between 20% and 25% asset growth.

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Rahul Bhangadia

And at the end of it what is the kind of we are trying to understand if the potential ROE of the
company can be closer to 19% to 20% is that something that you are also looking forward to?

Vellayan Subbiah

Yes absolutely. It is the number that we do track internally and we do believe that we can
achieve those numbers. Predominately what is the pressing it right now is the fact that credit
losses are much, much higher than they traditionally are. So cycle kind of revert to what we
think is a mean we definitely see the ROE numbers moving back. Obviously we kind of right
now in the short term we have got a bit of an injection that we will have to take because of the
Rs. 500 crores. But by the time the NCLs normalize and we absorb this in to our capital
structure we definitely see it going there.

Rahul Bhangadia

So one of the functions of going back to the 19%, 20% kind of ROE mark would be the
reduction in the provisions. Is there any further scope of reducing your cost levels or we have
kind of reached the bare minimum that you can do on the cost side?

Vellayan Subbiah

No, on the cost side rather we continue to believe that there is a lot of opportunity. We have got
it down to about 3.3% now and like we said I believe in the medium term and we have to get
that number to 2% to 2.5%. So basically on that side there will continue to be opportunity but it
will obviously we are not get there immediately we have to kind of continue to chip away at it.

Rahul Bhangadia

And besides the fact that the asset book itself will you are planning to grow it at 20% to 25%.
What else will kind of take the cost down from a percentage of 3.3% levels to may be 2% to
2.5%?

Vellayan Subbiah

The cost side there is a lot of opportunities that continues to remain it kind of almost 70% of
our costs are people related and people means that is very fundamentally driven on the
productivity of getting from the people. We have articulated some of the stands that things that
we have started to do in terms of improving the sales side productivity. So basically we are
looking at pretty much everything you should be looking at on the cost side.
On the collection side we continue to see that there will be opportunity to improve productivity.
We are moving to a two Tier-structure where the early stage collection is moving to call center
base which is we were finding it a cheaper model to go to for early stage collections. There we
are seeing that people have a general kind of intent to pay. So we are doing a lot in terms of
early warning signals in terms of what profiles are going to pay automatically versus what
profiles are not. And for profiles it have a higher propensity to pay.
We are moving them to call centers and then we are moving medium and late stages to more
people intensive collections. We are looking at that ACRs for the people part of it where the
people go out and collect to see how many accounts one collection agent can collect. That is on
the collection side.
On the other side we are actually kind of looking at overall structures itself span of controls
between our direct field force and the hierarchy above it. Most organizations tend to have a
fairly standard and kind of what I will call a classic hierarchy if you have a branch manager
then you have an area manager; regional manager; a zonal manager. So we need to look at the
entire span of control through that chain so that the organizational implications which again
have turn translate in to a lot of benefits over the medium term. The less hierarchy you have
obviously the better off you are.

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So there are several areas they were looking at on the operation side that we do believe that will
translate in to more benefits over time. We are also moving our mobile platform in to a tablet
which is going to do I say almost five times as much as what we were doing on the mobile
platform. That is going to help reduce our turnaround time significantly which then again help
to increase productivity on the sales front and actually we are looking at models in terms of
how much of credit will remain centralized versus decentralized.
Well, we will remain decentralized versus centralized so pretty there at least about five
initiatives going on. There are just totally focused on how we reduce our OPEX to assets. So
we still believe that it is early days on that front.
Rahul Bhangadia

The technology platforms that you have just talked about is that all in-house or outsource kind
of stuff?

Vellayan Subbiah

So lot of the thinking was lead so there being two areas kind of one is some of the design
aspects McKinsey has been involved with the thinking and the actual development has been
done by Cognizant.

Rahul Bhangadia

Okay so the design bit is from your side; the requirement is from your side and Cognizant is
doing the development work for you?

Vellayan Subbiah

Even in the design aspects we have used outside help as well both internal and external on the
design part.

Rahul Bhangadia

Okay so basically the software that you use is basically kind of the IPs your own and it is pretty
much kind of hosted in-house or you have actually kind of outsourced everything the whole
process in to outside?

Vellayan Subbiah

It is absolutely our IPs it is hosted in-house there is no question. It is totally our IP it is hosted
in-house. What we are outsourcing is the development of it. Cognizant basically we did not
develop.

Rahul Bhangadia

Everything else is basically on your end itself?

Vellayan Subbiah

Yes, it is for us they are doing the development.

Rahul Bhangadia

And just one final question. Pardon my ignorance but any mention of the conversion price of
the CCPS that you have issued?

Vellayan Subbiah

Rs. 407.

Moderator

Thank you. We have the next question from the line of Kunal Mehra from Visium . Please go
ahead.

Kunal Mehra

Couple of questions. Firstly, operationally some of your peers have talked about a significant
negative impact in collections in the past quarter largely due to the election related activities.
Did you witness or encounter anything that is similar that we should be cognizant of when we
kind of look forward to the next quarter?
Second, given the capital raise I certainly agree with the timing of it. But when you are looking
to pickup capital at this point your cautious statements on home equity CV how do you align
them with the need to capitalize right now for growth and therefore what will be the timelines?
And finally, and I will throw this out there that this is more of a comment from institutional
investor like us who want to be more involved in your stock. Issuances of this type
unfortunately do not aid liquidity in the near term which if I had to probably pick a little the
only strikes against the stock that will probably rank at 1, 2, and 3. I mean I realized that there

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is little to be done about that but just one for you and the senior management to be cognizant to
that if we can do anything to improve liquidity it will make a lot of what you are doing also
actionable for institutional investors like ourselves?
Vellayan Subbiah

No sure Kunal, thanks for turn for the questions. Let me kind of shoot in order. First, in terms
of collections and where they affected by elections. Yes, definitely I think Mahindra reported
there as in their quarterly review as well. The collections were affected by elections. The
question obviously is that April as a result got hit for pretty much us and everybody else. The
question is how much of an impact was elections versus otherwise and traditionally we have
always seen April be a bad month because March tends to be the best month so some of that
hangover basically comes in April.
So yes, we do attribute a certain amount of the performance to elections and so we do believe
that that will not be there in this quarter.
The second question on capital infusion I think your question was predominantly one on
timing. So first I just wanted to state that I did not imply that we are taking a more cautious
stand to home equity we are not. I think the question was more why did not we kind of grow
our disbursements so much in the first quarter and my response was more to that. We continue
to see a lot of growth opportunity in home equity and I do not believe that we are going to take
a cautious stand I mean we are going to take an increasingly cautious stand in that market. We
are taking a more conservative view to vehicles finance.
The second question was why did we choose to raise capital when we are seeing cautious
stands on both. I think lot of the people in the phone are far more experts in this than I am but
obviously the prudent thing to do is raise capital when capitals available and when we think
kind of the price justifies it. And we felt that from that perspective it was the prudent time
capital was available and I always think it is better to bulk up when it is available versus trying
to bulk up and timing it exactly when you need it.
So Kunal, I hope that answers the second question.
The third one is obviously kind of a tougher one to answer the point on liquidity. Obviously all
I want to say is that as promoters the family used to own effectively 75% of the stock. Now we
are down to 53% so we are hopefully kind of a bit better than it was in the past. Part of the
challenge that you talked about on the institutional side is that even when we have given the
institutions a lot of the institutional investors were given to continue to hold and not sold.
So we did go through the debate as to whatever we should go with a PE round and an
institutional round but our belief is that hopefully some of the funding we did four, five years
ago some of those investors I do not know at some point might choose to exit the market. But
obviously it is another dimension that we have to try and kind of optimize on and at this stage
we just felt that that PE was a kind of a quicker kind of a better route for us to go than basically
taking a QIP or basically going down the institutional route.

Kunal Mehra

Fair point, agree. Can I just seek one clarification on the first question you referred to April
being the month that was impacted. Would it be right to assume that the actual impact was
restricted to arguably that month obviously woven in with the seasonality that April represents
rather than being an impact that was across all three months, right?

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Vellayan Subbiah

Yes, definitely Kunal. It was restricted to only that one month. What you are seeing in May and
June is actually representative of where the market is at. And that is why we said that we do not
see any significant improvements in terms of the actual market conditions on the ground yet.
Yes, our moods getting better absolutely. So that gives us encouragement that it is going to get
better but we have not seen on the ground translation in terms of more money in terms of our
truck owners pockets.

Kunal Mehra

One final question if I may. You always talked about your approach for the mortgage home
product LAP SME oriented product and how it is a lot more granular and it involved then the
peers and most notably the PSU Banks. If I had to reflect on lot of my conversations with the
bank chairman this seems to be the new attractive product for a lot of them obviously on a
backward looking basis. My hypothesis is that you are countering a lot of that increased
competition by going further deeper in and probably trying to broader relationships with the
existing customers.
It is what and I mean the systems and the processes that you have talked about in the prior calls
point in that direction. Is that the right assumption; is there anything more to be built on in that
direction?

Vellayan Subbiah

Yes Kunal, you are absolutely right I think NBFCs in this country are always going to be if we
were to think kind of an in the early days we used to have this kind of classical game between
Sony and Matsushita where the Sony was always the innovator and then Matsushita was kind
of fast follower. Now people kind of talk about the Apple, Samsung battle in the same way and
you know invariably what happens in this country in terms of financial markets is that a lot of
that kind of innovation tends to come from the NBFCs and then the banks tends to be fast
followers once they see that a market has been proven out by set of NBFCs.
So we obviously expect that and it is a constant game for us. So basically the way we need to
look at it and we are looking at it kind of fairly actively in the home equity business right now
is that what we
Used to do in perhaps like 40, 50 locations we have to think of how we are going to move it out
to a 100. Now what is good for us is and that is one of the things we are actively looking at
what is good for us is that because we already have a vehicle finance presence. Our cost to
spread 80 to 100 locations is fairly minimal. It is basically if we are going to drop three people
in to a location with just three computers and the cost of the people but we definitely do see
both an increase in geographic depths that we need to go to as well as an increase in our general
approach using the segmentation on some of the micro market area.
I do not know we are kind of talked in detail about how we are trying to use the industrial
classification standards to kind of get more temporized in our approach but all of that is things
that we have to start pushing in to the HE business to basically keep ahead of the game and
continue to grow.

Moderator

Thank you. We have the next question from the line of Aditya Singhania from Enam Holdings.
Please go ahead.

Aditya Singhania

I had two questions. One in the vehicle finance business I heard your comment that nothing
much is changed on the ground but still like to understand whether the comments made last
quarter still hold in that NPLs will peak in may be one or perhaps two quarters and any
comments on competitive behavior there whether it is easing or how it is changing?

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Vellayan Subbiah

Yes so Aditya; thanks for the question. Yes, I do continue to believe that our NPLs will perhaps
peak in the first couple of quarters this year. In terms of competitive behavior obviously it is
kind of whether NPLs peak or not also it depends on competitive behavior. What we are seeing
is that people are getting more bullish on heavies and this is what interesting because we are
not seeing the collections data at the back-end to support it but I think the heaviest market is
just been so beaten up for so long that you are seeing people who basically want to start
replacing older fleet.
The big question for us is that the small road transport operators the guys who we
predominantly fund their economics fundamentally going to improve or not. So it is an ongoing
discussion we are having with the manufacturers nowadays basically saying that do we actually
want to act till we see real improvement on the ground? Our general bias is not to and that is
the stand we are taking.
But we do see some people beginning to say like listen hey, heavies are improving let us start
kind of opening up a bit on credit we are definitely not there yet.

Aditya Singhania

So when you say people are getting more bullish are these the manufacturers or are these the
fleet operators or the financiers?

Vellayan Subbiah

The manufacturers will always have an incentive to kind of get more bullish especially in that
conversations with us. So that is what is kind of take or given Aditya. So what is encouraging is
for the first quarter we actually seen some data they are pointing to at least now we are seeing
in the last one or two months we are seeing some data point to heavy sales increasing. But I
always think of this as you have got what George Soros used to call reflexivity or it still calls
reflexivity in there, right?
Because some of this is how much of it is kind of supply side created, right and I do think that
we have got to be cautious when we come out of this from the supply side and from that
perspective it is important to see how the other financiers react as well. So I do believe that in
general the market will get more bullish a bit ahead of time. It is always the nature of the
market to kind of to forget the past and then kind of get a bit more bullish.

Aditya Singhania

And the LCV will presumably be a year or year-and-half behind or is that not given?

Vellayan Subbiah

I do not think any of these things are given. It is very difficult to predict. The downturn came a
year, year-and-half .

Aditya Singhania

Yes, I mean that is why I was asking.

Vellayan Subbiah

But there is no guarantee for the other end. Always think of that disclosure is that all you guys
put in kind of a tough results and no predictors of the future or whatever it is.

Aditya Singhania

And just on the home equity I know you sort of indicated that there is somewhat slower
demand. But I just like to understand last quarter we were sort of reasonably optimistic about
the current year. So if you could just dig a little deeper in to what really changed between then
and now and if there is some color around is there a customer segment or geography or where
you see a slowdown?

Vellayan Subbiah

Yes Aditya, there see I want to kind of take one of that thing to be taken in context what we said
is that we did see that guys have not started opening up their purse string as much especially in
the first quarter of this year. Now there I do not see the home equity situation has kind of
prolonged. And what the conscious we will be taken home equity is even if we cannot make the

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disbursement number how do you ensure that we will hit the kind of the bottom line numbers
and that is something that we constantly kind of look at in terms of how we are going to do. So
that is part of what happens which is at some points you choose not to kind of push
disbursements too much because you want to keep that focus on bottom-line a bit more.
But do I think that the SME market or kind of the HE market and predominantly the SMEs will
end to. The spending is going to suppressed for a prolonged period of time the answer is
definitely not. All I am saying is we did see some tightening in the first quarter but I do not
think it is going to be sustained.
Aditya Singhania

And do you see any signs of yield or spread compression at all or any other issues on the
market with regards to credit quality?

Vellayan Subbiah

Yield side we have not seen any challenges which is the yield side is held up pretty well. If
anything what we hope to see is kind of cost of funds come off a bit that should actually help
open up NIMs. So I would actually believe it is going the other way.

Aditya Singhania

And on the credit quality side?

Vellayan Subbiah

The credit quality I think we have that discussion in the beginning I continue to believe that
may be kind of Q2 is where we will see this thing peak.

Aditya Singhania

Sorry I could not follow that this thing peak; no, not in vehicle finance I meant in home equity?

Vellayan Subbiah

You are talking about home equities, sorry. No, we are not seeing any significant stress in the
home equity side. Sorry, Aditya.

Moderator

Thank you. We have the next question from the line of Balaji Vaidyanath from Sundaram
Mutual Fund. Please go ahead.

Balaji Vaidyanath

I have couple of questions. One is in terms of the proportion between vehicle finance and home
finance. Currently it is about 75:25 how do you see this moving in the next 18 to 24 months and
what kind of proportion would you be comfortable with; number one? Number two, I know you
were speaking about home finance to the earlier caller could you also give us some sense on
what will be the top five markets for you in this Rs. 2,800 crores business and I know you have
mentioned that the target market is the self employed guys and the middle income group.
Can there be more specifics in that in the sense will your typical customer be a second time
home buyer or a first time home buyer or is there also some amount of cross selling which you
may think of in the sense where you can target the well off fleet operators or fleet owners?

Vellayan Subbiah

In terms of the ratio we do see that ratio moving more towards home equity but it will be at a
measured pace it is the same pace as it has been increasing at the last three years in terms of
share. So may be kind of five points over a two, three years period is what I see the mix moving
at.

Kaushik Banerjee

SV, one clarification. Last year it was 25:75 right but this year we are 73:27 the mix over last
year this page 2 as 73:27 between VF and HE.

Vellayan Subbiah

So Kaushik, they are basically be about 5 points over a three year period,. Right?

Kaushik Banerjee

Yes, so we are already 2.7%.

Vellayan Subbiah

So in terms of your second question so there are couple of points you raised, right? The top five
markets generally the metro tend to be larger markets for us because that is where most of the
asset classes. So the larger metros will be kind of where our lager markets are. You asked the
question in terms of whether these are people buying a second home.

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So just to clarify Balaji, the home equity business is where we provide a loan against an
unencumbered asset. So it is basically somebody who does not have a lean against a house
today and we would take the first lean against it. So it is not for new house construction but it is
much more against the existing real estate asset base in the country that does not have a lean
against it and like you probably know almost 70% of the assets in the country is still do not
have a lean against them.
There was a question on cross selling. We do see an opportunity but it is limited and also we
look at it from the perspective of if we had already because effectively we were funding the
free donors business so we generally do take a certain amount of caution as to how much
leverage we want to kind of get in with that same person.
Moderator

Thank you. We have the next question from the line of Umang Shah from CIMB. Please go
ahead.

Umang Shah

I just have two questions. One, on the vehicle finance asset quality the increase in gross NPLs
that we have seen in this quarter if you could just give us some color in terms of which asset
class is it coming from so is it mainly from LCVs, Heavies or is it across our products?

Vellayan Subbiah

Yes, it is fairly broad across products.

Umang Shah

And so broadly if you could also just give us some more color on the LCV market so heavies
have had their fair bit of struggle over past two years and LCVs probably for past six months
we are all seeing struggling both in terms of growth as well as for financial s in terms of the
asset quality. So how is this market shaping up if you could just throw some light on that?

Vellayan Subbiah

So I am not sure your question is when is the market is going to pick back up and like you
know I am not the greatest predictor of that. All I say is that and this is kind of common
thinking currently that heavies will come back first then lights will come back after that. But I
do not think we are at a stage where we can predict when exactly this will happen.

Umang Shah

In fact my question rather was on those lines itself that is it that we would see a may be some
more pain in LCVs before the overall CV getting picked up or is it difficult to predict at this
stage?

Vellayan Subbiah

Like I think I responded to Adityas question our belief is that Q2 should be kind of when
things peak out, right? Given that we do believe the mood and sentiments getting better Q2
should be when things do bottom out.

Umang Shah

Just secondly, on your home equity portfolio if you could just provide me the average ticket
size and average yields?

Vellayan Subbiah

The average ticket size is about 50 lakhs and average yield is just shy of 14%.

Umang Shah

Just one last question. You earlier mentioned that going forward the ROEs or rather the
improvement in ROTA would be mainly driven by normalization of credit cost and obviously
our operating cost coming down. Assuming that incrementally over a period of time we see a
70:30 kind of a mix between vehicles finance and home equity.
What kind of impact do you see on margins or rather my question is that which will be the
product segments which will actually give some kind of a kicker to margins at least from the
yield perspective so cost is something which will obviously be market determinant but at least
on the yield side what will give some kicker to margins?

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Vellayan Subbiah

Yes, see our focus there is predominantly on our ROTA our return on the total asset base. And
right now obviously home equity has much higher ROTAs in the vehicle finance business. I do
believe that as the vehicle finance picks back up its ROTA can improve significantly as well. So
I think the data is there on our investor presentation but where it about 3.7% for our home
equity business today. So as a business we think 3.7% or kind of anything that begins to push
you know that 4% number is pretty healthy.
And we do think that we have over the cycle can begin to deliver that. It may require some
tweaking and mix because even within vehicle finance we have some products like tractor and
Shubh which our used trucks business that competes against Shriram have a much higher
effective ROTAs. So when we take the mix in vehicle finance we do believe that in both those
businesses we can start pushing towards that 4% mark. Now some of the newer businesses we
are looking at housing loans for example and what we are focused on is housing loans are less
than Rs. 25 lakhs in are targeted towards the SMEs.
We believe that that business can get us pretty good yields as well. And so that is a business we
are quite encouraged with in terms of early results. We are also looking at the rural space and
we are seeing good results from that business as well. So some of the businesses that we are
currently piloting we do believe will help boost the yields in the medium term. But obviously
those are not the short term drivers but like I said in the short term our two existing businesses
itself can get us to our yield targets.
So basically the yields like you know are higher in vehicle finance and we see opportunity to
bring down operating expenses in vehicle finance. So the combination of higher yield; lower
operating expenses when the losses normalize we believe that the ROTA in that business can
get to the same levels as from my query.

Moderator

Thank you. We have the next question from the line of Digant Haria from Antique Finance.
Please go ahead.

Digant Haria

Just wanted a clarification that you just said that as a response to someone elses question that
the immediate recovery in M&HCVs could not actually materialize and even if it materialize
you would like to stay away initially till there are signs of actual revival. So should we
understand from this that may be for the next 6 months or 12 months even if there is say a mild
recovery in MS series we do not see our portfolio growing meaningfully especially on the
heavy side?

Vellayan Subbiah

Yes, I definitely say that it is the stand for the next three to six months I would not say for 23
months but for the next three to six months yes, definitely that is the stand.

Digant Haria

And what would be the individual NPAs for vehicle finance and the home equity?

Vellayan Subbiah

All of that data is there in our investor presentation. The individual NPAs and all?

Digant Haria

Yes, individual NPAs. I think you give it every quarter, right the GNPAs in vehicle finance and
home equity individually?

Vellayan Subbiah

2.72% for vehicle finance and 0.04 for hedging.

Digant Haria

Lastly, I think just repeat of the capital raise which we did so what is the date and price of
conversion I think Rs. 203 is what you mentioned before?

Vellayan Subbiah

Rs. 407. Money is yet to come to and it will come in September we are waiting for the postal
ballet to get it cleared by the shareholders.

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Moderator

Thank you. We have the next question from the line of Sonal Gupta from UBS Securities.
Please go ahead.

Sonal Gupta

Just in terms of two things. One is given that you have a large LCV and small commercial
portfolio and again you have exposure to achieve. So just wanted to understand like you
mentioned or alluded to in the beginning that the economics is I mean you are very sure right
now but have you seen any signs in terms of freight rates, etc., or utilization levels for your
customers sort of improving and is your sort of collection sort of efficiency improving in that
sense?

Vellayan Subbiah

Sonal, so that is what I was saying which is we are not seeing a definite improvement on the
ground yet.

Sonal Gupta

No visible sign across the board?

Vellayan Subbiah

See what we are saying is it is staying at the same levels. We are seeing their mood getting
better. So that is why I want to segregate that the moods getting better there is no visible signs
yet that actual income in to our truck operators is getting better.

Sonal Gupta

And just the other question that I had was you seem to be growing I guess fairly in terms of the
disbursement mix in tractors and cars and MUVs are the two areas which seem to be growing
within the vehicle finance portfolio. So just any thoughts there in tractors because again we are
seeing a very poor monsoon so are you seeing slower demand or because you have a fairly
limited exposure to the segment you are gaining market share so how we should look about it?

Vellayan Subbiah

Yes so, I think you have answered your question so it is kind of one is yes because we have had
smaller market share we are expanding a bit and we are seeing slower demand because of the
monsoon. So both factors are playing out. We are not growing as fast as we thought we would
that is because of the monsoon. But we are expanding our market share. No performance from
that sector now again performance in that sector also in particular markets, right Madhya
Pradesh has got badly hit. So we want to basically kind of stay focused on markets where we
are convinced that the performance will remain good over the cycle.

Sonal Gupta

So which are the key markets for tractors for you?

Vellayan Subbiah

We get a split but Rajasthan is a decent sized market.

Sonal Gupta

And just again on the car side because I mean looking in to split it looks like again you have
fairly large rural exposure so again this is coming largely from the rural side the car growth and
the portfolio?

Vellayan Subbiah

That is right so car MUV is kind of coming more from the rural side.

Sonal Gupta

And again I mean just because in some of your competitors who are dominant in the rural side
have actually been showing declining disbursement for the last four quarters. So again it is
more you would say it is more like market share gains or do you think the underlying demand
growth is fairly healthy in those markets?

Vellayan Subbiah

Yes, it is definitely more than market share size on the car MUV.

Moderator

Thank you. We have the next question from the line of Jigar Walia from OHM Group. Please
go ahead.

Jigar Walia

My first question is on if you can explain the refinance portfolio in terms of now what the
product usually is and tenure and the yield?

Vellayan Subbiah

Your question on the refinance portfolio was?

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Jigar Walia

No, typically what is the product profile and the tenure and yield?

Vellayan Subbiah

Refinance in average gets will be in close to 15.5% to 16% in terms of yield. The tenure can
vary it can be anywhere from 2 years is the low end to up to from 2 to 3 years I would say the
average tenure and in terms of what kind of products it is traditionally kind of combination of a
light commercial plus heavy commercial.

Jigar Walia

Some color on the branch expansion in out of the existing branches how many branches do
form equity?

Vellayan Subbiah

So we have got 575 branches now of which about 67 do home equity.

Jigar Walia

And you feel that eventually it can actually move to all the 575 home equity as a product?

Vellayan Subbiah

Yes, do I think that it is going to get there over that is going to be a longer term. Basically we
have to make a judgment on how many properties we see that have a value of Rs. 1 crores or
more. So obviously in some of our smaller branches today they are not that many properties
they have that kind of value. So we would not go in there.

Jigar Walia

So basically as far as home equity is concerned I understand you target probably the semi-urban
or the kind of Tier-III, Tier-IV market but high ticket size. So you will target the rich within the
Tier-II, Tier-III segment is it?

Vellayan Subbiah

Our primary target is the self-employed and so within the rich you would have salaried and
self-employed but we predominately go after the self-employed.

Jigar Walia

If I can put it other way the profile of the 67 branches are they more metro centric?

Vellayan Subbiah

Obviously we do cover the metros and like this say kind of our mix if you take our base right
now will come from the metros. Our growth is coming from the smaller locations.

Jigar Walia

So when you go to smaller locations your ticket size probably if you can give a range for the
home equity I mean the ticket size that you capture?

Vellayan Subbiah

From Rs. 30 lakhs to probably about Rs. 3 crores.

Jigar Walia

Sir, last question is on the collection so you said that you are going to be increasing your
focuses on increasing collection efficiencies and you mentioned the collection per agent on the
non-call center team. In this case does the distance become an issue because earlier your
competitor has alluded to the fact that the typical 70 kilometer radium for the branch is little too
large if one has to actively do collection?

Vellayan Subbiah

Yes, you are fully right. I mean distance is a factor in terms of loan performance and in our
current credit modeling now we are taking that in to account but we are seeing a degradation in
terms of loan performance once we move beyond 50 kilometers away from our branch. So if
you kind of take them in 25 kilometer increments clearly we are seeing loan degradation once it
go beyond 50. And even between 0 to 25 and 25 to 50; 0 to 25 is significantly better. So in this
environment where we are tightening credit significantly we are obviously kind of looking at
that fairly strictly in terms of where we are originating our loans and we want them to be closer
to the branches. So broader agreement with the statement which is basically yes, loan
performance does degrade as it goes further away from the branch.

Moderator

Thank you. We have the next question from the line of Kashyap Jhaveri from Emkay Global
Financial Services. Please go ahead.

Kashyap Jhaveri

Just one question. I do not know whether I missed out in the middle or not. In your CV
portfolio how are you seeing the resale prices moving for the used vehicles?

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Vellayan Subbiah

The resale prices are now kind of I will say stabilized at very low levels. They have a loss rates
it kind of vary anywhere and in the best vehicles losses kind of go up to as much as 55% or
even closer to kind of 60% in some cases. But on average we are doing about 42% and the best
are kind of doing 25% to 30%.

Kashyap Jhaveri

And how would have they moved over let us say last about two, three quarters or so?

Vellayan Subbiah

So they have gotten worse and I say if you take from.

Management

500 bps like it used to be around 38% now it is around 40%.

Kashyap Jhaveri

So they have gotten a little worse than where they were about couple of quarters back?

Vellayan Subbiah

Yes correct.

Kashyap Jhaveri

So one of your competitors actually had a slightly different view to share but let us say if the
loss rates have actually gone up and let us say second hand vehicle prices at least if not falling
seem to have at least bottom at this point of time. In that scenario would it be actually safe to
assume that probably recovery in some of our products could be down the line without any
recovery in the second hand vehicle prices?

Vellayan Subbiah

So your question was the new market will grow without the second hand vehicles?

Kashyap Jhaveri

Sort of yes.

Vellayan Subbiah

It can happen but traditionally I do not see that skew playing out because you are going to see
the second hand prices recover as well and who is going to pick up second hand prices have to
recover.

Kashyap Jhaveri

So how do you then explain this dichotomy that we have seen at least some part of the CV sales
is actually getting in to positive trend say for about couple of months now but nobody is
actually ready to buy the second hand vehicle. I mean I would presume that one would like to
keep the cap cost low when the economy is not doing as well. So how do you explain that?

Vellayan Subbiah

The biggest thing we are hearing see here there is one challenge, right which is we do not fund
fleets as much. What we are hearing from the manufacturers is that the larger fleets are
basically kind of looking at their average age on their portfolio and saying that the average age
has gone up to significantly and they basically kind of get more new vehicles as a result. So I
mean so that could be the one factor that would explain why news beginning to pick up and as
they kind of modernize their fleet or kind of reduce the age they are probably going to be
dumping their old on the market as well. But I think that is a short run challenge it cannot
sustain in the medium or long run economic environment.

Kashyap Jhaveri

So if I understand this correctly what you meant to say from the last sentence was that unless
we see any meaningful economic revival this kind of sales will not sustain? For them to sustain
it needs the economic revival as well?

Vellayan Subbiah

Absolutely I strongly believe so.

Moderator

Thank you. We have the next question from the line of Kunal Mehra from Visium. Please go
ahead.

Kunal Mehra

Vellayan, I am going to impose once again. Is the long term investor looking at this sector if
one looks at the RBI actions over the locals the last 12 to 15 months you can be forgiven for
believing that RBI is trying to gradually nudge a lot of the NBFCs in to broader bank structures
you see in the affordable housing side, you see the licenses, and you see on a specific banks it
sort of key implication on the company. Ho w you are thinking about that? Do you think it is a

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real risk and a reality that you will need to confront very soon or do you think you actually
have longer than we all perceive?
Vellayan Subbiah

I think Kunal, it is a great question especially with some of the differentiators licenses now
where they have come out with both within the small banks license, and with the payments
banks they do seem to be making nudges. I just do not think it is kind of fully thought through
from the RBIs perspective as yet. But I definitely do see kind of nudges in that direction. I
think I have always articulated that I know at least starting 2.5 years ago we articulated that in a
10-year horizon there will be no difference will be in the NBFCs and the banks especially the
larger NBFCs and the banks. I do think that if RBI has that rather they would compress that
time frame. The thing that there are still thing kind of needs to be fully thought through is that
they are still same very similar the things and kind of putting such onerous conditions on kind
of the bank requirements that it makes it tough for people to kind of get in, right? I mean even
payment banks like in small banks for example you have to be kind of contiguous at the district
level so it is almost like a kind of you guys ever played a ball game called risk right but every
time you are going to try your troupes and need to kind of like you need to have a contiguous
parts with them. And that is about the challenge with the small banks. The second is just the
ownership criteria, right? Where they want the promoters to start diluting fairly significantly
and fairly quickly. So we do have a kind of thinking hats on in terms of what we need to kind of
do on this. We do see pressure and what I do think is the new bank options offer is the ability to
run both where you could basically have a payment bank as a subsidiary of an NBFC for
example. So I think that perhaps we do have to do. I am not saying we have an answer on it but
clearly what we were thinking was we would have the liberty of kind of going longer to answer
is something that we will have to answer in the more short or medium term.

Kunal Mehra

A probing question is the fund raised in any way linked to your hypothesis on what that answer
would be?

Vellayan Subbiah

No, definitely not.

Moderator

Thank you. We have the next question from the line of Aditya Singhania from Enam Holdings.
Please go ahead.

Aditya Singhania

Just sort of follow up question on the asset quality on the vehicle side, you know obviously
your comments are clearly indicating that there is not any improvement on the ground so two
questions. What indicators would you be watching for to sort of give an early signal that things
are the worst is definitely behind? And related to that you know in a way what gives you then
confidence that your NPLs will be sort of this quarter if there are not any improvements on the
ground?

Vellayan Subbiah

I will answer the first question. The what indicators you will look at kind of the predominant
what we predominately look at is kind of roll forward rates and what is happening to our roll
forward rates in terms of how much is moving from each bucket to the next. So 0 to 30 to 31 to
60 it still hits NPA. And so for example sometimes you tend to see kind of roll forward risk
getting better in particular buckets but to actually kind of say that a recovery or revival is on
track. So the performance needs to move up and roll forward rates need to move down across
all buckets over a period of three months. So that is on what will give us an indication that the
market and the environment is getting better.

Aditya Singhania

And is that something that you are not seeing at the moment?

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Vellayan Subbiah

No, we have not seen it definitely not yet.

Aditya Singhania

So then what would give one confidence I mean is it just that you sort of wound down your bad
portfolio you have tackled it and hence your NPLs will peak, how should we see that?

Vellayan Subbiah

See Aditya, the confidence is always kind of a big challenging because this is a loop like you
know a hate kind of making forward-looking statements but from an investor perspective you
guys always demanding kind of forward-looking statements. So it is bit of a catch 22 if I do not
give you an answer it is a bad I do give you an answer it would be like my feet to the fire. And
as a result the kind of what we do have to make is kind of what I would call kind of like
calculative kind of your swag. Swags are like the strategic wild guesses. So in the end we got to
make it kind of a calculated guess as to what we think is going to happen. Even that nobody can
be kind of a totally good predictor, right? So when you asked me kind of the patterns were one
month is getting better so you do would you think it is going to bottom out yes but there is a
challenge kind of bucket swell so much that there is a lot more sitting in kind of JV right now
than we ever had in the past. So I am just giving our best estimate.

Moderator

Thank you. As there are no further questions from the participants, I would now like to hand
over the conference to Mr. Sanket Godha for his closing remarks. Over to you, sir.

Vellayan Subbiah

Just to close I just like to say that we have also Kaushik Banerjee now he is in Mumbai and he
is also on this call. So if anybody has any follow up questions, please feel free to reach out to
Kaushik Banerjee who is on our Mumbai office and he will be happy to kind of interact with all
of you and kind of get you more detail on anything that you might like.

Sanket Godha

Thanks. On behalf of JM Financial I would like to thank Mr. Vellayan and other management
team of Cholamandalam and all participants for attending the call. Thanks a lot.

Moderator

Thank you all. On behalf of JM Financial Institutional Securities Private Limited that concludes
todays conference. Thank you for joining us and you may now disconnect your lines.

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