REC Limited
NSE:RECLTD
Earnings Call Analysis
Q2-2024 Analysis
REC Limited
REC Limited has reported its most successful Q2 result in the company's history, surpassing any previous quarterly results within the last fiscal year. The Asset Under Management (AUM) of the company showed significant growth, starting from INR 385,000 crores at the beginning of the previous year and reaching INR 435,000 crores by its end, an increase of 13%. This uptrend continued in the current fiscal year with a substantial 23% spike in Q2 sanctions and an astounding 133% jump in Q2 disbursements compared to last year's same quarter.
Despite geopolitical events and increased competition escalating the cost of funds, REC's return on equity (RoE) reached 24.34% for the quarter, with first-half RoE at 22.3%. The renewable energy portfolio currently makes up 7% (approximately INR 30,000 crores) of the AUM, projected to grow tenfold by 2030 to INR 3 lakh crores. This accelerated renewable investment portfolio, along with diversification into non-power infrastructure and logistics sectors, contributes significantly to REC's growth trajectory.
REC is determined to resolve its non-performing assets (NPAs), aiming to become a net 0 NPA company by 2025. Currently, with a net NPA of only 0.96% and continuous reduction in gross NPA from 4.03% to 3.14%, the company demonstrates robust asset quality and healthy financials. The capital adequacy ratio stands comfortable at 28.53%, bolstering the company's net worth, which has seen an 18% increase at the end of Q2, to INR 63,117 crores. REC's impressive financial discipline is also exhibited by its 'AAA' credit ratings, both domestically and internationally, reflecting the company's stable and strong borrowing capacity.
The company has adopted an aggressive lending posture, with disbursement growth at an exceedingly high rate of 150% over the last year's first half. The recent Maharatna status has empowered REC to make strategic investments and expand its project portfolio into various infrastructure verticals, including transportation, healthcare, and IT. The entity's total sanctions this half year stand at INR 195,163 crores, which encapsulates REC's dynamic expansion strategy highlighting a confident approach towards capturing infrastructure sectors.
REC's journey as a finance company has been marked by numerous accolades and strategic achievements since its inception in 1969, leading up to its status as a Maharatna PSU. The company's income has grown by 16% in the first half of the current fiscal year with a notable 30% growth in profit after tax over the last three years. The earnings per share (EPS) stand at INR 51.32, with a book value per share at INR 239.7 reflecting the company's underlying value. REC's dividend payout remains attractive, emphasizing its commitment to shareholder returns.
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This Q2 result has been the best result for REC as compared to any other quarters in the previous year. When we talk about the asset under management, last financial year when we started on 1st of April 2022, our asset under management was about INR 385,000 crores, which at the end of the financial year -- last financial year on 31st March 2023, increased by 13% to INR 435,000 crores. But in the current year, in Q2, our sanctions have gone by 23%. Our sanctions in Q2 stands at around INR 104,366 crores, that is 23% increase year-on-year basis as compared to Q2 of last financial year.
And if we compare the H1 figure of the current financial year, our total sanction stands at around INR 195,163 crores, which is about a 35% increase as compared to H1 of the last financial year.
With regard to disbursement, there has been phenomenal increase in disbursement in this Q2, our disbursement is at INR 41,598 crores. That is 133% increase as compared to Q2 of last financial year, which was INR 17,827 crores.
If I compare half yearly figures in the current first half of the financial year, our total disbursement stands at around INR 75,731 crores that is 150% increase over last year's H1 figure of INR 30,269 crores.
Our income has grown by 17% in Q2. Total income stands at INR 11,590 crores, which is a 70% increase over the last Q2 of last financial year, that is INR 9,949 crores. With regard to H1 figures, total income has gone by 16% to INR 22,571 crores as compared to H1 figure of last year's INR 19,417 crores.
The profit after tax has grown by 38% to INR 3,773 crores in the current -- in Q2 as compared to last Q2 of last financial year, that was INR 2,728 crores. If I calculate this H1 figure for profit after tax, there is an increase of 30% over the last 3 years, H1 of INR 51,276 crores. Our current H1 figure profit after tax stands at INR 6,734 crores.
Asset under management has seen a predominant increase in the Q1 and Q2, both have seen 20% growth. Now our total asset under management stands at INR 474,275 crores. Earlier, we were targeting that our assets under management will grow to about INR 10 lakh crore by the year 2030. But if you are able to maintain this growth trajectory, perhaps we'll be able to reach [ INR 10 lakh thousand crore ] by the year 2028 itself.
The net worth of the company has seen an increase of 18%. At the end of Q2, our net worth has grown to INR 63,117 crores. The capital adequacy ratio is at a comfortable level at 28.53%. The NPA, the major mark of our -- this tremendous growth is that the last 7 quarters, not a single NPA has been added into our kitty. And our net NPA is now only 0.96%. We had total states assets -- 36 assets were states at the start of 2018, '19 when a committee headed by the then cabinet secretary was formed to suggest ways to resolve the states assets.
So far, we had already resolved 17 state assets. And in the current financial year, we are targeting to resolve 9 assets. Out of 9 assets, 4 assets are at the verge of resolution, and the remaining 5 assets will be able to resolve by the end of March 2024.
The remaining 10 assets also we are targeting. They are at different stages of resolution, and we hope to resolve the remaining 10 asset also by the year 2025. And that's why we are 100% sure that we'll become net 0 NPA company by the year 2025.
These results were achieved despite some major challenges. Including increased cost of funds owing to continued geopolitical events and heightened competition. This makes this performance even more pleasing. The return on equity in this Q2 has gone to 24.34%. And for H1, our return on equity stands at 22.3%.
The 2 significant factors, which has led to our tremendous growth, I would like to mention that our renewable energy portfolio is about 7% of our total asset under management. That is around INR 30,000 crores. We have made a clear-cut business strategy to increase our renewable energy portfolio by 10 times, to say, about INR 3 lakh crore by the year 2030.
In fact, when we had organized Green Finance Summit in Goa on the sidelines of G20 Energy Transition Working Group. We had detailed discussions with RE project developers, technology providers, manufacturers, EV, OEMs, and operators. And we were able to sign MOUs worth about INR 286,000 crores, wherein we had done project by project identification also. And I'm happy to share with you that out of INR 286,000 crores MOU, which we had signed with about 25, 26 entities in the month of July, third week. We already sanctioned projects worth INR 40,000 crores in the last 3 months, August, September and October. Out of total sanction of INR 195,000 crores in the H1, 25% has come from renewable energy segment.
So we are committed to increase our renewable energy portfolio. And by the end of 2030, our share of renewable energy portfolio will increase to INR 3 lakh crores, that will be 30% of our asset under management.
When we became a Maharatna company last year in September 2022, Government of India Ministry of Power allowed us to diversify into non-power infrastructure and logistics. With a carried that -- which is -- they have kept telling that 1/3 of our outstanding loan book should be -- it should not exceed 1/3 of our outstanding loan from non-power infrastructure and logistic. And every year also, there is a cap of 1/3 of the sanction, it should be limited to 1/3 only.
When we got this permission in October 2022, we started financing infrastructure logistics projects. Since it was first year, we were cautious. We financed those infrastructure logistics projects, which were in the state sector, which were duly supported by the state government guarantees. And out of INR 268,000 crores sanctioned last year, INR 85,000 crores was pertaining to infrastructure logistics sector.
In the current financial year, in H1, out of INR 195,000 crores, 20% has come from infrastructure logistics sector, about INR 40,000 crore project we have sanctioned from infrastructure logistics. It has -- covers a wide spectrum of projects. It varies from electromechanical components or refineries, steel plants. We also financed roads, expressway highways, Mumbai-Pune Expressway was one of the big projects -- big ticket project where we had sanctioned INR 17,000 crores. We also financed Ganga Expressway in Uttar Pradesh, Kagal-Satara Road in Maharashtra.
We also financed MMRDA's metro projects. Bangalore Metro project, we are in the process of sanctioning some more projects in the airports and port sector as well. We also sanctioned certain projects in IT infrastructure, data centers, and super specialty hospitals also.
The focus on energy transition related projects and non-power infrastructure and logistics, combined with our strategy -- conscious strategy to resolve our [ stage ] asset with the target to become net 0 NPA by year 2025, has led us to this tremendous growth, which we are sharing with you all.
Now I'll request my Director Finance, to make a presentation on our financial performance. Mr. Choudhury.
Thank you, sir. So good afternoon, dear friends. So I'll make a very brief presentation. Most of you probably know about REC Limited. And so we'll just go through the REC overview, its operational performance, asset quality, borrowing profile, and financial highlights. . So REC journey. Most of you know, probably started in 1969. And in 1998, we were registered with the RBI. In 2008, we were conferred with the Navratna status and we floated our IPO, which was subscribed 27 times. In 2010, we were conferred with our IFC status by the RBI. 2017, we were the first PSU to issue green bonds on the London Stock Exchange. 2019, nodal agency, which achieved 100% house electrification. 2021, we were appointed as the nodal agency for the very important reform Distribution Sector Scheme of the Government of India. 2021 -- '22 was a landmark year when we were conferred with the Maharatna status, which is the highest rates for any PSU and we also for it into the non-power infrastructure sector. These are the key strengths, experienced management team, nodal agency for major government of India power projects, highest domestic rating and international rating at par with the sovereign.
Strong fundamentals and profitable business Maharatna company and a strategic player in the Indian power sector, diversified asset base with robust access to diversified funding sources, healthy asset quality with adequate provisioning coverage ratio and we occupy a strategic position in the growth and development of the power sector across India and also a major player in renewable energy segment.
So these are [indiscernible] adjust the best PSU in the financial service category but done and dusted. We ranked third in the Fortune India 500 companies. Golden Peacock Award for Risk Management, we got this year from the Institute of Directors, London. Golden Peacock Award for Excellence in Corporate Governance, we got it from the -- again, by the Institute of Directors, London. We are the most profitable companies by money control, we are among the India's top 20 companies. And we were also awarded by the Indian Chambers of Commerce operationally performance category under excellent.
We have recorded the Maharatna status. This gives us greater financial and operational autonomy and it also allows a strategic investment by incorporating JV subsidiaries and M&A activities, and we are helping the government in supporting the government vision of power sector and by accelerating growth and so.
We forted into the infrastructure last year. So we are doing all this business, metro, port, waterways, airport, oil, refinery, roads and highways, IT infra, steel infra, and health sector. So we are the government trusted arm. We were the nodal agency for the very important Village Electrification Program, which is also known as the Deendayal Upadhyaya Gram Jyoti Yojana. And then that was completed in 2018. And then we were made the nodal agency for the SAUBHAGYA scheme, which was 100% household electrification. That got completed in 2019.
Currently, along with BFC, we are the nodal agency for the very important Reform Distribution Sector Scheme. Along with that, we are also in the various other projects that have been interested to us by the Government of India.
So this is a shareholders' outlook. Our EPS is around INR 51.32. Share prices have rallied from INR 115 to INR 287.4 in the last about 6 months. Book value per share at INR 239.7. And today, we have declared a second dividend of INR 3.50 along with the first dividend which were declared for INR 3. So around INR 6. 50, we have declared dividends.
So Power Finance Corporation hold 52.63% in our equity. Foreign portfolio investors hold around 22%. Foreign portfolio investors in fact, have always held more than 20% in our equity. Dividend payout, one of the best dividend-paying companies, 126% of the face value.
So sanctions, our total sanction this half year have been INR 195,163 crores, as compared to INR 144,784 crores in the corresponding half year of the previous year. We have made highest ever quarterly sanctions during Q2 FY '24 at 104,366 crores.
Disbursement at INR 75,731 crores compared to INR 30,269 crores, around 133% increase in the disbursement in the half year. This quarter, we have made the highest ever quarterly disbursement of INR 41,598 crores. Outstanding loans stands at INR 474,275 crores. And largely distribution sector, 44% out of this 44%, 12% is -- around 12% is for the Atmanirbar scheme, which was a special scheme announced by the Government of India to support their distribution companies during the COVID times.
Generation at 29%. INL at around 10%, including the power components part and relieve on energy at 6%, which we intend to take up to 30% by the year 2030.
Loan book has grown at a healthy rate of 20% year-on-year. So PAN India presents our 90% of our loan are to the state sector and 10% around to the private sector borrowers. Major borrowers, TANGEDCO, Maharashtra State Electricity Distribution Company, UPPCL, and all of these, there have never been any slippages in the first 10 borrowers.
Asset quality improving continuously. Net NPA at currently 0.096% of our loan book and 3.14% is the gross NPA, which has come down from 4.03% in September 2022. Provision coverage ratio is 69.37%, slightly lower because some of the assets which have -- we have reverse some of the provisions where there is a write-back which has happened in the Q3 actual current quarter. And so there's a case for withdrawal of this thing. So this is the -- this thing.
So credit impaired research resolution under NCLT, INR 13,008 crores. 14 projects with 73% provision, and there are 5 projects outside of NCLT being resolved at INR 1,884 crores, where there's 42% provision. AAA rated by all the major rating agencies domestically and internationally rated at par with the sovereign.
Recently, our perpetual debt instrument, which was rated AAA by CRISIL, now KR has also upgraded to AAA. Outstanding borrowing is at INR 413,542 crores, corporate bonds is around 39%. And our ECB is currently at around 28%, including the FCNR bonds. Tax-free bonds -- capital gain bonds is at 10%, which is the cheapest source of funds for us. We take the major share of this particular market.
Fund raised during the period quarter INR 30,691 compared to INR 16, 871, commensurate with the growth in our disbursement. And for the half year, it is INR 79,885 compared to INR 28,486 of the corresponding half year of the previous year. So these are the major highlights.
Total income stands at INR 22,571 crores, up 16%. Net profit stands at INR 6,734 crores, up 30%. Total comprehensive income at INR 7,331 crores, up 99% year-on-year. Loan book has reached to INR 4.74 lakh crores, 20% up. Asset quality improved with net credit impaired asset at 0.96%. Net worth now at INR 63,117 crores. And capital adequacy at a very comfortable 28.53%, giving us ample opportunity for growth.
So these are the key ratios. Our interest spread has gone up from the previous quarter from 2.59% to 2.74%. And our net interest margin has come to now 3.45% as against 3.28% in the last quarter. Return on net worth at 24.34% half year, which is 22%. It's not given here. Interest coverage ratio at 1.65% and debt equity ratio at 6.46%.
So thank you very much. I welcome any questions that you have.
We welcome questions from your side and queries. Please pass on the mic, please.
Sir, I have two questions. The first one is, despite the growth in disbursements and interest income. On the interest expense side, also, we have seen more than commensurate increase. So the net interest income is almost flat. And as you mentioned, the NIMs are slightly under pressure as compared to the same quarter last year. So if you could just explain what is going on, on the cost of borrowings and where you see that headed. Along with yields and hence, the NIM. Would be very helpful.
So interest expenses have grown commensurate with our disbursement. Our cost of funds have remained sequentially at 7.23%. Compared to last year, of course, it has risen, as you all know, what are the changes that has happened in the repo in the T-Bill market and also in the corporate bond market. But even with all these challenges, including the geopolitical ones, our sequentially, we have maintained our cost of funding at 7.23%.
So our NIM has improved sequentially again. If you compare with the last year, you see the point is that we are also very conscious of the asset quality. So our cautious approach on the asset quality is also a reason that we are not too aggressive on margins. So that's the reason why our margins compared to year-on-year. But sequentially, as you have seen, we want to take our interest margin -- net interest margin to 3.5%, I think, which is a healthy kind of margin, and which will give us space to manage our asset quality.
And my second question is slightly broader. A few years ago, almost all private sector banks and the public sector banks had vacated the infra of financing space because of policy paralysis and there were a lot of issues with infra projects. Now energy space has moved into the green energy space. There's a lot of renewable projects, very few thermal projects are coming up. How do you see the competitive intensity for people like REC-PFC, vis-a-vis for giving out loans vis-a-vis the SBI or the BOBs of the world, on the project finance side. And if at all, ICICI or HDFC Bank, the larger private sector banks, what's the competitive intensity? Are REC and PFC the only game in town to be key lenders to this entire renewable energy transition.
Renewable energy, we are competing actually with a lot of -- with banks and other financial institutions because everybody wants to add to their kitty this green angle. But what we are doing is that we are targeting good asset quality in the green projects. where the rating of the borrower is good. Although the margins are a bit lower in RE projects, that decrease in margin, we want to compensate through the large volume.
With regard to infrastructure projects, since government allowed us only last year in October, we were a bit cautious. Initially, we have sanctioned only those infrastructure projects in the state sector, which are having the state government guarantees. Now we are gradually -- we are learning. It is an evolving process for us also. We have brought in sector experts. We have brought in advisers, senior consultant, consulting from logistics and infrastructure sector who are helping us to appraise this infrastructure projects.
And yes, we are competing with other players in infrastructure. And we are targeting those infrastructure projects where revenue cash flows are assured. And will be -- once we evolve, then we'll start taking a calibrated risk in the infrastructure.
Just to clarify on the banks and all, see banks do lend to infrastructure, particularly SBI, but not all banks are so much in the infrastructure space, largely because they have their ALM issues. Their ALM does not permit them to go very long on infrastructure projects. So that's the advantage which we have compared to banks. Therefore, we are in a slightly better position as compared to other banks. .
Just before we continue, I would request each one who has a question to please introduce yourself and mention the name of the phone before you go ahead with your question and try to limit it to two a participant.
Yes. My name is Shreya. I'm from CLSA. My question is on growth. So while the growth has been great currently, a lot of the growth has come from these schemes that government has for the DISCOM sectors, the LPS scheme and the revolving bill payment facility, et cetera. So if I want to project growth in the coming years, there are certain programs that government has the INR 31 trillion program expansion of installed capacity in the country.
What is our plan in it and the INR 40,000 crore that you mentioned, is it a part of that program? Has that already started? How much will we -- what will be our market share in that expansion program that the government is planning to do. Also, if you can comment on RDSS has disbursals for those started, have the smart metering programs started et cetera. And sir, my second question is on cost of funds. So in third quarter, you have a big dollar bond, which is retiring. Can you help us understand what is the current rate at which you're raising dollar bonds? Or what is the plan going ahead?
Let me take this question on RDSS and infrastructure thing. RDSS was launched in the month of July 2021, when COVID was -- second wave of COVID was there. The 1 year when second wave of COVID slowed down, there was a bit of delay in sanctioning this RDSS project. RDSS is mainly aimed to improve the operation and financial efficiency of the distribution companies. And one significant feature is that the state government through their cabinet resolution has committed to certain trajectories like bringing down the AT&C losses bringing down the government department -- to liquidate government department dues to liquidate legacy subsidy payment to the DISCOMs. And these projects, under RDSS, which are being taken by the distribution company, they were first scrutinized by the Distribution Reform Committee headed by the chief secretaries of the state. And thereafter, the state cabinets have committed to those trajectories.
So this cabinet support from each of the states. This political commitment is there to maintain those trajectories committed in RDSS. So total overall financing -- total outlay of RDSS is about INR 3 lakh crores. Out of INR 3 lakh crores, INR 97,000 crores is Government of India grant. Remaining some of them will be contributed by the state from their own side and remaining they'll take loan from REC or PFC.
REC has been made nodal agency for about 19 states and UTs, we are looking at about 32 DISCOMs. And the remaining states are being looked after by PFC, and PFC have seen looking after about 24 DISCOMs. Except Karnataka and Telangana, all the states have already sanctioned their RDSS.
The disbursement has started happening about INR 22,000 crores have already been disbursed. But there are 2 companies RDSS. One is prepaid smart metering component that is about INR 150,000 crores. And remaining INR 150,000 crore is pertaining to the loss reduction work. The prepaid smart metering, we see a huge opportunity because prepaid smart metering is being done by the private players, they do require financing. And that financing also we are targeting.
And this prepaid smart meter is going to be the big game changer. Like people will be able to recharge their electricity connections. They'll be able to see their consumption through the Mobile App. And overall collection and billing efficiency or distribution companies will improve. So much so that what has happened that RDSS has brought certain kind of discipline among the distribution companies in order to get government of India grant, they have to meet this result evaluation framework. There are certain prequalifying criteria in which they have to pass.
What has happened that government department dues, which all the discounts through the state governments are committed, it has started coming down. At the start of RDSS, government department dues were to the tune of about INR 135,000 crore just come down to around INR 63,000 crores.
Similarly, the legacy subsidies that was more than INR 120,000 crores. That has also come down to about INR 60,000 crores. And so much so that the state government has started paying subsidy quarterly in advance, like for Q2 subsidiary was paid in Q1. For Q3, subsidy has already been paid in Q2. All these are -- and another significant factor which has happened is that the AT&C losses had come down substantially in the last 1 year from 22% to 17%. 5% reduction in AT&C losses is phenomenal. First time it has happened. In one year, the AT&C losses have come down by 5%.
The LPS rule is another big game changer, which was bought by Ministry of Power last year. Through the introduction of late payment surcharge rules. Now the DISCOMs have committed to clear the dues of GENCOS and TRANSCOS in equally, monthly installment, EMIs, which can go up to maximum 48 months. In 4 years, all these dues are going to be liquidated. That is also improving the balance sheet of DISCOMs.
Now I'll request our Director Finance to tell about the cost of funding and the question raised about cost of funding.
So our average cost of fund is at around 7.23%. But our incremental cost of fund is at a lower rate. So we have made an analysis that our repayments that we are making, those were going at higher rates compared to the money that we are currently raising. So the retirement of the bond or repayments will not impact our cost of funds at all. In fact, it will slightly improve on the overall average cost of funds.
Let me add one thing. Regarding the bonds, which you said, which are maturing in the month of November, so INR 700 million is maturing, but the entire amount is hedged, both, the principal coupon in any case is hedged, that is a fixed rate coupon and the principal also is hedged 100%.
And regarding the cost of borrowing also, the incremental cost is during this particular quarter is 7.23% while as on half year ending 30th September 2023, that is coming at 7.17%. So it has come down as compared to March also and as well as the first quarter also, it has come down by about 6 basis points from the last quarter also. So as such cost of borrowing is almost stable.
So virtually, it is coming down, though there will be a slight increase in the coming months, but still, it will be at the rate of about 7.20%, not more than that.
So you had also had a question about this infrastructure -- National Infrastructure Pipeline that current year, Government of India has committed that the CapEx of INR 10 lakh crore. And this national infrastructure pipeline is there. You rightly noted that this INR 40,000 crores that were sanctioned is coming from that infrastructure space. And we intend to increase our infrastructure lending to say about 20% to 25% by the year 2030.
So if my loan book is going to touch about INR 10 lakh crore roughly around INR 200,000 crores or INR 250,000 crores will come from infrastructure space.
Hello, sir. This is Shweta from Elara Capital. So I have a couple of questions. So one is on the cost of borrowings again. So what is the -- at what percentage we are hedged for foreign currency borrowings? And what is the pricing there?
Virtually, we are raising through different currencies. Currency, we are immune to that. We are raising CHF also JPY also as well as USD. And even we are -- whatever the raising we are doing in USD that we are swapping to different currencies also. So there the cost becomes quite minimal as compared to the normal, in case we do the dollar volume.
So the cost, which has come in case of JPY is roughly 6% on all hedged basis. And USD, the bond also which we recently did green-bond that was at 7.03% up to take into consideration the principal hedge also. As far as the USD that we have spoken to CHF as well as Euro also, there are also the cost which is coming to roughly 7.5%. Now it has come down to about 7%.
So all in all, the cost is not more than 7% in case we borrow in any of the currency. After considering the principal hedge also. And the hedge ratio is about 92%. It's only 2 bonds which are there, which will be maturing in 3 to 4 years, which are unhedged. And there doesn't seem to be any reason for hedging them. Because already the -- whatever the volatility is there that has already been factored in. And on a quarterly basis, we are already taking into consideration the foreign exchange fluctuation, which is there in the books of accounts. That is already factored in.
Okay. So fair to assume that 40% of your borrowings are below the current average cost of funds. And so what is the trajectory ahead on cost of borrowings?
Yes, roughly 28% is through the foreign currency borrowing, that is roughly 7% or even less than that. The 54EC bonds which we are raising, that's roughly about INR 12,000, INR 14,000 crores, roughly 10%, but that also is at 5.25%. So roughly 40% to 50% of the volume is 7% or even less -- less than 7%, roughly 6.5%.
So what is the trajectory ahead then for cost of borrowings?
Recently, the corporate bond rates have gone -- yields have gone up. But we are the ECB and the capital gain, the [indiscernible] We are focusing more and more on that. But there might be a 4 to 5 basis point increase due to the current scenario in the bond market. We hope that this is a matter of 4 to 5 months before it starts to cool down. So we believe that we can end up the year at the present level that we are in.
And so much of asset repricing is not coming, right? Because then you also mentioned that you have eyes on freight cost. So net-net, can we assume that net interest margins will remain steady state over the next 2 years? Is that a fair assumption?
Yes. I mean we are targeting a net interest margin of 3.5%. Currently, it is at 3.45%. So yes, you can assume that we shall maintain it at the similar levels.
Right. Sir, my second question, just taking cues from the earlier participant. Sir, just correct me if I'm wrong. So if AT&T losses are on downward trajectory, then of course, your smart metering installation financing is also sort of catching up really well. But then if AT&C losses are gradually coming down, then does that mean that DISCOMs as a percentage of overall loan mix should slightly come down going forward for us?
Let me answer that. As you see that this distribution infrastructure in the country is quite old. It is more than 40, 50-year old. The RDSS is doing this system thing for a certain portion of it. So we do hope that distribution companies will have CapEx requirement to replace their old distribution network. The distribution segment, we foresee that next 10 years, the percentage of that is about what, 35% to 40% of our lending is distribution that will be there in the next 10 years -- 8 to 10 years.
Sir, just last question on the growth front only. So that first half has put up a very strong upbeat tone. So what is the growth outlook for the next 2 years?
We hope to maintain or even better, our performance in the next 2 years.
Hello Bhavesh Kanani from ASK. My question was on the renewable space. Typically, there is a legislation decision period of about 2 years, and then the producer typically refinances the debt at better ease. How has been our experience that is when we disburse what kind of spreads we are charging? And in case we end up refinancing the project after the construction phase, what are the spreads in that stage.
Yes. So our focus thus far has been on financing of greenfield projects only. But then as you're right, there's a lot of refinancing activity happening in renewable energy project. The gestation is very low. The payment security mechanism after introduction of LPS has become extremely strong. So there's no revenue risk. And therefore, the rating of these assets go up as soon as these projects are commissioned. And then comes the refinancing risk. So we are also changing our strategy.
So rather than focusing only on greenfield projects, now we have started focusing on refinancing opportunity in the market where we can obviously -- will have to compromise a little bit on our margin. But then the quality of asset, the rating, the ECR of the asset will be better. So that is how actually we are going to ramp up our RE portfolio by looking at both greenfield as well as doing some bit of refinancing as well.
What is the difference between spreads for both greenfield and refinance?
So if it is a commissioned project, I mean, greenfield, we can charge a little more because there's a construction risk involved.
150, 200 basis points?
So our interest rate today, it starts from 9.25%, 9.5% and likewise it goes. But for refinancing, we are giving a rebate of 50 bps. So 9.25% becomes then 8.75% because we want to attract the project developers for getting their project refinance from us, and that can happen only if we provide them competitive interest rate. And therefore, this policy of 50 bps repeat is there in case of refinance.
Second, again on renewable was, at a pool level, what would be the project are of renewal projects we would have financed. And where I'm coming from is, on one hand, there is project IRR and then we have equity IRR. Like it had happened in the last power cycle. When project IRR are hampered, we run a risk of power producers actually raising their hands and not taking that keen interest in the project. So from that perspective, if you can help us understand.
Yes. So equity IRR, we don't see as a lender. Of course, we look at project IRR. Project IRR as per our experience of lending into this particular space over last decade is actually coming down. Now people are becoming more aggressive. They want to have a larger portfolio, for example, large I developers like ReNew, Adani and so on.
So project IRR is coming down, but then we have a policy. That IRR -- project IRR should not be less than our interest rate. The project should still make some economic sense to the developer also from our point of view. And therefore, we keep watching this. If the project IRR is much lesser that means there could be less interest on the project developer going forward. We are also very careful about it. So we do give weightage to the project.
But there's another one thing. While we are calculating all of these parameters, we are taking a very conservative performance at P90 level. I hope you understand P90, P75 and P50 in RE projects. So we initially calculated P90, but then our experience again is that project up are performing at much better levels. P75 in some cases, P50 also. And then the project dynamics, the financial equilibrium also changes. And then, therefore, the project becomes much more attractive, and therefore, it gets better rating also.
So coming to your point, project IRR is definitely one of the very important parameter we look at. If it is very low, we'd rather not touch that project.
Just to add to -- you mentioned over the last cycle, which was a thermal power project cycle. So there -- what was the problem there? One is that, that revenue was not tied up. So that was one. And secondly, the entity that came in was not so strong. When a project runs into difficulties, if the entity is strong, they are likely to pull it through. So now what we have done is we are dealing with the strong entities. So that's one. And the second is that we always see that the revenue is tied up. We don't take up projects where the revenue is not tied up. These are 2 major changes that we have brought about.
Last but continuing on the explanation you said, sir, what are the other hedges, let's say, the risk in earlier power cycle, was it related to fuel availability, which I'm sure you have addressed now. In case of renewables, it could be related to the quality of panels, which vendor is supplying those? I don't know how important land acquisition is for solar power projects. So what are the other hedges of important aspects you have put in place to ensure that the evaluation of project IRR is actually realized by the producer?
So land definitely is one of the most critical element in case of both solar as well as wind power project because you have to acquire take on lease. And therefore, we are saying in the beginning that the developer should be in position of 100%. So we are not taking any chance. We are still seeing that some of the projects are getting stuck because of the land. So 100% capacity is not getting installed because the small parcel of land could still not be acquired by the developer.
Therefore, before getting into the project and making first disbursement, we are saying that you should have 100% land identified and in your possession also. That is how we are hedging that particular risk. We currently are not financing any project which doesn't have 100% tie-up of the PPE. So unless that in the earlier project that we financed, we took a call on majority of projects that they'll be able to sell on merchant or this or that. But all that did not happen and we lost heavily on because of those users.
Now we are taking care that the 100% power offtake should be there earlier. We were saying that the offtake agent should be with a very good quality [indiscernible] because otherwise, that risk was also flowing into the project. Now after introduction of the LPS scheme, that particular risk is completely gone away. So there's no need to take into account that with whom the developer has entered into PK because now every utility is almost at par.
So that risk is gone. So other small, small things are also there. That is how we are hedging at different places.
Sushil [indiscernible] here in [ DAS Equity ]. Now government has permitted you to diversify beyond power. So energy transition, renewable, you have stated lots. Now where do you see a mix between PSU and private, let's say, by 2030?
Yes. right now, lending is 90% to a state sector, only 10% to the private sector. But going forward, since renewable energy projects are coming in private sector only. We do see that our lending to private sector will increase from the present level of 10% to about 30% by the year 2030.
Secondly, when you're looking at renewable or energy transition, most of these big companies, large corporate, whether private or public would go from end to end. So starting from polysilicon till solar park. And they would integrate hydrogen also into that. So now when that kind of transformation is likely, otherwise, it's not viable. Will you finance the manufacturing part of the first end or will you stick to only the end?
Thank you for asking this very pertinent question. In fact, we are precisely looking into this aspect, we have been -- started financing manufacturing also. And some of the companies are coming up with this end-to-end solution, from solar manufacturing to production, the solar energy, and then production of green hydrogen green ammonia. We are considering those projects. End-to-end solution also, we are considering those projects for financing.
And this typically would be 70/30, 75/25?
Depends on the entity. If the entity is strong, we can go for 75/25 or normally, it is 70/30.
And if working capital requirements are there in these projects, how do you manage that financing?
Working capital, normally these developers to [indiscernible] on the banks. But of late, we too have introduced some products, in which we also can provide working capital support in the form of nonfund-based facility. We call it LOU, Letter of Undertaking, by which a developer can using our LOU, take nonbank facility like bank guarantee or LC, which is backed by our Letter of Commitment.
So that also we are providing. And you know that in such projects, there's a requirement of giving advanced BG or a performance security, for example. And that also comes from the working capital facility. Now that facility is available with us also. So to that extent, we are able to support these projects for working capital as well.
I think PNB announced some tie-up with your organization. So is it for this kind of joint development or it's only for working capital?
It is for collaboration in both renewable projects as well as for infrastructure projects. It's not for working capital. It's mainly for infrastructure project, both in power and non-power sector.
My last question on e-mobility and energy transition. Does it mean only on the manufacturing and fast chargers? Or would you look at the vehicle part of this?
In fact, we have sanctioned about 4,000 electric buses. I was mentioning you that we have signed MOU worth INR 286,000 crores in Goa. Major chunk is coming from the electric bus segment. Electric bus, both OEM manufacturers will be financing the operator also as well as the associated charging infrastructure. So we are targeting that. In the current financial year, we'll be able to finance about 10,000 electric buses. And going for next 2 years, we'll be able to finance about 50,000 electric buses.
So you'll stick to buses, not cars.
Cars, they are not coming because aggregators -- I think car also -- some car aggregators are also coming up. But we are not going to do retail financing. Individual -- But aggregator if they come say about...
Somebody comes for 5,000, 10,000 vehicles?
Yes, then only we'll be able to consider.
Dan from India Capital here. I was wondering if you could talk a little bit more broadly about the scale of investment in the grid you expect in the coming years, either by dent of greater aggregate power demand or because of the higher T&D intensity with more renewable generating capacity. What type of growth in grid investment nationwide do you expect?
Let me just tell you about this renewable energy segment, green projects. Green projects, honorable Prime Minister has committed in COP26 at Glasgow that India will strive to install about 500 gigawatt of electricity capacity from non-fossil fuel sources. This includes not only solar and wind, but also biomass, it also includes the associated storage system because renewable energy is intermittent in nature. In order to stabilize the grid, we need storage solution. It also includes battery energy storage systems. It also includes pump storage projects like hydro projects also, plus, green hydrogen, green ammonia space also, this is a new technology initiative.
This will entail this technical arm of the Ministry of Power that is Central Electricity Authority, they have made a projection that this installation of these green projects, generation projects, the storage projects, evacuation through green energy corridors, that will require debt financing about INR 15 lakh crore to INR 20 lakh crore in the next 7 years. So we are targeting a humble pie of 20% of this business by increasing our green projects portfolio to about INR 3 lakh crores.
Also, we are focusing more on the non-power infra. So that also is our focus area. I think by 2030, we will take that up to 30% of our total loan.
Sir, this is Mangesh Kulkarni here from Almondz Global Securities. Sir, this is regarding the resolution status of the various projects, like you have mentioned about 9 projects expected to be resolved in the current financial year. Out of that, 4 will be in immediate basis. So can you just explain what will be the amount involved in this?
You were talking of 4?
Yes.
So 4, I think we have Dense Energy, TRN, Classic Global, and Meenakshi Energy, sir. Total principal outstanding in these 4 projects is INR 2,500 crores. And therefore, we think that in the next 1 to 1.5 months' time, this much amount of principle will be reduced from our NPA, which is INR 14,000 roughly INR 14,800, INR 14,900 crores. So that is how it will come down.
And will there be any write-back or provisions on this?
There will be write-back based on the discussions and the resolution plan that we have in hand, there will be write-backs.
Okay. And sir, RatanIndia, whether it is out of NCLT or it is within the NCLT?
So RatanIndia, we were trying resolution with the government of Maharashtra outside of NCLT, but now we don't see that happening. And then we have filed a Section 7 application in NCLT for the resolution via NCLT.
[ Ashwaria Agarwaal ] from [indiscernible]. Earlier year, total outstanding for the sector was roughly INR 131,000 crores. And currently, it's in the range of INR 80,000 crores, INR 70 crores to INR 80 crores, right?
For the distribution sector?
For the distribution sector. So as far as any collect out of this, the decline of INR 60,000 crores, roughly INR 40,000 crores was financed by PFC-REC, right? Is that correct?
See the total share in the distribution space, CapEx, we have INR 87,668 crores, which is around 18.48%, right? Our total loan portfolio.
I'm not talking about the portfolio. The total outstanding 2 years back or roughly 1 year back of the entire DISCOM sector was roughly INR 130,000 crores, right? Out of that, the current figure is roughly around about INR 70,000 crore, INR 75,000 crores, roughly INR 40,000 crores was financed by PFC and REC.
And you talked about prepaid meters, right? So if I look granular into it that the total amount outstanding more than INR 100,000 crores was from various municipal houses. They were not paying electricity bill to the state electricity boards. The overdue. So do you think that Police stations, municipal houses, all those people who were not paying. They have started paying currently? Do they have the money? And will they abide by the law of having a prepaid meter with them? And how many prepaid meters we have installed?
Okay. a very pertinent question. Your question pertains to this deals from the government department or government entities or urban local bodies. As I have mentioned that the government department dues, it covers all these urban local bodies also. It was to the tune of about INR 135,000 crore in the year 2021. Now it has come down to INR 63,000 crores.
All the state governments through their cabinet resolution have committed to bring down this government department dues, they liquidate this government department dues by the year 2025, '26. By March '26, all will go away. What state governments are doing is that they are making -- curtailing from the budget -- like police department, police department has got budget of INR 100, what the state government does is that out of INR 100, INR 20, the earmark for payment of the electricity and they are paying to the DISCOMs.
At the state level itself, the finance department or the state government, they are giving to the DISCOMs. That's how this government department through budgetary allocation from the budget of the respective government department, it is being paid to the DISCOM. That's how this departmental dues have come down. And if they have to avail Government of India grant under RDSS, they had to liquidate their government department dues compulsory by the 2025, '26.
So what's the total requirement for prepaid meters? And how many have been installed?
Yes. Let me tell you that total requirement of prepaid meters is 25 crore, prepaid smart meters. Prepaid meters are coming in smart meters only. Out of 25 crore prepaid smart meters, sanction has been done for -- about 23.5 crore smart meters have already been sanctioned RDSS. Tenders have already been invited for about INR 10 crore prepaid smart meter by the distribution companies. And they already awarded award for 3 crore prepaid smart meters.
But we hope that in next 1 year or 18 months, all this 25 crore prepaid smart meters will get awarded. And we also made an assessment of this manufacturing capacity within India, what prepaid smart meter. We had detailed meeting with the EMA and all the manufacturing association. The manufacturing capacity has been ramped up, which was only 5 crores. Now they can produce about 10 crore prepaid smart meter every year. So they'll be able to cater the total requirement of 25 crores, that is going to be installed in the next 2 to 3 years.
This is Umang from Kotak Mutual Fund. Just a couple of questions. One is, clearly, we are diversifying quite a bit from our core business, which we have been doing for years now. And the segments that we are entering appear to be fairly diverse, right? I mean, road, sports, e-mobility, logistics, et cetera, et cetera. So how are we working towards building these project evaluation capabilities in-house? Or we continue to depend on external consultants for evaluating these opportunities?
Yes. In fact, we are doing both actually. We are develop our in-house capability. As I had mentioned to you that we have brought in the sector experts in the pharma advisers, senior consultants, consultant from this respective from NHI, from railways, airports side, ports experts, we are roped in our team. They are in-house expert. In-house the entity appraisal -- project appraisal team, we have strengthened so that they are capable of appraising this project in a systematic manner.
In addition to that, we are also taking help from the external agencies for evaluating this technical evaluation, we are getting it done through the excellent agencies also.
The second question is, I mean, if you could talk a little bit about the ECL model changes that we have done, and there is roughly about INR 700-odd crore worth of write-back in the P&L. Out of that, how much is due to the ECL model change and how much is coming through recoveries? And how should we look at the credit cost going forward?
Yes. So there is no change in the ECL model as such. See, what happened there is the second wave of COVID and this pandemic going on. And concern about -- our majority of our lending is to the state sector utilities. There was a concern about the health of these distribution companies, in particular. So therefore, at that time, we had to increase the provision on our standard asset. So therefore, I mean, to work out a methodology, we said, okay, we will have a floor of 0.4% on each asset. Right. Now RBI mandates that you should have a 0.4% on all standard asset. I mean together, taken together. So therefore, we did that, and we actually provided for at that time and during the pandemic. And also because, as I said, there was some uncertainty about the health of the distribution sector.
Now the pandemic is behind us. And as our CMD has explained that the health of the distribution sector is improving day by day. There is a marked improvement in the reduction in AT&C losses, tariff revision, subsidiary receivables, et cetera. So therefore, we thought that provision, which we had made, it was a kind of management overlay, can be reversed. Our provisioning on standard asset is still 0.69%. I mean, compared to 0.4%, which RBI mandates, it is 0.69%.
And on Stage 2 assets, which is very low in any way. There, we have actually increased the provisioning to floor rate -- floor to around 1%. So that's the modification that we have done. It was only -- it was provided earlier. And now because there's no need, we have withdrawn it. So that's all.
Understood.
So going forward, One more thing to add. The total impact is only INR 508 crores on the PAT as such. Even if we don't consider that, the profit comes to about INR 3,300 crores which is much higher as compared to any of the earlier quarters.
So basically, the balance provision write-back is because of reversal on provisions on some of the other...
Some of the other assets. Actually, two of our assets have actually been resolved after the 30th September date. And therefore, the additional provision that was made there vis-a-vis the resolution that has occurred, we have returned written back. Not entirely fully but to the sizable extent, we have reversed the provisioning, where it has actually been resolved.
Understood.
Umangji.I just wanted to add what CMD sir said about your first question about the infrastructure financing. We know that we are very new to this sector. We are aware of this fact. We know that we still have to start financing this. I think in our earlier interactions, we have been able to perhaps clarify that we are not taking any risk in infrastructure financing. We did INR 85,000 crores of sanction last year. Out of INR 85,000 crores, 95% of financing was backed by the government guarantee. And only one project was actually Jindal, which is double-rated entity, which we did along with many other banks and led by SBI.
And at the same time, we are ramping up our ability to price these projects slowly, slowly, slowly. So we are not participating in any other project where we are taking any compromise on the asset quality or quality of the entity. I just wanted to add that.
Thanks for adding that because that was my next question. So in the first half of this year, out of INR 2 lakh-odd crores worth of sanctions that we have done. Of that, whatever non-power infra sanctions that we have done. How much is government backed or guaranteed in whichever way?
INR 40,000 crores -- approximately INR 40,000 crore we have sanctioned and whatever we have sanctioned to the government entities, all of which -- all of that is actually backed by the government. Like we have done one Metro for Bangalore, it is backed by the government guarantee. We have done another water infra project that also is backed by the government guarantee. So majority of it -- we can't give you the exact number, major to it is -- so road, we did road that was not backed by the government guarantee Ganga Expressway and we were at par in terms of security package with other banks.
Again, SBI is the lead lender for road projects we did for roughly INR 3,000 crores. But otherwise, all other government projects, what we did is backed by government guarantee.
Niharika from Aequitas Investments. So my question is on CRAR. So it's at around 28%, which is much higher than what is required by RBI. So just your thoughts on it, that how are you planning to go about it?
CRAR?
CRAR, much higher than what is required by RBI.
Yes. So that's a good thing, isn't it?
Yes, it's a bit higher.
Yes. So even if our CRAR is quite high, our Debt Equity ratio at reasonable 6.4x. So CRAR because we have taken a lot of projects, government guarantees. Of our total loan portfolio, if you see almost 40% is guaranteed by the state. So where the risk weightage is lower. So that's the reason.
But this enhanced CRAR gives us ample scope for growth. we can take up more projects, particularly in the private sector. So that's an advantage of the enhanced CRAR, which will happen because there's a renewal push now. Where we are going and the infra space where we are largely looking at government projects because we were getting hold of the space. So now we are looking at private sector projects as well. So where there's no discounting on the risk weightage, 100% risk weight there.
According to you, what would you perceive as two major risks to our numbers, if I have to narrow it down to two major risks, which you pursue as of now?
So one is that, obviously, because of the geopolitical reasons and sometimes RBI announcing OMO operations and so on. Cost of funds is one risk, which we are very carefully monitoring and managing it as well in spite of almost 56% increase in repo rate and 60% increase in table rate. Our cost of funds have largely remained the same. Some may increase if you compare to the previous year. So that's one challenge that we will have going forward because our disbursement is also very huge.
Other risk, I don't know. I mean I really can't see any other risk on the margins, you can say because we're so cautious about the asset quality. So margins can be under some kind of pressure. But we are now improving. The trend at least have been reversed. From NIM of 3.28% now we have gone to 3.45%. So we are okay with that.
Interest rate hikes, you have taken recently like quarter or two?
Yes, we have done 2 interest rate hikes in the last 6 months period, for 25 basis each, almost across the board, except in one case, with in increase, for renewal. Because that's the focus area. We don't want to raise the rates of renewal projects too much. But 25 basis point, we have raised in renewable and 50 basis points in other places.
[ Ramesh Bachwani ] from Mehta [indiscernible]. Sir, in your presentation, you mentioned the transmission and distribution losses in 1 year have come down from 22% to 17%, which is a good 5% reduction. Going forward, do you see this another 5% reduction coming in the next 1 year before the smart metering installation starts showing its effect that was the thought which I wanted to...
Let me share with you that the distribution companies, while they -- when they came for sanction RDSS project, they were supposed to give us directory for bringing down the AT&C losses.
Each of the DISCOM has given. Most of the DISCOMs have committed to bring down the AT&C losses to say, about 10% to 12%. But some DISCOMs are there, their AT&C losses are as high as 25% -- still 25% are there. Those DISCOMs will try to bring down their AT&C losses to about 15%.
Overall, 5% may not be possible, perhaps because by the end of this RDSS period, that is going to end in 2025, '26, next 3 years, the AT&C losses will come down to around 12%. 10% to 12%. I see that the overall AT&C also will come down 10% to 12%. Another 5% to 7% reduction will happen in the next 3 years.
And with smart meter installation, don't you see this becoming a single-digit loss in a year 2026 -- after 2026?
Yes, some of the DISCOMs have become single digit actually. Certain private DISCOMs are there. Gujarat DISCOMs...
Gujarat DISCOMs are already in -- 2 DISCOMs are already in single digits. There are 2 DISCOMs in south. They're also in single digit. So we expect there is a trajectory for each of the DISCOM that by which time they will come within 10% to 12% bracket as CMD sir mentioned. So they have to follow that particular trajectory. We believe that after this intervention of smart metering, this reduction will be much steeper than what we are seeing.
And after smart metering, don't you feel with the reduction in these losses and commitments given by DISCOMs, the cost of power to at least industry or commercial enterprises will go down so that things become more affordable and.....
That's a very correct observation, sir. In fact, pilot studies have been carried out in many states before going ahead with such a national level smart metering campaign. And those pilot studies suggest that there's a lot of saving because in our system, there's huge commercial losses because of many factors, we all are aware, theft being one of them. So all that will be curtailed. And then the -- it will have impact on the cost of power also because the cost of power today is inflated because of the losses.
It is double digit per unit to a manufacturing enterprise. So how do we become competitive?
So it should come down.
Globally, not only domestic but globally. And that should be the way forward for the private sector to participate in the CapEx for manufacturing, which -- I mean government is holding hand for infrastructure as well as manufacturing over the last 5 years.
Yes. In fact, some European countries, the tariff for domestic is higher than that of industrial tariff. But we'll also have to appreciate the fact that we are living in a political democracy, the state governments have been giving incentives. They have been announcing subsidy to a certain sector. So that has to be cost subsidized somewhere. There has to be balance. But overall, we think that with the introduction of prepaid smart meter overall improvement will happen.
Hello. So in the interest of time, we will take one last question. One last question. Please introduce yourself.
Shreepal this side from Equirus. My question was on the order book. So since we're talking about similar level of growth for FY '24 as well as FY '25, what is the kind of sanctioned cumulative book that -- order book that we have with us.
Let me just explain you that -- the last year's sanction was INR 268,000 crores, a disbursement was about INR 97,000 crores. All the disbursement from the new projects must not have come because the initial year, the disbursement for manufacturing is only about 5% to 10%. Then gradually, the disbursement goes for 4 to 5 years. But for renewable energy projects, the disbursement express in the next 2 to 3 years.
This year, H1, we already saying INR 195,000 crores, and we have a huge project pipeline, and we are anticipating that the current year, our sanctions will go up to INR 4 lakh crore our disbursement will touch across INR 150,000 crores. So next year also, at least this much project pipelines are with us. So this sanction and disbursement trend will continue next year also.
On that note, we'll end the analyst meet. Thank you so much, everyone, for your attendance today. And on behalf of REC Limited and Adfactors, we would end this meet today. Thank you. Please help yourselves with some snacks and tea. Thank you once again.