Shriram Finance Limited (511218) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Shriram Finance Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Umesh G. Revankar, Executive Vice Chairman. Thank you, and over to you, sir.

Yes. Thank you. Good evening, friends from India and Asia, and warm welcome to all of you, greetings also to those who have joined the call from the Western part of the world. To present our Q1 FY '25 earnings call today, I have with me our Managing Director and CEO, Mr. Chakravarti, Managing Director and CFO; Mr. Parag Sharma, Mr. S. Sunder, Joint Managing Director; and also present are Mr. Ravi Subramanian, MD CEO of our subsidiary, Shriram Housing Finance Limited. And Sanjay Mundra who is our Investor Relations head. It has been a good first quarter for the year for the Shriram Finance Limited. Before going to the quarterly result, I would like to go to other factors that has helped us. First look at our Indian economy that has performed quite well in the last financial year. India's GDP growth rate in the quarter ending March 31 grew by 7.8%. These figures surpass the RBI estimate of 7% according to the projection made in a April market policy review. Digital growth stands at 8.2% for the full financial year FY '24 as compared to the growth rate of 7% in the FY '23. Earlier, the government estimation was at 7.6%. The real GDP growth is expected to grow at 7.2% for the FY '25. On inflation, India's CPI inflation in June '24, stood at 5.08% on the back of higher food prices. The retail inflation in June is the highest in last 4 months. Inflation in the food basket rose to 9.36% in June compared with 8.69% in the month of May. While food inflation risk will continue to remain in the near term, we expect better sowing pattern and special distribution of rain to ease the price pressure beyond these -- those over 12 months. The wholesale price index inflation for June '24, at 16 months high of 3.36% after scaling 2.61% in the previous months. In fact, since February '24, WPI inflation has surged from 0.2% to 3.36% largely on back of the spike in wholesale food inflation and manufacturing inflation is turning negative to positive. RBI in its MPC meeting held on April 5, '24 kept the repo rate unchanged at 6.5% and desire to hold key policy rate for the eight consecutive time in June '24. The rural economy this year, IMD has forecast an above normal rainfall during June, September. The seasonal rainfall is expected to be 106% of long-period average. July rainfall looks promising as the country is expected to continue to receiving widespread rainfall in the next 10 days. Rainfall during July, August accounts for nearly 70% of India's seasonal rainfall. In the Southern Peninsula, monsoon rainfall has been 23.7% more than the benchmark so far at 70.4 million hectares or 64% of normal zone area. The combined zone area of key crops, such as paddy, pulses, oilseeds and sugarcane was up by 3.5% year-on-year till last week. This is a very good progress in the backdrop of GVA, which is gross value added for agriculture and allied activities in the crop year '23, '24 which grew just 1.4%, the slowest since 2018, '19. Even the estimated aggregate output in the last crop year was minus 6.2%. And on looking at that, we should be having a very good monsoon, a very good adjusted output due to a good monsoon in this crop year. S&P global rating on May, 29 upgraded India sovereign rating outlook to positive from stable while retaining the rating at BBB minor on robust growth and improved quality of government expenditure. On the GST as per the news report going forward, the finance ministry will not release monthly retail GST collection data on first day of every month. But as per media report, the monthly GST collection is 7.7% greater than the collections made in June '23. And stands approximately at INR 1.74 lakh crores. Average GST collection from April to June '24 works out to INR 1.86 lakh crores. Recently, we had a budget -- announced and highlight of the budgets are as follows: the finance minister highlighted on Navaratna, the 9 areas where sustained efforts are needed to take country on part of strong development and all-round prosperity to achieve the vision of Viksit Bharat. The highlights of which is of direct impact to us as in our business are as follows: One is we focus on agriculture productivity and employment generation. That will help us in our rural and MSME lending business, and we expect maximum traction here. The budget also provides INR 11.11 lakh crores of capital expenditure to improve infrastructure, with special focus being announced with additional facilitation for the Eastern part of the India, that is Purvodaya plan and also some additional financial support for building capital in Andhra Pradesh to the extent of INR 15,000 crores. There is also additional provision of INR 1.5 lakh crores long-term interest-free loan to state governments which should help in rural and urban infrastructure. Ultimately, this will benefit transportation, manufacturing and the MSME business. Coming to the auto industry. On OEM sales, this quarter has been reasonably good in the first quarter of the financial year. The commercial vehicle has seen a growth of 3.5% to 2.24 lakh units against 2.17 lakh in the Q1 previous year. And within this CV, M&HCV has grown 9.7% in Q1, which stands at 85,421 units against [ 77,801 units ] in the previous year same quarter. LCV sales has been flat at INR 1.39 lakh units with the same number of units in the previous quarter -- previous financial year first quarter. Passenger vehicle has seen continuous growth, it has registered 3% growth with the 10.26 lakh units against 9.97 lakh units in the year-on-year. The 2-wheeler has recorded robust growth of 20.4% with sales of 49.86 lakh units against 41.41 lakh units sold in Q1 '24. The 3-wheeler, again, has registered good growth with 14.2%, which is 1.65 lakh units against 1.45 lakh units. Tractor has de-grown mainly because of lesser output in the last year in the agricultural side. But we expect with a good monsoon this year to improve in the Q2. The numbers were 1.98 lakh unit against 2.25 lakh unit in the previous year. Construction equipment has registered a growth of 4.6% with the 26,010 units against 24,000 units sold in the previous year. With this, now I'll ask my colleague, Mr. Chakravarti, to take us through the operational performance. Thank.

Thank you, Umesh. Good evening, and welcome all of you to our quarter 1 FY '25 earnings call, and the trust you have had the opportunity to pursue them and relate to the investor presentation, which have been posted on the website of the stock exchanges. We have registered a disbursement growth of 23.82% Y-o-Y. Our disbursements in Q1 FY '25 this year aggregated to INR 37,709.79 crores versus INR 30,454.81 crores in Q1 FY '24. Our assets under management as of 30th June 2024, registered a growth of 20.82% over Q1 FY '24 and 3.82% sequentially. Our AUM stood at INR 233,443.63 crores as against INR 193,214.67 crores a year ago and INR 224,861.98 crores in Q4 FY '24. Our net interest income in Q1 FY '25 registered a growth of 20.63% year-on-year. We earned a net interest income of INR 5,354.47 crores in Q1 FY '25 this year as compared to INR 4,438. 68 Crores in Q1 FY '24. Our net interest margin was 8.79% as against 8.33% in Q1 FY '24 and 9.02% in Q4 FY '24. Our PAT grew by 18.21% in Q1 FY '25 over Q1 FY '24. And by 1.78% over Q4 FY '24. We have registered a PAT of INR 1,980.59 crores for Q1 FY '25 as compared to INR 1,675.44 crores in Q1 FY '24. And INR 1,945. 87 crores in Q4 FY '24. Our earnings per share for the quarter stood at INR 52.70 as against INR 44.73 in Q1 FY '24 and INR 51.79 in Q4 FY '24. On our asset quality, our Gross Stage 3 in current quarter stood at 5.39% and Net Stage 3 at 2.71%. These numbers show an improvement over the corresponding period of 6.03% gross and 2.96% net in the quarter 1 FY '24 and 5.45% gross and 2.70% in the -- net in Q4 FY '24. Our credit costs for the quarter FY '25, Q1 stood at 1.87% as against 1.62% for Q1 FY '24 and 2.06% for Q4 FY '24. Our cost-to-income ratio of 27.45% in Q1 FY '25 as against 28.85% recorded in Q1 FY '24. Our cost-to-income ratio in Q4 FY '24 was 26.61%. Regarding our subsidiary, Shriram Housing Finance. As you all know, the Board of Directors of the company in its meeting held on May 13, 2024, has approved had approved the proposal for disinvestment of the company's entire stake in Shriram Housing Finance Limited, a debt-listed non-material subsidiary of the company. And in this regard, the company has entered into a share purchase agreement the inter-alia with Mango Crest Investment Limited an affiliate of Warburg Pincus. The company's investment in Shriram Housing Finance Limited has been classified as assets held for sale and disclose this discontinued operations in the financial results. However, Shriram Housing assets under management as on 30th June 2024 exhibited a growth of 50.93% and stands at INR 14,397.30 crores as against INR 9,539.37 crores in Q1 FY '24. The net interest income of Shriram Housing Finance Limited, registered a growth of 40.62% in Q1 FY '25 over Q1 FY '24. Net interest income for Q1 FY '25 was INR 119.91 crores as compared to INR 85.27 crores in Q1 FY '24. Shriram Housing Finance has registered a PAT growth of 5.85% in Q1 FY '25 over Q1 FY '24. As for the quarter of this year was INR 48.31 crores as compared to INR 45.64 crores. The EPS stood at INR 1.34 against INR 1.40 in Q1 FY '24. Shriram Housing's Gross Stage 3 for Q1 FY '25 stood at 1.24%, and their Net Stage 3 came in at 0.94%. In comparison, these numbers are 1% on gross basis and 0.75% on net basis in Q1 FY '24. I will now request -- I shall now request our MD and CFO, Mr. Parag Sharma to take you through our resource-raising activities, after which our joint Managing Director, Mr. Sunder will brief you about our accounting and regulatory aspects.

Hello, everyone. The total debt as of June quarter end was INR 191,745 crores growth breaking up into retail deposits at 24%. Capital markets instruments, NCDs at 20%. We see the external commercial borrowing, both in the loan and the bond format stood at 14%. The securitization outstanding is at 15% and term borrowing from bank and institution is at 26%. Total cost of debt has marginally come down from March end numbers, which was 9.01% to 8.96% now. The leverage ratio stands at 3.79% versus 3.83% as of March end. The liquidity coverage ratio is 225.19%. Marginally up from 195.55 % as of March. Overall liquidity, we continue to maintain 3 months of liability repayment into liquid assets, and that continues to be close to INR 15,000 crores of -- to [ INR 2,220 ] crores of liquidity as of June end. The incremental cost of fund is at around 8.8%, which is slightly down from the previous quarter, which was at 9%. The ALM bucket, all buckets continue to be positive, short-term buckets up to 1 year continues to be positive. And the 6 months surplus -- cumulative surplus will be INR 20,000 crore plus. With that, I hand it over to Sunder for his remarks.

A couple of data points. The employee count as on 30, June was 75,813 as compared to 74,645 in March. And the Stage 1 PD in case of ECL was 9.02%. Stage 2 PD was 20.39% and LGD was 38.42%. Then segment-wise disbursement. Commercial vehicle contributed to INR 14,024 crores. Passenger vehicles INR 7,406 crores, construction equipment INR 1,850 crore, farm equipment was INR 820 crores, MSME INR 6,207 crores. 2-wheeler was INR 2,732 crores, gold was INR 2,652 crores. NPL was INR 2,014 crores. Totaling to INR 37,709 crores. And the breakup of the credit cost was INR 599 crores on account of bad debt and INR 588 crores impairment loss. Yes. With this, I hand over the mic to the moderator.

[Operator Instructions] First question is from the line of Chintan Joshi from Autonomous.

Thank you -- can I ask a question on cost of funds. How do you expect it to develop over the next few quarters? And on a medium-term view, what strategy are you trying -- are you following to get a credit rating upgrade?

Yes. So on the cost front, as of now, it looks to be quite stable. We don't expect much change from the current level, which was closer on [indiscernible] -- we are well diversified when it comes to sources and the diversity will continue to be there. The focus is there on retail deposits securitization, which is one of the cheapest source of funds for us. We also have large offshore borrowing program, and that will continue to be tapped as and when opportunity is right. Rating the -- with the dialogue is on with all the [indiscernible] rating agency. And other than continuous improvement in our overall business numbers. I don't think there are any factors with rating agencies are concerned about when it comes to diversity of assets, diversity of liabilities. Overall, merger process, how smoothly it has gone. And seamlessly, we have been able to increase businesses across all asset classes. I don't think there is anything further when it comes to the performance indicators from the company. So the dialogue will be honored as seen what is the ultimate time-frame rating agencies are giving.

Okay. And the second question is how should we expect the mix of AUM to develop over the next 1 to 3 years?

There could be a percentage point up and down, but I think it's largely because of the predominance of the vehicle portfolio. And since it's also growing, we don't see much of a -- there will not be any major change. Though we are focusing on gold loans and MSME loans to grow that book. But at the same time vehicle ones are also growing. So there would be probably a 2%, 3% plus or minus here and there, but not -- nothing major change.

So should we not expect the old truck business to grow a little faster?

No. We are looking at the truck business to grow at around 12%.

Sorry, can you repeat that?

The old truck business, we are expecting it to grow around 12%.

Okay.

So the other products will grow at a faster pace. For example, MSME, we are looking at growing the book by about 20% plus, 2-wheeler, about 15% to 18%. So they will grow, I mean, the growth rate will be faster, but the base is smaller.

Chintan to add to that, there will be some upset in used commercial vehicle and even the passenger vehicle, maybe in the next fiscal year '27 because the new [indiscernible] cycle has started in '22. And that to come into the market and having a larger market will take a little time on. So right now, we are growing at around 12% to 15%. But maybe in a year or 2, that growth rate can further improve as the market expands.

Next question is from the line of Kamal from Investec.

Hello, sir. I just wanted to ask that in this quarter, the gold prices have increased by around 10% to 12% quarter-on-quarter. However, our gold AUM is still declining quarter-on-quarter. So can you please help us with the reason on that?

Yes. So basically, so the impact was in this quarter has gone down. We have not increased our per gram rates, we have kept them at what we were doing. It's not that every increase in gold loan price, we increased the lending amount per gram. So one reason. Second is there was also a slight slowdown because of the adjustment from more than INR 20,000 cash disbursement. So there is a little impact of that -- and on top of that, we were also -- our legacy branches where we are doing gold loan. We actually had to undertake a total revamp of the strong rooms and security measures. So all this has contributed to a little slow down, but we feel that this quarter and the next quarter should be -- we should see a good growth.

So like can you please quantify like what is the percentage of the gold loan disbursed to bank channels and like what is the percentage you guys have been disposing by cash which has affected?

See, anything about INR 20,000 will go through bank. So loans up to INR 20,000 is in cash, rest of it will be through bank. So our average ticket size is around today about INR 70,000, INR 75,000.

See, it is not affected, I should say. It is basically adjustment time because the industry is undergoing some adjustment. And maybe temporarily customers may go into on broker for raising money. This is temporary. But everything will come back because all the industry is adjusting and everyone has been the same [indiscernible]. So that will help actually. I feel the industry will grow faster post this adjustment. So that is helpful. And also, we are adding more branches to gold lending because as Chakravarti rightly put it, each of the banks need a certain kind of security requirement. To start gold loan as we add more number of branches, the growth will come back.

Okay. I just want to ask if you could just guide what is the AUM growth guidance for FY '25? And -- how do we see the disbursements in the next few quarters?

See our guidance will remain at 15%, but this quarter has been good because you were expecting some kind of a slowdown in activity, overall credit uptake because of the election. But we did not see any impact because the election was very smooth and spread across so many states. So it had no negative impact. So credit uptake was good. So we expect momentum is good. So it will continue to be good for the rest of the year. We don't want to change the guidance now, but we can expect to do much better than the guidance.

Next question is from the line of Natraj Sankar from DSP Mutual Fund.

Would be 2 questions. One is on the MSME part and the non-vehicle finance part. As we look forward, I'm not looking at quarter-on-quarter over the next 2- to 3-year period of time, how are you managing risk. How are you growing differently compared to what others are doing? Can you just show some -- can you help us understand better the nature of the growth that you're doing compared to what others are offering. That will be helpful to understand the quality of the business growth. And secondly, over the next 2 to 3 years, as we grow how is the leadership position today. Is it started all like settled that would be helpful. Thanks.

See, MSME business, basically we are lending to the customer against the mortgage of property. Typically all the larger tickets and most of the loans. So that's the way the -- our quarter call, we are playing it very safe now. And the -- every cash flow at every business lending decision is taken on a cash flow basis only.

Is it also possible to share if we take the top 3 industries within MSME that we would be lending, what would those top 3 industries be.

Can you answer that?

See, basically, our major 70% of our lending goes to small businesses, basically in the service sector and trading sector. So manufacturing would be less than 30% of our total portfolio. Majority of it is towards trading and service industry. And the average ticket size here is about INR 10 lakhs.

Okay. And South versus non-South. Just a quick follow-up because I move to...

South versus non-South for MSME will be 60-40. 60 South, 40 non-South.

And as the transition to the next 2 to 3 years, would the mix be remain the same or it will be different.

Both markets are growing. So difficult to say, but not -- I mean, non-South is a much, much larger market for SMEs, and that is where we are focusing on actually. So we'll have to see -- as it creates more reach automatically, the proportion will change. So -- but it will take time. It will take 3, 4, 5 years to make that kind of a change. So we are in most of the other markets, we are relatively new in the SME segment. Even though in other segments, we are there for quite a long time.

And secondly, on the leadership part as we build these new businesses and scale up infrastructure in place for leadership of across channels. Is there any gap that exists that we want to plug both at the top at the middle -- can you just shed some light on that.

In the segment where we are in, we are, I think, a leader because most of the SME lending, if you look at, they are either focused on the medium size of around INR 40 lakh, INR 50 lakh ticket size. They are in a small ticket. So number of loan and what called micro entities enterprises, we are one of the largest. So we do not know the banks. But among the NBFCs, we are the largest in our segment.

I make leadership in terms of internal capacity...

I'm coming there. So it's pretty -- the succession lines are pretty much there. For every position, we have people. In fact, we have multiple people competing that way. So the succession planning is on a continuous basis at every level. There is no gaps on the -- as far as leadership is concerned, there are no gaps. Even from levels as low as a branch manager.

Next question is from the line of Bunty Chawla from IDBI.

In the opening remarks, as you said, there has been a -- in fact, the cost of -- incremental cost of funds has been lower as compared to on the books. So what has resulted in 20 bps decline in sequential margins?

One is the large factor is the -- Liabilities, which were at a much-elevated level earlier, cost of those liabilities which have matured was higher that has really helped. Incremental cost is a mix of securitization transaction what we do with [indiscernible] and also the capital market improvement was borrowed that also has come down. So both those factors are helping for the incremental cost being slightly lower. Some of the offshore borrowing wholesale, which is done in the loan format is cheaper compared to what we were doing in loan format earlier, which was costlier. That is [indiscernible] on -- and on the balance sheet costs being lower as a high cost get getting mature.

So my question was that, sir, as we have seen incremental cost of borrowings coming down. So there should be improvement in the margins. But oppositely, we are seeing there is a decline in the margins by 20 bps on a Q-on-Q basis. So is it because there has been a decline in yields? And what is the reason behind it?

As it basically what happens is, you have to compare Q1 with the Q1. What happens is, the Q4 is -- towards the end of March, there will be more disbursement on new vehicles. That is a little low-yielding. That's one thing. Second, in our portfolio, the gold and personal loan portfolio, we -- there were some decline was there. So overall product mix also changed a little. This contributed to a little lower yield on lending -- this is typical of Q1.

So going forward, we can see there could be an improvement in the yields, which and -- which should support the improvement in the margins, because cost of increment is almost stable as you just said.

Yes, margin is dependent on multiple factors. It also depends on liability costs and other factors. So overall, we can say that definitely there is some improvement. We can't quantify it.

Okay, sir. One, in provisioning analysis, you have shared basically, there has been improvement in gross Stage 3 on Q1, Q4 and all these things. But what we have observed ECL provisioning for Stage 1 has continuously increased 2.91% to 3.28% and now 3.42%. So what is the reason behind that? Because we are seeing the improvement in the asset quality. There should be a stability in the ECL provision as far as Stage -- there has been a decline in coverage ratio for Stage 3, but there has been an increase in Stage 1?

No, that is primarily because of the product mix that has been happening over a period of 5 years. So there will be some dip or increase of quarter-on-quarter, but nothing to do with the product-wise composition.

Okay, sir. And sir, lastly, data point, if you can share what was the write-off for this quarter as it is last year -- last quarter same year, write-offs.

Write-off for the current quarter was INR 599 crores. And for the March quarter was INR 805 crores and Q1 FY '24 was INR 573 crores.

Okay. Okay. It was arrear.

And you want provision amount also?

Provision amount?

You wanted?

Yes, sir, please.

Okay. Provision for the current quarter of INR 588 crores, March was INR 456 crores and June '23 was INR 305 crores.

Next question is from the line of Renish from ICICI Securities.

Congrats, on good set of numbers. So sir, just two things from my side, one on the growth side. So -- during Q4 call, you have added that Q1 should be muted, because of the election and some sort of seasonality, but Q1 turn out to be better than expectation. And still, we are sort of maintaining the same guidance. So does that mean that, let's say, Q2, Q3 might see some pressure or maybe we'll exit the guidance?

See, definitely, when we start well, we should -- you can expect to us to exceed the guidance. But there are multiple factors. The AUM growth has -- AUM growth and the bottom line growth, there are two different things. We are focusing on bottom line even last year also I maintain. We will be focusing on improving the product mix in such a way, that there will be improvement in the bottom line. And also, we will be focusing on the new geographies where we feel that there is, what about, a lot of growth opportunities. And the smaller ticket loan will not add to the AUM. So if you are looking at answer on the AUM growth, we cannot give the number right now, because the small ticket loan, they matures faster, like gold loan at 6 months on average ticket size. And the personal loans will be on an average of 18 months. Two-wheelers will be of 21, 22 months. So these are all small ticket loan, which comes into. So that means you are on a treadmill, keep doing more businesses. So what will result in the AUM growth may not result in the bottom line. So we are focusing on bottom line. So that bottom line grows much faster than the top line. So I should say that we will definitely exceed the guidance, but I can't quantify the same.

Got it. Got it. And sir, secondly, question is on farm equipment. So when we look at the gross Stage 3, touching 9% and despite that, we saw there is a almost 6%, 10% sequential growth on the AUM side. So how one should read these two different data points? I mean, growth in a segment wherein we have the highest gross Stage 3.

See, one thing is in the tractor, the biggest advantage is the -- most of the customers of the asset, will remain within the village limit. It doesn't move out. So the credit cost in the tractor portfolio is as good as any other portfolio, is around to same 2%. Even though the Stage 3 is a little higher and maybe provision is a bit higher, but there's also a write-back because credit cost is not higher. So -- and also, it is a high yielding. The portfolio is high yielding. So net to net, that portfolio is as good as any other portfolio. So we would like to grow there because it also gives a reach to us in the rural market.

Got it. And sir, would you like to share the asset yield for personal loan and gold loan?

We don't have it right now. You can contact with Mr. Mundra. He will help you out.

Next question is from the line of Gaurav Kochar from Mirae Asset.

Three questions from my side. Firstly, I think, it's less talked about, but I think you've done a fabulous job on the deposit franchise. I think even in this quarter, there was a decent traction. Net INR 3,000 crores kind of an accretion is commendable in the current context. So just wanted to understand some dynamics here. What is your sourcing mix? How much of it comes through branches? How much of it -- how much of it comes to the DSE? What is the overall sort of cost of acquisition? I'm not talking about deposit cost. I'm talking about cost of acquisition. You may be paying to agents, third-party agents who might be sourcing that for you. I just wanted to understand some numbers around this?

The corporate channel, which we have, which is basically a broker channel, that is around 35%, rest of it comes from the branch and our own direct intermediaries. We have direct intermediaries, which is directly linked to the company, right from the beginning. So overall cost is should be 75 basis points.

Okay. This 75-basis point is spread over the tenure of the deposit, correct?

Yes, correct.

What would be the weighted average cost and weighted average duration of these deposits?

Average tenure of the deposit will be around 40 months.

And cost, interest cost.

INR 8.3, INR 8.4 will be the interest cost.

My second question is on the MSME product, and I just wanted to understand how many branches have we covered doing this product? And let's say, by end of FY '25 or FY '26, any sort of target that you have of the number of branches that will be doing in MSME?

Even earlier in the erstwhile Shriram City Indian Finance branches also out of close to 1,000 branches, we were doing MSME only in about 550, 600 branches. So in these 2 years, we would have added about 50 of those -- 50, 55 of those Shriram City's erstwhile branches and in about 120 of commercial vehicle branches. So about close to about 170 branches is what we have added now.

Okay. So that 550 would have become 720, out of the 3,000-odd branches. So let's say, by next year or maybe slightly long, FY '26, what would be the target -- any sort of...

Probably we will be adding another 250 branches.

In the next 2 years?

Yes.

Okay. Understood. Understood. And just to understand this a little more, what would be the ballpark throughput of these branches in terms of -- just to understand when do these branches breakeven? And where do these branches typically cap in terms of disbursement per month or disbursement per annum? Any numbers that you might?

There's no clarity. Your voice was not very clear.

Yes. So I was asking, sir, at what -- in terms of disbursement per month or disbursement per annum at what level does it breakeven the MSME branches? And when do you expect to reach that level for the branches that you added, 170 you added?

The branches are not stand-alone MSME branches. So these are branches which are already in existence, which are doing other products where we add a couple of people for doing MSME business.

But at a product level, ROA, when you calculate for these branches, ballpark at -- is it like 18 months, 24 months by when these branches breakeven, apportioning the cost of the branch according to the mix, the EU mix of that branch?

Typically, obviously, if you look at MSME, if you look at the cost structure, it's a 2-wheeler which will cost us give us the most -- I mean, which will be the most expensive product versus SME, which is actually, because of the ticket sizes, two-wheelers is a INR 75,000 of a ticket size, whereas your MSME average ticket size is about INR 10 lakhs. So the breakeven -- I mean, we don't do -- we have -- right now, we are not -- we don't track our product level profitability. But at a branch level, we look at, at what AUM level or what level the branch breaks even or makes a profit.

And just last question, again, regarding, I think, earlier it was asked about rating. If I look at the overall balance sheet, I mean on the asset side, it's largely secured and well diversified. On the liability side, probably you have one of the most diversified liability profile. On the asset quality front, you have the strongest ECL covered, even at an aggregate 6.2% or even at Stage 1 of 3.3%. Capital position is strong at 20%. Now what is left to be done for a rating upgrade? Anything that the rating agencies are talking about? Or what has been the dialogue with the rating agencies?

Whatever the rating agencies' expectation as a right to put it, everything we have met and a macroeconomic situation also is reasonably stable. I think, they wanted to wait for one full financial year, which we completed in this year, March. And we expect any time in this financial year that they'll come back to us if at all who are looking at any other data points. Right now, they are quite happy with whatever the progress we have made, including the progress made in the, what to call, integration of merger. So I don't really see anything that is further pending or expected from us. But still, they would like to have their own, what to call, they have their own committee and their own expectation and they may be looking for a better macro and micro environment for announcement.

And how big is having a parent or having a, let's say, corporate structure as a shareholder, how big is that as a factor? Does that come in the discussion often when you discuss this with the rating agency?

Directly, no. Directly, they don't discuss on that. But if you look at the pattern of their, what to call, rating, they have been giving the favor to the corporates, especially with a parent age, having a good brand, a good name, a big large corporate, that is what we observe, but it is not in the discussion.

Next question is from the line of Rajiv Mehta from Yes Securities.

Many congratulations on very strong set of numbers. I have a few questions. Firstly, are we seeing used vehicle prices, both used CVs and use PCVs somewhat plateauing out?

Right now, we don't see. In fact, we are we -- we have initiated something called Shriram Mobility Bulletin, where we are trying to track the prices, and that is available on the old website and media. So you can look at it. But still, what we feel is that used vehicle prices have been reasonably strong year-on-year. The growth looks to be around double digits, around 10% to 12%. And we don't really see it is flattening. So, as long as it is more than the inflation, that means the prices are increasing. That's how we look at it. But yes, it is not as strong as the previous year, where we saw a 20%, 25% increase in the resale prices.

Correct. And this momentum in used passenger vehicle financing, which has been very strong over the past many quarters, I mean which segments, which products are driving this momentum, anything from a strategy perspective, which has changed in terms of distribution tie-ups. So what is driving this strong growth?

Basically, what has happened is, if you look at the pattern, the state undertaking investment in the public transportation has come down over the last 5, 6 years. And that is creating a gap in the semi-urban and rural transportation, especially in the semi-urban to urban that where state undertaking used to put a lot of new buses every year, and that's missing. And therefore, there is a lot of scope for private transportation using it for public. That's one. And second, also, the ownership of vehicle is increasing among the semi-urban and middle income group people. And they also would like to own their own vehicle. And that is second. Third one is, we are the largest player in the 2-wheeler financing. Many of them are upgrading to 4-wheelers. And when they upgrade to 4-wheeler, typically they buy second hand 4-wheeler. So these all factors are helping us to increase. We expect this will continue to remain because this is a systematic change where public sector or the government not investing on the public transportation. And that is -- definitely, there will be a gap and vacuum. And definitely, there will be more demand for transportation, both for public use and also for private partners.

Sir, one last thing. While the model LGD is 38%, but in your recent settlements with NPA cases, is the principal recovery or is the LGD loss lesser than what is the ECL model at right now?

So typically in when, seized vehicle, look at the ECL, it will be slightly higher than the ECL, because what happens is, once the vehicle gets seized, there is also a possibility that the borrower can replace these tires and batteries. So it will be difficult to compare ECL number with the seizing.

Next question is from the line of Kunal Shah from Citigroup.

Yes. So maybe just out of curiosity, just want to understand in terms of the improvement, which has been there in BS3 and BS2, what we are hearing from the other players is the higher stress, maybe because of heatwave election disruption while our trend has been quite different. Would you attribute it to move towards lower slippages, maybe because the utilization of fleet was better, cash flows of the operators have improved or would it be more towards the recovery efforts, which is leading to this kind of an improvement?

See, I can say all three has helped. And more than everything, Kunal, recovery efforts and also less disturbance in the election. This time, election has been for the 2 months without really impacting any one of the geography at any particular point of time, even when there are state election -- state level election, it has been staged in 2 or 3 different days. So we did not see any kind of -- businesses were as usual, they never got impacted. And the recovery efforts have been improving over the period. And last 30 months, if you see, there has been continuous improvement in our asset quality. And final point, you can always see that whenever the asset price goes up, people don't want to give up the asset. So repo has come down to all players. You take into account of all the banks, all the NBFC, you will see that the repo efforts are much lower or no repo at all. So that is itself is the indication that people are wanting to retain the assets, and they would like to pay. So the repayment has been quite good. And to give credit to our team, team has also been working hard in spite of heat waves, which did not really impact us much, because the -- most of the collection efforts are completed in the first 15 days. So 1 or 2 days of heat waves doesn't really impact the collection efforts.

Okay. Okay. And secondly, in terms of -- particularly on the vehicle side as well as the MSME, what proportion of customers would be utilizing the other lending facility from our end? And would that proportion would have gone up? Are we seeing more synergies coming through customers coming and taking further loans?

No, it has been improving, but absolute numbers we may not have right now, but it has been improving, because we are able to give the total, what to call, product basket to the customers. So we are able to interact customers more and able to retain the customers who otherwise would have gone for -- imagine, two other customers going for some other products or maybe same time truck customers wanting 2-wheeler, all those customers we were able to retain. So that is the biggest positive. But in the absolute number and all, probably, we'll be able to give the numbers in the later period.

We will take our last question from the line of Sonal from Asian Market Securities.

I just had two or three questions. One is, the clarification that I wanted. So you said that you will be adding about 250 branches in MSME over next 2 years. So that is basically reaches about 30% of total branches will do in MSME. Is that correct?

Can you repeat your question, please? Your voice was totally dabbled.

You said you will be adding 250 branches on MSME?

Next 2 years yes, about no -- this is about 125 plus 50, about 175 branches.

So, 175 branches will be added for 2 years.

Sorry to interrupt Sonal, your voice is breaking now.

Is it better now?

Yes, please proceed.

So we will be adding the products in about 175 existing branches. They are not greenfield branches. These are branches which are already there for quite some time, and they're selling other products.

Yes, sir, I understand. So basically, we will be reaching about 900 branches in 2 years' time. Is that correct?

Yes, that's right. That's right.

Similar number in gold loans, if you could give how many branches are we doing at the moment? And what would the branch count, say, at the end of 2 years -- next 2 years?

Gold loans, we already have in about close to 600 plus -- 1,500 branches. So we should be adding another 500 branches in the next 2 years.

Okay. Sir, one more question was on ECL provisions. So we are carrying 6.2%, 6.3% kind of a number. So are we carrying any macro provisions or overlay provisions in this number 6.2%?

Yes, it includes everything.

So would you be able to quantify that number?

No, see, these model runs in such a way that everything is factored and we don't have any -- the bifurcation on the same. It's factored.

Okay. And any guidance, I mean, do you want to maintain it at 6% or if there is a scope to take it down further, I mean, to take it down to certain extent to take it down?

No, no. It is primarily based on the model that we run. So -- and it's dependent on the product mix also. So it can vary by a couple of basis points.

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

Thank you all for joining the call. The first quarter was really good for us, and we expect with a good monsoon being there, the second quarter and second half would be much better. Once again, thank you. Meet you again.

Thank you. On behalf of Shriram Finance Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.