Power sector seeing major transformation; renewables space looks interesting: REC
The company has lowest stress in the power financing sector compared to its peers, said PV Ramesh, CMD, REC. With the improved outlook of the power sector, most the power generation and power finance companies are in focus. Rural Electrification Corporation (REC), which is a leading public infrastructure finance company has seen improvement in valuations and is currently trading at 52 weeks high. PV Ramesh, CMD of the company is very confident of the business outlook going forward with major transformation seen in the power sector and with signs of improvement in power consumption. He said the Ujwal Discom Assurance Yojana (UDAY) scheme is having a positive impact on the health of power distribution (Discoms) companies.
The company finances and promotes rural electrification projects across India. Going forward the company intends to diversify from financing only power generators & transmission to other segments in the power sector. Renewables is another interesting space, especially with the government having plans of doing 175 gigabytes (GB) of renewables over the next 5 years out of which 100 GB would be from solar, Ramesh told CNBC-TV18?s guest editor, Adrian Mowat, MD, Chief Asian & EM Equity Strategist at JPMorgan., Renewables have grown 75 percent in the last 18 months, he said, adding that the company is closely watching the changing technology and demand for renewables with an eye on investments. They would accordingly price and invest in the space, he said.
When asked about stressed assets, he said the company has made conscious efforts to work with co-lenders and clients to make sure that stress assets are de-stressed, they are standardised and no asset become stressed. The company has the lowest stress in the power financing sector compared to its peers, said Ramesh.
Below is the transcript of the interview
Sonia: What is your view on the power sector as a whole, what kind of improvement have you seen in terms of demand, etc. over the last three to six months?
A: As I have said before and continue to say and these are perhaps the most exciting times for the power sector and you are seeing a major transformation. On the generation front, we are growing at a CAGR of 8.9 percent. This is despite a massive improvement in energy saving. The power consumption is showing clear signs of increase.
Ujwal DISCOM Assurance Yojana (UDAY) in last nine months itself is showing a significant impact on the discom health. Renewables have grown in the past 1.5 years at the rate of nearly 74 percent. So, we are seeing a massive up surge in the power sector across the value chain, across the spectrum. So, these are very interesting times for the power sector.
Adrian: I wanted to follow up on the renewable story. 74 percent growth obviously from quite a modest base, as a finance company, how do you view the economics of renewables in India whether that be solar or wind?
A: This is a new arena, but nevertheless, we are the third most preferred nation in terms of renewables. As you know, the government?s ambition is to add 175 gigawatt of renewables within the next five years of which 100 gigawatts would come from the solar. Naturally there is a lot of competition, the technology is changing, there are new innovations that are taking place.
So, we are closely watching all these different transformations that are taking place on the renewable spectrum, and that specially includes the technology, the cost, and the demand. So, we will price ourselves and we will invest accordingly. This is an interesting time, perhaps the most interesting time ever for the renewable sector and especially in our country.
Latha: I wanted to ask you about stress, for most of the banks, power is a stress point. The last number, Q3 number, did indicate that your aggregate stress has come down, your GNPA figure came down. Can we expect that in Q4, are you seeing this as a theme now?
A: As the general trend, if you look at the power financing spectrum, we have the lowest stress among all our peers and that is very evident. We are making very conscious efforts to work with co-lenders and also with the clients to see that the stressed assets are de-stressed, they are standardised, and that no asset becomes an NPA.
So, we are working relentlessly on that front. We will see that as far as stressed assets are concerned, they are managed well and they are not stressed on our books.
Latha: What I am saying is, is it bearing fruit? You came down from I think about Rs 4,800 crore to Rs 4,600 crore, will it be Rs 4,000 crore now and lower?
A: I can?t get into specifics but I can tell you that we are doing well. We have recently — one of those large hydro projects that was classified as NPA has now become a standard asset and that is a trend that it is continuing and it will continue. We are putting a lot focus on that.
Adrian: If we look at these projects that have gone from non-performing back to standard, what has happened that has achieved that positive transformation?
A: In this sense, facilitating the promoter, the client to accelerate the project execution, we are putting a lot of efforts in project management support so that these projects move forward. We are also looking at what really is stressing each of these projects and finding solutions along with our co-lenders.
In most of these, we are one of the several others in the business, so, there is a positive change, change for the better, change that will result in quick commissioning of these projects.
Latha: What about loan growth, last quarter that was the big disappointment of your numbers. Your loan growth fell, your NII fell, can you now report in Q4 and in FY18, you have the confidence of growth and by how much?
A: Let me say this much that we have got a remittance back of nearly Rs 44,000 crore from UDAY prepayment. Now this was obviously not expected, notwithstanding the massive inflows but back from the discoms. Our loan book is higher than what it was last year. It has grown marginally higher which basically shows our disbursements have been fairly high.
So, we propose to continue to retain this robust growth both in terms of the loan book, disbursement and the quality of the asset. So I have absolutely no doubt on our ability to perform far better, both in Q4 and also in the coming year. We have been demonstrating a consistent growth.
Sonia: Just coming back to the number you were telling us about the UDAY repayment. What is the portion of the repayments that have happened so far and what are pending?
A: UDAY prepayment actually closed. We had an exposure to all discoms, put together about Rs 78,000 crore. Some states have chosen not to prepay because they felt the discoms are in fairly good health. So, they had basically taken on board the parameters for operational efficiency improvement which is very important in terms of reducing AT&C losses.
So, we have got back whatever the states had to give back or the discoms had to prepay these 75 percent that is Rs 44,000 crore notwithstanding that our loan book continues to grow.