Shriram Transport Finance Company Ltd (SRTRANSFIN) Q3 FY23 Earnings Concall Transcript

Shriram Transport Finance Company Ltd (NSE: SRTRANSFIN) Q3 FY23 Earnings Concall dated Feb. 1, 2023

Corporate Participants:

Umesh Govind Revankar — Executive Vice Chairman

Y S Chakravarti — Managing Director and Chief Executive Officer

Parag Sharma — Chief Financial Officer

Sunder S. — Joint Managing Director

Ravi Subramanian — Managing Director and Chief Executive Officer, Shriram Housing

Analysts:

Shubhranshu Mishra — PhillipCapital — Analyst

Nischint Chawathe — Kotak Mutual Funds — Analyst

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Param Subramanian — Macquarie — Analyst

Umang Shah — Kotak Mahindra — Analyst

Shweta Daptardar — Elara Capital — Analyst

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Uday Pai — Investec — Analyst

Rahul Jain — Goldman Sachs — Analyst

Ankur Jain — Private Investor — Analyst

Chandrasekhar Sridhar — Fidelity International — Analyst

Presentation:

Operator

Ladies and gentlemen, good morning and welcome to Shriram Finance Limited Q3 FY ’23 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to. Mr. Umesh Revankar, Executive Vice-Chairman Shriram Finance Limited for his opening remarks. Thank you and over to you sir.

Umesh Govind Revankar — Executive Vice Chairman

Yeah. Thank you. Good morning friends from India and Asia and a warm welcome to everyone. Good evening to those who joined from the western part of the world. This is the first earning call for the merged entity of Shriram Finance Limited. We have with me Mr. Chakravarti, the Managing Director and CEO, Joint Managing Directors, Parag, Sunder, Gilani, Sudarshan, Sridharan, Nilesh and Srinivas. And we also have Mr. Ravi Subramaniam, who is MD and CEO of subsidiary, Shriram Housing Finance Limited; and Sanjay Mundra who is our IR head.

First, let me go through the merger update. After nearly one year of the announcement of merger, on 13th December ’21, we announced the merger. As per the plan — timeline what we have given, one year we could complete the total merger process. On the 5th of December we officially announced our merger. In fact we had received a letter — order from NCLT on 9th, but for us to complete the other formalities and announce, it took some time. For the shift [Phonetic] and security equity trading it started from December 28th, after necessary formalities with the exchanges.

Meanwhile, we had prepared ourselves well with from April itself in the beginning of the financial year. We had planned the integration and we had put five managing, joint managing directors in respective geographies to manage the business as a combined entity. And that preparation has helped us well in running a few pilots for the various products.

Today out of 2,900 branches. I can say that around 85% of the branches, we have at least run one additional product. Depending upon the geography, depending upon the local needs, we have been trying to push the — at least one additional product of each of the companies and that has been successfully done.

As far as the larger ticket lending on commercial vehicle and SMEs, we are taking a little more time, because this needs to be done on a more concentrated and better supervised way and underwriting part of it is done centrally in some of this location. So we will be taking a little more time in rolling out large ticket products across India over the next one year.

Meanwhile, Indian economy is growing well and last quarter it recorded a 6.3% GDP growth. Overall for the first half, it is 9.7% and as per the estimate, it is likely to be around 6.9%. Yesterday the Government Economic Survey has indicated that it will be around 7% for this year and maybe 6.6% going forward for next year. That itself is — will make India, the growth engine of the world. India will be growing the fastest among all the countries, the inflation worry was. There for some more, some time, maybe six months now, mainly because of various commodity prices going up, fuel prices going up and also the geopolitical tension.

But now in India, the inflation numbers have come down significantly and December numbers there at 5.72%, which is below the 6% upper limit of RBI and also WPI has come down to 4.95% and last December it was 14.27%. So, there is a substantial improvement in the WPI number. So, it should help us in moderating our liability cost.

The RBI monetary policy also MPC had hiked the repo rate by 35 basis points, and at present it is 6.25%. And we expect maybe another rate hike — modest rate hike or with inflation number being there, it may not increase, that is a possibility.

The GST collection is robust. In fact, yesterday today morning, if you have gone through January collection is INR1.5 lakh crores, and with steady INR145,000 crore about collection for the last few months, we believe the government spend on infrastructure will continue. With infrastructure spend continuing, our segments, especially commercial vehicle and construction related activity will continue to grow, this is what we strongly believe.

The private capital is something which is not coming, in the way we expected. But this financial year, government seems to be confident, as today’s report on the government’s economic survey suggests that private capital is likely to come in, in a reasonable way this financial year. The agri and rural economy has been doing very well. If you look at India’s agri growth for last three years — India is bless with good climate, good rains for the last three to four years, and that is really helping. With the various programs of government supporting the agri income growth, and also direct credit to the farmers, that also is helping. There are some numbers which suggests the government has announced that totally INR2.16 lakh crore has been deposited directly into the bank accounts of farmers under Pradhan Mantri Fasal Bima Yojana and INR1.24 lakh crore has been given to farmers for crop losses. So, this augurs well for the rural economy and to the income of the rural area.

And government also has announced its plans to convert around 3.25 lakh fertilizer shops across the country, as Pradhan Mantri Kisan Samriddhi Kendra. These measures will definitely help the rural economy to be steady and consumption in the rural economy to grow.

Coming to the auto industry, overall commercial vehicle sales have gone up by 16.6% to 227,211 units in Q3 against 194,709 in Q3 22. The heavy vehicle sales out of it is 683,000 [Technical Issues] wasn’t higher for the nine months period compared to 466,760.

The heavy vehicles have been growing much faster at 33% over the previous quarter, and LCV have been growing at 8.2%. Three wheeler is showing robust growth of 67%. I believe it’s mainly because of the expansion of e-commerce activity. E-commerce is expected to grow 18% through 2025. That means the e-commerce is likely to reach to tier-2, tier-3 towns, including all pin codes that are available, maybe that’s the way the e-commerce going to play a major role in last mile reach, and the transportation part of it.

The earthmoving and construction equipments also are growing very healthy at 26%. Tractor sales have grown by 23%, of 209,980 units in Q3 versus previous year same period of 169,835. So, two wheeler also has been growing at 38,59,030 units at 6.3% growth for the nine months period. So, which indicates that the overall — there is buoyancy, demand in the urban and rural markets.

More to come to the current quarter performance, I’ll hand over the mike to Mr. Chakravarti, my colleague.

Y S Chakravarti — Managing Director and Chief Executive Officer

Thank you and I welcome all to the first earnings call of Shriram Finance Ltd. for the third quarter of financial year ’23. I trust you had the opportunity to look at the investor presentation that we have put out. And as Mr. Revankar mentioned in his opening remarks, financial year ’23 has been an eventful year for us because of the merger and all credit to our business and back office teams, that this merger has been concluded.

I would also request you to note that the corresponding previous sales figures are not comparable, as the merger effective date is 1st April, 2022. On the operational metrics, we clocked a disbursement growth of INR29,245.26 crores as against INR22,931.70 crores in the same period of the previous year, and as against INR25,789.32 crores in Q2 finanical year ’23. Our FX under management [Technical Issues]

Operator

Sir, I’m sorry to interrupt, can you please repeat your last line sir. There is a slight static on the line.

Y S Chakravarti — Managing Director and Chief Executive Officer

Okay. Our assets under management stands at INR177,498.17 crores, as compared to INR156,848.63 crores in the previous year, and increase by 13.17% as compared to INR169,358.2 crores in quarter two FY ’23. Net interest income stands at INR4,427.88 crores, as against INR2,387.97 crores in the same period previous year, and as against INR4,104.86 crores in Q2 FY ’23.

Our net interest margin was 8.52% as against 6.65% in the same period as previous year and 8.26% in Q2 FY ’23. Profit After Tax stands at INR1,776.97 crores in quarter three FY ’23 compared to INR680.62 crores in quarter three FY ’22, and as against 1,555.11 crores in Q2 FY ’23. Our earnings per share stood at INR47.46 rupees as against INR25.26 in the quarter of Q3 FY ’22 and INR41.53 in Q2 FY ’23. Gross Stage 3 declined by 2 basis points and net stage 3 declined by 12 basis-points over Q2 FY ’22. And hence gross stage 3 stood at 6.29% compared to 8.4% in Q3 FY ’22 and 6.31% in Q2 FY ’23. The net Stage 3 stood at 3.2% compared to 4.36% of Q3 FY 22 and 3.32% in Q2 FY ’23. The credit costs for the current quarter stood at 1.75% as against 1.73% for Q2 FY ’23.The cost-to-income ratio was 22.29% in this quarter as against 24.5% recorded in Q2 FY ’23.

Now I would like to move on to our subsidiary, Shriram Housing Finance Limited. The registered disbursement growth of 30.33% to INR1,001 crores as against INR768 crores in the same period last year, and as against INR1.049 crores in Q2 FY ’23.

Shriram Housing’s assets under management grew by 55.84% to INR7,178.16 crores, as compared to INR4,606.15 crores in the previous year and by 9.66% as compared to INR6,545.92 crores in Q2 FY ’23.

The net interest income increased by 86.23% to INR79.61 crores as against INR42.74 crores in the same period of previous year, and as against INR64.53 crores in Q2 FY ’23. Profit after tax for Shriram Housing increased by 27.19% to INR36.38 crores in Q3 FY ’23, compared to INR28.60 crores in Q3 FY ’22, and as against INR34.03 crores in Q2 FY ’23. The earnings per share stood at INR1.12 as against INR0.88 in the quarter, Q3 FY ’22.

Shriram Housing’s gross stage 3 declined by 37 basis points, and net stage 3 declined by 29 basis points, over Q2 FY 2023 and accordingly, gross stage 3 stood at 1.15% compared to 2.47% in the Q3 FY ’22, and 1.52% in Q2 FY ’23. The next stage 3 stood at 0.87% compared to 1.99% of quarter — Q3 FY ’22 and 1.16% in Q2 FY ’23.

I shall now request our wholetime Director and CFO, Mr. Parag Sharma, to brief you on our fundraising and equities and other liability related matter. After that, our Joint Managing Director Mr. Sunder, will talk about the accounting aspects. Thank you.

Parag Sharma — Chief Financial Officer

Hello everyone. For the liabilities, total liabilities as of December stood at INR1,53,328 crores, broken up into 47% through the term loan, bank loans route, around 23% from FD, which is retail FD, 44% is through domestic bond market, capital market, securitization is close to 13%, and external commercial borrowings, including bond and loan, was at around 12%. So that is the breakup of liabilities, the overall cost rate at around INR8.77 compared to INR8.71 in the previous quarter, up by around 6 basis points. Liability mix might change, with more securitization to be done in the coming quarter, and also some increases in the bond offering at the company.

That would be the two changes, one consolidation [Phonetic] for the quarter, we have mobilized in line with the previous quarters, close to around INR12,200 crores odd of borrowings, where the securitization is the largest contributor at INR4,400 crores, followed by retail deposits, which was INR4,093 crores.

On the ALM front, all buckets, as in past, has been positive, with cumulative surplus up to one year, being in excess of INR30,000 crore. Liquidity coverage ratio is healthy, it is at around 240%. So overall liquidity is INR17,400 odd crores, which is good for meeting our everyday repayments for close to around five months of liabilities. The leverage ratio is down from 3.9% to 3.63% in the current quarter. Rating agencies have reaffirmed ratings of Shriram Financial as AA+, all the four rating agencies, CRISIL, CARE, ICRA and India Ratings have reaffirmed the ratings, so we are confident that this quarter the cost may not go at 8.77%. They should reduce it, but we don’t expect the costs to go up for sure for this quarter.

With this, I hand over to Sunder for his comments.

Sunder S. — Joint Managing Director

Hi, everyone. A couple of data points. One is that the employees have — the count has increased by 3,536 members in the current quarter, with the closing employee count of 60,908. The cost to income ratio has stabilized at around 22.29% and we expect this to be different going forward, in a broad band of 22% to 24% and as you are aware, there was a one time sales tax write-off which happened in the previous quarter and hence it was higher at 24.9% in September quarter.

And most of the numbers have been already spoken by the MD and CFO, and one additional data point is that the LGD for the current quarter of the combined entity is 42.39% and PD for Stage 1 is 7.17% and PD for stage two is 17.4%. And one more additional point which I would like to clarify, is that the already reported numbers of STFM in the previous two quarters have been restated, to take into account some entries relating to the merger fair valuation, accounting as per the IndAS norms. So there may be a difference of around INR100 crores in each quarter, and which — if any queries are there, we’ll be happy to reply to it offline through Mr. Sanjay Mundra.

With this, I’d like to hand over the call back to the moderator and request the moderator to open the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Shubhranshu Mishra from PhilipCapital. please go ahead.

Shubhranshu Mishra — PhillipCapital — Analyst

Great. Hi sir. Just quickly if you can give out the disbursement as per product and sincere request if it can be part of the presentation going forward sir, it will be slightly easier, because we have so many products now. That’s the only question I have. Thanks.

Sunder S. — Joint Managing Director

Okay. The disbursement for the quarter is INR29,245 crores, and as against the previous Q2 number of INR25,789 crores, and coming to the segment wise — the commercial vehicle segment we had done INR11,750 crores, the passenger vehicles was by INR5,057 crore, construction equipment was INR1808 crores, farm equipment INR527 crores, MSME was INR2,870 crores; two wheeler INR3,230 crores, gold loans, INR2,131 crores, and personal loan contributed up to INR1842 crore and others, around INR17 crores. So this is a broad breakup of the segment wise disbursement, and we will definitely take your suggestion and then try to incorporate the same in the future presentation.

Shubhranshu Mishra — PhillipCapital — Analyst

Within CV sir, what is used and new sir?

Sunder S. — Joint Managing Director

It’ll be roughly — around 10% will be new and the balance will be used.

Shubhranshu Mishra — PhillipCapital — Analyst

Thank you so much.

Operator

[Operator Instructions] We have the next question from the line of Nischint from Kotak Mutual Funds. Please go ahead.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Hi. This is Nischint from Kotak Securities. Just one question to Parag. What gives you confidence that cost of borrowing will not increase next quarter? You mentioned that we are at 8.4% and it will not go up from this quarter.

Parag Sharma — Chief Financial Officer

Nischint, I said, it is 8.77%. Currently, whatever we are borrowing is at much lower level. We are borrowing at between 8.5% to 8.6%. So I don’t expect the costs to go up. It can only come down. We did repay some of the high-cost debt in the month of October end — towards October end. So I don’t expect — because incremental cost is lower than the — all balance sheet cost as of now, that is the reason I am confident that it will not go up for this quarter.

Nischint Chawathe — Kotak Mutual Funds — Analyst

No, but I would assume that some of the bank borrowing, as you would see the — I mean, there is a repricing that has happened…

Parag Sharma — Chief Financial Officer

Bank borrowing is happening, Nischint, at the rate of around 8.5% to 8.65% range only, nothing beyond that. And overall liability cost is around 8.77%. That is why I’m confident it will not go up.

Nischint Chawathe — Kotak Mutual Funds — Analyst

No, no, I understand that, but I’m saying that some of the bank borrowings that you’re currently having? Let’s say, if something is like at this point of time, let’s say, 7.5% or 7.7%, when it — and I believe this is one year due for repricing. So when it comes to repricing, maybe next month or two, three months down the line, then it kind of probably gets repriced at a higher rate, depending on what has been the rise in MCLR in the last 12 months.

Parag Sharma — Chief Financial Officer

Yeah. So there is nothing called annual repricing when it comes to the large borrowing which is from public sector banks, it is all MCLR-linked. And there was nothing — at around 7% level there is no borrowing. All the borrowings stood at around — MCLR at that point of time will be around 8% to 8.25% only. So I don’t expect that to be — there will be a major change. We do expect to increase our securitization volumes. We do expect to increase our bond offerings. And even bonds what we are currently borrowing, are not at the levels which is — in the balance sheet cost as of now. That is why I’m confident about costs not going up.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Perfect. Can you just remind last quarter, I mean, we can — maybe let’s look at stand-alone Shriram Transport, what would have been this cost of borrowing as against 8.77%?

Parag Sharma — Chief Financial Officer

The increment was around 8.25% to 8.30%.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Outstanding, if you are at 8.77% in December.

Parag Sharma — Chief Financial Officer

Yeah, that includes Shriram City Union liabilities also. And also, whatever we have borrowed from the offshore, everything included was 8.77%. But incremental what we have borrowed is between 8.25% to 8.30% range only. That is why I’m saying, it will not go up.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Sure. And outstanding last quarter only for standalone Shriram Transport would be how much?

Parag Sharma — Chief Financial Officer

That was at around 8.5%. 8.54% is what we reported for the September quarter.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Okay sure, got it. I think that was my question. Thank you very much.

Operator

[Operator Instructions] The next question is from the line of Mahrukh Adajania from Nuvama Wealth Management. Please go ahead.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Yeah, hello good morning. So what is the quantum of one-off in operating expenses?

Sunder S. — Joint Managing Director

This quarter, there was no one-off. The one-off was in the previous quarter of INR65 crores, which was on account of write-off of the earlier litigations regarding the field staff [Phonetic]. So there was an amnesty scheme launched by certain state governments, and we had availed of it. And whatever was the amount payable, we had paid and written-off in the books of accounts. That amounted to INR65 crores in the previous quarter and that was a one-off. Current quarter, there is nothing to this.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

And the merger-related expenses have, have they come in opex?

Sunder S. — Joint Managing Director

Yeah. It’s — the expense related to merger is around INR19 crores, and it will be deferred over a period of five years. And whatever is pertaining to the current quarter has already been factored, and it’s not significant compared to our size of the expenses.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

So it will be deferred over five years?

Sunder S. — Joint Managing Director

Yes, correct.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Over every quarter, okay. And then just in terms of credit cost, so this is where it settles, is it? The Q3 level, is that where it settles now, or how do we look at it going ahead?

Sunder S. — Joint Managing Director

We have been — Yes.

Umesh Govind Revankar — Executive Vice Chairman

See, credit cost, we always have given an indication that it will be around 2%. So this current year, it is 1.94% as of — for the nine months period. And we should be around 2% at any point of time, which is our long-term history, if you go 10 years back and also — forward-looking also, we have always been indicating that it will be around 2% credit cost.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Got it. And when you expense the intangibles of INR100 crores every month, is it tax deductible or it’s not?

Sunder S. — Joint Managing Director

The intangibles we will be adjusting for impairment, and it’s most likely that it will come maybe after a couple of years only, not before that. That is what is our estimation. But it’s up to the independent valuer to take a call, but we’ll be testing for impairment every year-end.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Okay. But whatever is written off through P&L or expense there, is that tax deductible or not?

Parag Sharma — Chief Financial Officer

The goodwill is not tax deductible, but the intangibles, yes, it is tax deductible.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Okay. Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Param Subramanian from Macquarie. Please go ahead.

Param Subramanian — Macquarie — Analyst

Yeah, hi. Thanks for taking my questions. So my first question was on understanding this NII that you’ve reported, on a merged basis. So if I just do an addition of the 2Q NII of Shriram Transport and Shriram City Union and compare with what you have reported for pro forma, there’s a gap of — or an incremental addition of about INR180 crore. So could you explain what exactly is giving this delta?

Sunder S. — Joint Managing Director

See, as I was telling you in the opening remarks, that as per the accounting standard, on merger, we have done some fair valuation of the liabilities, the loans that we have borrowed, as well as loans that we have given. And roughly around INR1,000 crores is the fair value that we have taken a hit, at the time of — in the opening balance sheet. And the benefit will come over a period of three years; maximum will come in the current year, that’s what we were indicating that it will be around INR100 crores per quarter will be the addition to the NII in the next couple of quarters, three, four quarters, at least. Then it will [Speech Overlap].

Param Subramanian — Macquarie — Analyst

INR100 crore per quarter for the next three, four quarters?

Sunder S. — Joint Managing Director

Correct. Correct. Yes.

Param Subramanian — Macquarie — Analyst

Okay. You said it is a hit to the balance sheet, so how is it giving you credit on the P&L?

Sunder S. — Joint Managing Director

No, it is a credit to the P&L and opening balance, we have taken a hit. {Speech Overlap]

Param Subramanian — Macquarie — Analyst

Okay, sir. And what is the corresponding impact on net worth? Because even if I do a net worth comparison even adjusting for goodwill, is it also adding to your net worth, this…

Sunder S. — Joint Managing Director

See, the net worth, if you see the — STUPN [Phonetic] standalone curve, as on 31st March and add your current nine months profit minus dividend what we already paid, and there will be difference of around INR2,800 crores, is on account of the goodwill and intangibles that we have created, which is kept as an asset. That is the difference.

Param Subramanian — Macquarie — Analyst

Okay. So goodwill is INR1,400 crores and the remaining INR1,400 crores is also…

Sunder S. — Joint Managing Director

INR1,300 crores is the goodwill and INR1,500 crores is the intangibles. And these primarily have been bifurcated to get a benefit of tax claim at least — as far as this is concerned. And it is supported by independent valuers, other spend and all those things. And the charge to P&L may happen maybe after the next couple of years, not before that. Parameswaran Subramanian Got it. Sir, if I can just ask, so considering the one-offs you are seeing post merger in the P&L currently, so what is the sustainable level of ROA and ROE. So this time, you are reporting 3.4% ROA, but what is — on a sustainable basis, what do you think — where should these numbers stand? Yeah, that’s my last question.

Umesh Govind Revankar — Executive Vice Chairman

ROA is 3% on a long-term basis, and ROE will be anywhere between 16% to 18%, depending upon the environment.

Param Subramanian — Macquarie — Analyst

Okay sir. Thank you so much. Yeah. Thank you.

Operator

The next question is from the line of Umang Shah from Kotak Mahindra AMC. Please go ahead.

Umang Shah — Kotak Mahindra — Analyst

Yeah, hi. Good morning. Thanks for taking my question and congratulations on a good quarter and the merger. Sir, a couple of questions. One is on the merger-related expenses, just wanted to reconfirm the expenses which you mentioned, were just about INR19 odd crores, is it?

Sunder S. — Joint Managing Director

Yes, INR19 crores.

Umang Shah — Kotak Mahindra — Analyst

Okay. And if I recall correctly, initially when the merger was announced, we were anticipating some merger-related costs to the tune of about — anywhere between INR200 crores to INR300-odd crores. Does that still stand or has that number gotten revised downwards?

Sunder S. — Joint Managing Director

When we announced the merger, at that time there was likelihood of an amendment in the Stamp Duty Act in Tamil Nadu. And foreseeing that, we had indicated that it will be around INR200 crores to INR300 crores. However, as on date also, the amendment has not taken place. And since our merger is already in place, so there’s unlikely that there will be a retrospective impact on the same. And hence, the management is confident that no further expenses on account of stamp duty is applicable to the company.

Umang Shah — Kotak Mahindra — Analyst

Okay. Understood. Fair point. Sir, the other question was on the growth outlook. And ideally, how should we now look at our AUM mix shaping up progressively, maybe a year or two years out from here. Should we assume that the share of vehicle finance business gradually just keeps coming off in the overall mix, or how should we look at it? And what’s broadly the growth outlook over the next 12 to 18 months?

Umesh Govind Revankar — Executive Vice Chairman

See, the overall AUM growth, which we had earlier indicated of 15% CAGR growth should continue is what we feel very confidently because Indian economy is growing, and with this growth, 15% CAGR growth is a possibility. We are leaders in commercial vehicle and two-wheeler. So our leadership will continue to remain. We are trying to reach out for SME business in the geographies which we have not been servicing till now. Earlier, the SME lending was focused mostly in the South and Western part, Rest of India, even though there is enough growth opportunity in SME business, especially large states like UP, MP, Rajasthan and Punjab, Haryana, we have not been doing much. So with that network being available today across and having the experience and the expertise of both customers and the expertise of doing SME business in the Southern part, Southern and Western part, we would be expanding it.

There cannot be a significant shift in overall ratios, but the slowly and steadily, SME growth will be much faster than the CV and two-wheelers, is what we see. So it’s [Indecipherable] immediately in two years, but over the 10 years, you can expect — because SME industry is so large and ability to reach out to these sectors and segments through the bank network is possible. So next two years, there may not be a big change — marginal change. But over 10 years, there will be a significant change.

Umang Shah — Kotak Mahindra — Analyst

Understood. And on the cost to income, just to reconfirm, in our opening comments, we mentioned that the steady state cost-to-income ratio should be close at about 22%, 23%-odd. Did I hear that right? Currently, we are at about 26%, 27%-odd?

Umesh Govind Revankar — Executive Vice Chairman

Yes, we had earlier said 26%, but this quarter, it has been 22.45%, but in the long run, it will be around 24%, 25%.

Umang Shah — Kotak Mahindra — Analyst

Okay. Okay. All right. And just last one, on the housing finance side, now that the merger is behind us, how should we look at it? Will that continue to operate as a wholly owned subsidiary or at some point of time, we look at some sort of a value unlocking happening via that subsidiary or a separate listing something — any plans on that front?

Umesh Govind Revankar — Executive Vice Chairman

No such plans. It will continue to run as a wholly owned subsidiary.

Sunder S. — Joint Managing Director

So it is not wholly owned, it is — 85% stake is with [Speech Overlap]…

Umesh Govind Revankar — Executive Vice Chairman

Yes, yes, 85%, right.

Umang Shah — Kotak Mahindra — Analyst

Yeah, 85%. Okay, all right. Thank you so much. Thanks for patiently answering the questions.

Operator

The next question is from the line of Shweta from Elara Capital. Please go ahead.

Shweta Daptardar — Elara Capital — Analyst

Thank you sir for the opportunity, and congratulations on great quarter. Sir, I just have one question, what are the cross-sell opportunities you see deriving across products with synergistic benefits?

Umesh Govind Revankar — Executive Vice Chairman

Can you repeat it? I couldn’t hear it.

Shweta Daptardar — Elara Capital — Analyst

Sir, what cross-sell opportunity across product sales that you can derive from the synergistic benefits, due to merger?

Umesh Govind Revankar — Executive Vice Chairman

Okay. See, we have — the two businesses, if you look at, the Shriram City Union businesses, they were mostly in the south and western part. They did not have reach across the country. Now with Shriram Transport branch and the experience in these geographies being available, we should be able to take the Shriram City Union product across all the geographies, so that loan products get expanded in the both sides, even in Shriram City Union branches, you will be able to offer CV and construction equipment or agriculture equipment lending.

So we’ll be expanding the loan product across all branches and all products depending upon the potential in each of the geographies. So that is the synergistic benefit. Additionally, since we have a large customer base, we would be able to cross-sell insurance and other investment products. Apart from sourcing deposits, we would be able to cross-sell insurance and other investment products. That will give us additional fee income. So that is the total synergy.

Shweta Daptardar — Elara Capital — Analyst

Sure. Thank you.

Operator

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, good morning and thanks for taking my question. Sir, again, kind of — just going back to the merger-related opex, merger-related expenses. I was just going through the call that we had hosted at the time when we announced the merger. That point in time, our expectation was including the stamp duty cost which is not there, something around INR350 crores. So I mean, is it that — I mean, merger-related expenses have actually come in much lower than what we anticipated? You already said that we are not required to pay that stamp duty that we anticipated of about INR190 crores, INR200 crores. But other than that, I think we talked about HR integration, cost of about INR60 crores, INR70 crores, branding and advertisement costs of about INR70 crores. So those expenses have not really come in, or I mean, they are being capitalized now and they will be expensed over the — let’s say, next two years?

Sunder S. — Joint Managing Director

When we guided one year back, we had expected high stamp duty expenses which not there now, as I had mentioned to the previous caller. And when it comes to the other expenses, the INR19 crores that we are talking about is the advisers and immediate merger-related expenses, which has been deferred over a period of five years. And the advertisement and other charges will be an ongoing thing, which will be debited to the P&L as and when it is incurred. And the cost of advertising, which we had guided maybe around INR50 crores to INR100 crores, will be happening over a period of time, and it has not already happened.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Got it. And your guidance of 24%, 25% cost-to-income ratio takes that into account?

Sunder S. — Joint Managing Director

Yes, it takes into account. Yes.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Sir, just one more question, here. Just wanted to understand, I mean though it’s one merged entity now, the branding is Shriram Finance. But wanted to understand, there are still employees who are part of either Shriram Transport or Shriram City, and who are maybe — people who understood the respective products a whole lot better. So I mean, what incentives have been put in place to kind of drive this cross-selling?

Umesh Govind Revankar — Executive Vice Chairman

See, incentive programs are — our business model, if you look at all our field and banks [Phonetic] team is — where the variable component is quite high. So both in Shriram Transport and Shriram City Union business model, that was factored in, and that’s how we have been functioning. So same thing is continuing. The incentives would be given for own product and also as cross-selling products, whether it is insurance or whether it is the investment product tomorrow or whether it is a multiproduct today, the variable component will continue to play a major role in our business model.

Abhijit Tibrewal — Motilal Oswal Financial Services — Analyst

Got it sir. This is useful. Thank you and all the very best.

Operator

The next question is from the line of Uday Pai from Investec. Please go ahead.

Uday Pai — Investec — Analyst

Hello, good morning and thank you for the opportunity. Can you quantify the amount of interest expense sales on account of buyback done in October?

Sunder S. — Joint Managing Director

Okay. We don’t have the number right now. We’ll — you can just touch this with Mr. Mundra. He will help you out offline.

Uday Pai — Investec — Analyst

Okay. Thank you sir. Thanks.

Operator

The next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.

Rahul Jain — Goldman Sachs — Analyst

Yeah, hi. Good morning everyone. Just two or three questions. Number one, on this cross-selling bit, can you give us an indicative sense, as to how the loan book would look like a couple of years down the line? Would it be — would the CV proportion come down over a period of time as the other products we cross-sell to other customers?

Umesh Govind Revankar — Executive Vice Chairman

Rahul, I think I just answered it just five, 10 minutes before, See, we are leaders in CV and two-wheelers. So there, it will not change much, overall pressure will remain. The SME focus will increase, because SME business, which we are mostly doing in the southern part, we’ll be taking to the rest of India. And scope and opportunity to grow will be faster. So we may grow there at around 20%, 25%, wherein other businesses, we may still grow at 14%, 15%. So it will not [Speech Overlap]…

Rahul Jain — Goldman Sachs — Analyst

Understood. Okay. Got it. The other question was on goodwill. So over how many years will this goodwill need to be written off?

Sunder S. — Joint Managing Director

Goodwill will be adjusted for impairment by an independent valuer, and basis that it will be provided. But the management feels that at least for the next two years, there will not be any impairment or discount [Phonetic].

Rahul Jain — Goldman Sachs — Analyst

Okay. Got it. Got it. Thanks. The other question was on cost of funds in Shriram City Union. Would there be any benefit if there’s any rating upgrades? I mean, of course, now you’ll borrow in Shriram Transport, but the incremental borrowing should be a lot lower on that portfolio also, right, as you do disbursals in the Shriram City Union portfolio? How much benefit can we get out of that?

Parag Sharma — Chief Financial Officer

Shriram City Union was AA, and now the labilities will get repriced to AA+ level. So there should be 25-30 basis point benefit, which will come out of repricing of Shriram City [Indecipherable].

Rahul Jain — Goldman Sachs — Analyst

Okay. And then that’s the reason why next year, you’re saying cost of funds would not increase much. I mean some benefit will come from here as well? Is that a fair insight?

Parag Sharma — Chief Financial Officer

I said for the March quarter, it will not go up. But if RBI increases rate, that has to be adjusted for next year. But this quarter, it won’t be [Indecipherable].

Rahul Jain — Goldman Sachs — Analyst

Got it. Got it. Just a last question in terms of the fair value that you were talking about earlier. Can you explain how do you arrive at this? Is there an element of NPV calculation also that goes in there and that’s why you had to sort of, you know, adjust the book by INR1,000 crores or there is something else?

Sunder S. — Joint Managing Director

See, the last quarter, that is March quarter of ’22, whatever was the loans disbursal and loans –liabilities mobilized, the benchmark rate is considered, and it is rephrased for the earlier entire book. And basis that — based on the NPV calculation, this valuation arrived.

Rahul Jain — Goldman Sachs — Analyst

Okay, got it. That’s it from me and good luck for the future quarters. Thank you everyone.

Operator

The next question is from the line of Ankur Jain [Phonetic], an Individual Investor. Please go ahead.

Ankur Jain — Private Investor — Analyst

Hi, good morning. I have a question on capital allocation. So Shriram Finance has paid an interim dividend of INR15. And in the past, both Shriram Transport and Shriram City Union have given healthy dividends. So my question is, has the management thought about the idea of doing a buyback with some part of the money, which could be more beneficial to the shareholders? Thank you.

Sunder S. — Joint Managing Director

I’ll say, finance companies or banks normally don’t do any buybacks because the capital is always required in the business.

Ankur Jain — Private Investor — Analyst

Okay. Even with the large amounts that you are paying, which are not required because ultimately, they have been paid to the shareholders?

Sunder S. — Joint Managing Director

So dividend is expectation. There are some shareholders who are invested for a steady dividend. So that is a different aspect altogether. So rewarding shareholders continuously with good dividend is part of a good governance and also appreciating the shareholders, [Speech Overlap] that’s all.

Ankur Jain — Private Investor — Analyst

Okay, thank you. That was my only question.

Operator

The next question is from the line of Chandrasekhar Sridhar from Fidelity International. Please go ahead.

Chandrasekhar Sridhar — Fidelity International — Analyst

Hi, good morning. I have a few questions, Parag. Parag, just how do you think of liquidity right now? So as I see, I think, on the merger entity also, the excess liquidity has actually stayed constant as you’ve moved on and you actually cut it by one month. How do you see that over — on a sustainable basis, one? Secondly, Shriram City Union had a liability duration, which had extended pretty reasonably over the last few years, longer — much longer than the asset division. Now that we are working on a merged entity, how do you just think on liability durations, given we have a merged balance sheet?

For Mr. Sunder, I have a couple of questions. One is, even if I — I understand the fair valuation, but if I look at the GNPLs also on a combined basis, I mean, the pro forma numbers in the GNPLs also, there’s a difference of 40, 50 bps. So what would explain the differential in the GNPLs? And for Mr. Ravi, just in Shriram Housing, was there any portfolio buyout done during the quarter? Thank you.

Parag Sharma — Chief Financial Officer

On liquidity, we always had a set policy of maintaining three months of liability repayment as liquidity buffer, which we enhanced during the COVID period to six months. Now we are around five months, I think, we we’ll continue with this liquidity buffer of INR17,000 crores till the March quarter and then based on market scenario, we will look at diluting it or continue to maintain slightly higher liquidity. But as of now, till March quarter, I think we’ll continue to have INR17,000 crores of liquidity.

When it comes to duration, I think duration in Shriram Transport also, the assets is not longer, it is, used vehicle is typically three to four years. So there’s not too much of duration difference which comes because of Shriram City. And Shriram Transport also, the liability was longer than the assets. So that doesn’t change. Sunder?

Sunder S. — Joint Managing Director

Yes. Coming to the Gross Stage 3 numbers, if you recollect, the AUM of Shriram City Union Finance around 31st March was INR33,000 crores, and they were carrying an ECL provision of close to — slightly more than INR2,000 crores. So net INR31,000 crores was acquired by Shriram Transport by way of the merger transaction. And this INR31,000 crores was — loan outstanding from the customer. And hence, this amount is added to the gross Stage 3. And you would find that the normalized, if you take 1 plus 1, had it been taken at gross level of INR33,000 crores, the NPAs would have been at around 25 bps higher than what we are reporting. And that explains the reduced number of the gross stage 3 of 6.29% in the current quarter. The same thing has been restated in the previous quarters also.

Chandrasekhar Sridhar — Fidelity International — Analyst

Okay. Got it.

Ravi Subramanian — Managing Director and Chief Executive Officer, Shriram Housing

And on the housing finance side, out of INR1,000 crores gross disbursement, the bought out portfolio was about INR6 crores, hardly [Indecipherable].

Chandrasekhar Sridhar — Fidelity International — Analyst

Sure. Maybe if I could just follow up with a couple of more questions, Umesh, one is just how do we think of just right pricing now — how much we’re charging to the insurance business on a sustainable basis? This has stepped up like a couple of years back, but didn’t seem to go anywhere after that? What’s your thoughts on that?

And second is, we are still carrying a COVID provision buffer at this point in time. Now the buffers were created in Q4 FY ’20 and Q1 FY ’21 and then some later. Now obviously, the contracts are — and our understanding was, they’ll be utilized over a period of time once the contracts mature. Given the duration of the book, the contract should be maturing by now, but is still carrying a large buffer and we have utilized very little. So what do we think of some of these provision buffers which you’re carrying?

Umesh Govind Revankar — Executive Vice Chairman

Yeah. See, as far as the insurance is concerned, the insurance cross-sell is done to help the customers to get better claims and quicker claims, that is the main objective. The earnings out of it, the commission occurring out of the insurance, whatever is statutorily available or can be given, that we are getting from the insurance companies, both life and general business.

So our focus has been to provide better service to customers. For example, earlier, we used to get claims on accident at around 180 to 200 days — after 180 to 200 days, putting customer into a lot of difficulties. By providing them insurance service now in-house, we’re able to get the claim in 20 days. So that’s the benefit customer gets and indirectly, company benefits because of quick settlement of the claim. So there is no NPA due to — or there’s no delay due to the claim being delayed. So that is the biggest advantage. So the benefit will improve over the period, as we penetrate more. Today, the penetration level of insurance cross-sell is much lower, both life and general. Once we increase it across, then benefit will get more pronounced in — then bottom line will reflect very healthy growth in fee income.

Sunder S. — Joint Managing Director

And on the COVID provisioning, we had created a provision of INR2,850 crores in Shriram Transport books. And as we have been guiding everyone, that it has been allocated to the respective contracts, and as and when the contracts settle, it will be written back or charged off, is what we have been indicating. And as on 31st December, an outstanding of INR1,651 crores is available in the books. And we expect this to be cleared, maybe in the next one year or so, by March ’24, maximum will come out.

Chandrasekhar Sridhar — Fidelity International — Analyst

But I mean, that should actually extend beyond the contract duration, right, just given the duration of the book? By now, that should have been flushed out, right? It was my understanding.

Sunder S. — Joint Managing Director

No, no. See, if you recollect, we had also given a moratorium of six months and hence, entire book was postponed by six months. So in a normal scenario, it would have been — maximum should come to an end by September ’23. So that’s likely to be pushed beyond close to March ’24. So this I am saying, majority of the book. But still there can be some provision lying still.

Chandrasekhar Sridhar — Fidelity International — Analyst

Thank you.

Operator

The next follow-up question is from the line of Nischint from Kotak Securities. Please go ahead.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Can you share what was the absolute valuation of Shriram City considered during the merger, if you can share the number in rupees thousand crores?

Sunder S. — Joint Managing Director

Yes. Nischint, I’ll just take this question offline and give it to you.

Nischint Chawathe — Kotak Mutual Funds — Analyst

Okay. Sure, perfect. Thank you.

Operator

The next follow-up question is from the line of Mahrukh Adajania from Nuvama Wealth Management. Please go ahead.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Yeah, hi. Thank you for the follow-up. Sir, sorry, but can you please quantify the fair value gains in NII and then through other line items of the P&L in this quarter?

Sunder S. — Joint Managing Director

Fair valuation gains in the current quarter? Okay. I’ll do one thing, I’ll just send it across to Sanjay, both the impact on the PAT as well as the NII.

Mahrukh Adajania — Nuvama Wealth Management — Analyst

Okay, okay. Thank you.

Operator

Thank you. As that was the last question for today, I would now like to hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited for his closing comments. Over to you, sir.

Umesh Govind Revankar — Executive Vice Chairman

Thank you. Thank you all for joining this call. We had a good set of numbers in this quarter. And going forward, we feel that fourth quarter should be equally good or maybe even larger, because demand seems to be quite good in the fourth quarter. And going forward also, we feel that post — all merger-related integration issues are adjusted, we should be able to continue to grow and do our business very comfortably and keep growing our bottom line and good progress. Thank you, everybody.

Operator

[Operator Closing Remarks]