Expect bottom line to grow 15-20% in FY13: REC

State run power company Rural Electrification Corporation (REC) has received finance ministry’s nod to garner USD 1 billion through optionally convertible foreign currency convertible bonds (FCCBs).

“The Ministry of power is sending the proposal to the department of economic affairs, after that it will go to the cabinet. The response is very good,” HD Khunteta, director finance, REC told CNBC-TV18. The investors will have an option to convert these bonds into shares within a period of five years and the premium is expected to be in the range of 25% to 35%, he added. Meanwhile, the company posted its highest ever quarterly profit of Rs 762 crore in Q4 and it aims to boost its bottom line by 15-20% in FY13. Below is the edited transcript of Khunteta’s interview with CNBC-TV18. Also watch the accompanying videos. Q: You are making an FCCB issue, give us an idea of what kind of yields or price you will have to pay for that money? Is risk cover getting a little expensive? We get statements that European banks are extremely cagey they are not lending to anybody; there is almost a close door policy over there? A: We have discussed with a number of banks and the yield to the maturity will be around 2% to 2.25%. A number of bankers are ready to give the hard underwriting also so there is a lot of confusion amongst the banks for FCCB. At present the status is that the finance ministry has given no objection on USD 1 billion issue. Ministry of power is sending the proposal to the department of economic affairs, after that it will go to the cabinet. All the procedures and the initiative will be taken only after getting the approval of the cabinet. The response is very good. Q: What is it likely to be, is it an NCD or an FCCB? A: This is an FCCB that is the optionally convertible foreign currency bonds and the investor will have an option to convert into a share within a period of five years and the premium maybe decided after discussion with the bankers. It may be in the range of 25% to 35%. But when we send the proposal we have taken the price of around Rs 210, so it may be converted around Rs 260-Rs 270. But, now the market is on the downward side so we will come up with it when the conditions are favourable. Q: Approximately on a fully hedged basis what will the cost come to? A: On a fully hedged basis the cost will be at around 8% or 8.5% which is much better compared to the bond issue or the syndicated loan. But, we hope that whenever the sentiment in power sector becomes positive investor will prefer to convert into shares. Q: You restructured Rs 11,000 crore, which is around 10% of your outstanding loan book in the previous quarter. How exactly the restructuring process is panning out in this quarter and where are the key sectors that you would be possibly restructuring in? A: First it is not restructuring, it is reschedulement of loan, it is mainly Bhusawal project of Maharashtra and two more projects in UP and Tamil Nadu. The commissioning has been delayed by one year, so the principal repayment of the loan has been deferred by one year, but we are getting the payment of interest on due date. Q: You don’t have to provide extra if you reschedule? A: There is no need because there is no loss of interest to the company. We are charging the interest as per our policy, that is around 12.25% to 12.50%. They are making the payment of interest on due date. There is no deferment of interest payment that is a point. The delay in commissioning is on account of delay of supply of equipments by BHEL. There is a lot of difference between restructuring and reschedulement. Company has not lost any money on account of this reschedulement only the repayment period has been increased by one year. Q: The other key point which was brought up by a lot of brokerages post your earnings was that there was a strong, increase in disbursements but there wasn’t an incremental increase in sanctions or there wasn’t a parallel increase as much in sanctions as in disbursements, what is the trend that we are seeing and what is the reason why we are seeing this disparity taking place in REC? A: Last year sanctions were Rs 50,000 crore compared to corresponding period sanctions of Rs 65,000 crore. We were having proposals of more than Rs 15,000 crore in hand and that has been approved in April and May this year. Our outstanding sanctions are more than Rs 1,40,000 crore so that will take care of future growth. The growth in the disbursement will be in the range of 15% to 20%. Even in April-May, disbursement growth is 20% against Rs 2,500 crore, so we have already crossed around Rs 3,000 crore. Our loan book is growing and that is more important because interest income is coming from that. As far as our net interest margin is concerned, we are able to sustain that. In the last year, it was around 3.312% which is more or less at the same level as previous year. Net interest margin is also more than 430 bps, this this is achieved inspite of the fact that no income has been recognized on the NPAs of around Rs 500 crore. Even then we have been able to sustain the net interest margins. _PAGEBREAK_ Q: I just one more word on this rescheduling of loans – does it not reduce the quality of the loan in any fashion. You don’t have to make any extra provisioning. After all you are deferring or you are increasing the length of the loans. It has no impact at all on the P/L? A: We have the system of reseting of interest after every three years so there is no loss of interest. The only point is that if collection would have come then loan would have given to another borrower. Here the repayment has been enhanced by one year, so there is no loss. Q: How is the NPA situation anyway? Is it likely that you are going to see an increase in NPLs, what was the situation in the previous quarter and how do you see it in the current quarter? A: Whatever NPAs were there in Q3 remain in Q4 also. I am hopeful that in Q1 of this year, it should remain in the same level although there are some defaults by UP or Tamil Nadu, but we are hopeful that they will be able to make the payment before two quarters.  Similarly, in case of some private sector project like Everest Malana – II, they have defaulted for one quarter. But we are hopeful that they will be in a position to make the payment before June 30. Out of 94 projects, you have to consider that for four-five projects there maybe some delay. Q: What is the amount involved in these three that you have mentioned? A: For the Everest Malana – II project the amount is around Rs 18-19 crore. For UP and Tamil Nadu, the amount maybe around Rs 400-500 crore. Q: What will be the amount that will get into NPL if they don’t pay, what is the principal? A: The impact maybe around Rs 50 crore. But I am totally confident that before June 30 we will be able to get the payment. At the same time, we are also going for underwriting, so we are trying to increase fees based income. In any case that will also compensate that, but quality of assets is a major criteria for us. So we are trying to keep the assets as standard assets, so there may not be any need to provide for the provisioning. Q: Is that why your sanctions are so cautious because you are worried about asset quality? A: We are sanctioning only those projects which either own the mines or have clear linkage of coal because fuel is the major issue so without that we don’t disperse. Simply sanction of the loan does not give the right to take the money. We put number of pre-disbursement condition like signing of the power projects agreement, signing of the future price agreement, environment clearance, forest clearance, arrangement of water. Unless they comply with all these conditions, we do not disperse the money so through that we are trying to mitigate the risk. Q: You said that you are trying to increase fee based income by underwriting how much does fee based income rise in this quarter or in this year – is there a target how much will fee income be? A: This quarter we have a target to have Rs 35 crore as fee based income through our underwriting. Q: You posted your highest ever quarterly profit in Q4 Rs 762 crore can be better that in FY13? A: We are hopeful . Q: Any sort of guidance you can leave us with possibly on the top-line? A: The growth maybe around 10% to 15%. We should not say more than. Now the base is very high. We have to consider the market conditions and the problems that power sector is facing. Looking at that there maybe need to make the provisioning of around Rs 40-50 crore so that aspect has to be considered. Q: 10-15% is earnings or bottom-line? A: Bottom-line growth will be around 10%-15%.