Rating Rationale
September 27, 2019 | Mumbai
NLC India Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.10741 Crore
Long Term Rating CRISIL AAA/Stable
 
Rs.600 Crore Bond CRISIL AAA/Stable
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL rating on the long-term bank facilities and bond programme of NLC India Limited (NLC) 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 strategic importance of the company to Government of India (GoI), along with NLC's strong financial risk profile, driven by healthy capital structure and liquidity. These strengths are partially offset by exposure to counterparty risks, and to risks related to 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 - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Strategic importance to the Indian government: NLC is the nodal agency for lignite mining in India, backed by its sizeable reserves. The company's plants are a major source of power for South India. The government has granted the Navratna status to NLC, and continues to be dominant shareholder with 82.8% stake in the company. Furthermore, GoI has provided guarantees for NLC's foreign currency borrowings in the past, and is expected to continue providing 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 4,240 megawatt (MW), including the 1,000-MW coal-based capacity under NTPL, commissioned in August 2015. All the 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). Moreover, the owned lignite mines and depreciated plants allow the company to price its power lower than other suppliers in southern India, which makes it the preferred supplier and adds stability to cash flow.
 
* Healthy operating efficiency and adequate fuel availability: NLC's ownership of lignite mines mitigates risks related to availability and price of fuel; it 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 met partly through a 3.0-million-tonne-per-annum (mtpa) fuel supply agreement with Mahanadi Coal fields, and through imports. However, for 31% of the installed capacity'including TPS-II and the vintage TPS-I in Neyveli (Tamil Nadu), and the Barsingsar plant in Rajasthan' operating efficiency is expected to remain subdued over the near term due to technical issues.
 
* Strong financial risk profile, driven by healthy capital structure and liquidity: Gearing, on a consolidated basis, stood at 1.00 time as on March 31, 2018 (0.96 time as on March 31, 2017), despite the ongoing capex, and remains well within the CERC-stipulated norm of 70:30. Liquidity was healthy, with cash and cash equivalents of Rs 360 crore as on September 30, 2018, and bank limit of Rs 2,200 crore, (average utulisation of 30% in the 12 months ending September 30, 2018). Buyback of 9.28% shares in November 2018, was funded through the internal accrual. Comfortable liquidity (including undrawn bank lines) and steady accrual should continue to provide coverage for debt obligation, besides meeting the funding commitment towards the ongoing projects.
 
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 (discoms). Receivables rose to 210 days as on March 31, 2018, from 199 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 remaining debt at low rates. Nevertheless, NLC will remain exposed to counterparty risk, and therefore, timely recovery of receivables will continue to be 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, owing to the long-term PPA and adequate fuel availability. However, the company will face risks relating to time and cost overruns (as seen in some of its newly commissioned projects), primarily due to delay in obtaining clearances and 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 4,720 MW of projects on a standalone basis, and 1,980 MW through NUPPL, a 51:49 JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, entailing capital expenditure (capex) of Rs 51,000 crore. Besides, there are over 1,200 MW of renewable projects under implementation. Total annual capex is estimated to be around Rs 7,000 crore till fiscal 2020. While NLC has sufficient cash accrual and liquidity to fund its equity contribution for the proposed expansion, timely commissioning of the projects without any cost overrun and higher-than-expected capex will remain key rating sensitivity factors.
 
Liquidity: Strong
NLC generates healthy cash accrual. Consolidated accrual of Rs 2,410 crore in fiscal 2018 (Rs 1,911 crore in the previous year) sufficed to cover the maturing debt of around Rs 817 crore. Bank limit (sanctioned limit of Rs 2200 crore) utilisation averaged 30% in the 12 months ended September 30, 2018. Cash and bank balance outstanding as on September 30, 2018 was Rs 360 crore.
Outlook: Stable

CRISIL believes NLC's business risk profile should remain strong over the medium term, 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
Downside Scenario
* Change in the ownership by Government of India resulting in its shareholding falling below 50%
* Delay in recovery of dues from counterparties, constraining liquidity
* Significant cost and time overruns in expansion projects
* Large debt-funded acquisition, constraining 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 mines, with combined mining capacity of 30.6 mtpa of lignite, and six thermal power stations, with combined generation capacity of 4,240 MW. In addition, NLC operates a 10-MW solar power plant, and 25.5-MW wind power plant in Tamil Nadu. NLC was awarded the Navratna status in fiscal 2011. It plans to add 6,771 MW capacity over the long term through projects in Uttar Pradesh, Rajasthan, and Tamil Nadu. GoI has 82.8% stake in the company.

Key Financial Indicators - (CRISIL Adjusted)
As on/for the period ended March 31   2019 2018
Revenue Rs crore 10616 11,859
Profit after tax (PAT) Rs crore 1528 1,955
PAT margin % 14.4% 16.5%
Adjusted debt/adjusted networth Times 2.00 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 & 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 Jun-22 2000 CRISIL AAA/Stable
#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 Limited Full Strong managerial, operational, and financial linkages
Neyveli Uttar Pradesh Power Limited Full Strong managerial, operational, and financial linkages
MNH Shakti Limited Equity method Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  0.00
27-09-19 
CRISIL AAA/Stable  08-04-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable  29-12-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
        06-03-19  CRISIL AAA/Stable      19-05-17  CRISIL AAA/Stable  06-01-16  CRISIL AAA/Stable   
                31-03-17  CRISIL AAA/Stable       
Fund-based Bank Facilities  LT/ST  9741.00  CRISIL AAA/Stable  08-04-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable  29-12-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
        06-03-19  CRISIL AAA/Stable      19-05-17  CRISIL AAA/Stable  06-01-16  CRISIL AAA/Stable   
                31-03-17  CRISIL AAA/Stable       
Non Fund-based Bank Facilities  LT/ST  1000.00  CRISIL AAA/Stable  08-04-19  CRISIL AAA/Stable  28-11-18  CRISIL AAA/Stable  08-11-17  CRISIL AAA/Stable    --  -- 
        06-03-19  CRISIL AAA/Stable      19-05-17  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 2200 CRISIL AAA/Stable
Letter of credit & Bank Guarantee# 1000 CRISIL AAA/Stable Letter of credit & Bank Guarantee 800 CRISIL AAA/Stable
Proposed Long Term Bank Loan Facility 3741 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility 5741 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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