Shriram Finance Limited (511218) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Shriram Transport Finance Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] 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.

Thank you. Good morning, friends. And good evening to those who are joined from the Western part of the world. A warm welcome to all of you who have joined this call. I hope all of you are healthy and safe. Today, we have our JMDs, Joint Managing Director; Mr. Sudarshan, Sridharan, Nilesh, Sunder and Parag along with me, and Mr. Sanjay, who is our IR Head. Friends, let me first go through economic updates, then let me come to business results. Most of the states started unlocking almost fully. And the second quarter on the back of aggressive vaccination. As stated in the previous quarter, goods transportation continues to have a good run and not hindered by any kind of lockdowns. And with good freight rates, they were able to run their business quite comfortably. There is also a pickup in passenger transportation, which helped taxi and bus operators to repay their installments regularly. All these have helped in improved collections overall. The government has announced several policies to support the Indian economy in beginning the momentum. Most important is the MSP on various crops, which has increased by 2% to 8%, and that really helped the rural economy. RBI is continuing to come with a lot of positive statements and initiative. RBI issued securitization of standard asset direction of 2021, which will enable greater risk distribution and greater liquidity of the -- greater liquidity to the originating lenders. Bank lending to NBFC for providing on lending to MSME, which was permitted to be classified as a priority sector was extended until March 31, 2022. As a result of all the above factors, we continue to expect Indian GDP growth to clock 9.5% for fiscal 2022 in line with RBI's estimates. In line with the same, several economic indicators were positive in the past quarters. Our manufacturing PMI rose from contraction in Q1 FY '22 to expansion level to 55.3 in July 2021 and remained above crucial 50 mark being 52.3 and 53.7 in August and September, respectively, reflecting a pent-up demand. Reflecting this index, IAP rose 11.5, 11.9 in July and August 2021, respectively. The GST collections, which were low in June rose about INR 1 lakh crore mark being at 1.12 and 1.17, respectively, in the month of July, August and September. Now coming to the auto industry. Commercial vehicle sales was 166,251 units in Q2 '22 against 133,524 units in Q2 '21, an increase of 24% and almost close to 167,173 in Q2 FY '20. The medium and heavy grew much faster with 51,740 units against 23,921 units in Q2 FY '21 and 40,158 units in Q2 FY '20. The higher fleet utilization level were visible. The greater amount of infrastructure, road construction and adding to that cement steel consumption, they were all positive indicators. In the new rate of sales, 1 particular differentiating item, what we have witnessed this time is the demand for CNG vehicles. The CNG vehicle sales, which were 25,729, 26,250 and 23,269, for the last 3 years, almost constant for around 25,000, which rose to 31,529 in 6 months in this year. That means significantly, the new vehicle sales is moving towards CNG, and especially in the corridor where CNG is available, that is in and around Delhi and now Mumbai-Delhi corridor, where CNG availability is reasonably good. Majority of our staff have been vaccinated, and we continue to operate with full strength across India. Now coming to quarter performance. We dropped a disbursement of INR 14,869 crores, including INR 493 crores towards new vehicle and INR 14,317 towards used vehicles. Compared to the total disbursement of INR 6,263 in the previous year. AUM was INR 121,647 crores compared to INR 113,346 crores in the previous year. Net interest income was INR 2,193 crores in Q2 against INR 2,025 crores in Q2 last year. The net interest margin was 6.44% against 6.38% in the previous quarter and 6.66% in the previous year. The profit after tax was INR 771 crores in Q2 compared to INR 685 crores in the Q2 previous year and INR 170 crores in Q1 FY '22. The earnings per share stood at INR 28.71 against 27.79 in the previous year. The collections were consistently good in the month of July, August, September. It was 98.05%, 99.56% and 99.49% against the demand, respectively. The gross stage 3 NPA stood at 7.82 compared to 6.5 in the previous year, and 8.18 in the Q1 FY '22. Previous year, we had the advantages of a moratorium. Therefore, the comparable would be previous quarter where we have improved. The late stage NPA stood at 4.18 compared to the 3.69 of previous year and was 4.74 in Q1 '22. The Board has decided on the dividend of INR 8 per share. Our liquidity position now stands at INR 17,228 crores against INR 17,051 crores in the previous quarter. And the Board has suggested to continue with higher liquidity. On growth outlook, we still are confident of double-digit growth for the full year. The cost-to-income ratio was 20.73% in this quarter, and we are likely to maintain our long-term average of 22%, 23% for the full year. The asset quality. We have been very selective in restructuring and have done INR 239.62 crores restructuring in this quarter and INR 369.05 crores were done in the previous quarter. We added 4 branches and -- which now stands at 1,825. And employee strength, we continue to add more number of employees through business associate method so that we can onboard the new employees by giving them fresh training. During the quarter, the company has not considered any additional credit loss for the COVID. And so far, we have done INR 2,852 crores of COVID provisioning. The long-term strategic initiative like digital road map, green financing and creating deeper reach mentioned in the previous quarter by the JMD, it is in good progress. And any specific question would be answered by them. Now I request our CFO, Parag Sharma to take the call. Subsequently, Sunder also would be joining the call with the numbers. Thank you.

Hello, everyone. On the liabilities front, we have focused more on bank borrowing and securitization during the quarter. Compared to last quarter, the bank loans have gone up substantially, which is 5,400 for the quarter versus 1,300 for the previous quarter. Securitization, which was hampered last year around because of moratorium concerns and all has picked up. This quarter, we did 4,200 versus 1,600 in the previous quarter. The volumes, we feel will continue to be at around 4,000 to 5,000 every quarter for next part of the year. When it comes to the cost of fund, it has come down by around 25 basis points for the quarter. That is on the overall liabilities, the cost is down. We do have scope to reduce it further by around 15 to 20 basis points in next quarter. Liquidity, as mentioned, is high, which is good enough for 6 months of liability repayment. We had a policy of 3 months liabilities to be in liquid cash, but it was announced last year around. We will look at diluting it by around December to March quarter. We'll continue with slightly more liquidity for maybe 1 or 2 months, and then gradually reduce it. The incremental cost of fund is at around second quarter, so that also should have further improvement we should be able to see in next quarter. On the ALM front, we continue to have all buckets positive, cumulative also is positive and that has been the case in the past. I think retail is still -- are doing well, and we should see further increase in our retail portion of the liabilities. Broad breakup of liabilities, the bank loans is close to around [ INR 42,041,957 ]. The offshore borrowing, including masala and ECB loans is around INR 22,900 crores. Domestic capital market is INR 23,000 crores and deposit is close to around INR 20,000. That is a broad mix of liabilities. I think that is it from my side. We'll pass on to Sunder, please.

Hello, everyone. The cost-to-income ratio for the quarter was 20.73% as against 19.11% in June quarter. Primarily, the increase has been on account of royalty in the current quarter, which was minimal at the previous quarter on account of the lower profit in the previous quarter. The employee count has been stable in the current quarter and we have vaccinated more than 92% of the employees at least with 1 dose of COVID-19 vaccination. And we have done OTR totaling to INR 608 crores. And in the OTR 1, we had done INR 551 crores. The total OTR stands at INR 1,159 crores as on 30th September, which is less than 1% of the total AUM. And we are holding adequate provisioning in respect of these assets. The stage 3 was at 7.82% and the net stage 3 was 4.18% as on 30th September as against the gross stage 3 of 8.18% in June and net phase 3 of 4.74% in June. And the coverage ratio has been increased to 48.57% as against 44.16% in the previous quarter. On the stage 1 in the current quarter was 79.39% as against 77.49% in the previous quarter. There has been an improvement in the stage 2 also, which is now at 12.79% as against 14.53% in the previous quarter. We have maintained our coverage reach of 3.28% in stage 1 assets and 9.66% of stage 2 assets. And the PD for stage 1 was at 7.34% as against previous quarter of 7.35%. And for stage 2, the PD was 22.06% as against 22.17% in the previous quarter. The LGD remained at 45.10% as against 45.20% in the previous quarter. The COVID-related provisioning was maintained at [ INR 278,243 ] crores and no addition was there in the current quarter. And we are holding more than the RBI required provisioning, which as per the NDA is we are holding INR 9,258 crores as against an IRA fee norm of [ 3,008 ], which translates into INR 6,249 crores of excess provisioning that we are carrying on the books. And the capital adequacy has been healthy, thanks to the [indiscernible] offer to be promoted. Now it stands at 21.06% in the tier 1 and 2.15% in the tier 2 totaling to 23.21%. With this, we hand it over to...

Time for Q&A.

[Operator Instructions] Our first question is from the line of Rikin Shah from Credit Suisse.

Am I audible now?

Yes, you are. Please go ahead.

I have 4 questions. First, I just wanted to get a sense of how the vehicle capacity utilization of trucks for our customers is moving, say, in this quarter versus last and versus the March quarter. The reason why I ask is that the new AUM is still down 8% sequentially and has been declining quarter after quarter. I just want to get a sense on when do we expect the new truck sales to kind of start picking up our AUM. Second question was on the freight rates and the fuel cost. Of course, the gap has been narrowing between the 2, but we do hear that the freight rates are, despite of increase since the COVID second wave, has not kept up pace with the fuel. So wanted to get a sense of what kind of freight rate movements you are seeing in your customer segment. And should we expect more freight rate increase in the coming months? The third question is on the asset quality part. The provision coverage has been consistently increasing on the stage 3. I just wanted to get a sense that given our stage 3 ratio has not really moved much. Is there a particular kind of target coverage level that you intend to kind of operate at and subsequently bring down? And lastly, just a clarification question for Parag, sir. Did I hear correctly that the incremental cost of fund was 7.25%? That's it.

The incremental cost is right, 7.25%.

Yes. Okay. On the utilization level, see utilizations have improved from the previous quarter. If you are comparing with the Jan to March quarter, the utilization level came down in the month of April and May because of the sudden increase in COVID. And this time, the COVID traveled to the rural area. So there were challenges. And because many of the drivers, they hail from the rural bed and some backward areas. And because of that, the driver availability was a challenge for large fleet operators. For individual operators, there was no challenge at all. The utilization level for individual operator was quite good. So therefore, we had a consistently good collection. And as far as the sales vehicle sales are concerned, we believe the vehicle demand will go up significantly in the next couple of quarters. But our estimation is that the overall vehicle sales would be around 20% more than the previous year. So it may not -- it may reach the FY '20 level, but may not go beyond FY '20 level, but still there is a scope for that kind of growth. And as I was telling you, many of the customers are shifting to CNG. And not only new CNG, they are also fitting the CNG kit for their existing vehicle. CNG cost is INR 50, that is around 50% of diesel cost. And thereby, they bring down the cost -- operational cost by nearly 50%. It all depends upon the CNG availability. Right now, the CNG availability is good in the corridor of Ahmedabad to Delhi. But now last couple of months, there has been new CNG availability in Ahmedabad to -- sorry, Baroda to Mumbai. Therefore, Mumbai to Delhi corridor is almost CNG is available at a shorter distance. Similarly, it is now available till Rampur in UP. And likely that they are completing the Delhi-Kolkata corridor. Then from Mumbai, they're extending towards the Bangalore. Now up to Pune and beyond Pune, the CNG is available. It's only the availability that will create the demand for the CNG vehicles. So I feel, ultimately, people would move towards CNG or even the LNG because the LNG is more efficient than CNG as far as the carrying is concerned because LNG is -- they can carry double the size of the -- in the same tank, double the quantity can be carried. So LNG availability is a challenge in India, especially stations, LNG station. I think maybe next 2 to 3 years, many vehicles would move, new vehicles would move towards change in LNG. And even the existing vehicle, people would try to replace. So we will have a solution apart from a 20% ethanol mix, which the government is trying. Now already, they have -- 10% mix has been tried. So environment friendly, if you will, would be used for the vehicle, and also it will be cheaper. So the diesel cost going up is also another way of moving people towards the alternative sales. So I feel the overall demand for the vehicle would go up as infrastructure projects are going on stream very fast. The other most important thing is the coal. Last 3 years, you would have noticed that coal production in India was almost started. And with the government taking new initiative and allowing privatization of coal, a lot of coal-producing area are getting what we call demand. This time because of the extended monsoon, most of the coal-producing area were inundated with water, they could not really produce. And now there is an urgency especially in the Chhattisgarh, Jharkhand, Orissa, there is a big push for coal production. So I expect that, that will lead to more utilization or more demand for vehicles. So overall, I feel the vehicle demand will go up significantly in the next 1 year. As far as the asset quality is concerned, the Board and the management, we have decided to bring it down, the day 3, to below 7% by March. Day 3 -- net, we want to bring it below 4%.

Our next question is from the line of Shubhranshu Mishra from Systematix.

I just want to understand how many vehicles have we financed in this particular quarter in new vehicles and used vehicles. And if I look at the disbursement run rate, we are pretty much at 2018 run rate right now, which was a stellar year for us. So is that the normalized run rate that we should model for the balance of FY '22 as well as FY '23? And also the number of -- approximate number of vehicle contracts you put up every quarter, if you can close some light on this one.

See, the quantum of disbursement we have given you, numbers don't have immediately. I can relay it to Sanjay for the number of contracts. But you can take an average used vehicle ticket size is around INR 4 to INR 5 lakhs. And the new vehicle is around INR 7 lakhs to INR 8 lakhs. So that is a rough estimation I can give you.

Right, sir. And the run rate, you said that's going to be similar as...

Our disbursement run rate will be almost similar for next -- normally, second quarter -- second half is 60%, -- 40%, 60%. So in that ratio, the second half should be higher disbursement.

And FY '23, sir?

FY '23, we expect a much bigger disbursement, mainly because the -- all the economic indicators project that the FY '23 is going to be large. And back on a 9.5% growth this year. If you are able to grow at around 8% to 9% next year, then the demand for the vehicles would be good. See, I would like to mention the Gati Shakti Yojana, which PM has announced, that is going to have a huge impact on the demand for the vehicles. One, they are trying to bring various -- the corridor, transport corridor, in various locations nearer to the manufacturing area so that the manufacturing and the transportation goes seamlessly for export and import. So that is 1 big plan. So with that, the in purchase for logistics growth in India will be high. And the second part is the -- if you look at the last quarter, there was $100 billion export by India. And Indian agriculture export grew by 21.8%. So that is a very big thing. I say, if it's from Indian [ winter land ], agriculture produce goes to international level through export. That is going to create a large movement of goods. And we feel that FY '23 can go -- can be a good growth momentum for the movement -- the goods movement.

Sure, sir. And if I can just squeeze in one last question, sir. What would be the percentage of repeat customers for our new vehicles and percentage of repeat customers for our old vehicles?

See, repeat customers for new vehicle -- most of the new vehicles are our existing used vehicle customers. So we normally don't go to any counter or we don't have arrangement with any manufacturing company for new vehicle financing. So you can say that almost 100% of our new vehicle customers -- when I say 100%, near to 100% will be our existing used vehicle customer. And used vehicle customers, the repeat customers would be around 60%.

The next question is from the line of Prashant Sridhar from SBI Mutual Fund.

Sir, in terms of capacity utilization, how far you would say we are from FY '18 or '17 levels before the cycle turned? And when do you expect the cycle to sort of turn positive again going forward?

Okay. The base year FY '18 is a good indicator because that's the time when we increased the carrying capacity by 15%. That means all the existing vehicle could carry 15% more weight, and therefore, there was excess carrying capacity build and the economic slowdown also added to the challenge. So we are still continuing with some kind of excess capacity in certain pockets, not all pockets in certain segments. But overall, I think the growth is coming back. And where people need to change to new vehicle because of some of the contracts is that more than 3 years old cannot be used for transportation. There, people are going for a newer vehicle. But the rest everywhere, the carrying capacity is adequate right now. So if the economic growth continues to do well, like the RBI estimation of 9.5%. I believe next year, there will be huge demand for new vehicles. At present, I see the carrying capacity is adequate and utilization levels are good. It is not underutilized now. They are able to use most of the existing capacity.

Sure. That's helpful, sir. If you could just give us some idea on the reposition trends in this and last quarter versus what used to be done before. And just one other question. On the new RBI securitization guidelines, the profit from direct assignment is not included now in the network calculation. Does that affect the capital adequacy for us and to what extent? That's it from my side.

As far as the attainment guidelines are concerned, anyway, do not have any material impact on the capital adequacy. So our assigned portfolio is hardly anything compared to the overall securitization that we do. It should not have any impact on the capital adequacy.

Yes. On the reposition, surprisingly, repossession is low maybe because utilization levels are high. See, reposition happens only when the utilization levels are low. And we did not see any increase in repossession. Hope, you recall last year, at the same time, there was an anticipation that moment, the moratorium is lifted. Lower -- a lot of vehicles would be repossessed and sold by the financial entities, including bank. That will see [indiscernible] to make. But in fact, repossession has come down in the last 4 quarters. I don't really see a big jump in repossession. Anyway, for that [indiscernible] because we have Shriram Automall, where they have an arrangement for parking of repossessed vehicle. We do not see any increase in repossessed vehicle at all.

Our next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

The first question was regarding the earlier question, the thing about freight rates and diesel costs, and the movement that was an answer. So if you could answer that, it will be helpful, sir.

Yes. See, price rates have been moving up on par with diesel price. The very indication of freight rate. So what happens in the freight rate is all the perishable goods, vegetables, et cetera, the increasing fuel price gets passed down to the end consumer immediately. That's why you see that the vegetable [indiscernible] price increasing immediately and the fuel price increases. Because even at 2% of the vehicles do not [ apply ]. The perishable goods remains where it is, and therefore, people end up paying either a farmer -- a producer will end up paying or the consumer end up paying. So it has no impact on the transporters per se. On the manufacturing goods, typically, the contract will include escalation costs for every increase in the diesel price. It can be weekly or it can be monthly. But nowadays, escalation clause are mostly weekly. Therefore, there will be a temporary challenge for the transporter. But over the period, it gets adjusted. So transporter per se, do not take the burden of the increase. It is either consumer or the manufacturer producer who take the burden of the increase in the fuel price. However, there are smart operators who would like to use this opportunity when the freight rate is fixed at diesel price. A cleverer person can use CNG vehicles and make more profit. That is the clever business map. So -- and there are people who are fitting CNG kits. So the people who are clever and business people, they make use of this to make higher profits.

Okay, sir. Sir, I'll ask my questions. They're both interlinked. In terms of -- you said that you're going to reduce GNPA significantly, our stage 3 assets -- is it -- do you expect cumulative collection efficiency to go over 100% over the next few quarters to enable you to do that? That's question number one. And linked to that is, is a liquidity policy by any chance tied to the collection efficiency numbers? Or how do you calibrate it? That's it from my side, sir.

See, normally, collections in the second half is better than the first half. That's mainly because the agri output counts festive period agri output, all will help people to earn more. So even if there are some small outstanding earlier, that gets paid in the second half. And last year also, if you remember our numbers, then to March, our collection was more than 100%. So normally, we tend to have more than 100% collection in the second half of the year. So we expect the collection to really improve. Second question.

Yes, liquidity. I think is no correlation to collection, though that can have some bearing, but more to do with the overall liquidity in the system, and any concerns on the sector or portfolio. Nothing directly linked. It was the tough scenario last year around when we decided to increase the liquidity buffers from 3 months to 6 months. Continuing with that, those things have eased out a lot. We will look at diluting it, as I mentioned in the earlier comment, but maybe towards the Q4.

Our next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Just 1 question I had. You -- I think, I mean, if I heard you right, during your opening remarks, you suggested that we are looking at a double-digit kind of a growth in AUM in this year. But let's say, if I were to try to juxtapose that with the comment that you just made that collections are indeed better in the second half of the fiscal year, which is to suggest that the runoff that you typically see and which I must admit has been largely very, very stable for you. I mean it would be higher in the second half. So to that extent, I mean, would it be fair to assume that disbursements in the second half of the fiscal year will be materially higher. Because I was just looking up, typically, our disbursements in the first half and the second half of the fiscal year have, in the past, meaning that range of, let's say, the 50-50 or 45, 50. Can this year be what you suggested some time back, 40-60 kind of a split between H1 and H2 disbursements? And maybe a related question here, sir. INR 15,000 crores of disbursement is what we will see in Q4 -- in Q2 of this fiscal year? And probably, I mean, the highest ever level of disbursements that we've been clocking. In the past, you have always suggested that, I mean, this growth in disbursements can be achieved to deeper penetration and increase in number of branches. So I mean, where is it going to come from? Is it volumes? Or is it actually price increases that you're looking for, which will help sustain better disbursement momentum in the second half of the fiscal year?

Yes. Mostly what happens is collections in the second half are better. And whatever the small outstanding remains in the first half, that gets paid in the second half. Therefore, the collection goes up. So it will not increasingly reduce your AUM because of the -- there may not be big link between a reduction in AUM because of the collection. But having said that, disbursement, as you rightly put it, the ticket size have gone up. The vehicle prices have increased significantly because of the BS-VI. The average increase in the price is around 15%. One is BS-VI. And second, steel price also has increased by around 50% over the previous year. And therefore, the component price has gone up and vehicle prices are going up. So we expect the increased vehicle price also will have a bearing on the used vehicle prices. So on an average, used vehicle prices have gone up by around 15% to 20% because of that base. And the increase in price has been especially used, used vehicle in LCDs. The prices are steeply increased by around 25% to 30%. In heavy vehicle, the increase has been a little less 10% to 15%. So that will help us because even though we are to be very conservative in our lending, lending up to only 70% of the LTV. Because of the vehicle price going up, the ticket size also will go up to that extent. So additional around 3% to 4% AUM will grow because of the ticket size going up. And as we have seen in the last year, in the fourth quarter, our disbursement was almost INR 16,000 crores last year. So we should be able to reach to that level in the third quarter itself if the environment is very positive, and if the COVID wave 3 doesn't disturb the economic activities. So we feel that the disbursement would be -- of course, I can't take first quarter into consideration, but we had a good first quarter. So it should be 40-60 is what I believe. But as you rightly put it on a -- normally, it is INR 45, 55 for us.

Sure, sir. This is very, very useful. And sir, maybe a last question. Do we have any update that we can share on the merger? And sir, the reason I ask is, I mean, from time to time, we keep hearing that, at least from a thought process, we are clear that we want to do this merger and then maybe we are kind of trying to work on the modalities, which will be involved in the merger. So if you could maybe share some updates if you haven't.

See, as you rightly put it, we have been debating on the merger. See, both the entities are doing well. They have a good growth opportunity. They have a niche presence. So we continue to run business the way we have been running. But there are opportunities like it's 1 plus 1, it is above 2 or if it is 3 or 4. Then that synergy should help the -- all the stakeholders. That is the argument. So we are only looking at what are the synergies we have if we come together. Whether we can give a better deal to the -- all the stakeholders, employees, customers. If yes, then we will look for the merger. So that's how the discussion is going on. And maybe we will try to come to some conclusion at the earliest on the same.

The next question is from the line of [ Aman Shah ] from Kotak Mutual Fund.

First question is related to asset quality. So clearly, our performance is probably, past year, in what we have seen compared to in the last few years despite the COVID impact, and the outlook also remains fairly benign. So in that case, should we see a material drop in our credit cost in the second half?

Yes. The credit cost should only improve. If you observe the number for the quarter, the credit cost was 1.91%. And for the first quarter, it was around 4%. So it is around 3% for a half year. We expect the credit cost to be below last year's level. Last year, it was 2.48% by the year-end. So we expect it to be below that by the year-end.

That's helpful. Sir, second thing was I just wanted to reconcile the restructured loan numbers that [indiscernible] directly when Sunder, sir, mentioned that OTR number was INR 608 crores, and OTR 1 was INR 550. So total is about INR 1,000 crores. Is that correct?

You're right.

Correct, yes.

Okay. But our presentation mentioned the outstanding total restructure is about INR 608 crores, so...

That is only for the OTR 2. We did not mentioned OTR 1 in the presentation. OTR 1 is INR 551. Both together is 1,000-odd.

Okay. And would this be classified under stage 2 or stage 1?

It doesn't categorize stage 2, and the necessary provisions pertaining to stage 1 has been applied, [indiscernible].

All right. Okay. And last data-keeping question, if you could just share the reimbursement rate, sir. Sorry, I missed it in the opening remarks.

The new vehicle is INR 4,933.9 million. Used vehicle is INR 143,170.6 million and other is INR 584 million. The total is INR 148,688.5 million.

The next question is from the line of Piyush from [indiscernible].

I mean the credit outcomes over the last 12 months has been really exceptional for Shriram. Just like to understand a little bit as to how this has happened because ever since the [ NPA ] went from 180 to 90 days, we had a tough time adjusting. But the last 12 months have been pretty exceptional. So I just wanted some understanding of what's actually happened in the ground that its outcome has been so much better.

Let us understand the business model. Our customers are individual operator and owner operator. They are not dependent on driver or outside labor. One of the family member drives the vehicle. So during the COVID period, they were able to operate without depending on any outside labor or driver, that was the biggest positive for our customer base. And most of them are in a last mile reach or essential transportation. The demand for essential remained throughout strong. And therefore, their business model did not get hampered. So they were able to operate. And the third, we did not allow our staff to remain at home and make the call from home for collection. Immediately after the lockdown was over, initial lockdown was over, we opened all the offices and asked our staff to join for the duty even though we maintained the COVID protocol, social distancing, marketing, et cetera. We did try to reach out to the customer, depending upon the convenience. We did not try to barge into their home, but we always were in touch with customers. And customers also responded by doing the business in this opportune time. And they were able to earn well and our executives were able to reach them and collect wherever required. So -- and also the digital initiative, which we have taken 4 years back after the demonetization, that also has helped. More than 50% of our customers today, they are comfortable doing a digital transaction. So all these factors have really helped us and we have been very consistent in our collections.

The next question is from the line of Anand Bhavnani from White Oak.

Secondly, sir, just wanted to understand our securitization quantum in the context of high liquidity that we are maintaining. So on one hand, we have very high liquidity. On the other hand, we've done significant securitization this quarter, and then we are projecting it for next 2 quarters. So if you can reconcile these 2 contradicting things. And where is the -- how do you think about the balance?

Sir, I think we're not letting only securitization to liquidity [ of around ] fund mobilization and liquidity. I think we mentioned that we'll bring down liquidity securitization as fast runoff portfolio also. So the way we have done of around INR 4,200 crores of securitization, but securitization outstanding per se has not gone up. So it's a fast runoff pools, so -- let's not link that to liquidity. It's bank borrowing also, which has contributed to a larger liquidity. We will look at rationalizing overall liquidity, as I mentioned, from December onwards. So irrespective of INR 4,000 crores to INR 5,000 crores of securitization, this liquidity buffers will not go up because it runs off very fast.

Okay. And given that currency system-wide credit growth as we -- are you seeing better terms for yourselves when you do securitization because a lot of banks would be keen to increase their [indiscernible] loan growth? And are you seeing terms being better than, let's say, pre-COVID for you when it comes to securitization?

In securitization, what we do is largely for private sector, [indiscernible] banks. The rates will definitely be far better than any other borrowing what we'll do. So as long as there is a [indiscernible] better demand, I think rates will continue to be the cheapest when it comes to this particular source of fund. The banks are [indiscernible].

Question [indiscernible] slightly different vis-a-vis pre-COVID, are you getting better rates?

I think there will be similar rates, not substantially different. So last year around, we were not able to get better rates. We were, I think, back to the pre-COVID levels now.

Okay. And can you contrast if you got to fund through securitization? How is the cost of funding? Approximately how much is it lower as compared to direct bank funding?

It will be around 100 basis points lower.

Okay. Okay. And lastly, overall, when it comes to the merger, the thought process is there. But in terms of time and -- is there [ actual ] times like whether by x year, this has to happen. Is that kind of the thought process? And if you can give us some color on that.

See, we've yet to draw our plan. We have not finalized any scheme so far. So once we finalize the scheme, then we need to take respective Board approval, then the process will start. So nothing is in finalization at this stage now.

Yes. But there's no asset thinking that this has to happen by, let's say, '23, '24 or '25. Is there a thought process around the time line that we kind of -- can use?

[indiscernible] decide on the advantages and benefits to all the stakeholders, then only which they draw the scheme. So that is -- that's still in the process.

The next question is from the line of [ Sameer Bhise ] from JM Financial.

So could you just give some details on the vintage of the book on the used side? And if any perceptible change you've seen in the last couple of years or 3 years?

See, there has been -- vintage-wise, it is actually becoming younger and younger. The fleets are becoming young. Our portfolios are becoming young because after the initial -- the NGT recommendation are for 10 years, that is green tribunal in Delhi. We started lending up to only 10 years old vehicle. Earlier, we used to lend up to 12 years. So the fleet have become tender now. So on an average, now the fleet average age should be around 6 to 7 years versus 8 to 9 years in the previous year. So that should be the average vintage.

And any material gap between the PV and the CV side?

There will be. PV will be much younger because normally, the personal vehicles, passenger vehicles would be much younger. And also we have more new vehicle components. So on an average, PV -- the passenger vehicle will be definitely 4 to 5 years, whereas, the kind of goods would be a little older.

Great. And secondly, any sense on operating costs as we go ahead given that growth is expected to be strong? So that's my last question.

Operating costs would remain almost same. Last 2 quarters, it was actually better than the average. Now our average cost to income is around 22%, 23% and it has been around 20% now. But I think we'll be on the long-term average.

The next question is from the line of [ Krishnan Dusana ] from Quantum AMC.

Can you hear me? Hello, can you hear me?

Yes.

Just a couple of understanding. Sir, for the first time, I see the rural book has more than 50% of the AUM. How does it apply for the ease and the spread of the business going -- should be able to maintain? And sir, how is the ECLGS book of INR 7.2 billion which we have given, how is that behaving sir? These are the first 2 questions, and I'll have another question later.

See, rural portfolio has been consistently doing well and increasingly, most of our new branches, if you look at -- if you observed, in the last 3 years, most of the branches have come in the rural area, which is we had the rural centers that got converted into rural branch -- rural central got converted into rural branches. Typically, we merged 2 or 3 rural centers into 1 branch and increase our branch network. So the portfolio in the rural is consistently going up. And since the agri output has been strong in the last 3 years, there is a bigger demand as -- and also because of the road network. The road network into rural areas, Pradhan Mantri road plan. That has made the road reach to most of the villages. That is creating a demand in the deep rural profit, and we continue to grow there. We feel that the growth opportunity is much, much bigger there, and we'll continue to grow. And we have 869 rural branches, rural centers now. That will, over the period, get converted and we'll have better network in the rural. And we'll keep adding more rural centers going forward.

Sir, how does this compare to the yields of the spreads?

Yield will be better in rural. It gives us 1% to 2% more yield in the rural. Even though ticket size is small, and the operating costs would be a little higher because of that. So on our average, it amounts to almost the same, but there is a scope for us to further increase the yield if required. So that's the advantage. As far as the ECLGS is concerned, it has been stable. We did not see much adverse challenges there.

Sir, 1 observation also. I'm just trying to understand, sir. At the end of Q4, we had 2.12 million customers. Today, you have 2.1. Our disbursement has grown, our AUM has grown. So how do I understand this number? How should we reconcile these numbers? Can you help me, please?

The ticket size have gone up. So -- and we have the numbers -- a number of customers have not gone up, but the ticket size has gone up and the resale prices of the vehicles and also new vehicle prices, as I was explaining you, around 25% increase in the price of the new vehicles because of the [indiscernible] and the steel price that contributed to the higher tickets.

But wouldn't the number of customers with the economic picks up with the number of customers who will be there, which will be again in the next presentation, will that number increase drastically or you see at the same level?

It will increase now because as we are adding more new branches, automatically, a number of customers will improve. And maybe next 6 months, you will see, we also have other plans to add more number of customers. So we are trying to bring out some new products to add more customers. So you will see that number of customers will increase in the next 6 months.

And sir, last question from my side. Gearing, which you're at 4.3, 4.4, how do we look at that going ahead?

I think we always want to keep it below 5. So I don't think there will be substantial increase in gearing. As of now, liquidity will be placed for increased business volume, so gearing may not go up.

And sir, 1 more thing, if I can squeeze in, sorry. Working capital loan, would it come back to that 2.2%, 2.5%, which is below right now? So will that again inch up? Or we will still below 1 or below 2 for the coming years ahead?

As the economy opens up, opportunities there, definitely, the working capital requirement will go up. So as of now, we are controlling it because of -- one of the reason is that we wanted to see how the COVID impact is panning out. And once we are able to overcome that, we should be able to increase our working capital requirement, fulfill -- a requirement of working capital can be made.

The next question is from the line of Sanket Chheda from B&K.

So my first question was just reconfirming the exit GNPA guidance that you gave. We are currently at 7.8%, You are saying we'll exit at 7%. Is that right?

Yes. We are targeting at below 7% by March.

Okay. And sir, the other thing was again on liquidity. Now it's pretty [indiscernible] that we had reached 100% plus [indiscernible], I believe, in the last month of last quarter. And then this quarter, all the 3 months were relatively closer to 100% only. And going ahead also, we are guiding that projections are likely to be above 100%. Then what is making us keep the liquidity book so higher? It's [indiscernible] either around 16% to 18%, whereas, our peers have already started reducing on it meaningfully, by say, from 1 quarter back levels. So that is second. And third, again, on the merger and the record synergies that you said. So that 1 plus 1, will it be equal to 2 or 3? That seems pretty -- or maybe somewhat not convincing as much. Can you just highlight 2, 3 very good reasons why these -- which can be achieved by way of this [indiscernible] year?

See, as far as the liquidity is concerned, if you look at the expectation of the international rating agencies, we have raised money in the international market. In fact, Moody's, we're expecting to keep this -- the NBFCs around 12 months what do you call -- maturity in hand. That was the expectation in the COVID. Now it has come up. So slowly, the Board also wanted us to keep 6 months maturity as liquid buffer. And that's the reason that we have been keeping our liquidity. And as far I'd rightly put it, by Q4, we'll try to reduce it to some extent and put it in the business. That will give us a little more gearing into our activity. And as far as the merger is concerned, see, this is something which we are discussing and debating and trying to figure out and give most advantageous situation to all the stakeholders. So that's how we are working out. So customers and employees and the -- all the other investors, shareholders should benefit out of it. When I said that, that means that what advantages we have now, what further advantages we'll get in the merged entity is something which you are envisaging so that we come out with a concrete plan.

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Umesh Revankar for closing comments. Thank you, and over to you, sir.

Yes. Thank you. Thank you for joining the call this time. And as I was alluding to you, next 2 quarters are likely to be much bigger because we see a very good environment. COVID wave 3 is not being there and more than INR 100 crores vaccinated is extremely positive. And government is also proactive to the business. And we believe with the 1 large privatization of Air India, there will be more private capital coming into the India for investment and further economic activity, which will lead into a bigger scope and opportunity for the growth. And we will be definitely participating in the growth journey and we are very confident and bullish on our growth. Thank you very much.

Thank you very much. Ladies and gentlemen, on behalf of Shriram Transport Finance, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.