Ladies and gentlemen, good morning, welcome to Shriram Finance Limited Q3 FY 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited, for his opening remarks. Thank you, over to you, sir.
Yeah. Thank you. Good morning, friends from India and Asia, and warm welcome to everyone. Good evening to those who have joined from the western part of the world. This is the first earning call for the merged entity of Shriram Finance Limited. We have with me Mr. Chakravarti, the Managing Director and CEO, Joint Managing Directors, Parag, Sundar, Gilani, Sudarshan, Sridharan, Nilesh, and Srinivas. We also have Mr. Ravi Subramanian, who is MD and CEO of subsidiary Shriram Housing Finance Limited, and Sanjay Kumar, who is our IR Head. First, let me go through the merger update. After nearly 1 year of the announcement of merger on 13th December 2021, we announced the merger.
As per the plan, timeline what we had given, one year we could complete the total merger process. On 5th of December, we officially announced our merger. In fact, we had received letter order from NCLT on 9th, but for us to complete the other formalities and announce, it took some time. For the shares and for security trading, it started from December 28th after necessary formalities with the exchanges. Meanwhile, we had prepared ourselves well with from April. In the beginning of the financial year, we had planned the integration, and we had put five managing, joint managing directors in respective geographies to manage the business as a combined entity. That preparation has helped us well in running a few pilots for the various products.
Today, out of 2,900 branches, I can say that around 85% of the branches, we have at least run one additional product. Depending upon the geography, depending upon the local needs, we have been trying to push the, at least one additional product of each other companies, and that has been successfully done. As far as the larger ticket lending on commercial vehicles and SME, we are taking a little more time because this needs to be done on a more concentrated and better supervised way. Underwriting part of it is done centrally in some of this location. We'll be taking little more time in rolling out large ticket products across India over the next one year.
Meanwhile, Indian economy is growing well. Last quarter it recorded a 6.3% GDP growth. Overall, for the first half, it is 9.7%. As per the estimate, it is likely to be around 6.9%. Yesterday, the government economic survey has indicated that it will be around 7% for this year, and maybe 6.6% going forward for next year. That itself will make India the growth engine of the world. India will be growing the fastest among all the countries. The inflation worry was there for some time, nearly six months now, mainly because of various commodity price going up, fuel price going up, and also the geopolitical tension.
Now in India, the inflation numbers have come down significantly. December numbers, they're at 5.72, which is below the 6% upper limit of RBI. Also WPI has come down to 4.95. It last December, it was 14.27. There is a substantial improvement in the WPI number. It should help us in moderating our liability cost. The RBI monetary policy also MPC had hiked the repo rate by 37 basis points, and at present it is 6.25. We expect maybe another rate hike, a modest rate hike or, with inflation number being there, it may not increase. That is the possibility. The GST collection is robust.
In fact, yesterday, today morning, if you have gone through the GST collection, generally, the GST collection is INR 1.5856 lakh crore. With steady INR 1,45,000 crore above collection for the last few months, we believe the government spend on infrastructure will continue. With the infrastructure spend continuing, our segments, especially, commercial vehicle and construction-related activity will continue to grow is what we strongly believe. The private capital is something which is not coming the way we expected. This financial year, government seems to be confident. With yesterday's report on the government economic survey suggest that private capital is likely to come in a reasonable way this financial year. The agri and rural economy has been doing very well.
If you look at India's agri growth for last three years, India is blessed with good climate, good rain for the last three to four years, and that is really helping. With various programs of government supporting the agri income growth, and also a direct credit to the farmers, that also is helping. There are some numbers which suggest that the government has announced that totally INR 2.16 lakh crore has been deposited directly into the bank accounts of farmers under Pradhan Mantri Fasal Bima Yojana. INR 1.24 lakh crore has been given to farmers in lieu of crop losses. This augurs well for the rural economy and to the income of the rural area. Yeah.
Government also has announced its plans to convert around INR 3.25 lakh fertilizer shops across the country as Pradhan Mantri Kisan Samruddhi Kendras. These measures will definitely help the rural economy to be steady and consumption in the rural economy to grow. Coming to the auto industry, overall commercial vehicle sales have gone up by 16.6% to 227,111 units in Q3 against 194,709 units in Q3 2022. The heavy vehicle sales out of it is 683,000, which is 36.2% higher for the nine-month period compared to 466,760.
The heavy vehicles have been growing much faster at 33% over the previous quarter, and LCV has been growing at 8.2%. Three-wheeler is showing robust growth of 67%. I believe it is mainly because of the expansion of e-commerce activity. E-commerce is expected to grow 18% through to 2025. That means, the e-commerce is likely to reach to tier two/three towns, including all pin codes that are available. Maybe, that's the way the e-commerce is going to play a major role in the last mile reach and the transportation part of it. The earthmoving and construction equipments also are growing very healthy at 26%.
Tractor sales have grown by 23% up to 2,09,918 units, in Q3, versus previous year same period of 1,69,835 units. Two-wheeler also has been growing at 38,59,030 units, at 6.3% growth for the nine months period. Which indicates that the overall, there's buoyancy demand in the urban and rural market. Now more to come to the current quarter performance, I'll hand over mic to Mr. Chakravarthy, my colleague.
Thank you. I welcome all to the first earnings call of Shriram Finance Limited for the third quarter of financial year 2023. I trust, you had the opportunity to look at the investor presentation that we have put up. As Umesh Revankar mentioned in his opening remarks, financial year 2023 has been a eventful year for us because of the merger. All credit to our business and back office teams that this merger has been completed successfully.
I would also request you to note that the corresponding figures, corresponding previous year figures are not comparable as the merger was effective. The merger effective date is 1st April, 2022 . On the operational metrics, we clocked a disbursement growth of INR 29,245.26 crores as against INR 22,931.70 crores in the same period of the previous year and as against INR 23,789.32 crores in Q2 financial year 2023. Our Assets Under Management stands at INR 1 lakh seventy-seven-
Sir, I'm sorry to interrupt. Can you please repeat your last line, sir? There is a slight static on the line.
Okay. Our Assets Under Management.
Uh-huh.
Our assets under management stands at INR 1,77,298.17 crores as compared to INR 1,66,848.63 crores in the previous year, and increased by 13.17% as compared to INR 1,69,358.20 crores in Q2 FY 2023. Net interest income stands at INR 4,427.88 crores as against INR 2,387.97 crores in the same period of previous year and as against INR 4,104.86 crores in Q2 FY 2023. Our net interest margin was 8.52% as against 6.65% in the same period of previous year and 8.26% in Q2 FY 2023.
Profit after tax stands at INR 1,776.97 crore in Q3 FY 2023 compared to INR 680.62 crore in Q3 FY 2022 as against INR 1,555.11 crore in Q2 FY 2023. Our earnings per share stood at INR 47.46 as against INR 25.26 in the quarter Q3 FY 2022 and INR 41.53 in Q2 FY 2023. Gross Stage 3 declined by 2 basis points and Net Stage 3 declined by 12 basis points over Q2 FY 2023. Hence, Gross Stage 3 stood at 6.29% compared to 8.4% in Q3 FY 2022 and 6.31% in Q2 FY 2023.
The Net Stage 3 stood at 3.2% compared to 4.36% of Q3 FY 2022 and 3.32% in Q2 FY 2023. The credit cost for the current quarter stood at 1.75% as against 1.73% for Q2 FY 2023. The cost to income ratio was 22.29% in this quarter as against 24.5% recorded in Q2 FY 2023. I would like to move on to our subsidiary, Shriram Housing Finance Limited. They have registered a disbursement growth of 30.33% to INR 1,001 crore as against INR 768 crore in the same period last year and as against INR 1,049 crore in Q2 FY 2023.
Shriram Housing's assets under management grew by 55.84% to INR 7,178.16 crores as compared to INR 4,606.15 crores the previous year and by 9.66% as compared to 6,545.92 percent Q2 FY 2023. Their net interest income increased by 86.26% to INR 79.61 crores as against INR 42.74 crores in the same period of previous year and as against INR 64.53 crores in Q2 FY 2023.
Profit after tax for Shriram Housing increased by 27.19% to INR 36.38 crores in Q3 FY 2023 compared to INR 28.60 crores in Q3 FY 2022. As against INR 34.03 crores in Q2 FY 2023, their earnings per share stood at INR 1.12 as against INR 0.88 in the quarter Q3 FY 2022. Shriram Housing's gross Stage 3 declined by 37 basis points and Net Stage 3 declined by 29 basis points over Q2 FY 2023. Accordingly, gross Stage 3 stood at 1.15% compared to 2.47% in the Q3 FY 2022 and 1.52% in Q2 FY 2023.
The Net Stage 3 stood at 0.87% compared to 1.99% of Q3 FY 2022 and 1.16% in Q2 FY 2023. I shall now request our Whole-time Director and CFO, Mr. Parag Sharma, to brief you on our fundraising activities and other liability related matters. After that, our Joint Managing Director, Mr. Sundar, will talk about the accounting aspects. Thank you.
Hello, everyone. On the liabilities, total liabilities as of December stood at INR 1,53,328 crores, open up into 47% to be Term loan, bank loans, route around 23% from FD with retail FD. 24% is through the domestic bond market, capital market. Securitization is close to 13%. External measure borrowing, including the bond and loan, is at around 12%. That is the break up of liabilities. The overall cost is at around 8.77 compared to 8.71 in the previous quarter, up by around 6 basis points. Liability mix might change with more securitization to be done in the coming quarter and also some increase in the bond offering by the company. That will be the two changes.
When it comes to mobilization for the quarter, we have mobilized in line with the previous quarters. It's close to around INR 10,200 odd crores of borrowing, with the securitization being the largest contributor at INR 4,200 crores, followed by retail deposit, which was INR 4,093 crores. On the ALM front, all buckets, as in past have been positive with cumulative surplus up to one year being in excess of INR 30,000 crores. Liquidity coverage ratio is healthy. It is at around 240%. The overall liquidity is INR 17,400 odd crores, which is good for meeting our liability repayment for close to around 5 months of liabilities. The leverage ratio is down from 3.9 to 3.63 in the current quarter.
Rating agencies have reaffirmed our rating of Shriram Finance Limited as AA+. All the credit agencies, CRISIL, CARE, ICRA and India Ratings have reaffirmed the rating. We are confident that this quarter the cost may not go up at 8.77%. It should reduce it. We don't expect the cost to go up for sure for this quarter. With this I hand over to Sundar for additional.
Yeah. Hi, everyone. Couple of data points. One is that the employees have count has increased by 3,500 numbers in the current quarter, with a closing employee count of 60,918. The cost-to-income ratio has stabilized at around 22.29%, and we expect this to be the trend going forward in a broad band of 22%-24%. As you're aware that there was an one-time sales tax write-off which happened in the previous quarter, and hence it got higher at 24.5% in September quarter. Most of the numbers have been already spoken by MD and CMO.
One additional data point is that the NGT for the current quarter of the combined entity is 42.39%, PT for stage one is 7.17%, and PT for stage two is 17.4%. One more additional point which I would like to clarify is that the already reported numbers of STSM in the previous two quarters have been restated to take into account some entries relating to the merger, fair valuation accounting as per the Ind AS norms. There may be a difference of around INR 100 crores in each quarter, and which if any queries are there, we'll be happy to reply to it offline through Mr. Sanjay Mundra. With this, I would like to hand over the call back to the moderator and request the moderator to open the lines for Q&A. Thanks.
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may please press star one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star two. An operator will take your name and announce your turn in the question queue. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants may press star one to ask a question. The first question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Right. Hi, sir. Just quickly, if you can give out the, disbursements as per product and, sincere request if it can be part of the presentation going forward, that it will be slightly easier because we have so many products now. That's the only question I have. Thanks.
Okay. The 24 quarter is INR 29,248 crores and as against the previous Q2 number of INR 25,789 crores. Coming to the segment-wise, the commercial vehicle segment, we have done INR 11,750 crores. The passenger vehicles was INR 5,057 crores. Construction equipment was INR 1,808 crores. Farm equipment, INR 527 crores. MSME was INR 2,870 crores. Two-wheeler, INR 3,230 crores. Car loans, INR 2,001 crores.
INR 31 crores and personal loan contributed to INR 1,842 crores and others around INR 17 crores. This is the broad breakup of the segmentary disbursements and we will definitely take your suggestion and then try to incorporate the same in the future presentation. Thanks.
Within savings, sir, what is used and new, sir?
It will be roughly say around 10% will be new and the balance will be used.
Sure, sir. Thank you so much.
Thank you. A reminder to all the participants, anyone who wishes to ask a question may please press star and one at this time. We have the next question from the line of Nischan from Kotak Mutual Fund. Please go ahead.
Hi, this is Nischint from Kotak Securities. Just one question to Parag. You know, what gives you confidence that, you know, cost of borrowing will not increase next quarter? I think you mentioned that we are at 8.4% and, you know, it will not go up from this quarter.
Nischint, as I said, it is 8.77%. Currently, whatever we are borrowing is at much lower level. We are borrowing it between 8.5%-8.6%. I don't expect the cost to go up. It can only come down. We did repay some of the high-cost debt in the month of October end, October to October end. I don't expect because incremental cost is lower than the all balance sheet cost as of now. That is the reason I am confident that it will not go up for this quarter.
I would assume that, you know, some of the bank borrowing, you know, as you would see the, I mean, there would be pricing happening.
Bank borrowing is nothing, Nischint, at the rate of around 8.5% to 8.65% range only, nothing beyond that. The overall liability cost is around 8.77%. That is why I'm confident it will not go up.
No, I understand that, but I'm saying that some of the bank borrowings that you're currently having, let's say something is like, you know, at this point of time it's let's say 7.5% or 7.7%, you know, when it's. I believe this is one year, you know, due for repricing. When it comes for repricing maybe next month or two, three months down the line, then it kind of probably gets repriced at a higher rate, you know, depending on what has been the rise in ECLGS in the last 12 months.
Yeah. There's, that is called annual repricing, when it comes to the large borrowing, which is from public sector banks, that is all ECLGS linked. There was nothing at around 7% level, there is no borrowing. All the borrowings were at around ECLGS. That point of time will be around 8%-8.25% only. I don't expect there will be a major change. We do expect to increase our securitization volumes. We do expect to increase our bond offerings. Even bonds, what we are currently borrowing at are not at the levels which is the balance sheet cost as of now. That is why I'm confident about cost not being.
Sure. Can you just remind, you know, last quarter, I mean, we can maybe let's look at Standalone Shriram Transport. What would have been this cost of borrowing as against 8.77?
Incremental was around eight quarter I would say.
Outstanding, if you are at 8.77 in December.
That includes, yeah, that includes Shriram Shipping in liabilities also.
Mm-hmm.
Also, whatever we have borrowed from the offshore, everything included was 8.77%. Incremental, what we have borrowed is between 8.25%-8.30% range only. That is why I'm saying it will not go up.
Sure. And outstanding last quarter only for Standalone Shriram Transport would be how much?
That was, at around 8.5%. 8.54% is what we reported for the September quarter.
Okay. Sure. Got it. I think that was my question. Thank you very much.
Thank you. Participants may press star one to ask a question. The next question is from the line of Mahrukh Adajania from Nuvama Wealth Management. Please go ahead.
Yeah. Hello, good morning. What is the quantum of one-off in operating expenses?
This quarter there was no one-off. The one-off was in the previous quarter of INR 65 crores, which was on account of write-off of the earlier litigations regarding the sales tax. There was an amnesty scheme gone by certain state governments, we had availed of it. Whatever was the amount payable we had paid and written off in the books of accounts. That amounted to INR 65 crores in the previous quarter. That was a one-off. Current quarter there is nothing to this.
The merger related expenses, have they come in OpEx?
Yeah. It's the expenses related to merger is around INR 19 crores and it will be deferred over a period of five years. Whatever is pertaining to the current quarter has already been factored and is not significant compared to our size of the expenses.
It will be deferred over five years.
Yeah. Correct.
Over every quarter. Okay.
Sure.
Just in terms of credit cost, this is where it settles, is it? The Q3 level, is that where it settles now? How do we look at it going ahead?
The credit-
Yeah.
The credit cost, we always have given indication that it will be around the 2%.
This current year it is 1.94, as of, for the nine months period. We should be around the 2%, any point of time, which is our long-term history, if you go of 10 years back and also if forward-looking also, we have always been indicating that it will be around 2% trade cost.
Got it. When you expense the intangibles of INR 100 crore every month, is it tax-deductible or it's not?
The intangibles, we will be testing for impairment, and it's most likely that it'll come maybe after a couple of years only, not before that. That is what is our estimation. It's up to the independent valuer to take a call, but we'll be testing for impairment every year-end.
Okay. Whatever is written off through P&L or expense there, is that tax-deductible or not?
The goodwill is not tax-deductible, but the intangibles, yes, it is tax-deductible.
Okay. Okay. Thank you so much.
Thank you. The next question is from the line of Param Subramanian from Macquarie. Please go ahead.
Hi. Thank you for taking my question. My first question was on understanding this NII that you've reported on the merged basis. If I just do an addition of the 2Q NII of, you know, Shriram Transport and Shriram City Union, and compare with what you've reported for pro forma, there's a gap of or an incremental addition of about INR 180 crore. Could you explain what exactly, you know, adding or giving this data?
See, as I was telling you in the opening remarks that, as per the accounting standard on merger, we have done some fair valuation of the liabilities, the loan that we have borrowed, as well as loan that we have given. Roughly around INR 1,000 crores is the fair value that we have taken a hit at the time of in the opening balance sheet. The benefit will come over a period of three years. Maximum will come in the current year. That's what we were indicating that it will be around INR 100 crores per quarter will be the addition to the NII in the next couple of quarters, three-four quarters at least. It will come.
100 crore per quarter for the next three-four quarters?
Correct. Correct. Yeah.
Okay. You said it's a hit to the balance sheet, so how is it giving you credit on the P&L?
No, it is credit to the P&L, and opening balance we have taken a hit.
Okay.
It is reflecting in the results.
Okay, sir. What is the corresponding impact on net worth? Because even if I do a net worth comparison, even adjusting for goodwill, there's an issue. Is it also adding to your net worth?
The net worth, if you see the standalone STFC and standalone SCUF as on 31st March, and add your current nine months profit minus dividend, what we have already paid, and there'll be a difference of around INR 2,800 crores is on account of the goodwill and intangibles that we have created.
Okay.
-which is kept as a asset. That is the difference.
Okay. goodwill is INR 1,400, and the remaining INR 1,400 is also.
It is INR 15. INR 1,300 is the goodwill and INR 1,500 is the intangibles. This primarily have been bifurcated to get a benefit of tax claim at least as far as this is concerned. It is supported by independent valuers, assessment and all those things. The charge to P&L may happen maybe after the next couple of years, not before that.
Got it. If I can just ask, you know, considering the one off we are seeing, you know, post-merger, in the P&L currently, what is the sustainable level of ROA and ROE? This time you are reporting 3.2% ROE, but what is on a sustainable basis, what do you think, you know, there should be some boost there? Yeah. That's my next question. Thank you.
ROA is 3% on a long-term basis, and ROE will be anywhere between 16%-18%, depending upon the environment.
Okay, sir. Thank you so much. Yeah. Thank you.
Thank you. The next question is from the line of Umang Shah from Kotak Mahindra AMC. Please go ahead.
Yeah. Hi. Good morning. Thanks for taking my question, and congratulations on a good quarter, and the merger. Sir, a couple of questions. One is, on the, on the merger related expenses. Just wanted to, reconfirm the expenses, which you mentioned were just about INR 90 odd crores, is it?
Yeah, INR 19 crores.
Okay. If I recall correctly, initially when the merger was announced, we were anticipating some merger related cost to the tune of anywhere between 200 to 300 odd crores. Does that still stand or has that number gotten revised downwards?
When we announced the merger, at that time, there was a likelihood of an amendment in the stamp duty act for in Tamil Nadu. Foreseeing that we had indicated that it will be around INR 200 crore-INR 300 crore. As on date also, the amendment has not taken place. Since our merger is already in place, so there is unlikely that there will be a retrospective impact on the same. Hence the management is confident that no further expenses on account of stamp duty is applicable to the company.
Okay. Understood. fair point. sir, the other question was on the growth outlook and ideally how should we now look at our AUM mix shaping up progressively maybe, a year or two years out, from here, should we assume that the share of vehicle finance business gradually just keeps coming off in the overall mix or how should we look at it and what's the broadly the growth outlook over the next 12-18 months?
See, the overall AUM growth which we had earlier indicated of 15% CAGR growth should continue in what we feel very confidently because Indian economy is growing and with this growth 15% CAGR growth is a possibility. We are leader in commercial vehicle and two-wheeler, so our leadership will continue to remain. We are trying to reach out for SME business in the geographies which we have not been servicing till now. Earlier, the SME lending was focused mostly in the south and western part. Rest of India, even though there is enough growth opportunity in SME business, especially large states like UP, MP, Rajasthan and Punjab, Haryana, we have not been doing much.
With branch network being available today across and having the experience and the expertise of both customers and the expertise of doing SME business in the southern part, southern and western part, we would be expanding it. There may not be significant shift in overall the ratios, but slowly and steadily, SME growth will be much faster than the CV and two-wheeler is what we feel. It's not higher immediately in two years, but over a 10 years you can expect because SME industry is so large and ability to reach out to these segment, sectors and segments through the bank network is possible. Next two years there may not be a big change, marginal change, but over 10 years there will be a significant change.
Understood. On the cost to income, just to reconfirm, in our opening comments we mentioned that the steady-state cost to income ratio should be close at about 22%-23% odd. Did I hear that right? Currently we are at about 26%-27% odd.
Yeah. We had earlier said 26%, but this quarter it has been 22.45%. In the long run it will be around 24%-25%.
Okay. Okay. All right. Just last one. On the housing finance side, now that the merger is behind us, how should we look at it? Will that continue to operate as a wholly owned subsidiary or at some point of time we look at some sort of a value unlocking happening in via that subsidiary or a separate listing, something? Any plans on that front?
No such plans. It will continue to run as a wholly owned subsidiary.
It is not wholly owned. It is, 85% stake is with Shriram.
Yeah, yeah. 85%.
Okay. All right. Thank you so much. Thanks for patiently answering my questions.
Thank you. The next question is from the line of Shweta from Elara Capital. Please go ahead.
Thank you, sir, for the opportunity and congratulations on great quarter. I just have one question. What are the cross-sell opportunities you see deriving across products due to synergistic benefits?
Can you repeat it? Poor hearing.
Sir, what cross-sell opportunities across products do you think that you can derive from these synergistic benefits due to merger?
Okay. See, we have the two businesses, if you look at the Shriram City Union businesses, they were mostly in the south and western part. They did not have reach across the country. Now, with Shriram Transport banks and the experience in these geographies being available, we would be able to take the Shriram City Union product across all the geographies, so that loan products get expanded in the both sides. Even in Shriram City Union branches, we will be able to offer CV and construction equipment and agricultural equipment lending. So we will be expanding the loan product across all branches and all products depending upon the potential and need of the geographies. So that is the synergy benefit. Additionally, since we have a large customer base, we would be able to cross-sell insurance and other investment products.
Apart from sourcing deposits, we would be able to cross-sell insurance and other investment products. That will give us additional fee income. That is the total synergy.
Sure. Thank you.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services. Please go ahead.
Yes. Good morning, thanks for taking my question. Again, you know, just going back to the merger related OpEx, merger related expenses, I was just going through the call that we had hosted at the time when we announced the merger. That point in time our expectation was, including the stamp duty cost, which is not there, something around INR 350 crores. I mean, is it that, I mean, merger related expenses are actually coming much lower than what we anticipated to. You already said that we are not required to pay that stamp duty that we anticipated of about INR 190-200 crores.
Other than that, I think we talked about HR integration costs of about INR 60-70 crores, branding and advertising costs of about INR 70 crores. Those expenses are not really coming or, I mean, they are being capitalized now and they will be expensed, over the, say, next two years.
When we guided, one year back, we had expected a high stamp duty expenses which is not there now, as I had mentioned to the previous caller. When it comes to the other expenses, we, the INR 19 crores that we are talking about is the advisors and immediate merger related expenses, which have been deferred over a period of five years. The advertisement and other co-charges will be an ongoing thing, which will be debited to the P&L as and when it is incurred. The cost of advertising, which we had guided maybe around INR 50-100 crores, will be happening over a period of time, and it has not already happened.
Got it. I mean, your guidance of 24%-25% cost to income ratio takes that into account.
Yeah, it takes into account. Yeah.
Got it. Sir, just one more question here. Just wanted to understand, I mean, though it's one merged entity now, the branding is Shriram Finance. Wanted to understand there are still employees who are part of either Shriram Transport or Shriram City, and who are maybe kind of people who understood the respective products a whole lot better. I mean, what incentives have been put in place to kind of drive this cross-selling?
See, incentive programs are our business model, if you look at all our field and branch team is there the variable component is quite high. Both the Shriram Transport and Shriram City Union business model, that was factored in, and that's how we have been functioning. Same thing is continuing. The incentives would be given for own product and also a cross-selling product. If whether it is insurance or whether it is an investment product tomorrow, or whether it is a multi-product today. The variable component will continue to play a major role in our business model.
Got it, sir. This is useful. Thank you and all the best.
Thank you. The next question is from the line of Uday Parikh from Investment. Please go ahead.
Hello. Good morning. Thank you for the opportunity. Can you quantify the amount of interest expense paid on account of buyback done in October?
Okay. We don't have the number right now. You can just touch base with Mr. Mundra. He will help you out offline.
Okay. Thank you, sir. Thank you.
Thank you. The next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Yeah, hi. Good morning, everyone. Just two or three questions. Number one, on this, cross-selling bit, can you give us an indicative sense as to, you know, how the loan book could look like a couple of years down the line? Would it be, would the CV proportion come down over a period of time as the other products we cross-sell to other customers?
Rahul, I think I just answered it, just five, 10 minutes before. We are leaders in TV and two-wheelers, so there it will not change much. Overall ratio will remain. The SME focus will increase because SME business, which we are mostly doing in the southern part, we'll be taking to the rest of India. Scope and opportunity to grow will be faster. We may grow there at around 20%-25%, wherein other businesses we may still grow at 14%-15%. It will not alter-
But-
Yes. Yeah.
The loan rate will.
Yeah. Yeah.
Understood. Understood. Okay, got it. The other question was on goodwill. Over how many years will this goodwill need to be written off?
Goodwill will be tested for impairment by an independent valuer and basis that it will be provided. The management feels that at least for the next two years there'll not be any impairment on this count.
Okay, got it. Got it. Thanks. The other question was on cost of funds in Shriram City Union. Would there be any benefit if there's any rating upgrades? I mean, of course now you'll borrow in Shriram Transport, but the incremental borrowing should be a lot lower on that portfolio also, right? As you diversify within the Shriram City Union portfolio. How much benefit can we get out of that?
Shriram City Union was Double A and now the liabilities get repriced to Double A plus level. There should be 25, 20 basis point benefit which will come out of repricing of Shriram City Union liabilities.
Okay. That's the reason why next year you're saying cost of funds would not increase much. I mean, some benefit will come from here as well. Is that a fair insight?
I said for the March quarter it will not go up. If...
Okay.
Market increases rate, that has to be then tested for next year. This quarter I don't see any difference.
Got it. Got it. Just a last question in terms of the fair value that you were talking about earlier. Can you explain how do you arrive at this? Is there an element of NPV calculation also that goes in there, and that's why you had to sort of, you know, adjust the book by 1,000 crores?
Yeah.
Is it something else?
See, the last quarter, that is March quarter of 2022, whatever was the loans dispersed and loans, liabilities mobilized. The benchmark rate is considered and it is repaid for the earlier entire book. Based on the NPV calculation, the travel agent arrives. Okay. Got it. All right. That's it from me. Good luck for the future quarters. Thank you, again.
Thank you. The next question is from the line of Ankur Jain, an individual investor. Please go ahead.
Yeah. Hi, good morning. I have a question on capital allocation. Shriram Finance has paid an interim dividend of INR 15, and in the past, both Shriram Transport and Shriram City Union have given heavy dividends. My question is, has the management thought about the idea of doing a buyback with some part of the money which could be more beneficial to the shareholders? Thank you.
I see. finance companies or banks normally don't do any buybacks because the capital is always required in the business.
Okay. Even with the large amounts that you are paying which are not required, because ultimately they are being paid to the shareholders.
Dividend is expectation. There are some shareholders who are invested for a steady dividend. That is a different aspect altogether. Rewarding shareholders continuously with good dividend is a part of a good governance and also appreciating the shareholders with the, yeah, that's all.
Okay. Thank you. That was my only question.
Thank you. The next question is from the line of Chandrasekhar Sridhar from Fidelity International. Please go ahead.
Hi, good morning. I have a few questions. Parag, just how do you think of liquidity right now? As I see, I think as a merged entity also the excess liquidity has actually stayed constant as you've moved on and you've actually cut it by one month. How do you see that over on a sustainable basis, one. Second is, Shriram City Union had a liability duration which had extended pretty reasonably over the last few years, you know, longer, much longer than the asset duration. Now that we are working on a merged entity, how do you just think on liability durations given we have a merged balance sheet? For Mr. Sundar, I have a couple of questions.
One is, if I, even if I, you know, I understand the fair valuation, but if I look at the GNPL also on a combined basis, I mean, the pro forma numbers and the GNPL also there's a difference of 40, 50 basis points. What would explain the differential in the GNPL? For Mr. Ravi, just in Shriram Housing, was there any portfolio buyoff done during the quarter? Thank you.
On liquidity, we always had a strict policy of maintaining three months of liability repayment as liquidity buffer, which we enhanced during the COVID period to six months. Now we're at around five months. I think we'll continue with this liquidity buffer of INR 17,000 crore till the March quarter, and then based on market scenario, we will look at diluting it or continue to maintain slightly higher liquidity. As of now, till March quarter, I think we'll continue to have INR 17,000 crore of liquidity. When it comes to duration, I think duration in Shriram Transport also, the assets is not longer. It is, a used vehicle is typically three-four years. There's not too much of duration difference which comes because of Shriram.
Yeah.
Shriram Transport also the liability was longer than the assets. That doesn't change. Sundar.
Coming to the gross stage three numbers, if you neglect the AUM of Shriram City Union Finance around 31st March was 33,000 crores, and they were carrying an ECL provision of close to slightly more than 2,000 crores. Net 31,000 crores was acquired by Shriram Transport by way of the merger transaction. This 31,000 crores was accounted as a loan outstanding from the customer, and hence this amount is added to the gross stage three. You'll find that normally if you take one plus one, had it been taken as a gross level that of 33,000 crores, the NPA would have been at around 25 basis points higher than what we are reporting. That explains the reduced number of the gross stage three of 6.29 in the current quarter.
The same thing has been restated in the previous quarters also.
Okay, got it.
On the AUM current side, out of INR 1,000 crores gross exposure, the bottom portfolio is about INR 6 crores AUM.
Okay. Sure. Maybe if I could just follow up with a couple of more questions. Umesh, one is just how do we think of just right pricing now? You know, how much you're charging to the insurance business on a sustainable basis? This had stepped up like a couple of years back, but didn't seem to go anywhere after that. What's your thoughts on that? Second is, we are still carrying a COVID provision buffer at this point in time. Now, this provision, the buffers were created in Q4 FY 2020 and Q1 FY 2021 and then some later. Now obviously the contracts are, and our understanding was, you know, they'll be utilized over a period of time once the contracts mature.
Given the duration of the book, your contract should be maturing by now, but they're still carrying a large buffer and we've utilized very little. What do we think of some of these provision buffers which we're carrying?
See, as far as the insurance is concerned, the insurance cost center is done to help the customer to get better claims and quicker claims. That is the main objective. The earning out of it, the commission occurring out of the insurance, whatever is statutorily available or can be given, that we are getting from the insurance companies, both life and the general business. Our focus has been to provide better service to customers. For example, earlier we used to get claims on accident at around 180 to 200 days, after 180 to 200 days, putting customer into a lot of difficulties. By providing them insurance service now in-house, we are able to get a claim in 20 days.
That is the benefit customer will get and indirectly can company benefit because of quick settlement of the claim. There is no NPA due to, or there is no delay due to the claim being delayed. That's the biggest advantage. The benefit will improve over the period as we penetrate more. Today, the penetration level of insurance cross-sell is much lower, both life and general. Once we increase it across then benefit will get more pronounced and then our bottom line will reflect very healthy growth in the fee income.
On the COVID, the provisioning we had created a provision of INR 2,850 crore in Shriram Transport books. As we have been guiding everyone that it has been allocated to the respective contracts and as and when the contract settle it will be written back or charged off, is what we have been indicating. As on 31st December, an outstanding of INR 1,651 crore is available in the books. We expect this to be cleared maybe in the next one year or so. By March 2024 maximum will come out.
I mean, that should extend, actually extend beyond the contract duration, right? Given the duration of the book by now that should have been flushed out, right? It was my understanding.
No, no. See, if you recollect, we had also given a moratorium of six months. Hence the entire book was postponed by six months. In normal scenario, it would have been, maximum should come to an end by September 2023. That is likely to be pushed beyond, close to March 2024. This I'm saying majority of the book. Still there can be some provision lying still.
Thank you.
Thank you. The next follow-up question is from the line of Nischint from Kotak Securities. Please go ahead.
Right. Can you share what was the absolute valuation of Shriram City considered during the merger? If you can share the number.
Yeah.
INR 1,000 crores.
Yeah. Nischint, I will just take this question offline and give it to you.
Okay. Sure. Perfect. Thank you.
Thanks.
Thank you. The next follow-up question is from the line of Mahrukh Adajania from Nuvama Wealth Management. Please go ahead.
Yeah. Hi. Thank you for the follow-up. Sorry, but can you please quantify the fair value gains in NII and then through other line items of the P&L in this quarter?
The fair valuation gains in the current quarter?
Mm-hmm.
Okay, I'll do one thing. I'll just send it across through Sanjay. Both the impact on the PAT as well as the NII.
Okay. It's okay. Okay. Thank you.
Thank you. As that was the last question for today, I would now like to hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited, for his closing comments. Over to you, sir.
Yeah. Thank you. Thank you all for joining this call. We had a good set of numbers in this quarter. Going forward, we feel that fourth quarter should be equally good or maybe even larger because demand seems to be quite good in the fourth quarter. Going forward also, we feel that post I think all the merger related integrity, integration issues are addressed, we should be able to continue to grow and do our business very comfortably and keep growing our bottom line and have good progress. Thank you very much.
Thank you, sir. Ladies and gentlemen, on behalf of Shriram Finance Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.