Maximum demand for new vehicles coming from north and east: Umesh Revankar, Shriram Transport Finance
“Sales in February and March are picking up as there is a much bigger demand in the northern belt.”
Looking at how strong the February sales numbers have been from some of the CV makers, you should be a happy person today. With the AUM growth in third quarter at a healthy 18%, are you likely to beat this number by a huge margin in the next quarter?
This quarter should be good. In fact, we expect the q-o-q numbers especially on CV sales, to be good though January was not really very good for demand as there was an oversold situation. Many of the manufacturers sold in December because from January, there was a compulsory AC fitment and therefore, the vehicle prices went up. So, December sales were high. But the sales in February and March again are picking up as there is a much bigger demand in the northern belt. The construction activity is attracting a lot of demand. Generally, there is a good demand all over India and maximum new vehicle sales demand are coming from the north and east.
Just to understand, the share of used CV in terms of your AUM has now fallen to 85.6% in Q3 versus 90.1% on a year on year basis. as How is it that you see the mix between used CVs and new CVs shape up because used CVs generally earn more margins?
You are right. New CVs have much bigger ticket size. The used vehicles ticket size is around 50% or one-third of the new vehicle. The used vehicle demand is quite high in the rural areas but because of the ticket size, the volume is definitely bigger in the new vehicles. It is a customer’s choice. If the customer feels very confident for next four-five years, he would buy a new vehicle. It also depends on the application. If it is for construction activity, mining activity, you definitely need new vehicles because it is used for much bigger torque or you need the gradation for moving into such terrain.
This kind of a mix change keeps happening and we are not really disturbed and the margins coming down. Because of new vehicle mix, there could be some small shift in the margin but we had a advantage in the last 18 months or cost of funds was coming down till December. We could really improve on our net interest margin and going forward, we may not be able to expand the margin further but we will be able to maintain it.
When you say demand is coming back, where exactly is the demand coming from? Is this coming back in the second-hand truck market or new vehicles?
No what happens is when there is a demand, people buy new vehicles and sell their used vehicles or people sell their used vehicles and would like to buy new. It is almost going hand in hand but in the rural areas when there is a demand, resale price of used vehicle goes up. What we have seen today is the resale price of used vehicle continuously going up allowing the existing vehicle owner to sell the vehicle at good rate and go for a new vehicle. So. the rural demand is very important for used vehicle resale price and therefore the demand. The rural demand is likely to be good for another three or four months because the winter crop has been reasonably good in the northern belt. The only area where winter crop has not really done well is the interiors of Maharashtra. So the demand from the rural side is good and we have a very good network in the rural. We are therefore able to get good growth.
Is there any large proposal which is there on the table where you are likely to consolidate more Shriram Group of companies into one single entity? The reason why I am asking you this question is because this is the question I have been asked every time I meet some of your investors and some fund managers. Please clarify this buzz about a single entity structure which Shriram Group is working on.
We have been debating what is good for each of the entities and that discussion is still on. We have been discussing whether we have better ways of increasing the penetration among our customer base and growing. We would like to remain the way we are, getting specialised into each of the activity and keep growing. Shriram Transport Finance Company is focussed on vehicle financing; Shriram City Union Finance is focussed on SMEs and personal loans. There is enough scope to grow. In day-to-day operation and business, we are focussing on the existing business model.
So as of now, what you are confirming to us is that Shriram City Union and Shriram Transport will remain independent and there is no proposal on board to create a mega entity?
See we have not discussed or brought a paper on the board or something like that. Informally, there could be some discussion but that continues, that does not prevent us from doing our business the way we have been doing.
Just trying to understand where the business is headed over here. Would the Piramals, who hold about 9.96% stake in the company and another indirect stake via Shriram Capital which holds about 26.08%, be upping their stake in the near future?
No, no, we are not hearing anything on that so the present arrangement is good and we are quite happy with the arrangement.
What about your capital raising requirements? Are you sufficiently funded right now? Would you be looking to raise capital anytime in the near future?
As of now, we are sufficiently funded. We have a tier-1 of around 15% and the statutory requirement is only 10% but definitely if you are looking at 20% plus growth in the next two three years, we would like to raise some capital and that decision would be taken once we have our annual result because we would have finished our moving into 90 days. Once we move into that, we would like to assess the capital requirement and probably look into what is to be done. So maybe, in the next quarter, we will relook into what is needed and what kind of a growth we are planning so as the environment eases, we expect a scope to grow around 20% year-on-year.
With that kind of a growth in mind what is the capital needed is something which we would be debating post the annual results.
The cost of capital is likely to move higher and that could be a challenge for companies which are borrowing wholesale and lending retail, most of the NBFCs borrow long and then they lend short, . What happens when suddenly the cost of capital goes higher?
See the cost of capital has been moving up in the last one month. For us, in this quarter there is no impact. As of now, we are sufficiently funded for this quarter business. Going forward, there is a challenge but we normally borrow our ALM mismatch is not there and we have a perfect way of raising three years borrowing and three years lending. So, we do not have a big gap on raising money short or long or lending short. We have been maintaining it over the years and we will continue to do it but we have to see liquidity position going forward in the next year maybe in April because only then we will know what is the plan for the next year and what is the likely cost of funds.
For us, since the churning is exactly one-third in every year, whatever the increase in the cost of borrowing next year is, you can take it that one-third of the cost could be the total increase. If there is 50 bps increase next year, since one-third is maturing, the impact is around 15-18 bps and if that is the increase we can pass it on to the customer. If it is a little beyond that, then it may be a little challenging but as it stands now, we are confident of passing it on to our customers. Our net interest margin should remain safe.