Good morning, ladies and gentlemen, and welcome to the Shriram Transport Finance Q2 FY 2022/2023 earnings conference call. As a reminder, all participant 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 star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director. Thank you, and over to you, sir.
Yeah, thank you. Good morning, friends from India and Asia. A warm welcome to all of you who's joined this call. Good evening to those who joined the call from the western part of the world. Today, we have our Joint Managing Directors, Mr. Sudarshan, Sridhar, Nilesh, Sunder, and Parag, along with me and Mr. Sanjay, who is our IR head. In the first quarter of this financial year, the Indian economy grew by 13.5%, the fastest in the last four quarters on account of better performance by agri and services sector. The official data show India remained fastest growing major economy in April to June quarter. However, it fell short of the expected 16.2% increase anticipated. The IMF, in the latest World Economy Outlook report, cut its forecast for India.
India's gross GDP growth in financial year 2022/2023 by 60 basis point to 6.8%, warning of a long and tough economic winter. India's headline inflation rate, as measured by CPI, rose to a 5-month high of 7.41% in the month of September from 7% in August. This is the 9th consecutive time CPI print has come above RBI's upper margin. The stubborn inflation is definitely having some adverse effect on consumption, and there are some indication of economy slowing down. However, I attribute this to unexpected rains or unscheduled rainfalls that got delayed in the month of June, July, and there was late rains in certain pockets that disturbed agri movement, and that would have led to food-related inflation.
However, the wholesale inflation eased to 10.7 in September as against 12.41 in the month of August. The WPI in September was 11.8. Despite easing wholesale inflation data, the WPI continues to remain double-digit for 18th consecutive month beginning from April 2021. The RBI in its monetary policy on September 30, 2022 has hiked the repo rate by 50 basis points to 5.9%, fourth straight increase in current cycle to tame sustained above-target retail inflation rate. The RBI now has raised by total of 190 basis points since its first unscheduled mid-meeting hike in May. The economic growth projection for 2023 cut to 7% from 7.2 estimated in August, and GDP is expected to grow 6.3 in September quarter, 4.6 in December and March quarters.
The inflation projection retained at 6.7% for ongoing fiscal year, and inflation to remain above the tolerance limit of 6% of RBI. The GST collection seems to be doing well. India's tax collection from sales GST was INR 1.47 trillion in September, as against INR 1.43 trillion collected in August. On account of rising demand, higher rates and greater tax compliance, this is second-highest collection next to April 2022 collection of INR 1.67 trillion. The goods and services GST collection remained above INR 1.4 trillion for seven straight months during this month, continuing to display very high buoyancy. This augurs well for government spend on infrastructure. Government has announced national logistic policy aiming to achieve last mile delivery to end transport-related challenges.
The policy focuses on key areas such as process reengineering, digitization, multimodal transport. It is a crucial move as high logistics costs impact competitiveness of domestic goods in the international market. Along with PM GatiShakti, which is the national master plan for multimodal connectivity and part of NIP of spend of $1.35 trillion target. With a vision to develop technologically enabled, integrated, cost-efficient, resilient, sustainable, trusted logistics ecosystem in the country for accelerated and inclusive growth. This is highly positive for the transportation and logistics industry and to our business. As I was telling you in the beginning, there was a disturbed monsoon in the northern part, especially in the UP, Bihar and MP. Overall, the acreage was a little lesser than the last year by 5%.
Apart from dairy, there is a slight difference in sowing of pulses, oilseeds too. Overall, the deviations are very insignificant. However, the late rains and the reservoirs being full augurs well for bumper crops in rabi, which is always much bigger crop across India and rabi being bumper year-on-year for last four years augurs well for rural, cement, and economy. Coming to the auto industry, the commercial vehicle sales has increased by 39.48% to 2,31,880 units in Q2 as against 1,66,251 units in Q2. Compared to the previous quarter, it is 3.37% increase.
The heavy and medium commercial vehicles showed a maximum growth with 40.90% with 79,650 units sales against 63,481 units. Significant portion of these heavy commercial vehicles are the dumpers and tippers, which the demand is coming from the infrastructure industry. LCV numbers also showed good growth of 35% to 152,230 units, compared to 112,770 units sold in Q2 last year. Tractor sales have been almost on par with last year's half year number with 319,642 number against 315,250 number, a marginal increase.
The earthmoving and construction equipment showed significant growth again for the first half of this year, with 42,530 units being sold against 32,398 units. Coming to the company's performance. The collections were consistently good. The average collection of September quarter were 100.13% of the total demand as against 99.03% of the corresponding quarter last year and 101.45% in the Q1 of the previous year. We clocked a disbursement growth of 19.51% to INR 17,769 crores against INR 14,868 crores in the same period of previous year as against INR 16,670 crores in the Q1 of this year.
The used vehicle disbursement increased by 15.27% to INR 16,502 crores as against INR 14,310 crores in the same period of previous year as against INR 15,754 crores. The new vehicle disbursement has improved significantly. It has gone up by 106% to INR 1,020 crores as against INR 493 crores in the same period previous year and as against INR 784 crores in the Q1 of this financial year.
Overall AUM, Assets Under Management, grew by 11.18%, in line with the guidance of 12% to INR 1,65,249 crore, as compared to INR 1,21,646 crore in the previous year and increased by 3.49% against the previous quarter of INR 1,30,688 crore. The net interest income increased by 22.85% to INR 2,653.96 crore against INR 2,192.82 crore in the same period previous year and marginal increase of INR 2,641.74 crore against the previous quarter. The net interest margin improved to 6.98% against 6.44% in the same period previous year and 6.91% of the previous quarter.
The PAT increased by 13.33% to INR 1,066.87 crore in Q2 compared to INR 771.24 crore in the Q2 of previous year and against INR 965.27 crore in the previous quarter. The EPS stood at 93.94 against 28.71 in the quarter, this quarter. The gross NPA declined by 7 basis points to 6.93 against 7.82 in the previous year and 7% in the previous quarter. The net NPA stood at 3.48 compared to 4.18 in the Q2 previous year and 3.52 in the Q1, this year.
The credit cost for the current quarter stood at 1.67% against 3.68% of full year. The cost-to-income ratio marginally increased to 31.12% in this quarter against 20.73% recorded in the same period of previous year. The update on the merger, we have received approval from all the regulators like NBFC, RBI. Then NCLT had convened the shareholders and the secured creditors, unsecured creditors meeting, the IRDA, CCI. The final order of the NCLT was heard on 19th of this month, October. We expect the order in a week's time. The growth outlook remained at the original guidance, 15% for the combined entity. Now I request our CFO, Mr.
Parag Sharma, now to take over the call and give details on liability side. Hello, everyone. The fund mobilization for Q2 was good. Liquidity continues to be good across banks and that has been the focus area for fundraising. Some fundraising increase has been there from the capital market in the form of bonds also. Overall, for Q2, we have mobilized INR 17,000 crore as overall mobilization. Total debt outstanding as of September is INR 1,25,586 crore. The cost being marginally up compared to Q1 by 10 basis point. If you look at year-on-year basis, that is down by 16 basis point. Liquidity continues. On balance sheet liquidity also continues to be strong. We have liquidity of close to around INR 20,700 crore.
Liabilities for next three months is only INR 13,000, so there will be sufficient cushion for managing our liabilities for next six months also. When it comes to ALM, each bucket as in past continues to be positive, cumulative automatically is positive. Leverage ratio is at around 4.51 with excess liquidity being utilized. Leverage ratio should slightly drop below 4.5. HQLA is at 188% versus 191% in the previous quarter. We did announce buyback of our offshore bonds in August, and we did buyback close to around $256 million of bonds, which were maturing in 2025 and some part in October 2022, which was a maturity for a short period. That was bought back.
Currently, we have announced buyback of the July 2023 bond with a cap of INR 250 million. That process is on. We'll take another few days to realize how much interest is there. Incremental cost of borrowing is definitely up by around 50-70 basis points. We do expect overall cost of liabilities to go up in next quarter. Nothing. We have increased our FD rates also in the shorter duration by around 25 basis points and a 3-5-year, you know, bracket by 5 basis points. Now I move on, give it to Sridhar now. Thanks, Raj. Hi, everyone. The employee count has increased in the current quarter by 1,056 employees.
As against 25,720 employees in June quarter, we are currently having 27,736 employees as on thirtieth September. The cost to income has marginally increased in the current quarter to 21.12%. That is primarily due to a one-time hit of INR 65 crore because of the settlement of certain sales tax litigations in which the company had opted for the amnesty schemes. In the one-time provisioning, which RBI had permitted last year, the outstanding as on thirtieth September was INR 683 crore. Here, I would just like to mention that in the investor deck that we had circulated yesterday, it was wrongly mentioned as INR 6,830 crore instead of millions. The coverage ratio was 51.57% as against 51.62%.
Stage three improved to 83.29% as against 82.49% in the previous quarter. Stage two was 9.78% as against 10.51% in the previous quarter. We maintained a coverage ratio of 3.29% as against 3.21% for stage one assets and coverage ratio of 8.84% as against 9.18% in the stage two assets. The PD was 77.35% as against 77.32% in the previous quarter in the stage one and 21.62% as against 21.75% in the stage two, and the LGD was 44.75% as against 43.76%.
The capital adequacy was strong at 22.48%, and Tier 1 was 20.59%, and Tier 2 was 1.89%. We continue to have the COVID related overlay of INR 1,749.41 crores as against close to INR 830 crores in the previous quarter. That's it from me. I will try to open the floor for the questions. Thanks.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone phone. An operator will take your name and announce your turn in the question queue. Participants are requested to use only handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants may press star and one to ask a question. The first question is from the line of Rikin Shah from Credit Suisse. Please go ahead.
Hi. Good morning, everyone, and thanks for the opportunity. I have four questions. First one was on the new vehicle disbursement and the AUM growth. The new vehicle AUM has grown after 14-15 quarters. Just wanted to get a sense on the outlook from here for the new vehicle AUM. Second one was relating to the margins. Have you taken any rate hikes on the loans for any products, and what would be the quantum of the same? And on the liability side, could you please recap the total bond buyback that you did in 2Q and are looking to do in 3Q? And thirdly, on the OpEx, I think you did mention that there was certain one-off of INR 65 crores.
Could you please elaborate on that and whether do we see that repeating in the coming quarters? Lastly, there have been news flows pertaining to Shriram Group looking to lead the consortium in buying a stake in IDBI Bank. Just wanted to get a sense on the rationale of the same and the strategy out there. Thanks. That's all from my end.
Yeah. Thank you, Rikin. See, new vehicle, if you see, quarter-on-quarter, our lending is going up because our customers, typically what we do is we lend to our existing customers, who are already used to vehicle. When they want to wish to upgrade, then we fund them. We don't have a direct arrangement with any OEM or a dealer point for lending to the new vehicle business directly to new customers. As the economy progresses, when our customer decides to buy a new vehicle, then he upgrades himself. To that extent, we are increasing the new vehicle portion. Last quarter, we did around INR 1,000 crore, and we expect that to grow.
It may not have a significant increase on the overall AUM immediately because since we have not done new vehicle lending for last 3 years much, the AUM is actually coming down. With new lending, it may get stabilized and then move up. Overall proportionately, it may not make any difference between new and used. Margin-wise, we are whatever the net interest margin of around 7% target, we may be plus or minus 10 basis points on the same, and we should be able to maintain that. On the OpEx, that is a cap, no? Yeah.
It is a one-time settlement that we had done for the sales tax litigations. It's a one-time thing which was all these cases are pertaining to prior to GST regime, which we were litigating. Now just since the amnesty schemes were announced by certain state governments, we had opted for it and went in for a settlement. We don't expect any one-time hit on this count at least for the next any future quarters. Coming to the
Bond buyback.
Yeah, buyback, as I mentioned, we did in August, INR 256 million, which was for two maturities, October 2022 and 2025 bonds which are maturing. This is largely to do with carrying excess liquidity and also the unwindment of the hedges what we have for the long-term bonds. If they are in the money or not hugely negative, then only we can go in for it. What we have also announced now is another INR 250 million for the 2023 maturity. So total will be around INR 500 million is what we look to buyback. We don't have any plans for further buyback.
On the bank part of it, we deny the same, because as a company individually, we have not really discussed with anyone or not shown any interest in looking at any what you call buying or a merger of a bank. We don't have any plan on that direction.
Got it. Just a clarification on the yield side. Have you taken any price increases on any of your vehicle products and the quantum, if any, there?
Yeah. On the used vehicles, we have increased our lending rates, because as and when the liability cost goes up, then typically we pass it on the fresh contract. On existing contract, we cannot change because these are all contractual. The new lending we increased by around 25-50 basis points, depending upon the segments. Normally the smaller ticket, the lending rate increase will be much higher.
Got it. This is helpful. That's all from me. Thank you, and happy Diwali to the entire team.
Thank you.
Thank you. The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go ahead.
Sir, good morning, and season's greetings to you all. I have three questions in the same direction. Number one, does the buying of new vehicles indicate confidence that the economy is going to be doing well? How are the freight rates, utilization and freight rates itself behaving? The freight utilization and rates. That's question one. On the bond, sir, can you just you know so you know what is the strategy behind the buyback of the bonds in terms of you know the fact that you know domestic market liquidity is getting tighter. Is there some arbitrage that you have that you can utilize? That's the second question. The third question is on costs. You know, Umesh, sir, mentioned about inflation.
Are you seeing wage cost pressures and do you think that's going to impact cost income later on? That's it from my side, sir.
Yeah. Thank you. See, as far as the new vehicle, as I was telling you, customers are getting confidence in the economy or the cash flow. Ultimately, they need a higher cash flow to repay the new vehicle. New vehicle cost will be approximately 2 times of the used vehicle for same application, because application to application fees vary. When they buy a new vehicle, one advantage is it will be maintenance free. That is the advantage. Since the acquisition cost is high, their EMIs will be much bigger. If the cash flows are bigger, then they'll repay. People delay buying new vehicles mainly because of increase in new vehicle value, increase in cost of new vehicle in the last couple of years.
First, because of the BS6 technology upgrade, and second because of the steel price increase. Of course, the third one was chip shortage and supply chain issue. It was mostly to car, not to trucks. But overall, the cost went up by 25-30 basis, 30%. Because of that, many people postponed the upgradation of buy or buying new vehicle plan. Now, people are getting confident that since there is very little idling, better freight rate, better movement of vehicle, and also better resale values, they are able to dispose of their existing vehicle at a better value. All this is a positive, and people will definitely move towards buying more new vehicles. As and when our existing customer buy new vehicle, we fund it. So that's the standard here.
We are very confident that once they realize that cash flow will be better and whenever they buy new vehicle, their repayment also will be equally good. Coming to the bond,
Yeah, I think we entered the offshore market since when RBI allowed, which was around five years back. We are particular that we will continue to tap the offshore market for sure to the extent RBI permits or the limits are available. Whatever support is required, if there is investors in distress looking at opportunity to sell, we want to support the market. What we largely offered was for a very short duration maturity, which was October, and we were carrying excess liquidity. We thought we are buying it fast, so whosoever, whichever investor is keen to sell, we will give them the option. For the long-term, 25, what we have done was largely because the bond was raised in the current calendar year, January, et cetera.
The markets, after that, went negative. We wanted to give comfort to the investors, and the RBI doesn't permit huge buyback. RBI also is particular about average maturity to be more than three years. Limited option up to INR 80 million is what we offered to buyback. It was only to help investors. We are particular that as and when markets are okay, rates are conducive, we will continue to tap the offshore market. We want to develop this market and give them support, whatever is required.
On the cost front, inflation will definitely push us to increase our rate bill a little. We have done it in this financial year to some extent. We have not seen big pressure on the overall increase in the cost. We estimated the cost increase to 10% in our budget, and that will remain good for the rest of the year.
Thank you very much, sir, and wishing you a happy Republic Day.
Thank you. Before we take the next question, a reminder to all the participants. Anyone who wishes to ask a question may press star and one on their touchtone now. The next question is from the line of Shweta Daptardar from Elara Capital. Please go ahead.
Thank you, sir, for the opportunity, and congratulations for a healthy quarter. I have three questions. The first one being, I understand that your collection team is completely internal, but what is the total collection employee count as a percentage of the overall number?
See, our field team is 16,000 people totally out of 4,000 people in the supervisory level at the branch managers level or collection managers level. The 16,000 people, they are the field officers who will both source business and collect. We don't have separate team for collection. These people will build relationship with customer and continue to collect every month. We don't outsource collection to outside. We don't have any outsourcing arrangement for collection, repossession. Even the repossession is done by in-house team only.
Okay. Got it, sir. You guided for 15% growth for combined entities. Can you guide for the standalone CV finance and Shriram Transport Finance?
Standalone, we have given guidance of 12%. As for 6 months we have reached 11%, so we should be able to maintain that 12%.
Sure. Got it, sir. My last question, if I look at your liability mix, NCDs are marginally have gone higher, securitization a bit down. Where is it coming from, I think one of the things which are
I'm sorry to interrupt, Ms. Daptardar. We cannot hear you.
Is it better now?
No, ma'am, we cannot hear you. I'm sorry.
I think we understood the question.
Okay, sir.
Yeah, you're talking about securitization transactions being down and bond borrowing being up. Okay. Securitization normally in Q3 and Q4, normally the demand is huge. That is where we feel we should go beyond the last year what we did. Quantum what we did was INR 13,000. We should definitely do more than what we have done in Q1 and Q2. Bonds is something which we, in fact, the bond market for lesser rated entity is limited, and during COVID time it was completely closed. Now it has opened up, so we want it, that particular source to be around 20% of our liability. It was much lower. It has now reached around 20% level, and that is what we will try to maintain it.
Securitization will definitely go up. It is around 15%. I feel by year-end it should be around 17%.
Sure. Got you, sir.
Thank you. The next question is from the line of Nidhesh Jain from Investec. Please go ahead.
Good morning, sir. In the current environment, how should we think about margins going forward? I think there is sequential decline in margins in Q2. How should we think about margins in coming quarters?
Margins we should, we are confident of maintaining it. Q-on-Q margins improved by 7 basis points. I think we should be able to maintain that. See, we always guide 7% ±20. That's the guidance, broad guidance. That is the target we keep trying to achieve. There will be some movement because of the cost of the liability going up and not being able to immediately pass on to entire book because incrementally only we can increase our lending rate, not to the existing book. There will be some gap. Otherwise, we should be able to maintain around 7%.
Sure, sure. Sir, I think if you can share the disbursement number in this quarter, both in terms of new vehicles and used vehicles.
We have already given the numbers. New disbursement, INR 1,020 crores for this quarter against the previous quarter of INR 784 crores on new disbursement.
Used?
AUM is INR 16,502 crore against INR 15,754 crore in the previous quarter.
Sure, sure. That's it from us.
Thank you. Participants who want to ask a question may press star and one now. The next question is from the line of Vikas Agarwal from Bank of America Merrill Lynch. Please go ahead.
Hello. Good morning, sir. Can you hear me?
Yeah.
Yes. Sir, thanks for the opportunity, and thanks for all the updates. Just a couple of questions from my side. One is following up on the recent discussion on the NIM just now. Just want to understand a bit more in detail because you know the impact as you said on the existing portfolio will probably stay longer. Plus the you know cost of liability is also increasing. I know you're also normalizing the liquidity. This is you know 20 bps margin impact sufficient, 20 bps headroom impact something which is sufficient in the near term to maintain the margin NIM above 6.8%. That's my first question. The second question is on the bond buybacks, offshore bond buybacks you're doing.
Can you also share what sort of, you know, other offshore funding you're using and what are the terms and borrowing costs for those funding?
As far as the net interest margin is concerned, we have a headroom to improve because we have higher liquidity. We had told in the previous quarter also that we would like to reduce the liquidity portion. Right now we're carrying 6 months of liquidity, which we would like to decrease to 5 and 4 and 3 gradually. That is where we have an opportunity to improve the margins. Apart from increasing the lending rate for the new contracts. Parag, second question.
Yeah. On the offshore borrowings, we have combination of bonds. We have loans from banks and also loans from development institutions. Our total offshore debt is close to around INR 25,000 crore now. The landed cost depends because some of the facilities are even 10 years, what we have taken from development institutions and ECA. Our bonds typically are 3-3.5 years, so hedge costs will be accordingly they different. It has been at a between 9.5%-10% in what we have done in the past. Currently, what we are borrowing or what we have taken from development institutions is at around 9%.
9% all-in landed cost, including the hedging?
Correct. Correct.
Okay. Got it, sir. Thank you. Thank you so much.
Thank you. The next question is from the line of Nilanjan Karfa from Nomura Group. Please go ahead.
Hi, sir. I hope I'm audible.
Yes.
Just go back to this, you know, offshore bonds. I understand there was excess liquidity, but what tilted the favor in, you know, not doing buyback on the domestic and offshore? I heard, again, a sort of giving, you know, the thing that you mentioned is giving comfort to investors. Which investors are we talking about? Was there some kind of a stipulation that, you know, something is not right?
No, no. Nothing of that sort. Largely, if you see what we have bought back is October 2022 maturity only. On INR 170-odd million what we have bought back is October. It was only very, very short duration. Because we were carrying liquidity for excess liquidity from April itself, instead of carrying that liquidity, we thought we can look at buyback. When it comes to the long term, October to 2025, October 2025 what we have bought back is because the secondaries were trading very, very high.
Mm-hmm.
We thought we should intervene in case any investors are in distress. In fact, it's only for bonds what we have bought back.
Right.
Offshore, we really don't know because it keeps trading to who are the ultimate, the owners, we will not know. Secondaries were trading much wider, so we thought we should intervene and give comfort that in case anyone has got any concern, any, you know, stresses, we should be able to address it. It's very limited quantum what is permitted as per RBI. That is what we have done. It was only INR 80 million, so not very, very significant.
Sure.
When it comes to onshore, the secondaries are not trading any wider. That was there during the COVID period. Post that everything is normalizing. I don't feel any need any investor is in any kind of stress to sell. If there is a need, as of now, liquidity is there. In case there is a need to support domestic bondholders also, we'll be happy to do it.
Right. Okay. Just a continuation. I mean, when we hedge a foreign bond, for example, do we do it on a annualized basis, or do we do it for the entire maturity?
No, we as a policy always do it for the full maturity.
Okay. Fair enough. My second question is to Umesh Revankar. I mean, you know, I know that we don't have an, you know, sort of an outsourced repossession, but if you can talk about, in general how the environment is panning out on the repossessed vehicle. And specifically if you want to comment a bit on the Shriram Automall, how the business is doing.
Yeah. See, this, right now, since the resale values are good, customers would like to hold on to their vehicle. They don't like to get their vehicle repossessed. That's a tendency. The repossession increases when customer vehicle values drop and customer doesn't have the tendency to hold on to their vehicle. The vehicle is an earning asset, and if it's not earning enough and vehicle value drops, then the customer will allow the vehicle get repossessed or maybe we are forced to repossess because customer is not paying in time. Currently, the repossession is minimum. I don't think there is any pressure for any of the NBFC industry or even banking industry on the repossession because the recent values are good, earning is good. Repossession has come down.
In fact, even in the Automall business, last two quarters, we have witnessed that repossession as a source for their business activity has come down. They are mostly doing the market business now. Market business means anyone who wants to sell their vehicle on their own, they will come on the platform. Automall is doing good, and the focus is more on the market business rather than the repossessed vehicle from the NBFC or bank.
Okay. Umesh, I mean, you know, many NBFCs sort of, you know, went into a sell-off post this RBI directive on Mahindra. You don't think something like that is impacting the, you know, the platform businesses or in general repossessions?
No, that has nothing to do with the platform business because repossession has, as I believe, most of the NBFCs, they are capable of doing the repossession on their own without depending on outsourced agents. Because the NBFCs which are there for traditionally long time. If there are new NBFCs which we have just come up in the last few years without enough network and manpower, they may depend on outsourcing agents, and there, that is a very insignificant number, so I don't think that will make any change.
Okay. That's very clear. Finally, just small clarification. I mean, the point was also raised earlier. The improvement in the new vehicles is that something that came towards the quarter end? I mean, just because of, you know, the change in customer season, is that what has led to this improvement? Why is this?
See, yeah, festival definitely now there is opportunity for customers to buy new vehicle. September ends. Normally, month of September, there will be more new vehicle sales during this Ganesh Chaturthi. Till Dussehra, the mood will be upbeat and positive for the people to buy new vehicles. That is normal trend. What I am seeing is the viability of a new vehicle operation has improved significantly in spite of increase in the vehicle value for even individual operator. For smaller vehicles, the e-commerce activity and the tier two, tier three town business, the agricultural activity, everything is positive. People are now buying more new vehicle, and the numbers are visible across the country. 38% increase year-on-year is significant increase in new vehicle.
Surely, sir. You know, the 15% guidance you are quite comfortable, right? I mean, that's.
Yeah, we are comfortable with the 15% guidance for combined entity.
Perfect. That's very helpful, sir. Thank you so much.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services. Please go ahead.
Yes. Thank you for taking my questions and good morning to all of you. I have two or three questions. First one was on the merger. While we acknowledge that you are comfortable with the 15% kind of guidance on the merged entity, if you can just help us understand that given that the final hearing in NCLT has happened and given that the order is expected in each time, what is the operational readiness in terms of working as one combined entity, given that you've been running quite a few pilots across many of your branches? Secondly, sir, on the merger, just wanted to understand how will shares be issued.
What I'm trying to understand is, will there be a period where there will be no trading in the stocks of Shriram Transport and Shriram City? Or will it be a scenario where there will be no disruption on the trading activity and Shriram City and Shriram Capital shareholders will be issued shares of Shriram Transport and which will eventually kind of get renamed as Shriram Transport?
Yeah.
That was my first question on the merger.
Yeah, merger. Yeah. See, as far as the merger is concerned, what we have done is, geographically, we have put geographical heads, Joint Managing Directors as the unit head. They are running both businesses, Shriram Transport and Shriram City Union. Even though respective companies keep doing the business, the leadership is in place. Then we had pilots. We had pilots only to understand the challenges of cross-sells of each other's products, because the knowledge has to be passed on to the staff, skilling them, training them, reskilling them, and all those things we have done in the pilot one. Pilot one was done in around 50 branches. Then we scale it up to 200 branches across both the companies. The pilot one and pilot two is completed.
Now the post-merger, it will be for the entire, all the branches. The high-ticket lending or high-ticket business like SME and heavy commercial vehicle, that is something which we'll be doing more centrally. All other smaller tickets like those two-wheeler, gold and the LCV and tractor, all those things we should be able to do in all the branches. That's how it has been planned. The merger will be seamless, and we should be able to scale up the business and achieve the target which has been already guided. As far as the
Note reading period.
The note reading period. There will be note reading period for a SCUF, but not for STFC. That will be maybe 10-15 days, depending upon the regulatory requirement. STFC shares will be continues to be traded because STFC will be a surviving company, and that will be renamed as SFL post the completion of ROC formalities.
Understood. This is useful. The last question was around. Rather, two questions. One is, I mean, this new guidance that you gave of 7% ± 20 basis points that kind of stands despite, I mean, the rising rate environment, right?
Yes, yes. I mean, I have given a rationale also that we have a higher liquidity which we can manage and around 10%.
Understood, sir. Lastly on this repossession ban which was recently there by the RBI, where you have clarified that Shriram Transport has no engagements with third-party agencies for collections and repossession. Just wanted to understand, as an industry, has RBI engaged with you in the past or after this recent ban and advised to improve on some of the repossession processes? I wanted to understand if the regulator is a little concerned with the industry as a whole when it comes to repossession processes, or was it an isolated incident for a particular vehicle financier?
No. See, basically in the past also on the collection part of it, and the harassment of the borrower's part of it, RBI did have interaction with us. This incident is isolated one. It is nothing to do with the initial discussion we had with the RBI. RBI wants us to have top-quality standards on engaging outsourcing team and methods of either repossession or collection to be properly guided and the proper manual being there and training to be given even if it is outsourced. All those things are there. There is more of a discussion. We also had, as SIDBI, we've had come out with broad guidelines on repossession and handbook was released long back.
Once again, after this particular incident, it is isolated and unfortunate incident. Once again, we have given our broad outlook and broad guidelines on the same, and that is shared with RBI and also seeking the appointment with RBI to further improve if necessary on the same. As an industry body, we are working on the same, but there will always be some kind of incident which can go out of control.
Thank you so much, sir. This is very, very useful, and I wish you and your team all the very best, and look forward to speaking to you next quarter as a merged entity. Thank you so much.
Thank you. The next question is from the line of Nishant Shah from Kotak Securities. Please go ahead.
Hi. Thanks for taking my question. Just a couple of points. What is the target of, you know, gross stage two when you come down in single digits? Where do you think, you know, this kind of goes in exact terms? What was the level which you would try and go to?
See, stage two would remain range bound in between 10%-12%. I think we have significantly improved over the last 3-4 years. Once we have moved to the 90 days, right from that day, it has been a continuous effort to bring it down, because when we moved from 180 days to 90 days, it was a gradual improvement. Customer had a little bigger time for managing his NPA, and we have been educating the customer. Over the period, we have brought it down, and we should remain at this level. I don't think it will significantly improve over it. Since most of our lending is asset backed, we may not really get disturbed or perturbed with this and we are feeling that this is a good comfortable range.
What is the your current IRR range or the interest rate range that you are charging for used CVs and new CVs?
Used?
Used and new commercial vehicles. What is the
It ranges between anywhere between 14-18. It all depends upon the vintage of the vehicle and also ticket size. The simple principle, higher the vintage, lower the ticket size, higher the rate.
I mean, just a broad range for used versus new, you know, how much could be the weighted average differential?
Weighted average differential between new and used will be around 300 basis points.
Sure. Just the last one is, you know, on the, you know, possible use, on the liability side, after the merger. You know, currently now we are kind of very close to the merger and I guess you'd have evaluated the, you know, consolidated borrowing position. What could be the, you know, use left out there, you know, probably borrowing, you know, prepaying some of the, you know, high cost borrowings on the consolidated level and, you know, probably accessing cheaper ones or maybe, you know, kind of just, you know, as the more expensive ones get redeemed, you know, looking into the cheaper ones or probably, you know, looking at a consolidated liquidity position.
Very roughly, you know, some assessment on your side in terms of what you would have done and what could be the benefit.
See, this is a continuous work, and I think Parag will be able to explain it better.
Yeah. In fact, if you look at Shriram City Union, because you would have been looking at it very regularly. It is more skewed towards fixed deposit, retail deposit and bank borrowing. There is not much of bonds. Offshore is anyway not there. But from looking at the total borrowing what they have from banks, I don't think that adds very significantly to the overall bank borrowing. It will continue to at around 20%-21% of our liability post-merger. From looking at whether we can reduce cost, I don't think we will force that. We will only look at the borrowing fresh from the same banks at a lower rate. We'll not going for immediately paying off.
When it comes to the overall liquidity, what we'll maintain, I think, policy will remain the same. Three months of liability repayment to be in hard cash for the merged entity also is what we will look at. We did mention that around INR 11,000-INR 12,000 crore is what is required for Shriram Transport. If we add Shriram City Union liabilities also, it should be around INR 14,000-INR 15,000 crore of overall liquidity to be maintained. That is what we will do post-merger.
If I have to look at lending facilities from the same bank, is there a differential between what you are able to borrow and what they borrow?
Yeah, definitely. There is a differential. One, there's a rating difference itself. Banks also have been pricing it differently. Capital market automatically goes by the rating in the public domain. Banks also, so there are rate differences.
That's something that you kind of get negotiated immediately?
Correct. Immediately, I don't think banks will immediately reduce the rate, but, whatever fresh we borrow from the bank will definitely be at a much lower rate.
Got it. Thanks. Those were my questions. All the best. I'm happy to value.
Sure.
Thank you.
Thank you. The next question is from the line of Ajit Kumar from Goldman Sachs. Please go ahead.
Thank you for taking my question. So first, on the OpEx side, despite increasing employee count by more than 1,000 in this quarter, why is employee expense down sequentially? How do you look at employee and branch addition going forward as the assessment picks up and impact on the cost income ratio side? That is one.
You want an explanation of the cost going down.
Employee cost going down.
Okay. See, in the first quarter, we typically pay the annual incentive for certain grade of people, and hence it was on the higher side. Current quarter it was not there, and hence it was lower compared to the previous quarter.
As far as the employee count, see, we had not recruited more people in the last two years, during the COVID years, our recruitment drive had come down. Actually our employee count also had come down from around 27,000 employees it had come down to less than 25,000 in the last 2.5 years because we did not do fresh recruitment, which we have started doing in the last six months. Therefore the number count is going up. For our business, as we increase the volume, we do need to add a more number of people. As far as the branch is concerned, we have not opened any branches in the last quarter. We did not add any branch.
Going forward, seeing post-merger, we will look at the scope and opportunity to open more branch or using the existing network of combined entity. That we need to really work on. We already have a blueprint on the same, but we'll execute it over the period.
Okay. Thank you. Second, coming back again on the liability side, what could be the mix going forward? Or in other words, on which funding instruments you will focus more on, and how much increase in cost of funds do you expect in next 12 months or so?
Funding mix, whatever is there for STFC, that is equally distributed between deposit, offshore, bonds, securitization, 20% each is what we will look at for the merged entity also. Borrowing cost, as of now for the next quarter I can definitely say it will go up around between, anywhere between 8-10 basis points. Going forward, depends upon how much further rate increase is there. That kind of increase will be there. Banks have increased rates in line with all the capital market rates have also gone up in line with the repo rate increase.
Uh-huh.
We'll have to only look at the policy rate hikes and then factor in what will be the foresight for us. Keep in mind that whatever is available in the market. 8-10 basis points is what I can tell you about the next quarter.
Okay. Thank you. Thanks a lot.
Thank you. The next question is from the line of Chandra from Fidelity Investments. Please go ahead.
Hi. In the last quarter, we used INR 200 crore of our buffer provision. We've used about INR 100 crore of our buffer provisions in this quarter towards write-offs. We still have INR 1,700 crore of buffer provisions, and my understanding is that the contracts for which we have made these provisions should be maturing before the year-end given the tenure of your books. How are you thinking on what would eventually happen given sequentially the utilization also has come off?
These accounts will get matured over the next two years because typically average contract would be four years. Over the two years it will get adjusted. In the last two quarters you have seen that trend, and we have INR 1,700 crores. We expect maybe another INR 500-600 crores by this year-end, then maybe the rest will be next financial year.
Sorry, my understanding was some of this was created because of the moratorium interest period and things. My understanding earlier, I think you always said that, you know, contracts were matured by the end of FY 2023 for this. We'll take a decision on writing back after then. It seems that you have a different thought process now.
No. See, all these contracts were pre-COVID, which were closed prior to March 2020. For all these customers, majority of the customers we had extended the moratorium approved by the government. These cases typically will have a tenor of 3-4 years, and the majority of the cases will come to an end by the end of this financial year, and something will spill over to the next financial year. That's what you are trying to indicate.
Understood. You don't really expect any writeback at all from this?
Write-back is very difficult because in our the segment of customers that we cater to, they come in for some waivers at the end of the contract. These six months during the COVID period, they had all been impacted, and we had assessed that thing and had created this provision. We believe that it will go out as a waiver and not much should come back as a write-back into our books.
Just a couple of questions. Was there a stamp duty of, if I'm not wrong, about INR 200-INR 250 crore. I would presume that in this quarter we should see that impact in the P&L number. Second is that, you know, when the merger was announced, there was about INR 68 crore of employee cost rationalization which had to be done across to sort of equalize wages. I would presume provisions for that also would be taken in this third quarter.
The stamp duty will not be as high as INR 200 crore. We had initially anticipated that the maximum amount that was prevailing in Tamil Nadu was around INR 200 crore. I believe there has been some relaxation. The amount involved will be much lower than that. Coming to the cost rationalization, we are still working on it and it will take the next 2 to 3 quarters for that to really impact. We don't expect that to come in the next quarter immediately.
Thank you.
Thank you. The next question is from the line of Amit Jain from Axis Capital. Please go ahead.
Hi, sir. Good morning, and thanks for taking my question. Sir, in this quarter, the credit costs have come off as compared to Q1. Just wanted to know your outlook for FY 2023. How are you looking at credit cost? I believe they would be on a declining trend, but just wanted to know your thoughts on that.
Yeah. We have given a guidance of 2% as the credit cost for the full year. We should be close to that.
Right, sir. In terms of excess liquidity, what is excess liquidity currently on the balance sheet, sir?
Around INR 5,000 crores is what we have said. With one large maturity this month itself, we should be able to utilize that. Around INR 5,000-6,000 crores is what is there in excess.
All right, sir. Thank you, sir. Thank you, sir.
Thank you. There is a follow-up question from the line of Rikin Shah from Credit Suisse. Please go ahead.
No, thanks. My question has been answered.
Thank you. The next question is from the line of KC Poovanna from an individual investor. Please go ahead.
Hello.
Hello. Yeah.
Hello. Am I talking?
Yes, yes.
Good evening, everybody. I'm a shareholder. As such, you can expect my question easily. This question is to Mr. Umesh Revankar. Last year in the September quarter meeting you had declared an interim dividend of 80%. This time there's no such declaration. Why is that? Hello?
We will plan something in next two quarters. This quarter, because of the merger, we thought it is a better prudent to do it post the merger from what you call Shriram Finance. That is the plan.
That means, we can expect any dividend only after the merger is completed, is that?
Merger is completed in this month, that November month. Next quarter you can expect, next two quarters.
Okay. Thank you, Mr. Umesh. Thank you very much.
Thank you. Ladies and gentlemen, as that was the last question for today, I would now like to hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director, for closing comments.
Thank you. Thank you all for joining this call. Let me first wish you a happy Diwali. Let's have this festival as a revival of Indian economy and the leading economy in the world by growing the fastest. That should augur well for us, and I expect next couple of quarters to be a much better quarter than this quarter as demand, collection and customer business, everything is looking very sound and good. Thank you. Hope to see you all in the next quarter call. Thank you.
Thank you. On behalf of Shriram Transport Finance, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.