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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Shriram Transport Finance Q2 FY 2022, 2023 Earnings Conference Call.
[Operator Instructions]
Please note that this conference is being recorded. I now hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director. Thank you, and over to you, sir.
Yes. Thank you. Good morning, friends from India and Asia. A warm welcome to all of you who joined this call. Good evening to those who joined the call from Western part of the word. Today, we have our Joint Managing Directors, Mr. Sudarshan, Mr. Sridharan, Mr. Nilesh, Mr. Sunder and Mr. Parag, along with me, and Mr. Sanjay, who is our IR head. In the first quarter of this financial year, the Indian economy grew by 15.5%, the fastest in the last 4 quarters, on account of a better performance by agri and services sector. The official data show India remained fastest growing major economy in April to June quarter. However, it fell short of the expected 16.2% increase anticipated.
The IMF in their latest World Economy Outlook Report cut its forecast for India, India's gross GDP growth in financial year '22, '23 by 60 basis points to 6.8%, warming up a long and tough economic winter. India's headline inflation rate as measured by CPI rose to 5-month high of 7.41% in the month of September from 7% in August.
This is the ninth consecutive time CPI print has come above RBI's upper margin. The stubborn inflation is definitely having some adverse effect on consumption. And there are some indication of economy slowing down.
However, I attribute this to unexpected rains or unscheduled rainfalls that got delayed in the month of June, July, and there was a late rains in certain pockets that disturbed every moment and that would have led to a food-related inflation. However, the wholesale inflation eased to 10.7% in September as against 12.41% in the month of August. [indiscernible] in September was 11.8%. Despite easing wholesale inflation data, the [indiscernible] continues to remain double digit for 18th consecutive month beginning from April 2021. The RBI in its monetary policy on September 30, '22, has hiked the repo rate by 50 bps to 5.9% for straight increase in current cycle.
To tame sustained above-target retail inflation rate, the RBI now hiked rates by total of 190 basis points since its first unscheduled median hike in May. The economic growth projection for '23 cut to 7% from 7.2% estimated in August, and GDP is expected to grow 6.3% in September quarter, 4.6% in December and March quarters.
The inflation projection retained at 6.7% for ongoing fiscal year and inflation to remain above the tolerance limit of 6% of RBI. The GST collection seems to be doing well. India's tax collection from sales of GST was INR 1.47 trillion in September as against INR 1.43 trillion collected in August.
On account of rising demand, higher rates and greater tax compliance, this is the second highest collection next to April '22 collection of INR 1.67 trillion. The goods under this GST collection remained above $1.4 trillion for 7 straight months during this month and continuing to display very high [indiscernible] .
This augurs well for government spend on infrastructure. Government has announced national logistics policy, aiming to achieve quick last mile delivery to end transport-related challenges. The policy focuses on key areas such as process reengineering, digitization, multimodal transport.
It is a crucial move as high logistics cost impact competitiveness of domestic goods in the international market. Along with PM GatiShakti, which is a national master plan for multi-model connectivity and part of NIP of spent of USD 1.35 trillion target. With the vision to develop technologically enabled integrated cost-efficient resilient, sustainable, trusted logistic ecosystem in the country for accelerated and inclusive growth.
This is highly positive for the transportation and logistics industry and to our business. The monsoon has -- as I was telling you in the beginning, there was a disturbed monsoon in the northern part, especially in the UP, Bihar and MP. But overall, the acreage was a little lesser than the last year by 5%.
Apart from paddy, there is a slight difference in sowing of pulses, oil seeds and jute. So overall, the drop is very insignificant. However, the late rains and the reservoirs being full, augurs well for bumper crops in rabi, which is always a much bigger crop across India. And rabi has been bumper year-on-year for last 4 years, augurs well for rural and [indiscernible] economy.
Coming to the auto industry, the commercial retail sales has increased by 39.48% to 2,031,880 units in Q2 as against 1,066,251 units in Q2. And compared to the previous quarter, our earnings were 3.37% increase. The heavy and medium commercial vehicle showed a maximum growth with [indiscernible] with 79,650 unit sales against 53,481 units. A significant portion of this heavy commercial vehicles are the dumper and tippers, which the demand is coming from the infrastructure industry.
[indiscernible] numbers also showed a good growth of 35% to 1,052,230 units compared to only 1,012,770 units sold in Q2 last year. Tractors rates have been almost on par with last year's half year number with 3,019,642 number against 3,015,250 numbers, a marginal increase.
The earthing and construction equipment showed significant growth again for the first half of this year with the 42,550 units being sold against 32,398 units. Coming to the company's performance. The collections were consistently good.
The average collection of September quarter were 100.13% of the total demand as against 99.03% of corresponding quarter last year and 101.45% in the Q1 of the previous year. We clocked a disbursement growth of 19.51% to INR 17,769 crores against INR 14,868 crores in the same period of previous year as against INR 16,670 crores in the Q1 of this year.
The used vehicle disbursement increased by 15.27% to INR 16,502 crores, as against INR 14,317 crores in the same period of previous year, as against INR 15,754 crores. The vehicle disbursement has improved significantly. It is down by 106% to INR 1,028 crores as against INR 493 crores in the same period previous year and as against INR 784 crores in the Q1 of this financial year.
Overall, the AUM, asset under management, grew by 11.18% in line with the guidance of 12% to INR 165,249 crores compared to INR 121,646 crores in the previous year and increased by 3.49% against the previous quarter of INR 113, 688 crores.
The net interest income increased by 22.85% to INR 2,693.96 crores against INR 2,192.82 crores in the same period previous year. And marginal increase of INR 2,641.74 crores against the previous quarter. The net interest margin improved to 6.98% against 6.44% in the same period previous year and 6.91% of the previous quarter.
The PAT increased by 38.33% to INR 1,066.87 crores in Q2 compared to INR 771.24 crores in the Q2 of previous year and against INR 965.27 crores in the previous quarter. The EPS stood at 39.44% against 28.71% in the quarter -- this quarter. The gross Stage 3 declined by 7 basis points to 6.93% against 7.82% in the previous year and 7% in the previous quarter.
The Net Stage 3 stood at 3.48% compared to 4.18% in the Q2 previous year and 3.52% in the Q1 this year. The credit cost of the current quarter stood at 1.67% against the 2.68% of full year. The cost-to-income ratio marginally increased to 31.12% in this quarter against 20.73% recorded in the same period of previous year.
The update on the merger. We have been received approval from all the regulators like NSE, BSE and RBI, then NCLAT had conducted the coming, the shareholders and secured creditors, unsecured creditors meeting, the IRDAI, CCA. The final order of the NCLAT was heard on 19th of this month, October. And we expect the order in a week's time.
The growth outlook remained at the original guidance, 15%, for the combined entity. Now, I request our CFO, Mr. Parag Sharma to take over the call and give details on liability side.
Yes, hello, everyone. The fund mobilization for Q4 was good. Liquidity continues to be good across banks and that has been the focus area for fundraising. Some fundraising increase has been there from the capital market in the form of bonds also.
Overall, for Q2, we have mobilized INR 17,000 crores in the gross mobilization. Total debt outstanding as of September is INR 125,586 crores. The cost being marginally up compared to Q1 by 10 basis point. But if you look at year-on-year basis, that is down by 16 basis points. Liquidity continues -- on balance sheet liquidity also continues to be strong. And we have liquidity of close to around INR 20,700 crores.
Liabilities for next 3 months is only INR 13,000 crores. So there will be sufficient cushion for managing our liability of the next 6 months also. When it comes to ALM, each bucket, as in the past, continues to be positive, cumulative automatically is positive. Leverage ratio is at around 4.51% with excess liquidity being utilized. Leverage ratio [indiscernible] dropped below 4.5%.
HQLA is at 188% versus 191% in the previous quarter. We did announce a buyback of our offshore bonds in August, and we did buy back close to around USD 256 million of bonds, which were maturing in 2025 and some part in October '22, which was a maturity for a short period. So that was bought back.
And currently, we have announced buyback of our July '23 bond with a cap of USD 250 million. While that process is on, we will take another few days to realize how much interest is there. Incremental cost of borrowing is definitely up by around 50 to 70 basis points. So we do expect the overall cost of liabilities to go up in next quarter. And nothing -- we have increased our FD rates also in the shorter duration by around 25 basis points in the 3- to 5-year bracket by 5 basis points. So now I'll move on to Mr. S. Sunder's side.
Thank you, Parag. Hi everyone. The employee count has increased in the current quarter by 1056 employees as against 25,720 employees in June quarter, we are currently having 26,776 employees as on 30 September. Cost to income have marginally increased in the current quarter to 21.12.
That is primarily due to a onetime hit of INR 65 crores because of the settlement of certain [indiscernible] in which the company had offered for the unlisted schemes. And in the onetime resecuring which RBI had permitted last year, the outstanding as on 30th September was INR 683 crores.
Here, I'd just like to mention that investor deck that we had circulated yesterday, it was wrongly mentioned as INR 6830 crores, it's not millions. And the coverage ratio was 51.57% as against 51.62% and Stage 3 improved to 83.29% against [82.49%] in the previous quarter. And Stage 2 was 9.78% as against 10.51% in the previous quarter.
We maintained a coverage ratio of 3.29% as against 3.21% in these -- for Stage 2 assets and coverage ratio of 8.84% as against 9.18% in the Stage 2 assets. The PD was 7.35% as against the previous quarter of 7.34% in the Stage 1 and 21.62% as against 21.75% in Stage 2. And the LGD was 44.75% against 43.76%.
And the capital adequacy was strong at 22.48%. And Tier 1 was 20.59% and Tier 2 was 1.89%, and we continued to have the COVID-related overlay of [indiscernible] crores as against close to crores in the previous quarter. That's it from me. I would like to open the floor for the questions. Thanks.
[Operator Instructions]
The first question is from the line of Rikin Shah from Credit Suisse.
I have 4 questions. First one was on the new digital disbursement and the AUM growth. So the new vehicle AUM has grown after 1, 3 quarters. So just wanted to get a sense on the outlook from here for the new vehicle. Second one was relating to the margins. Have you taken any rate hikes on the loans for any products and what would be the quantum of the same? And on the liability side, could you please recap the total bond buyback that you take in 2Q and are looking to do in the 3Q?
And thirdly, on the OpEx, I think you did mention that there was certain one-off of INR 65 crores. Could you please elaborate on that and whether do we see that repeating in the coming quarters?
And lastly, revenue flows pertaining to Shriram Group looking to lead the consortium in buying the IDI banks stake. So just wanted to get a sense on the rationale of the same and the strategy out there.
Yes, thank you, Rikin. In new vehicles, if you see quarter-on-quarter, our lending is going up. because our customers, typically, what we do is we lend to our existing customers who are already used vehicle. When they want to wish to upgrade, then we fund it. We don't have a direct arrangement with any OEM or a dealer point for lending to the new vehicle business directly to new customers. So as the economy progresses, when our customer has to buy new vehicle, then we upgrade himself. So to the extent, we are increasing the new vehicle portion.
So last quarter, we did around INR 1,000 crores, and we expect that to grow. It will not have a significant increase on the overall AUM immediately because since we have not done new let lending for the last 2 years much. So the AUM is actually coming down and with new lending, it may get stabilized and then move up. So overall, proportionate may not make any difference between new and used.
So margin-wise, we are -- whatever the net interest margin of around 7% target. We may be plus or minus 10 basis points on the same, and we should be able to maintain that.
On the OpEx, that's the capped...
One thing settlement that we had done for the sales tax sites, it's a onetime thing. It was -- all these cases are putting to -- prior to [indiscernible], which we were litigating. And now just since the amnesties [indiscernible] certain state governments. We had offered for it and went in for a settlement, and we don't expect any onetime hit on this contact list for the next -- any future quarters. And coming to the...
As I mentioned, we did in August, $256 million, which was [indiscernible] and hence 2025 bonds which are maturing. This largely to do with carrying excess liquidity and also the ongoing of the hedges, what we have for the long-term bonds are there in money or not usually negative. The [indiscernible] can go in for [indiscernible].
What we have also announced now is another 250 million for the '23 maturity. So total will be around 500 million what we look to buy back. And we don't have any plans to buyback.
Yes. On the bank part of it, we don't [indiscernible] because as a company usually we don't discuss with anyone or not shown any interest in looking at any -- what's called buying or a merger of a bank. So we don't have any plan on that direction.
Got it. And just a clarification on the yield side, have you taken any price increases on any of your vehicle products and the quantum you see there?
Yes. On the used vehicle, we have increased our lending rates because as and when the liability cost goes up, then typically, we pass it on.
On the fresh contract, on existing compact, we cannot change because these are all contractual. But the new lending, we increase by around 25 to 50 basis points and depending upon these segments. Normally, the smaller ticket, the lending rate increase will be much higher.
The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
I have 3 questions on the same direction. Number one, does the buying of new vehicles indicate confidence that the economy is going to be doing well? How are the freight rate utilization and freight rates itself behaving, freight utilization and rates is question one.
On the bond, sir, can you just -- what is the strategy being buy back the bonds in terms of the fact that domestic market liquidity is getting tighter. So is there some arbitrage that you have that you can utilize? That's the second question.
And the third question is on costs. Umesh mentioned about inflation. Sir, are you seeing wage cost pressures? And do you think that's going to impact cost to income later on? That's it from my side, sir.
As far as I was telling you, our customers are getting confident in the economy or the cash flow. Ultimately, they need a higher cash flow to repay the new vehicle. Vehicle costs will be approximately 2x of the used vehicle for same application because the application to application vary.
So when they buy a new vehicle, one advantage is it will be renting [indiscernible]. That's the advantage but since the acquisition cost is high, the EMI will be much bigger. So the cash flows are bigger, then they're repaid. So people delay buying new vehicles mainly because of increase in new vehicles, including part of the [indiscernible] in the last couple of years. First, because of the [indiscernible] technology upgrade. And second, because of the steel price increase. And of course, the third one was a chip shortage and the supply chain issue. This mostly to or to, but overall, the cost went up by 25% to 30%.
And because of that, many people postponed the upgradation of buying new vehicle plan. Now people are getting confident that since there is very little hiding, better [ flight ] rate, better movement of vehicle and also better recent values. They are able to dispose of their existing vehicle at a better value. All this is a positive and people will definitely move towards buying more new vehicles. And as and when our existing customers buy new vehicle, we fund it. So that we -- stand at the end. We are very confident that once they realize that cash flow will be better and they never divide vehicle. The repayment also will be equally good. Coming to the bond...
I think we entered the offshore market has been and allowed, which was around 5 years back. We are particular that we will continue to tap the offshore market for sure, to the extent RBI [indiscernible] are available. So whatever support is required if there is investor, the industries looking at opportunity to sell, we would support the market. What we largely offer was for a very short duration maturity, which was October. And we were getting access to part. We buying that part. So whoever whichever investors is keen to sell billion, give them the option.
For the long term, what we have done was largely because of [indiscernible] was raised in the current calendar year. January is the markets after that went negative. So we wanted to give comfort to the investors, and [indiscernible] huge buyback. There also is particular about that. As I mentioned [indiscernible] to be more than 3 years.
So limited option, up to 80 million is what we offered to buy back. It was only to help investors. And we are particular that as and when markets are okay, rates are conducive, we will continue to tap the offshore market. So we want to develop this market and give them support whatever is required.
On the cost front, yes, inflation will definitely push us to increase our wage bill later. We have done it in this financial year to some extent. But we'll -- we are not seeing this pressure on the overall increase in the cost. So we estimate the cost increase to 10% in our debt. And that will remain good for the rest of the year.
[Operator Instructions]
The next question is from the line of Shweta Daptardar from Elara Capital.
I have 3 questions. The first one is I understand that your collection team is completing internally. But what is the total collection into all count as a percentage of the overall number?
See, our team is 16,000 people totally out of 25,000. And there will be another 4,000 people in the supervisory level and ones level or collection manages level. So the 16,000 people, they are the field offices who in both source business and collect. We don't have a separate team for collection. And these people will build relationship with the customer and continue to collect every month. We don't outsource traction to outside. So we don't have any outsourcing arrangement for collection, a reposition. Even the reposition is done by in-house team only.
Okay. Got it, sir. So you guided for 15% growth for combined [ addition ]. Can you guide for a stand-alone [indiscernible] to transport finance.
Standalone, we had grown guidance of 12%. And the last 6 months, we have reached 11%. So we should be able to maintain that 12%.
Sure. So my last question. If I look at our liability unit, our margin grows higher, has gone higher, securitization a bit down. So we [indiscernible] I think one of the [indiscernible]
[Technical Difficulty]
I think we understood the question.
Yes, you're talking about situation transactions being down and gone borrowing being up. Okay. So securitization normally -- in Q3 and Q4, normally the demand is huge. So that is where we feel we should go beyond the last year corporate quantum of [ INR 13,000 ]. Definitely do more than what we have done in Q1 and Q2.
Bond is something which we, in fact, one market for a lesser rated entity is limited and during COVID time, it was completely close. Now it has opened up. So we -- once it that particular store should be around 20% of our liability, it was much lower. So it have now reached around 20% level and here that is what we will try to maintain it. And securitization, we'll definitely have around 15%. I say by year-end, it should be around 17%.
The next question is from the line of Nidhesh Jain from Investec.
In the current environment, how should we think about margins going forward? I think with the sequential decline in margins in Q2. How should we think about margins in coming quarters?
Margin, we're confident of maintaining it. Q-on-Q, the margins improved by 7 basis points. So around[indiscernible] basis point. Yes. So I think we should be able to maintain that.
See, we always guide a 7% plus or minus 20%. It's the guidance. So that is the target to we keep trying to achieve. There will be some movement because of the cost of the liability going up and not being able to immediately pass on to entire book because incremental only we can increase our lending rate, not to the existing book. So there will be some gap. But otherwise, we should be able to maintain around 7%.
Sure, sir. And sir, if you change the disbursement number in this quarter, both in terms of new vehicles and these [indiscernible].
Yes, yes. We have already given the numbers. I did new disbursement, INR 1,020 crores for this quarter against the previous quarter of INR 784 crores on new disbursement.
And the used?
Used is INR 16,502 crores against INR 15,754 crores in the previous quarter.
[Operator Instructions]
The next question is from the line of Vikash Agarwal from Bank of America Merrill Lynch.
Just a couple of questions from my side. One is following up on the discussion on the NIM just now. I just want to understand a bit more in detail because the impact, as you said, on the existing portfolio will probably stay longer. And plus the cost of liabilities is also increasing. I know we're also normalizing the liquidity, but this 20 bps margin is that sufficient, 20 bps, et cetera? Is that something which is sufficient in the near term to maintain the margin NIM above 6.3%? So that's my first question.
And the second question is on the bond buybacks, offshore bond buybacks you're doing. Can you also share what sort of other offshore funding you're using and what sort of the terms and borrowing cost for those fundings?
See, as far as the net interest margin is concerned, we have a headroom to improve because we have higher liquidity. and we had told in the quarter also that we would like to reduce the liquidity portion. Right now, we are carrying a 6 months of liquidity, which would like to decrease to 5 and 4 and 3 gradually. So that is where we have an opportunity to -- and improve the margins. Apart from the increase in the lending rate for the new contracts. Parag?
Yes. On the offshore borrowings. We have a combination of bonds. We have loans from banks and also loans from development institutions. A total offshore debt is close to around INR 25,000 crores now. And the landed cost depends because some of the facilities are even 10 years what we have taken from development institutions and ECA. The bonds typically are 3 to 3.5 years. So hedge costs will be accordingly different. It has been at between 9.5% to 10% is what we have done in the past. But currently, what we are borrowing or what we have taken from developing institutions is at around 9%.
9% all-in an rate costs, including the hedging?
Correct. Correct.
The next question is from the line of Nilanjan Karfa from Nomura Group.
Just go back to this offshore bond. So I understand there was excess liquidity, but what [indiscernible] Not doing buybacks on the domestic and offshore? And I heard for sort of giving things have been unseen giving comfort to investors. So which investments are we talking about? Was there some kind of a stipulation that something is not right.
No, no, no. Nothing on that certain. But largely, if you see what we have bought back in October '22 maturity only on 170-odd million what we have bought back is October. So it was only a very, very short duration. And because we are carrying liquidity for -- excess equity from [ Apple ] itself or instead of carrying that liquidity, we thought we can look at buyback.
When it comes to the [indiscernible] notify what we have bought back. And because the secondaries were trading very, very high. So we thought we should intervene in case any investors and invested, in fact, it's only for bonds, what we have bought back [indiscernible] right offshore, we really don't know because it keeps trading to ultimate their owners, we will not know.
But secondary, we were trading much wider. So we thought we should intervene and give comfort that in case and any one has got any concern, any stress, you should be able to address it. It's very limited point of what is permitted as per RBI. That is what [indiscernible] only 80 million. Not very, very significant.
When it comes to onshore, the second question, we are not trading anyway. So it there during the COVID period, but for that, everything is normalizing. So I don't feel any need, any investor is in kind of a stress to set. So there is a need. As of now, [indiscernible] in case there is a need to support, domestic bondholders also will be happy to do.
Right. Right. Okay. And just a continuation. I mean when we send your foreign bonds, for example, do we do it on an annualized basis? Or do we do it for the entirety -- entire maturity?
We report it as full maturity.
Okay. Okay. Fair enough. My second question is to mature, I mean, I know that we don't have a sort of an outsourced reposition. But if you can talk about, in general, how the environment is standing out on the repossessed vehicle. And specifically, if you want to comment a bit on the China. How the business is doing.
Yes. So right now, the retail values are good. Customers would like to hold on to their vehicle, they don't like to get their vehicle repossessed. So that's the tendency. So the repositioned increases when customer vehicle values drop and customer doesn't have the tendency to hold on to their vehicle.
So rates earning effect. And it is not earning enough and very value drops. Then the customers will allow the vehicle there to get repossessed or maybe we are posed to report this because customer is not paying right.
And currently, the repositioning is the minimum. I don't think there is any pressure for any of the MBS industry or the banking industry.
On the reposition, because the reason values are good, earnings is good. So reposition has come down. In fact, even in the Automall business last 2 quarters, we have witnessed that reposition as source for their ad business activity has come down. So they are mostly doing the market business now.
So market business, anyone who wants to sell the vehicle on their home, they will come on the platform. So overall it's doing good. And the focus is more on the market business rather than the repossessed vehicle from the industry or bank.
Okay. So we -- many NBFCs sort of went into a sell post, this RBI directive on Mahindra. So you don't think something like that is impacting the platform business or internal repositions?
No, that has nothing to do with the platform business because repossession as I believe -- most of the industries, there are a couple of doing repossession under [indiscernible] without on outsourced agents because the MBS, which are there traditionally there will be a long time. But there are new industries have just come up in the last few years, without enough network and manpower. They may depend on outsourcing agents. And that is very insignificant number. So I don't think that will make any change.
Okay. Okay. Okay. That's very clear. And just finally, a small clarification. I mean, the point was also [indiscernible]. The improvement in the new vehicles, is there something that came towards the quarter end? I mean just because of the change in customer season, is that what has led to this improvement on Y-o-Y basis?
See, yes, festival definitely will -- there is opportunity for customers to buy new vehicles. But September end, normally, month of September, there will be more new vehicle sales during this Ganesha festival. Then still, [indiscernible], the move will be updated and positive for the people to buy new vehicles. That is a normal trend.
But as what I'm seeing is the viability of new vehicle operation has improved significantly in spite of increase in the vehicle value for even the individual operator. And for smaller vehicle, the e-commerce activity and the Tier 2, Tier 3 business as the agricultural activity, everything is positive.
So people are now buying more new vehicle. And the numbers are visible across the country. We have 38% increase on year-on-year is significant increase in unit [indiscernible].
Surely, sir. Surely. So therefore, the 15% guidance you are quite comparable, right?
We are comfortable with the 15% guidance for combined entity.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services.
Sir, I had 2 or 3 questions. First of all, was in the merger while none that you're comfortable with 15% kind of guidance on the merged entity. If you could just help us understand that given that the final [indiscernible] happened and given that order is expected in each time, what is the operational readiness in terms of working as one combined entity given that you've been running for a few pilots across many of your branches?
And secondly, sir, on the merger. Just what you can understand how will share the [indiscernible]? What I'm trying to understand is, will there be a period where there will be more trading in the stocks of Shriram and [indiscernible] or will it be a scenario where there will be more disruption on the trading activity? And Shriram City and Shriram shareholders will be issued shares of Shriram Transport, which will eventually kind of get the [indiscernible] Shriram units? So that was my first question on the merger.
Yes, as far as the merger is concerned, what we have done is geographically, we have put geographical [indiscernible], grant managing directors as the unit head and they are running both business, Shriram customer and Shriram [indiscernible] and even though the respective company keep doing the business, the leadership is in place. And then we had pilots. We had pilots only to understand the challenges of process of each other products because the knowledge to be passed on to the staff training them, reskilling them and all those things we have done in the pilot 1. Pilot 1 was done in the -- around 50 branches. Then we scale it up to 200 branches across both the companies. So the Pilot 1 and Pilot 2 completed. Now the post merger, it will be for the entire -- all the brands, all the matters.
So the high ticket lending or high-ticket business like SME and heavy commission vehicle, that is something which we'll be doing more centrally. But all other smaller tickets like [indiscernible] and the L3 and factors, all those things, we should be able to do in all the branches. That's how it has been planned.
So the merger will be seamless, and we should be able to scale up the business and achieve the target, which has been already guided.
As far as the [indiscernible] not trading period. There will be no rating for a [indiscernible] but not for HDFC. That will be maybe 10 to 15 days, depending upon the regulatory requirement and SFC shares will be -- continues to be traded because HDFC will be a surviving company. And that will be redeemed as [indiscernible], post the completion of ROC formalities.
Understand this is useful. And sir, the last question was around -- I have 2 questions. One is in this new guidance that you gave of 7% plus/minus 20 basis points. That kind of stands despite, I mean, the rising rate environment, right?
Yes, yes. I mean I have given a rationale also that we have a higher liquidity, which we can manage around 7%.
Understood, sir. And sir, lastly, on this reposition band, which was recently had by the RBI, where you have clarified that Shriram transport has no indent third-party agencies for collections and new positions. Just wanted to understand, as an industry, has RBI engaged with you in the past or after this recent event and advice-ed to improve, I mean, some of the repositioning processes. I wanted to understand if the regulator is a little bit concerned with the industry as a whole when it comes to repositioning processes or was it an isolated incident for a particular vehicle financial.
See, basically, in the past also on the collection part of it and the harassment of the borrower is part of it. RBI did had interaction with us. But this incident is isolated one. It has nothing to do with the initial discussion we had with the RBI. RBI wants us to have a board standards on engaging outsourcing team and matters of either reposition or collection to be properly guided and the proper of [indiscernible] being there and trading to be given even if we did outsource. All those things are there. There is more of a discussion.
And we also had, as IDC, we had come out with broad guidelines on reposition and to cause the release long back. Once again, after this particular incident, it is isolated and unfortunate incident.
Once again, we have given our broad outlook and broad guidelines on the same. And that is shared with the RBI and also seeking the apartment is RBI to further improve if necessary on the same.
So as an industry body, we are working on the same, but there will be always some kind of some incident, which can go out of control.
The next question is from the line of Ms. Nischint Chawathe from Kotak Securities.
A couple of points. What is the target gross stage to come down in single digits? So where do you think this kind of goes in a certain [indiscernible] or what was the level in [indiscernible] it can go to?
Stage 2 would remain rain bound in between 10% to 12%. And I think we have significantly improved over the last 3 to 4 years. Once we have moved to the 90 days, right, from that day, it has been a continuous effort to bring it down because when we moved from 180 days to 90 days, it was a gradual improvement. Customer had a little bigger time for managing this NPA. And we have been educating the customers.
So over the period, we have brought it down. And we should remain at this level. I don't think it will significantly improve since most of our lending is assets backed. We did not really get disturbed with this, and we are feeling that this is a good comfortable range.
What is the current IRR range, the interest rate range that you are charging for used vehicles and? [indiscernible]?
Used?
[indiscernible] commercial vehicle. What [indiscernible]...
It ranges between [indiscernible] 14 to 18. It all depends upon the vintage of the vehicle and also ticket price. So the simple and triple, higher the vintage and lower the ticket size, higher the rate.
So I mean, just a broad range for used versus new on how much would be the weighted average [indiscernible]?
Weighted average differentiation between new and used will be around 300 basis points.
Sure. And just the last one is on the possible dues on the liability side after the merger. Currently, now we are kind of very close to the merger, and I guess you are valued to the consolidated borrowing position. So what could be the juice left out there? Probably borrowing, keeping some of the high-cost borrowings on a consolidated level and probably accessing [indiscernible] ones or once or maybe kind of just as more expenses [indiscernible] for one or probably looking at a consolidated liquidity position. So then roughly some assessment on your side in terms of what you would have done and what could be the benefit.
See, this is a continuous work, and I think Parag will [indiscernible]...
Yes. In fact, if you look at [indiscernible] you would have been looking at it very regularly. So it is more skewed towards fixed deposits, retail deposits and bank borrowing. There is not much of bonds offshore and even not there. But look at net total borrowing, what they have from banks, I don't think that adds very significantly to the overall bank borrowing. So we continue -- around 20%, 21% of our liability, post-merger.
And looking at whether we can reduce cost, I don't think we will pause that, and we will only look at the borrowing fresh from the same bank at a lower rate. We will not be going for immediately [indiscernible]. It comes to the overall liquidity, what will maintain, I think policy will remain the same 3 months of liability repayment to be in half cash. For the merged entity also is what we will look at.
We did mention that around INR 11,000 to INR 12,000 crores is what is required for Shriram Transport, if we actually run security and liabilities also. It should be around INR 14,000 to INR 15,000 crores of overall equity to be maintained. That is what we will do, post-merger.
And if I have to look at [indiscernible] from the same bank, is there a differential between what you are able to borrow and what they borrowed?
Yes, definitely. There is essential. One, there's a rating difference itself. Banks also have been pricing it differently. Capital market automatically grows by rating and the public movement, but banks also, there are definition.
Then that's something that you kind of get negotiated immediately?
Correct. So immediately, I don't think banks will immediately reduce the rent. But whatever price we borrow from the bank will definitely be at a much lower level.
The next question is from the line of Ajit Kumar from Goldman Sachs.
So first, on the OpEx side, despite increasing employee count by more than 1,000 in this quarter, why is employees expenses down sequentially? And how do you look at employee and grant addition going forward as the assessment picks up and impact on the cost to income ratio side. That is one.
You wanted [indiscernible] going down?
[indiscernible]
Okay. See, in the first quarter, we typically see the annual incentives for certain grade of people. And hence, it was on the higher rate. And current quarter, it was not there, and hence, it was lower compared to the previous quarter.
And as far as the employee count, see, we have not recruited more people in the last 2 years during the COVID years. Our recruitment drive had come down. And actually, our employee count also has come down. From around 27,000 employees, it has come down to less than 25,000 in the last 2, 2.5 years because we did not do fresh recruitment, which we started doing in the last 6 months. So therefore, the number of count is going up.
And for our business, as we increase the volume, we do need to add more number of people.
As far as the brand is concerned, we have not opened any branches in the last quarter. We did not add any branch.
Going forward, post-merger, then we will look at this scope and opportunity to open more brands or using the existing network of combined entity. So that we need to really work on. We have already have a blueprint on the state, but we'll execute it over the period.
Okay. Okay. And second, coming back again on the liability side, what could be the mix going forward? Or in other words, on which funding instruments you will focus more on? And how much increase in cost of fund do you expect in the next 12 months or so?
The funding mix, whatever is the for Shriram Transport is equally distributed between deposit, offshore, bond, securitization. [ 20% ] each is what the we will look at for the merged entity also.
Borrowing costs as of now for the next quarter, I can definitely say it will go up around anywhere between 8 to 10 basis points.
Going forward, depends upon how much further rate increase is there. So that kind of increase will be there. The banks have increased rate in line with or the capital market rates also has gone up in line with the report rate increase. So we'll only look at the policy rate hikes and then factor in what will be the cost side for us in line with whatever revenue in the market. But 3 to 10 basis points is what I can tell about the next quarter.
The next question is from the line of Chandra from Fidelity Investments.
In the last quarter, we used INR 200 crores of our buffer provisions. We used about INR 100 crores of our buffer provisions in this quarter towards write-offs. We still have INR 1,700 crores of buffer provisions. And my understanding is that the contracts for which we have made these provisions should be maturing before the year-end given the tenure of your books. So how are you thinking on what would eventually happen given sequentially the utilization also has come off.
See, these homes will get matured over the next 2 years because typically average contract would be 4 years. And over the 2 years, we will get adjusted. So we have now last 2 quarters, you have seen that trend, and we have INR 1,700 crores. So we expect maybe another [indiscernible] growth by this year-end than maybe the rest will be next financial year.
Sorry my understanding was some of this is created because of the moratorium interest period. And my understanding earlier, I think I have always said that contracts would be shared by the end of FY '23 [indiscernible]. So we would -- you will take a decision on writing back after them. It seems that you have a different thought process now?
No.
These all these contracts. There are pre-COVID [indiscernible] March 2020. And for all these customers, maximum customer, we had extended the moratorium up by the government. And these cases typically will have a share of 3 to 4 years. And the majority of the cases will come to end by the end of this financial year and something will be filled over the excellent year. That's what he was trying to indicate.
Understood. Do you -- so you don't really expect any write-back from all from these?
Write-back is very difficult because in our -- the segment of customers that we cater to, the company for some waivers on the end of the contract. And these 6 months would be COVID period, they had all been impacted, and we had up that thing and had greater disposition. And we believe that it will go out as a lever and not much should come package back into books.
Sure. Then just a couple of questions as there is a standout, if I'm not mistaken INR 200 crores to INR 520 crores. I would presume that in this quarter, we should see that impact in the P&L number.
And second is that when the merger was announced, there was about INR 68 crores of employee cost rationalization, which had to be done across 2 sort of equalized wages. I would presume provisions for that also will be taken in the third quarter?
[indiscernible] We had initially anticipated that maximum amount that was prevailing in terminal loan was around [ INR 200 crores ], but I think there has been some relaxation as far that is. And the amount no will be much lower than that. And coming to the cost raising, we are still working on it and it will take the next 2 to 3 quarters for that to really impact, but we don't expect that to come in the next quarter immediately.
The next question is from the line of Ankur Jain from Access Capital.
Sir, in this quarter, the credit costs have come off as compared to Q1. So just wanted to know your outlook for FY '23. How are you looking at credit cost? I believe there would be a declining trend, but just wanted to know your thoughts on that.
Yes, we have given a guidance of 2% as the credit cost for the full year. We should be close to that.
Right, sir. And in terms of excess liquidity, what is excess liquidity currently on the balance sheet?
Around [ INR 5,000 crores ] is what we have said with 1 large maturity that [indiscernible] we should be able to utilize that. So around [ INR 500 crore to INR 6,000 crores ] is what is their excess.
There is a follow-up question from the line of Rikin Shah from Crédit Suisse. The next question is from the line of KC [indiscernible], an individual Investor.
I'm a shareholder as such you can expect my question easily. My question is to Mr. Umesh. Last year, in the September quarter meeting, we have declared an interim dividend of 80%. This time, there's no structure declaration. Why is that?
Yes, we will plan something in next 2 quarters. This quarter, we have -- because of the merger, we thought it is better prudent to do it post the merger from the -- what to call Shriram finance, that is the plan.
That means we can expect any dividend only after the merger is complete, is that?
Merger is completed in this month, this November month. So next quarter in the next -- next 2 quarters.
Ladies and gentlemen, as that was the last question for today. I would now like to hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director for closing comments.
Thank you. Thank you all for joining this call. Let me first wish you a Happy Diwali and let's have this festival as a revival of Indian economy and being a leading economy in the world by growing the fastest. And that should [indiscernible] well for us, and I expect the next couple of quarters to be a much better quarter than this quarter as demand collection and customer business, everything is looking very sound and good. Thank you. Hope to see you all in the next quarter call. Thank you.
Thank you. On behalf of Shriram Transport Finance, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.