CRISIL has assigned its ‘AAA/Stable’ rating to Rural Electrification Corporation Ltd’s (REC’s) Rs.255-billion long-term borrowing programme, while reaffirming the ratings on the other debt programmes at ‘AAA/Stable/P1+’.

The ratings continue to reflect REC’s strategic importance to, and majority ownership by, the Government of India (GoI) because of its key role in financing the Indian power sector. The ratings also continue to reflect REC’s sound resource profile, and comfortable capitalisation and profitability. These rating strengths are partially offset by the company’s significant customer concentration and exposure to a single sector.

REC is strategically important to GoI because it is the nodal agency for channeling finance towards GoI’s rural electrification programme carried out under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The company also plays a developmental role in channelling finance to meet the power sector’s large funding requirements. GoI supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax exemption bonds. CRISIL believes that GoI has strong strategic reason and moral obligation to extend support to REC, both on an ongoing basis and in the event of distress, given REC’s role in implementing GoI’s power sector policies and GoI’s majority ownership in the company (66.8 per cent as on March 31, 2011).

REC’s credit risk profile is supported by its sound resource profile, with competitive borrowing costs and a diversified, albeit wholesale, resource base. Its cost of borrowings is better than that of its peers; REC’s borrowing cost was around 7.9 per cent (on an annualised basis) for the first nine months of 2010-11 (refers to financial year, April 1 to March 31; 7.8 per cent for 2009-10). REC’s capitalisation remains comfortable, thereby providing cushion against asset-side risks arising from its high sectoral and customer concentration. Its absolute net worth was Rs.125.5 billion as on December 31, 2010. The company’s capitalisation is supported by healthy accruals, as reflected in its return on net worth ratio of around 21 per cent (on an annualised basis) during the nine months ended December 2010 (23.2 per cent in 2009-10). REC raised Rs.26.28 billion through a follow-on public offer in February 2010, which will support its growth plans, while it maintains its adequate gearing over the medium term. REC’s comfortable profitability is supported by its ability to maintain healthy interest spreads and low operating expenses ratio. This is reflected in its return on assets ratio of 3.5 per cent (on an annualised basis) during the first nine months of 2010-11 (3.4 per cent in 2009-10).

However, REC caters only to the power sector, with more than 85 per cent of its advances to state electricity boards (SEBs) as on December 31, 2010. REC’s top 10 customers accounted for about 46 per cent of its advances as on December 31, 2010. REC’s customers, primarily SEBs, have weak inherent asset quality because of their poor financial risk profiles. The aggregate losses (excluding subsidy) of all the state power utilities were around Rs.526 billion in 2008-09 and is estimated to have increased over the past two years. While REC has taken various measures, including exposure limits and increased lending to generation projects (which have relatively lower risks than transmission and distribution projects) to mitigate the impact of asset side risks, these measures only partially offset the risks, as its sectoral concentration remains and the SEBs’ financial risk profiles remain weak. REC has also increased its quantum of lending to private players to diversify its customer profile. However, given the long gestation period of the projects, and uncertainities related to regulatory clearances, fuel linkages, and financial closure, CRISIL believes that REC will reap the benefits of financing private power sector projects only over the long-term.

Outlook: Stable
CRISIL believes that REC will continue to benefit from GoI’s support, given REC’s strategic role in the implementation of GoI’s power sector initiatives and majority ownership in the company. REC is also likely to maintain its comfortable capitalisation and earnings. The outlook may be revised to ‘Negative’ if there is a decline in REC’s strategic importance to, or support from, GoI. The outlook may also be revised to ‘Negative’ if REC’s asset quality, or profitability, deteriorates significantly.

About the Company
REC is a public financial institution under the administrative control of the Ministry of Power (MoP), GoI. Until 2003, REC’s primary objective was to provide financial assistance on concession to SEBs for rural electrification. REC’s mandate was broadened in 2003 to include financing of all segments of the power sector; REC finances generation projects, including independent power projects (IPPs). It was conferred the Navratna status in 2008-09, giving it more financial and administrative autonomy.

For 2009-10, REC reported a total income (net of interest expense) and a profit after tax (PAT) of Rs.27.97 billion and Rs.20.0 billion respectively, against Rs.20.34 billion and Rs.12.72 billion respectively for 2008-09. For the nine months ended December 31, 2010, REC reported a total income (net of interest expense) and a PAT of Rs.26.4 billion and Rs.18.7 billion respectively, compared with Rs.20.0 billion and Rs.14.4 billion respectively for the corresponding period of the previous year.