REC Limited
NSE:RECLTD
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REC Limited
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Good day, and welcome to the Q4 FY '21 earnings conference call of REC hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kunal Shah from ICICI Securities Limited. Thank you, and over to you, sir.
Thank you, Janice. This Kunal Shah from ICICI Securities. Good afternoon, everyone. Today we have with us, Mr. Sanjay Malhotra, Chairman and Managing Director; Mr. S. K. Gupta, Director of Technical; Mr. Ajoy Choudhary, Director of Finance and other senior officials of REC Limited, to discuss their Q4 FY '21 earnings and full year FY '21 earnings and to give us the update on the power sector developments as well as the financing opportunities and outlook. So now over to you, sir.
Okay. Thank you, and good afternoon to everyone. It's indeed a pleasure to be with all of you once again and to share with you our thoughts and especially the results of the last financial year. As you would all have gone through, the last year has been, insofar as REC is concerned, a stupendous year. It has been the best year insofar as the profits and the revenues, et cetera, are concerned. Let me, first of all, take you through the major highlights of the last financial year. You would all perhaps be aware that sanctions last year, we had record sanctions of more than INR 1.5 lakh crore, which is a 40% rise over the corresponding period last year, the full year. Similarly, disbursements at almost INR 93,000 crore, are up 23%. Interest income is up 17%, at almost INR 35,000 crore, INR 34,684 crore, to be precise. And total expenditure, on the other hand, has increased only by 8%, finance cost only by 13%, as a result of which, the profit before tax is the highest ever for REC at about INR 10,750 crore, up 54% last year. And PAT is also a record for REC at INR 8,362 crore, which is 71% more. Our loan book, therefore, has grown by 17% and is now about INR 3.77 lakh crore. In terms of the key indicators, very happy to report that net worth has increased by 24% and now stands at INR 43,426 crore, vis-à-vis INR 35,000 crore last year. The CAR ratio, now we are quite comfortable touching 20%, 19.72% to be precise, vis-à-vis 16.06% last year. Debt equity has also improved. It is now at 7.4% as against 7.94% last year. The spread has increased. The yield on our loan portfolio has marginally decreased by 11 basis points, primarily because of liquidity infusion scheme in which we have given taxational rate of interest considering the pandemic, 11 basis point. It has come down, but it has been helped by reduction in cost of funds by 18 basis points. From 7.31%, it has gone down to 7.13% per annum in the last financial year, as a result of which, the spread more or less static, but slight improvement, from 3.26% to 3.33%. Similarly, NIM, there's a 15 basis point improvement from 3.74% to 3.89%. Return on net worth is more than 21%. And interest coverage ratio is also quite comfortable at 1.5%. In terms of asset quality, over the previous year, we have -- again, there is an improvement with more provisioning and resolution of new assets. The gross NPA now stands at 4.84% as against 6.59% as on March 31, 2020. And the provisional -- the coverage ratio -- provisions coverage ratio is 2/3 -- almost 2/3, 64.59%, and the net NPA is now 1.71% as against 3.32%. We are quite hopeful even about the next year. You would have seen, in the last year, the electricity sector has been quite resilient despite the economy shrinking by more than 7% per annum. Demand, consumption for electricity went down only by about 1%. And this year now, we are seeing a growth in the demand for electricity. So that is something which is a positive for the electricity sector. You are already aware that in the budget speech last year, an announcement has been made by the Finance Minister for a new revamped distribution scheme of more than INR 3 lakh -- INR 3.05 lakh crore, in which almost INR 1 lakh crore is going to come as a grant. So that is going to give a [indiscernible] to the distribution sector. And with the improvement in the distribution sector, should have a cascading effect on all the other segments, the transmission and the distribution -- transmission and generation sectors and provide opportunities for our finance companies like us to help in the investment required for these schemes. The third push is also, as you are all aware, coming from the energy transition with ambitious target of Government of India or 175-gigawatt next year, FY '22, and then moving forward, 450-gigawatt of renewable energy. There is a tremendous opportunity for PFC-REC companies to take advantage of this benefit -- to take advantage of this push for renewable energy. Already, we are sanctioning a major part of the investments required in the renewable energy sector. Of course, with the COVID last year, the disbursements in this particular sector had slowed down, but hopefully, they should -- we should again be on the growth trajectory. Then there are other areas like e-vehicles. Energy efficiency is another area, which the Government of India is going to give a push. And then we are entering into associated sectors. We are in touch with various agencies, various state governments and their organizations for projects related to lift irrigation and others, and especially the hydromechanical components and associated civil works in these projects. And that is a new business segment, which is opening up for the likes of REC. And we are hopeful that the next year, again, this comes -- in fact, in the current year, we should be able to maintain and, in fact, exceed the profit levels. I would also like to mention that we have, from 1st of April 2021, we have rationalized our interest rates with the interest rates in the market. As you have seen, our cost of funds has gone down, and the banks are also lending at very reasonable and low rates of interest, so in order to be able to compete with the banks and also in order to give to our borrowers reasonable rates of interest, we have reduced our rates of interest from 1st April 2021. And that also, I'm quite hopeful, will help us in improving our turnover, improving our disbursements. So our focus is going to be more on the quality of our…[Technical Difficulty]
[Operator Instructions] Request the participants to please stay on the line. We've just lost the line for the current speaker. We will just reconnect the speaker back.
I got disconnected.
Reconnected. You may please go ahead.
Yes.
You may go ahead, sir.
Yes. Hello?
Sir, we can hear you on the call. You may please go ahead.
Okay. So I can continue. I really do not know. Sorry, I got disconnected. I really do not know what point I got disconnected. But I think I was saying that we reduced our rate of interest, and that will again help us in getting more business without so much impacting our margins because we have already a decent amount of margin, decent cushion to actually reduce those rates. So that will actually help us expand our business, expand our turnover and revenue without so much impinging on our margins, especially hoping that the liquidity that is present in the market and the accommodative stance of RBI and maintenance of repo rate like we heard even today on the interest rates. So going forward, I think REC has a very good future. Even in the coming year, we expect it to be a better year than the last year. Thank you. I think we can take -- I would request Director of Finance, Mr. Ajoy Choudhary, if you would like to add, if I missed out on some of the key points, I would request him to supplement, wherever he feels necessary.
Thank you, sir. I think Sanjay sir has covered the almost entire gamut. Our -- only one thing that I'd like to say is that we have -- he touched upon it, provisioning coverage ratio, which we have improved quite significantly this year. We have an ECL method of providing for on our assets and the standard asset. We have now got at par with IRAC norm of the RBI, which is 0.4%. So -- and on stage-3 assets, also, we have significantly improved our provisioning. And 2 of the assets which have come to standard assets are Essar Power Transformation and TRN Energy totaling to INR 2,520 crores. So that's one of the highlights. And another thing he touched upon is the Athma Nirbhar Scheme, where we disbursed this year around INR 40,000 crores. So that's almost covers. Thank you.
I think we can take questions now.
Yes.
[Operator Instructions] The first question is from the line of Kishan Gupta from CD Equisearch.
So you talked about your reducing rates compared to banks, et cetera. So what sort of competitive advantage do you have compared to banks in your lending business?
See, the advantage that we have of our bank is not so much in rates. We cannot beat them in rates, as you would be aware, because of the way the banks raise their funds. Our competitive advantage basically lies in understanding the businesses, especially the distribution companies, very well. So it is over there and are liaising with state utilities, especially, because we are mostly in the state sector. More than 90% of our portfolio is in the state sector. So our competitive advantage is basically in understanding these businesses much better and being able to, of course, to -- able to reduce our risk because we are able to get -- because we are in -- because being the lending arm of Government of India through various -- and implementing various schemes, we can get better security from the utilities as compared to banks. And then the second advantage is that because we are implementing agencies, the nodal agency for various government schemes, then it becomes advantageous for the utilities to take funds from one agency because the grant is channelized through REC and, of course, PSC also. So it is advantageous for them to take the loan component because most of the schemes have a loan component. So that is the second major advantage that REC has over the over the banks.
So essentially, you mean to say, invest in schemes where there are grants. And if utilities approach banks, they will not be able to get that -- those grants?
No, they will be able to get grants. Most of the schemes do allow. It's not that the schemes do not allow it. But then it's easier for them to liaise with -- coordinate with 1 agency rather than 2, 1 for grant and the other for the loan component. So that is why it is advantageous for us vis-à-vis banks. But that is -- that would be a small proportion. I don't think that's a very high proportion of the total loan book.The other advantage is, as I mentioned that, by virtue of being the implementing arm, we are able to understand the business of the utilities, the risk of the utilities, and accordingly take security for the advances that we make to them.
And profits, almost like left 80% last year, but you people have not jacked up the dividends this time. So any particular reasons?
Last year, you see '18 -- '19/'20, we gave higher dividend than our profits, than what the DPE guidelines say. So that is one major reason. So the dividend last year, that is '19/'20 last to last year, '19/'20 was on the higher side. This year, it is shared low, I mean, lower than what the DPE would have otherwise prescribed. But that is to adjust for the higher dividend last year. And considering that our CRAR ratios at about 17%, our debt equity ratio touching almost 8 or high. So that's why we have not increased the dividend. And then the third thing is that there are certain investment opportunities that may come up, especially for the DFI, the financial institution for the infrastructure, which has been announced in the budget. And maybe some investments over there. And then fourth, of course, considering our overall growth opportunities, we have maintained the dividend levels.
And what was the guidance now, going ahead, for dividends?
We will -- as far as possible, unless there are any extraordinary reasons, as I mentioned to you, we'll follow the DPE guidelines.
The next question is from the line of Punit Srivastava from Daiwa Capital.
My first question is on the provisioning coverage. It has increased. So if you can throw some light, is this because you are seeing some more hit on any of the accounts? Or is it like because due to delay? What would be the reason for raising the providing coverage this quarter so much?
Mostly. Okay, sorry. Yes, go ahead.
Yes, sorry. So -- and second question, of course, was on the yield side. Yield, of course, you mentioned that on a Y-o-Y basis, it's not fallen that much. But on a quarter-to-quarter basis, there's a short decline of around 55 basis points. So apart from that interest on interest charge and, of course, the liquidity Discom scheme, is there any other factor we should look at, which would have led to such a fall in the yield quarter-to-quarter?
Yes. So -- okay. So first question is about provisioning. Major provisioning increase is basically because of the Tamil Nadu utilities. Their rating has gone down being an election year, et cetera. We hope that their rating will further -- will improve in the coming years, and so this should be only a kind of a onetime thing. And the provisioning, it may even be reversed in the coming years. To my mind, that is the major reason. However, I will request my Director of Financial, Ajoyji, to please supplement me as to what are the other areas where provisioning has gone up?And also on your second question related to is, to my mind, these are the 2 reasons that you have already mentioned, which is the interest on interest, which was reversed; and secondly, the liquidity infusions? But if there are any other points then? Ajoyji, please.
Yes. Thank you, sir. We have increased our provisioning on our stage-3 assets. Last year, we had made a provisioning of around INR 600 crores of stage-3 assets, which we have taken this time to close to INR 1,800 crores, largely because we think that on the ECL method that we are following, along with PFC, that mandates as the time progresses that the provision has to be increased. But we are very hopeful that some of the provisions will get reversed as we are seeing that the resolutions that are coming are at higher levels. In 2 or 3 cases, which we resolved last year, there was some reversal of provisioning. So the provisioning coverage ratio has been increased largely to take care of the ECL methodology. And of course, as Sanjay, sir, has mentioned that standard asset provisioning, we have taken up, up to the RBI mandated 0.4%.Regarding the yield on quarter-to-quarter basis. One is, as you said, interest on interest of INR 130 crores, which we have made provision for payment of and also because in the last quarter, the number of days are less. And therefore, the income in this quarter for the month of February is less. That's the 2 reasons only the slight fall in the yield.
Okay, sir. Got it. And sir -- I'm sorry, if I can chip in one more question. I just needed some outlook on the coal projects going ahead. Like so far, it has been disbursement pretty strong. But there was an article today also from IEFA saying that coal file projects are under construction. They may get stranded because of the high cost and all that. So sir going ahead, how do you see them? Do you see risk increasing in the coal sector projects? And also on the outlook in terms of the sanctions and disbursements?
Yes. I mean that is, of course, as you are saying -- I mean there is a risk over there. But there are countries which are opposing even the IEA on the phasing out of coal. I'm not remembering which countries, but quite a few countries. I think Japan is there. Japan is also included in them. So coal will, of course, be phased out, but it's going to take time. It's not -- it's imminent, but it's not immediate. It will take time. It will take time. And there are coal projects which are coming up and will be needed. See, India's consumption per capita is only about 1,100 -- 1,200.Sorry, I was on hold. So I was saying -- yes, I hope I am audible now. I was on...
Yes, fine now, sir.
So 1,200 units per capita consumption in India, which is 1/3 the global average and much less than the developed countries. So India is to grow. And renewable today does not -- will not be able to meet those demands, so -- for some time, till we get around the clock renewable energy power at reasonable comparable costs. The costs of renewables today are comparable, only peaked during the daytime. Around the clock, still coal will be required. So while -- I mean that risk is there. If there is a breakthrough, there has been in hydrogen or in battery storage or something, that risk is always going to be there. Other than that, I don't think India can afford to neglect coal at this stage, given the technology that we have today. I hope that answers your question.
The next question is from the line of Saket from India Capital.
Am I audible?
Yes.
So sir, my question was regarding slippages this particular quarter. So I've noticed that our absolute gross NPAs have increased slightly from December quarter from around INR 25,000 crore -- sorry, from around INR 18,221 crore to INR 18,257 crore. I just heard -- Ajoy sir also mentioned that we've had a couple of resolutions, Essar transmission being one. So were there any major slippages or these resolutions will only be reflected in numbers in the coming quarters? Just wanted to understand that.
Yes, so I'll request Ajoyji only to answer. I think it's a question of they are getting reflected in the accounts, but I'll request him to handle this.
Sure, sir. In 2021, we had 2 upgrades. As I said, Essar Power transmission, TRN Energy, totaling to INR 2,500 crores; and 1 resolution of [ Baker ] Power, that's of INR 500 crores. There's only been 1 slippage during 2021, that is a small renewable project of INR 36 crores only. That's the slippage. And going forward, there are some of the projects which are under very advanced stage of resolutions. And there, we hope that about -- how much -- about INR 3,000 crores of assets will be resolved next year. One of INR 54 crores via Sygnite has already been resolved, and this will be reflected next year.
Great. Great. Good to hear, sir. Sir -- and in terms of, sir, resolutions, you mentioned that you're expecting about INR 3,000-odd crores. In terms of slippages, are we expecting any major project? Small, I understand can come up. But any major projects which you are tracking, which can throw the problem in the next year?
We don't foresee any.
No. Great. Great. Sir, just 1 more question from my side if I can ask, which is on the provisioning side. So sir, as you mentioned that we've taken the PCR on standard assets on NPAs already to 65%. So you mentioned earlier that as time progresses, we have to increase the coverage over there. But sir, now we are -- given that we are already at 65% and in most cases, a resolution percentage has been much higher, do you expect that we'll do the same kind of provisioning next year as well? Or would the provisioning requirement come down? I just wanted to understand that as well.
See, provisioning is a dynamic thing and even our ECL methodology is a dynamic thing. We keep revising the methodology based on the -- on new experience as we gain experience because we are also new to it. I think 65% is -- my understanding is that 65% is perhaps on the -- it's quite a reasonable figure. Neither -- it's quite a realistic figure, and neither on the higher side nor on the lower side. I think it seems to be okay. Director of Finance, Ajoyji, you can also chip in.
Yes, sir. As you rightly said, we believe that it is a very reasonable figure. And our auditors are also quite satisfied with this. Going forward, we will have to see how the resolution goes by. And if there is a need for further provisioning, we'll do that and if reversal comes along, we'll do that as well. But 65% is a very, very reasonable figure.
I mean leave aside any surprises. And over days, it's hopefully -- I mean, one has learned. And it has already been, to a great extent, factored in. We hope that it should be in the same range.
The next question is from the line of Shreepal Doshi from Equirus Securities.
Sir, just wanted some project-wise update. So as you said that Essar Power transmission in [ Baker ] Power have been resolved. What about Hiranmaye Energy? What about New Barath Utkal and R.K.M. Powergen? Because I think these projects were also at advanced stages wherein we've got the resolution, but I think we were also under the advanced stages. So what's the update there?
So you have mentioned -- I think you mentioned R.K.M. So R.K.M. restructuring plan has been implemented on December 29, 2020. So -- and 60.7% is sustainable debt. Rest has been converted into debt instruments and account has been upgraded to standard category. Second, you have mentioned about Hiranmaye. Hiranmaye, we are in -- we had restructured it. We had given some time until 31st March 2021, for the borrower to agree to certain conditions, which he has not been able to do so, especially related to tariffs. We believe there were elections in West Bengal. And so we are still -- we are hopeful that this year we should be able to resolve Hiranmaye. And there was another -- third one, which one did you mention?
Ind-Barath, Utkal?
Ind-Barath, Utkal, resolution plan has been approved by COC, and NCLT approval is awaited.
Sir, how much recovery are we expecting there? And what is the exposure?
In Ind-Barath?
Yes.
I will -- Ind-Barath, total exposure is INR 416 crore. And I request my colleague to give me the details. Lakshmanan can come in perhaps.
Yes, sir. Sir, Ind-Barath, Utkal, we are expecting, as per the plan that is reviewed, we are expecting 31% recovery.
So that is 31%.
And Hiranmaye, one update, sir, like the MIT tariff order has come from West Bengal regulatory commission, which was long awaited. So that will also probably aid us in the resolution.
Yes, so that will expedite there.
Just a follow-up question. Hiranmaye, our exposure and how much are we expecting as a recovery there?
Yes, exposure is INR 1,347 crore. And we are expecting a recovery on the restructured plan of around 68%.
16%, 1-6.
6-8, 6-8. 68%.
Okay. Okay. And sir, like, we had indicated that some -- like projects in a liquidation where dates have been received. So there were 3 projects. And they were, I think, close to [Technical Difficulty] Yes. So I think there were some 3 projects, which was under liquidation. And I think there were 3 projects and of course INR 2,000 crore exposure. So what's the update there? Has the cost further delayed? Or if you can just give some color there.
Yes, Lakshmanan, please go ahead.
Yes, sir. So -- yes, projects under liquidation, 4 projects are there, as you rightly said. The liquidator is going through the process of selling the assets. Like in a couple of cases, like bids were under bid, and Ind-Barath, Madras, there is litigation which is going on. So that is actually delaying the process. So otherwise, Lanco Babandh piecemeal sale is under this. We are getting partial recoveries out of that. That is -- that project was very low on completion. So Konaseema, the bidding is underway.
And the total exposure, as I said, is right at INR 2,000 crores for these 4 projects or...
It's just less than INR 2,000 crores. It's around INR 1,800 crores.
Okay. Okay. Okay. And so are there any other projects? As you said that there are 2 projects which are at an advanced stages of resolution. So bring FY '20 -- or say, during FY '22, first half of FY '22, how many projects do you see -- will get resolved or we could have had the provisioning write-backs from there?
So -- okay, Lakshmanan, go ahead.
Yes. Basically, the projects which are under NCLT, where bids have been received. There are 5 projects where we have received bids, accounting for close to INR 6,000 crores of exposure, where the decision on the bids is in advanced stages. So we are quite hopeful that at least a couple of them should be resolved in the first half and the balance could take place in the next half. So this is actually a major progress. So we are hoping at least 2 or 3 of these transactions will fructify in the first half itself.
And sir, overall branded recovery that we're expecting, like for this INR 3,000 crore?
So all these projects are actually like commissioned assets. So we are expecting a recovery which could be sharing from 45% to 60% or slightly above, depends on the project.
Okay. Okay. And...
Jhabua project is one of them, for example, where resolution is almost around the corner. Similarly, Lanco Amarkantak is around the corner. Essar Power is, again, around the corner. And we are getting good recoveries here. And we should take care of -- we should -- there may be some reversal. Similarly, Southeast UP transmission company. That bidding is going on, and we expect it should be resolved this year. So quite a few projects. I think this year, in terms of resolution, we should whether through IBC or outside. And outside IBC, we have, dams for example. Dams should get -- Hiranmaye, we already talked about. Dams energy, we should get resolved outside IBC. Restructuring plan is already in very advanced stage. Tariff has been given by the regulator. So that should also -- so quite a few projects. We feel that this year should be good insofar as a resolution of some of these stressed assets is concerned.
Right, right. Sir, just one last question. I think in our last call, we had indicated that there are some 4 projects wherein we have the PPA signed. But they were seeing some stress. So -- they were gencos basically, private sector gencos. So have you seen any slippage from there during the year? Or are we seeing that it could slip in future?
Which are the projects you are referring to?
Sir, I do not know the name, but then we had indicated that there are 4 private sectors genco projects, wherein PPAs have been -- they already have the PPA signed, and our exposure was close to INR 60 million. So we were seeing stress building up in those accounts. How is the situation, I mean, currently?
Private, I -- is the -- Director of Finance, would you like to take this question? I mean to my mind, there are -- I mean there -- all projects, like this project in supplies power to UP. What's it name? There's a small project. There is some we have restructured it.
PRN Energy.
PRN Energy.
PRN Energy. That is one. Others would be of smaller capacity. I don't think there is any major. [Foreign Language] Ajoyji, if there is any?
I think, sir, we have some of the projects like Sasan Power, the MP Power, but these are all doing very well. They have -- they are servicing our loans pretty well. I think Mr. V.K. Singh, would you like to add something.
Yes, sir. Whatever assets we have, particularly in thermal space, all of them have adequate PPA tied up with the state, except as Sanjay sir mentioned, PRN Energy, which has got roughly 70% long-term power tied up and rest of the power is being sold on extent or to short-term arrangements. And -- but since the PRN, we have already restructured very, very recently. We did 5/25 restructuring in this case. But now this account is performing very well, upgraded also. And all other accounts are having adequate people.
The other one is, that I can remember in Sikkim. But that also, after taken over by the Sikkim Government Company. That is also performing well. And we don't expect -- even over there, we don't expect any issues over there. So I do not know which 4 companies we referred to last year. Maybe very, very small assets perhaps, and so that's why -- there is no -- there are no signs of stress that we can see in large -- in our large projects. We can take the next question, I think.
The next question is from the line of Anand Laddha from HDFC Mutual Fund.
Sir, just a couple of questions from my side, sir. Sir, just wanted to have your outlook on growth, both in terms of disbursements and loan book growth for next year. Is there any other new area which we are looking to lend as an extension to our deposit exposure? If yes, can you give some color on that? Also, sir, there has been a media article on market-based economic dispatch. The article talks about the saving for the power sector per se or SEBs per se. So can you highlight what is this new concept all about? And what are the roles with REC or PFC will play in this?
Yes. So outlook, you see this year was an exceptional year because of the Atma Bharat Liquidity Infusion Scheme, as I had mentioned in my earlier con call. Otherwise, if you neglect that, we should expect normal times 10% growth in disbursement. So considering '19/'20 as a base, one can easily expect a minimum of 10% growth over there. Coming to the areas, I already touched upon them. Energy transition opens up areas in -- didn't work so we are giving it a renewed focus, renewables and associated transmission. And other associated sectors we are opening up, we are trying to get business in irrigation, as I mentioned; and electrical vehicle charging. So that's again a sunrise sector. We are looking at that. We have done some financing over there. So these are broadly the new sectors. And coming to your question about MBED. MBD -- MBED is basically nothing. But if you understand merit order, so instead of -- right now, all the states are doing a state level merit order dispatch. So merit order basically means that you run the most efficient power plant. Most efficient being calculated as the one which has the lowest energy charge, the power plant which is able to generate 1 unit of energy at the lowest, lowest cost. So you run that first. Once you exhaust its capacity, then you run your next most optimal or cheapest power plant and so on and so forth. So you run your most efficient power plants most so as to reduce your energy charge because fixed charge is a given charge. So that is being done on a state level basis right now. The attempt is to -- in MBED, the attempt is to do a national level dispatch. So that requires changes in regulations. And that will mean that the states may be procuring power from cheaper power plants with whom they may not have a power purchase agreement. So right now they are purchasing only from those with which they have a PPA and that they would in the most cost-efficient way because of which there may be some more efficient power plants with which that particular state does not have a PPA, but this MBED will enable it through the power exchange. It will enable that power plant to supply energy without a PPA to the Discom and -- so that will be a win-win because the power plant, which is presently not operational, not running, it will run and it will make some money because, obviously, it will be selling power at more than its energy charge -- it's cost and it will be beneficial to the Discom because it will be procuring at a cheaper cost than it would have otherwise done. So this is what is being attempted, I hope...
Sir, what will be the role of REC in that, sir?
I don't think PFC REC directly would have a role, but there are benefits. As power sector improves its sustainability, viability, as per one study, there was savings when they did this on a very limited basis which is MBED on a limited scale. There were benefits of about INR 1,500 crores, when they did it only for NTPC power plants. And those interstate generating stations, those -- I think interstate generating stations, yes. So those connected to the interstate transmission that there was saving about INR 1,447 crore. My memory tells me correct, about INR 1,500 crore annually. So if this is done pan-India basis for all plants, there will be savings, which will improve the financial health of the Discoms. And so there will be spin-off benefits in terms of low risk and lower provisioning, et cetera. So those will be the benefits PPA.
If you allow me, I have more couple of questions, sir. Sir, one thing on the dividend policy, sir, what I understand is, generally, the public sector enterprise has a dividend policy of 40% of profit or 5% of net worth, whichever is higher. And if I go back to tools this year, our payout has been at 26% of the profit. So I just want to understand, sir, what could be our dividend policy going forward?
Yes. So it is 30% of net profit. It is not 40%. 30%. We are marginally lower. And that is -- as I explained to an earlier question, that is because our CRAR ratio, our debt equity ratios, we needed to improve, but it will in turn help us in reducing our cost of borrowing. And secondly, it will also help us in expanding as we need more money for expanding our business. So it will help us in that. An investment in the national -- the financial institution for infrastructure. Over there, we may have to make some investment. This is over and above. Fourth reason I gave was that already in '19/'20, we gave much more than 30%. So if you look at '19/'20 and '20/'21 together, more or less, we have met the DPE guideline.
So next year, sir, would that be fair to say we will move back to 30% payout policy?
Yes, 30% or 5% of net worth. And then in '20, it was, I think, about 44% or so. Profits were very less, but still we maintained that dividend in interest of the investors.
Perfect. Perfect. And sir, lastly, on the NPA side. You indicated -- given color a lot on the resolution side. 2 accounts, I thought, which, if you can highlight. One was KSK Mahanadi and the other one was Indiabulls Nasik. Both where they are in terms of the resolution stage? One thing that. Second, sir, government -- you could have heard from the media that government is forming a bad bank or PSU bank coming together and making a bad bank. Would REC PFC are looking to transfer some of their NPA to this bad bank?
So bad bank, as I mentioned, we are looking at participating in the bad bank. I'm not sure if there will be any -- as of now, there does not seem to be a candidate of -- from our lending portfolio, which we may transfer to the bad bank, as of now. That does not seem to be any probable candidate. Coming to KSK Mahanadi, the bids are awaited. It's -- EYs have been received. However, final bids are still awaited in KSK Mahanadi Power Company. And another -- which was the second one you mentioned?
Indiabulls Nasik.
Indiabulls Nasik is -- I mean that is -- we are in touch with the Maharashtra Government. There is no further update. We are where we were. That is -- there is not much progress. I'll request DT, Sanjeevji Gupta, if he has anything to add for these Mahanadi and...
No sir. This is the status, sir, what you are seeing, that is my status as of now the margin.
Okay. Thank you. So we can move to the...
The next question is from the line of Vipul Shah from Sumangal Investment.
I just want to know what is the tenure of loan to this distribution companies, in terms of number of years, generally?
The tenure varies from 1 year to 15 years.
1 year to 15 years.
1 year to 15 years. The average, I think, is about 7 years.
Average is about 7 years.
Remaining period -- remaining as on today is about between 6 and 7 years. The remaining tenure of loans is between 6 and 7 years. Ajoyji, is that correct?
Can I comment, sir?
Yes, Sanjeevji, [Foreign Language].
Normally, sir, distribution [Foreign Language] this [Foreign Language] normal [Foreign Language] CapEx loan [Foreign Language] capital expenditure loan for creating assets, that is presently is 3 plus 10 years, that is 3 year moratorium and 10 years is the -- this thing. And as you have said very correctly, sir, for the station company where we are lending a lot of this short-term and medium-term loan, so the short-term is 1 to 3 years. And in certain cases, this saw non-CapEx loan. This amount -- this tenure comes to even 7 years -- even 7 to 10 years also. So on an average, if we will take CapEx on non-CapEx loans together, the average tenure will be, as you have said, it would be 7 to 8 years or so.
And sir, any plan to move away from the lending to these distribution companies, which are, I mean no private player generally lends to them. So even though we are having a book value of INR 220, market is giving us very low valuation just because market is not confident that these loans will come back. So what is your view, sir?
I'm very surprised that's why the market behaves like this. I mean they have their own way of looking at it. But you look at the industry. You look at my NPAs. How many of them are from the state sector? Nil, 0. And payments -- all payments have been more or less on time, within the 90-day period, which is given. Some of them breached that, but within 90 days. So none of them are -- all of them are standard. None of them are kind of NPAs. So we have not had any default till now. We have got good security for all our assets, all our loans. So I find it surprising that REC as well as PFC are quoting at less than book value. They are very, very safe. They have been consistently giving dividend. They have been generating enough cash to be able to give the dividend. And there has been, at the same time, reasonable growth, about 17% per annum. It is not reasonable, it is high growth. And we do expect at least 10% to 15% growth in the coming few years given the various opportunities and given the fact that we are still now much the low energy consumption countries in the world.
Sir, you said, these are nil default from the state distribution companies. So what exactly is the source of NPA then?
It's in private sector.
It all in private sector?
Yes.
Okay, sir. Okay. And lastly, sir, can you make some, means, qualitative comment regarding your relationship with PFC, means, is it -- is this company being run at arm's length? Or all management personnel are sourced from PFC? If you can offer some comments, it will be helpful.
No, they are totally -- they are -- see, they are totally 2 different companies. The management is separate. The management is appointed by the government, right? It is not appointed by the PFC. PFC has the right to only appoint 1 Director. So they are totally a separate company and work independent of each other. And the personnel are totally different. They are not personnel of PFC on reputation or on settlement to REC or the other way around. Totally different companies. Because they were different companies, so -- that's why employees being same -- does not -- being from 1 company that does not arise. And that process of -- I mean of merging the employees also is not on the cards. So they are totally different employee wise, management wise. Only ownership, yes. PFC is having majority ownership.
The next question is from the line of Romil Oza from Oza.
Congrats on a great set of numbers.
Sir, sorry to interrupt. May I please request you to speak a bit louder.
Yes. Congrats on a great set of results. One, if there are no new NPAs, this year will our profits grow compared to last year?
Profits, you see, is a function of so many things. And provisioning is only a small amount in any case. There are other variables like foreign exchange, which we can't take into account. So to give -- this year has been -- as you are aware, this is -- this year, we have had the highest ever profit. So -- and you see, our return on net worth is about 22%. It is the highest. It is very, very high. So I don't think that the return on net worth will remain the same. It -- and a lot depends on how interest rates move in the market. But broadly speaking, I think the profits should remain in the same range, perhaps.
And sir, the second question, and...
I would request my Director of Finance also to supplement if he has any thoughts on this...
Yes, sir. This year was really an exceptional year and also a year in which the rupee actually appreciated. It's long -- after a long time that we have seen appreciation of the rupee. But the growth is there in the company, and we have a large order book. So I think going forward, we should be able to at least maintain this kind of profit, maybe somewhat here and there, that's all. But looking at the growth book, I'm confident that we will maintain this further profits.
And sir, the second question, this relates to why I think it's one of the reasons the company can't get the valuation it deserves. Sir, if you can please -- even if you have to pay less of a dividend, please convey the idea that you're going to start paying the dividend quarterly. I would prefer buybacks because I think buying the share back below book value is a good thing. But if you can't do buybacks, at least please pay dividends quarterly because that will -- what is happening is there's a technical -- when you pay the dividend in a lump sum manner. The issue that's coming is after the dividend is paid, for technical reasons, the stock is compressed, and it's taken almost 3 months to 4 months for the stock to go back to where it was. In PFC's case, it's still not risen back. Sir, please try to understand how the market perceives this. Please, please, I really humbly request you to. Even if you have to pay less of a dividend, but pay it quarterly.
Okay. Suggestion taken.
Please, because the stock is...
We will consider your suggestion. Seriously.
The stock is extremely undervalued considering you have a 20% ROEs. You have a white board. This is a great...
Okay. We'll consider your suggestion.
We have been others, but...
Now just can we move to the questions from...
Yes, sir. Give me a minute. Sure. We'll proceed to the next question is from the line of Milind Rudra from Daiwa Capital.
I just had a couple of questions. One is, when does the reduction in card rates and the liquidity scheme -- hello?
Sorry, you were not audible.
Hello? Can you hear me now, sir?
Yes, now this is absolutely better?
Yes. Sorry. So sir, regarding the reduction in card rates and the liquidity scheme, how far do you think that NIM will be compressed? Or where do you think that NIM would stabilize going forward?
See, we would like our return on net worth to be somewhere in the range of about 16%. So it is right now -- last year -- last to last year, it was about 14%. This year, it is more than 20%. So on an average, it is about 17%. So that is where we would like it to be. So that is kind of a guidance to us. And why do we say 16% is kind of the benchmark? Because in the power sector, this is what is the benchmark at which the regulators are allowing for purposes of tariffs. So if you go by that yardstick and back calculate, I think -- NIM, I think should be about -- I'm not sure. You can do your calculations. I am told about 3.2 or something, but you can do your calculation. We would like the return on net worth, as I'm saying, to be in the region of 16% to 18% -- 14% -- 15% to 18% or so, right? So you can do your calculation and see where the -- and this is because we wanted to balance the interest of the consumers, the distribution companies, generating companies. And all this goes back to you people, like you as consumers because the higher the rate of interest is passed on directly as tariffs if the benefit is not taken by -- is not retained. In case there is a reduction in the interest rate, the benefit does not go to the distribution company or the generation company. Most of them are on cost-plus basis. Tariffs are on cost-plus basis. And so most of these loans, benefits of lower rate pass on to the consumer or in case the rates are increased, a burden goes to the consumer. So we would like to balance the interest of our shareholders as well as of the ultimate consumers of the country, and keep the return on net worth at a reasonable level. As you can see, this year, it's slightly high, but it has -- other for our previous year lower return on net worth. Somewhere in the region of 16% to 18% is where we would like our return on net worth to be. And you can do your back calculation and see where -- slightly it is on -- it is -- this year, you can see it is on the higher side. But with the reduction in -- as you mentioned, in the card rate and the lower rate of interest in the Atma Bharat Liquidity Infusion Scheme. Yes, sometimes a little. Especially -- but we are hopeful that it will not get compressed too much if the liquidity and the rate of interest remain soft as they are as of now.
Okay. And how much of the CapEx loan has already been achieved COD? And what is under construction?
Sanjeevji, would you like to take this? Do you have any details to share or we can prompt them offline? Director Technical?
I would like this question to be repeated, please?
Sir, how much of the CapEx loans have already achieved COD? And how much of these loans are under construction?
You see that particularly -- if you see that this year, we are looking for disbursement in the range of INR 80,000 crores to INR 85,000 crores, out of which maybe INR 60,000 crores to INR 65,000 crores will be towards CapEx projects, which we have sanctioned in the last few years. So that pipeline is very, very strong, and we will maintain the current level of disbursement this year too. It's almost close to 80% to 85% contribution from capital expenditure projects on this. Will that suffice as the answer to you?
Okay. And sir, how much of the portfolio has a reset of 3 years, 1 year and 10 years? Sir, if can you please provide a breakup?
That breakup...
Mostly, it is 1 year -- mostly, it is 3 years.
Mostly 3 years.
Yes. Mostly, it is 3 years. Ajoyji, would you have figures?
Yes, sir, it is almost -- roughly INR 3,70,000, out of which INR 20,000 is kind of stress. So INR 3,50,000.
Mostly, I would think that -- this 80% ballpark figure, should be 3-year basis. Is that a good estimation?
Yes, sir. That's the kind of figure. And some of them are short-term loans also, but there is no reset involved. So around 80% will be 3-year reset And that said, 10% to 15% will be the short-term and medium-term loan. And rest of release, some of them will be on 1-year reset and 10-year reset. So largely on 3-year reset.
See, bulk of the portfolio is 3-year reset.
The next question is from the line of Parag Trivedi (sic) [ Parang Trivedi ] from India Capital.
This is Parang Trivedi from India Capital. Sir, just a small question on yield. So the yield reduction that you mentioned, will it be applicable for incremental loans or entire loan book of REC?
So it will be applicable on the incremental loans. And on the existing loans, rather when the most become due for reset -- interest reset, mostly which is 3-year, as we mentioned just now, again, they become eligible for alignment with the new rate card. Plus, we are trying to come up with a scheme of the -- for the existing loans if they want to switch to a 1-year reset. Mostly, I said it is 3. If they want to switch to a 1-year reset, then we are giving some incentives to them of sharing the gains in reduction on 50-50 basis for the period from the date of shift to 1 year, from that date to the date that the loan would -- interest rate would have got reset after 3 years or 10 years as the case maybe.
Well, due to the time constraint, we'll take the last question from the line of Punit Srivastava from Daiwa Capital.
Sir, I have a question on this -- the government loan book. You have like 3 categories of loans in the government loans, category A, B and C. And I believe, like genco was downgraded from B to C last quarter. So can you give the like portion of how much of the loans are in category A, B and C, respectively?
So the category that you are referring to is basically the category of the rating. It's the credit rating. It is a credit rating on the utilities, which we are doing for the state power sector utilities. The ratings are varying from A++, A+, A, B, C, right? So there are these new types of categories. Most -- there are very few in A+ -- A++. Mostly, they are the ones -- see, we can share the details with you if you want, how much is an A++. Often I have not remembered. Mostly, they will be in the range of B and C, mostly in B.
So B and C, how much they will put together? Or mostly C in particular?
We can share the figures with you. I mean often, I'll not be able to comment. Mostly, they will be in B or -- A or B, right? Mostly, they will be in these categories. So we can share the figures with you. There is some in A+ and A++. Maybe about 15% would be A++, and A+, it will be about -- combined, it will be about 15% to 20%. And then A and B will be the bulk of it, and C will be very small.
Yes, understood. And sir, just one last question on the reserve side. So basically, you have started providing some more details on the reserves, how they are moving as per IndAS. And that's been very helpful. So I just needed to understand that last year, which is FY '20, you had a net of INR 1,700 crores of negative reserves coming from the ForEx translation losses, which, of course, because the rupee has appreciated it, that has come down to INR 500 crores. So reserves -- do you account these reserves in the Tier 2 calculations, especially the ForEx reserves, which keeps -- which is very -- generally very volatile during the quarter and especially from...
Ajoyji, I'll ask you -- I'll request you to...
Yes, we do take into account the impact of these reserves in our network. So while...
I'm talking about the Tier 1, sir. Whether do you consider them for Tier 1 because there was a loss of INR 500 crores, which has come down from INR 1,700 crores last year?
Yes, yes. Let me explain to you. As per the ECL method, the loans that we have taken before 1/4/2018, those are spread over the tenure of the loans. The foreign -- ForEx losses that come on those loans are spread over the tenure of the loans. But while calculating a net worth, the Tier 1 capital, as I said, we do take into account the positive or the adverse movements that take place in that account, for loans which are before 1/4/2018. After 1/4/2018, any losses that are coming are automatically taken care of in the profit and loss account. So it is automatically in the tier -- impacts the Tier 1 category. So Tier 1 capital is definitely impacted by ForEx movements.
Yes. So you're carrying like INR 500 crores of negative reserves somehow is -- if you see the breakup of the reserves, you show like minus INR 500 crores of transmission losses in the reserves. So that also you take into account, the Tier 1?
That's right. Absolutely. Any losses -- product losses, we've taken into account in Tier 1 capital.
Okay. And sir, there is a part from because RBDD, you do this reserve for bad and doubtful debt that I think is Tier 2 and not Tier 1. So apart from RBDD, is there any other reserves which you take into account into Tier 2 like 45-IC and all? Are they into Tier 1 or Tier 2 category?
You said, provision for doubtful debt, as you are saying, is not considered for capital at all. They are reduced from the capital. They are straightaway charged to the profit and loss account. So other than that, other than those, there are small provisions that we make for under Section 45-IA of the RBI, 20% of PAT. And for income tax purposes, those are taken generally to be Tier 1 capital. But as per the methodology given, there are some of the provisions and reserves, which are taken to Tier 2 capital as well.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments. Can we please go ahead with...
Yes, Kunal over here. So I would like to thank the entire management team of REC for patiently answering all the questions and giving the detailed explanation. And all the best, sir, for future quarters. And thanks for giving us the opportunity to host you. Thank you.
Thank you to you for hosting us.
Thank you. On behalf of ICICI Securities Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.