© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good morning, and welcome to Shriram Finance Limited Q3 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited for his opening remarks. Thank you, and over to you, sir.
Yes. Thank you. Good morning friends from India and Asia, and warm welcome to everyone. Good evening to those who joined from the Western part of the world. This is the first earnings call for the merged entity of Shriram Finance Limited. We have with me Mr. Chakravarti, the Managing Director and CEO; Joint Managing Directors: Parag, Sunder, Jilani, Sudarshan, Sridharan, Nilesh and Srinivas. And we also have Mr. Ravi Subramanian who is the MD and CEO of subsidiary, Shriram Housing Finance Limited and Sanjay Kumar -- Sanjay Mundra, who is our IR Head.
First, let me go through the merger update. After nearly 1 year of the announcement of merger around 13th December '21, we announced the merger. As per the planned timeline, what we have given 1 year, we could complete the total merger process. On 5th of December, we officially announced our merger. In fact, we had received letter order from NCLT on 9th, but for us to complete the other formalities and announce, it took some time. For the shares -- for security trading, it started from December 28 after necessary formalities with exchanges.
Meanwhile, we had prepared ourselves well with -- from April itself, in the beginning of the financial year, we had planned the integration and we had put 5 joint managing directors in respective geographies to manage the business as a combined entity. And that preparation has helped us well in running a few pilots for the various products.
Today, out of 2,900 branches, I can say that around 85% of the branches, we have at least run 1 additional product. Depending upon the geography, depending upon the local needs we have been trying to push the one additional product of each other companies, and that has been successfully done.
As far as the larger ticket lending on a commercial vehicle and SME, we are taking a little more time because this needs to be done on more concentrated and better supervised way and underwriting part of it is done centrally in some of this location. So we need -- we will be taking a little more time in closing out large ticket products across India over the next 1 year.
Meanwhile, Indian economy is growing well. And last quarter, it recorded a 6.3% GDP growth. Overall, the first half, it is 9.7%. And as per the estimate, it is likely to be around 6.9%. As today, the government economic survey has indicated that it will be around 7% for this year and maybe 6.6% going forward for next year. That itself is -- will make India the growth engine of the world, India will be growing the fastest among all the countries.
The inflation worry was there for some time, nearly 6 months now, mainly because of various commodity prices going up, fuel price going up and also the geopolitical tension. But now in India, the inflation numbers have come down significantly. December numbers, they're at 5.72%, which is below the 6% upper limit of RBI. And also, WPI has come down to 4.95%. And last December, it was put in 14.27%. So there is a substantial improvement in the WPI numbers. So it should help us in moderating our reliability cost.
The RBI monetary policy -- also MPC had hiked the repo rate by 35 basis points. And at present, it is 6.25%. And we expect maybe another rate hike, a modest rate hike or with inflation number being there, it may not increase, that is the possibility.
The GST collection is robust. In fact, yesterday -- today morning, if you have gone through, the GST collection -- generally the GST collection is INR 1.5 lakh crore. And with steady INR 1.45 lakh crore above collection for the last few months, we believe the good spend on infrastructure will continue. With the infrastructure spend continuing, our segments, especially commercial vehicle and construction-related activity will continue to grow, is what we strongly believe. The private capital is something which is not coming the way we expected, but this financial year, government seems to be confident with their yesterday's report and the government economic surveys suggest that private capital is likely to come in, in a reasonable way in this financial year.
The agri and rural economy has been doing very well. If you look at India's agri growth for the last 3 years, India is blessed with good climate, good rain for the last 3 to 4 years. And that is really helping. With the various programs of government supporting the agri income growth and also direct credit to the farmers, that also is helping. There are some numbers which suggest the government has announced that totally INR 2.16 lakh crore has been deposited directly into the bank accounts of farmer under Pradhan Mantri Fasal Bima Yojana and INR 1.24 lakh crore has been given to farmers in view of crop loss.
So this augurs well for the rural economy and to the income of the rural area. And government also has announced its plans to convert around 3.25 lakh fertilizer shops across the country as Pradhan Mantri Kisaan Samriddhi Kendras. These measures will definitely help the rural economy to be steady and consumption in the rural economy to grow.
Coming to the auto industry. Overall, commercial vehicle sales have gone up by 16.6% to 227,111 units in Q3 against INR 194,709 in Q3 '22. The heavy vehicle sales out of it is 683,088, which is 46.4% higher for the 9 months period compared to 466,760. So the heavy vehicles have been growing much faster at 33% over the previous quarter, and LCV has been growing at 8.2%. Three-wheeler is showing a robust growth of 67%. I believe it is mainly because of the expansion of e-commerce activity. E-commerce is expected to grow 18% through 2025. That means e-commerce is likely to reach to Tier 2, 3 towns including all pin codes that's available maybe that is the way the e-commerce is going to play a major role in the last mile reach and the transportation part of it.
The earthmoving and construction equipments also are growing very healthy at 26%. Tractor sales have grown by 23% of 209,918 units in Q3 versus previous year same period of 169,835 units. So two-wheeler also has been growing at 3,859,030 units at 6.3% growth for 9 months period. So which indicates that the overall -- there is buoyancy demand in the urban and rural market.
Now move to -- come to the current quarter performance, I'll hand over mic to Mr. Chakravarti, my colleague.
Thank you, and I welcome all to the first earnings call of Shriram Finance Limited for the third quarter of financial year of '23. I trust you had the opportunity to look at the investor presentation that we have put out. And as Revankar mentioned in his opening remarks, financial year '23 has been an eventful year for us because of the merger and all credit to our business and back office teams that this merger has been concluded.
I would also request you to note that the corresponding figures -- corresponding previous year figures are not comparable as the merger was effective -- the merger effective date is 1st April 2022.
On the operational metrics, we clocked a disbursement growth of INR 29,245.26 crores as against INR 22,931.70 crores in the same period of the previous year and as against INR 25,789.32 crores in Q2 financial year '23. Our efforts and the management and...
Sir, I'm sorry to interrupt. Can you please repeat your last line, sir. There is a slight static on the line.
Okay. Our assets under management stands at INR 177,498.17 crores as compared to INR 166,848.63 crores in the previous year, and increased by 13.17% as compared to INR [ 159,358.2 ] crores in quarter 2 FY '23. Net interest income stands at INR 4,427.88 crores as against INR 2,387.97 crores in the same period of previous year and as against INR 4,104.86 crores in Q2 FY '23.
Our net interest margin was 8.52% as against 6.65% in the same period of previous year and 8.26% in Q2 FY '23. Profit after tax stands at INR 1,776.97 crores in quarter 3 FY '23, compared to INR 680.62 crores in quarter 3 FY '22 and as against INR 1,555.11 crores in Q2 FY '23. Our earnings per share stood at INR 47.46 as against INR 25.26 in the quarter Q3 FY '22 and INR 41.53 in Q2 FY '23.
Gross Stage 3 declined by 2 basis points and Net Stage 3 declined by 12 basis points over Q2 FY 2023. And hence, Gross Stage 3 stood at 6.29% compared to 8.4% in Q3 FY '22 and 6.31% in Q2 FY '23. Net Stage 3 stood at 3.2% compared to 4.36% of quarter Q3 FY '22 and 3.32% in Q2 FY '23.
The credit cost for the current quarter stood at 1.75% as against 1.73% for Q2 FY '23. The cost-to-income ratio was 22.29% in this quarter as against 24.5% recorded in Q2 FY '23.
However, I would like to move on to our subsidiary, Shriram Housing Finance Limited. They registered a disbursement growth of 30.33% to INR 10,000 -- sorry, INR 1001 crore as against INR 768 crore in the same period last year and as against INR 1,049 crores in Q2 FY '23.
Shriram Housing assets under management grew by 55.84% to INR 7,178.16 crores as compared to INR 4,606.15 crores the previous year and by 9.66% as compared to INR 6,545.92 crores in Q2 FY '23.
The net interest income increased by 86.26% to INR 79.61 crores as again at INR 42.74 crores in the same period of previous year and as against INR 64.53 crores in Q2 FY '23. Profit after tax for Shriram Housing increased by 27.19% to INR 36.38 crores in Q3 FY '23 compared to INR 28.60 crores in Q3 FY '22 and as against INR 34.03 crores in Q2 FY '23.
The earnings per share stood at INR 1.12 as against INR 0.88 in the quarter Q3 FY '22. Shriram Housing's Gross Stage 3 declined by 37 basis points and Net Stage 3 declined by 29 basis points over Q2 FY 2023, and accordingly, Gross Stage 3 stood at 1.15% compared to 2.47% in the Q3 FY '22 and 1.52% in Q2 FY '23. The Net Stage 3 stood at 0.87% compared to 1.99% of quarter Q3 FY '22 and 1.16% in Q2 FY '23.
I shall now request our Whole-Time Director and CFO, Mr. Parag Sharma, to brief you on our fundraising equities and other liability-related matters. After that, our joint Managing Director, Mr. Sunder, will talk about the accounting aspects. Thank you.
Hello, everyone. On the liabilities, total liabilities as of December stood at INR 1,053,328 crores, broken up into 27% through the term loan, bank loans route, around 23% from FD with retail FD, 24% is through the domestic bond market, capital market. Securitization is close to 13% and external commercial borrowing, including the bond and loan is at around 12%. That is the break-up of liabilities. The overall cost is at around 8.77% compared to 8.71% in the previous quarter, up by around 6 basis points.
Liability mix might change with more securitization to be done in the coming quarter and also some increase in the bond offering by the company. That would be the 2 changes.
When it comes to mobilization for the quarter, we have mobilized in line with the previous quarters, close to around INR 12,200-odd crores of borrowing with the securitization being the largest contributor at INR 4,400 crores followed by retail deposit, which was INR 4,093 crores.
On the ALM front, all buckets, as in past, has been positive with cumulative surplus up to 1 year being in excess of INR 30,000 crore. Equity coverage ratio is healthy. It is at around 240%. The overall liquidity is INR 17,400-odd crores, which is for meeting our liability repayment for close to around 5 months of liabilities. The leverage ratio is down from 3.9 to 3.63 in the current quarter.
Rating agencies have reaffirmed rating of Shriram Financial Limited has AA+. All the [ score rating ] agencies, CRISIL, [indiscernible] rating have been on the rating. So we are confident that this quarter, the cost may not go up at 8.77, it should be reduced, but we don't expect the cost to go up for sure for this quarter.
With this, I hand over to Sunder for his comments.
Hi, everyone. A couple of data points. One is that the employees have -- count has increased by 3,536 numbers in the current quarter, with the closing employee count of 60,918. The cost-to-income ratio has stabilized at around 22.29% and we expect this to be the trend going forward in a [ broad back of ] 22% to 24%. And as you are aware that there was a onetime sales tax write-off, which happened in the previous quarter and hence, it was higher at 24.5% in September quarter. And most of the numbers have been already spoken by MD and CFO. And one additional data point is that the LGD for the current quarter of the combined entity is 42.39% and PD for Stage 1 is 7.17% and PD for Stage 2 is 17.4%.
And one more additional point, which I would like to clarify, is that the already reported numbers of [ STFL ] stocks in the previous 2 quarters have been restated to take into account some entries relating to the merger fair valuation accounting as per the IndAS norms. So that may be a difference of around INR 100 crores in each quarter and which if any queries are there, we'll be happy to reply to it off-line through Mr. Sanjay Mundra.
With this, I would like to hand over the call back to the moderator and request the moderator to open the lines for Q&A. Thanks.
[Operator Instructions] The first question is from the line of Shubhranshu Mishra from PhillipCapital.
Right. Just quickly, if you can give out the disbursements as per product? And sincere request if it can be part of the presentation going forward, sir. It will be slightly easier because we have so many products now. That's the only question I have.
Okay. The disbursement for the quarter is INR 29,245 crores and as against the previous Q2 number of INR 25,789 crore. And coming to the segment-wise, the commercial vehicle segment, we had done INR 11,750 crores. The passenger vehicle was INR 5,057 crore, construction equipment was INR 1,808 crores, farm equipment INR 527 crores, MSME was INR 2,870 crores, two-wheeler INR 3,230 crores, gold loans INR 2,131 crores and personal loans contributed to INR 1,842 crores and others around INR 17 crores. So this is a broad breakup of the segmentwise disbursements, and we will definitely take your suggestion and then try to incorporate the same in the future presentation.
Within CV, sir, what is used and new, sir?
It will be roughly, say, around 10% will be new and the balance will be used.
[Operator Instructions] We have the next question from the line of Nischint from Kotak Mutual Fund.
This is Nischint from Kotak Securities. Just one question to Parag. What gives you confidence that cost of borrowing will not increase next quarter? You mentioned that we are at 8.4% and it will not go up from this quarter.
Nischint, I said, it is 8.77%. Currently, whatever we are borrowing is at much lower level. We are borrowing at between 8.5% to 8.6%. So I don't expect the cost to go up. It can only come down. We did repay some of the high-cost debt in the month of October end -- towards October end. So I don't expect -- because incremental cost is lower than the all balance sheet cost as of now, that is the reason I am confident that it will not go up for this quarter.
No, but I would assume that some of the bank borrowing, as you would see...
Bank borrowing is happening, Nischint, at the rate of around 8.5% to 8.65% range only, nothing beyond that. And overall liability cost is around 8.77%. That is why I'm confident it will not go up.
No, no, I understand that, but I'm saying that some of the bank borrowings that you're currently having, let's say, if something is like at this point of time, let's say, 7.5% or 7.7%, when it -- and I believe this is 1 year before repricing. So when it comes to repricing maybe next month or 2, 3 months down the line, then it kind of probably gets repriced at a higher rate, depending on what has been the rise in MCLR in the last 12 months.
Yes. So there is nothing called annual repricing when it comes to the large borrowing which is from public sector banks, that is all MCLR-linked. And there was nothing, at around 7% level there is no borrowing. All the borrowings stood at around -- MCLR at that point of time will be around 8 to 8.25 only. So I don't expect that to be -- there will be a major change. We do expect to increase our securitization volumes. We do expect to increase our bond offerings. And even bonds what we are currently borrowing at are not at the levels which is the balance sheet cost as of now. That is why I'm confident about cost not going up.
Can you just remind last quarter, I mean, we can -- maybe let's look at stand-alone Shriram Transport, what would have been the cost of borrowing [ as of ] 8.77%?
The agreement was around 8.25 to 8.30 only.
Outstanding, if you are at 8.77 in December.
Yes, that includes Shriram City Union liabilities also. And also, whatever we have borrowed from the offshore, everything included was 8.77. But incremental what we have borrowed is between 8.25 to 8.30 range only. That is why I'm saying it will not go up.
Sure. And outstanding last quarter only for stand-alone Shriram Transport would be how much?
That was at around 8.5. 8.54 is what we reported for the September quarter.
[Operator Instructions] The next question is from the line of Mahrukh Adajania from Nuvama Wealth Management.
So what is the quantum of one-off in operating expenses?
This quarter, there was no one-off. The one-off was in the previous quarter of INR 65 crores, which was on account of write-off of the earlier litigations regarding the field stack. There was an amnesty scheme drawn by 7 state governments, and we had availed of it. And whatever was the amount payable, we had paid and written-off in the books of accounts. That amounted to INR 65 crores in the previous quarter. And that was a one-off. Current quarter, there is nothing to this.
And the merger-related expenses have, have they come in OpEX?
Yes. It's -- the expense related to merger is around INR 19 crores, and it will be deferred over a period of 5 years. And whatever is pertaining to the current quarter has already been factored and it's not significant compared to our size of the expenses.
So it will be deferred over 5 years?
Yes, correct.
Over every quarter, okay. And then just in terms of credit cost, so this is where it settled, is it? The Q3 level, is that where it settles now? Or how do we look at it going ahead?
We have been -- Yes.
The credit cost, we always have given an indication that it will be around 2%. So this current year, it is [ 1.94% ] as of -- for the 9 months period. And we should be around 2% at any point of time, which is our long-term history if you go up 10 years back and also forward-looking also we have always been indicating that it will be around 2% credit cost.
Got it. And when you expense the intangibles of INR 100 crores every month, is it tax deductible or it's not?
The intangibles we will be adjusting for impairment. And it's most likely that it will come maybe after a couple of years only, not before that. That is what is our estimation, but it's up to the independent valuer to take a call, but we'll be testing for impairment every year-end.
Okay. But whatever is written off through P&L or expense there, is that tax deductible or not?
The goodwill is not tax deductible, but the intangibles, yes, it is tax deductible.
The next question is from the line of Param Subramanian from Macquarie.
So my first question was on understanding this NII that you've reported on the merge basis, so if I just do an addition of the 2Q NII of Shriram Transport and Shriram City Union and compare with what you have reported for pro forma, there's a gap of -- or an incremental addition of about INR 180 crore. So could you explain what exactly is giving this delta.
We have been telling you in the opening remarks that as per the accounting standard, on merger, we have done some fair valuation of the liabilities, the loans that we have borrowed as well as loans that we have given. And roughly around INR 1,000 crores is the fair value that we have taken at the time of -- in the opening balance sheet. And the benefit will come over a period of 3 years; maximum will come in the current year. That's what we were indicating that it will be around INR 100 crores per quarter will be the [ the addition ] to the NII in the next couple of quarters, 3, 4 quarters, at least. Then it will...
INR 100 crore per quarter for the next 3, 4 quarters?
Correct. Correct. Yes.
You said it is a hit to the balance sheet, so how is it giving you credit on the P&L?
No, it is a credit to P&L and opening balance, we have taken a hit. [indiscernible] the results.
Okay, sir. And what is the corresponding impact on net worth? Because even if I do a net worth comparison even adjusting for goodwill, is it also adding to our net worth, this...
See, the net worth, if you see the STFL standalone curve, as on 31st March and add your current 9 months profit minus dividend what we already paid, and there will be difference of around INR 2,800 crores is on account of the goodwill and intangibles that we have created, which is kept as an asset. That is the difference.
Okay. So goodwill is 1,400 and the remaining 1,400 is also...
1,300 is the goodwill and 1,500 is the intangibles. And these primarily have been bifurcated to get a benefit of tax claim at least as far as this is concerned. And it is supported by independent valuers, other spend and all those things. And the charge to P&L may happen maybe after the next couple of years, not before that.
Got it. Sir, if I can just add, so considering the [indiscernible] post merger in the P&L currently, so what is the sustainable level of ROA and ROE. This time, you are reporting 3.4% ROA, but what is on a sustainable basis, what do you think there should be numbers there?
ROA 3% on a long-term basis, and ROE will be anywhere between 16% to 18%, depending upon the environment.
The next question is from the line of Umang Shah from Kotak Mahindra AMC.
Congratulations on a good quarter and the merger. Sir, a couple of questions. One is on the merger-related expenses, just wanted to reconfirm the expenses which you mentioned were just about INR 19-odd crores, is it?
Yes, INR 19 crores.
Okay. And if I recall correctly, initially when the merger was announced, we were anticipating some merger-related costs to the tune of about anywhere between INR 200 crores to INR 300-odd crores. Does that still stand or has that number got on revised downwards?
When we announced the merger at that time, there was likelihood of an amendment in the Stamp Duty Act in Tamil Nadu. And foreseeing that we had indicated that it will be around 200 crores to INR 300 crores. However, as on date, the amendment has not taken place. And since our merger is already in place, so there's unlikely that there will be a retrospective impact on the same. And hence, the management is confident that no further expenses on account of stamp duty is applicable to the company.
Okay. Understood. Fair point. Sir, the other question was on the growth outlook. And ideally, how should we now look at our AUM mix shaping up progressively maybe a year or 2 years out from here. Should we assume that the share of vehicle finance business gradually just keeps coming off in the overall mix? Or how should we look at it? And what's broadly the growth outlook over the next 12 to 18 months?
See, the overall AUM growth, which we had earlier indicated of 15% CAGR growth should continue is what we feel very confidently because Indian economy is growing. And with this growth, 15% CAGR growth is a possibility. We are leaders in commercial vehicle and two-wheeler. So our leadership will continue to remain. We are trying to reach out for SME business in the geographies which we have not been servicing till now. Earlier, the SME lending was focused mostly in the South and Western part, Rest of India, even though there is enough growth opportunity in the SME business, especially large states like UP, MP, Rajasthan and Punjab, Haryana, we have not been doing much. So with that network being available today across and having the experience and the expertise of both customers and the expertise of doing SME business in the Southern part, Southern and Western part, we would be expanding it.
There is not be a significant shift in overall ratios, but the slowly and steadily, SME growth will be much faster than the three- and two-wheeler is what we see. So it's not [indiscernible] immediately in 2 years, but over the 10 years, you can expect because SME industry is so large and ability to reach out to these sectors and segments through the bank network is possible. So next 2 years, there may not be a big change -- marginal change. But over the 10 years, there will be a significant change.
Understood. And on the cost to income, just to reconfirm, in our opening comments, we mentioned that the steady state cost-to-income ratio should be close at about 22%, 23-odd percent. Did I hear that right? Currently, we are at about 26%, 27-odd percent?
Yes, we had earlier said 26%, but this quarter, it has been 22.45%, but in the long run, it will be 24%, 25%.
Okay. Okay. All right. And just last one. On the housing finance side, now that the merger is behind us, how should we look at it? Will that continue to operate as a wholly owned subsidiary or at some point of time, we look at some sort of a value unlocking happening via that subsidiary or a separate listing something -- any plans on that front?
No such plans. It will continue to run as a wholly owned subsidiary.
So it is not wholly owned, it is -- 85% stake is with...
Yes, yes, 85%, right.
The next question is from the line of Shweta from Elara Capital.
Congratulations on great quarter. Sir, I just have one question. What are the cross-sell opportunities you see deriving across [ trade-off with ] synergistic benefit?
Can you repeat it? I couldn't hear it.
Sir, what cross-sell opportunity across [ trade-offs for you ] that you can derive from the synergistic benefit due to merger?
Okay. See, we have the 2 businesses, if you look at, the Shriram City Union businesses, they were mostly in the south and western part. They did not have reach across the country. Now with Shriram Transport branch and the experience in these geographies being available, we would be able to take the Shriram City Union product across all the geographies. So that loan products get expanded in the both sides. Even in Shriram City Union branches, you will be able to offer CV and construction equipment on agriculture equipment lending. So we'll be expanding the loan product across all branches and all products depend upon the potential in each of the geographies. So that is the synergistic benefit. Additionally, since we have a large customer base, we would be able to cross-sell insurance and other investment products. Apart from sourcing deposits, we would be able to cross-sell insurance and other investment products. That will give us additional fee income. So that is the total synergy.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services.
Sir, again, just going back to the merger-related OpEx, merger-related expenses. I was going through the call that we had hosted at the time when we announced the merger. That point in time, our expectation was including the stamp duty cost which is not there, something around INR 350 crores. So I mean, is it that -- I mean, merger-related expenses have actually come in much lower than what we anticipated? You already said that we are not required to pay that stamp duty that we anticipated of about INR 190 crores, INR 200 crores. But other than that, I think we talked about HR integration cost of about INR 60 crores, INR 70 crores, pending an advertisement cost of about INR 70 crores. So those expenses are not really coming or I mean, they are being capitalized now and they will be expensed over the, let's say, next 2 years?
When we guided one year back, we had a high stamp duty expenses which not there now, as I had mentioned in the previous caller. When it comes to the other expenses, the INR 19 crores that we are talking about is the advisers and immediate merger-related expenses, which have been deferred over a period of 5 years. And the advertisement and other charges will be on ongoing thing, which will be debited to the P&L as and when it is incurred. And the cost of advertising, which we had guided maybe around INR 50 crores to INR 100 crores, will be happening over a period of time, and it has not already happened.
Got it. And your guidance of 24%, 25% cost-to-income ratio takes that into account?
Yes, it takes into account. Yes.
And sir, just one more question, sir. Just wanted to understand, I mean though it's one merged entity now, the branding is Shriram Finance. But wanted to understand, there are still employees who are part of either Shriram Transport or Shriram City and who are maybe people who understood the respective products hold better. So I mean, what incentives have been put in place to kind of drive this cross-selling?
See, incentive programs are -- our business model, if you look at all our field and banks team is where the variable component is quite high. So both in Shriram Transport and Shriram City Union business model, that was factored in, and that's how we have been functioning. So same thing is continuing. The incentives would be given for own product and also as cross-selling products, whether it is insurance or whether it is investment product tomorrow or whether it is a multiproduct today, the variable component will continue to play a major role in our business model.
The next question is from the line of [ Uday Pai ] from Investec.
Can you quantify the amount of interest expense sales on account of buyback done in October?
Okay. We don't have the number right now. We'll -- you can just touch this with Mr. Mundra. He will help you out offline.
The next question is from the line of Rahul Jain from Goldman Sachs.
Just 2 or 3 questions. Number one, on this cross-selling bit, can you give us an indicator sense as to how the loan book would look like a couple of years down the line? Would it be -- would the CV proportion come down over a period of time as the other products we cross-sell to other customers?
Rahul, I think I just answered it just 5, 10 minutes before, See, we are leaders in CV and two-wheelers. So there, it will not change much. Overall relation will remain. The SME focus, we will increase because SME business, which we are mostly doing in the southern part, we'll be taking to the rest of India. And scope and opportunity to grow will be faster. So we may grow there at around 20%, 25%, wherein other businesses, we may still grow at 14%, 15%. So it will not...
Understood. Okay. Got it. The other question was on goodwill. So over how many years will this goodwill need to be written off?
Goodwill will be adjusted for impairment by an independent valuer and basis that it will be provided. But the management feels that at least for the next 2 years, there will not be any impairment on this count.
Okay. Got it. Got it. The other question was on cost of funds in Shriram City Union. Would there be any benefit if there's any rating upgrade. I mean, of course, now you'll borrow in Shriram Transport, but the incremental borrowing should be a lot lower on that portfolio also, right, as you do dispersals in the Shriram City Union portfolio, how much benefit can we get out of that?
Shriram City Union was AA, and now the labilities will get repriced to AA+ level. So there should be 25-30 basis point benefit, which will come out of repricing of Shriram City under Stage 3.
Okay. And then that's the reason why next year, you're saying cost of funds would not increase much. I mean some benefit will come from here as well. Is that a fair insight?
I said for the March quarter, it will not go up. But if RBI increases rate, that has to be adjusted for next year. But this quarter, it won't be up.
Got it. Got it. Just a last question in terms of the fair value that you were talking about earlier. Can you explain how do you arrive at this? Is there an element of NPV calculation also that goes in there and that's why you had to sort of [indiscernible] or there is something else?
See, the last quarter, that is March quarter of '22, whatever was the loans disbursal and loans liabilities mobilized, the benchmark rate is considered, and it is rephrased for the earlier entire book. And basis that -- based on the NPV calculation, this valuation arrived.
The next question is from the line of Ankur Jain, an Individual Investor.
I have a question on capital allocation. So Shriram Finance has paid an interim dividend of INR 15. And in the past, both Shriram Transport and Shriram City Union have given healthy dividends. So my question is, has the management thought about the idea of doing a buyback with some part of the money, which could be more beneficial to the shareholders?
I'll say, finance companies or banks normally don't do any buybacks because the capital is always required in the business.
Okay. Even with the large amounts that you are paying, which are not required because ultimately, they have been paid to the shareholders?
So dividend is expectation. There are some shareholders who are invested for a steady dividend. So that is a different aspect altogether. So rewarding shareholders continuously with good dividend is part of a good governance and also appreciating the shareholders, yes, that's all.
The next question is from the line of Chandrasekhar Sridhar from Fidelity International.
I have a few questions. Parag, just how do you think of liquidity right now? So as I see, I think, [ with the merger also ] the excess liquidity has actually stayed constant as you've moved on and you also cut it by 1 month. How do you see that over -- on a sustainable basis, one? Secondly, Shriram City Union had a liability duration, which had extended pretty reasonably over the last few years, longer -- much longer than the asset duration. Now that we are working on a merged entity, how do you just think on liability durations given we have a merged balance sheet? For Mr. Sunder, I have a couple of questions. One is, even if I -- I understand the fair valuation, but if I look at the GNPLs also on a combined basis, I mean, the pro forma numbers in the GNPLs also, there's a difference of 40, 50 bps. So what would explain the differential in the GNPLs? And for Mr. Ravi, just in Shriram Housing, was there any portfolio buyout done during the quarter?
On liquidity, we always had a stated policy of maintaining 3 months of liability repayment as a liquidity buffer, which we enhanced during the COVID period to 6 months. Now we are around 5 months, I think, we we'll continue with the liquidity buffer of INR 17,000 crores until the March quarter and then based on market scenario, we will look at diluting it or continue to maintain slightly higher liquidity. But as of now, until March quarter, I think we'll continue to have INR 17,000 crores of liquidity.
When it comes to duration, I think duration in Shriram Transport also, the assets is not longer, that is, used vehicle is typically 3 to 4 years. So there's not too much of duration difference which comes because of Shriram City. And Shriram Transport also, the liability was longer than the assets. So that doesn't change. Sunder?
Yes. Coming to the Gross Stage 3 numbers. If you recollect, the AUM of Shriram City Union Finance around 31st March was INR 33,000 crores, and they were carrying an ECL provision of close to -- slightly more than INR 2,000 crores. So net 31,000 crores was acquired by Shriram Transport as the merger transaction. And this INR 31,000 crores was accounted when loan outstanding from the customer. And hence, this amount is added to the Gross Stage 3. And you would find that the normalized, if you take 1 plus 1, had it been taken at a gross level of 3,300 crores, the NPA would have been at around 25 bps higher than what we are reporting. And that explains the reduced number of the gross stage 3 of 6.29% in the current quarter. The same thing has been restated in the previous quarters also.
Okay. Got it.
And on the housing finance side, out of INR 1,000 crores gross disbursement, we've -- the bought out portfolio was about INR 6 crores, hardly anything.
Sure. Maybe if I could just follow up with a couple of more questions, Umesh, one is just how do we think of just right pricing now, how much we're charging to the insurance business on a sustainable basis. This has stepped up like a couple of years back, but didn't seem to go anywhere after that? What's your thoughts on that?
And second is we are still carrying the COVID provision buffer at this point in time. Now the buffers were created in Q4 FY '20 and Q1 FY '21 and then some later. Now obviously, the contracts are -- and our understanding was they'll be utilized over a period of time once the contracts mature. Given the duration of the book, our contract should be maturing by now, but they're still carrying a large buffer and we have utilized very little. So what do we think of some of these provision buffers which you're carrying.
Yes. See, as far as the insurance is concerned, the insurance cross-sell is done to help the customers to get better claims and quicker claims. That is the main objective. The earnings out of it, the commission occurring out of the insurance, whatever is statutorily available or can be given, that we are getting from the insurance companies, both life and the general business.
So our focus has been to provide better service to customers. For example, earlier, we used to get claims on accident at around 180 to 200 days -- after 180 to 200 days, putting customer into a lot of difficulties. By providing the insurance service now in-house, we're able to get the claim in 20 days. So that's the benefit customer gets and indirectly, company benefits because of quick settlement of the claim. So there is no NPA due to -- or there's no delay due to the claim being delayed. So that is the biggest advantage. So the benefit will improve over the period as we penetrate more. Today, the penetration level of insurance cross-sell is much lower, both life and general. Once we increase it across, then benefit will get more pronounced in -- then bottom line will reflect very healthy growth in the fee income.
And on the COVID provisioning, we had created a provision of INR 2,850 crores in Shriram Transport books. And as we have been guiding everyone that it has been allocated to the respective contracts, and as and when the contracts settle, it will be written back or charged off is what we have been indicating. And as on 31st December, an outstanding of INR 1,651 crores is available in the books. And we expect this to be cleared maybe in the next 1 year or so, by March '24, maximum will come out.
But I mean, that should actually extend beyond the contract duration, just given the duration of the book by now, that should have been flushed out, right? It was my understanding.
No, no. See, if you recollect, we had also given a moratorium of 6 months and hence, entire book was postponed by 6 months. So in a normal scenario, it would have been maximum should come to an end by September '23. So that's likely to be pushed beyond close to March '24. So this I think majority of the book, but still there can be some provision lying still.
The next follow-up question is from the line of Nischint from Kotak Securities.
Can you share what was the absolute valuation of Shriram City considered during the merger, if you can share the number of rupees in thousand crores.
Yes. Nischint, I'll just take this question offline and give it to you.
The next follow-up question is from the line of Mahrukh Adajania from Nuvama Wealth Management.
Thank you for the followup. Sir, sorry, but can you please quantify the fair value gains in NII and then through other line items of the P&L in this quarter?
Fair valuation gains in the current quarter? Okay. I'll do one thing, I'll just send it across to Sanjay, both the impact on the PAT as well as the NII.
As that was the last question for today, I would now like to hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited for his closing comments. Over to you, sir.
Thank you. Thank you all for joining this call. We had a good set of numbers in this quarter. And going forward, we feel that fourth quarter should be equally good or maybe even larger, because demand seems to be quite good in the fourth quarter. And going forward also, we feel that post -- all merger-related integrity -- integration issues are adjusted, we should be able to continue to grow and do our business very comfortably and keep growing our bottom line and good progress. Thank you, everybody.
Thank you, sir. Ladies and gentlemen, on behalf of Shriram Finance Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.