Transcript

Can Invoice Discounting Be the Next Big Fixed-Income Opportunity? 

Ms. Akshara Menon: Hello everyone, and welcome to another episode of our Fund Manager Interview Series. In recent conversations, we've explored diverse investment strategies from private equity to listed equities, wealth preservation, multibagger investing, and philosophies of fund managers who have consistently delivered alpha. Today's conversation is a little different. Instead of discussing where to invest, we're looking at how capital can work in a faster-growing digital payment ecosystem and how investors can potentially earn returns by financing short-term cash flow needs. India's digital payment ecosystem has transformed the way we transact. Today, millions of transactions happen every single day, with every UPI payment, card swipe, and bill payment having a settlement cycle behind it. Merchants often have to wait for their money even though the transaction has been completed. What if there is a way to bridge that gap, and more importantly, can investors earn returns by financing these short-term cash flow requirements? That's exactly what we're going to discuss today. Hi Karan, welcome to the show.

Mr. Karan Mehra: Hi, thank you for having me.

Ms. Akshara Menon: Karan, let's start with a very basic thing. For the benefit of our viewers, we know more about stocks, mutual funds, PMS, and AIF, but not much about this product. So what is your product, and what is Amplio?

Mr. Karan Mehra: Amplio is a company we started five years back. We create fixed income investment products which allow investors to invest in receivables-backed securities. These are slightly higher return products with a similar amount of risk as in a fixed income instrument. I would say anyone looking to diversify their investments beyond equity, PF, PMS, or mutual funds would consider this as an investment.

Ms. Akshara Menon: Just to add to that, who are the ideal investors for this kind of product?

Mr. Karan Mehra: The ideal investors for these types of products would be HNIs, corporate treasuries, family offices, and funds. These products are short-term investment products providing a yield anywhere between 10 to 11% per annum. Because of their short-term nature, it allows people to park their capital for a small amount of time. We also have a lot of HNIs and family offices which park capital here to earn a fixed interest return on their investment. To summarize, I would say 60% of our audience is HNI and family offices looking to invest short-term, and the balance are investors looking to earn a fixed return over a period of time.

Ms. Akshara Menon: Okay, let me understand this part now. What is invoice discounting in layman's terms for investors to understand, and how is this different from Amplio Red?

Mr. Karan Mehra: Invoice discounting, for someone who does not understand, is an age-old financial system we call bill discounting, supply chain financing, or invoice discounting. It basically allows businesses—largely MSMEs who are selling goods and services to very large corporations—to get upfront cash or advanced cash against their receivables.

Let me take a step back. Today, when a company bills a large corporation for services or goods rendered, they usually have to follow a credit cycle. Traditionally, the credit cycle we've seen in India is 90 days, which means your payments for the invoices raised will be paid only after 90 days of the invoice being submitted or even being approved. At the same time, the corporate is going to give you orders or expectations of deliveries for the next month. This leads to a working capital gap in your business cash flow.

What a business does is approach NBFCs or wealth management companies like us for discounting their invoices or unpaid invoices. These invoices are approved by the buyers but are yet to be paid. What we do is finance these invoices upfront, and on the due date, we collect payments directly from the buyer. That is what invoice discounting is.

But before companies like mine existed, this was done in a very unstructured manner. There was very less documentation and very less usage of tech. Now that AI has come in, we're able to verify invoices, check authenticity, and even fetch data from GST and bank statements. So a very unstructured product has been made structured. That is exactly what Amplio Red is.

Amplio is an RBI-regulated product managed by a semi-trustee. It is very similar to a mutual fund, which means as an investor, you can invest in these invoice discounting deals or these products through units of a trust. So it is the mutual fund of investing in fixed income products, I would say.

The minimum amount to be invested is 1 lakh rupees, and the minimum tenure for holding your investments is as low as 30 days. There is no exit load on exit, and the NAV of your investment increases daily.

Ms. Akshara Menon: That's interesting. You just mentioned that the loan tenure is as small as 60 to 90 days for an investor who wants to calculate their returns on an annual basis, but the loan is for a short period. So where is this gap, and how do you address this?

Mr. Karan Mehra: It's a very interesting question. Most of these products or loans are very short-term, from 30 days to 90 days. But what happens is when we promise this as an investment to the end investor, we give a return which is per annum basis, which means you can earn a certain amount of return per annum. Although it's a very short product, it keeps getting replenished. Replenished in financial services terms means recycled—as soon as the old loan has been paid, the new invoice is presented for financing. So it runs a replenishment structure or a churning structure.

We've done the analysis. We've worked with more than 150 clients in the last one year. We've disbursed more than 4,000 crores of loans. Our active investment book that we are managing is more than 1,000 crores. What we've realized is that the ideal days where the money is not used is less than 5 days in a year. There are always new invoices ready to be financed the moment an old invoice is paid.

This may seem like an operational challenge, which is where tech comes in. We build our own structures and dashboards which allow us to finance these invoices almost immediately after they've been placed as a request by the borrower.

Ms. Akshara Menon: Now the point is about risk management. Just imagine if the merchant supposed to pay has delayed the payment. Then how is the investor's money protected here?

Mr. Karan Mehra: Defaults are possible. There is credit risk in all of these products. What we do at Amplio is we hedge every single risk possible. Let me talk about the risks which are there in this product.

The first risk is the financial risk—the risk that the payment will not come from the buyer on time. In this case, the buyers or the companies to whom these goods and services are being sold are very large corporations. They would be the Tatas, Reliances, and Adanis of our country. We only select very large companies or MNCs as the buyers. This reduces the credit risk because a double-A or AAA-rated company will usually pay on time in case services or goods have been rendered.

The second risk is the operational risk—that the goods have been delivered but there is some damage, some return, or some pilferage. In that position, we confirm after the goods have been delivered from the buyer whether all invoices that have been raised are approved and are in order. The way we do that is by contacting the buyer directly and engaging with him. Additionally, we also check the SAP portals or the vendor portals that these buyers operate for their customers. This helps us hedge the operational risk as well.

The next risk is the risk of fraud or cheating. That risk is possible if the payment has been made by the buyer to the seller but the seller does not pay us. In that case, we've built an escrow mechanism. The buyer now directly pays into an escrow-controlled account run by a semi-trustee. So we also eliminate the risk of fraud by taking the payments directly from the buyer.

These three risks are the largest risks we see. An additional kicker we throw in is we also get these invoices insured. We've partnered with general insurance companies who insure these invoices similar to trade credit. That makes sure that in case payments are running late or the buyer has gone insolvent or bankrupt, the insurance company pays us a claim.

Ms. Akshara Menon: So you've kept it covered for the investors.

Mr. Karan Mehra: We've tried to cover every single leakage possible. But eventually, it is an interesting product in the fixed income space trying to give a slightly higher yield for absolutely very less amount of additional risk.

Ms. Akshara Menon: Now that we've spoken about the risk management part, one more aspect in our industry is taxation. How does taxation work in this invoice discounting from an investor perspective?

Mr. Karan Mehra: Taxation is a very interesting point. Let's look at the structure. The structure of this investment, which is Amplio Red, is mutual fund-like. What I mean by that is you invest or you buy units of a trust exactly like mutual funds. Hence, the asset owned by you is a security or a capital asset. If the same is held for a tenure below 12 months or up to 12 months, it is taxed as short-term capital gains. If it is held beyond a tenure of 12 months, it is taxed as long-term capital gains. This is the view we have created in partnership with one of the Big Four. We do not advise this, but this is the view we have, and we recommend you speak to your tax consultant before finalizing it.

Ms. Akshara Menon: When you talk about this, how is the investment process? How transparent is it? Just imagine I am an investor—can I have access to the underlying invoices and the legal documentation that's going on?

Mr. Karan Mehra: One of the main principles behind us building this business was to build a transparent business where you have access to every single document that you are investing in.

Let me explain the investment process to you. The investment process can be completed directly from our application, which is Amplio Invest. You will have to come and complete your KYC on our application. The KYC process is run digitally for a company as well as for an individual. Once your KYC is completed, you can link your Demat account on this platform. You can also do it without a Demat account as well—we have both options available.

Every single deal or SDI available to be invested in will be made available to you by your relationship manager. You can see the invoices and the underlying agreements. You can request a physical copy of the same by just clicking a button on the app. Additionally, you can also contact the trustee in case you want more information or want to verify some documentation. All in all, every single document, every single invoice, and every single product that you're backing with us will have complete transparency and information available to you.

Ms. Akshara Menon: How many companies are there? For example, if I'm into investing, how many companies can I see as of today?

Mr. Karan Mehra: As of today, we're running our mandates with more than 150 companies. These are companies pan India. They work with almost all top corporates in our country as well as MNCs from abroad. Every company that comes in your Nifty 50 or any company which is the top 100 or 200 companies in India—our clients or their receivables are what we finance.

Ms. Akshara Menon: One interesting aspect is that an investor who has a portfolio predominantly dominated by equities and very little fixed income—your product stands in between. It gives more than fixed income but less than equity in terms of returns. For such an investor, how do you convince them to invest through Amplio?

Mr. Karan Mehra: Interestingly, I'd like to correct you. In the last 2 years, our product has surpassed equity, debt, or even any other product possible. In the last 700 odd days, the market has not performed, but anyone who's invested with us has made more than 25% CAGR in the last 24 months. That's because our product also offers the benefits of compounding, as opposed to traditional fixed income products, right—like equity.

So compounding benefits are a very large part. If I had to convince someone looking to invest capital, there are many investors out there who would be happy making 25% in 2 years, knowing that they're making that much without having any bigger risk, and at the same time having the ability to liquidate their investments wherever they want. That's actually the audience we're seeing getting converted the most. It's largely investors liquidating their liquid mutual funds or their short-term investments for predictable cash flow.

Ms. Akshara Menon: When you said 2 years, 25% CAGR, it's actually very interesting. Markets are neutral now, so inflows are more. Just imagine if markets are bullish, what happens? The money flows into equities. So what is the realistic return an investor can expect through this?

Mr. Karan Mehra: The realistic return I would say is anywhere between 10 to 11% per annum if the same is not redeemed and is held to maturity. It can compound giving an XIRR higher than 11% as well. A conservative number would be 10 to 11%. Still, 80% of our audience are investors who are risk-first and return-second. I would not say these are investors looking to make a higher alpha. They're looking to park their capital in a lower-risk product, having peace of mind—a kind of diversification that truly plays a role here.

One of the strategies which a lot of our investors hold true is this: you're getting to invest in a double-A or AAA receivable earning a double-digit return having liquidity every 30, 60, or 90 days. But if you were to buy their bonds, you'd make 7, 8, or 9% at best with liquidity coming after yours. So I think this is that niche or that arbitrage which people are finding interesting.

Ms. Akshara Menon: How long do you expect investors to stay invested, in spite of having multiple exit options?

Mr. Karan Mehra: In my view, holding till maturity if you don't need the money is a great idea because of the taxation benefits, the benefits of indexation, and also the benefits of compounding. The maximum tenure that we offer in these SDIs is around 30 months. We do have investors who are locked until maturity. The average tenure that we are seeing is roughly around 13 to 14 months. The logic behind that again is to enjoy the benefit of capital gains, and at the same time, keep the tenure not so long that liquidity is far away.

Ms. Akshara Menon: You just said that investors can see the 150 companies that are on your platform. So what are these companies, and who are the counterparties? Can you explain about this Amplio part here?

Mr. Karan Mehra: Our product policy when building Amplio is to find mid-market companies selling goods and services to large corporates. A mid-market company, as per our definition, is a company having a turnover range or revenue range from 100 crores to 1,000 crores, profitable, having a controlled debt-to-equity ratio, and facing a working capital challenge in order of the credit cycles that it has to fulfill with large corporations.

Some of the industries I can name would be financial services where we have receivables of large banks. Another one would be logistics, last-mile delivery, and warehousing companies where receivables are of the large e-commerce and quick commerce platforms of our country. Then we have manufacturing companies where receivables are again of the large conglomerates of our country. These three or four sectors would be the majority of our portfolio. We also have companies in pharmaceutical, healthcare, and companies providing different types of services as well. But I would not say we're sector-focused—we're sector-neutral—but largely concentrated in these four or five sectors.

Ms. Akshara Menon: Most of the people watching this video now want to know about your current MA as such. What exactly have you done, and what made you start this company?

Mr. Karan Mehra: I come from a financial services family itself. My background has been in finance. We spoke about financial services at home while I was growing up. The majority of my family are people in the finance profession. After pursuing my CA and CFA, I was working in consulting for a bit. That's where I discovered that MSME or mid-market companies have it really tough to access capital. They're considered poor credit or riskier credit and will not get capital unless they provide physical collateral as security.

That's when we thought there is a very large market. The MSME industry is growing by 15 to 16% per annum. It contributes 40% of our GDP. The idea was to build an investment product where the MSMEs are considered good credit by structuring their receivables of large corporations. That was the thought behind Amplio, and that's what we've been doing.

This company has been built by myself and my co-founder. We're around 85 people now across four offices and four locations. The thought process is to build India's largest asset-backed security platform and build our wealth management niche in that.

Ms. Akshara Menon: Thank you, Karan. With that, we have come to the end of the session. I think throughout the session, we were able to understand what invoice discounting is, how investors can have access through it, and also the kind of returns you can expect. Thank you, Karan, for joining, and thank you for watching PMS Bazaar. If you're enjoying this conversation, do like, share, and subscribe to our channel. We'll get back to you soon with another insightful discussion from the universe of investing.