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Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Conference Call of REC Limited, hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shreepal Doshi. Thank you. And over to you, Mr. Doshi.
Thank you, Michelle. Good morning, everyone. I welcome you all to the earnings conference call of REC Limited to discuss the Q1 FY '24 performance of the company, industry trends and outlook. We have the senior management team of REC with us, represented by Mr. Vivek Kumar, Chairman and Managing Director; Mr. Ajoy Choudhury, Director of Finance; and Mr. Vijay Kumar Singh, Director, Projects. I would now like to hand over the call to Mr. Vivek for his opening comments, post which we can open the floor for question and answer. Over to you, sir.
Good morning dear friends. I'm Vivek Kumar Dewangan, MD, REC Limited. I'm joined by my Director Finance, Mr. Ajoy Choudhury; and Director Technical Mr. Vijay Kumar Singh. I would like to share with you the fabulous results of quarter 1 of this current financial year. REC management has taken a conscious decision that from Q1 itself, we need to enhance our performance. Over the years, what we have on that. The trade was that the Q1 and Q2 sanction and disbursement was muted one and got substantial increase in Q3 and Q4, both sanction and disbursement. We took a conscious call well in time. And the results are in fact front of all of us. REC continues to grow in its strength and it has shown growth in all the parameters. Compared to corresponding quarter of the previous year, let me share with you that our sanctions have gone up by 52% last year, in quarter 1, our sanction was to the tune of $7.22 billion. This year, in Q1, our sanction has increased to $10.94 billion. With regard to disbursement, we have seen a growth of 174%. Last year in Q1, our sanctions were -- disbursement were $1.5 billion and in the current financial in Q1, we have achieved a disbursement of $4.11 billion. Our income has seen a growth of 16% from last year's $1.14 billion. Our income has grown to $1.32 billion one of this financial year. Profit before tax has seen a growth of 26%. Last year, profit before tax was $354 million which has come to $447 million in the current financial year in Q1. Profit after tax has also seen a growth of 21% from $295 million to $357 million in Q1 of this current financial year. The loan book at the end of quarter 1 has seen a growth of 17% from last year's $46.73 billion we have exit the loan book size of $55 billion. Net worth of company has seen a growth of 15.75% from last year's $6.34 billion. Our net worth has increased to $10.33 billion in the current financial year at the end of Q1. The capital adequacy ratio of the company is at a comfortable level of 27.6%. Our gross and net NPA have also come down substantially. The net NPA is down 97% at the end of quarter 1. And I need to share with you that the company has not added any new NPA for the last 6 quarters. This fabulous performance we are targeting to become a net 0 NPA company by the end of 2025. These results were achieved despite some major challenges, including increased cost of funds going to the continuing geopolitical events and heightened competition. This makes the performance even more pleasing. The focus of the world in India is today on energy transition. The 5 imperatives articulated by our Honorable Prime Minister is set to make India developed nation by the year 2047 in the next 25 years. With India deciding to host G20 Summit this year, REC is continuing to pursue its ambition to be a leading finance provider in this segment. The company intends to increase its share of renewable energy to at least 30% of our total loan portfolio from the current level of $3.6 billion, we intend to increase our renewable energy portfolio to more than $45 billion. As we has held a green finance conference on the sidelines of G20 ministerial meeting at Goa in the last week of July, where the company has signed a memorandum of understanding with about 25 major developers of solar, wind, hybrid power, solar panel manufacturers, electric mobility, electric buses, green hydrogen, green ammonia and pumped storage hydro project. The total amount of this project for which MOUs signed were more than $35 million. As you are aware, REC has expanded its mandate and took shareholders' approval for financing in non-power infrastructure and logistics. Last year, in the first year -- last year was the first year when we started this financing non-power infrastructure and logistics, and we had sanctioned about USD 7.5 billion for infrastructure and logistics project and the current financial year also, we want to increase this trajectory. And we intend that 1/3 of our total sanction will come from non-power infrastructure and logistics going to cover roads, ports, airports, metro projects, health care, IT infrastructure. The fundamentals of power sector continues to improve, and that augurs well for the country. The [indiscernible] used of generation and transmission companies stood at about INR 1.4 lakh crores as on June 22, had reduced by almost 50% in 1 year itself. The AT&C losses have also come down substantially. In 1 year, there was a reduction of 5% from AT&C losses have come down from 32% to about 17%. The average cost of supply and average revenue realized gap of ACS ARR has also come down substantially from INR 0.61 per unit to about INR 0.15 per unit now. The introduction of revamp distribution sector schemes. All the states are taking very proactive states for reforming their distribution sector. The all current subsidies are being paid by the state government in discounts, and areas are also being liquidated in a phased manner. The tariff orders of almost all discounts are in place. The measures being taken through revamp distribution sector scheme and in particular, installation of prepaid smart bidders will strengthen the distribution sector, allowing investment to flow in the sector. I'd like to assure all the investors that REC shall continue to add value to our shareholders in the coming days and months. Thank you so much. We are open to now question and answer.
[Operator Instructions] We'll take the first question from the line of Shreya Shivani from CLSA.
Congratulations for a good set of numbers, sir. I have 3 questions over here. First is on the renewable and the infra book. So sir, if you can give us some color about the book as and how different it will be from the traditional financing in the power sector in terms of what is the average tenure of these two books? What would be the yields, would the yield be lower? Would that mean any pressure on spread? Some color around that? That's my first question. Second question is, sir, on the LPS scheme. So in presentation, you've written [ INR 136 billion ] more sanctions were done in first quarter? And basis some calculations that have done basis what PFC also reports on sanctions of the consolidated group under NPA, is it correct? Is my number correct that the sanctions of NPA scheme for REC stands at [ INR 713 billion ] as of June 23. And if you can talk about how many states are covered? Are there more sanctions coming in? Will all the disbursements be done in FY '24 itself? Or will it spread over 2 years? If you can help us understand that. And sir, my last -- the third question and the last small question is, sir, you mentioned AT&C losses have come down from 22% to 17%. 17%, I believe, 16.5% is of FY '22. The one of the Minister came out and said that the AT&C losses have further reduced to 13% or 14%, which is a provisional number for FY '23. Is my understanding correct? Or the provision number can change significantly when the final number comes out? Those are my questions.
Shreya, let me start with your last question, AT&C losses. AT&C losses came down from 22% to 17% in the year 2021, '22. Now you're right that the AT&C losses have come down further. It is around 15% in some of the states, it has gone on below 13% also. So the statement by Honorable Minister is quite correct. And it is provision figure and provision figure is going to be around 15% overall. But some states have done exceedingly well. And some of the states are trying to reduce their AT&C losses to single digit. That's a very good news. With regard to your question about RE and Infra, let me start with renewable energy segment. Now instead of plain vanilla solar or wind, now we are looking for hybrid solution solar and wind combination or solar with storage, wind with storage because a lot of demand is there for around the clock for power supply. And we are also started looking after this green hydro and green ammonia, we have sanctioned recently a project in Oman and some more projects are likely to come up in Odihsa and the state of Tamil Nadu. They also sanctioned this pump storage hydro. You're right that the margins in renewable energy segment are not that high, but we would like to -- we are targeting the good asset quality as far as the renewable energy segment is concerned. Our margins may not be that high, but we would like to compensate it by increasing the volume of our renewable energy portfolio. With regard to infrastructure, we were going cautiously. Actually, last year was the first year when we started financing non-power infrastructure sector. We had targeted the state utilities with the state government guarantees, like metro projects, road projects, IT infrastructure, health infrastructure. Those projects we started with the support of the state government guarantee. Now once we gain the content, we are in the process of roping in experts from different infrastructure will. And gradually, we'll start financing the private sector also. With regard to late payment surcharge, I'll hand over to my Director Finance.
So under NPAs we have overall disbursed around USD 3.6 billion and this current year out of $11 billion, $1.6 billion have gone towards LPS. So LPS will reduce going forward because this is a short-term measure. And this overall outstanding currently on LPS is just about $9.8 billion of overall $55 billion. $9.8 billion also includes the liquidity infusion scheme that happened during the COVID times.
Okay. Sir, just a clarification here. So when you say -- when your presentation says LPS and LIS, that LIS is not a part of LPS, like that's not under the late payments such as, that's something going on from before, is it?
LIS was during with COVID times, our government came up with a Liquidity Infusion Scheme, so that the power sector could sustain the loss of receivables that happened during a brief period of time. So LIS is that much. LPS is a different scheme where the states have been allowed -- the discounts have been allowed to securitize their outstanding payables to the generation transmission companies. And with a condition that going forward, there will be no delay in payment of dues. So LPS and LIS are quite different here.
So sir, the $3.6 billion is just LPS, does it includes LIS also? Or is it just LPS? Just to clarify, please?
Third quarter sanction is just about LPS. Yes.
We'll take the next question from the line of Niharika from Aequitas Investments.
My first question would be how REC has hedged itself on interest rate risk with U.S. interest rates going up. So how are we hedging ourselves on interest rate?
Our Executive Director, Mr. Sanjay will explain the hedging methodology adopted by REC.
Actually, 91% of our total exposure is already held up to the maturity. We are hedging through the various options which are available in the market through the single options or spread options. And the cost which is coming on the hedging basis, including the open-only swap, which we are entering into -- it's roughly in the range of about 6.8% to 6.7%. So as compared to the domestic cost of borrowing of about 7.5%, it's about 50 basis points lower. So 91% of the total exposure is already hedged, as said, we don't have to see any eventuality that may be coming in the future years.
And when we say this exposure, this is my currency exposure as well as interest rate, is it 91%?
Yes. Both the things are hedged.
And when we say cash flow repayments towards the loan. So have you hedged on the interest payments or it includes interest plus principal?
Interest plus principal, both.
Okay. That's helpful. And how much of our book as a percentage of our book has a 3-year reset figure. Again, because we would have some refinancing risk over there. So...
Close to 80% of our book is on 3-year reset, but that will gradually come down because now a days we are disbursing loan on 1-year reset and every borrower is also taking on 1-year reset. Here used to be almost 90%, 95%, which is gradually coming down.
Sir, all the new renewable energy loans and infra loans, which we are sanctioning and signing MOU for, we plan to do it on 1-year reset period?
That's right, largely on 1-year reset period, and some of them very small, are also on quarterly recent basis as well.
Okay. And any rate increases that we have taken in past 2 quarters?
Yes. We have raised our rates, keeping with the increase in the cost of funds. So around 50 basis points have been raised during last -- in the previous year.
No has taken in recent quarters, which must be like coming -- the effect must be coming saying gradually over the next few quarters?
That's right, yes.
And sir, all the renewal energy loans and again infra loans. So any kind of bucket that you can give for the spreads we plan to give like the spreads on these loans?
So on renewal, as our Chairman has said that our spread is lower compared to other segments of our lending. So our spread generally in the renewal segment is around 1.5% to 2% or 2.25% in this range. And for the infrastructure, it is near about between anything between 2% to 3% -- between -- largely between 2.5% to 3%.
We'll take the next question from the line of Shweta from Elara Securities.
Congratulations on good quarter. A couple of questions. Just taking queue from the previous question. So as against 50 bps rate hike which we took last year, we saw almost 40 bps decline in. So is it that it's still not reflecting on the yields because of the [ NA ] effect?
Yes. Just you're right. The effect of the reset of rates will come after a while. But because of our emphasis on asset quality, we have also lowered our margins in spread in many of the cases. So renewable projects, particularly and also in some of the good power projects also, so we have reduced our spread and margins to accommodate good quality assets. That's all...
Sir, just a follow-up question there. So in renewables, as you clearly highlighted, the rates will be slightly lower also because the competitive dynamic is playing out there. On the non-power side, incrementally, we are focusing on state-backed assets. So how do you see the yields stacking up over next 2 years, especially after this -- post this reset.
Yields are expected to be in the range of 9.5% to 9.8% percentage. That's what we are targeting. And we wish and we think we shall hold on to a spread of 2.5% and take our NIM to close to 3.5%. Currently, it is 3.28%. So we should would like to take it to 3.5% our NIM. 3.5% and 2.5% are fairly good numbers considering that asset quality is improving and sanctions are improving, disbursements are all-time high. So overall -- on an overall basis, these margins are actually market reflected.
Right, sir. Sir, second question is on asset quality. So Q1 of 3.28% GNPAs with a stock of INR 14,900-odd crores. So what is the impending resolution pipeline now on the immediate basis for FY '24? And vis-a-vis whether you will be seeing recoveries or write-backs for this particular year?
Let me tell you the broad picture. We had about 36 assets. Out of 36 states the already resolved -- 17 assets have already been resolved. In the current financial year, we are targeting to resolve about 9 assets. That total amount is about $1 billion, roughly. There will be write-backs as well because what we are seeing that our recovery is in the range of 50% to 60%. In most of the states asset. And going forward, we do see some write-backs happening in this current financial year. And next year, we are targeting to resolve the remaining 10 assets, which are state-one.
Right, sir. And sir, one last question, if I may squeeze in. So I wanted a broader sense on growth in light of -- sir look, today we are 90% of public sector assets 10% private sector. And we are sort of also growing our non-power mix. But then if I look historically or traditionally, the key driver, especially for REC and for PFC, for both the financials have been the distribution portfolio. So if I look at the overall CapEx opportunity overall government outlay, then correct me if I'm wrong, [ INR 2 lakh crore ] per annum is the kind of opportunity for the sector on the distribution side each year. But then you also highlighted the fact that AT&C losses are coming down and the balance sheet out there are strengthening. So going forward, how do you see the growth panning out for the traditional portfolio, which is largely driven by generation and distribution segment? Because I understand that these RDSS, LPS schemes and sanctions that growth should taper off, right? I mean, beyond FY '30. Could you just highlight mainly the growth from the traditional segment?
Let me try to address your question. You rightly said that our 90% portfolio is for public state utilities and 10% only in the private state. But going forward, as we are targeting to cover more of renewable energy projects. The portfolio of private sector is going to increase from 10% to about 30% in the next 7 years. With regard to traditional sectors. Distribution sector will still require funding. This revamped distribution sector scheme will continue up to March 2026. As you rightly pointed out that, out of INR 3 lakh crore, RDSS outlay, INR 97,000 crores is government of India grant and [ INR 2 lakh crores ] will come from the state side or by the financing from REC and PFC. But you have to appreciate the fact that the distribution network in the country is quite old, about 40 to 50 years. So there will be continuous requirement of upgrading the distribution infrastructure. So I don't see any share of distribution sector will continue to 30% to 35% in our loan portfolio in the next 10 to 15 years.
[Operator Instructions] We'll take the next question from the line of Mahesh Bendre from LIC Mutual Fund.
Am I audible?
Yes, yes. You're.
Sir, I just wanted to understand our role exactly in the funding of renewable projects. I mean, over the next 2 to 3 years, what kind of opportunities do we see funding of power projects in renewable side and even transmission and distribution side?
Renewable energy, as you are aware that Government of India has given a target about 500 gigawatt of installed capacity from nonfossil fuel sources, mostly it will be renewable energy only. Right now, our installed capacity is about 177 gigawatts. About 323 gigawatt capacity is going to come in next 7 years. As I already highlighted that now we are not looking for only a plain vanilla solar or wind. Now this -- it will be mostly -- it will be hybrid, solar and wind combination, solar with storage, wind with storage. And we are also quite confidence about the potential for storage solution because renewable energy is intermittent in nature to stabilize the grid, we need the storage foundation. There are a lot of potential for battery storage and pump storage hydro projects also and some of the developers also trying hydrogen fuel storage also, that is also in the pipeline. Green hydro and green ammonia with the recently Government of India has amended the Energy Conservation Act. With this amendment, Government of India can mandate the consumption of renewable energy in different segments, they are in the process of notifying the consumption of green hydrogen and green ammonia also. We see a huge potential for financing green hydrogen and green ammonia projects as well. And with that, associated this evacuation of renewable energy will also require green energy corridor. That also has huge potential. By the year 2030, we are expecting that total requirement funding requirement to be about INR 15 lakh crore in this energy sanction initiatives. And REC is targeting to capture 20% to 30% of this business potential. Maybe we made INR 3 lakh crore to INR 4 lakh crore we'll be able to finance this energy financial-related initiative in the next 7 years.
Sir, what proportion will be this for T&D and what will be proportion for power plants, I mean, renewables?
If the T&D, this distribution had not included the energy sanction related initiative pertains to this renewable energy generation projects, then storage solutions and it's evacuation through transmission with [indiscernible] about INR 3 lakh crore to INR 4 lakh crore potential. The distribution sector, as I already told to Niharika that it will continue to remain our distribution portfolio will be stable to around 30% to 35% of [indiscernible] loan portfolio in the next 10 to 15 years because distribution sector will keep required -- will require continuous upgradation of its infrastructure. So it is excluding distribution sector.
Okay. Sure, sir. And sir, last question, I mean, last year, we did a disbursement of INR 96,000 crores to INR 97,000 crores. So what is the outlook for the current year?
Going forward, the trend that in the first quarter itself, we have crossed INR 34,000 crores. And as on data as we are speaking, our total disbursement stands around INR 53,000 crores. If this trend continues, we should be touching about INR 150,000 crores disbursement in the current financial year.
We'll take the next question from the line of Kaitav Shah from Anand Rathi.
Congratulations on a good set of numbers. My questions are twofold. Number one, if you can tell us more about the competitive environment in traditional set of business are we seeing any increased competition from banks. And so if you can highlight more about that? And are you seeing some kind of yield pressure on account of that given that the sector itself is seeing some improvement. And second question, if you can highlight more about the structural changes that you're doing on account of lending to non-power segments. So is it that you're doing anything different in terms of underwriting there? How do you get some comfort around that underwriting process.
Let me first address this competitive environment with regard to renewable energy projects, a lot of competition there, I fully agree. That's why our margins are going to be lower in renewable energy segment. We have got competition from banks and other financing industries also. But the one advantage that REC has over the bank is that we give longer tenure loans. We can -- our tenure could be 15, 20 years also. The banks normally give shorter 10-year loan. And with the introduction of renewable energy into the grid, the flexible operation of coal-based power plant would become very important actually, right now, technical mine coal-based power plant is about 55%. And going forward, with more injection of renewable energy into the grid, we might have to operate coal-based power plant towards 40% of P&L. That will require investment for traditional coal-based power plant also for enabling their flexible operation. Their banks are not comfortable to finance this coal-based power plant because they are not trained or they are not -- they don't have experience of this kind of flexible operations. There, we see a huge potential. We'll be able to finance this flexible operational coal-based power plants also. With regard to structural changes, we are targeting that our non-power infrastructure and logistics sector will be about 1/3 of our total loan book. Right now, our total loan book is about INR 4,54,000 crores. And that right now, the share of this infrastructure non-power infra is very small, only 1%. But going forward, its share will definitely going to increase. It may not reach 30% in the near future. But by the end of 2030, when we are targeting to take our total loan book rate to about INR 10 lakh crore by that time, 30% would be coming from the renewable energy segment, 30% would be coming from non-power infrastructure and logistics sector. And our director of finance would like to add.
Yes, about the structural changes. Last year, we generally sanctioned mostly the government projects are backed by the government guarantees. So as we get more hold on the space, we should be financing private sector projects as well. And we are also in the process of engaging good consultants to support us in appraisal in business development and in monitoring of these projects. That's the kind of approach we are taking.
We are in the process of finalizing a roping in and bringing on board the high-quality professionals and experts from road and highway sector, railways, airports, ports, IT infrastructure, and will have a strong professional team to upgrade this non-power infrastructure and logistics sectors.
[Operator Instructions] We'll take the next question from the line of Saket Yadav from India Capital.
Can you hear me?
Saket, we can hear you.
Firstly, congratulations on a fantastic set of numbers. And I also wanted to thank the management for laying out here sort of path ahead that the company plans to take with regards to increasing the share of renewables and also the path on how to company plan shooting down its net NPA for the next 2 years. I had a related question on the net NPA guidance as -- and sir just mentioned that we are planning to resolve 9 projects this year, which in total amounts to about $1 billion. So if you can give more granular color around those 9 projects and how things have moved. Because in first quarter, I think no resolutions came through, so we are anticipating those 9 projects to be resolved over the next 9 months. So if you can share some more color, that would be very helpful. That is my first question.
My Director Technical Mr. Vijay Singh, some projects we are in advanced stage of resolution and some will [indiscernible].
So out of the total NPA amount of, say, INR 14,000 crores, we are targeting close to INR 7,500 crores of projects in this year for resolution. This includes projects like Dense Energy wherein there are three lenders who have already approved the resolution plan, and that resolution plan will be implemented within the current quarter, and this asset was targeted in the current quarter. Although I said together [indiscernible] classic driven, both are expected to be resolved during the current quarter itself. Then we have a few more projects lined up for resolution. [indiscernible] Energy is one where we got the resolution plan under the IBC process and that resolution plan now stands approved by the NCLT. This will also be implemented within the next 3 months of time and then that resolution, we are expecting in Q3 that will be settled. Another one is Lanco Amarkantak where you may be aware that REC, PFC as well as DVC consortium has bidded and won this particular asset. And this resolution plan approved by the COC is currently under approval process of NCLT, and we are expecting this appear to come very soon. And this, again, we are targeting for resolution in the Q3 that is next quarter. [indiscernible] which is another project, the [indiscernible] have been received. Plans were received, but the value was not up to the mark. So we had gone for rebidding. And then again, we are likely to get -- we are hoping that we'll get better resolution plan this time. That again, the whole process is likely to be completed within Q3. So these are the major projects lined up for resolution during the current financial year.
Sir, my second question is around margins. I think Ajoy has mentioned that we are transiting to take the NIM up to 3.5% over a period of time. So my understanding is some of the rate times that we have taken last year, the effect of that will be visible as we go along. If I can require still some clarity as to what's the time line around this? We are currently at 3.3%. Are we hoping to touch 3.5%, say 3, 4 quarters time if management can give some guidance around that, that would be helpful.
Yes, we are targeting NIM of around 3.5% by the end of this year. So that's what we are targeting at. So the rate hikes, which have taken place during the previous year and also one in this year itself. That should have effect on our reset of loans as we progress along. So there, we hope that our margins will slightly go up. So we are targeting margins is one thing, but we are also very conscious of asset quality. So both will go hand in hand. So we think that going forward, as I said, our spread will be around 2.5%, and we are targeting a NIM of 3.5%. Figures that we are looking at.
Sure. Just one final question from my side is around hedging. So earlier, sir, team had mentioned that 95% of our cash outflows are hedged. In the past, sir, due to currency movements, there has been some volatility on the P&L side. So I just wanted to reconfirm that, that -- those costs that we incur on a quarterly basis, those are absolutely noncash basis. Is that understanding correct?
Virtually, we are paying the premium, which is already accounted for on a quarterly basis. And normally, the premium payment is either upfront in case of the single option and in case of call spread, it's on a quarterly basis. So premium is already accounted for in the profit and loss account. So as said, there is no impact over and above that in the financial asset. I said the 91% to 95% is already hedged. So both the -- both are hedge. So it's not going to affect in any way adversely the profit loss account over and above the premium which we are paying, which is already counted for.
Understood. Sir, in the past, there was some impact because of MTM on nonterm moving contracts, so that should impact the P&L going ahead. Is that understanding correct? Because previously, there was there used to be some impact because of currency movement as some of these contracts were mark-to-market. So just wanted to clarify that.
If they are hedged and it is not going to affect the profit and loss account. It's only the [indiscernible] income that [indiscernible] if [ PAT ] is not in any way impacted by that. For any of the MTM movement, which are there. Actually, up to last year, the percentage hedge portion was about 60%. So this year, [indiscernible] it is not going to affect adversely the profit and loss account in the coming periods.
We'll take the next question from the line of Jigar Jani from B&K Securities.
Congratulations on a great set of numbers. Just 2 questions. One, you mentioned about RDSS now this RDSS disbursement earlier, I think you were guiding for end of FY '24 for them to start. So just wanted to get a sense as to when these disbursements will start and what would be the quantum of disbursements we are envisaging under this scheme for FY '24 and '25. And the second question is for your guidance of INR 10 lakh crores of loan book by 2030, that if I just back calculate that ends up to about a 12% growth in AUM. So is that kind of a conservative guidance as of now because considering the traction and the amount of scope that we have on the renewable side and the infra side, does this -- is this a more conservative guidance from your end? Because the growth doesn't look to be very high based on the scope and the opportunity that we have. Yes, that's the 2 questions.
Government of India, our grant is about INR 97,000 crores. In FY '23 disbursement figure stood around INR 6,000 crores. And in FY '24, disbursement will increase to about INR 15,000 to INR 20,000 crores only because you'll have to appreciate that most of the discounts are in the process of awarding this loss reduction work and prepaid is quadrupling. Only about 20% work has been awarded. 80% of the work is yet to be awarded. We are in the advanced stage of finalization of the tender some negotiations are going on. We hope that by the end of October, all these contracts will be awarded. Thereafter, works will pick up. So most of the disbursement is likely to happen in FY '25 and FY '26. FY '25, we are targeting that about more than INR 40,000 crores would be disbursed. In FY '26, remaining about INR 40,000 crores would be dispersed. With regard to our total outstanding loan portfolio about INR 10 lakh crore by the year 2030, it appears to be really conservative actually. But after the results of Q1, now we are in the process of revising this figure actually. We will have to increase our -- this target. Perhaps we'll be able to reach this INR 10 lakh crore outstanding loan book size in the year 2027, '28 itself. So instead of, 7 or 8 we might achieve this target in the next 5 years itself. And our Director Technical would like to...
Under RDSS, there are 2 components. One is, of course, loss reduction, which actually we're talking about. There's another very important component of installation of the smart metering. And that component is actually being implemented essentially by the private sector player. And the total outlay is INR 1,50,000 crores. So the numbers that we -- our Chairman sir gave is about disbursement happening towards loss reduction for -- to the discounts. They are the implementing agency for loss reduction programs. But for the smart meter implementation program, you may be aware that only 900 per meter grant is coming from the government of India and remaining investment is being made by the private entities, which are called Advanced Metering Infrastructure Service Providers. So there is also a financing opportunity of close to INR 1,50,000 crores under [indiscernible], smart meters solution under the RDSS.
Yes. So just a clarification on this. So we won't be financing this smart metering part of it. We will be financing cost reduction part of it as I understand that.
Let me clarify. If the discounts had to far past this result evaluation frame more. REF evolution, they are to clear, only then they are eligible to get government of India grant. Some of the state they have to score 50 mark out of 100 evaluation mark. Some of the states have secured about 56 marks, 57 mark, just short of scoring going more than 50% mark. That will require some bridge financing from REC and PFC. We'll be doing bridge financing to those states, which are just about to get to clear this REF this year or next year. Some bridge financing would be required for that also, or both loss reduction as well as for prepaid smart meter the financing requirement would be there. Total outlay for the RDSS, including prepaid smart metering is INR 3 lakh crores, INR 97,000 crores only is being given by government as grants. Remaining INR 2 lakh crore, some portion, 10% or 20% will come from the state government, remaining about INR 1,80,000 crores will come from the financing from [ REC and PFC only ].
Okay. Great, sir. And asking for this year considering we have had very strong growth, we could anticipate north of, say, 16%, 17% kind of full year growth, right, for this year in terms of loan book.
That is our ambition.
We'll take the next question from the line of [ Vipulkumar Shah ] from [ Sumangal Investments ].
Sir, my question is regarding your Slide #17, list of your major borrowers, they are all state disk comps. So these loans do we have any security against this lending or these are unsecured lending?
We do have state government guarantee, but in to certain components [indiscernible].
So we are doing essentially all our financing or project finance. So there are underlying project assets as part of security. There are other collaterals also. So hypothecation of all entire assets, mortgages, standard security packages are there. They're in all cases of project financing. This security structure is in place. In addition to that, if I just have to give you some sense about additional collateral that we are taking. I think out of [ INR 4,54,000 crore ] we have roughly 41% of our financing is backed by the government guarantee also. So that's the additional collateral in addition to the project assets that are available as security to us.
No. But sir, in the majority of them are discount. So what type of assets they can offer as collateral they are not generating most of the -- when I read the list, most of them are discount companies.
Yes, discount also all the assets that are created out of our financing, all those assets are actually mortgage or [indiscernible]. And for, of course, there are -- for distribution company, there is some financing related to non-CapEx but the entire almost entire non-CapEx financing, which doesn't have underlying assets is backed by the government [ grants ].
Okay. So if I summarize, so 40% of these loans are guaranteed by state government over and above the securities, which is at the project level. Is that understanding correct, sir?
That is.
[Operator Instructions] We'll take the next question from the line of [ Arjun Bhatia ] from Bowhead Investment Advisors.
Can you just repeat the disbursement target that you gave for this year, FY '24?
Yes. The disbursement target, as I had mentioned, in Q1, we achieved INR 34,000 crores. And as we are speaking today, our disbursement have touched INR 53,000 crores. We are expecting that our disbursement would be to the tune of about INR 1,50,000 crore in the current financial year.
We'll take the next question from the line of Satinder Singh Bedi from Eon Infotech Investments.
Yes. Congratulations on a great set of numbers and also for the investor outreach activities that you've stepped up. Sir, my question is, sir, on this loan book only. So you've given a long-term outlook by 2030. So what would be the indicative outlook for, let's say, FY '24, FY '25 and FY '26, given that we have the tailwind of RDSS, while the LPS will taper off over this period of time. So if you could help us understand an indicative loan book over these 3 years, it will helpful.
So we feel that we can grow at safely at a 15% rate on our loan book. This quarter, we have achieved 20%. Going forward, definitely, we can grow at 15% or even more. The opportunities are huge. But on a conservative basis, it will be 15% growth.
Right, sir. And if I could quickly squeeze sir, what are the two key challenges or concerns that you see as leadership of REC going forward because the results have been very good. So what are the challenges or concerns that you see.
Right now, the outlook for the sector is quite robust. And we have already grow an infrastructure where also we are seeing a lot of traction. I mean, a lot of applications and request for financing. So the challenge, which might come up is on the margins. So there, we'll have to work on that. But as I said earlier, asset quality is a paramount importance to us. So we are prepared to sacrifice a bit of margins for better asset quality. So that's the only challenge that at present...
Another challenge I can force is that cost of green hydrogen has to come down substantially. Some technological breakthrough could happen in the next 2 to 3 years to bring down the cost of green hydrogen. [indiscernible] technology, more improvement is required. Similarly, the battery energy storage cost is quite high. That also needs to be brought down. Some R&D work is going on, and we hope that some solution will come through. When solar energy project got started, the cost for it -- of electricity are [ INR 16.78 ]. But now you see that costs have come down to INR 2.30 per unit electricity from solar energy. Similar technological advancement and technological breakthroughs are one of the challenges. And hopefully, since all the countries are focusing on some energy transition some breakthrough will definitely happen.
We'll take the next question from the line of Venkatesh from LogicTree.
I have 2 questions. One is on -- when we are exploring this large opportunity, and you laid out a road map for us. what kind of collaboration would be there with PFC? Would there be -- is there like an unsaid understanding where looking at various projects, which you'll be able to work together with PFC and they being declared as some sort of a nodal agency. That's number one. And my second question is in terms of human resources at the moment, PFC, what is our strength in terms of management talent. And considering the kind of growth plans, do you plan to add more people with different sets of expertise in the next year?
Thank you Venkatesh, for asking this very particular question in regard to collaboration with PFC, this conventional coal-based generation, we are having understanding with PFC, we are jointly funding coal-based generation project because no other financing agencies are coming forward. There's still requirement about 51,000 megawatt capacity is going to come up next 3 to 4 years with regard to conventional coal-based generation. And with regard to RDSS, Ministry of Power has allocated different states to REC and some states to PFC. REC has been allocated 19 states and in territories covering 32 discounts, and PFC has been alloted 14 states with having total 24 discounts. So RDSS will be financing the distribution sector in our states which have been allocated to REC and PFC, we'll be doing financing solely. We also entered into collaboration with SBI and Punjab National Bank so that we can take up large infrastructure projects, like we have recently taken up Rajastan Petroleum and Refinery project in Barmer. The total financing requirement was more than INR 45,000 crores. They've joined the consortium with REC and PFC is also one of the lenders there. We also -- we are also financing this steel sector project in Odisha [indiscernible]. There also, we had joined hand with SBI. We are in the process of farming collaboration with Punjab National Bank, Bank of Baroda, Canara Bank also to finance a steel projects. And with regard to taking expert on board, we are in the process of finalizing -- taking high-quality professional and experts from road and highways, railways, ports, airports and IT infrastructure related. We'll have sufficient number of competent professional experts to upgrade this non-power infrastructure projects and will also help us in those projects.
Great. Sir, first of all, I appreciate your answers. So across the board, there is great clarity and the way you're going about it in granular. It's very refreshing to listen to you. So thank you so much. And just one minor accounting question. Currently, what is our total manpower resources at REC and with increased management talent, how much would that be over the next, say, 2, 3 years?
Right now, total manpower is 430. We are already finalized -- we are in the process of recruiting a 125 new officials at different levels, some lateral entry is also taking place. And -- we are in the process of hiring about 28 sector experts from non-power infrastructure sector. Total manpower stands will go up to about 550 or 560 in next 3 to 4 months.
We'll take the next question from the line of Naga Raja-Rao Somanchi from Sun Corporate Finance Advisory.
Am I audible sir?
Yes, Naga. You're clearly audible.
Congratulations on amazing set of numbers. And I also extend my best interest to REC consumer in this kind of revenue growth by company, small company [indiscernible]. The only thing is just taking in the search of a little bit while ago about NPA and other things. Are you experiencing any storm in the current portfolio of over 60 days below 90 days. And going forward, with the industry is robust and doing well. As a follow-up they will be generally down some impact little bit. It will be about 60 days to 90 days or like that over...
Raja, you voice was not very clear actually. Moderator, I request the moderator to kind of repeat the question because we could not hear his question clearly.
Mr. Somanchi, I would request you to use your handset, sir, and repeat the question, please. Sir, the participant has left the queue. Even I couldn't understand his voice, I try to adjust his volume, but it did not work for us. As the current participant has left the queue, we'll move on to the next question, which is from the line of Niharika from Aequitas Investments.
So this is regarding like we discussed that almost 91% of our exposure is hedged and remainder of it should come to OCI and not [indiscernible]. But then there's the element of INR 350 crores even this quarter, which has come at less gain on fair value changes. So what exactly is this is like some level of interest rate you are exposed to say, it is like LIBOR or some benchmark inland? That is why the INR 350 crores are sitting my P&L.
So these fair value changes, which is there, this is virtually some of the INR rupee that we have swapped to JPY and euro. There is a substantial margin of about 2.5% that is available to us. And since we did JPY at the level of about 71%, now it has come down to about 58%. So we are gaining in the currency also there. So these are the fair value changes, which are favorable to REC as such. And going forward also, they are likely to be favorable. So only about INR 5,000 crores, and that is INR 2,500 crores against JPY and INR 2,500 crores against euro. So these are the fair value changes only in respect of that, giving the additional benefit to us by way of reduction in the interest rate.
Okay, understood. And my second question would be like we have emphasized the point that you will be looking for more like better asset quality and probably might lesser margins probably. So how do we plan to increase our mix to 3.5% considering our loan book is moving towards renewable energy and the spread would be like significantly lesser than what we used to get on conventional book.
Yes. So yes, you're right. I mean, as our Chairman has already said that the margins in the renewable space is lower because of two reasons. One is that, yes, there is a bit of competition out there. And secondly, because we also are focusing to build our renewal portfolio much more than what it is today. So there, we have around between 1.5% to 2.5% of margin. But in the infra space, which we are now entering in quite a big way, there, the margins are slightly better. The margins are around 2.5 to 3 percentage. So that will somehow -- somewhat make up for the lower margins in the renewable space. And the power sector also, it will continue to have a place in our conventional power also will have a place in our portfolio because distribution sector, as earlier mentioned, that this will -- a lot of modernization, et cetera. So there a lot of scope will come. There, the margins are okay. And in the transmission sector also A lot of opportunities are likely to come. And some opportunities will come in the conventional generation space as well, where the margins are, of course, very good. So overall, as I said, our margins, we are targeting a 2.5% of spread and 3.5% of NIM.
And so the loans which will be extending towards the RDSS, they would have a spread of 2% to 2.5%, is it?
0.5% yes.
RDSS sir.
2.25% or up little bit on the kind of borrowers, the ratings, et cetera. So between 2.25% to 2.5%.
We'll take the next question from the line of Satinder Singh Bedi from Eon Infotech Investments.
Yes. Thanks for the follow-up. Sir, picking up from this last question. So okay, we are trying to aim for 2.5% and 3.5%. And so my issue was that we are currently -- last quarter, we've done about 69, 70 bps of ticker so far as NIM is concerned, over the interest spread given that our fee income, et cetera, might actually not be as healthy. We've had the benefit of prepayments in the past, okay? So how do we plan to achieve this 100 basis point spread of NIM over the interest spread?
Let me clarify that our cost of financing is about 7.25%. And renewable energy, we are getting margin to 2%. Our average cost of finance is that we are lending for the service is around 9.25%, so there is margin of 2% is there. And in infrastructure, our margins, we are lending from 9.5% to 10%, actually. So there, our margins are better, it is about 2.5% to 3%. And majority of this late payment surcharge loans that we have given there, we are having good margin. That is about 3%, 2.5% to 3% margins are there. Now Director of Finance would like to supplement.
Yes. The incremental cost of funding has also come down in spite of no respite from repo rate, low lowering of repo rate or the benchmark rates, we have been able to bring down our cost of funds. The incremental cost of funds this year has been at the tune of around 6.85%. So this will bring down the average cost of funds as well. This has been largely possible due to our foreign currency borrowing and, of course, increased borrowing and another 54EC bonds. So these two are helping us to lower the cost of funds.
Is there an ROE goal that the management sets kind of for itself? Like we've got a very healthy return on net worth as of date, okay? But is there an ROE goal that we work towards because normally the investor community does look at that as an important parameter while trying to put an intrinsic value to financial institutions and financial corporations.
Just 3 years, if you see our ROE has been in the range 20%.
20 to 21%.
20% to 21%. So we hope to maintain this in spite of the increased capital base. So this 20%, we will continue to maintain.
Right? The only challenges is sir, we benefited from very low credit cost, okay, because the way it's been managed and the conservative provisioning that we've done earlier. And those benefits might not be available going forward. Okay. So that's one care. I think it's a great show. And how do we hope to mitigate while you mentioned, okay? So you mentioned that the private sector book will go from 10% to 30% over a period of time as we bring more RE into the portfolio, okay. Was that understanding correct, sir? And over what period is that expected to happen?
Yes. Absolutely, you're right that going forward because most of the renewal projects are coming up in the private sector. So our private sector portfolio will definitely increase. And -- also in the infrastructure, as we get more hold on the space, we shall start to lend to good quality projects developed by the quality borrowers. So there also, we see some traction in the private sector lending. So it's a fair assessment. Going forward in the next 6 to 7 years, our portfolio of the private sector should go up to 30%.
And key learnings sir, all our NPAs are in the private sector. So that's one potential risk down the road. We understand that you are strengthening your evaluation themes, okay? But any key learnings, okay, that you hope to incorporate this time?
Yes. So I'd like to clarify this question of what happened in the past when this NPA is happening were 3 reasons. One is that the revenue stream was not tied up. The PPAs were not in place. The second was, of course, an external reason where the old blocks were canceled some of the projects [indiscernible] due to that. And thirdly, the entities were not so strong. So we have taken care now on all these aspects. Now we don't finance unless there's a revenue stream already in place. The second is, of course, entity, we are going with a rated borrowers. We're not going with a small time. And that's the reason why you see some dip in our margins. And thirdly, the very strong emphasis we have given on monitoring. And we have a very strong monitoring framework, particularly in the private sector, where we engage specialized agencies to monitor on a day-to-day basis. In conventional space, we place these agencies at the site, at the project site. And they give our first hand report on a weekly and monthly basis. So these are the changes that we have made, and we feel that in spite of our lending increasing in the private space, our NPAs will not go up. In fact, we are targeting a 0 level of NPA by the end of '25.
We'll take the next question from the line of Naga Raja-Rao Somanchi from Sun Corporate Finance Advisory.
My question was basically on NPAs. Since the team has answered most of the questions. So I just wanted to limit in the last con call, if I'm right, they did mention that just quarter state without the new NPAs. How are the existing portfolio doing, sir, any concerns in between 60- to 90-day overdues.
Not substantially -- so our Stage 2 is around [ INR 182 million ], and there is a provisioning coverage of 2.26%. But let me tell you that these are generally small cash gap that exists with the utilities or in the government sector that this where delay takes place. So we have seen that because of procedures we are having this Stage 2 assets for a long time, but they have not resulted into NPAs because these are largely from the government sector where there are delays, as I said, are procedural or because of for a very limited period of cash flow mismatch. That's the only reason.
You did mention these are mostly from government sector you're saying correctly, sir?
Mostly from the government sector.
[Operator Instructions] We'll take the next question from the line of Venkatesh from LogicTree.
Just a quick follow-up question, sir. You had mentioned that we are targeting a NIM in the range of 3% to 3.5% over a period of time. What would be considering that we are in that line of business, over a 4-year, 5-year period, what is the net NPA target that you're keeping as most optimal for us.
As I already clarified, we are targeting that by the end of 2025, our net NPA will become 0.
The next question is from the line of Jay, an Individual Investor.
I heard that you said that most of your loans are on 3-year reset. So just wanted to check if you intend to continue in this pattern? Or do you think -- because it looks like that most of the banks or other lenders are on 1-year reset maximum. So is there any plan to change that? And how is this -- does this make sense from a risk management perspective? Because there is an interest rate risk involved?
So we have already stated that we have already changed this 3-year recent arrangement. Now all our loans fresh sanctions, which we are giving are on 1-year reset. So this earlier, our 3-year reset loan book was almost 95%, which has come down to 80%. And going forward, they will all be on 1-year reset. It will take a while, of course.
We have given options also to convert 3-year to 1-year.
Yes. We have also given option to many of the borrowers to convert their loans from 3 years to 1-year reset. And some of them have opted for it. So let's see. But going forward, all our loans will be on 1-year reset.
Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mr. Shreepal Doshi for closing comments. Over to you.
Thank you Michelle. I would like to thank all the participants for being part of the call. A special thanks to the REC management for giving us the opportunity to host this call. Thank you all, and have a good -- and have a nice day.
Thank you, members of the management. Ladies and gentlemen, on behalf of Equirus Securities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.