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Edited Transcript of SRTRANSFIN.NSE earnings conference call or presentation 25-Jul-19 11:30am GMT

Q1 2020 Shriram Transport Finance Company Ltd Earnings Call

Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Shriram Transport Finance Company Ltd earnings conference call or presentation Thursday, July 25, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Parag Sharma

Shriram Transport Finance Company Limited - CFO & Executive Director

* S. Sunder

Shriram Transport Finance Company Limited - Executive Director of Accounts & Administration

* Umesh Govind Revankar

Shriram Transport Finance Company Limited - MD, CEO & Director

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Conference Call Participants

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* Abhijit Tibrewal

ICICI Securities Limited, Research Division - Research Analyst

* Aditya Jain

Citigroup Inc, Research Division - Assistant VP & Senior Research Associate

* Anusha Badhwar;IDBI Federal Life Insurance;Credit Analyst, Investments

* Darshan Shah;White Equity Investment Advisor;Head of Research

* Gaurav Singhal;Davidson Kempner Capital Management;Analyst

* Hemant Sultania

CRISIL Research - Research Analyst

* Madhuchanda Dey

moneycontrol.com, Research Division - Research Head

* Nishant Shah

Macquarie Research - Research Analyst

* Pranavi Shirodkar-Kulkarni;Edelweiss Financial Services;Fixed Income Credit Analyst

* Saurabh S. Kumar

JP Morgan Chase & Co, Research Division - Senior Analyst

* Utsav Gogirwar

Investec Bank Limited (SA), Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and a very warm welcome to the Shriram Transport Finance Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I'm now glad to hand the conference over to Mr. Umesh Revankar, Managing Director and CEO of Shriram Transport Finance Limited. Thank you, and over to you, sir.

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [2]

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Thank you. Good evening to everyone in India and other Asian countries, good afternoon to people who have joined from the European countries and good morning to the investors who have joined from the U.S. I hope all of you have gone through the investor update that was already sent to you. I brought a brief overview of macroeconomic scenario and development on the ground before I share the highlights of our performance.

India's GDP was reported at 5.8% for January to March quarter, significantly lower than 6.6% in the previous quarter, indicating a slowdown in the economy. This slowdown has been attributed to weak demand conditions in both domestic and external markets. However, the latest economic survey has projected GDP growth at 7% for the current fiscal, so -- which is higher than the previous fiscal.

On the government's trend, we witnessed the official mandate in favor of incumbent government in May 2019. This was followed by Indian budget, wherein the new finance minister outlined the vision for growth and evolution into USD 5 trillion economy.

Importantly, fiscal prudence was maintained as the deficit was estimated 10 bps lower than the interim budget at 3.3. The biggest positive is the issues plaguing financial sector. There was an INR 700 billion capital injection for the banking sector outlined. And also, a liquidity window leading to -- for leading industries. The project has provided a onetime 6 months partial credit guarantee to appease the bank, for the first half up to 10%, for the purchase of highly rated pooled assets of financially sound industries, up to INR 1 trillion. Better [and greater than] the approval have the advantage and they can bargain for better rates to increase the credit enhancement facilities.

In addition to these measures, RBI continues its expansionary stance as it announced another repo cut by 25 basis points in the latest monetary policy. It is the third time in a row and totaled 75 basis points. And banks have so far given around 15 to 20 basis point reduction of rate. That means that there is scope for the banks to reduce further by 50 to 60 basis points. This may happen over the next quarter or 2 quarters.

Monsoons were delayed across the country this year, but the rainfall across the country in the recent days, in the last week, also points towards a revival. Credit scoring has been delayed due to a later onset of monsoon, but the acreage which was less 15 years back, has been increased, added in the last 1 week. And that gives a hope that the monsoon should be normal. And apart from that, the government also has come out with some support to the farmers with PM-KISAN farm labor and rural workers' pension. We believe these measures should help the rural economy, and there should be a better consistent consumption demand arising out of it.

Coming to the CV industry, overall commercial vehicle segment registered a decline of 9.53% in April to June as compared to the previous year. The M&LCV was the highest de-growth at 16.6% and LCV at 5%. We believe that it's basically due to the election process, a very long election process. This dampened the demand. And the cash transactions had come down significantly during this time.

Diverse revenues [in these products] has been very steady. Demand has been quite good, I should say. However, we have been a little more careful or more, what, in the new vehicle lending, demand also being low. And we also been additionally more careful because of the vertical side and lower yield. We have reduced our exposure on new vehicle lending. But the used vehicle lending continues with, however, a lower LTV.

We expect the demand to pick up in the second half of the year, mainly due to the construction and infrastructure activity, which has typically come to a halt during the monsoon. We believe we should restart by the September end and October. And the festival season, which starts from September first week, should boost the demand. Additionally, the transition from BS-IV to BS-VI will give some demand for BS-IV vehicle, because BS-VI ratings are likely to be costly by 10% to 15%. And the customers would prefer a prebuying of their core vehicle to reduce the cost of acquisition of fleet.

On the liquidity front, we have successfully completed several issuance, despite creating anomaly of risk aversion. We have successfully diversified our liability base. We raised [$48 billion] through [intercompany] public issue in the last financial year. And assets wound up for [$400 million] in the February. USD 500 million in [H2], additionally, last week, we completed issuance of USD 250 million significant notes under $200 million Global Medium Term Note Programme.

Having said this, there has been a marginal rise in cost of borrowing. This is being absorbed as our pricing power in the used vehicle is better. And since we have very niche presence in this segment, we are able to pass it on to our customers.

Stronger growth demand in India should further help us in passing on of any further increase, in increasing borrowing cost. However, we don't really foresee any such event, mainly because we believe that banks would be able to pass on the lower cost through the NBFC, so that we can maintain our net interest margin.

Our asset quality has been stable and the credit cost stabilizing. So ALM profile is very comfortable, and ALM gap is positive in all buckets.

Coming to our headline numbers, our -- in this quarter, AUM grew by 5.77% year-on-year to INR 1,063,434.8 million against INR 1,005,405.7. Net interest income was higher by 7.62% to INR 1,961 crores against INR 1,822 crores. Net interest margin stood at 7.16% compared to 7.44% in the previous year same quarter. The PAT has increased by 10.71% year-on-year to INR 634 crores against INR 572 crores. The Stage 3 NPA stood at 8.52% in the first quarter against 9.06%, corresponding last year.

The overall credit cost, which was around 2.2% last year, has come down to 2% and we are confident of maintaining at 2% for the full year.

The number of branches stands at 1,585 numbers, that is the 40 numbers added in this quarter, and total employee count stands at 27,174, which is [refined with] the numbers added in this quarter.

We are quite happy with this performance, despite economic slowdown, and I'm confident we'll continue to deliver consistent profitability and responsible growth in the future.

That brings an end to my opening remarks. I have with me Mr. Sunder, Mr. Parag and Sanjay to answer specific questions. I would now request operator to open the floor for the question-and-answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions). The first question is from the line of Utsav Gogirwar from Investec Capital.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [2]

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Just a few questions from my side. So if you look at the demand right now, the CV sales are declining. But we continue to expand our branches and continue to add employees. What is the thought process behind that? Just because we expect second half to be stronger? Or is it like a more longer-term strategic plan we have?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [3]

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Both are right. We believe one thing is these bankers are not in with our existing rural centers. They are not getting into new geographies. Where we have already gone into and where we have been able to expand our business. There, we are is a conversion of existing rural center into branches.

So there's no additional cost involved in opening of branches for us. And also, once we have a business and business is growing in a particular geography, we need to put people so that the collection becomes smooth. So we cannot allow the collection to deteriorate. That's one of the reasons we need to add people, because our business model, it totally depends upon our addition to good customers. And therefore, any improvement in the business, we need to keep adding more number of people. So this opening of branches are just conversion of rural center. It is not adding to any cost.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [4]

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(technical difficulty)

clear, for the year and for the total, for the company as well as under new CV and the used CV business. Because in this quarter, we have -- new CV book has declined. So just wanted to understand how the segmented growth would be, in your view?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [5]

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Yes. See, new CV, for us, new CV is not a priority. Whatever lending we'll do to new CV is basically our existing customer upgrading themselves. So we don't have any direct relationship with our manufacturer or to dealer to do the new vehicle lending.

So if our existing customers are not opting for buying new vehicle, then automatically, our new vehicle lending comes down to that extent. And also, we don't relax on our NPV or lending rate to accommodate the other customers who our dealers may be referring. Therefore, our new vehicle lending program is totally dependent on the customers' business opportunity, and this growth.

And as far as used rate is concerned, we keep exploring new markets, especially rural centers. We keep opening rural centers. And wherever we have a scope to increase it to large numbers, there, we can note that into branches.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [6]

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(inaudible)

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Operator [7]

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Utsav, we are unable to hear you. We are getting [static].

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [8]

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Yes, so yes, it doesn't. I'll come back in [queue].

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Operator [9]

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The next question is from the line of [Shubhra Dwivedi] from [SBI] Life.

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Unidentified Analyst, [10]

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So I have 3 questions. One is on the provisioning coverage. So any reason why that has fallen slightly?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [11]

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Last year, we had made an add of provision on account of the similar effects and the Kerala flat. Now, after 1 year, we feel that it is no longer required. And the [payment] has been reversed.

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Unidentified Analyst, [12]

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Okay. So we can expect these kind of levels, this year levels to continue for the year?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [13]

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Yes, correct.

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Unidentified Analyst, [14]

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Okay. And my second question is on the liability mix. So in Q1, FY '20, the term loan shares seems to have gone down significantly as compared to last year, whereas the proportion of bond, more or less, remained the same. This is a bit surprising because your bond market raising would have been almost -- the good hasn't quite muted, whereas banks would have [resumed the liability for.]

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [15]

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As mentioned in our opening comments, we did the dollar bond placement, which was for $500 million, a significant quantum grade. So that is the reason why the bond has remained constant.

We also did a large securitization and [tabulation] being that [particular] assets do come at a lower cost to us. And that is the reason why bank borrowing has not been done. And that has come down. But this bond placement, which was overseas fundraising and securitization, this took care of our requirement for the quarter.

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Unidentified Analyst, [16]

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So the dollar bond is classified under bonds only, not in borrowings in foreign currency.

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [17]

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Okay. So that foreign currency bonds have been separately in the...

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Unidentified Company Representative, [18]

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[9.9%].

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [19]

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Foreign currency bonds are put in separately in this classification.

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Unidentified Analyst, [20]

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Right, sir. So my question is the -- that is already getting captured in that 9.99%. Despite that, the proportion of bonds has not changed materially. So that...

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [21]

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No, because normally what we borrow will be 3 years bond. It will not come down.

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Unidentified Analyst, [22]

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Okay. Okay. Sorry, last one here. How much bonds, final bonds would have been issued, fresh?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [23]

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I do not know the numbers offhand, but it would be whatever was there as of March, I think that has been maintained.

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Unidentified Analyst, [24]

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Okay. Okay. And what is the hedged cost of the foreign currency, $500 million that you raised average?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [25]

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Depending on the forecast and all, we do [swap] conditions with various banks. So it will not be a fixed number when it comes to doing partial transactions with several banks. But overall, it comes to around 10%. This is the blended cost to us.

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Operator [26]

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The next question is from the line of Pranavi Kulkarni from Edelweiss.

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Pranavi Shirodkar-Kulkarni;Edelweiss Financial Services;Fixed Income Credit Analyst, [27]

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I just wanted to know one thing. Two questions I had. One is that on Slide #4, there are off books that is direct assignment portfolio has reduced by 10% in this quarter. And the securitized assets have increased by 15%. I wanted to know the reason for that?

And secondly, what percentage of your workforce would be in collections?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [28]

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The decrease in the off-books portfolio is mainly on account of [lease] events and there has been no fresh addition in the current quarter. And the increase in securitized assets is primarily on account of fresh additions during the quarter.

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S. Sunder, Shriram Transport Finance Company Limited - Executive Director of Accounts & Administration [29]

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You see, new additions will be mostly into field force only. We don't add much into the back office.

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Pranavi Shirodkar-Kulkarni;Edelweiss Financial Services;Fixed Income Credit Analyst, [30]

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Sir, just wondering of what percentage of that is in collections, of your total employees of 27,000?

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S. Sunder, Shriram Transport Finance Company Limited - Executive Director of Accounts & Administration [31]

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No, see the entire 16,700 people who are in the field, they do both lending and collections. We don't have separate team for our collection.

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Pranavi Shirodkar-Kulkarni;Edelweiss Financial Services;Fixed Income Credit Analyst, [32]

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Okay. And sir, that was just my first question. So you're saying you have not done any new direct assignment from branch is it? And you have not done any new direct assignments in this quarter?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [33]

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Yes, we have not done. We have not done in the current quarter.

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Pranavi Shirodkar-Kulkarni;Edelweiss Financial Services;Fixed Income Credit Analyst, [34]

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Okay. Sir, any particular reason? Because I thought the direct assignments would have been higher. Just a basic question, sorry.

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [35]

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The only addition we have done, direct assignment demand normally comes from public sector branch, which we have not done, not any new transaction with public sector bank in this quarter.

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Operator [36]

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The next question is from the line of Saurabh Kumar from JPMorgan.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [37]

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Sir, 3 questions from my side. First, on the LTV, how much would it have reduced in the new and the used CV? And what are those levels currently?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [38]

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See, LTV we reduced in October, and that has remained until now. The 5% is LTV related to new and used both. And in some products, it was reduced to -- by 10%. So that is continuing. We have not changed our LTV norms. We felt that still we get a good news on good monsoon, we should not change it.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [39]

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Okay. And sir, what will be these levels in the new CV and the used CV?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [40]

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New, it will be 80%. And used, it will be 65%.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [41]

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Okay. So 70% would have come to 65%. And then in new 90% would have -- 85% would have come down to 80%?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [42]

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Yes, yes. New, actually, what happens is, in many of the vehicles, there will be additional expenses on building body and all. So on average, it is 80%. If we include the body building expenses and all, well then it will be at 70%.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [43]

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Okay. And sir, on the working capital loans in the AUM, that's like growing at 62%. It's obviously off a low base. But what kind of checks, I mean, this looks like a slightly unsecured loan towards the steel. I know it's your existing customers, but what kind of checks you are keeping there to make sure that the underwriting here is decent?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [44]

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In the Q&Q, there is not much of growth. It is year-on-year when we get the growth. What happened is in the second half of last year, we started the fuel credit. We have tied up with it and now with the [PPL] Board. And this fuel credit has built the new products. So we have been adding new products, new working capital. And basically, it is a small increase in the exposure with the existing customers.

So actually, it is nothing but secured only. Because instead of giving a separate line of -- sorry, I would call it -- instead of giving credit on the same account, we are giving additional grant as working capital. So maybe an additional 5%, we can use it as fuel credit.

Similarly, we do fund the mutual requirement if he's buying insurance, either for [life or central] but we do the funding to him. Our working capital cost us only leaves the tire, fuel and insurance. And all are a little added on to the existing loan. So we are not calling it as a top-up loan on the same asset. We are classifying it as a working capital. So it is, however, unsecured, but definitely, it is covered by the existing asset.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [45]

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And the cap is 5% of the...

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [46]

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Yes, tentatively 5% to 10%. It depends upon the number of products the customer is using.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [47]

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Okay. And sir, lastly, on your Stage 3 provision, your Stage 1 and Stage 2. So your Stage 3 provisions have come off from, let's say, 24% to 32%, and your Stage 1 and 2 has gone up from 2.75% to 2.9%. So are you -- one would have assumed that the lower retail values your Stage 3 covers should have gone up, but they seem to be coming off. Why should that happen? And the Stage 1 and 2 are [those are] Stage 2 assets, which are basically impacting it or...

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [48]

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Stage 1 and 2, due to the shift of bucket from Stage 1 to Stage 2 has contributed to higher equivalent of portioning, and Stage 3 is more or less stable, right?

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

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[34.5 to 51.]

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [50]

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No, [that is] because of the --

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [51]

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Oh, that is primarily we saw a recovery, which we had released on account of the provisions, on account of the Kerala [counts for lot of it], which we had made last year.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division - Senior Analyst [52]

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Okay. So from here on, do we expect this 32%-odd to -- just to remain?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [53]

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Yes, correct.

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Operator [54]

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The next question is from the line of Abhijit Tibrewal from ICICI Securities.

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Abhijit Tibrewal, ICICI Securities Limited, Research Division - Research Analyst [55]

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I had just 2 really quick questions.

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Operator [56]

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Abhijit, you are not audible.

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Abhijit Tibrewal, ICICI Securities Limited, Research Division - Research Analyst [57]

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Can you hear me now?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [58]

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Yes, yes.

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Abhijit Tibrewal, ICICI Securities Limited, Research Division - Research Analyst [59]

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Just 2 very quick questions. How do we plan to maintain our NIMs, given that our cost of borrowings has gone up?

And also, we have said that we plan to maintain about INR 6,500-odd crores about 2 months off the investments on our balance sheet for the rest of the financial year. So I mean, how do we plan to maintain our NIMs?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [60]

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How do we maintain?

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Abhijit Tibrewal, ICICI Securities Limited, Research Division - Research Analyst [61]

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Our NIMs.

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [62]

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NIMs? Yes. NIMs has come off in the -- compared to last year. But if you see quarter-on-quarter, it is almost nearby, only 6 basis points less. And keeping cash on the balance sheet is something which the Board wanted us to be -- because of the liquidity situation, wanted to maintain a higher cash on the balance sheet. So we would be maintaining 2 months disbursal as the additional cash on the balance sheet.

And increase in borrowing costs, we feel that it will come off, because the banks have had to add on the [appropriate] reduction. So we believe there is a scope for banks to reduce around [52] basis points over the next 2 quarters. That should help us, and we believe that there is some scope for us if there is a bank reduces the lending cost to improve our net interest margin. But that depends upon the banks acting on the repo rate cut.

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Abhijit Tibrewal, ICICI Securities Limited, Research Division - Research Analyst [63]

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Okay, sir. And the other question that I had is could you give some qualitative comments on -- and if I look at the -- if we talk about India between rural and urban, the urban idiom has kind of broadly remained between something about [3.7%] kind of a year-over-year growth, while rural continues to see very good growth. Some qualitative color in terms of rural and urban?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [64]

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But basically, we have been expanding our -- focusing on rural. Therefore, there is more increase you'll see in the rural. And also, there were some...

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [65]

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See, certain rural branches which are attached to urban centers, because of the conversion of those rural centers, they have independent full-fledged branches, those portfolio has been reclassified under rural instead of the urban. That was one of the reasons for the shift impact.

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Operator [66]

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The next question is from the line of Gaurav Singhal from DK Partners.

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Gaurav Singhal;Davidson Kempner Capital Management;Analyst, [67]

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Congratulations on a good quarter and [it appears you moved forward] for further auditing. I have a question on the CV cycle. It seems that the new CV cycle is -- that is in a downturn for a while. Can you just help us understand how the dynamics of the used CV cycle, out of which you are exposed, generally differs versus the new CV cycle? And maybe if you can tie that in terms of [some of] the slippages that you have seen historically? When did the peak and what has been a trend recently in terms of new slippages?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [68]

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Generally, the used vehicle transactions, buying-selling continues to happen in spite of the new vehicle sales coming down. It does not -- does not have a big bearing, but what happens is if there is a good demand for new vehicles, then particularly people sell their existing vehicle a little earlier than the normal time. That is -- if you are waiting for 4 years to sell your existing vehicle, if there is a good time. If the economy is good and if there is a good demand for new vehicle, people try to sell their existing vehicle at the end of 3 years rather than 4 years. And if the economy is going down and they don't want to buy a new vehicle, they may keep the vehicle for 5 years.

So like that it may change, depending upon the economic activities. But the used vehicle transaction, by and large, keeps happening in the overall economy, rural or urban. And the demand for used vehicle is a little more in the rural market than in the urban because typically, vehicle moves from urban and any other market to rural over the period. As the vehicle becomes older, which runs lesser kilometer, it goes into semi-urban and rural market. So typically the vehicle do shorter distance traveling, the used vehicle, and the new vehicle normally covers the longer distance. That's how the overall market plays.

And the way we look at is since we are able to create more reach in used vehicle, we are still able to grow in used vehicles. Even though transactions would have come down or slowed down a little, still we're able to get a market share. And even otherwise, overall market, if you look at our market share, it's between 25% to 30% only in the used vehicles. Still, there is enough scope to increase your volume by going into deeper pockets, which we still are getting into. So we believe there is still a good opportunity to grow in use.

But as far as new, it is totally depending on the economic activity, plus the infrastructure building activity. If the infrastructure remains, which normally requires new vehicle and large-ton vehicle, if these activities go on very aggressively, then the new vehicle demand goes up.

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Gaurav Singhal;Davidson Kempner Capital Management;Analyst, [69]

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All right. Sir, just a couple of more questions. When I look at Slide 6 of your presentation, on a year-on-year basis, your branches have increased almost 29%, but your AUM has been -- that has increased about 6%. Sir, I just have 2 questions from this.

One is, like, typically, what's your strategy in terms of how much growth do you want in terms of opening new branches? And how should we think about your growth? Like is it more in terms of geographies, where you're underpenetrated in certain regions and you want to open more branches there or is there some other way of looking at it? That's one.

And second is, how should I think about this 29% growth in your branches, but only 6% growth in your AUM?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [70]

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Yes. The branches -- increase in branches are for 2 reasons. One, in the rural market, where we have opened rural centers 3 years back, if they have reached a particular level of size, then we have to convert that into branch for a closer supervision and it helps in the collection. So these conversions from the rural center into branches become necessary once that -- there is particular scale.

And second, what we have done is in some urban centers, we have converted these urban centers where we have large branch into satellite branch. Of course, the satellite branch has nothing but full-fledged branch only. So unwieldy large branches, we have further split into small -- number of small branches. So number of branches have gone up, but number of managers who are looking into it, they're already in existing, already in the system. So we have not really added people at manager level. So it is only splitting off existing branches into nearby location so that it can be managed much better. So the number of branches added will not be directly proportional to the AUM growth. It is the ability to supervise and manage that becomes more important to us.

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Gaurav Singhal;Davidson Kempner Capital Management;Analyst, [71]

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All right. Sir, just one last question for me. Just looking at -- it's a basic question, so apologies for this one. If I look at the breakdown of your Schedule 21 on your annual report, which breaks on your -- so we didn't write-off even your P&L, so you have one listed for FY '18, your one component of the P&L provision and write-off, which is a bad debt written off. Also for example, in FY '18, your provision and write-off in P&L of INR 31.22 crores, of which INR 14 crores...

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [72]

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Can we take this question offline?

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Gaurav Singhal;Davidson Kempner Capital Management;Analyst, [73]

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Sure. That's okay.

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Operator [74]

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The next question is from the line of Darshan Shah from White Equity.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [75]

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I have 3 questions. First, can you please share the structural partnership that we have with private financials?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [76]

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This is a very old program, we have been running for last 10 years. We identified a few of the local financials who have been doing well and where we do not have a reach. And also there are asset classes, which we are not funding directly, especially 3-wheelers and taxies. So these are the customers or financials who are having a good track record, who we are lending. And as per the program -- our credit program, they had lend onwards and they take the responsibility of the collection. So there is a revenue-sharing arrangement with these people. And as for amount, it is the size -- total size is just below 2% of the total area.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [77]

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Okay. And, sir, next question is on, can you please share the proportion of Stage 2 assets, that's their total exposure that you have shared that's Stage 1 and Stage 2 as of June '19? They have given [an incremental] amount as Stage 2 assets as of June '19.

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [78]

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Yes. These Stage 2 assets as on June '19 is INR 23,560 crores. And the Stage 1 is INR 71,000 crores -- INR 72,328 crores.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [79]

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Okay. And last question is on -- what is the yield on incremental yield on advances during the quarter and -- yes, incremental cost of funds?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [80]

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Yield is around 9.5%.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [81]

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8.5%, right?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [82]

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9.5%.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [83]

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9.5%, okay. And yield on the other one, incrementals?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [84]

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Its yield is around 16%.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [85]

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Okay. And continuing with the Stage 2 questions. Stage 2 question -- Stage 2 assets have seen significant increase in very good sales compared to March '19 numbers. Can you just throw some light on that?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [86]

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See, basically, last quarter because of the election in India, there were some challenges in our cash-oriented or cash-related businesses because cash-carrying was banned by the Election Commission. Therefore, the collection was a little slower during the election period. But it has picked up in the June. But there were still some postponement, which in this quarter, we should be able to set right -- collect and set right.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [87]

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Okay. And can you please share the claim number last quarter June '18?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [88]

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Stage 2 assets, I don't have it right now. You can text this, Sanjay Mundra will take it.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [89]

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Sir, your pardon?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [90]

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You can contact Mr. Sanjay Mundra offline and you can collect it.

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Darshan Shah;White Equity Investment Advisor;Head of Research, [91]

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Sure, sure.

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Operator [92]

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The next question is from the line of Hemant Sultania from CRISIL.

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Hemant Sultania, CRISIL Research - Research Analyst [93]

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Two questions from my side. Firstly, sir, with respect to the disbursements, what will be the number for the quarter?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [94]

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The new vehicle is INR 891 crores, used vehicle is INR 11,260 crores. And other business -- other loan and business are INR 145 crores, making it totaled INR 12,296 crores.

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Hemant Sultania, CRISIL Research - Research Analyst [95]

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And, sir, second question. Sir, with respect to passenger vehicles, what we've been seeing over the quarters is that there are proportion of PVs and overall AUM has been coming now. Any specific reason for the same?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [96]

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In passenger vehicle, see passenger vehicle, you mean -- I did not get you fully. See, the demand for LCVs, light commercial vehicles, have been relatively robust. But passenger vehicle has, as a proportion, it may look less because others have grown faster, but the demand is reasonably good.

But the urban demand is going down, urban demand for transportation. We have been normally financing only the taxies and passenger transportation vehicle. In urban, the demand is a little lower. But in the rural area, demand has been quite good.

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Operator [97]

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The next question is from the line of Utsav Gogirwar from Investec.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [98]

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Can you just tell me how much bank borrowings and ancillary borrowings for the quarter?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [99]

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Secularization is the largest resource what we have tapped, which is INR 5,700 crores. And as we mentioned that we did dollar bond, which was close to around INR 3,400-odd crores. And the bank volumes were not very significant. It was not very significant amount.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [100]

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And if there is, that total negligible?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [101]

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That also was [under the -- yes].

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [102]

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Okay. And you mentioned that the incremental cost of fund is 9.5%. And the landed cost for it is around 10%. So securitization is the balancing? Is that correct way to look at it?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [103]

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Yes, securitization comes because of the priority sector assets, it comes at a lower cost to us.

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Utsav Gogirwar, Investec Bank Limited (SA), Research Division - Research Analyst [104]

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Okay. And how much that could be?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [105]

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It varies from anywhere from 8.5% to 9.5%.

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Operator [106]

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Next question is from the line of Madhuchanda Dey from MC Research.

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Madhuchanda Dey, moneycontrol.com, Research Division - Research Head [107]

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My question is very simple. Last time, you had given a guidance on the overall AUM growth. Given that we have started the year with 5.8% and you're talking about a revival in the second half, do you stick to similar numbers? Or you are revising it a bit?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [108]

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Yes. See, overall AUM growth for the year, as it is planned now, the way things are moving, we expect it to between 14% to 16%.

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Madhuchanda Dey, moneycontrol.com, Research Division - Research Head [109]

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Okay. You're expecting FY '20 to be 14% to 16%. And what are the kind of lead indicators that you are looking at for this to happen? And why this might not happen?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [110]

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There are 2 lead indicators, which we expect is reasonably good monsoon, normal monsoon. And the second one is the BS-IV demand because the BS-VI vehicles are likely to be costlier. And we expect there'll be increase in demand for the BS-IV vehicle.

That will create more transactions on new vehicle and used vehicle, both. And there also will be some re-rating of used vehicle because of the new vehicle price being higher. So these are the factors we are looking into. And if at all, the monsoon is weak -- turn out to be weak -- and because of monsoon being weak, economy being slow and people do not respond to pre-buying the BS-IV vehicle, then the growth rate could be lower.

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Madhuchanda Dey, moneycontrol.com, Research Division - Research Head [111]

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Okay. Sir, second related question, which you partially answered is like there is already a bit of a sluggishness, in fact, significant sluggishness in the new vehicle market. In light of this, do you think that the expected pickup of BS-VI, will -- BS-IV will actually happen because of the transition to BS-VI?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [112]

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I still feel it will happen because many of the customers who we know, they say that if at all, vehicle cost is going up by 10% to 15%, it is better to buy 6 months earlier -- 6 months to 10 months earlier rather than buying a costly vehicle after March -- after April 1. So that is what most of the customers have been indicating.

But it all depends upon the sentiments when -- because if there is a lot of dampening event, which forces people to postpone their decision, then people will postpone their decision. So that also can happen. So we have to wait and see.

Generally, if we go by the Indian season to work, the post monsoon and the festive period is the time when people start buying new things or new vehicles or even consumption going up. So we have really wait and see September to November time. These are 3 most crucial months where most of the consumption pattern of India gets decided. And that last -- that demand and that enthusiasm will last for more than 7, 8 months subsequently. So we have to just wait and see till this quarter end to see the momentum.

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Madhuchanda Dey, moneycontrol.com, Research Division - Research Head [113]

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Okay. And one last question. You obviously would have seen a loss of momentum in the market, in general. So if you can highlight between rural and urban, where has the loss been more pronounced in recent times in the last couple of months?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [114]

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See, if you -- by and large, if you look at rural, rural is now reasonably active and the demand from the rural area unlike in the past is spread across the country. So except for a few locations of the Central India where there was drought last year, the demand from the rural market has been reasonably steady.

And as far as the urban market is concerned, Urban market is largely dependent on the overall economic activity or the way the export activity or the industrial activity is growing and that is subdued for last 1 year. So I see a lesser demand from the urban market as of now.

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Operator [115]

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The next question is from the line of Nishant Shah from Macquarie.

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Nishant Shah, Macquarie Research - Research Analyst [116]

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A question based on one of the other slides that you gave earlier. You mentioned that some of the AUM has been reclassified based on some branches. Some asset centers being now corporate or branches. So the proportionate rural AUM, the AUM has been moved from urban to rural. So could you just qualitatively come -- if you know what kind of rural and urban demand are you seeing? And probably if you can just quantify the growth, excluding this kind of reclassification impact in both the geographies?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [117]

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For us, the rural demand has been higher than the urban demand mainly because we are creating a more reach. So it's only -- the additional reach is getting us additional growth. So whatever growth we are getting in the rural. Because in urban, we have already grown. There is no further scope to grow. In the rural, we are adding more numbers. So automatically, the fresh businesses will be mostly from the rural market.

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Nishant Shah, Macquarie Research - Research Analyst [118]

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Okay. And one more similar question. So when you say you've converted your asset center into a branch, what does that entail? Like do you necessarily move to a bigger location, like hire more employees? How do the costs move up? Like could you just throw some light on that?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [119]

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See, rural center converting into branches. It's typically if you have 500 customers in that particular location, we convert that into branches. So that is the thumb rule for converting into branches. So as we have 500 customers, you would have already added around 4 people there working in that location. Only thing is, we will be having a manager there because the manager in the branch is who is responsible for handling the rural center, especially credit decision. That will be split into the new branch. So the new branch manager will come.

So typically, one among the 4 who has done the best performance will become the branch manager, senior most. And there may be the additional cost would be of branch premises because the rural center would have run from a small center. They will be paying around INR 5,000 rent -- INR 5,000 to INR 6,000. That will go up to around INR 25,000 or INR 20,000 to INR 25,000 rent. Other than that, there will be initial furnishing cost of around INR 5 lakh. Beyond that, there is no additional cost.

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Operator [120]

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The next question is from the line of Anusha Badhwar from IDBI Federal Life.

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Anusha Badhwar;IDBI Federal Life Insurance;Credit Analyst, Investments, [121]

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Sir, we wanted to ask if there is a scenario of slowing economic growth, will there be any impact on asset quality or will that be maintained at around 8.5% to 9%?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [122]

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We are quite confident of maintaining at this level because as of now, if you look at the first quarter, there was a little slowdown because of election process. And we have managed it quite well at 8.5%. And we should be able to maintain at 8.5%, and if economy improves, we can further improve.

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Anusha Badhwar;IDBI Federal Life Insurance;Credit Analyst, Investments, [123]

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Okay. And you have recently diversified your borrowings in terms of ECB and now you're also passing the retail entities. But going forward, is there any kind of borrowing mix that you have in mind? Like what percentage you'll be taking from bonds, long-term loans and from other avenues?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [124]

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See, there will be some increase in the retail. We are definitely looking at increasing the retail and probably some increase in the ECB and securitization. So the bank and institution, which was around 70% earlier together, that will come down and probably bank and institution and others will become 50-50.

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Anusha Badhwar;IDBI Federal Life Insurance;Credit Analyst, Investments, [125]

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Okay. And lastly, sir, I've been like following your other conference call transcripts. Sir, there was some news of this merger that's going to happen. So is there any update on that? Or that's still under process?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [126]

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Yes, there is no further update. They are just still at the questions page.

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Operator [127]

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

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [128]

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On the cost, the growth for the quarter looks fairly slow, 3%. So I guess, part of this will be just lower variable sales to replace. But is there any other factor at play or any one-offs in the base?

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [129]

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So on the cost, increasing cost has been low.

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [130]

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Can you just repeat the question?

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [131]

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Sir, why has the increase in cost been low? And is there an outlook for the full year?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [132]

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It is in line with the growth per se, and it will continue to be in the same percentage growth going forward also.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [133]

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You're saying 3% type growth for the full year?

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Parag Sharma, Shriram Transport Finance Company Limited - CFO & Executive Director [134]

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Even around 6% to 7% will be the growth for the full year.

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Operator [135]

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As there are no further questions, I now hand the conference over to Mr. Umesh Revankar for closing comments.

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Umesh Govind Revankar, Shriram Transport Finance Company Limited - MD, CEO & Director [136]

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Thank you. As I said in the opening remarks, we are quite satisfied with the way things panned out in the first quarter. Mainly due to a very long election process this time, we were a little -- we had a little apprehension. But it has -- June month has been quite good for us, both in collection and disbursement. And this yields us confidence that this quarter will be relatively better. And good monsoon should definitely give us a very good indicator of the growth. And we strongly believe that festive demand will create further increase in demand and improved asset quality.

So next time, probably, when we meet, we should be able to talk about improved numbers and better asset quality. And of course, it depends on good monsoon and the festive demand. But I'm quite confident and optimistic that things will become much better. Thank you. Thank you very much.

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Operator [137]

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