- 2 weeks ago
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00:00Umesh, it's great to have you. I mean, India is really being looked as sort of the next big
00:05consumption engine. I have to wonder what you're expecting in this budget. Do you think it'll do
00:09enough to actually boost consumption, especially when it comes to the rural population?
00:15No, I do agree. I do expect that this budget will focus on the capex because last one and a half
00:25years, there has been slowdown in the investment into the infrastructure. India needs infrastructure
00:34because India has vast resources in the hinterland. These need to be linked to the coast and we need
00:42to transform these activities into international activities because that's where major future
00:52activity will come from. And make in India or made in India have been there for the last four years.
00:59And to fructify that logistics linkages are very important. I think government is going to put a
01:06lot of focus on the execution of infrastructure is what I believe. Yeah. Can you tell us more about
01:14that? You know, we were just talking to a colleague about how, you know, it seems like we're at a
01:19tipping point where there's a bit of saturation in the amount that they can really spend on
01:23infrastructure and whether they can still expand and execute on some of these projects.
01:29What sort of specific budget announcements are you thinking in terms of the infrastructure side
01:33do you think that, you know, you want to hear most?
01:37It will be mostly on the logistics side because India's logistics cost is around 13, 14 now.
01:46We need to bring it down to around eight to nine. That is the goal government has set in. And I think the next couple of years government will be focusing on that ease of movement of the goods and transformation of raw material into the final product. I think that's going to be the focus.
02:09So the railways and the road infrastructure is going to be the main focus.
02:17And also, there's been a lot of, I guess, external sort of, you know, risks out there, right? Especially when it comes to U.S. tariffs on India. That largely has kind of weighed on a lot of investor minds on whether they need to invest in India this year or not. We're still waiting for some sort of clarity on that front. But how have you seen these U.S. tariffs on India exports, you mesh, really affect vehicle
02:39So basically, if you look at the U.S. tariffs that impacted Indian segment or sectors are mostly MSMA sectors, which have been focused on U.S. market, especially textile, leather, fisheries.
02:57These are the few examples, gems and jewelry and electronics. What I feel is the industry is now looking into newer market. The European trade agreement is some relief for them.
03:14And they're also finding newer market in Asia. Some of the MSME sector leaders, whom I am in touch, they did tell me that they are looking at a new market. And they're quite successful because the December, the IIP number suggests that the manufacturing has increased to 8.3 year on year.
03:35Mining has improved. Mining has improved. Mining has improved. That means there is increased manufacturing activity in India. And we are able to find newer market.
03:46I think U.S. tariffs, even though it had initial some kind of discomfort with many of the local manufacturers, they have overcome to some extent.
03:57I think any further improvement of relation with the U.S. only will further improve and help India.
04:06Umashal, I want to talk a little bit more about the business as well. Just recently, UFG, I should say, recently bought a 20% stake of the company.
04:16What sort of strategic sort of gaps do you think this investment from MUFG can really fill for you now?
04:21See, we have been hitherto focusing on individual customers. Basically, a new to credit kind of a customers who like to own an asset, whether it's a vehicle or a car or a two-wheeler or some of the businesses.
04:40And that's been the focus for us. And we believe that with the new investment coming in from the MUFG, we'll be able to lower cost and keep the customer with us.
04:54Because after being with us for 10 to 15 years, many of the customers, after building a good track record, move on to the banking.
05:00And if we talk, we have a better rating and lower cost of funds, then we can cater to the customer who are leaving us.
05:10So I think that is the focus for us. And I believe strongly that around 25 to 30% of my customers who leave us after building a relationship with us for 15 years, they will be retained.
05:25And that will be the biggest benefit. We will also be able to onboard new customers. Because India, if you look at the challenge, it is not just unbanked.
05:36Non-banked is the unbanked customer is not the only challenge. It is the underbanking. Many of the customers, they find it difficult to extend their credit or extend their relationship with the bank after reaching a particular size.
05:49And we believe that that is the customer whom we can engage with. So there is a huge scope and opportunity in India, especially in the MSME segments to build business.
06:03And we believe that this will help us to lower the cost. Because already after the announcement of the MSG investment, we have credit rating upgrades received from a couple of rating agencies.
06:20S&P has already upgraded us to BBB- in this investment grade. And the Fitch also have put us in the positive watch and also Modi's.
06:31Locally, our domestic rating have been upgraded to BBB- by CARE. And other two agencies also have put it in the positive watch.
06:41These are all positive for us. If you are able to bring a volume cost by 100 pesos point, that is going to be a big change.
06:50And we will be able to service our customers much better.
06:53Is this, you know, can you tell us maybe what MEFG's role is going to be? Is it just a, is it more than just a financial investor?
07:03Are they going to have more of a say when it comes to strategy, risk management, or even just governance overall?
07:08See, they are 20%, they are going to be 20% stakeholder, minority, say, do we believe.
07:17But with their vast experience of more than 100 years and their experience of investment in the other Asian countries,
07:25we believe strongly that their experience will help us in the risk and governance and trade policies.
07:34And also, we believe, being a bank, they have a strong technology platform,
07:40which will help us to upgrade our technology platform and digital offering to our customers.
07:47Yeah, can you tell us more, do you think this is more of a, just a one-off sort of strategic investment for you?
07:57Is there more sort of to come in terms of global capital partnerships?
08:00And are you actually looking at more sort of stake sales in the future, Yumesh?
08:05See, currently we are definitely continuing to do MEFG only.
08:12And we would like to build a very strong relationship with our existing relationship rather than looking for a new investor right now.
08:24I think this is going to be very long-term.
08:26And as a management group, as a promoter group, we are going to be at 20.4% after the post-investment.
08:37And MEFG is going to be 20%.
08:38You mentioned a little bit more about the credit profile and the like and what you've been hearing from some of the ratings agencies as well.
08:46I was just wondering, if rates stay higher for longer, how do you think that is going to really impact your borrower profile?
08:54Do you think that can still remain quite resilient?
08:58See, our borrower profile, if you look at it, that has been improving over the period.
09:04India, the way we have grown in the last 20 years, if you see, our borrowers have been upgrading themselves and they'll be able to buy a newer vehicle or newer assets and upgrade themselves and be more efficient.
09:22And that's only going to help us build a better customer profile and bring down our credit cost to some extent.
09:31Our credit cost is averaging at around 2%.
09:35And as the credit profile of the customer improves, we believe the credit cost can come down further.
09:41In terms of just this investment, do you think that this makes Sri Ram a little bit better positioned in what could be maybe more tighter scrutiny from regulators when it comes to some of these MBFCs here?
09:57How do you see that all play out?
09:58We are already an upper layer. In India, we have upper layer, middle layer and base layer MBFCs and we are already in upper layer and all upper layer MBFCs are supervised on par with the scheduled bank, if not as closely monitored as the banks.
10:21But we have been already supervised. I think that is and being a deposit taking MBFC, we are the one of the deposit taking MBFC, we take term deposit and being the deposit taking MBFC, we are already in the highest scrutiny.
10:38I don't really think there is going to be further increase on the same.
10:44But definitely, yes, we are working very closely with the RBI and we are very happy with the kind of relationship that we have with regulators.
10:56You mentioned a little bit about interest rates. How much do you think borrowing costs can actually come down? What's your forecast?
11:02My forecast is around 100 basis points from now because incrementally, there has been interest rate reduction in India.
11:13The rates have been coming down. The transmission has been slow. There is further transmission to be happening. That's one advantage.
11:21And the credit rating upgrade itself will give us around 40-50 basis point advantage. So, together, we should have around 100 basis point advantage on our total book.
11:33Currently, my book cost of borrowing, if you see, is around 8.69. So, around 100 basis point improvement will be around 7.6 or 7.7.
11:46So, that is going to be a hugely advantage for us to service our customer better.
11:54I also want to talk a little bit more about just the competition, too, Umesh. I mean, there's been so much interest in the whole financial sector in India.
12:01There's also a lot of banks that are going very aggressively into retail lending here right now.
12:06Does this partnership with MUFG at least help you maintain a bit of that market share as well as, you know, really defending your margins?
12:13Uh, definitely, yes. We will be definitely passing on some of the, uh, the, uh, interest rate reduction to the customer.
12:22Uh, that is, uh, the plan we have. The net interest margin, uh, last quarter, it was 8.5a.
12:29We would be happy to retain anywhere between 8.5 to 9. It depends upon the season to season, um, portfolio mix.
12:39But we are very happy with that kind of an interest margin.
12:43So, uh, we, uh, our customers are not actually a banking customer, but definitely, there is an aspiration of our customer to become large and go to a bank by having a good track record.
12:55But typically, bank on board's customer who have a minimum track record of around 10 to 15 or 20 years.
13:03So, therefore, there is a gap. So, uh, many customers who come into the business in India freshly and who are there for the last three, four, five years,
13:13they tend to go to NPFC and there's a lot of role to play for NPFCs.
13:19The market is very, very wide in India, very big. And I don't really think there is going to be a direct competition with any bank.
13:26And we don't really expect a banking customer to come to us at all.
13:32Okay. Um, the final question, I'm just wondering, you know, what sort of the financing needs that you need right now?
13:39I mean, are there any plans to sort of raise funds, uh, through the bond market?
13:42Uh, we are not really looking at the bond market now, but yes, the bond markets have improved significantly, uh, post, uh, the investment for us individually.
13:55And also there's some kind of a stability in the market, but, uh, I think, uh, the, uh, for the liability mixes, which we are freshly looking at,
14:06uh, we have, if you look at my liability mix, 27% of my liability is the term deposit, that the retained deposit.
14:14And then, uh, and the 20% is, uh, the bank, uh, term loans.
14:18And, uh, the 15% is the securitization because that is the cheapest source for us, uh, domestically, the banks need to, uh, lend to priority sector and, uh, they, uh, they, uh, keep buying, uh, portfolio from us, that securitization.
14:37And another 15% is the, the, the NCD, local, uh, domestic, uh, capital market.
14:45And, uh, and 15% is the international borrowing for us, including syndicated loan and the bond, uh, international.
14:53So, there may be a little delay in for us to coming to the bond market, but we will definitely look into a syndicated loan.
15:02That has been one of the cheaper source for us.
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