Rating Rationale
October 29, 2021 | Mumbai
Nabha Power Limited
Rating Reaffirmed
 
Rating Action
Rs.2300 Crore (Reduced from Rs.4000 Crore) Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper (CP) programme of Nabha Power Limited (NPL) and withdrawn its rating on commercial paper of Rs 1,700 crore at the request of the company. The rating action is in line with the CRISIL Ratings policy on withdrawal of ratings.

 

The rating continues to reflect the long-term cash flow visibility for NPL through availability-based tariff structure, fully contracted capacity and requisite fuel supply agreements. The rating also factors in the strong financial and management support from the ultimate parent, Larsen and Toubro Ltd (L&T; ‘CRISIL AAA/Stable/FAAA/CRISIL A1+’), and the high moral obligation of L&T given its letter of comfort for the commercial paper programme and corporate guarantee for the non-convertible debentures (NCDs) of NPL.

 

These strengths are partially offset by modest returns due to pending resolution of legacy disputed dues and weak credit risk profile of the counterparty.

 

The cumulative plant availability factor (PAF) in fiscal 2021 was above the normative level of 85% resulting in full recovery of capacity charges. The company reduced debt from Rs 7,221 crore as of March 2020 to Rs 6,769 crore in March 2021 and to Rs 5,450 crore by September 2021, led by recovery of pending coal washing charges of Rs 1,126 crore from Punjab State Power Corporation Ltd (PSPCL) as well as healthy cash accrual.

 

In the first half of this fiscal, the cumulative availability was 99.94% and load factor averaged 87%. Domestic coal availability improved starting fiscal 2021 led by better mining throughput resulting in nil coal import till September 2021. Although NPL’s coal stock has reduced to 3-5 days from the normal level of 30-40 days as an extended monsoon impacted production and offtake by Coal India Ltd, it is expected to stabilise going forward.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support available from the ultimate parent, L&T.

Key Rating Drivers & Detailed Description

Strengths

  • Low offtake and fuel supply risk, and availability-based tariff structure that provides cash flow visibility: The company has tied up its total capacity of 1,320 megawatt (MW) through a long-term power purchase agreement (PPA) of 25 years with PSPCL under a classic two-part tariff structure, wherein recovery of capacity charges (quoted at the time of bidding) is allowed if PAF of over 85% is maintained each year while energy charges are completely pass-through. This provides strong cash flow visibility over the project life. The company has a track record of maintaining plant availability above the normative level since commissioning, thereby enabling it to recover fixed capacity charges as per the PPA. Besides, it has a fuel supply agreement with South Eastern Coalfields Ltd for 20 years, leading to low fuel supply risk.

 

  • Healthy debt service coverage ratio (DSCR): The average DSCR over the life of the PPA has improved considerably following significant debt reduction over the past year. Furthermore, the cash flows are cushioned by return accretive flue gas desulphurization (FGD) capex project and stable income from fly ash which is sold through medium-term contracts. The project is funded through short- and medium-term debt and the long remaining life of PPA and stable cash flow mitigate the refinancing risk.

 

  • Strong financial and management support from L&T: The treasury is actively managed by L&T, which has extended a guarantee for the NCDs and letters of comfort for the commercial paper issuance of NPL. L&T has been looking to sell its stake in NPL as it seeks to exit capital-intensive developmental projects. Nevertheless, given its high moral obligation towards meeting debt obligation, L&T should continue to support NPL over the medium term. Any change in this stance will be a key rating sensitivity factor.

 

Weaknesses:

  • Modest project returns due to tariff under-recovery: L&T was awarded the project by Punjab State Electricity Board (PSEB) under the Case-II competitive bidding guidelines of the Government of India. However, the returns from the project have been modest due to i) under-recovery of fixed tariff stemming from pending resolution of the dispute pertaining to mega power status scheme, ii) additional cost incurred on railway sidings work to realign the track route, iii) deduction of capacity charges pertaining to April and May 2021 on force majeure invocation by PSPCL, iv) fuel cost under-recovery owing to higher than quoted station heating rate (SHR).

 

Favourable outcomes on these disputes can improve project returns and remain key monitorables.

 

  • Exposure to counterparty risks: The offtake risk is low as the plant is placed favourably on the merit order dispatch (MOD) due to low cost of power among the thermal power stations in Punjab. However, NPL faces the risk of delayed payments by the counterparty as most distribution companies in the country, including PSPCL, have weak financial risk profiles because the average revenue realised per unit is lower than the average cost of supply because of higher aggregate technical & commercial (AT&C) losses. PSPCL has been clearing the monthly undisputed billings in 30-45 days and earns a rebate of around 1% as per the PPA provision. Nonetheless, NPL remains exposed to the risk of delayed payments.

Liquidity: Strong

Liquidity is strong on account of need-based support from the ultimate parent, L&T. Net cash accrual in fiscal 2022 is expected at Rs 250-300 crore against nil term debt obligation. Furthermore, the company is able to refinance its maturing debt being a part of L&T.

Rating Sensitivity factors

Downward factors:

  • Weakening of the credit risk profile of L&T
  • Any change in the stance of support by L&T
  • PAF sustaining below the normative level of 85%

About the Company

NPL is a special purpose vehicle formed by PSEB to develop a super-critical coal-based thermal power project in Rajpura, Punjab. Bid documents were floated by PSEB in line with the Case-II competitive bidding guidelines of the Government of India. L&T Power Development Ltd (L&T PDL), a 100% subsidiary of L&T, was identified as the lowest bidder and a letter of intent was awarded to L&T PDL in November 2009 to set up the power plant on a build, own, operate basis. The ownership of NPL was transferred to L&T PDL and a long-term PPA of 25 years was signed with PSEB for 1,320 MW capacity on January 18, 2010. The cost of the project was Rs 9,900 crore and units 1 and 2 commenced commercial operations in February 2014 and July 2014, respectively.

Key Financial Indicators– Standalone (Reported)

As on / for the period ended March 31

 

2021

2020

Operating Income

Rs crore

3,398.40

3,780.44

Profit after tax (PAT)

Rs crore

163.86

246.54

PAT margin

%

4.82

6.43

Debt/adjusted networth

Times

1.85

2.06

Interest coverage

Times

1.55

1.42

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

Complexity

level

Rating assigned

with outlook

NA

Commercial Paper

NA

NA

7-365 days

2300

Simple

CRISIL A1+

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper ST 2300.0 CRISIL A1+   -- 28-10-20 CRISIL A1+ 30-10-19 CRISIL A1+ 29-10-18 CRISIL A1+ CRISIL A1+
All amounts are in Rs.Cr.

      

Criteria Details
Links to related criteria
Rating Criteria for Power Generation Utilities
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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