Shriram Finance Limited (511218) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Shriram Transport Finance Company Limited Q3 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, Shriram Transport Finance Company Limited. Thank you, and over to you, sir.

Yes. 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 joined this call. I hope all of you are healthy and safe. Today, we have our Joint Managing Directors; 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 the results. India saw rising economic activity in October and November on the back of decline in new COVID cases. However, the emergence of new variants led to some restrictions, including night curfew in some cities towards the end of December. However, a heartening feature of the third wave is lower, serious hospitalization and fewer casualties. This led to very mild restriction on people and vehicle movements in January 2022, which have not majorly impacted the overall economy so far. And also new cases have been decreasing in the major cities like Mumbai and Delhi for the past few days, pointing to better days ahead. The government announced several policies to support Indian economy in the -- in regaining the momentum. The excise duty on the fuel was reduced to curb inflationary pressures. The central government announced relaxation of additional market borrowing by states equivalent to 0.5% of their gross state domestic product for strengthening their CapEx spend and INR 20,900 crores was released under PM-KISAN scheme to boost the rural economy. The RBI continued to come out with positive statements and initiative. RBI introduced a PCA framework for NBFC, which will come into the effect from October '22. We, at Shriram Transport, are currently compliant with said norms and will continue to be within the norms even after our proposed merger with Shriram City Union Finance. As a result of all above factors, we continue to expect Indian GDP growth to cross 9.5% for fiscal 2022, in line with RBI estimates. In line with saying, several economic indicators were positive in the past quarters, the PMI increased from 53.7% in September to 55.9% in October and 57.6% in November before slightly moderating to 55.5% in December. Hence, remaining above expansion mark of 50%, reflecting stable demand. The index -- the IIP was slightly up being 4.5% and 1.4% in October and November, reflecting nascent recovery. The GST collection continues beyond -- being INR 1.3 lakh crores in October, INR 1.31 lakh crores in November, INR 1.29 lakh crores in December. So that's up to 24%, 25% and 13%, respectively on a year-on-year basis. Coming to the auto industry, commercial vehicle sales marginally increased to 194,712 units in Q3 as against 193,034 units in Q3 '21 and higher compared to 166,251 units in Q2. The heavy and medium commercial vehicles, which indicates the robustness of the economy showed positive growth with 60,349 units against 49,473 units same period in the previous year. LCV numbers were flat on a year-on-year basis but showed a good demand all over the geography. Coming to the Shriram's current quarter's performance, we dropped a disbursement of INR 15,489 crores, including INR 574 crores towards new vehicles and INR 14,820 crores towards a used vehicle compared to the total disbursement of INR 12,606 crores in the previous year. AUM was INR 124,602 crores compared to INR 114,932 crores in the previous year. Net interest income was INR 2,388 crores in Q3 against INR 2,148 crores in Q3 last year, an increase of 11.17% year-on-year. Net interest margin was 6.65% against 6.44% in the previous quarter due to improvement in cost of funds. The profit after tax was INR 681 crores in Q3 compared to INR 728 crores in Q3 previous year and INR 771 crores in Q2 in the previous year. The earnings -- sorry, current year. Earnings per share stood at 25.26% against 29.54% in the previous year. The collections were consistently good in the month of October, November, December, it was 102.32%, 100.14%, and 101.06% of the total demand respectively. Collection for Q1, Q2 and Q3 were 91%, 99% and 101.17% of the demand respectively. The gross Stage 3 NPA stood at 8.4% compared to 7.11% in the previous year and 7.82% in Q2 FY '22. The net Stage 3 NPA stood at 4.36% compared to the 4.31% of previous year and 4.18% in Q2 '22. There was 80% increase in gross stage 3 and 47 basis point increase in net stage 3 due to revised norms -- revised process of NPA classification based on RBI circular dated November 12, '21. As the company followed earlier method, the profit before tax for the quarter and 9 months ended December would have been higher by INR 354.75 crores. Our liquidity position now stands at INR 17,319 crores against INR 17,228 crores in the previous year. The Board has adjusted us to continue with higher liquidity due to COVID Wave 3. We still are confident of double-digit growth for the full year as we see good credit demand coming in the fourth quarter. The cost-to-income ratio was 19.70% in the quarter. We are likely to maintain the same for the rest of the period. We added 9 branches, which now stands at 1,834. And in terms of employee strength, we added 362 new employees through business associate method. During the quarter, the company has not considered any additional credit loss for COVID. And so far, we have done INR 2,852.50 crores of the total provision. On the external front, we have applied to all concerned regulators on the merger front. The credit rating agencies are already updated. Mr. Parag will give you updates on the rating and new fund raise and on cost of funds. Parag, please take the line.

Good morning. I'll cover up on the liabilities front first. One is the mobilization for the quarter has been similar to the mobilization in the previous quarters with securitization as indicated earlier closer to INR 5,000 crores level. It is INR 4,800 crore for this quarter, which includes assignment transaction of INR 500 crores. Rest of the sources are retail deposits, domestic bonds and bank borrowing, which is almost INR 2,500 crores level each. On the overall liabilities, the cost has come down by 11 basis points for the quarter. And if you compare with March '21, it has come down by around 50 basis points. We do expect some benefit on cost of funds to be there for coming quarters also. There could be some reduction. On the liquidity buffer already indicated -- as already indicated, we are carrying INR 17,300 crores of liquidity buffer. Maturities for next 3 months, which includes a dollar bond repayment in February is INR 14,000 crores. January, we have already raised a dollar bond of $475 million, which will take care of liquidity to be maintained at higher levels. Post March, we will review our liquidity position and try to reduce it if the situation is normalized. On ALM front, we continue to have all buckets positive and up to 1 year. The cumulative surplus will be around INR 16,000 crores. HQLA is 165% against security requirement of 56%. On rating, I think post our announcement, we reached out to all rating agencies, including international rating agencies, and all rating agencies have given a stable outlook for Shriram Transport, considering the merger, which will be there after 8 or 9 months. I think I'll hand over to Sunder now for...

Hi, everyone. On the employee front, around 95% of our employees have been vaccinated with at least 1 dose of COVID vaccine and close to 75% with both the doses of COVID vaccine. Coming to the provisioning part. As you are aware that RBI has came out with an clarification circular on November 12, 2021, wherein they had -- there were 2 major factors indicating the financials. One was the upgradation of NPA assets into standards assets only on recovery of the entire overdues, which Shriram was anyway already complained, and we did not have any impact on that count. And the second component was the daily stamping of NPAs, which the company was earlier doing on a quarterly basis, now RBI had stipulated that it should be done on a daily basis, which the company started following effective November 12, 2021 due to which there has been an increase in the NPA to the extent of INR 956 crores. And had we not followed this earlier -- had we followed the earlier method, the profit would have been higher by around INR 354.75 crores because the provision would have been lesser. The gross stage 3 and NPA both currently are 8.4% as against 7.62%, had we followed the earlier norm. We have increased our coverage to 50.25% as against 48.57% in stage 3, primarily because -- due to an increase in the management overlay. The LGD continues to be at 45%. It was at 45.1% in the previous quarter. Stage 1 assets were 79.99% as against 79.39% in the previous quarter and Stage 2 was 11.61% as against 12.79% in the previous quarter. And we are maintaining an excess coverage over and above the RBI recommend to the extent of INR 6,541 crores. And the share of profit from associate Shriram Automall was INR 5.4 crores in the current quarter. With this, I have covered most of the data points, which have been said by CFO and CEO. We'll...

Yes. We'll throw open for Q&A.

[Operator Instructions] The first question is from the line of Abhiram Iyer from Deutsche CIB Center Private Limited.

First, what I wanted to ask was a bit more clarity on the higher provisioning and the difference in stage 3 assets due to the RBI circular. You mentioned that this is primarily due to daily recognition versus what the company used to do on a quarterly recognition. But from the company's perspective, the results are still announced on the end of the quarter, December 31. So it doesn't matter if are -- what you recognize as NPAs on December 30 or December 31 because ultimately, it's a point in time. So could you just explain the mechanism on how exactly this contributed to an increase in the Stage 3 assets? That's question one. Question 2 was primarily around delinquencies. Could you just let us know what's the sort of percentages of 0 to 30, 30 to 60 and 60 to 90 delinquencies? And how does this compare to, say, the previous quarter?

Coming to the first question, I'll just give you an example. Supposing, there's a due for a customer on December 5, and he does not -- he skips the December 5th due date and makes the payment of that particular installment on, say, December 7, so on 7th December, he is at 60 days bucket. But on December 5, he had held 90-day bucket. And as for the earlier recognition norms, as on December 31, since he was at 60-day delinquency bucket, he was not treated as a stage 3. However, now RBI says that you need to do a daily stamping at the day -- daily -- end of day processing, so by which this particular borrower has been classified as an NPA on 5th December. And he will be continued to be classified as a nonstandard asset till he repays the entire overdue. And hence, there is an impact on the financials and also the stage 3. When it comes to the bucketing, anyway stage 3 is close to 80%. And stage -- sorry, stage 1 is close to 80%. And stage 1 is 11%.

Stage 2 is 11%.

Stage 2 is 11%, yes.

This is primarily -- I can see stage 2 seems to be lower than previous quarters. So could you sort of help me understand, is this because the loan quality of the assets have been going up, the loan quality of the borrowers as well?

No. See, one is the collection has been good; and second is because of this new RBI rule some of this -- otherwise, what would have been stage 2 would have gone into stage 3. Had it not been followed, it would have remained in stage 2.

We'll move on to the next question. That is from the line Rikin Shah from Crédit Suisse.

I had 3 questions. first one was on the business front, I just wanted to understand the overall capacity utilization levels for your customers and how the freight rates have moved vis-a-vis the fuel costs? That's one. Second was related to the margin. If Parag could help with the incremental cost of funding and the overall cost of funding that would be helpful. And as an extension to that, the liquidity buffer that we are carrying, which is around INR 173 billion. Earlier, we used to articulate that we would start trimming and while COVID 3 wave is milder than expected, just want a get a sense as to what level we can kind of come down starting from 1st April. And the last question is on the asset quality. While I understand that you may have to keep higher stage 3 coverage to keep the net NPAs below 4%. But is there a scope to bring down the coverage on the stage 1 and 2 loans, which is around 130 basis points above the pre COVID levels actually that for my calculation.

Yes. Thank you. I'll cover on the business front, then I'll hand over to Parag. See, as far as the credit demand or freight rates are concerned, both are good. In fact, idling of the vehicles are minimum now. The retail prices are better. The fuel price has come down because government had reduced certain duties. So it has come down by around 10%, and that really helped the customers. And the new trend is people are also moving actively into CNG, either fully-built CNG vehicle or putting a CNG kit on the vehicle. So this is seen in the area where CNG is available not across the country, because CNG availability is mostly in the Western corridor -- Mumbai to Delhi corridor. Rest of the place, CNG availability is not strong. But government has promised to add 6,000 more CNG pumps across the country. Thereby, the viability of the customers will be much better those who are owning the CNG vehicle. So because the price difference is around 35% between diesel and the CNG will be less by 35%. So that is the, what call, the way the business may move. So people may get into CNG. So the business is very viable and the business is available throughout the day. As far as the credit cost or the stage 3 is concerned. When we first calculated -- when the RBI circular came, when we first had a first cut at the end of November, it looked as if the stage 3 will move up by 120 basis points. But as we started communicating with the customers and our team about the change in the norm and making the customers realize that they will move to Stage 3 and they need to pay earlier. Then by December end, the overall increase in stage 3 came to around 80 basis points. With this exercise, we are confident that by next quarter end, the stage 3 will improve by another 80 to 100 basis points. That means from 8.4%, we should be able to bring it down to around 7.5% to 7.6% level, it's basically communicating to the customer because many of the customers even though they know the due date, they may be 1 or 2 days late, not realizing that it is going into stage 3. So this communication is something which we are trying to make it clear to the customers. So I feel we are very confident because market is good, business is good. The viability in the business is good. So we should be able to reduce significantly by the fourth quarter. And as far as the provision is being concerned, we will look into our, what call -- what is that called, the stage 2 and stage 3 at the end of a quarter 4 because normally, we do it annually. This exercise we will be doing, and we rework on the same.

Okay. And just on the funding costs and liquidity offer?

Yes. So blended cost of whatever we have raised for the quarter will be around 7.25%, with the overall cost at the end of December being at around 8.45%, which used to be close to around 8.97% as of March end -- March '21. When it comes to liquidity buffers, yes, we used to carry around 3 months of liquidity requirement. And if you go back to those levels, the liquidity requirement will be around between INR 9,000 crores to INR 10,000 crores. What we are currently carrying is more than INR 17,000 crores. I think this is a 2 questions. When it comes to the reduction I was talking about between September and December quarter is around 11 basis points. It was 8.56% as of September end, and it is 8.45% now, and incremental cost is between 7.25% and 7.5%.

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

Yes, sir, my question was on particularly write-offs. So first, what was the amount of write-off? On the back calculation suggests that it was around INR 450 crores. So we had a total improvement of about INR 2 billion, in a way, if we put stage 3 and stage 2 and compare it to last quarter's stage 3 and stage 2 in the new method. But the write-off was even higher than that. So the comment you made that earlier you expected 120 bps and later it went down to 80 bps. It seems that it was higher, either the -- if the write-off was taken from stage 3 or even it was taken from stage 2, the overall quantum was still higher and there is no improvement per se even the collection -- even if the collection efficiencies are going up. So as a total pool, from stage 3 plus stage 2, there is no inherent improvement, if we include the write-offs.

The total provision on a write-off in the current quarter was INR 984 crores, out of which write-off that is written off on settled contract were INR 453 crores. And the balance INR 530 crores was allocated to the provisions, which we have made. And on account of the change in norms, it was INR 354.75 crores, and the balance -- even though there was a write-back because of dip in the quarter-on-quarter pre-RBI circular, it was -- by close to 20 basis points. It was 7.82%, it came down to 7.62% as per the earlier norms. Technically, there would have been a write-back. But management had prudently taken an addition management overlay, and that increased the total overall provision to INR 530 crores. That is the reason.

No, no. My question was if the write-off was INR 450 crores, then there was no inherent improvement or the thing which we are saying that the impact was 80 bps, maybe it was more, but it looks less because of the write-off statement. Is that right?

See write-off -- no, no. See write-offs have been -- if you analyze each quarter's numbers, there'll be an write-off of close to INR 350 crores to INR 450 crores quarter-on-quarter. And those are attributed to the settled contracts during this particular period. And further, if you analyze it, around 40% of the total write-offs are contributed by the performing standard asset, wherein the company gives certain waiver of interest as a goodwill gesture and to retain the customers for repeat business. So that contributes to 30% to 40% of the overall write-off. And the other write-offs, which we take it is on account of cases which are in stage 3. And if you see the historical LGD, it is in the range of 30% to 45% because of the COVID now it is elevated. But that is what is the percentage of write-off, which is required for an asset to -- which is settled -- when it is in stage 3. So these have contributed to that. But having said that, we still maintain that post the COVID. We have seen a marked improvement in the collection figures as stated by our MD earlier also, it is now 101% in the current quarter as against 99% and -- 98%, 99% in the previous quarter. So we see an improvement in the collections, and we are confident that going forward, our NPA levels will further come down.

Okay. Sure, sir. And 1 thing on this disbursement. Now we have done almost a similar kind of disbursement what it did last quarter and even in Q4, whereas the tailwinds due to the specialities should have been reflected with slightly higher disbursement number coming out. So what -- how do you relate it, little bit -- just give some muted response, if we do a relative [Technical Difficulty], what kind of disbursement they have seen in terms of quarter-on-quarter? And how we are sure that we will comfortability -- comfortably achieve double-digit growth by the end of Q4, just some light on that.

Yes. See, we are seeing a little more -- bigger demand for new vehicle and bigger ticket size than a heavy vehicle. That will give us a little momentum on lending. So volume will definitely be higher compared to Q3 because of the bigger ticket size and the new vehicle demand, and the heavy vehicle and including construction equipment. We expect that the budget will be focused on infrastructure. And therefore, there will be immediate demand for infrastructure-related vehicles and equipment. So this is the expectation. So AUM growth as of December is 8.41%. So we are still aiming at double digit. We may be a little short of double digit. But still our 4th quarter will be quite big, that's what I can say.

The next question is from the line of Radhika Lohia from Mirae Assets.

My questions have been answered.

The next question is from the line of Vikram Subramanian from Spark Capital.

My question is regarding the stage 3 provision cover and LGD under the new norms. So you have provided provisional analysis in the presentation where you have given Q3 FY '22 stage 3 and all asset quality parameters, both on the old norms and new norms. Under the earlier norms, your provision coverage remains at the same 48% as in Q2. But under the new norms, it's increasing to 50%. Why would that be the case? Because LGD should remain ideally the same or, in fact, even improve, given that the increase in stage 3 under new norms is just because of daily stamping. So probably, they are slightly better quality customers than the normal NPAs. So why would PCR -- stage 3 PCR increase? Or am I missing something here?

See, we reassess the LGD on a yearly basis and the next review is due in the month of March 2022. Having said that, our LGD has remained more or less constant, but for that across the products some variation. If you relate the previous year -- previous quarter, LGD was 45.10%, now it has become 45%. It has improved impact by 10 basis points based on the product allocation. And answering your specific question of the increase in the coverage, as we had mentioned in the start of the call itself that we had taken an additional management overlay to ensure that the net stage 3 remains under control. Our target, which we have been indicating earlier also that we want to see less than 4% on March 2022. And hence, to achieve that, management is taking additional coverage over and above the LGD requirement. And hence, it has crossed 50% in the current quarter.

Okay. Got it, sir. So I just ask that to assess if we are expecting some kind of sticky credit losses or NPAs from the daily stamping movement. And also sir an additional question, so the impact during this quarter due to the new norms is close to INR 350-odd crores. Why couldn't we have had drawn it down from the existing management overlay?

We could have done that, but that would have ensured that our net NPA was closer to 4.5%, which we didn't want that to do it. And hence, we have taken an additional management overlay over and above that. See, our objective is to reduce the net NPA to 4% -- sub 4% by March '22. To achieve that, we need to take additional management overlay.

Okay. Got it, sir. Just one last question. On the -- you had mentioned you had reached out to the credit rating agencies post the merger announcement and all of that. What has been the feedback if any from them regarding the merger and how they view it?

Rating agencies are -- I think they are okay. In fact, one of the things rating agencies will definitely like to have diversity of assets, which can be achieved by this merger. We'll have multiple assets, but cyclicity of businesses is addressed through diversity. So that should be positive for the rating agencies. Other than that, because of the size of the entity, which is getting merged is relatively small. There are not much of concerns from the rating agencies point of view. In fact, the entity Shriram City Union which is getting merged was rated 1 notch lower. And now all the rating agencies have put that entity on -- rating was positive. So there are -- more or less, all rating agencies are okay with the number and the merger -- merged balance sheet, how it will look like. Other than that, no concerns from rating agencies point of view.

Okay. Got it. I just asked because there is identifiable promoter stake is slightly reducing after the merger. So has there been any feedback on that was what I wanted to know?

No, there's no mention on that. Rating agencies are more looking at the business viability and the overall asset quality. They normally don't comment on the owners equity holding. So the robustness of the business is what they are focused on. And as Parag rightly said, they are more comfortable of multiproduct business than a monoline business. So monoline business, due to cyclicality, they feel there are ups and downs. So that's the comfort that derive out of the multiproduct company. So the overall, they are quite positive.

The next question is from the line of Piran Engineer from CLSA.

Just have a couple of questions. Firstly, has the portfolio composition of vehicles changed in the past 2 years? Have we moved to higher tonnage vehicles within the HDV segment? So that's my first question. The second one, out of the 2 million customers on book, how many of them are taking a loan from Shriram for the first time? And has this ratio changed over the past few years? So that's it from my end.

Yes. See, if you -- composition of vehicles, depending upon how the new sales happen, it keeps changing. For example, the vehicle -- the capacity of the vehicle has been increasing over the period. Earlier 10 tonne -- 10 wheelers, which carry around 70 tonne was the largest vehicle. But now with the additional tonnage being allowed, 15% additional tonnage being allowed, a 54 tonne gross, that is going to be the -- which carries around 42 tonnes. That is going to be the vehicle. So if you look at the new sales, most of the new sales are happening at 16-wheel vehicle, which are earlier to 49 tonnes, now 54 tonnes. So the capacity or the size of the vehicle is increasing. And accordingly, our portfolio also keeps changing a little. Even in the ICV segment, earlier, the maximum ICV that carry would be around 7.5 tonnes. Now ICVs, they carry up to 9.5 tonnes. So today's ICVs are nothing but the earlier MCV, that medium and heavy. So there is a change in the way products are changing. Therefore, there is some movement in our portfolio. So the ticket size and the vehicle is changing. The second thing...

If I may just stop, this should happen for us with a lag of 5, 6, 7 years, right? So if it's happening now, maybe in 2027, '28 we get that benefit of migration of tonnage? And also after the axle load norms, would we have not seen the tonnage going down rather than up for vehicles? Because now you can carry more load on the vehicle. So I'm a bit confused here.

No, no. You're right. What happens is when I'm saying it, the vehicle carrying capacity has gone up and also, it is not that after 5 or 7 years as we get to finance huge vehicle, sometimes it comes within second year or third year. So if ownership changes because if somebody is taking the loan from a bank and if the ownership changes there, then for the second-hand vehicle, you need finance. So vehicle can come to us in the second or third year also. And we also finance new vehicle, it's not that we don't finance new vehicles. And as far as the tonnage is concerned, you are right, the tonnage is not coming down. Tonnage is only increasing. People are preferring more and more heavier vehicle because of the fuel cost. As the fuel cost goes up, people prefer to carry on the larger vehicle because it should carry 30 tonnes or 45 tonnes. The fuel cost is going to be same. So preference would be to take the heavier vehicle.

Understood. Understood. Sir, the other question on customers on the book?

Customers on?

So out of 2 million customers that we have, how many are existing and how many are taking a loan from Shriram for the first time?

It remains 30% to 40% of the customers would be always new and rest of them will be repeat customers. When I say repeat customer, people who have one vehicle will buy a second vehicle or even upgrade to new vehicle. So no customer will remain in the same segment throughout, he'll keep upgrading or keep adding. So the new to Shriram would be around 30% to 35%.

And this has always remained stablish.

It depends. When there's a credit growth, the expansion is very fast. When economic growth is very fast, then the new customer would be around 40% because more people will come into this business and more -- maybe driver would like to upgrade into new vehicle because of the new vehicle -- being owner because of the opportunity that creates. So basically, difference is how the economic activity is. So current level, it will be 30%, 35%. But when economy revised fully, it can be 40%.

Okay. Okay. Sir, if I may just squeeze on the last question for the CFO. Just wanted to understand what percentage of volume or proportion of bonds are maturing in FY '23 and at what interest cost?

See, roughly around on maturities 3 to 4 years, so we have total bonds outstanding as of now of close to around INR 20,000 crores. So 1/3 of which will mature in the current year in '23. And cost wise, it will be around 100 basis points more than what we are borrowing as of now.

The next question is from the line of Gaurav Kochar from Mirae Asset.

So just wanted to understand on this RBI daily stamping norms, how does it impact the BAU slippages and credit cost therein? So I mean whatever you provided is a onetime reset for the existing book. But going forward, given that this has to be continued, do you see any sort of impact on slippages and hence credit cost?

See, whatever is the RBI norms, whether it is 180 days or subsequent stringent norm of 90 days, now coming to the daily stamping and other things, it will have a momentary impact in the financials. But historically, if you see our credit losses have been around 2%, so which in the long-term averages, we are confident that we will be achieving the same.

Okay. And in that backdrop, I mean I think Umesh sir commented that we would like to bring the stage 3 down to 7.5% -- 7.6%. So will it be driven by write-offs or you expect to recover from existing stage 3 customers?

See, we expect recovery from the stage 3 customers. And as the correction efficiency has improved over the last couple of quarters, we are confident that the gross stage 3 will automatically come down and the daily stamping also since it has been sensitized to our business team as well as the customers in turn by them, so there will be a natural reduction in the gross NPAs in the next couple of quarters.

See, for example, if somebody has a due date on a 5th of month, and earlier, he felt that he has the time to pay it. So there would have been some relaxation within his attitude to pay, where he can use that money for something else. Now when we communicate to him that it will be stamped as the stage 3 account, then he would rather pay before the due date or on due date rather than delaying it. So it is only the communication that is what is important. Since we did not have much time when RBI came out with the clarification, so we could not communicate. And as I was telling you, our earliest estimation was around 120, then it has come down to 80. And we feel that it will come down further. So when it comes down from further, we have another 3 months to go -- another 2 months to go rather by March 31, we should be able to bring down to around 7.5% or 7.6% level.

Okay. Okay. Understood. Understood, sir. And sir, next question is on liquidity. Just extending from where Rikin left, the liquidity seems to be high. So any plans to trim down the liquidity levels? I think earlier, you talked about trimming it down post September, but in December, it's still at elevated level. So any kind of trimming that down given that the impact of the third wave is not very high by 4Q? Just wanted to understand your thoughts on the liquidity that we're carrying.

Definitely, yes. We would like to bring it down. But this time, the Board members said that it is better to be cautious and wait for the impact of third to wave to be fully seen. So till March we will be continuing with same. But post March, definitely we would like to bring down the high liquidity levels. So that there is a positive impact on the net interest margin. And as Parag briefed you, our cost of borrowing is also is coming down Q-on-Q. So that's also a positive for us.

Right, right. Understood, sir. And sir, my last question is with respect to the stage 3, the total that you have quoted is 8.4%. How much of this would be, say, less than 90-day DPD? I mean, I understand that some customers would have paid EMI on a delay, some customers would have been 60 plus, but because of daily stamping, they are still marked as NPA because they need to clear all 3 EMIs. So what portion of the stage 3 would be 90 days -- less than 90 days overdue?

It is INR 956 crores. So that is nothing but in the provision sheet if you see, the difference between the INR 10,000-odd crores and the next column, it is INR 956 crores, which are less than stage 3. But they have been classified as stage 3 because of the daily stamping.

Our -- all our lending is against the asset. So we have underlying asset. So as Sunder rightly put it, the net credit cost for us over the period will not be more than 2%. Temporarily, for a technical reason, it will go up and then may come down. So what we need to see is the business model. The business model will tell you over the 10 years that our credit cost in this business model has been 2% and it still remains around that, sometimes it may go up and down because of a technical reason and because of the -- some of the new way of looking at the NPA.

Understood, sir. And so in that, just to get -- I mean, for FY '23, our credit cost guidance remain at 2%. That hasn't changed because of the RBI norms?

Yes, yes. It has not changed. We are confident that we'll be around 2%.

The next question is from the line of Raja Kumar V, an individual investor.

Sir, I have a couple of questions. The first question is on the...

Apologies, Mr. Kumar. Sir, we are not able to hear you clearly.

Can you hear me now?

Much better.

Yes. I have a couple of questions. The first question is on the tie-up with Ashok Leyland. One of your subsidiaries had tied up with Ashok Leyland. So I just want to know what benefits Shriram Transport is going to get, particularly with reference to the scrappage policy? And the second question is on the -- I also see that the recent value of the trucks has gone up because of the increase in steel. So just wanted to know how Shriram is benefited in terms of sale of the repurchased vehicle? And if possible if you can give me the value of repurchased vehicles at the end of December?

Yes. See, the Automall has signed an agreement with both Ashok Leyland and Bharat Benz. There are 2 points there. One is the unsold vehicle of a previous year, which would be sold in the market. And that is one. And second one is if they have an exchange vehicle, if they are dealers, are in exchange of a vehicle, selling new vehicles against the used vehicle. And these 2 stocks remain with either a dealer point at or at the manufacturer level. So Shriram Automall is helping them in selling those vehicles and Shriram Transport will get benefit if documentation is clean, then we should be able to fund that vehicle. So there is understanding wherever the sale happens, Shriram Transport executive will reach out and assess the vehicle and give his estimation of finance that can be given. So that is the arrangement. And the second one is the resale values have definitely gone up, has rightly put it because of the steel value going up as scrappage value has gone up, it has gone up by around 20%. And in some cases, it is has gone up by around 30%. So it depends upon the kind of the steel content in particular vehicle. So resale values have gone up which helps us in our portfolio quality. That means our underlying asset has much higher value than the outstanding amount. So that helps us even in the credit cost. If at all, we have re-pulls and sale, the loss would be minimum.

The next question is from the line of Nischint Chawathe from Kotak Securities.

Yes, yes. just wondering the excess provisions that we made this quarter. Most companies are sort of -- most companies and auditors would kind of find that has change in the -- also post the clarification from RBI on the NPA classification, it should not have any impact on the overall credit cost or the ECL should broadly be neutral. So with that kind of a logic, is it fair to say that the extra provisions that has [Technical Difficulty]. When you will be basically resetting or reviewing your long-term LGDs and PDs?

See, every year, in March, we review our LGD. Definitely, we will really look at it at that time that's one. And the second, you are right that this is more of a technical and not actual. So what we said is it's easier to maintain 1 set of books rather than trying to keep it 2 separate set one as per the RBI requirement and another as probably in our normal accounting requirement. And therefore, we said that it is better to have a straight line thinking. That's one. And second one is the -- what I would like to say is the credit cost over the period should not change for the company, it will be temporary increase because of this. And therefore, maybe 2 quarters from now, it will all -- it will come down to the regular level.

But I'm -- the point is that if the PDs and LGDs are reset, then in all possibilities, you will see probably a reversal of this amount because technically this is supposed to be an ECL neutral. I mean, this has to be kind of ECL neutral, that's the point I'm trying to make.

Yes, it will reverse more of the time, agreed.

Then one more, Nischint, since we also were targeting 4% net as per the RBI requirement, we wanted to make a progress towards that. And as I was telling you, since we are confident of bringing the stage 3 to around 7.6% level, even at this level, we'll be less than 4%.

That's right. And just if you could share the numbers, the absolute percentage is on PDs and LGDs for stage 1 and 2.

Yes, LGD is 46% and PD for stage 1 means 7.33% and PD for stage 2 is 21.75%. This is as against 45.10% in the previous quarter LGD, 7.34% PD for 12 months and 22.06% PD for stage 2 of the previous quarter.

Okay. Sorry, I thought you are going to reset at every end of the year, right?

Yes. No, this difference is primarily because -- see, we have different rates for different products.

Okay. The weighted average because of the portfolio change?

Yes. Because of that changes.

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

Sir, just 2 questions here. We kind of -- from what I understand, we have taken conservative credit cost or provision during the quarter because we guided for net stage 3 of less than 4%, and you've also said that this is a RBI requirement. So I just wanted to understand, I mean, what RBI requirement is this? Because at least the PCA guidelines that kind of came out PCA framework guidelines talked about, net NPAs of 6%. So this net stage 3 requirement of less than 4% with some of your peers also end up in [indiscernible] what RBI requirement is this? That's my first question. And sir, the second question is to Parag sir. I mean, we've not been very active in doing assignment transactions. I mean in the coming quarters, will we be seeing more of assignment transactions in addition to the securitizations or EPCs that we've been doing? And maybe last -- the third question is for maybe Sunder sir. So when we kind of classify these -- under new RBI guidelines, when we classify these assets under stage 3, do you also end up taking interest income reversals or is this adjustment routed through the provision line item, is what I kind of wanted to understand. So those are my 3 questions.

Basically, as you rightly put it, for PCA, the net NPA should be 6% or less, but RBI has been consistently telling that large NBFCs, they would prefer it to be less than 4%. And so that the systematically important NBFC are more, what we call, more prudent and more -- take the hit at earliest level so that there is a overall health of the NBFC remained strong. So that is the advice -- more of advice. And we would like to adhere with that, so that it helps us to project the company as a conservative company.

On assignment versus securitization that depends more on the investors' interest and assignment also bring in some kind of upfronting of income and all, in securitization, it is more evened out. So there is no kind of variations on quarter-on-quarter basis. That is why securitization is a preferred product from our side also but also depend upon investors' interest.

And answering your last question, whatever we have classified as stage 3 based on the day stamping, so we have tried to maintain the same provision as well as the income reversal. Even though the cases might have been in -- technically in stage 2 after the earlier guidelines, we continue to maintain the same provision coverage as well as the interest reversal also it is maintained based on the stage 3 only. Even though it may be -- bucket wise it can be less than 90 also. So we are more conservative in that approach.

And sir, to that extent, maybe just a follow-up here. You have maybe answered this already during this call. But fair to assume that at least internally, given that you've been building management overlay, given that you're already holding COVID provisions, while you we might have to kind of maintain a higher provision cover in stage 3 because of our endeavor to keep it below 4%. But fair to assume that going forward, maybe the next few quarters if things really start normalizing, we can expect the provision cover on stage 1 and stage 2 kind of start coming down.

Yes, correct. It is fair to assume. So next couple of quarters, if the gross NPA gross -- gross stage 3 comes down below 7.5% or 7.7% levels, definitely, there will be a release of the management overlay.

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

We gather bit of a [ processable ] slowdown on -- in rural demand. So I wanted to know your sense there? And secondly, just if you could share the interest reversal number for the quarter and 9 months?

Interest reversal number, I don't have it right now. I can ask Sanjay to share it across offline.

Sure, sure, that will be fine, yes.

See, as far as credit offtake is concerned, you are right. First 15 days in January, we did observe this slowdown because, one is the virus; and second one is because normally in the first 15 days, because of the -- not the auspicious days people normally don't get into new activity. So post 17, we have seen the demand picking up. And we are confident because the Prime Minister has announced Gati Shakti Yojana with a lot of emphasis on the logistics and infrastructure, that, what call, that actually the disbursement or the actual plan out has not come out fully till now. And during the budget, we feel the prime -- Finance Minister will emphasize on the same. And February and March, we will see heightened activity in these infrastructure sector. That's the expectation. And therefore, we are quite confident that disbursements will be much higher in February and March.

The next question is from the line of Param Subramanian from Macquarie.

So 2 questions. Firstly, on OpEx. So if I look at OpEx, it's roughly at the same level for the last 2 years. So where is this headed from here? Could you explain why this is the case -- disbursements have come back and collections has also come back. So OpEx directionally where does it go from here? And secondly, on the cost of fund. Obviously, quarter-on-quarter, there is a sharp reduction. Where is this, in your view, headed from here, especially since the consensus view seems to be that we are headed into rising interest rates? Yes, those are my 2 questions.

We offer -- we feel that -- okay, last couple of years, we have been having a strict control on the cost of the company, ensuring that it does not go to an elevated extent. But now we have started hiring in the last couple of quarters and the incremental employees are going up. So we expect this cost to go up maybe by around 5% to 10% in the next financial year. However, we want to maintain a cost-to-income ratio of close to 22% to 23%, which has been our earlier trends. So that should be a fair indicator for the OpEx. And the next question, Parag.

On cost of fund, we feel that 10 to 15 basis points further reduction can be there. And yes, cost otherwise bond market rates are up, so 10 to 15 basis points because of elevated costs what we have had earlier and replacement of higher cost liabilities will help to bring down the overall cost by 10 to 15 basis points and further reduction may not be possible.

The next question is from the line of Matthew Zheng from PIMCO.

I just wanted to understand a bit more about this ECL provision. If I understand correctly, one of the key drivers for the higher ECL provision this quarter is because of your higher headlined GNPA because of this new RBI rule, while your LGD assumption has yet to be revealed. Should we expect a reversal of some of this additional ECL provision in Q4 after you review your LGD assumptions? And if yes, what will be the issue? And my second question is, I understand some of the states have already brought back the lockdown, COVID lockdown measures, how is this affecting your customer? And what is the trend of the collection efficiency in January?

To answer the first question, the gross stage 3 has increased because of the change in the regulatory requirement as stipulated by Reserve Bank of India. This is the circular dated November 12. And these numbers will be, again -- the LGD numbers will be again refreshed in the March quarter, and we are confident that it can marginally come down from the current 45% level to a manageable level. And going forward, the management is confident that the -- once the business team and the customers are fully versed with the daily stamping of the NPAs, the gross stage 3 should gradually come down in the next couple of quarters. And Mr. Revankar will take the second question.

This -- as I was telling you, first 15 days in January, there was a widespread virus impact, even though many people are not testing. But this time, since the virus is less virulent, a couple of days absenteeism or maybe week's absenteeism we have seen in the first 15 days. But post that, business is as usual. The collections have really picked up. So we feel that January collection will be quite good, maybe near to 100%. But February and March, we should be able to do very well. So we expect the collection to be on par with the previous quarter or even it can be better.

The next question is from the line of Gaurav Purohit from BNP Paribas.

I have a question on the new sales AUM. It continues to decline for the past 8 quarters. So what is the strategy there? And what are the kind of yield differentials between a new vehicle portfolio and a used vehicle portfolio?

Even though the portfolio is coming down, but disbursements are going up. If you see Q-on-Q, the disbursements have gone up by around 30% Q-on-Q. So we feel that the new portfolio will start picking up now. We were restraining ourselves from the new because the economic environment were not really feasible for new assets, which is higher ticket. And normally, a new vehicle also require higher LTV lending, which we were resisting. But now since the economy looks like fully recovered, we will be doing some new vehicle. And the differential between new and used is around 300 to 400 basis points. So that's one reason we focused more on used. But when we start lending to new, the used also will go up simultaneously. It will not have a big challenge on our overall yield. Overall yield will not have much impact. So this quarter, we feel the new vehicle lending will go up without much of impact on the overall yield.

Sir, 1 follow-up question on that. Where do you see the AUM mix stabilizing, especially for the new vehicle? Currently, it is at around 5% of the total?

Ideally, we have to take -- new vehicle, when you say, you have to take up to 5 years old vehicle in the book also because sometimes we may fund a vehicle, which is just 2 years old and that is as good as new to us. So if you take up to 5 years old vehicle, the overall portfolio would be anywhere between 12% to 15%. So only new vehicle, if you take by the invoice, it is today at 5%, but slowly it will be inching up to around 7% to 8%, maybe in the -- as economy start growing, demand for new vehicle will go up. Now automatically, the proportion of new vehicle will go up. So in the past, if you see our -- historically, it has been at around 15%. So up to 5 years old, if you take, we will be around 15% at any point of time.

The next question is from the line of Aditya Jain from Citi Group.

There is a slide on the provision analysis, which is very helpful to see the impact of the daily tagging. So in that, there is a small movement from stage 1 to stage 3. So stage 1 is lower when daily stamping is applied. So the right way to see that is that some people came after 90 days past due and then paid 2 EMIs. Is that the right to see it?

Yes. Correct.

Right. Okay. And then on the liquidity reduction, so any thoughts now on will it be phased out? And if yes, over what period or would it be a more sharp reduction in liquidity? Is there any possibility to...

We will have a relook at next quarter Board meeting because Board wants us to be conservative for this quarter. But definitely, they have indicated that it's the time to reduce the overall liquidity. Next 2 quarters, definitely, we will reduce it.

Got it. Then the impact of daily stamping on income recognition, so if you could just explain the difference in the approach on how we recognize income on stage 3 versus let's say an asset is stage 1. So daily stamping aside, I just had to -- how they approach led is, what is the recognition that we do on stage 3 as of now?

See in stage 3, the coverage that we are carrying is 50%. And supposing it's the same asset -- actually, now I'm supposing X, the borrower is in stage 1, then on that asset, we have a coverage of 3.27% in the current quarter. And supposing if the same asset was in stage 2, it was at 11.61%. This is the difference, which happens wherever it is positioned. So if it's in stage 3, you take a higher cover -- provision. If it's in stage 1, we take a lower coverage of 3.27%.

No, no. My question was on the interest income recognition.

Okay. Interest income, it will be replica of the same thing. Supposing if I'm -- there was an interest income of say INR 100, right, on the interest of some of the contract to the cutoff date, if it had been in stage 3, we would reverse 50% of the interest booked. And supposing if it was in stage 1, there will be no reversal per se. But it would have been at 3% -- yes, correct. It would been at 3%.

So if it was -- if the conversion to stage 3 happened, let's say, in the middle of the quarter, then whatever was recognized till then, of that 50% would be reversed, and incrementally 50% would be recognized.

Correct, correct, correct, yes.

Got it. And just lastly, is there any thoughts on -- currently on -- or any pilot project or something on the merger synergy. So you've given us some sense during the yearly call and all, which was helpful. But any specific pilots or studies that you could talk about now?

Look, the pilots are going on. We are working on HR and technology integration. And we feel it will be virtually seamless because there has been a reasonably good progress. So as far as the -- introducing the products in each other company, that we are working on. There are some studies going on, on that thing. And that we will start working on launching of various products in various branch. That should happen at any time.

Got it. And just lastly if you could tell us disbursement by segment and -- sorry, if this has already been told, then I will sign off. It's a pretty...

The next question is from the line of Prakhar Agarwal from Edelweiss.

Just a couple of questions. First, more fundamentally, just wanted to understand, given that we are already in that -- so we would be probably looking at a behavior with respect of the customers. So how does this daily tagging impact your gross stage 3? Ideally, it should have been the under Ind AS norms that you would have been maintaining a separate gross NPA levels and probably that would have been impacted. Just wanted to fundamentally understand that how does impact under Ind AS?

What you say is correct. Many of the other companies have taken this stand. However, we thought it is prudent to follow the circular in spirit as well. And hence, we aligned both our stage 3 and NPA as similar lines. And also, we also decided that whatever has been classified as an NPA will be retained as stage 3, irrespective of whether it comes to stage 2 or 1. Still, it is fully recovered. The overdues are fully recovered. And also maintain a provision equivalent to stage 3 in spite of nonrecommend in Ind AS. So we followed the RBI circular in spirit also.

So if I were to just say that under IRAC norm, if we were to just look at your gross NPA numbers will be 8.4%.

Correct. And had we followed the earlier -- have we not followed the circular, our gross NPAs would have been 7.62%.

Okay. Second, and more so in relation to this RBI circular, the second part of story, which says that you have to -- the account can only be updated if you pay entire dues. Don't you think these sort of things materially impact your LGDs at least for a guy -- for a customer like us, which probably wherein the cash flows -- inherent volatility is higher for cash flows, the ability to pay 4 EMIs or more probably may impact your overall LGDs for the pool?

See, last -- 4, 5 years back itself, we were in one of the instruction, RBI had asked us to upgrade the NPAs only on recovery of the full overdues, and the company has been following it for the last 4, 5 years. And hence since we have always been following that, it will not have any impact on the LGD competition going forward also because we have already taken that into consideration.

Okay. So just last follow-up on this. So the rise that we have seen in coverage ratio for stage 3 this quarter is essentially to do with us maintaining a net NPA of around 4% by March quarter this time.

Correct, correct, correct.

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

Yes. Sir, just 2 questions. One is what is the total amount of repossessed assets outstanding to date? And is that included in the stage 3 number?

Yes. The restructured number -- our count is slightly more than 10,000 assets, which we have as on December 31. And yes -- sorry, repossessed stock is slightly more than 10,000 numbers as on December 31. And all the repossessed assets are classified as stage 3. And we also make it provision of 100% if the repossessed assets remain unsold for more than 6 months.

Okay, sure. That is helpful. Sir, and the other question was, since now almost 20% of your borrowings are non-rupee, are those all 100% hedged?

Yes, 20% of the borrowing is overseas, including loans and bonds, and everything is completely hedged for the full duration.

Okay. So even like a 7- or 10-year paper, you are able to find a hedge, is it?

Yes, yes. We are able to find a hedge to it.

Okay. Okay. And lastly, since you have a significant securitization also, how is the collection efficiencies different on the securitized pool versus on the overall portfolio what you've disclosed?

So recognized pool will be largely seasoned pools, collection efficiency will be slightly better. At the time of securitization itself, the performance should be 100%. The collection efficiencies for securitized pool is slightly better, cherrypicked.

Sure, sir. But I'm just trying to understand what would be the delta, let's say, 3 years before versus today?

See, in the -- when you take over -- talk about the stage 3 level for securitized portfolio and this nonsecuritized portfolio, this should be closer to 8.5%, 8.6% level, the nonsecured portfolio. And the securitized portfolio will be around 3%, 4%, not more than that.

Okay. Okay, sir. And that hasn't -- the difference between them hasn't changed. Even today, it's like about double?

Yes, it is. It has been continuing to be the same.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Umesh Revankar for his closing comments.

Thank you all for joining this call. And we are confident that Q4 will be quite large because we do see a lot of positive indicators, especially on the demand and also number of employees reporting to the duty on a regular basis and customers feedback, all seems to be quite positive. As I was telling you, first 15 days, there were some challenges. But after that, we are seeing a reasonably positive indicator, and we expect Q4 to be quite large. And there will be a significant improvement in the portfolio quality as we have taken enough measures to see that we we'll overcome the challenges and improve our overall portfolio. One particular line, which I missed in the beginning, I would like to inform that our deposit portfolio is seeing a healthy growth. Our deposit portfolio today stands at more than INR 20,000 crores, that is 19% of overall liability, against around INR 14,800 crores in the same time previous year. So there is a good progress in retail deposit mobilization. All our is deposit retail, and that's helping us to stabilize. And the cost of deposit portfolio is around 8%. So -- and incremental deposit is coming at 7.57%. So that -- this is very positive. And we expect overall good progress and good result going forward in the next quarter. See you all again in the next call. Thank you very much.

Thank you. Ladies and gentlemen, on behalf of Shriram Transport Finance Company Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.