Shriram Finance Limited (511218) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Shriram Transport Finance Company Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Umesh Revankar, Managing Director and CEO, Shriram Transport Finance Limited. Thank you, and over to you, sir.

Yes. Good evening to the participants from India, and good day to those of you joining from overseas, especially from U.S. and west. Let me begin with a brief overview of macroeconomic scenario and onground development before I cover performance for the quarter. Amidst slowing global growth, India's GDP growth decelerated to multiyear low of 4.5% in Q2 '19-'20. This was primarily due to subdued private consumption and continued weakness in the credit growth. The other key engines of growth, namely government spending, investment and exports have also slowed and are believed to be cyclical. However, there has been some green shoots amidst challenging environment with a bit of revival witnessed in infrastructure, mining and construction; moderate revival in industrial activity post the monsoon has resulted in pickup in demand for cement, steel and other industrial material. The IIP numbers for the month of November grew by 1.8% compared to degrowth of 3.84% in October. Mining output grew -- growth stood at 1.7% in November against contraction of 8% in October. Manufacturing output growth stood at 2.7% in November compared to the contraction of 2.1% in the preceding month. The country experienced rigorous monsoon in 2019, with rainfall at 110% of the long period average. The trend of uneven distribution continued as 15% of the geographic area of the country faced deficient rainfall, even as many areas received excessive rainfall. On the whole, it has been favorable monsoon as a large proportion of reservoir across the country have reported increased storage level. This bodes well for agriculture sector, and we are already witnessing some buoyancy in the rural and semi-urban markets. We believe that rural credit demand is good due to reasonably good agri output in the current season as well as optimism about next one. Improved agri output will also contribute towards moderation in inflation, which at 7.35% in December, despite two 5-year high. This is largely driven by food articles and expected to ease off during Q4. In this December meeting, RBI revised CPI inflation projection for the second half of the 2019-20 to 4.7% to 5.1% range from earlier forecast of 3.5% to 3.7% range. This has necessitated a pause by RBI after already undertaking multiple rate cuts aggregating 135 basis points. In the interim, the financial system will benefit from RBI effort towards transmission of lower rates. Coming to the CV sale data, there has been lower volume, both in heavy and LCV year-on-year basis. Heavy being hit little hard, 40% year-on-year low, whereas LCVs were moderate at around 15%. However, the LCVs were all-time high in the last year. So 15% seems to be quite reasonable. This has been impacted due to last year's axle load norms and also extended monsoon and delay in construction and mining activity. And also because of the discounts around BS-IV to BS-VI change, the BS-IV inventory levels, which were quite high in the last year, and manufacturers were quite eager to clear the inventory, therefore, the discounts were a little high and making it a little difficult for the customers to choose which is the right time to buy, both new and used. However, pre-buying, which we expected to pick up in the Q3 did not happen, and we expect Q4, it should pick up, even though till now, in January, we did not see a much pickup. But we hope to see that pick up in February and maybe in the first 2 weeks of March. Post-March, BS-IV vehicle will not have any demand because it cannot be sold and registered in any of the registration offices. So we do expect the manufacturer to announce the price hike of around 10% to 15% depending upon the various models. And we expect the used vehicle prices to improve subsequent to that. We, as always, focused on customers' profitability and sustainability in the business, and therefore, customer success is our victory. Our new products such as fuel credit to customer, jointly with HPCL and BPCL, is well received as combined outlets of 50,000 fuel pumps are giving us a big reach. We are also tied up with tire majors to give tire credit, and we are getting a very good response. On liquidity, we continue to be well placed. In January, we raised fourth successful USD bond issuance amounting to USD 500 million. This is a part of USD 3 billion global medium-term note program. The issuance has received an overwhelming response from the subscriber and was oversubscribed 4x. We have also steadily witnessed better pricing, and were able to seal decisions at a coupon of 5.1, which is 85 basis points below that of our first USD bond issuance and 60 basis points below that of our third, that's the last USD bond issuance. The specialty of this particular issuance is this is a social bond under the frame of social framework and part of ESG group. We believe that keeping this under and qualifying this under ESG group will have a benefit to us over the period. We continue to densify our sources of fund and combination of global bond issuance, securitization, publications have allowed us to reduce our dependence on wholesale funding. We remain on track to reduce credit costs. Some of you may recall that a couple of quarters ago, we lowered LTV of loans and also focused on used assets while deemphasizing financing of new assets. These initiatives have strengthened our book and along with steady trends in collection and helped us to reduce our credit cost. We should be able to maintain it around or below 2% going forward. Coming to the headline numbers for this quarter. The AUM grew by 4.92% year-on-year to INR 1,08,931 crores, against INR 1,03,818 crores. Net interest income stood at INR 2,055 crores compared to INR 2,028 crores. The net interest margin was 7.14% compared to 7.44% last year, and 7.19% compared to previous quarter. Profit after tax went up by 38.35% year-on-year to INR 879.16 crores against INR 635.45 crores in Q3 FY '19. EPS stood at INR 38.75 compared to INR 28.02. Stage 3 NPA increase stood at 8.71% in Q3 FY '20 against 8.78% in Q3 FY '19. Overall credit cost, which was around 2.24% has come down to 1.54%. We expect rise in volume in Q4 on the back of prebuying and trend remains favorable for the quarters ahead, given strong monsoon. However, on the back of weaker-than-expected first half of the fiscal, we trimmed our expectation of our growth to 8% to 9% for the full year. That brings me to an end for the -- to the opening remarks. I have with me, Mr. Sunder, Parag, and Sanjay to answer specific questions. I'd now request the moderator to open the floor for question and answer.

[Operator Instructions] We have our first question from the line of Jaikishan Parmar from Angel Broking.

Congratulations for good set of numbers. My first question is relating to the borrowings, see, if you can give us the incremental cost of borrowing for last 3 quarters. And our foreign borrowing has went up from 3% to 13% comparing to last year same quarter. So just some colors on, like, what is the maturity cost of borrowing and total cost of borrowing of that foreign borrowing? And one data point that how much percentage of AUM that vehicle refinance have age of 5 to 10 years, between 5 to 10 years, and greater than 10 years?

Yes. When it comes to the overseas borrowing as per regulatory requirement, nothing can be less than 3 years. And the bond, what we have currently done is bullet 3.5 years maturity. The coupon on this overseas bond was 5.1%. The landed cost to us will be around 9.6% range. When it comes to the domestic borrowing, the bank borrowing is some spread over the MCLR, which comes to around 8.60% to 8.75% range. We do have a retail program, the reposit rates have been reduced. And the minimum tenure -- what average tenure what we get in retail deposit is also more than 3 years, and the coupon is around 8.75%. When it comes to securitization, which is another large source of resources for us, that, because it is a priority sector assets and do get a lower rate, we are able to do at -- between 8% to 8.5% range. That is the incremental cost across all sources. Apart from that, we are also looking at the capital market bonds and CP, but that, in the last quarter, has been a smaller number. So the liquidity is good across different sources. And when it comes to your other question of the age of assets?

Age of asset breakup is around 73%, 74% between 5% to 10%, 5% more than 10 years. And new and newer, that is less than 4 years, is around 21%.

We have next question from the line of Karthik Chellappa from Buena Vista Fund Management.

Sir, my first question is, if we were to look at our ECL provisions, especially in Stage 1 and 2, that has come down a bit this quarter, both Q-on-Q and year-on-year. What would explain that?

Basically, see, if you look at last quarter, there has been some increase from Q1 to Q2. The increase was mainly due to delayed and extended monsoon and many of our customers who were from the rural market, their activity got a little postponed. I don't say it is hit. They only postponed because the normal cycle got changed, agricultural cycle. And therefore, there were some delays, and there was a significant improvement post-rain being stopped, that is from November, and it also was the festive period. So overall, the rural economy improved significantly, and therefore, the improvement was there in the Stage 2 accounts. As far as Stage 3 accounts, the improvement was just 9 basis points, but it is quite significant in this kind of a situation.

Okay. So this current ratio of about 2.72% is what you would assume the normal range to be?

Yes, it is a normal range. There was a little increase, but now it has normalized. And we're confident of improving further depending upon the economic activity and condition of the environment.

Okay. Got it. My second question, sir, is on the domestic funding environment per se. There was this news report, I think, about a week or so ago that one of the NCDs of transport was subscribed almost close to the base size of about INR 200-odd crores. So although there was an option to upscale it, because of moderate appetite or demand, they settled it to be at about INR 200-odd crore. Any thoughts on that particular issue? And how is the domestic funding environment in general for Shriram Transport?

See, we normally come out with 2 to 3 public issue in a year, and this is focused only on retail. And typically retail inflows are ranging between INR 10 crores to INR 15 crores in a day. So this time around, we kept it open only for 15 days, and normally, we keep it open for 30 days. So -- and since we expect -- and our inflows are basically only from retail, and there was a very less participation from HNI, it amount -- it totaled around INR 200 crores, and that was on the expected level. And there's nothing of unexpected event. We also lowered our rate from the previous issue, both on our normal deposit and also on the NCD program. So we are -- we were quite comfortable with this kind of subscription. And it is not out of our, what you call, imagination or out of our plan. So we are quite happy with the kind of participation. And we will continue to come out with this kind of issue, because we are always focused only on retail. We don't focus on institution participation or, in large way, HNI participation.

Got it. So in conclusion, although this year the guidance that you've given is around 8% to 9%, looking into next year, if growth were to revive, let's say, to a 12%, 15% kind of range, you believe that even the domestic funding would be comfortable for you to meet that growth?

We are very much comfortable with the funding because we have a significant part of our portfolio that can be securitized for our priority sector. And on the top of that, we also are now getting for on-lending of -- from priority sector pool of bank. So funding, there is no challenge. Our -- it depends upon the demand from the market and the environment. If the demand and environment is strong, we would like to grow as much as we can. But however, we have a program on which we grow. We typically would like to grow 15% even in the best of the condition. And this kind of a condition, depending upon the environment, we will plan our growth. As of now, we are planning for next financial year, a low double-digit growth.

We have next question from the line of Ankit Shah from White Equity.

Sir, can you help us better understand the increase in cost of funds? This quarter, it's moved up slightly.

So there will be some impact because of the overseas borrowing what we did. It was done previously that will be larger. And also, we have increased some of the liquid reserve, so there will be a carrying cost for having excess liquidity on balance sheet also.

Okay. Sir, can you help us with the number for Stage 2 assets?

Stage 2 from 22.21% in the previous quarter, it has come down to 20.4%.

Sir, can you give us the absolute number?

The current Stage 2 absolute amount is INR 21,991 crores.

[Operator Instructions] We have next question from the line of Aakash Dattani from HDFC Securities.

My first question is, what is the quantum of securitization done during the quarter?

We did close to around INR 3,000 crores we did -- INR 2,930-odd crores we did in this quarter.

Okay. What is the quantum of loans written off this quarter?

We wrote off INR 530 crores of loans. And we got a write-back of INR 86 crores because of the improvement in the asset quality. So net provisions on write-offs was INR 444 crores.

Okay. And could you quantify the amount of fuel credit and tire credit in your AUMs, please?

Amount-wise, it is quite small. It should be around 1% of the total volume. That's around INR 1,000 crores.

Okay. And sir, could you possibly elaborate on any steps or measures taken that have helped keep your Stage 3 assets stable quarter-on-quarter, given that a couple of players that operate in the vehicle finance space also -- although not exactly in the segment that you operate, have seen some stress?

Let us understand. We are basically into used vehicle lending, and our reach is mostly in the rural market. And the used vehicles are basically used for day-to-day consumption, agricultural output and for maybe short-term -- short-distance transportation. And these are not impacted by the overall industrial activity. So the new vehicles are typically used for industrial transportation, including raw material to finished goods. So there has been little slowdown there and some challenges. But as far as the -- our segment is concerned, which is for day-to-day consumption, agri and the local transportation, there has not been big challenge or a change. So I think there is not much of impact to us. And the -- on the ground, actually, it is improving. The rural markets are improving because of good monsoon, good output, both kharif has already announced the increased output, highest output in the last 5 years, plus the rabi crop is, again, considered to be very good because of cold -- the cold atmosphere in the north and also it's because of the better water storage because of the good monsoon.

Okay. Sir, did you face any difficulties because of any sort of civil unrest in any part of the country?

No, no. Most of these unrests were in these cities, and it was not in the semi-urban and rural market. And the prominent cities in a few -- maybe it would have impacted some passenger transportation, it has not impacted the normal business.

We have next question from the line of Pranay Rajani from B&K Securities.

I just wanted to -- I want to run through a quick question, sir. Can you please repeat the UCV, like you said, 5 to 10 years and 10 years and above the percentage terms once again?

5% to 10 years, 73%, and more than 10 years is 5%.

All right, sir. And also, sir, where do you see -- like, you have already provided with the AUM growth guidance. Where do you see the NIM for next financial year, sir, NIM target? As we have seen in the last couple of quarters, NIM has been consistently coming down.

Yes. See, as I explained earlier, there is some carrying cost because we are carrying little higher cash in this environment. But I feel we should have some expansion in the NIM in the next financial year. Mainly because we feel that better transmission would be there from the bank. And I understand banks are having high liquidity, and they would be able to lend to us at much lower rate. And we're able to attract term loan now from the bank on a continuous basis. So over the period, the borrowing cost should come down, and NIM, we should be able to expand.

We have next question from the line of Sneha Ganatra from Subhkam Ventures.

Sir, first, wanted to know on the merger front on the corporate restructuring part. What is the status as of now?

See, merger, we have been discussing for nearly 1 year with the various options, and which gives us best synergy benefit and also stakeholder value. So the discussion is on a continuous basis. As and when we feel we arrived at a best option, we would be able to take this to the Board and post-Board approval, then we'll make the announcement.

And any time line to this?

No immediate time line, but we would like to make it as early as possible because it is there in the public discussion for nearly 1 year. We would not like to postpone or increase the speculation. We would like to announce as early as possible, depending upon the comfort we have from all the stakeholders.

Okay, okay. Second question is on the network expansions and the employee expansion? And how do you see your cost-to-income ratio to be panning out?

We have around -- added around 50 branches last year, but they were not in the new location. They were all in the location we had the rural centers. It's mostly conversion of rural center into branches. So we already had business there. So we have not incurred additional expense in these branches. And we had recruited in the first half of the year little aggressively and that is continuing. Those employees are getting -- continued to be used. We have not recruited further in the last quarter. Our net increase in employee count is not there in the last quarter. And going forward, also, we would be converting some of our rural centers into branches. And we have sufficient manpower as of now. We always keep around 1,000 people on training. So we have enough manpower to be managed for the next quarter. And if at all, we see a good scope in expanding our branch network next year, then probably we'll add more manpower. So at any point of time, we would be having people under training because we don't recruit -- make any recruitment laterally. We recruit only fresh graduates. Now cost-to-income should remain at the present level, around 23%; maximum, it may go up to 24%?

Okay. And when you're guiding for the double-digit growth for this fiscal, the mix would be remaining more or less similar? Or any changes in the mix is expected?

For this year, we may end up with 8% to 9% growth because already 3 quarters are over. Next year, probably -- not probably, we are looking at low double-digit growth. And if at all environment changes significantly positively, then we may look at a little faster growth.

Okay. And this faster growth is because of just an economic environment or any other rationale to this?

Only economic environment. We react to the economic development and environment.

Okay. And so for the next year, what would be your credit cost guidance?

We should be around 2%.

Okay. And sir, last question, any repossession has been going on and the increase in the side of the repossessions of the vehicle, have you seen in the last 3 to 4 months?

We have not witnessed any increase in repossession of vehicle from our side. But there have been some talk about the other market players have increased their repossession. So the -- maybe most of those players, they were in new vehicle financing, and we were in used vehicle -- we are always in used vehicle financing. The rural environment being reasonably good, we did not see any kind of a pressure on more repossession. That is the only explanation I can give, and our portfolio also is behaving better and improving all the time.

We have next question from the line of Pranav Tendolkar from Rare Enterprises.

Sir, any lead indicators that you are tracking are improving or worsening? For example, one is fleet utilization, second is the cash flow and freight rates that the existing customers are getting? And third is that are inquiries for secondhand vehicles, secondhand CVs, increased in various parts of India?

Okay. See, basically, I would like to tell you, overall, the cash flows are a little tight in the market, especially from the corporate and the government sector. The cash flows are little tight and slower. But as far as the rural market, agricultural commodities, the cash flows are quite good, and they are moving faster and improving. So we have not seen any kind of a challenge to our customers. And as far as inquiries are concerned, the used vehicle inquiries are quite good. Only thing is, earlier, we used to have certain percentage of our customers wanting to buy new vehicle to upgrade themselves, that inquiries have come down significantly because of uncertainty in the discounting because the new manufacturers have been discounting their product to clear up their inventory. And therefore, the resale prices or even the customer's expectation of the vehicle price is -- there is no clarity. Therefore, I feel there has been sluggishness, and that will improve immediately after March 31, because whatever is the inventory now of BS-IV vehicle will have no value next year. Only the BS-VI vehicle has to be sold. Then, I think the resale value of used vehicle will go up significantly. And for us, the asset coverage of our existing portfolio will go up. So that will be very positive for every one of us.

Right, sir. And according to you, the fleet utilization would have also bottomed out hence freight rates?

No. Freight rates have been quite good. I don't see freight rates being low. Only thing is the -- see, certain segment, like, car carriers, imagine, if car carriers have been utilized for certain level and if the car sales have come down by 10, 15 basis point, the car carrier utilization will come down by 10, 15 basis point -- percentage. That's how certain sectors have impact. Mostly industrial sector, where the particular activity has come down, that has an impact. But overall, the consumption-based and agri-based vehicles, their utilization levels are constant.

We have next question from the line of Akshat Hariya from Multi-Act.

Sir, I would like to know what would be our landed cost of foreign borrowings for the current quarter?

Overall, it is -- last quarter, no -- last quarter is no, but this quarter, we have raised. It should be around 9.6% landed cost. That is in January what we raised.

And the previous tranche landed cost would be?

It's around 10%, 10.20%.

We have next question from the line of Anirvan Sarkar from Principal India.

I have 2 questions. One is that on the fee and commissions line, we have a rather big spike in this quarter. So I wanted to know, if there is a one-off component here? And my second question is regarding your funding mix. So the proportion of securitization has been quite high. And just wanted to know how are we viewing this? So like, if the funding environment improves, do we look to bring this down? What is the kind of spread that you earn on this portion? And what's the view in general on this? What -- how should we view this?

See, we have been focusing more into cross-selling over the last 2 years. And insurance cross-selling is one, which we have been doing quite aggressively. And we have received an amount, which was accumulative of 9 months this quarter, therefore, it is looking a little high. So then the -- coming to the funding mix, securitization has been a regular source of borrowing for us for several years. Every quarter, we do -- earlier, it used to be happening mostly in the year-end. And in last 2 years, since they have to maintain it every quarter, it is happening every quarter. It has not gone up significantly because it is Q-on-Q. It has -- there has been more regularity rather than a year-end phenomenon. That's the only thing.

We have next question from the line of Divya Maheshwari from Motilal Oswal.

Yes. My questions have been answered.

We have next question from the line of Pratik Poddar from Elara Securities.

Sir, I just have one bookkeeping question. Can I know the disbursement amount for the quarter?

See, the total disbursement was INR 11,607 crores. The new vehicle was INR 476 crores, used was INR 10,807 crores, INR 122 crores was others.

We have next question from the line of Darpin Shah from HDFC Securities.

So one of the media articles suggested that Shriram Capital has put on hold the merger plans because RBI has asked for reducing the stake in the insurance business. So if you can throw some light on it?

See, we have been looking at various different option of structures, and what is the best possible structure that will bring efficiency, synergy and the profitability and also stakeholders to benefit. So it is not true that the -- from RBI there has been any kind of a instruction or suggestion on that.

We have next question from the line of Abhinav Ganeshan from SBI Pension funds.

You had given this -- you had given the breakup of this -- the loans you are giving to used vehicles in 1 to 4 years. So what would be the number for last couple of years, if you could give it?

We do not have right now. You can contact Sanjay, who will -- he will be able to give.

Or broadly, can you just give a direction? Has that gone up?

It would have gone up by around 2% in the younger vehicle in the last -- this year. And new vehicle has come down. That's all. Overall, it will remain almost same.

As there are no further questions from the participants, I now like to hand the conference over to Mr. Umesh Revankar, Managing Director and CEO, for closing comments. Sir, over to you.

Yes. Thank you for all of us to -- for joining this Q3. Q4 is always the biggest quarter in the volume numbers and also in the efficiency. We are confident that Q4 will be much better. Before that, I would like to tell 1 or 2 lines on the budget. Budget has been quite positive towards NBFC, especially our Finance Minister had talked about partial guarantee scheme to be enhanced. Hopefully, it will come with some better enhancement to reach more NBFC because we feel overall NBFC industry being robust and good helps everyone in this industry. And also, government, the FM, has announced allocation to various infrastructure activity, both in rural and urban separately. That also is quite encouraging. So we feel that since budget is rolled out and once the busy session starts, business session typically starts post-budget from March onwards, the -- all government activities should start helping the economic activity to resume aggressively and everyone benefits. So we expect a very good Q4 and Q4 numbers. Thank you very much for joining again.

Thank you, sir. Sir, we have one last-minute question come up. Should we take it?

Yes.

We have a question from the line of Prashant Kothari from Pictet.

Yes, the question was around the branch expansion. You explained how the rural centers have been converted into branches. But you've seen expansion even on the urban side, but there are many more branches compared to last year. Can you just explain why you're expanding so aggressively? And what's happening to the branch level profitability therefore?

See, basically, what we look at is, we wait for the rural centers to come to a particular level of customer base and the efficiency. Typically around 500 customers if we have in the rural center that we convert into branch, and by the time, it will breakeven. So that's the rough calculation we have. And also, sometimes, it depends upon the faster development in a particular geography. So there is no additional cost per se because most of our branches have a minimal cost, and therefore, it will not have any impact on the overall cost of the operation.

But we have seen that your operating expenses have gone up, like, 18% Y-o-Y. Obviously, there is a cost to all these branches?

See, we have increase in cost which is ranging between 8% to 10% every year in administrative cost and our operating cost. And since the growth has been little lower, maybe as a percentage it may look as if a little higher. So once we grow, that will catch up. So the -- and also, there is -- we are also looking at various method of improving our efficiency through technology. We are also focusing on building a digital framework, where most of the transactions from that will happen through mobile. So there could be some investment now on that. And ultimately, it will have a huge beneficial impact. So over the next 2 years, we feel the digital interface or the technology should help us to bring down our overall administrative cost and also operating cost. So as -- we would definitely have best of both, bricks-and-mortar and technology based.

Okay. And just one last question. Considering your comments that your customers are generally okay because they are more focused towards the agri, and towards consumption kind of activities, what do you think that the current level of Stage 3 effect that we have got, is it like a normal cycle for us? Or do you think they are higher than the normal?

See, this kind of a cycle keep happening because what happens is the industrial activity requires support from global activity also because our export also is down. And overall, capital into new business or new manufacturing also is down. And even the government spend on infrastructure was also down in the last 1 year because of various reason. I feel the election was a big distraction. We could not had 1 full year of proper functioning of a government, that could be the main reason. I feel this year onwards, things will become normalized. And at least local economic activity and industrial activity will be quite busy. Only export part of it, we are not very sure how global economy will grow. So I think once the uncertainties are reduced, I think there will be both activity on industrial side, government spend and also rural and the agri and consumption being normal, that should have a further positive impact for us, apart from having a normal comfort with the current situation.

Ladies and gentlemen, that was the last question. Yes, any further closing comments, sir?

No, thank you very much.

Thank you very much, sir.