Gagan Banga: The way that we are progressing is essentially that we got into an asset-light model close to about four years ago and since then we have been systematically working on scaling that up. As part of that model, we had to continue a process of reducing our legacy book which we have materially progressed on, that progress will continue over the next 24 months. But we have now reached a stage where over the last four to six quarters, we stabilised the overall business, scaled up the retail disbursals and whatever are the targeted segments for growth, the disbursals around that are coming along at a good pace.
At this point in time, we believe that to grow and take the disbursals to the next level, we have set a goal that by the end of FY25, we should be disbursing close to about Rs 2,000 crore. By the end of FY26, we should be disbursing around Rs 3,000 crore a month. In order to get to those numbers, this growth capital is going to come in extremely handy. And overall, the goal now is that with the equity capital that we have, first we try and get to a return on asset number which is north of 3% by FY26 and then target to touch ROE of 15% sometime in FY27.
You are repaying a lot of overseas debt, I am assuming that you are restructuring debt in a way that the high cost debt could be repaid. And at the same time, I see a lot of NCDs being raised as well. So where would you like to take your overall cost of capital down to?
Gagan Banga: It is more important for us to make sure that we never get into a situation where any type of debt is ever going to get restructured or even remotely, even that suggestion is an issue to us. As and when whatever debt comes up for maturity, it gets repaid. If there is a chunky debt repayment in any month, in any quarter, we start preparing for that visibly and publicly four quarters prior to that and start setting aside money such that the liquidity cover is already in place for that specific repayment.
We have, following this model, repaid close to Rs 1,25,000 crore of principal, Rs 90,000 crore of that is on a net basis. Our gearing has been reduced by close to about 90,000 crores. From a peak gearing of 6.5 times, we are at 1.4 times. The target is over the course of the next five years to moderately increase the gearing from 1.4 times to two times, but that is going to be a back-ended increase. That increase is going to come between FY27 and FY29.
FY25 and 26 are going to see no increase. We will continue to operate at 1.5 times gearing which means that our debt levels would stay more or less in the same ballpark where they are at about Rs 72,000 crore plus minus 10%. So we are at one end repaying, at the other end, in order to maintain our debt levels at the current level, we will obviously have to continue to borrow fresh.
Within that, we will try and populate as many options as we have. Over the last 30 months, we have done 13 public issues, small in size, which provide us granular money. We cannot take deposits, but we want granular money. So we have raised around 2,000 crores. This Rs 2,000 crore today comprises approximately 7% of our borrowings. Hopefully, in the next 24 months, this should be 15-20% of our borrowings. Similarly, overseas capital should comprise 15-20% of our borrowings and the rest will be institutional capital from banks via the bond route.
The ROE target is 15%, 3,000 crore per month kind of disbursal by FY26. And gearing will slowly and steadily inch up to 2x. But what is the ROE target internally that you are working with? I was also looking at the asset quality. There’s a slight deterioration in the asset quality. Anything that we should be worried about, at least at the net NPA level?
Gagan Banga: No, the asset quality over the last eight quarters is being the single biggest demonstration of strength. So even though the book has contracted on absolute value, both the gross and net NPAs have actually come down because the book has contracted on a percentage basis, they will be marginally up. On an absolute value basis, the gross NPA is down by about Rs 200 crore. This is despite this being an ever seasoning book. This is not a book in which we are incrementally doing much of disbursals. The book is getting seasoned. And despite that seasoning, if the NPAs are staying stable, there cannot be a better performance than that.
As for the question of ROA, we are targeting to touch an ROA of a lot of 3% by FY26. We are currently at about 1.6% ROA. The incremental business that we generate, generates around 3.5% ROA. The book that we are running down was at a similar level of about 3.5% ROA. So as our disbursals exceed under the new model, the repayments which are happening, 1.6% will start getting into 3.5% and via that, we hope to get to about 3% by FY26.
In the last one month, we started reading some reports and some views coming in that we are in a mature cycle now as far as the housing space goes. Are you going deeper into the country and going to the mid and lower? How is the overall business shaping up in that sense?
Gagan Banga: The macro cannot be more favourable. India is poised to go from over $3 trillion of GDP size to $5 trillion and to $10 to $10 trillion. In a country which is primarily depending on consumption for its GDP compounding, real estate tends to form a very, very important part. And unlike the rest of the world, where there was a massive real estate upcycle between 2014 and 19, before interest rates went up, India had a very benign downward cycle through that period.
In 2020, when the upward cycle started, India was actually coming off almost 10 years of an extended downward cycle in residential real estate. If we look at the price compounding, price compounding of real estate assets, despite the momentum that it has shown in the last three years, is all of about 7%. The average inflation through the last 10 years would be also in the same ballpark. So essentially, our CPI is equal to real estate inflation.
There is no better situation than affordability for this to happen. Wage inflation has been happening for the industry at 10% to 11%. So affordability is very good, which is getting reflected in how there is momentum on the real estate side. COVID has also resulted in demand for bigger homes.
The massive spends that the government of India has made on infrastructure, especially on the road sector, and now on the airport sector, is connecting the hinterland with the main cities, which is causing economic prosperity in tier 3, 4, 5. And most importantly, the government’s focus on making sure that affordability continues.
If you look at PMAY or the Honourable Prime Minister’s personal focus on making sure that more and more people get homes, all of this creates a very good scene for a housing finance company like ours.