Shriram Transport Finance Company Ltd (SRTRANSFIN) Q2 FY23 Earnings Concall Transcript

Shriram Transport Finance Company Ltd (NSE: SRTRANSFIN) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate Participants:

Umesh G Revankar — Vice Chairman and Managing Director

Parag Sharma — Chief Financial Officer, Joint Managing Director

S. Sunder — Joint Managing Director

Analysts:

Riken Shah — Credit Suisse — Analyst

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Shweta Daptardar — Elara Capital — Analyst

Nidhesh Jain — Investec — Analyst

Vikas Agarwal — Bank of America Merrill Lynch — Analyst

Nilanjan Karfa — Nomura Group — Analyst

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Nischint Chawathe — Kotak Securities — Analyst

Ajit Kumar — Goldman Sachs — Analyst

Chandra — Fidelity Investments — Analyst

Amit Jain — Axis Capital — Analyst

KC Poovanna — Individual Investor — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Shriram Transport Finance Q2 FY 2022-2023 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director. Thank you and over to you, sir.

Umesh G Revankar — Vice Chairman and Managing Director

Yes, thank you. Good morning friends from India and Asia. A warm welcome to all of you who has joined this call. Good evening to those who joined the call from the western part of the world. Today, we have our Joint Managing Director, Mr. Sudarshan; Sridharan; Nilesh; Sunder; and Parag along with me, and Mr. Sanjay, who is our IR Head.

In the first quarter of this financial year, the Indian economy grew by 13.5%, the fastest in the last four quarters, on account of better performance by agri and the services sector. The official data shows India remained fastest-growing major economy in April to June quarter. However, it fell short of the expected 16.2% increase anticipated. The IMF in the latest World Economic Outlook report cut its forecast for India, India’s gross GDP growth in financial year 2022-2023 by 60 basis point to 6.8%, broadening of a long and tough economic winter.

India’s headline inflation rates as measured by the CPI rose to a five months high of 7.41% in the month of September from 7% in August. This is the ninth consecutive time CPI print has come above RBI’s upper margin. The stubborn inflation is definitely having some adverse effect on consumption and there are some indication of economy slowing down. However, I attribute this to unexpected rains or unscheduled rainfalls this got delayed in the month of June-July and there was late rains in certain pockets that disturbed agri movement and that would have led to food-related inflation. However, the wholesale Inflation eased to 10.7% in September as against 12.41% in the month of August. The WPI in September was 11.8%. Despite easing wholesale inflation data, the WPI continues to remain double-digit for 18th consecutive month beginning from April 2021. The RBI in its monetary policy on September 30th, 2022 has hiked the repo rate by 50 basis-points to 5.9% fourth straight increase in current cycle, putting sustained above target retail inflation rate, the RBI now has rates by total of 90 basis point since its first unscheduled median hike in May.

The economic growth projection for 2023 cut to 7% from 7.2% estimated in August and GDP is expected to grow 6.3% in September quarter, 4.6% in December and March quarters. The inflation projection retained at 6.7% for ongoing fiscal year and inflation to remain above the tolerance limit of 6% of RBA. The GST collection seems to be doing well. India’s tax collection from GST was INR1.47 trillion in September as against INR1.43 trillion collected in August. On account of rising demand, higher rates and greater tax-compliance, this is second-highest collection next to April 2022 collection of INR1.67 trillion. The goods and service — GST collection remained above INR1.4 trillion for seven straight months during this month, continued to display very-high balance sheet, this augurs well for government spend on infrastructure.

The government has announced National logistics policy, aiming to achieve quick last mile delivery to end transport related challenges. The policy focuses on key areas such as process re-engineering, digitization, multi-modal transport. It is a crucial move as high logistics cost impact competitiveness of domestic goods in the international market, along with PM GatiShakti, which is a national master plan for multi-modal connectivity and part of NIP of — spent of UDS1.35 trillion target. With the vision to develop technologically enabled integrated cost-efficient resilient, sustainable trusted logistic ecosystem in the country for accelerated and inclusive growth. This is highly positive for the transportation and logistics industry and to our business.

The monsoon has — as I was telling you in the beginning, there was some disturbed monsoon in the Northern part, especially in the UP, Bihar and MP. But overall the acreage was split a little lesser than the last year by 5%. Apart from paddy, there is a slight difference in sowing of pulses, oil seeds, jute. So overall the drop is very insignificant. However, the late trains and the reservoir being full, augurs well for bumper crops in Ravi, which is always a much bigger crop up across India and Ravi being bumper and year-on year for last four years augurs well for rural and semi-urban oil economy.

Coming to the auto industry, the commercial vehicle sales is increased by 39.48% to 2,31,088 units in Q2 as against 1,66,251 units in Q2. And compared to the previous quarter, it is 3.27% increase. The heavy and medium commercial vehicles showed maximum growth with 48.93% with 79,650 units sales against 53,481 units. A significant portion of this heavy commercial vehicles are the dumpers and tippers, which the demand is coming from the Infrastructure Industry. LCV numbers also showed good growth of 35% to 1,52,230 units compared to 1,12,770 units sold in Q2 last year. Tractor sales have been almost on par with last year’s half year number, we realized 19,642 number against 3,15,250 numbers, a marginal increase. The earth moving and construction equipment showed a significant growth again for the first half of this year with the 42,550 units being sold against 32,398 units.

Coming to be company’s performance, the collections were consistently good. The average collection of September quarter were 100.13% of the total demand as against 99.03% of the corresponding quarter last year. And 101.45% in the Q1 of the previous year. We clocked a disbursement growth of 19.51% to INR17,769 crores against INR14,868 crores in the same period of previous year, as against INR16,670 crores in the Q1 of this year. The used vehicle disbursement increased by 15.27% to INR16,502 crores as against INR14,317 crores in the same period of previous year, as against INR15,754 crores. The new vehicle disbursement has improved significantly. It has gone up by 106% to INR1,020 crores as against INR493 crores in the same period previous year, and as against INR784 crores in the Q1 of this financial year.

Overall, the asset — AUM, asset under management grew by 11.1%, online with the guidance of a 12%, to INR1,35,249 crores as compared to INR1,21,646 crores in the previous year, and increased by 3.49% against the previous quarter of INR1,30,688 crores. The net interest income increased by 22.85% to INR2,693.96 crores against INR2,192.82 crores in the same period previous year and marginal increase of INR2,641.74 crores against the previous quarter. The net interest margin improved to 6.98% against 6.44% in the same period previous year and a 6.91% of the previous quarter.

The PAT increased by 38.33% to INR1,066.87 crores in Q2 compared to INR771.24 crores in the Q2 of previous year and against INR965.27 crores in the previous quarter. The EPS stood at INR39.44 against INR28.71 in the quarter — this quarter. The gross Stage 3 declined by 7 basis point to 6.93% against 7.82% in the previous year and 7% in the previous quarter. The net Stage 3 stood at 3.48% compared to 4.18% in the Q2 previous year and 3.52% in the Q1 this year. The credit cost for the current quarter stood at 1.67%, against the 2.68% of full-year. The cost-to-income ratio marginally increased to 31.12% in this quarter against 20.73% recorded in the same period previous year.

The update on the merger, we have received approval from all the regulators like NSE, BSE, RBI. Then the NCLT had conducted the convening the shareholders and secured creditors, unsecured creditors meeting, the IRDA, CCA. The final order of the NCLT was heard on 19th of this month, October and we expect the order in a weeks time. The growth outlook remained at the original guidance 15% for the combined entity.

Now I request our CFO, Mr. Parag Sharma to take over the call and give details on liability side.

Parag Sharma — Chief Financial Officer, Joint Managing Director

Yes, hello everyone. The fund mobilization for Q2 was good, liquidity continues to be good across banks and that has been the focus area for fund-raising. Some fund-raising increase has been there from the capital market in the form of bonds also. Overall, for Q2, we have mobilized INR17,000 crores, the gross mobilization. Total debt outstanding as of September is INR1,25,586 crores. The cost being marginally up compared to Q1 by 10 basis-point, but if we look at year-on year basis, it is down by 16 basis point. Liquidity continues — on-balance sheet liquidity also continues to be strong. We have liquidity of close to around INR20,700 crores. Liabilities for next three months is only INR13,000 crores, so there will be sufficient cushion for managing our liabilities for the next six months also.

When it comes to ALM, each bucket as in past continues to be a positive, cumulative automatically is positive. Leverage ratio is at around 4.51%, with excess liquidity being utilized, leverage ratios were slightly dropped below 4.5%. HQLA is at 188% versus 191% in the previous quarter. We did announce buyback of our offshore bonds in August and we did buy-back close to around $256 million of bonds which were maturing in 2025 and some part in October 2022, which was a maturity for a short period, that was bought back and currently we have announced buyback of — our July 2023 bonds with a cap of $250 million, when that process is on, we’ll take another few days to realize how much interest is there. Incremental cost of borrowing is definitely up by around for 50 basis point to 70 basis point, but we do expect the overall liability — cost of liabilities to go up in next quarter. Nothing — we have increased our FD rates also in the shorter duration by around 25 basis points in the three to five year bracket by 5 basis point.

So now, I’ll move on — give it to Sunder, sir.

S. Sunder — Joint Managing Director

Thanks Parag. Hi, everyone. The employee count has increased in the current quarter by 1,056 employees, as against 25,720 employees in June quarter we are currently having 2,6776 employees as on 30th September. The cost-to-income has marginally increased in the current quarter to 21.12%, that is primarily due to a one-time hit of INR65 crores because of the settlement of certain sales tax litigations in which the company had opted for the Amnesty Schemes. And in the one-time registering [Phonetic] which RBI had permitted last year. The outstanding as on 30th September was INR683 crores. Here, I would just like to mention that in the investor deck that we had circulated yesterday, it was wrongly mentioned as INR6,830 crores instead of millions. And the coverage ratio was 51.57% as against 51.62%. And Stage 3 improved to 83.29% as against 82.49% in the previous quarter and Stage 2 was 9.78% as against 10.51% in the previous quarter.

We maintained a coverage ratio of 3.29% as against 3.21% in these for Stage 2 assets and coverage ratio of 8.84% as against 9.18% in the Stage 2 assets. The PD was 7.35% as against the previous quarter of 7.34% in the Stage 1 and 21.62% as against 21.75% in the Stage 2 and the LDD was 44.75% as against 43.76%. And the capital adequacy was strong at 22.48% an Tier 1 was 20.59% and Tier 2 was 1.89% and we continued to have the COVID related [Indecipherable] of INR17.41 crores as against close to INR1,830 crores in the previous quarter.

That’s it from me. I will like to open the floor for the questions, thanks.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Riken Shah from Credit Suisse. Please go-ahead.

Riken Shah — Credit Suisse — Analyst

Hi, good morning everyone, and thanks for the opportunity. I have four questions. First one was on the new vehicle disbursements and the AUM growth. So the new vehicle AUM has grown-up for 14, 15 quarters. So, just wanted to get a sense on the outlook from here for the new vehicle AUM? Second one was relating to the margins, have you taken any rate hikes on the loans for any products and what would be the quantum of this change? And on the liability side, could you please recap the total bond buyback that you did in 2Q and are looking to do in the 3Q?

Thirdly, on the opex, I think you did mentioned that there were certain one-off of INR65 crores, could you please elaborate on that and whether do we see that repeating in the coming quarters? And lastly, there were news flows pertaining to Shriram Group looking to lead the consortium in buying the IDBI Bank Intech. So just wanted to get a sense on the rationale of the same and about the strategy out there? Thanks, that’s all from my end.

Umesh G Revankar — Vice Chairman and Managing Director

Yes, thank you Riken. See, new vehicle, if you see quarter-on-quarter, our lending is going up, because our customers, typically what we do is, we lend to our existing customer, who are already a used vehicle. When they want to wish to upgrade then we fund them. We don’t have a direct arrangement with any OEM or a dealer point for lending to the new vehicle business directly to new customer. So as the economy progresses, when our customer decides to buy a new vehicle then he upgrades himself. So to the extent, we are increasing the new vehicle portion.

So, last quarter we did around INR1,000 crores and we expect that to grow. It may not have a significant increase on the overall AUM immediately, because since we have not done new vehicle lending for the last three years much, so the AUM is actually coming down. And with the new lending it may get stabilized and then move-up. So overall proportionate, it may not make any difference between new and used. So margin-wise we are — whatever the net interest margin of around 7% target, we may be plus or minus 10 basis point on the same and we should be able to maintain that.

On the opex, there is a tax, no?

Parag Sharma — Chief Financial Officer, Joint Managing Director

Yes, the one-time settlement that we had done for the sales tax litigations, it’s the one-time thing which was — all these cases are pertaining to prior to the GST regime, which we were litigating and now just — since the Amnesty Schemes are announced by certain state governments, we had opted for it and went in for a settlement, and we don’t expect any one-time hit on discount at least for the next — any future quarters. And coming to the —

S. Sunder — Joint Managing Director

— bond buyback, as I mentioned, we did in August $256 million, which was for two maturities October ’22 and in 2025, bonds which are maturing, this largely to do with carrying excess liquidity and also the unwind can — of the hedges what we have for the long-term bonds, if they are in money or not hugely negative then only we can go in for IFRS [Phonetic]. What we have also announced now is another $250 million for the 2023 maturity. So total will be around, around $500 million is what we look to buyback and we don’t have any plans for further buyback.

Umesh G Revankar — Vice Chairman and Managing Director

Yes. On the bank part of it, we don’t — we deny to say because as a company individually we have not really discussed with anyone or nor shown any interest in looking at any, what we call, buying or merger of bank, so we don’t have any plan on that direction.

Riken Shah — Credit Suisse — Analyst

Got it. And just a clarification on the yield side, have you taken any price increases on any of your vehicle products and the quantum if any there?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, on the used vehicle we have increased our lending rates. Because as and when the liability cost goes up, then typically we pass it on on the fresh contract. On existing contracts we cannot change, because these are all contractual, but the new lending we increase by around 25 basis point to 50 basis point, depending upon the segments. Normally the smaller ticket, the lending rate increase will be much higher.

Riken Shah — Credit Suisse — Analyst

Got it. This is helpful. That’s all from my end. Thank you and Happy Diwali to the entire team.

Umesh G Revankar — Vice Chairman and Managing Director

Thank you. Thank you. The next question comes from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go-ahead.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Sir, good morning and seasons greetings to you all. I have three questions on the same direction. Number one, does the buying of new vehicles indicate confidence that the economy is going to be doing well. How are the freight rate utilization and freight rates itself behaving, the freight utilization and rates? That’s question one.

On the bond, sir can you just — what is the strategy being buyback the bonds in terms of the fact that domestic market liquidity is getting tighter. So, is there some arbitrage that you have that you can utilize. That’s the second question. And the third question is on cost. Umesh sir, mentioned about inflation, so are you seeing wage cost pressures and do you think that’s going to impact cost-income later on? That’s it from my side, sir.

Umesh G Revankar — Vice Chairman and Managing Director

Yes, thank you. See, as far as the new vehicle, as I was telling you, customers are getting confidence in the economy or the cash flows, ultimately the cash — their needs higher cash-flow to repay the new vehicle. New vehicle cost will be approximately two times of the used vehicle, first time application, because application to application things vary.

So when they buy a new vehicle, one advantage is, it will be maintenance free, that is the advantage. But since the acquisition cost is high, the EMIs will be much bigger. So if cash flows are bigger, then they’ll repay it. So people delay buying new vehicles, mainly because of increase in new vehicle — increase in cost of new vehicle in the last couple of years. First, because of the BS-VI technology upgrade; and second, because of the steel price increase; and of course the third one was, the chip shortage and supply-chain issue, this is mostly to car, not to trucks.

But overall, the cost went up by 25% to 30%, and because of that many people postponed the upgradation or buying new vehicle plan. Now, people are getting confident that since there is a very little idling, better freight rate, better movement of vehicle, and also better resale values, they are able to dispose off their existing vehicle at a better value. All this is a positive and people will definitely move towards buying more new vehicles. And as and when our existing customer buying new vehicle, we fund them. So that’s the strategy and we are very confident that once they realize that cash flow will be better and whenever they buy new vehicle, their repayment also be equally good. Coming to the bond —

S. Sunder — Joint Managing Director

I think we entered the offshore market as when [Indecipherable] allowed, which was around five years back. We are particular that we will continue to tap the offshore market for sure to the extent RBI permits and the limits are available. So whatever support is required, if there is investors, industry is looking at opportunity to sell. We want to support the market. What we largely offered was for a very short-duration maturity which was October and we were carrying excess liquidity, we thought buying at par, so whose ever — whichever investors is keen to sell we will give them the option.

For the long-term, ’25, what we have done was largely because the bond was raised in the current calendar year, January itself, the markets after that went negative. So we wanted to give comfort to the investors and RBI doesn’t permit huge buyback. RBI also is particular about average maturity to be more than three years. So limited option of $280 million is what we offer to buy-back. It was only to help investors and we are particular that as and when markets are okay, rates are conducive, we will continue to tap the offshore market. So we want to develop this market and give them support. Whatever is required.

Umesh G Revankar — Vice Chairman and Managing Director

On the cost front, yes, inflation will definitely wish us to increase our wage bill little. We have done it in this financial year to some extent. But we will — we have not seen big pressure on the overall increase in the cost. So, we estimated the cost increase to 10% in our budget. And that will remain good for the rest of the year.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Thank you very much sir, and wishing you Happy Diwali in advance.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shweta Daptardar from Elara Capital. Please go-ahead.

Shweta Daptardar — Elara Capital — Analyst

Thank you, sir, for the opportunity and congratulations for a healthy quarter. I have three questions. The first one being, I understand that your collections teams are completely internally, but what is the total collection, employee count as a percentage of the overall number?

Umesh G Revankar — Vice Chairman and Managing Director

See, our field team is. 16,000 people totally, out of 25,000. And there will be another 4,000 people in the supervisory level, at the branch managers level or collection managers level. So the 16,000 people, they are field offices who in both source business and collect, we don’t have separate team for collection and these people will build relationship with the customer and continue to collect every month. We don’t outsource collection to outside, so we don’t have any outsourcing arrangement for collection, reposition, even the reposition is done by in-house team only.

Shweta Daptardar — Elara Capital — Analyst

Okay, got it, sir. Sir, you guided for 15% growth for combined entity. Can you guide for a standalone CV Financing, Shriram Transport Finance?

Umesh G Revankar — Vice Chairman and Managing Director

Standalone, we had given guidance of 12% and as — for six months have reached 11%, so we should be able to maintain that 12%.

Shweta Daptardar — Elara Capital — Analyst

Sure, got it, sir. Sir, my last question. If I look at our liability mix, NCDs are marginally going higher, have gone higher, securitization a bit down. Sir, where I’m coming from is, I think one of the previous participant told [Technical Issues].

Operator

I’m sorry to interrupt Ms. Daptardar, we cannot hear you.

Shweta Daptardar — Elara Capital — Analyst

Is this better now?

Operator

No ma’am, we cannot hear you, I’m sorry.

Umesh G Revankar — Vice Chairman and Managing Director

I think we understood the question.

Operator

Okay sir.

S. Sunder — Joint Managing Director

Yes, you’re talking about securitization transaction is being down and bond borrowing being up. Okay, so securitization normally in Q3 and Q4, normally the demand is huge, so that is where we feel we should go beyond the last year what we did — quantum what we did was 14,000 we should definitely do more than what we have done in Q1 and Q2. Bonds is something which we, in fact, the bond market for a less rated entity is limited and during COVID time, it was completely closed. Now it has opened up, so we want it — that particular source to be at around 20% of our liability, it was much lower, but have now reached around 20% level and that is what we will try to maintain it and securitization will definitely go up at around 15%, I feel by year end it should be around 17%.

Operator

Thank you. The next question is from the line of Nidhesh Jain from Investec. Please go-ahead.

Nidhesh Jain — Investec — Analyst

Good morning, sir. Sir, in the current environment how should we think about margins going-forward? I think we saw a bit of a sequential decline in margins in Q2. How should we think about margins in coming quarters?

Umesh G Revankar — Vice Chairman and Managing Director

See, margin, we should — we are confident of maintaining it. Q-on-Q margins improved by 7 basis point. So, I think we should be able to maintain that. See, we always guide a 7% plus or minus 20%, that’s the guidance, broad guidance. So that is the target we keep trying to achieve. There will be some moment because of the cost of liability going up. And not have been able to immediately pass onto entire book, because incremental only we can increase our lending rate, not to the existing book. So there’ll be some gap, but otherwise, we should be able to maintain around 7%.

Nidhesh Jain — Investec — Analyst

Sure, sir. And sir, I missed out, if you have shared the disbursement number in this quarter, both in terms of new vehicles and used vehicles?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, yes, we have already given the numbers. New disbursement, INR1,020 crores for this quarter against the previous quarter of INR784 crores on new disbursement.

Nidhesh Jain — Investec — Analyst

And sir, used?

Umesh G Revankar — Vice Chairman and Managing Director

Used is INR16,502 crores against INR15,754 crores in the previous quarter.

Nidhesh Jain — Investec — Analyst

Sure sir, that’s it from my side.

Operator

Thank you. [Operator Instructions] The next question is from the line of Vikas Agarwal from Bank of America Merrill Lynch. Please go-ahead.

Vikas Agarwal — Bank of America Merrill Lynch — Analyst

Hello, good morning sir, can you hear me?

Umesh G Revankar — Vice Chairman and Managing Director

Yes.

Vikas Agarwal — Bank of America Merrill Lynch — Analyst

Yes. Sir, thanks for the opportunity and thanks for all the updates. Just a couple of questions from my side, one is following-up on the question — discussion on the — and I am just now. Just wanted to understand a bit more in detail, because the impact as you said on the existing portfolio will probably stay longer and plus the cost of liabilities is also increasing. I know you’re also normalizing the liquidity, but this 20 bps margin, is that sufficient, 20 bps headroom is that something which is sufficient in the near-term to maintain the margin and I’m above 6.8, so that’s my first question. And the second question is on the bond buybacks, offshore bond buybacks you’re doing. Can you also share what sort of other offshore funding you are using and what’s the terms and borrowing cost for those funding?

Umesh G Revankar — Vice Chairman and Managing Director

See, as far as the net interest margin is concerned, we have a headroom to improve because we have higher liquidity. And we had told in the period quarter also that we would like to reduce the liquidity portion. Right now we are carrying the six months of liquidity, which we would like to decrease to five, and four and three gradually. So that is where we have an opportunity to — and improve the margins. Apart from the increasing the lending rate for the new contracts.

Parag, second question.

Parag Sharma — Chief Financial Officer, Joint Managing Director

On the offshore borrowings, we have a combination of bonds. We have loans from banks and also loan from development institutions. Our total offshore debt is close to around INR25,000 crores now. And the landed cost dependent, because some of the facilities or even 10 years what we have taken from development institutions and ECA. Our bonds typically at 3 years to 3.5 years, so hedge cost will be accordingly different. It has to be between 9.5% to 10% of what we have done in the past. But currently what we have borrowing — or what we have would have taken from development institutions is at around 9%.

Vikas Agarwal — Bank of America Merrill Lynch — Analyst

9% all-in landed cost, including the hedging?

Parag Sharma — Chief Financial Officer, Joint Managing Director

Correct, correct.

Vikas Agarwal — Bank of America Merrill Lynch — Analyst

Okay, got it, got it sir. Thank you. Thank you so much.

Operator

Thank you. The next question is from the line of Nilanjan Karfa from Nomura Group. Please go-ahead.

Nilanjan Karfa — Nomura Group — Analyst

Hi sir. I hope I’m audible. Just go back to this offshore bonds, so I understand there was excess liquidity, but what tilted the favor in not doing a buyback on the domestic and offshore. And I heard, again, sort of giving — the thing that mentioned is giving comfort to investors, so which investors are we’re talking about? Was there some kind of a stipulation that something is not right.

S. Sunder — Joint Managing Director

No, no, nothing of that sort. In fact largely if you see, what we have bought back is October ’22 maturity only, around $170 million odd what we have bought back is October, so it was only, very, very short-duration and because we were carrying liquidity for — excess liquidity from April itself, so instead of carrying liquidity, we thought we can look at buyback. When it comes to the long-terms, 2022-2025. 2025 what we have bought back is because the secondaries were trading very, very high.

So, we thought we should intervene in case any investors and industries, in fact it’s only for bonds what we have bought back. And offshore, we really don’t know, because it keeps trading to where the ultimate owners will not know, but secondaries were trading much wider, so we thought we should intervene and give comfort that in case anyone have got any concern, any stresses, we should be able to address it. But it’s very limited quantum what is permitted as per RBI, that is what we had done, this is only $80 million, so not very, very significant.

When it comes to onshore, the secondaries are not trading anyway there. So that was there during the COVID period, but post that everything is normalizing. So I don’t feel any need, any investor is in any kind of distress to set. So if there is a need, as of now liquidity is there and in case there is a need to support domestic bond holders also, we’ll be happy to do it.

Nilanjan Karfa — Nomura Group — Analyst

Right. Right, okay. And just a continuation, I mean when we hedge a foreign bond for example, do we turn a annualized basis or do we do it for the entirety — entire maturity?

S. Sunder — Joint Managing Director

We have a policy, always do it for the full maturity.

Nilanjan Karfa — Nomura Group — Analyst

Okay, okay, fair enough. My second question is to Umesh sir. I mean I know that we don’t have an sort of an outsourced reposition, but if you can talk about, in general, how the environment is standing out on the repossessed vehicle. And specifically if you want to comment a bit on the Shriram Automall, how the business is doing?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, see, right now the resale values are good. Customers who would like to hold-on to their vehicles, they don’t like to get vehicle gets repossessed, so that’s the tenancy. So the reposition increases when customer vehicle values drop and customer doesn’t have the tendency to hold-on to their vehicles, if a vehicle is an earning asset, and if it’s not earning enough and vehicle value drops, then the customer we will allow the vehicle get repossessed or maybe we are forced to repossess, because customer is not paying in time.

And currently the reposition is the minimum. I don’t think there is any pressure for any of the NBFC, industry or is a banking industry, reposition because the resale values are good, earning is good. So reposition has come down. In fact even in the Automall business, the last two quarters, we have witnessed that reposition as a source for their business activity has come down. So they are mostly doing the market business now. So market business means anyone who wants to sell their vehicle on their own, they will come on the platform. So Automall is doing good and the focus is more on the market business, rather than the repossessed vehicle from the NBFC or bank.

Nilanjan Karfa — Nomura Group — Analyst

Okay. So, many NBFCs sort of went into a — Shell posts that RBI directive on Mahindra. So you don’t think something like that is impacting the platform businesses or in general, repossessions?

Umesh G Revankar — Vice Chairman and Managing Director

No, no, that has nothing to do with a platform business, because a reposition, as I believe, most of the NBFCs are capable of doing the repositioning on their own without depending on outsourced agents. Because that NBFCs which are there for traditionally long-time. But, if there are new NBFCs, which we have just come up in the last few years, without enough network and manpower they may depend on outsourcing agent and there that will be very insignificant number. So, I don’t think that will make any change.

Nilanjan Karfa — Nomura Group — Analyst

Okay, okay, that’s very clear. And a final small clarification. I mean the — and the point was also raised earlier. The improvement in the new vehicles, is there something that came towards the quarter-end? I mean just because of the change in festival season, is that what has led to this improvement on Y-o-Y basis?

Umesh G Revankar — Vice Chairman and Managing Director

See, yes, festival definitely will — no, that is the opportunity for customers to buy new vehicle. But September en, normally month of September, there will be more new vehicle sales, including this Ganesha festival. Then till Dussehra the mood will be upbeat and positive for the people to buy new vehicles, that is normal trend. But what I’m seeing is, the viability of a new vehicle operation has improved significantly in-spite of increase in the vehicle value for even individual operators. And for smaller vehicle, the e-commerce activity and the Tier 2, Tier 3 town business, the agricultural activity, everything is positive. So people are now buying more new vehicle and their numbers are visible across the country. The 38% increase on year-on year is a significant increase in new vehicle.

Nilanjan Karfa — Nomura Group — Analyst

Surely sir, surely. So therefore that 15% guidance you’re quite comfortable, right? I mean, that’s —

Umesh G Revankar — Vice Chairman and Managing Director

Yes, we are comfortable with the 15% guidance for the combined entity.

Nilanjan Karfa — Nomura Group — Analyst

Perfect, perfect. That’s very helpful, sir. Thank you so much.

Operator

Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services. Please go-ahead.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Yes, thank you for taking my questions, and good morning to all of you. Sir, I had two or three questions. First one was on the merger, while we must acknowledge that we are comfortable with the 15% kind of a guidance on the merged entity. If you could just help us understand that given that the final theory in maturity has happened, and given that the order is expected in a weeks next time. What is the operational readiness in terms of working as one combined entity, given that you’ve been running quite a few pilots across many of your branches?

And secondly, sir, on the merger, just wanted to understand how will shares be issued? What I’m trying to understand is, when there’ll be a period where there will be no trading in the stocks of Shriram Transport and Shriram City or will it be a scenario where there will be no disruption in the trading activity and Shriram City and Shriram Capital shareholders will be issued shares of Shriram Transport and which will eventually kind of get the newness Shriram Finance? This is my first question on the merger.

Umesh G Revankar — Vice Chairman and Managing Director

Yes, merger, yes, see, as far as the merger is concerned, what we have done is, geographically we have put geographical head, Joint Managing Directors as the Unit Head and they’re running both business, Shriram Transport and Shriram City Union. And even though respective companies keep doing the business, the leadership is in place and then we had pilots. We had pilots only to understand the challenges of cross sales of each of the products, because the knowledge to be passed on to the staff, skill — training them, reskilling them and all those things we have done in the Pilot 1. Pilot 1 was done in the — around 50 branches. Then we scale it up to 1,200 branches across both the companies. So Pilot 1 and Pilot 2 is completed, now post-merger, it will be for this entire — all the branches.

So the high-ticket lending or high-ticket business like SME and heavy commercial vehicle, that is something which we’d be doing more centrally, but all other smaller tickets, like two-wheeler, gold, and the LCVs and tractor, all those things we should be able to do in all the branches, that’s how it has been planned. So the merger will be seamless and we should be able to scale-up the business and achieve the target which has been already guided. As far as the no trading period, there will be a no trading period SCUF, but not for STFC. That will be maybe a 10 to 15 days depending upon the regulatory requirement. And STFC shares will be — continues to be traded, because STFC will be surviving company and that will be renamed as SFL post the completion of ROC formalities.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Understood, sir. This is useful. And sir, my last question was around — rather two questions. One is, I mean this NIM guidance that you gave of 7% plus-minus 20 basis-points, that kind of stands despite the rising rate environment, right?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, yes. I have given a rationale also that we have a higher liquidity which we can manage and around 7%.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Understood sir. And sir lastly, on this reposition ban which was recently thereby the RBI, while you have clarified that Shriram Transport has no engagements with third-party agencies for collections and repossessions? Just wanted to understand, as an industry, has RBI engaged with you in the past or after this recent event and advice to improve some of the reposition processes? I wanted to understand if the regulator is a little concerned with the industry as a whole, when it comes to the reposition processes or was it an isolated incident for a particular vehicle financial?

Umesh G Revankar — Vice Chairman and Managing Director

See, basically in the past also on the collection part of it and the harassment of the borrowers part of it, RBI did had interaction with us, but this incident is isolated one, it is nothing to do with the initial discussion we had with the RBI. RBI wants us to have proper standards on engaging outsourcing team and methods of either reposition or collection to be properly guided and the proper manual being there and training to be given even if it is outsourced. All those things are there, it is a more of a discussion and we also had — as a FIDC, we had come out with broad guidelines on reposition and handbook was released long back.

And once again, after this particular incident, it is isolated and unfortunate incident. Once again we have given our broad outlook and broad guidelines on the same and that is shared with RBI. And also seeking the appointment with the RBI to further improve, if necessary, on the same. So as an industry body, we are working on the same. But there will be always some kind of — some incidents which can go out of control.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Thank you so much, sir. This is very, very useful and wish you and your team all the very best and look forward to speaking to you next quarter as a merged entity. Thank you so much.

Operator

Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities. Please go-ahead.

Nischint Chawathe — Kotak Securities — Analyst

Hi, thanks for taking my question. Just a couple of points. What is the target gross Stage 2, you’ve come down into single-digits. So where do you think this kind of goes in [Indecipherable] or what was the levels for COVID [Indecipherable]?

Umesh G Revankar — Vice Chairman and Managing Director

See, Stage 2 would remain range-bound in-between 10% to 12% and I think we have significantly improved over the last three to four years. Once we have moved to the 90 days, right from that it has been a continuous effort to bring it down, because when we moved from 180 days to 90 days, it was a gradual improvement, customer had a little bigger time for managing his NPA. And we have been educating the customer. So, over the period we have brought it down and we should remain at this level. I don’t think it will significantly improve over it, since most of our lending is asset backed, we need not really get disturbed or perturbed with this and we are feeling that this is a good comfortable range.

Nischint Chawathe — Kotak Securities — Analyst

What is the current IRR range, interest-rate range that you are charging for used CVs and new CVs?

Umesh G Revankar — Vice Chairman and Managing Director

Used?

Nischint Chawathe — Kotak Securities — Analyst

Used and new commercial vehicles, what is the –?

Umesh G Revankar — Vice Chairman and Managing Director

Previously it ranges between — anywhere between 14 to 18, it all depends upon the vintage of the vehicle and also ticket size. So the simple principle, higher the vintage, lower the ticket size, higher the rate.

Nischint Chawathe — Kotak Securities — Analyst

So, I mean just a broad range for used versus new, how much would be the weighted-average differential?

Umesh G Revankar — Vice Chairman and Managing Director

The weighted-average differential between new and used will be around 300 basis point.

Nischint Chawathe — Kotak Securities — Analyst

Sure and just a last one is on the possible use on the liability side after the merger. Currently — now we are very close to the merger and I guess you would have evaluated the consolidated borrowing position. So what could be the juice left out there, probably borrowing, pre-paying some of the high-cost borrowings on the consolidated level and probably accessing cheaper ones or maybe kind of just — as the more expensive ones get redeemed, we’re letting it with the cheaper one or probably looking at a consolidated liquidity position. So very roughly, some assessment on your side in terms of what you would have done and what could be the benefit?

Umesh G Revankar — Vice Chairman and Managing Director

See, this is a continuous work and I think Parag will be able to explain better.

Parag Sharma — Chief Financial Officer, Joint Managing Director

Yes, in fact if we look at Shriram City Union, because you would have been looking at it very regularly. So it was more skewed towards fixed deposit, retail deposit and bank borrowings, there is not much of bonds, offshore is anywhere not there. So it is — but look at the total borrowing what they have banks, I don’t think that adds very significantly to the overall bank borrowing, so it should continue to add around 20%, 21% of our liability post-merger.

And looking at whether we can reduce cost, I don’t think we will force that. And we will only look at borrowing fresh from the same banks at a lower rate. We will not go in for immediately paying-off. When it comes to the overall liquidity what will maintain. I think the policy will remain the same. Three months of liability repayment to be in heart for the merged entity also is what we will look at.

We did mentioned that around INR11,000 crore to INR12,000 crore is what is required for Shriram Transport. If we add Shriram City Union liabilities also, it should get around INR14,000 crores to INR15,000 crores of overall liquidity to be maintain, that is what we will do post-merger.

Nischint Chawathe — Kotak Securities — Analyst

And if I were to look at, let’s say, facilities from the same bank, is there a differential between what you are able to borrow and what they borrow?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, yes, definitely, there is a differential. One, there is a rating difference itself. Bank also have been placing it differently. Capital market automatically goes by the rating in the public domain, but banks also there are differentials.

Nischint Chawathe — Kotak Securities — Analyst

So then that’s something that you kind of get negotiated immediately?

Umesh G Revankar — Vice Chairman and Managing Director

Correct. Immediately, I don’t think banks will immediately reduce our rate, but whatever fresh we borrow from the bank will definitely be at a much lower level.

Nischint Chawathe — Kotak Securities — Analyst

Got it. Thanks. Those were my questions. All the best and Happy Diwali.

Operator

Thank you. The next question is from the line of Ajit Kumar from Goldman Sachs. Please go-ahead.

Ajit Kumar — Goldman Sachs — Analyst

Thank you for taking my questions. So first on the opex side, despite increasing employee count by more than 1,000 in this quarter, why is the employee expense down sequentially? And how do you look at employee and branch addition going-forward as disbursement picks up an impact on the cost-to-income ratio side? That is one.

Parag Sharma — Chief Financial Officer, Joint Managing Director

You wanted a clarification on the cost going down?

Ajit Kumar — Goldman Sachs — Analyst

Employee cost going down.

Parag Sharma — Chief Financial Officer, Joint Managing Director

Okay, see in the first quarter we typically pay the annual incentive for certain grade of people and hence it was on the higher side and current quarter. It was not there and hence it was lower compared to the previous quarter.

Umesh G Revankar — Vice Chairman and Managing Director

And as far as the employee count, see, we had not recruited more people in the last two years. During the COVID years our recruitment drive had come down, actually on our employee count also had come down from around 27,000 employees it has come down to less than 25,000 in the last two, two and half years, because we did not do fresh recruitment, which we started doing in the last six months. So therefore the number of count is going up. And for our business, as we increased the volume, we do need to add more number of people.

As far as the brand is concerned, we have not opened any branches in the last quarter, we did not add any branch. Going-forward, post-merger, then we look at this scope and opportunity to open more brands or using the existing network of combined entity. So that we need to really work on. We have — already have blueprint on the same, but we’ll execute it over the period.

Ajit Kumar — Goldman Sachs — Analyst

Okay, thank you. And second, coming back again on the liability side, what could be the mix going-forward or in other words, on which funding instruments you will focus more on and how much increase in cost of fund do you expect in the next 12 months or so?

Parag Sharma — Chief Financial Officer, Joint Managing Director

The funding mix, whatever is there for Shriram Transport, that is equally distributed between deposit, offshore, bonds, securitization. 20%, 20% each is what we will look at for the merged entity also. Borrowing cost as of now for the next quarter, I can definitely say it will go up around between — anywhere between 8 basis point to 10 basis point. Going-forward, it depends upon how much further rate increase is there. So that kind of increase will be there. But banks have increased rates in-line with the — or the capital market rates also has gone up in-line with repo rate increase. So, we’ll have to only look at the policy rate hikes, and then factor-in what would be the first sales for us. It will be in-line with whatever is available in the market, but 8 basis point to 10 basis point is what I can tell about the next quarter.

Ajit Kumar — Goldman Sachs — Analyst

Okay, okay, thank you. Thanks a lot.

Operator

Thank you. The next question is from the line of Chandra [Phonetic] from Fidelity Investments. Please go-ahead.

Chandra — Fidelity Investments — Analyst

Hi. In the last quarter we used INR200 crores of our buffer provisions, we’ve used about INR100 crores of our buffer provisions in this quarter towards write-offs. We still have INR1,700 crores of buffer provisions. And my understanding is that, the contracts for which we have made these provisions should be maturing before the year end given the tenure of book. So, how are you thinking on what would eventually happen, given sequentially the utilization also has come off?

Umesh G Revankar — Vice Chairman and Managing Director

See, these accruals will get matured over the next two years, because typically average contract would be 4 years. And over the 2 years this will get adjusted. So we have now, last two quarters, you have seen the trend as we have INR1,700 crores. So we expect maybe another INR500 crores to INR600 crores by this year-end, then maybe the rest will be next financial year.

Chandra — Fidelity Investments — Analyst

Sorry, my understanding was, some of this has created because of the moratorium interest and my understanding earlier, I think you have always said that the contract should mature by the end of FY ’23 for these. So we would — you will take a decision on writing back after then. It seems that you have a different thought process now?

Umesh G Revankar — Vice Chairman and Managing Director

No.

S. Sunder — Joint Managing Director

See, these — all these contracts were pre-COVID and which were closed prior to March 2020. And for all these customers, a maximum of the customers we had extended the moratorium approved by the government. And these cases typically will have a tenure of 3 years to 4 years and the majority of the cases will come to an end by the end of this financial year and something will be spilled over to the next financial year, that’s what he was trying to indicate.

Chandra — Fidelity Investments — Analyst

Understood. Do you — so you don’t really expect any write-backs at all from this?

Umesh G Revankar — Vice Chairman and Managing Director

Yes.

S. Sunder — Joint Managing Director

Write-back is very difficult, because in our — the segment of customers that we cater to, they come in for some waivers at the end-of-the contract and these six months, during the COVID period, they had all been impacted and we had after that thing and had accreted this provision and we believe that the — it will go out as a waiver and not much should come back again an write-back into our books.

Chandra — Fidelity Investments — Analyst

Sure. Then just a couple of questions was, there is a stamp duty of, if I’m not wrong, over INR200 crores, INR250 crores. I would presume that in this quarter we should see that impact in the P&L number? And second is that, when the merger was announced, there was about INR68 crores of employee cost rationalization which had to be done across to sort of equalize wages. I would presume provisions for that also would be taken in this — the third quarter?

S. Sunder — Joint Managing Director

The stamp duty will not be as high as INR200 crores. We had initially anticipated that the maximum amount that was prevailing in Tamil Nadu was around INR200 crores, but I believe there has been some relaxation as far as that is concerned and the amount involved would be much lower than that. And coming to the cost rationalization, we are still working on it and it will take the next two quarters to three quarters for that to really impact, but we don’t expect that to come in the next quarter immediately.

Chandra — Fidelity Investments — Analyst

Thank you.

Operator

Thank you. The next question is from the line of Amit Jain from Axis Capital. Please go-ahead.

Amit Jain — Axis Capital — Analyst

Yes, hi sir, good morning for thanks for taking my question. Sir, in this quarter the credit costs have come off as compared to-Q1. So just wanted to know your outlook for FY ’23 how are you looking at credit cost? I believe they would be on a declining trend, but just wanted to know your thoughts on that?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, we have given a guidance of 2% as the credit cost for the full-year. We should be close to that.

Amit Jain — Axis Capital — Analyst

Right, sir. And in terms of excess liquidity, what is excess liquidity currently on the balance sheet, sir?

Parag Sharma — Chief Financial Officer, Joint Managing Director

Around INR5,000 crore is what we have excess. With one large maturity this month itself, we should be able to utilize that. So around INR5,000 crore to INR6,000 crores is what is their excess.

Amit Jain — Axis Capital — Analyst

All right, sir. Thank you, sir. Thank you so much.

Operator

Thank you. There is a follow-up question from the line of Riken Shah from Credit Suisse. Please go-ahead.

Riken Shah — Credit Suisse — Analyst

Thanks my question has been answered.

Operator

Thank you. The next question is from the line of KC Poovanna [Phonetic], an Individual Investor. Please go-ahead.

KC Poovanna — Individual Investor — Analyst

Hello, am I audible?

Umesh G Revankar — Vice Chairman and Managing Director

Yes, yes.

KC Poovanna — Individual Investor — Analyst

Good morning, everybody. I’m a shareholder. As such you can expect my question easily. The question is to Mr. Umesh. Last year in the September quarter meeting you had declared an interim dividend of 80%. This time there is no such declaration, why is that? Hello?

Umesh G Revankar — Vice Chairman and Managing Director

Yes. We will plans something in the next two quarters. This quarter we have — because of the merger, we thought it is better — prudent to do it post the merger from the, what you call, Shriram Finance, that was the plan.

KC Poovanna — Individual Investor — Analyst

That means we can expect any dividend only after the merger is completed, is that?

Umesh G Revankar — Vice Chairman and Managing Director

The merger will be completed in this month, that’s November month, so next quarter you can expect, next two quarters.

KC Poovanna — Individual Investor — Analyst

Okay. Thank you Mr. Umesh. Thank you very much.

Operator

Thank you. Ladies and gentlemen, as that was the last question for today, I would now like to hand the conference over to Mr. Umesh Revankar, Vice Chairman and Managing Director for closing comments.

Umesh G Revankar — Vice Chairman and Managing Director

Thank you. Thank you all for joining this call. Let me first wish you a Happy Diwali and let us have this festival as a revival of Indian Economy and being a leading economy in the world by growing the fastest, and that should augur well for us and I expect next couple of quarters to be a much better quarter than this quarter as demand, collection and customer business, everything is looking very sound and good. Thank you. Hope to see you all in the next quarter call, thank you.

Operator

[Operator Closing Remarks]