REC Limited
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REC Limited
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Good morning, ladies and gentlemen. Welcome to the Rural Electrification Corporation Q3 FY '21 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities. Thank you, and over to you, sir.
Thank you, [ Lethan ], and good morning, all of you. This is Kunal Shah from ICICI Securities. We have with us today, Mr. Sanjay Malhotra, Chairman and Managing Director; Mr. Ajoy Choudhary, Director of Finance and the senior management team of REC, to discuss their Q3 and 9 months FY '21 earnings and update on the recent developments in the power sector in general and for REC in particular. Over to you, sir.
Yes. So thank you, Kunal, and thank you, everyone, for joining in this conference call. We published -- we had our Board meeting on the 4th of February, and we have published our results for Q3. And I'm happy to report that we have got excellent results, excellent performance, record performance. All of you would have seen that sanctions, insofar as sanctions are concerned. In the 9-month period, we have had a record sanctions of INR 137,000 crores disbursement, INR 62,000 crores. That is again a record, interest income of INR 25,800 crores. Total income, INR 26,300 crores. And the profit before tax of INR 8,060 crores and profit after tax of INR 6,292 crores, which is a record for the 9-month period. Similarly, for the 3-month period also, it is a record. In terms of growth, sanctions grew in the 9-month period by about 43%. Disbursements, again, a healthy 17% and interest income by about 18%. Profit before tax in this 9-month period has grown 28%. Q-on-Q vis-à-vis last year, it grew by about 20%. And even sequentially, it has grown 1%. If you talk about profit after tax, it grew 41% in the 9-month period. Sequentially, it grew 3%; and Q-on-Q, 38%. Loan book has also grown by about 16% in the last 1 year. And in terms of the key financial indicators, happy to report that net worth has increased. I think this is perhaps, again, a record growth in net worth in the 9-month period, from end of -- the beginning of this fiscal to the end of Q3. And it has grown by about INR 6,000 crores, which is 19% growth. The CRAR, this remains -- this has improved. This has improved from 16% to 19.27%, 16% as on March 31, 2020 to 19.27%. And correspondingly, the debt equity ratio has also improved from about 8%, 7.94% on March 31, 2020, to 7.31% as on December 31, 2020. The margins and the interest spread remain quite decent. The yield for the 9-month period was 10.71%. Cost of funds has decreased by about 15 basis points to 7.29%, and the spread is 3.42%. Net interest margin is 3.98%, an increase of about 20 basis points. And return on net worth is exceptionally high at 21.84%, almost 22%, which is quite high. And in fact, it used to be in this range about 4, 5 years ago. Asset quality has improved over the last 9 months. Asset quality has significantly improved. The gross NPA has reduced from 6.59% to 5.1%. And the net NPA has also decreased from 3.32% to 1.95%. So that is, again, a matter of satisfaction. In fact, one major part of the reason is the resolution of one major asset bad debt came in Q2. So that has contributed. And the provisioning is for the stage 3 loans. Stage 3 loans provisioning is about 62%. So asset quality is very, very high. In terms of the loan portfolio, we are well diversified in our loans. Mostly, of course, it is in the government sector, as you are all aware, almost 90% is in government sector and about 11% -- just less than 11% is to the private sector. In terms of CapEx and non-CapEx loans, about 79% is in CapEx, again, which signals a healthy trend. Non-CapEx loans, 21%. It has increased, it would have increased marginally in the 9-month period because of COVID-related liquidity infusion scheme. We are well diversified amongst various borrowers, as mentioned. Top 10 borrowers account for about 44% -- about 40% top 10 borrowers, and they are well -- we have got good securities. So going forward, we don't expect bad debts and NPAs, and about 28% of our government portfolio is guaranteed. So overall, it's been a very, very satisfying Q3 for us. Going forward, again, we are very hopeful that we will be able to maintain good results. You are aware that in the budget, it's a growth-oriented budget, first of all. And secondly, even for the power sector, we have got 2 major announcements, one of them related to a new scheme for the distribution sector which remains, people say they actually seal off the power sector. So there is a new scheme, a reman distribution scheme, which should be notified and implemented, launched in the coming years. So that should help in our business and help in the sustainability of the power sector. Along with that, there is a major reform, which was announced by the honorable Finance Minister, and that is regarding introducing competition in the distribution sector. So we are very hopeful that as a result of these, REC will continue to improve its business sustainably in the next quarter and in the next financial year as well. Thank you. If there are any questions, comments, I suppose we can now take them over.
[Operator Instructions] The first question is from the line of Kishan Gupta from CD Equisearch.
So basically, I want to understand, one, about your cost of funds, what is the trajectory?
Our stock funds trajectory in the sense -- see, it has been in the range of about between 7% and 8%. It has been going down. I will just -- I can share the figures over the years. If you give me a moment, we have those figures. And -- but going forward, I think, more relevant to us is going forward. Going forward, I think, we expect it to go down further. We have been raising funds at very, very competitive rates. And going forward, we should be able to raise funds. You are aware that we raised funds for periods, 1 year to 10 years, mostly, mostly 5 and 10 years. So we should be able to raise -- we have been able to raise 10-year funds in the term -- by way of bonds and loans at about 7% and about 6% for 5 years.
Sir, essentially, if I see your cost of funds, it has declined by 15 bps in 9 months.
Yes. That's right.
So has there been any major shift in your cost of funds because of this COVID-related fall in -- general fall in interest rates?
Yes. So as you are right -- as you are yourself saying, the fall is about 15 basis points, so this is overall fall of 15 basis points to the average fall on the fall of the borrowing. And the borrowing this year have been about INR 70,000 crores, INR 80,000 crores, which is only about 20% -- let's say, about 20% of our total portfolio. So if you look at the cost of borrowings this year, will be the cost of borrowing in the previous year, it has fallen by about 70, 80 basis points. And that's why, on an average, it has fallen by about 15 basis points.
And what is your loan book growth target for the year -- I mean, next year, '22?
We hope to grow by about 10% to 12% per annum.
Okay. And what's the dividend, expected this -- because you have given the first interim dividend, so what would be a dividend...
That is for the Board to decide. I don't think I will be able to answer this question right now. But one can expect in the same range as one has been seeing over the last few years. I don't think it should be lower than that. More than that, I think, we'll have to wait for our next Board meeting. It is not something that is in my hands alone to decide.
No, it is okay. But the point is, will there be a policy to give out the interim -- all the dividends as interim dividends? Or how it will go about? Because last 2 years has been all interim.
There will be some interim dividend. There should be some interim dividend. But whether it is going to be all of it, I will not be able to say, but yes, there will be an interim -- there will be an interim dividend. Most of the dividend should be in the form of an interim dividend. But finally, what interim dividend and final dividend is announced, it's a little premature to say.
The next question is from the line of Subrat Dwibedy from SBI Life.
I wanted a bit more color on asset quality. Are these numbers -- are the pro forma numbers, excluding Supreme Court decision? Or these are just the reported numbers on the NPA?
Yes. So you see we are having 26 loans -- 26 projects, which are under various categories of stress, totaling about INR 18,220 crores. So out of these, category A projects, where resolution plan has been already approved and implemented, they are INR 7,300 crores. Those which have been where the plan has been approved and is under implementation, that is about INR 2,178 crores. Projects under resolution, but outside IBC, they are INR 4,400 crores. And those under the NCLT, IBC process, still under resolution are INR 11,588 crores. So this makes INR 18,220 crores.
Okay.
Yes. So these are the details. This is the full 26 -- total number of projects are only 26, out of which 7 have been resolved, INR 7,311 crores. And the remaining roughly about INR 11,000 crores are NPA profits comprising 19 projects.
Okay. Okay. Yes. So last time, I think some -- even in the government sector, some projects had moved above 0 DPD perhaps in stage 2 and the expectation was they will again move back to standard, I mean, 0 DPD status. So any updates on that?
I don't think there is any project in the state sector.
There's no project in the state sector. There is only one project which most called stage 3 to stage 2 in Q2, that was CR energy. And we hope that it will move to stage 1 very soon.
But in the government sector -- coming to your question, in the government sector, there is no major or even minor to my knowledge, which is in the NPA category.
Sir, not in NPA, but are there like delays earlier? Because it used to be 0 DPD always, not a single day of delay also. But...
No, there are delays. Let me clarify. There are delays of -- but the delays are up to 90 days. Beyond 90 days, there are no delays. There are delays, but that is also, again, a very small quantum. That's a very, very small quantum. I'll see if my team has those numbers, I can perhaps share those numbers with you, but that quantum is not very substantial. It is not very substantial.
Okay, sir. So that number will help. I have more questions, but I can come back in the queue.
Yes. So...
He has 2 questions on [ NPA ].
Their question is as to -- Mr. [ Vishno ] will have that figure as to those which are overdue as on date. We can only give them those which are overdue as on date. It is that number. This is what he wants to know.
We'll share it later on.
We'll share the information with you separately. We'll share that information with you. Yes. But it is not very high.
The next question is from the line of Bunty Chawla from IDBI Capital.
To a previous question, the previous, who was asking about this, this number includes the Supreme Court dispensation as well? Or is it the Supreme Court dispensation has not been taken care in these Phase 3 assets? Because Q2 to Q3, the number has been still at INR 18,220 crores. So it shows that there has been not a single slippages during this quarter. So if you can clarify that.
Yes, we have not taken any dispensation with regard to the Supreme Court decision. All our standard assets are standard by virtue of their period of...
Yes. So it is as per the RBI provision, which is the 90-day period, it becomes substandard. And it is exactly as for that. We had not taken -- we had in our reporting even, as we have not taken any relaxation. And we continue to follow the RBI provisions with regard to provisioning and with regard to asset quality.
Okay. That was very helpful, sir. And sir, similarly, any OTR -- any applications we have received because it was deadline after 31st December, any restructuring we have done, sir? Or is it expected to do in Q4 on that part?
Restructuring proposal, which is pending, which is regarding TRN, which was received some time ago that TRN is a 600-megawatt project. So that restructuring without any loss -- without any financial loss, only a restructuring in payment of about -- for about 2 years is pending, and that should happen in Q4. Other than that, there is there is no restructuring proposal that we are actively considering. There are certain proposals which keep coming, but we are -- but we don't think there are any suitable candidates for restructuring. Does that clarify?
[Operator Instructions] We'll move on to the next question that is from the line of Sanket Chheda from B&K Securities.
Yes. My question was, sir, firstly, on growth that you already answered that for this year, at least, we had mandated disbursement and hence, there were some growth. But going ahead, are we keeping our guidance that it will be about 12%, 13% growth every year?
So this year was obviously an exceptional year, as you are aware. But over the past 7 years, we have been growing at the rate of about 14% per annum compounded. So going forward, certainly, 14% per annum may not be achievable. Next year, we hope that we will -- that CapEx cycle, post COVID, will kick in. And it will be -- maybe the next year, it will be difficult to have a growth because this year has been an exceptionally -- an exceptional year in which the growth has been about 16%. So -- but I said that in the coming years, we should expect 10% to 12% growth. Next year, it will be difficult. Let me be very standard. I don't expect it to be a growth. If we are able to maintain these figures next year, that in itself should be an achievement. These -- overall, I'm saying, broadly, I'm saying, let us look at it at a longer than infrastructure sector we are working in. And long-term outlook, I think, is very, very positive. It's positive because we are still average per capita consumption of electricity is 1/3, 1,200 units per year roughly is 1/3. And the new scheme is going to come in next year. So there are going to be sanctions next year. Maybe some disbursements, not major. Because the scheme will just pass. So next year, there will be some disbursements on account of the new scheme, but most of it will -- my sense is that most of it will come in the next to next year, some of it can come in the next year. And then we are moving to related sectors like EVs, electrical vehicles, forward and backward linkages with the lift irrigation projects and then there is a lot of energy transition, as you people are already aware, some are being replaced by renewable energy projects. And a lot of the thermal projects are also going in for pollution control equipment. We have not been able to get much business, but we are looking at our policy and especially our interest rates as to how -- and we hope that we will get some business from even the pollution control equipment being installed in thermal power plants, which again went slow because of COVID. And renewable energy already, we have a presence. And I think there should be substantial offtake now with prices going down below 2. In the long term, of course, these prices will -- lower prices will drive energy transition. And so there is good opportunity for us in the next 3 to 5 years to easily record 10% to 12% per annum growth rate.
Sir, and my second question was that now that the much need disbursement have happened in gencos transmission companies, which will ultimately use the funds to pay up the gencos. We don't have anything -- any NPAs in the public book. 50% of the private book is already NPA. And this one affects, I think, different stages of resolution. So is it safe to assume that for at least near to medium term, that is exactly for 1.5 years, there won't be any material headwinds on assets qualities? Does the stock of Phase 3 is likely to come down quarter-on-quarter for at least next few quarters?
Certainly. Absolutely. You are absolutely right. Asset quality is certainly going to improve. And stage 3 to stage 2 is going to further increase. And as our total NPAs are going to reduce.
The next question is from the line of Anand Laddha from HDFC Mutual Fund.
Sir, I have a couple of questions, sir. You indicated in the call that one of the assets probably R.K.M. Power got this all this quarter. If you can give some color like what was...
Sorry to interrupt, Mr. Laddha. We are not able to hear you clearly.
Okay. This quarter, we saw one account getting resolved, which is R.K.M. Power. If you can share some color on this in terms of at what haircut or loss is a concord resort. Have you been putting interest on this exclusion in the past or not? Or -- and incrementally, what the portion of the exposure will start accruing into for us?
R.K.M. Powergen. I'll request my colleague, to share the details of the resolution plan and the haircut that was taken to resolve R.K.M. So this is Mr. Lakshmanan. He is Executive Director and he's directly looking after these assets. So Lakshmanan, please help me with this.
In the case of R.K.M. Powergen -- can you hear me?
Yes, I can hear you, sir.
Yes. In case of R.K.M., the overall sustainable debt that has been restructured now with 60% of the principal. And we have not taken any haircut percent. We balance 40% of principal and even the outstanding interest. They have been converted into OCD. And we have also taken a 26% equity as a part of this restructuring. And we have also like put a loss of cash fee. So there's an unsustainable portion, which has been converted into OCD. They could be recruit going forward, depending on how the plant performs. So we have to keep a sustainable debt at 50% because of the rating agencies' requirements. And we are hopeful that now the plant has started operating also, 2 units are operating. So that's -- from this quarter, they have started paying also.
Okay. Okay. And sir, while indicating a breakup of the gross NPA, we indicated that we have category A assets of INR 7,500 crores of fee, which are under different stages of restructuring. When we say category A, what it means? Are these operational assets? Or has the -- restructuring plan has been approved? Where they are, sir?
Yes. These are the projects which have been already resolved. So like R.K.M. Powergen, for example, FACOR, Essar Power -- Essar Power Transmission Company Limited, Rattan India, Lanco Teesta, Lanco Anpara and TRN. So INR 7,311 crores, these have been resolved.
So these are -- have been resolved, but still they are part of our stage 3 asset. When they will move out from stage 3 asset, sir?
All these assets are moved out of stage 3. All these assets are moved out.
These are stressed, these have moved out.
Moved out. And our recovery in all these assets have been ranging from 70% to 100%. On an average, you can say we've had 80% recovery in all this.
Okay. And all this -- we are accruing interest or they are paying interest or are they accruing interest?
Yes.
Yes. As for the restructuring, they are paying their fees.
Sir, we still has a gross NPA of INR 18,200 crores. What is the breakup of that, sir, then broadly?
So you see INR 18,221 crores is the NPA, of which INR 21,778 crores is resolution plan has been approved and is under implementation. So this is one. And then those which have been resolved outside the IBC are INR 4,436 crores. So you can say about INR 6,500 crores has been resolved -- are under resolution, sorry. And I mean, these are under resolution. So INR 6,500 crores out of INR 18,220 crores is under resolution. And other INR 11,600 crores are NCLT. This is the INR 18,220 crores. The INR 7,311 crores is already resolved. And we're at one-point NPA. But today, they are not stressed. They are outside this figure of INR 18,221 crores.
Correct, correct. Sir, we have a couple of large exposures, which, I believe, are under NCLT. And if you can update us what's your status on the same, like the KSK Mahanadi and Indiabulls Nasik, sir, large exposure for us. So any development in this specific stage, sir?
KSK Mahanadi, which is the other one?
Indiabulls Nasik.
Indiabulls Nasik.
Indiabulls Nasik. Yes. So Mr. Lakshmanan will give you the details.
KSK Mahanadi, basically it's admitted and the resolution process is on. There are 3 separate companies, which was operating. One was the main generation company and other one was for the railway line and another one was for the water. So basically now, NCLT has approved the merger of these 3 entities. So now it will be focused to the RPAs in the process of calling of expression of interest for sale of the asset. And in the case of a RattanIndia Nasik, that was the second asset, right?
Yes, sir.
So in that case, we are trying for a resolution outside the NCLT. PFC is the lead lender in -- we are co-lenders with PFC. And we have had a couple of rounds of meetings with Maharashtra state government and the promoters have put forth the proposals, that they are trying to -- Maharashtra government or the Mahagenco taking over the plant. So we are trying to work on those lines. We have had a couple of rounds of meeting. So we are hopeful and we are in the process of submitting our proposal to Mahagenco.
Okay. Sir, you indicated INR 4,400 crores of proposals which are outside NCLT, which is getting restructured. So is that largely a part of that or it's part of NCLT?
It is part of that, it is INR 4,436, which is outside NCLT under resolution, INR 4,436. That includes in our thermal power.
Okay. Okay. Okay. And sir, there were 2 other large exposures we had. One is IPCL Haldia and one is Essar Mahan. What is the status of these 2 exposures, sir?
So IPCL Haldia, that is Hiranmaye Energy. We have approved the restructuring of this. And by end of February, they were supposed to comply with the 3 conditions for conclusion of that restructuring. One was tariff approval by Resinol regulatory commission. And the other one was to demonstrate the technical capability of the plant. So they are on track for doing that. So we are hoping that by end of February, we should be able to conclude Hiranmaye Energy restructuring. And second, that you asked was Essar Power empty. So that is admitted, and the bids are being invited and the bids are being received, and Adani is the one at the highest bid. So probably like POCs in the process of taking a decision on that. So we have repeat the bid. So final decision is to be taken on that.
Perfect. Perfect. And sir, on the business side, if you can give some color like how much has been sanctioned under the SAP liquidity scheme of government of India? And at what rate this -- or what spread this loan has been deferred?
Our other liquidity infusion scheme, you see the total sanction is INR 135,000 crores. This INR 135,000 crores is -- comprises sanctions by REC of INR 66,500 crores, and INR 69,000 crores by PFC. And disbursement is about INR 46,000 crores, INR 24,000 crores by REC and about INR 22,000 crores by PFC.
Okay. And sir, balance, how -- by when you expect the balance amount will be disclosed?
Balance, I think, should start happening in Q3 -- in Q4, sorry, and it should start happening in Q4. And by Q1 next year, we should conclude with this scheme. We should fully disperse whatever is required and whatever can be dispersed under the scheme.
And sir, fair to say, this disbursement or this -- can we also be at the same spread, like 3% spread, which we are earning currently?
Yes. It is at about -- it is 9.5%. So the spread is almost 3, it is not exactly 3. It is less than 3, it is about 2.5% -- 2% to 2.5% depending on how one looks at it. It's -- I mean, the spread is about 2% impact. Average cost is 7.3%. So 2.2% spread.
And sir, lastly, on the borrowing side, sir, we had some FX borrowing. If you can share what proportion of the FX borrowing is now fully hedged and what proportion is open?
Roughly, I think we have had about 60%, 60% of our borrowings of about roughly INR 50,000 crores or 7,000 billion -- sorry, $7 billion. Of the $7 billion, 60% is hedged, and 40% is not hedged. Kindly keep in mind, RBI also does not mandate any hedging for borrowing of 5 years and more.
The next question is from the line of [ Mahesh Oza ] from [ Mahesh Oza Investments ].
Congrats on a great set of results, sir. And...
Sorry to interrupt, Mr. [ Oza ]. We are not able to hear you. Can you speak a bit louder?
Thank you for a great set of results and for your service to the country. My question pertains to how we are doing the dividend distribution. So if you look at FD rates currently, 1 year FD rates are around 4%. And our dividend yield projected would be around 8%. So I would highly appreciate like the government has asked to start giving the dividend payout quarterly. Even if the dividend payout ratio is less than the 30% mandated, what happens is the greater the clarity in terms of the dividend payout, the higher will be the re-rating in the stock. Can I have your thoughts on that, please?
Yes. So that's a very good suggestion. That's a very, very good suggestion. And I can see merit in what you are seeing. And I -- of course, there will be the challenge -- there will be the challenge of us trying -- compromising on growth because the more dividend we distribute, lesser would be the funds available for growth. I do recognize that this challenge would be there. But I'm pretty confident that what you are suggesting is doable, and we would give it a serious thought.
Sir, the second question I had was, sir, I would highly appreciate it if in our presentation, we would write down -- we would present our ESG credentials. I believe PFC and REC together are the largest financials of renewable energy in the country. We are -- whenever electric vehicles start taking off in the country, we will lead from the front. So these -- if you look at our stock, these opportunities are not presented in our presentation, and we are unable to get investors who might be attractive to these opportunities. I would appreciate it if you could highlight our environmental, social and governance credentials in our presentation.
Sure. I mean -- and we are concerned about this stocks trading at a fee of, say, 4 or 5 or 3.5 or 3.2. So that is certainly something that we all need to ponder over and reflect as to how that can be improved, and it is a little surprising. If you see the results, it's been -- they have been very consistent. So it's probably not to do with -- I do think it is -- it has ultimately, of course, some bearing on the financials. And so that's why it is surprising. But you're right, I mean, we need to look at the ESG part more, and we will be doing that.
[Operator Instructions] The next question is from the line of Saket from India Capital.
Congratulations on the great set of numbers. Sir, my question was around provisioning. So what we see is typically on the NPS, we have already taken a fairly higher provision of about 61%, 62% using ECL. Now this quarter, we have increased the provision even on standard assets. Now as you had answered in one of the previous questions, that we do not expect any new steps to come up or go into stage 3 assets. Do we expect this provisioning number to come down? Because last couple of quarters, we were almost taking INR 700-odd crores of provision every quarter. Do we expect this number to materially come down? Or would we want to increase provisions on standard assets even further going ahead? If you can help us understand that, that will be great.
Yes, that's a good question. The provisioning on standard assets is about 0.38%. RBI expect a provisioning of about 0.4%. So we are more or less about at that number. And we do believe that it's on the conservative side. So we do not expect it to -- expect more provisioning on standard assets going forward. This quarter, the provisioning on standard assets have gone down because there was a re-rating exercise. And in that rating exercise because of one -- basically one state, the provisioning has increased. So hopefully, in time to come, we are confident that there is going to be a lower and lower spreads in the -- for power sector. I already mentioned to you that there is a new scheme, which is coming in, then there is a budget announcement. Power costs are going down. You saw record lows in solar tariffs. So all these things, efficiencies are improving. So all these are going to help the profitability of the utilities, which are our major clients. And I do not expect provisioning whether on standard or substandard assets to increase substantially. Yes, Kunal.
Can we take the next question?
The next question is from the line of Punit Srivastava from Daiwa Capital Markets.
So I had a question first on the net interest margins. And if you notice, the net interest income, sir, it went up by almost 19% in second quarter versus first quarter. So you see there was like almost INR 530 crores sharp jump in NII in second quarter, and it sustained in the third quarter also. So we just needed to firstly understand what happens and whether this kind of NII and net interest margin will sustain, going forward. Because if you see, there was a sharp increase in NIM also in the second quarter. Can you explain that, sir?
Yes. So see, primarily, it is explained by the lower cost of funds. The cost of funds have decreased, and so the margins have -- margins have improved. Going forward, I don't think these are kind of -- these are numbers -- these are exceptional numbers, let me say, these are exceptional numbers. The spread has been in the range of NIM, the net interest margin has been in the range of 3.5% to 4%, 4% on the higher side, 3.5% on the lower side. And over the years, it has decreased. Over the years, it has decreased. And despite the decrease, there has been good growth. And I expect the trend -- I expect the trend to continue. This is an exceptional quarter or an exceptional year.
Sir, my question was more on the yield side, if you see the yields jumped also sharply in the second quarter. The interest income also jumped sharply. And it's sustained in the third quarter, sir. So I was not referring to the cost of fund. Cost of fund, I mean, was actually almost stable, if you see the reported numbers. So I was just trying to understand that was -- why this jump happened in the yields on loans. And if any explanation is there, sir.
I've not actually analyzed it, we will analyze it, and we'll let you know as to why there has been an increase in the yield. I think because the rates...[Technical Difficulty]
Hello? Members of the management team? Sorry to interrupt, sir, we have...
So probably -- high interest cost funds -- loans projects. I think probably that would explain the higher yields. Going forward, as I mentioned to you, I do not expect net interest margins be as high as 3.98% and the -- to be as high as 22%.
Just to add to what Sanjay has said, yield in this quarter has actually fallen by 10%. If you see, it has come down 9 months' 10.7% was the first, but in this quarter, it's 10.61%, largely because of the lower rate of interest that we provided for the [indiscernible] team. In the previous quarter, it rose because of an exceptional income. We recognize the income of TRN Energy. So it gave us a higher yield. So we expect the yield to remain in the range of around 10.5% also.
Okay. Understood, sir. And sir, just one question on the -- if I can ask on CMP. Sir, you have continue -- you have been there with the Ministry of Power earlier. So I just -- we just needed to have a broad view on what kind of challenges you see in the power sector going ahead. And what kind of competition you see from banks and other entities?
As I mentioned to you, there are 2 schemes this year announced in the budget and the comment has been even before the budget announcement been trying to know that -- see, it's a complex job that the distribution companies are doing, given the state of technology and the state of affairs in the discount. So -- and it's difficult. It's my belief that it's difficult to actually do multiple things at the same time. And so the distribution companies till now, most of them have been trying to address the issue of access. I think to a great -- to a large extent, the issue of have been taken care of. And now it is shifting more and more towards quality and reliability of power and sustainability. So going forward -- and one would have seen that, if one looks at the numbers of the distribution companies because they are the ones at the lowest level. If one looks at the numbers of the distribution companies and the other utilities, they have been improving. So going forward, I expect the -- expect this to be there to be lower stress and business to improve. For us, yes, that will bring in competition from the banks, and that's a good thing for the whole country and for the sector. And PFC and REC, especially, REC is going to take up the challenge of the banks. And as I mentioned, there are other opportunities available with energy transition happening. I mean the space is -- the requirement is a lot. The point is that there is a huge requirement. And...[Technical Difficulty]
Ladies and gentlemen, the lines of the management have got disconnected. [Operator Instructions]
Yes. So I was mentioning that even though there is -- as the sector improves, one, it will bring in more opportunities for us. So opportunities will be in form of energy transition. They will be in form of better quality of equipment needed for better quality automation, modernization. So all those things are going to bring in more business, more opportunities for REC. And at the same time, of course, there is also going to be the competition from the bank. But I think the pie is huge. It's very big. And so there is enough opportunities for REC going forward.
We move on to the next question, that is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
My question is on the leverage ratios that you'll have. We are generating strong return on network, and you're expecting growth to be lower. And even if you take a 30% dividend policy, your gearing ratio should decline over a period of time. Just wanted to know whether, a, that is correct? And b, do you have any target debt equity in mind when you plan your growth?
Yes. So debt -- so we plan CRAR ratio of between 15 and 20. 20 is the ideal, between 15 and 20. And the rest of the questions, debt equity, Ajoy, do you want to...
Yes. Debt equity ratio has actually fallen from almost 8 as on 31st March to 7.31. So going forward, we expect this to come down to around 7. 7 for financing to capital sector, I think, is a reasonable thing. So that is the kind of figures that we are looking at going forward.
The next question is from the line of Bunty Chawla from IDBI Capital.
Just one question. Do we have any exposure to AP projects, which the government now is trying to recalculate the solar and -- solar as well as wind power pricing, which is under Supreme -- under the court issues is going on. So any exposure to the AP stake? And out of that, how much will be under stressed because of the case -- court case issue?
All are regular as of now. All are regular. And the only exposure to this under litigation project that you are mentioning is about INR 600 crores, but it is through SECI and we are getting regular as of now. And going forward, I do expect that it should be resolved. It should be resolved sooner than later.
Okay. And sir, if you can share total AP exposure, if it is possible.
Total AP -- government -- all government companies, just share you the number. Total exposure to Andhra is INR 28,000 crores.
Okay, sir, okay. And sir, in the notes to account you have share, the company has implemented restructuring plan of one of the borrowers, which is outstanding loan of INR 2,300 crores. So is it the same which you have shared at R.K.M.? Is it the same exposure? Or can you share the name of that?
R.K.M. Powergen.
Okay. R.K.M. That is -- okay, okay.
The next question is from the line of [ Saket Kapoor ] from [ Kapoor Company ].
Sir, as you told that this part of continuous dividend distribution would affect the cash flow and the CapEx part improvement in books and all. Sir, do these valuations then account for a buyback at a slightly significant premium, thereby giving opportunities to all set of investors to even participate? And if you go through the tendering route I'm calling for. And sir -- secondly, sir, as we have seen the policy of this current government, wherein they have put a lot of focus on the renewable sector. So sir, going forward, say, 3 years or a decade from now, how are you -- how -- what is the vision of the current government regarding the household electricity being completely converted to this renewable form and coal being the medium of energy only for the factories and the heavy industries? So what kind of broader picture can we look forward? And how the dynamics of our business are going to get better or downgraded if this policy is being implemented over a period of time? As we hear, sir, these companies like Tata Power and all are putting more and more trust on solar rooftop installations and moving towards the solar part of the story. So my -- these 2 were my primary questions, sir, please.
Yes. So in terms of buyback on tendering route that you have mentioned, I think, in the government sector rather than ONGC, HPCL buyback, I mean, buyback by HPCL owned by ONGC. I do not think there has been any...
Sir, NALCO is going to do, Engineers India have done. So these are the 2 current examples.
Buyback of shares, you mean.
Yes. Buyback of shares.
Yes. But those are not on tender route.
Tender route. both NALCO and Engineers India has got to the tender route. Even NMDC went through the tender route, wherein even below the -- even the stock was ahead, the government of India participated and tendered the entire quantity at INR 105. That was a INR 1,400-crores issue. That closed on 15th of January only.
Okay. So these are recent developments which are...
Recent development, sir, I wanted to address the management because the [Foreign Language] So I thought that this could be a good way of rewarding your shareholders other than the dividend part.
Yes. I mean both the options are available, as you are saying dividend as well as buyback. Merits and demerits, I suppose, of both. We'll look into the buyback as well. But as one of the callers mentioned, there is also a demand for regular returns, regular returns in the form of dividends throughout the year. So how we balance these competing demands is something that we will certainly -- we will look at. But as of now, we have not thought of it. We've not actually thought of it.
Be deliberate, sir, in the both, whenever...
And coming to your second question as to how things are going to pan out vis-à-vis renewable. Well, I think it is anyone's guess about the time period. But going forward, certainly, renewable and green power are going to be less [ mainstay ] of our generation. How long it will take, we really don't know whether it will take a decade or 2 decades. It all depends on technologies, especially of storage as also technologies which reduce -- which improve efficiencies of solar panels, solar cells. But going forward, certainly, it is going to be the main state. One can't actually predict the time. And there will be scope. You are already -- as you are aware, there will be scope for REC. REC is landing not only in generation, it is landing in transmission. It is landing in distribution. And generation, of course, is a big part, about 1/3. We are also into renewable. And the other shift that is going to happen along with the greening of electricity is the shift from the fossil fuels in the energy sector in other areas other than electricity to electricity. So whether it is in transport sector or others, that shift is also going to happen, and that is going to increase the share of power in the country, the use of electricity in the country, and that should again open up new vistas for REC.
Sir, can I ask a follow-up?
Sure.
Sir, what my understanding was, sir, that the -- going forward, as you are lending through the distribution companies, the quantum demand that is there today is the pulls are from both sides, for the electricity part also and for the factories in the heavy engineering segment. But going forward, as this demand pull and pressures, it queued down towards renewal, is that going to affect the business model for us in any better way? And sir, for the distribution companies part also, sir, in this budget, what is there for the distribution companies? How is the debt part going to solve? And how has UDAY implementations are affected or being implemented? How has that affected the environment for us, sir?
So I think there are 2 questions. One question you are saying is that the very existence, if I understood you correctly, is the very existence of distribution companies, whether it is going to remain and transmission companies as more and more solar -- distributed solar, rooftop solar is installed and it becomes viable and cheaper. Well, that is certainly a threat to -- one cannot discount that threat. That is certainly something which is possible because of technology disruption, that is something which we need to be aware of. But I think REC is a very mature organization. It's a very old, 60-year-old organization. And it has evolved over a period of time. And it has faced these challenges starting off with funding basically electricity pumps to becoming NBFC to funding thermal and from thermal to renewable and now also getting into operations. I think REC has shown the resilience and the flexibility to adapt to the times. And so we need to be aware of it, and we are pretty confident. Second question is about UDAY and the policies of government and how they have impacted the distribution companies. Contrary to believe, I think, UDAY -- I mean, it depends on how one looks at UDAY. Obviously, it was not panacea. I mean if people expected it to be a panacea for all the ill, then I think we were over expecting. But in terms of bringing in discipline in the power sector, especially in the distribution companies and making the state governments realize that well, this is -- the distribution companies are their own and their problems are also there. I think it was quite successful. And over the years, as I mentioned earlier also, the profitability, sustainability of distribution companies, is CRAR cap, AT&C losses. All these figures have improved. So UDAY was one part of it. It was more about financial restructuring, and it did help in the distribution companies in improving -- in reducing their finance costs. I mean there are no 2 doubts about it. And the second in realizing -- in making the state governments realize that, well, this is their own company and the liabilities of the distribution companies are also the liabilities of the state government. And in future, if they do not improve, then they have to, again, take back and so well. Some states, I would see, have learned that lesson. And they are being -- and they have improved, maybe not to the extent that we would have liked to. But there is improvement. I mean notable example, of course, is Haryana. But even states like Rajasthan, from a loss of about INR 14,000 crores annually to a loss of only about INR 6,000 crores over a period of -- in the last 4 or 5 years. I think these are tremendous improvements and the improvements are only going to continue.
The next question is from the line of Saket from India Capital.
Just one follow-up question, I missed asking last time. So in the medium term, you've said, sir, that our stress asset ratio should come down consistently going ahead, especially over the next 1.5 years. But sir, I remember last time when we had done the call, you had mentioned that we are monitoring projects worth about INR 4,000 crores to INR 5,000 crores when we have done the call after first quarter results. Are those normal now? Are those staying regularly? And to that extent, this INR 18,200 crores number of GNPA, this should at least remain flat over the next couple of quarters. We're not expecting any new spread or any new slippages into stage 3 if that's over the next quarter or 2 from the COVID disruption. Is that understanding correct, sir?
Yes, yes, absolutely. We do not expect any new NPAs, any new bad debt, we do not expect. I mean there are none on the horizon at least. One doesn't know. But as of now it doesn't seem very likely.
Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Chintan (sic) [ Kunal ] Shah for his closing comments.
On behalf of ICICI Securities, I would like to thank the entire senior management team of REC for sharing their perspective and insights. Thank you, participants, for joining the call, and have a good day. Thank you.
Thank you very much.
Thank you, all.