"Entities such as PTC India Financial Services Ltd have been attempting to look beyond opportunities in the power sector and create a pan infrastructure portfolio with limited success." (Excerpts from the Report of the Task Force National Infrastructure Pipeline (NIP)of Niti Ayog)
India is the fastest-growing trillion-dollar economy in the world after USA, China, Japan, Germany and United Kingdom, driven by key structural reforms and further reduction in external vulnerabilities. Our GDP growth has been 7.5% in fiscal year (FY) 2022 and expected to grow at 8% in FY2023, supported by increased public investment in infrastructure and a pickup in private investment. Power, roads and bridges, telecommunications, railways, irrigation and urban accounted for ~95% of the infrastructure investment. Centre and states were the major funding sources for power and roads, with participation from the private sector. The infrastructure investment was around ~5.8% of gross domestic product (GDP).
India is on the path to a sustained economic recovery, thanks to the vigorous countrywide drive to deliver safe and wide-reaching COVID-19 vaccinations, which helped reduce the severity of the third pandemic wave with minimal disruptions to mobility and economic activity. The Government of Indias policy to improve logistics infrastructure, incentives to facilitate industrial production, and measures to improve farmers income will support the countrys accelerated recovery. Government of India has retained its focus on fiscal consolidation and implemented structural reforms for further growth in the infrastructure sector in general.
Large public infrastructure investments planned over the next 2 years will encourage more private investment. Together with the PM Gati Shakti initiative to improve Indias logistics infrastructure, increased financial and technical support to states to expand capital investment will boost infrastructure spending and help spur economic growth. The governments production-linked incentive scheme will provide a thrust to the manufacturing sector in coming years.
In Dec 2019, Government of India has envisaged expenditure of Rs 102 Lac Crore on Infrastructure till FY2025 under National Infrastructure Pipeline (NIP). The projects will be implemented in the next five years as part of the governments spending push in the infrastructure sector. To achieve the GDP target of $5 trillion by 2024-25, India needs to spend about $1.4 trillion (Rs. 100 Lakh Crore) over this period on infrastructure. In March 2022, the government has increased the number of projects under NIP from existing from 6,835 to 9,335 projects cumulatively costing ~Rs 132 lakh crore till fiscal 2025, to build infrastructure projects and drive economic growth, energy, roads, railways and urban projects are estimated to account for the bulk of projects (around 70%) etc.
The Governments policy to increase private sector participation, with the Government permitting 100 per cent Foreign Direct Investment (FDI) has proved to be a boon for the infrastructure industry with many private players entering the business through the public-private partnership (PPP) model. Indian infrastructure sector is facing a paradigm shift moving towards timely completion of projects as against the general phenomenon of delay in completion of projects due to the delay in obtaining approval and clearances, lack of co-ordination between various departments and the resultant delay in project completion. The mix of Public Private Participation model is continuously increasing, thereby, increasing confidence, support and investment in the infrastructure sector.
With the aim to achieve a US$ 5 trillion GDP, and to steer the Indian economy for the next 25 years under the aegis of PM Gati-Shakti, infrastructure development shall be key area of capex outlay. The increase in Budget outlay by 35.4% (from INR 5.54 lakh crores to INR 7.50 lakh crores in FY 2022-23) reflects the Governments commitment for economic growth and sustainable development. Out of the above, the government has allocated INR 1 trillion for providing 50-year tenure interest-free loans to the state governments for catalyzing investments which would further lead to creation of infrastructure projects at the local level.
The Report of the Task Force National Infrastructure Pipeline (NIP) expects that out of the total sources of funding for the National Investment pipeline, 15%-17% of the funding is expected to come from the NBFCs and the balance is expected to come from a judicious mix of Centre-State Budget, PSUs, Banks, Equity, Bond markets etc. Capital outlay by Public Sector NBFCs are therefore projected to grow at 12% and the private sector NBFCs are projected to grow at 15% given the lower base. NBFCs have played a crucial role as one of the key contributors to Indias economy by providing a fillip to infrastructure, employment generation, wealth creation and access to financial services for the rural and weaker sections of society. In the last few years, NBFCs have contributed more to infrastructure lending than banks. As Indias economy grows further, requirement for credit is bound to surge, and NBFCs, along with banks, can act as the key credit facilitators, which is likely to give a strong push to the growth and development of the Indian economy. Infrastructure Finance Companies (IFCs) are likely to post 10%-12% loan growth in FY23 on rising credit demand and renewed government efforts to revive public works projects.
In addition to developing world class infrastructure, our country is also committed to meeting its commitments under the Nationally Determined Contributions (NDCs) submitted by countries under the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC) which represent pledges on climate action that seek to limit global warming to well below 2?C, preferably to 1.5 ?C, over pre-industrial levels. Thus a balance between development and growth leading to sustainable development has not only remained a buzzword but has become a modus operandi for many businesses across the globe.
Climate change has today emerged as an unprecedented existential crisis. Emerging countries like India will need greater access to green finance and appropriate green instruments to facilitate this transition particularly to support climate change vulnerabilities. As overwhelming as the challenges are, PFSs unshakable belief that business possesses immense capability to make a transformational contribution has become a driving force behind making sustainability the bedrock of our business strategy, leading towards sustainable and inclusive growth in a unified dimension. PFS has been a carbon positive company for the last decade and is driven by the commitments under the nationally determined contributions. Pursuing a proactive strategy of decarbonization PFS is increasing its renewable energy footprint in answering green infrastructure by scaling up carbon neutral projects and ensuring in all our business verticals. PFS is now scaling up the efforts in E-mobility sector which would enable us to move a step closer towards meeting our Countrys ambitious targets under the NDCs sustainable development goals within the energy, transportation, roads and water treatment projects.
PFS over the years has moved away from the traditional power business of thermal and hydro and built a book around green and sustainable business and other government focused sectors such as ports, transmission, HAR Road projects, etc. The focus will continue to be on green sustainable sunshine sector. While a large part of AUM constitutes renewable and road business, with the advent of new sectors like E-mobility, water management; waste of energy; HAM projects in various sectors including road, water; airports; ports; transmission and many more. Post COVID, with government focus on revival of the economy infrastructure sector will play a pivotal role and we will continue to see huge funding opportunities in this sector in the next few years.
Renewable Energy Sector Outlook
Indias mission to become a $ 5 trillion economy hinges on rapid growth in the energy sector. Energy consumption in the country has almost doubled since 2000 and is set to grow further. This calls for huge investments over the next few years. It also entails segment specific reforms in power generation,
transmission and distribution and storage, to ensure uninterrupted power supply to urban and rural areas and meet the massive infrastructure needs of what may soon become the worlds most populous country. One of the key pillars for the inclusive sustainable growth of the nation is generation of power from renewable sources which is crucial for the economic growth and sustainable development. The Government of Indias focus on attaining ‘Power for all has accelerated capacity addition mainly through renewable sources in the country.
According to the Ministry of Power, Indias power consumption grew 2% YoY at 130.35 billion units (BU) in August 2022 over the same month last year. The level of availability and accessibility of affordable and quality power is also one of the main determinants of the quality of life. India is the third largest producer after China and USA and second largest consumer of electricity in the world and had an installed power capacity of 407.97 GW as of September 2022. India was ranked fourth in wind power, fourth in solar power and fourth in renewable power installed capacity, as of 2021. Electricity demand in the country has increased rapidly and is expected to rise further in the years to come. In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.
Our Country has set up an ambitious target of 280 GW of installed solar capacity by 2030. India is likely to add an estimated 16 GW of renewable energy in FY23, as the country has a strong pipeline of 55 GW clean energy projects. Outlook for capacity addition remains strong due to a large project pipeline and highly competitive tariffs offered by these projects. Commitments made at the COP26 summit such as increasing non-fossil fuel power capacity to 500 GW and meeting 50 percent energy requirement through renewables by 2030, strengthen prospects for the renewable energy sector. There remains large under-development solar, wind and hybrid capacities of more than 55 GW.
Near term challenges include execution headwinds and supply chain challenges for procuring modules and wind turbine generators. The average price of imported solar PV modules (Mono PERC) has increased by over 35 percent over the past 12 months, putting upward pressure on capital costs for solar power projects. Besides this, there was also a hike in Goods and Services Tax (GST) rate for solar power equipment. The availability of adequate funding avenues at cost competitive rates remains critical to achieve these capacity targets.
Government made an additional allocation of INR 19,500 crore in the budget for PLI scheme for domestic manufacture of high efficiency modules (with priority to fully integrated manufacturing units from polysilicon to solar PV modules) which will provide further opportunities for PFS to partner in the sun-shine sector as a credible partner for the overall development of the sector.
Power Transmission Sector Outlook
The countrys power transmission sector has witnessed unprecedented growth in the past five years, with line length and transformer capacity growing at an average annual growth rate of 6.5 per cent and 9.6 per cent, respectively. Further, both operational and financial performances of the transmission utilities have witnessed an improvement in the past few years. Further, Government of India has focused on development of green and dedicated corridor for evacuation of generated power from renewable energy projects. The augmentation of transmission and distribution network capacity is required to meet the generation demand from various sources, which will lead to enough business potential in the sector for PFS in coming years.
Going forward, an estimated Rs 2.6 trillion investment is required in the transmission sector to meet future peak load. The private sector is expected to play an important role in achieving the countrys grid expansion targets as competitive bidding gains momentum at both interstate and intra-state levels. Several grid expansion programmes such as the GEC and cross-border links are underway to expand the physical grid infrastructure. Further, transmission utilities, at the central and state level, are expected to invest significantly in new technologies to make grids more reliable, resilient, secure and smart. The sector is also expected to immensely benefit from major policy reforms including the Electricity Act amendments and the Tariff Policy amendments.
Roads and Highways Sector Outlook
The share of roads sector investment in the overall infrastructure investment was ~17% between fiscals 2019 and 2022, rising at ~19% CAGR. As part of bolstering infrastructure in the country, which aims to become a USD 5 trillion economy in the coming times, building high quality roads and ensuring smooth connectivity is a key priority.
Roads are part of an integrated multimodal system of transport which influences the pace, structure and pattern of economic development. Road provides crucial links to airports, railway stations, ports and other logistical hubs and acts as a catalyst for economic growth by playing a critical role in the supply chain management. India has the second largest road network in the world, spanning a total of 5.89 million kilometres (kms). This road network transports 64.5% of all goods in the country and 90% of Indias total passenger traffic uses road network to commute.
GOI has allocated Rs.1.75 lakhs crores for development of roads in FY 23 budget and the National Highways network to be expanded by 25,000 KM in 2022-23. PM GatiShakti National Master Plan to encompass the engines for economic transformation, seamless multimodal connectivity, and logistics efficiency. Expressways to be augmented in 2022-23 to facilitate faster movement of people and goods.
Sustainability Infra Sector Outlook
Few of the sunshine green sustainable sectors that PFS will additional focus on going forward will include e-mobility, sewage treatment, waste management etc.
E-Mobility : The future of E mobility is set to shift as a result of climatic change, growing fuel prices, and urban transportation issues. To a large extent, e-mobility addresses all of these issues. While the first electric vehicle was launched in India way back in 2001, the fundamental shift from internal combustion engine (ICE) based vehicles to electric vehicles (EV) started only in the last five years. According to NITI Aayog and Rocky Mountain Institute, Indias EV market could touch US$152.2 billion by 2030. Moreover, about 80% of two- and three-wheelers and 50% of the countrys four-wheelers would be electric vehicles. This trend demonstrates an enormous possibility for Financial Institution to look funding of viable projects.
Transportation sector has also been identified as one of the major sectors for local pollution resulting in rise in air pollution. In a move to address the issues of National energy security, vehicular pollution and growth of domestic manufacturing capabilities Government of India unveiled the ‘National Electric Mobility Mission Plan (NEMMP) 2020. The Department of Heavy Industry (DHI) launched Phase-II of the Scheme on 8th March 2019, with the approval of Cabinet with an outlay of Rs. 10,000 crores for a period of 3 years commencing from 1st April 2020. DHI, has approved the sanction of 5,595 electric buses to 64 Cities. PFS has been a pioneer in funding one of the first projects in the electric vehicle public transportation sector by assisting manufacturing and operations of more than 350 e-Buses across 6 major cities in the country. PFS intends to leverage its experience in funding this sun-shine sector by funding more projects leading to reduction in vehicular pollution and sustainable development.
Sewage and Waste water Treatment : The India wastewater treatment plants market stood at USD 2.6 billion in 2020 and is further projected to reach USD 5.3 billion by the year 2027, growing at the CAGR of 10.8% in the forecast period. Indias wastewater treatment plants market is growing rapidly due to stringent government regulations in India and increasing water pollution. Further, NMCG is the Cabinet approved nodal agency has laid out a total outlay of Rs 20,000 Crore for implementing Namami Gange in India for cleaning, rejuvenation, and protection of the river Ganga. A total of 153 sewerage infrastructure projects have been sanctioned in eight (8) States (Uttarakhand, Uttar Pradesh, Bihar, Jharkhand, West Bengal, Delhi, Haryana, and Himachal Pradesh) till date to create/rehabilitate 5065 MLD sewage treatment capacities and Sewer network of 4972 Km at a cost of Rs. 23,305 Crore along Ganga and its tributaries. Out of 153 sewerage infrastructure projects, 56 projects are completed which have created, ~670 MLD sewage treatment capacity and are
presently in operation. There is a budgetary allocation of Rs.65,549 crs in FY 23 under various program of Sewage and Waste water Treatment across India. Solid Waste Management : The Indian waste management market is witnessing a healthy growth rate, owing to the high population density and increased industrial activity, which is generating high amounts of wastes, both hazardous and non-hazardous. Waste Type includes Municipal Solid Waste, Hazardous Waste, E-waste, Plastic Waste, Bio-Medical Waste. The Indian waste management industry offers huge potential, as only 30% of the 75% recyclable waste is being recycled currently. Shortage of proper policies for collection, disposal, and recycling and the lack of efficient infrastructure are few of the many reasons leading to poor waste management in the country. Many companies are coming up with innovative ideas to manage wastes, as well as convert them into valuable resources. While the above sector will be the focus for PFS, the company will continue to look to diversify its portfolio in green and sustainable businesses like green hydrogen etc.
Financial and Operational Performance
In FY 2021-22 the total income decreased by 15% from Rs 1139.45 crore in FY2020-21 to Rs 968.74 crore. However, this got offset significantly by decrease in finance cost by 23% to Rs 581.47 crore as compared to Rs 752.98 crore in FY 2020-21. In FY 20-21, the Spread on earning portfolio has improved to 3% from 2.71% and NIM on earning portfolio has improved from 3.47% to 4.19%. The other expenses decreased by 51.35% to Rs 16.99 crore during FY 2021-22 as compared to Rs 34.92 crore in FY 2020-21, the decrease in provision is due to one-time provision made during the FY 2020-21 amounting to Rs 10.39crore for payment made to YIEDA towards stamp duty for purchase of land. Other income increased by 79% to Rs 15.86 crore during FY 2021-22 compared to Rs 8.88 crore in FY 2020-21. Provision for Impairment on Financial Instruments has decreased to Rs 167.86 crore in FY 2021-22 from Rs 231.84 crore in FY 2020-21.
During the FY 2021-22, with the focused efforts of the management, one NPA loan accounts amounting to Rs. 206.92/- crore were resolved and few loan accounts are on verge of resolution. During the year gross NPAs have decreased from Rs. 824.11 crore to Rs. 724.09 crore and net NPAs have increased from Rs. 313.06 crore to Rs. 386.84 crore. For FY 2021-22, Gross NPA as a % to gross advances was 8.29% and Net NPA as a % to net advances was 4.67% as compared to 7.64% and 3.08% respectively for FY 2020-21. The Company is continuously focusing on resolving the stress assets and the efforts may result in better profitability in coming years. Most of the NPA accounts belong to legacy portfolio primarily comprising of Thermal projects. The Company is shifting its focus on other areas including renewable energy because of which the companys exposure to thermal has reduced to 10% in FY 2021-22 in comparison to 30% as at FY 2015-16.
The profit before tax (PBT) for FY 2021-22 stood at Rs. 173.91 crore compared to Rs. 93.42 crore in FY 2020-21. The profit after tax (PAT) for FY 2021-22 stood at Rs. 129.98 crore against Rs. 25.60 crore in FY 2020-21.
PFSs risk management framework is based on clear understanding of various risks, disciplined risk assessment and measurement procedures and continuous monitoring.
The Board of Directors of PFS has oversight of all risk assumed by PFS with specific committees of the Board constituted to facilitate focussed risk management. There is adequate representation of independent directors in each of these committees. The proceedings and decisions of these Committees are reported to the Board. The policies approved by the Board of Directors or Committees of the Board from time to time constitute the governing framework within which business activities are undertaken.
The hallmark of PFSs Risk Management function is that it is independent of the business sourcing unit with the convergence only at MD level.
The key risks that PFS is exposed to in the course of business are Credit Risk, Market Risk, Liquidity Risk and Operational Risk. These risks not only have a bearing on PFSs financial strength and operations but also its reputation.
PFSs core business is lending, which exposes it to various types of credit risk especially failure in repayments and increase in non-performing loans. PFS measures, monitors and manages credit risk at an individual borrower level and at the portfolio level. In the last few years, PFS has strengthened its credit risk management framework by adopting Early Warning Signal Framework (EWS Framework) and introducing sector specific credit risk grading framework. Further, PFS rigorously adheres to RBI mandated prudential norms on provisioning of stressed assets and has adopted stringent approach in taking aggressive provisioning thereby preserving the shareholder value. During the year, PFS has worked on the resolution of the stressed assets portfolio and has significantly reduced the quantum of stress assets.
Liquidity Risk is the risk that PFS may not be able to meet its short term financial obligation due to an asset liability mismatch or interest rate fluctuation.
PFSs framework for liquidity and interest rate risk management is spelt out in its Asset Liability Management Policy that is implemented, monitored and periodically reviewed by ALCO. ALCO provides guidance for management of liquidity of PFS and the management of interest rate risk within the broad parameters laid down by the Board of Directors/RMC.
There is a risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This could include fraud or other misconduct by employees or outsiders, unauthorised transactions by employees and third parties, misreporting or non-reporting with respect to statutory, legal or regulatory reporting and disclosure obligations, operational errors including clerical and record keeping and system failures.
PFS had Operational Risk Management Policy that covers the system of internal controls, systems and procedures to monitor transactions, key back-up procedures and undertakes regular contingency planning.
Policy for Investment of Surplus Funds
The policy of investment of surplus funds i.e. treasury policy provides the framework for managing investment of surplus funds. Realizing that the purpose of mobilization of resources in the Company is to finance equity as well as loans to power sector projects, the prime focus is to deploy surplus funds with a view to ensure that the capital is not eroded and that surplus funds earn optimal returns.
INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY
The Company has established procedures for an effective internal control. The policies and procedures have been laid down with an objective to provide reasonable assurance that assets of the Company are safeguarded from risks of unauthorised use / disposition and the transactions are recorded and reported with proprietary, accuracy and speed. These aspects are regularly reviewed during internal audit and statutory audit. The Company has also laid down adequate internal financial controls. During the year, such controls were tested and no material weakness in their operating effectiveness was observed. The Finance and Accounts function of the Company is adequately staffed with experienced and qualified personnel. Board of Directors and the Audit Committee review the operational and financial performance of the company at regular intervals.
The Company has a highly committed, loyal and dedicated team. The Company promotes an atmosphere which encourages learning and informal communication within the organisation. The Company is having Performance Management System to objectively measure the performance of the individual and the organization. The overall remuneration structure is linked with such system.
During the unprecedented Covid 19 pandemic, your company has responded positively and instantly according to the guidelines issued by the Central and State Governments. Health of the employees has always been the utmost priority of the Company; hence the Company has successfully conducted the vaccination drive for the employees, their members of family and the stake holders in the premises of the factory. The other required safety norms were followed throughout the company.
Regular employee strength as on 31st March, 2022 stood at Forty Five (45). Changes in Key Financial Ratios
The key changes in financial Ratios are as follows:
|Sl. No. Particulars||2021-22||2020-21||Change in %||Reason of change|
|1 Debt equity ratio||3.14||4.37||-28.15%||Company has prepared its part borrowing out of cash flow generated from prepayment of its loan by borrowers.|
|2 Operating profit margin||16.59%||7.48%||121.79%||Operating profit margin improved on account of the reduction in provision on loan portfolio and capital advance.|
|3 Net profit||12998.48||2560.31%||407.69%||In addition to reduction in provision, company adopted new tax reginee whereby defered tax assets as at March 2022 carried at lower rates and difference charged to Profit & Loss. Thus increasing the overall net profit.|
|4 Return on net worth||5.93%||1.22%||386.07%||On account of above stated reasons, return on net worth improved.|