AUM may grow 15% on reasonable monsoons: Shriram Transport

Q: What has been the sore point this quarter, the equipment finance business? Could you explain to us what happened in equipment finance business this time around and for how long do you expect the pain to last? Do we see gross non performing loans (NPLs) increased, stabilise or may be reduced from that 15 percent that it touched this quarter?

A: The equipment business is all depended on infra activity that is happening. Because the equipment which is required for earth moving and the initial project is around 6 -12 percent of the total project cost. That has been procured by the contactors or sub contractors in the initial stages of the project.

If the project doesn’t start off then there is a likelihood of delay in payment. We have been experiencing it from the beginning of this year and so, we slow down the business from around Rs 3,400 crore assets under management (AUM) we have come down to around Rs 3,000 crore AUM. So there is reduction in AUM in the last two quarters. The payments also have not come in the last two quarters as we expected.

Normally, the year end March 31 we do expect large collection or amount coming in. Liquidity becomes much better in the March. This did not happen in this particular year and looking forward I am able to see a better picture or better atmosphere. Mainly because the government spending which has been outlined in the Budget whether it is around Rs 70,000 crore infra or the Smart City project both have been announced and the Finance Bill being passed, the activity will start happening from now onwards.

The collection will start coming in, as the infra activity starts then the collection will come in and things will become much easier and better as we go to the second half of the year. So I am very confident that collection will come in because we have made extra provisions.

The actual provisions should be around 20 percent plus and we have provided 60 percent. On our book we have Rs 176 crore extra provisions which is there to cushion any particular movemnet. However the collection seems to be come in the first two quarter gradually, till the second half of the year it should come. I believe that overall provisioning level need not go up.

Q: How much does the commercial equipment business contribute in terms of consolidated numbers and how much of your lending have you reduced within this segment?

A: It constitutes 5 - 6 percent of the overall consolidated AUM. The decrease in volume was in last two quarters and so, we did not disburse much in the last two quarters. We don’t intend to disburse much in the next two quarters till we get an overall picture because we have been focusing in the last one year on the earth moving part of it.

Since various equipments are required for various activities, the earth moving equipments like backhoe loader, dumpers and excavators are much easily movable from one site to another site. Liquidity and collection also become better and so, we are focusing on that in the last two-three quarters and these products should give good return in the coming quarters.

Q: How much of capital infusion will the commercial equipment business need, by when and how do you plan to infuse this capital?

A: Right now we have infused Rs 100 crore. That will be sufficient for our calculation because we believe that the collection will definitely come in and as the correction comes in the NPLs situation improves. There may not be further requirement of a capital in the equipment finance business.

Q: Your standalone CV business saw a relatively stable performance with used CV portfolio growing around 15 percent. What led to this growth and what is your visibility for FY16 for say AUM, the margins and the gross NPLs?

A: We are increasing our geographical reach. Geographical reach is giving us the volume of the business. We have added around 80 branches in the last financial year and are going to add another 80 branches in this financial year.

Most of the branches are not really costly because we are converting the rural center into branches where we already have build business. So, the growth will mostly come from the new geographies and the rural market.

Having said that, the urban market demand is reviving, there is good revival in the urban market, haulage market is improving. We have witnessed good demand for haulage movement in the last quarter.

We are very confident of haulage market, especially the consumable items, FMCG goods transportation to increase in the coming two quarters. Index of Industrial Production (IIP) numbers of February also were very encouraging. So over all it looks as if industrial activity plus consumption is good so the overall transportation activity is likely to be good in the full year.

However, I see bigger growth in second half of the year mainly because if the monsoon is reasonably good and rainfall happens in the right place there should be increased demand from the rural areas also and that should help us increase the volume in the second half of the year.

Overall, with reasonable good monsoon 15 percent AUM growth is possible. The net interest margin should remain at present level because there is increased demand for new vehicle also. As the new vehicle mix goes up, yield will remain at a particular level and we may get some advantage out of cost of funds coming down. If that happens we have two options of balancing between growth and margins. If we see good growth opportunity we may go for a growth because we are going to new geography. In new geography we need to grow fast and have the market with us.

Q: For the near-term, say Q1, how much do you expect the gross non-performing loans to spike up due to the migration to one 150 days? Hence what is your outlook on the stand-alone and the consolidated profit, net interest income (NII) growth say, in Q1 or the visibility that you might have at least at this point?

A: Migrating to 150 days is something which we have not taken a call because as per the Reserve Bank of India (RBI) we have to move towards 150 as on March 31, 2016. So, we are debating whether to move from Q1 or at the end. There will be some marginal spike from one quarter only. That one quarter where we are moving into 150 days. Otherwise it will even out over the year. When it is evening out, I do not think there will be a much difference between previous year and current year.

Q: Can you leave us with some guidance on the gross non-performing loans (NPL) front from here on?

A: As the condition today at around 180 days when we calculate, it looks as if first two quarters, there may not be much spike. In second half we should be able to reduce it because economic activities are likely to be much better. So we should be able to reduce it, is what we have calculated. But, when we go to 150 days, that one particular quarter, there could be a spike because of moving into 150 days.