Shriram Finance Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. First question is from the line of Chintan Joshi from Autonomous. Please go ahead.

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 following to get a credit rating upgrade?

On the cost front, as of now it looks to be quite stable and we don't expect much change from the current level which was close to around 8%. We are well diversified when it comes to sources and the diversity will continue to be there. The focus is there on retail deposit, securitization which is one of the cheapest source of fund for us. We also have large offshore borrowing program and that will continue to be tapped as and when opportunities arise. Rating, the dialogue is on with all the rating agencies. Other than continuous improvement in our overall business numbers, I don't think there are any fa ctors which 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 thi nk there is anything further when it comes to the performance indicators from the company. The dialogue will be on. Let us see what is the ultimate timeframe rating agencies have in mind.

Thank you. And the second question is how should we expect the mix of AUM to develop over the next one to three years?

There could be a percentage point up and down but I think it is largely , because of the predominance of the vehicle portfolio. And since it is 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 loans are also growing. So there would be probably a 2%-3% plus or minus here and there, but nothing major change.

So should we not expect the old SCUF businesses 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 , two-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 upsurge in used commercial vehicle and even passenger vehicle maybe in the next fiscal, '27 because the new vehicle cycle has started in '22. And that to come into the market and having a larger market will take a little time. So right now we are growing at around 12% to 15%. But maybe in a year or two that growth rate can further improve as the market expands.

Thank you.

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?

So basically, the impact was in this quarter. It has gone down. We have not increased our per gram rates, we have kept them at what we were doing. It is not that eve ry increase in gold loan price we increase the lending amount per gram. So one reason. Second is there was also a slight slowdown because of the adjustment from more than INR20,000 cash disbursement. So there was a little impact of that. And on top of that , we were also -- our legacy branches we were 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 slowdown. But we feel that this quarter and the next quarter should see a good growth.

Okay. So can you please quantify what is the percentage of the gold loan disbursed to bank channels? And what is the percentage you guys have been disbursing by cash which has affected?

See anything above INR20,000 will go through bank. So loans up to INR20,000 is in cash. Rest of it will be through bank. So our average ticket size is around today about INR70,000- INR75,000.

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

Thank you sir. 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 disbursement in the next few quarters?

Our guidance will remain at 15. But this quarter has been good. Because we were expecting some kind of slowdown in activity, overall credit uptake because of the election. But we did not see any impact. Because the electi on 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.

Okay. Thank you so much, sir.

Hi. Thanks for the opportunity. Two questions. One is on the MSME part and the non-vehicle finance part. As we look forward, I am not looking at quarter -on-quarter over the next two to three-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 t he nature of the growth that you are doing compared to what others are offering ? That will be helpful to understand the quality of the business growth. And secondly, over the next two to three years as we grow, how is the leadership positioned today? Is it sorted, all well settled? That will be helpful. Thanks.

MSME business basically , w e are lending to customer s against the mortgage of property , typically all the larger t ickets and most of the loans. That's the way our, what you call, we are playing it very safe now. And the every cash flow, every business, lending Decision is taken on a cash flow basis only.

Is it also possible to share. If it takes the to p three industries within MSME. That would be lending. What would those top three industries be?

Yes. 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 70 %. Less than 30% of our total portfolio. Majority of it is towards trading and service industry and the average ticket size here is about INR10 lakhs.

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

Non-South for MSME will be 60-40. 60 South. 40 Non-South.

And as we transition to next two to three years. Would the mix be remain the same or it will be different?

Both markets are growing. So, difficult to say but the North. I mean. Non-South is a much larger market for SMEs. And that is where we are focusing on actually. So we will have to see.

As we create more reach automatically the proportion will change. So but it will take time it will take three, four, five years. To make that kind of a change so 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 t he leadership part as we build these new businesses and scale up. Is the structure in place. For leadership across channels. Is there any gap that exists. That we want to plug. Both at the top and the middle. Can you just show some. Thanks.

In the segment we are in. We are I think leaders. Because most of the SME lending. If you look at they are either focusing on the medium size of around. 40 -50 lakh ticket size. We are in a small ticket. So number of loan and what we call micro entities enterprises. We are one of the largest. We do not know the banks. But among the SBFCs. We are the largest in our segment.

I meant leadership in terms of internal capacity.

I am coming there. So it is pretty. The succession lines are pretty. Pretty much there. For every position. We have people. In fact. We have multiple people competing that way. So the succession planning is on , on a continuous basis. At every level. There is no gap. As far as leadership is concerned there are no gaps even from levels as low as a branch manager.

Thanks. That is it for me.

Thank you. Next question is from the line of Bunty Chawla from IDBI. Please go ahead.

Thank you sir. Thank you for giving me the opportunity. In the opening remarks , as you said. There has been in fact. Incremental cost of funds has been lower. As compared to on the books. So what has resulted in 20% decline in sequential margins.

One is. Last factor is the Liabilities which were. The cost of those liabilities which have matured was higher. That has really helped. Incremental cost is mix of securitization. What to do with. And also the capital market instrument. That also has slightly come down. Both those actors are helping for the incremental cost being slightly lower. Some of the. Borrowing also which is done in the don't format is cheaper compared to what we were doing. On format earlier. Which was costlier. That is Incremental cost and on the balance shee t c ost be ing lower High-cost debt getting mature.

So my question was that. As we have seen. Incremental cost of borrowing coming down. So there should be improvement in the margins. But oppositely we have seen there is a decline in the margins. By 20 bits on a Q1 basis. So it's because there has been a decline in the yields. And what is the reason behind?

Basically what happens is , you have to compare Q1. With the Q1. The Q4. Normally towards the end of March. There will be more disbursement on new vehicles. That is a little low yielding. That is one thing. Second in our portfolio. The gold and personal loan portfolio there was some decline was there. So our 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 should support the improvement in the margins. Because the cost of an increment is almost stable as we said?

Margin is dependent on multiple factors. It also depends on liability cost 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 at this sta ge. There has been improvement in cross test 3. On a Q1, Q4 and all these things. But what we have just -- so the 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 have seen the im provement in the asset quality. There should be a stability in the UCL 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 quarter-on-quarter. But nothing to do with the product wise composition.

Okay. 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?

One second. Write-off for the current quarter was INR599 crores and for the March quarter was INR805 crores. And the Q1 FY '24 was INR573 crores.

Okay. That was very helpful, sir. Thank you.

Do you want the provision amount also?

Provision amount?

Do you want it?

Yes sir please.

Okay. Provision for the current quarter of INR588 crores. March was INR456 crores. And June '23 was INR305 crores.

Okay. Okay. That was very helpful sir. Thank you and best of luck.

Thank you. Next question is from the line of Renish from ICICI Securities. Please go ahead.

Yes, hi sir and congrats on a good set of numbers. So, sir, just two things from my side. One on the growth side, so during Q4 call, you have elected that Q1 should be muted because of the election and some sort of seasonality. But Q1 turn out to be a better than expectation and still we are sort of maintaining the same guidance. So do -- does it -- does that mean that let's say Q2, Q3 might see some pressure or maybe, you know, we will exceed the guidance?

See, definitely, when we start well, we should expect -- you can expect to us to exceed the guidance. But there are multiple factor. See, AUM growth has -- the AUM growth and the bottom line growth, there are two different things. We are focusing on bottom line, even last year also I maintained, we will be focusing on improving the product mix in such a way that will be improvement in the bottom line. And also we will be focusing on the new geographies where we feel that there is lot of growth opportunities. And the smaller ticket loan will not add to the AU. So if you are looking at answer on AUM growth, we cannot give the number right now because the small ticket loan, the matures faster like gold loan is six months on average ticket size and the personal loans will be average of 18 months, two wheeler will be 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, second question is on farm equipment, so when we look at the gross Stage 3 touching 9 % and despite that we saw there is an almost 6%-10% sequential growth on the AUM side. So how once you read this 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 or 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. It's around 2%, even though that Stage 3 i s little higher and maybe provision is a little higher. But there is 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 Mr. Mundra, he'll help you out.

Okay. Thank you sir and best of luck, sir.

Thank you. Next question is from the line of Gaurav Kochar from Mirae Asset. Please proceed.

Hi. Good evening team. Congrats on the quarter. Three questions from my side. Firstly, I think it's less talked about, but I think you have done a fabulous job on the deposit franchise. I think even in this quarter there was a decent traction n et 3000 crore s 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 comes through the DSA? What is the overall sort of cost of acquisition? I am not talking about deposit cost. I am talking about cost of acquisition. You may be paying through agents, third party agents who might be sourcing it for you. Just wanted to understand some numbers around this?

The corporate ch annel which we have which is basically 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 should be 75 basis point.

Okay this 75 basis point is spread over the tenure of the deposit?

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?

8.3, 8.4 will be the interest cost.

All right understood. My second question is on the MSME product and just wanted to understand how many branches have we covered doing this product and let's say by end of FY25 or FY26, any sort of target that you have of the number of branches that we would be doing MSME?

See even earlier in the erstwhile Shriram City Indian Finance branches also out of close to 1000 branches we we re doing MSME only in about 550, 600 branches. So in these two years we would have added about 50 of those, 50 -55 of those S hriram City's erstwhile branches and in about 120 of commercial vehicle branches. So, close to a bout 170 branches is what we have added now.

Okay so that 550 would ha ve become 720 out of the 3000 odd branches. So let's say by next year or maybe slightly longer FY26 what would be the target?

See next two years probably we would be adding another 250 branches.

In the next two years?

Yes.

Okay, understood. And just to understand this a little more what would be the ballpark throughput of these branches in terms of just to unde rstand when do these branches break even and where do these branches typically cap in terms of disbursement per month or disbursement per annum any number that you might…

There is no clarity sorry voice was not very clear.

Is it better now?

Yes.

Yes so I was asking sir at what in terms of disbursement per month or disbursement per annum at what level does it breakeven on the MSME branches a nd when do you expect to reach that level for the branches that you added 170 you added?

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

See typically obviously if you look at MSME, if you look at the cost structure it's the two - 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 -wheeler is a 75,000 ticket size whereas your MSME average ticket size is about 10 lakhs. So the breakeven I mean we don't do -- right now we have not, we don't track the product level profitability, but at a branch level we look at what AUM level the branch breaks even or makes a profit.

Sure got it. 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 profiles. On the asset quality front you have the strongest ECL cover even at an aggregate 6.2 or even at stage one of 3.3. Capital position is strong at 20%. Now what is left t o be done for a rating upgrade, anything that the rating agencies are talking about? What has been the dialogue with the rating agencies?

I think whatever the rating agencies' expectation as you rightly put it everything we have met and 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 they 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 you call integration of merger. So I don't really see anything that is furth er pending or expected from us, b ut still they would like to have their own comm ittee and their own expectation a nd they may be looking for better macro and micro environment for announcement.

And how big is having a parent or having a corporate structure as a shareholder? How big is that as a factor? Doe s that come in the discussion often when you discuss this with the rating agencies?

Directly they don't discuss on that, b ut if you look at the pattern of their rating they have been giving favour to the corporates especially with a parentage having a good brand, a good name a big large corporate. That is what we observe, but it is not in the discussion.

Perfect. Got it, sir. Great quarter again and all the very best.

Thank you.

Hi. Good evening. Many congratulations on a very strong set of numbers. I have a few questions. Firstly, are we seeing used vehicle prices, both used CVs and used PVs, somewhat flattering out?

Right now, we don't see. In fact, we have initiated something called S hriram Mobility Bulletin where we are trying to track the prices. And that is available on the website and in the 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 digit, around 10 % to 12%. And we don't really see it is flattening. So as lo ng 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 20%-25% increase in the resale prices.

Correct. And this momentum in used passe nger 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, see 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 t ransportation. Especially in the semi -urban to urban, where state undertaking used to put 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 two-wheeler financing. Many of them are upgrading to four-wheeler. And when they upgrade to four-wheeler, typically they buy second-hand four- wheeler. So these are 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 gap and vacuum. And definitely there will be more demand for transportation. Both for public use and also for private purpose.

One last thing. While the model LDD is 38%, but in your recent settlements with NPA -- with NPL cases, is the principal recovery or is the L DD loss lesser than what is the ECL model at right now?

Typically in a seized vehicle, 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 the tires and batteries. So it will be difficult to compare ECL number with the seized vehicle.

Okay. Yes, that's it from my side. Thank you.

Yes, so maybe just out of curiosity, just want to understand in terms of the improvement which has been there in GS3, GS2. What we are hearing from the other players is the higher stress, maybe because of hit wave election disruption, while our trend has been quite different. Would you attribute it more 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 have helped. And more than everything, Kunal, recovery efforts and also less disturbance in the election. This time, election has been, you know, for the two months, without really impacting any one of the geography at any particular point of time. Even when there are state level elections, it has been staged in two or t hree different days. So, we did not see any kind of business as usual. It 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 or all the NBFC, you will see that repo efforts are much lower or n o repo at all. So, that itself is an 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 d id not really impact us much because most of the collection efforts are completed in the first 15 days. So, one or two days of heat waves doesn't really impact the collection efforts.

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 product basket to the customers. So, we are able to interact customers and able to retain the customers who o therwise would have gone for, imagine, two -wheeler customer going for some other product or maybe same time truck customer wanting a two-wheeler. All those customers we are able to retain. So, that is the biggest positive. But in the absolute number and all, probably we will be able to give the numbers in the later period.

Okay. Yes. Thanks and all the best.

Thank you. We will take our last question from the line of Sonal from Asian Market Securities. Please go ahead.

Yes. Congrats on the good quarter, sir. I just have 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 the next two years. So, that is basically reaching about 30% of total branch es will be MSME. Is that correct?

Can you repeat your question, please? Your voice was a little rumbled.

Sir, you will be adding 250 branches for MSME. Next two years, yes, about no. This is about 125 plus 50, about 175 branches.

So, 175 branches will be added next two year?

Sorry to interrupt, Ms. Sonal. Your voice is breaking now.

One second. Is that better now?

Yes, please proceed.

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

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

Yes, that's right.

Okay.

That's right.

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

Gold loan, we already have in about close to 1500 branches. So, we should be adding another 500 branches in the next two years.

Okay. Sir, one more question was on ECM 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, the model runs in such a way t hat everything is factored and we don't have any bifurcation of the same. It's factored.

No, no. It is primarily based on the model that we run. And it depends on the product mix also. So, it can vary by a couple of business points.

Okay. That's it from me. Thank you.

Thank you. 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 expec t with the 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 S hriram Finance Limited, that concludes this conference. Thank you all for joining us. And you may now disconnect your lines.