Rating Rationale
May 15, 2020 | Mumbai
NLC India Limited
 'CRISIL AAA/Stable' assigned to NCD ; Bond Withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.10741 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
 
Rs.3000 Crore Non Convertible Debentures CRISIL AAA/Stable (Assigned)
Rs.600 Crore Bond CRISIL AAA/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating to the non-convertible debentures of NLC India Limited (NLC), while reaffirming its 'CRISIL AAA/Stable' rating on the long-term bank facilities.
 
CRISIL has also withdrawn its rating on the bond programme of Rs 600 crore based on the company's request and on receipt of independent confirmation of its redemption from the trustee, in line with CRISIL's policy on withdrawal of debt instruments.
 
The rating continues to reflect the company's strong business risk profile, backed by healthy operating efficiency, regulated cash flow, and adequate fuel availability for its power plants. The rating also factors in NLC's strategic importance to the Government of India (GoI) and a healthy financial risk profile, driven by a healthy capital structure and liquidity. These strengths are partially offset by exposure to risks related to counterparty and implementation of the ongoing capacity expansion project.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of NLC and its joint ventures (JVs) - NLC Tamil Nadu Power Ltd (NTPL; 89% held by NLC) and Neyveli Uttar Pradesh Power Ltd (NUPPL; 51% held by NLC) - due to the management's stated position of providing complete financial and managerial support to the JVs. Any new acquisition will remain a key rating sensitivity factor.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Strategic importance to GoI: NLC is the nodal agency for lignite mining in India and is backed by its sizeable reserve. The company's plants are a major source of power for South Indian states. The government has granted the 'Navratna'Â? status to NLC and continues to be a dominant shareholder, with a 79.20 % stake in the company. Furthermore, GoI has provided guarantees for NLC's foreign currency borrowings in the past and is expected to continue to provide need-based support.
 
* Regulated cash flow under the classic two-part tariff structure: NLC, on a consolidated basis, owns and operates thermal power plants with combined capacity of 4,490 megawatt (MW), including the 1,000-MW coal-based capacity under NTPL. It has recently commissioned a unit of 500 MW Thermal Power Station (TPS) named Neyveli New Thermal Power Station (NNTPS) and is expected to commission another 500-MW unit soon. All these plants have long-term power purchase agreements (PPAs) with a regulated two-part tariff structure; this ensures recovery of all fixed expenses - including debt obligation'and fixed return on equity based on the achievement of performance benchmarks mandated by Central Electricity Regulatory Commission (CERC). The company also receives revenue from trading sales from one of the units, TPS-I, as the PPA had expired last year. Moreover, owned lignite mines and depreciated plants allow the company to price its power lower than other suppliers in southern India, making it a preferred supplier and adding stability to the cash flow.
 
* Healthy operating efficiency and adequate fuel availability: NLC's ownership of lignite mines mitigates risks related to availability and price of fuel; this has also enabled the company to operate above normative levels for most of its plants despite their vintage status. The captive lignite mines should be sufficient to meet the fuel requirement for about 20 years. Fuel requirement for the coal-based NTPL plant is partly met through a fuel supply agreement with Mahanadi Coalfields Ltd for 3.0 million tonne per annum (mtpa). While 48% of the installed capacity, comprising TPS-II Exp and vintage TPS-I in Neyveli (Tamil Nadu),  operates at reduced efficiency due to technical issues, the newly commissioned unit-I (500 MW) of NNTPS and expected commissioning of the Unit-II (500 MW) in the current fiscal are expected to support the operating efficiency. In addition, the company has recently commissioned Talabira mines of 20 mtpa and will support the upcoming Talabira TPS. In the meanwhile, open sale of coal from the mine will provide additional cash flow.
 
* Healthy financial risk profile: Gearing, on a consolidated basis, is estimated to remain below 2 times as on March 31, 2020 (1.56 times a year earlier) despite ongoing capital expenditure (capex), which is well within the CERC-stipulated norm of 70:30. The company had unutilised fund-based limit of around Rs 1,150 crore as on March 31, 2020. Bank limit utilisation averaged 79% over the 12 months through March 2020.
 
Weaknesses
* Exposure to counterparty risks: Exposure to receivables collection risk persists given the weak credit risk profile of key consumers, which are primarily state distribution companies. Receivables are estimated to be higher in fiscal 2020 compared to 259 days in the previous fiscal. Nearly half the power generated is sold to Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO; the generation and distribution arm of the erstwhile Tamil Nadu Electricity Board). TANGEDCO's credit risk profile was weak, as poor operating performance and absence of periodic tariff revision led to substantial loss from operations. While TANGEDCO is still in the red, its performance has improved due to implementation of the financial restructuring package, increase in tariff, and support from the state government through higher subsidies.
 
TANGEDCO's financial risk profile is also likely to improve, as it has joined the Ujjwal Discom Assurance Yojana, resulting in takeover of part of its debt by the state government and repricing of the remaining debt at low rates. The company started using letters of credit (LCs) as a form of payment security from the previous fiscal and has started discounting the LCs; moreover, the government has recently announced liquidity support of Rs 90,000 crore to the power sector. The final contours of the package are yet to be announced. This is expected to partially ease the counterparty risks. However, timely recovery of receivables will remain a key rating sensitivity factor.
 
* Risks related to implementation of the ongoing capacity expansion projects: Exposure to project implementation risk persists due to the ongoing large capacity expansion programme. The upcoming capacity will be insulated from demand and fuel supply risk due to the long-term PPA and adequate fuel availability. However, the company will face risks related to time and cost overruns (as seen in some of its newly commissioned projects), primarily due to delay in obtaining clearances, supply of equipment, and technical issues during the stabilisation phase. These delays can impact profitability depending on the extent of cost overruns allowed, as a pass-through by CERC.
 
The long-term expansion plan includes development of around 7 gigawatt (GW) of projects on a standalone basis and 1,980 MW through NUPPL, a 51:49 JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd and 5,000 MW in a JV with Coal India Ltd. Besides, there are around 2.8 GW of renewable projects under implementation. Total standalone capex is estimated at around Rs 14,000 crore on a standalone basis and around Rs 9000 crore through JVs until fiscal 2022. Timely commissioning of the projects without cost overrun will remain a key rating sensitivity factor.
Liquidity Strong

The healthy liquidity is reflected in unutilised bank lines of around Rs 1,150 crore as on March 31, 2020. Utilisation of bank limit of Rs 4,000 crore averaged 79% over the 12 months through March 31, 2020. Liquidity (including undrawn bank lines) and expected cash accrual of more than Rs 2,000 crore in fiscal 2021 should adequately cover the debt obligation and meet the funding commitments towards the ongoing projects.

Outlook: Stable

CRISIL believes NLC's business risk profile will remain strong, backed by efficient operations and fuel security (because of its status as a nodal agency for lignite mining in India). Financial risk profile should also remain strong, driven by conservative gearing and healthy liquidity.
 
Rating sensitivity factors
Downward factors
* Any change in the support philosophy of GoI
* Significant weakening in the operating performance of power plants and delays in capex
* Delay in recovery of dues from counterparties, constraining liquidity
* Large, debt-funded acquisition constraining the business and financial risk profiles

About the Company

NLC operates lignite mines and thermal power stations in Neyveli and Barsingsar. It sells power to the state utilities of Tamil Nadu, Rajasthan, Andhra Pradesh, Kerala, Karnataka, and the union territory of Puducherry. The company has four lignite mines and two coal blocks, with combined mining capacity of 50.6 mtpa, and seven thermal power stations, with combined generation capacity of 4,490 MW. In addition, NLC operates a 1,352-MW solar power plant and a 51-MW wind power plant in Tamil Nadu. It was awarded the Navratna status in fiscal 2011. It plans to add around 11.5 GW capacity in the long term through projects in Uttar Pradesh, Rajasthan, Odisha, and Tamil Nadu. GoI has a 79.2 % stake in the company.

For the nine months ending December 2019, NLC reported profit after tax (PAT) of Rs 955 crore on total income of Rs 8,188 crore compared to Rs 1,042 and Rs 7,890 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31  Unit 2019 2018
Operating Income Rs crore 10,616 11,859
Profit after tax (PAT) Rs crore 1,528 1,955
PAT margin % 14.4% 16.5%
Adjusted debt/adjusted networth Times 1.56 1.00
Interest coverage Times 4.66 8.40

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)
Rating assigned with outlook
NA Cash credit*# NA NA NA 4000 CRISIL AAA/Stable
NA Letter of credit and bank guarantee# NA NA NA 1000 CRISIL AAA/Stable
NA Proposed long-term bank loan facility NA NA NA 3741 CRISIL AAA/Stable
NA Term loan NA NA June-2022 2000 CRISIL AAA/Stable
NA Non-convertible debentures NA NA NA 3000 CRISIL AAA/Stable
INE589A07029 Bonds Jan-2009 NA Jan-2019 600 Withdrawn
#100% Two-way interchangeability between fund-based working capital and non-fund-based working capital
*Full interchangeability with working capital demand loan
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
NLC Tamil Nadu Power Ltd Full Strong managerial, operational, and financial linkages
Neyveli Uttar Pradesh Power Ltd Full Strong managerial, operational, and financial linkages
MNH Shakti Ltd Equity method Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  0.00
15-05-20 
Withdrawn     27-09-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
            08-04-19  CRISIL AAA/Stable      19-05-17  CRISIL AAA/Stable   
            06-03-19  CRISIL AAA/Stable      31-03-17  CRISIL AAA/Stable   
Non Convertible Debentures  LT  3000.00
15-05-20 
CRISIL AAA/Stable    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  9741.00  CRISIL AAA/Stable      27-09-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
            08-04-19  CRISIL AAA/Stable      19-05-17  CRISIL AAA/Stable   
            06-03-19  CRISIL AAA/Stable      31-03-17  CRISIL AAA/Stable   
Non Fund-based Bank Facilities  LT/ST  1000.00  CRISIL AAA/Stable      27-09-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable  -- 
            08-04-19  CRISIL AAA/Stable      19-05-17  CRISIL AAA/Stable   
            06-03-19  CRISIL AAA/Stable      31-03-17  CRISIL AAA/Stable   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit*# 4000 CRISIL AAA/Stable Cash Credit*# 4000 CRISIL AAA/Stable
Letter of credit & Bank Guarantee# 1000 CRISIL AAA/Stable Letter of credit & Bank Guarantee# 1000 CRISIL AAA/Stable
Proposed Long Term Bank Loan Facility 3741 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility 3741 CRISIL AAA/Stable
Term Loan 2000 CRISIL AAA/Stable Term Loan 2000 CRISIL AAA/Stable
Total 10741 -- Total 10741 --
#100% two way Interchangeability between Fund based Working Capital and Non fund based Working Capital
*Full interchangeability with working capital demand loan
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Power Generation Utilities
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
The Rating Process

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