Power Finance Corporation Limited Ratings Reaffirmed
Rating Action
^Borrowing programme for fiscal 2023 (refers to financial year, April 1 to March 31). The overall limit for the long-term borrowing programme and the short-term borrowing programme is Rs 82,000 crore. The long-term borrowing programme inter-alia includes tax-free bonds under Section 10 of the Income Tax Act. Total incremental long-term borrowing and short-term borrowings not to exceed Rs 70,000 crore and Rs 12,000 crore, respectively, at any point in time during fiscal 2023. @ Borrowing programme for 2021-22 ~Borrowing programme for previous fiscals # This amount excludes long-term borrowing programmes for fiscals 2021, 2022 and 2023, which are listed separately in the rows above. However, the amount includes Rs 5,000 crore of extra budgetary resources to be raised on behalf of the Ministry of Power. & Limit for working capital demand loan/overdraft facility/cash credit/line of credit/bank guarantee. Total working capital borrowing not to exceed board-approved limit of Rs 10,000 crore. However, quantum of sanctioned working capital facilities may be different from the Board-approved limit for outstanding working capital borrowing. Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings to the debt instruments of Power Finance Corporation Limited (PFC).
CRISIL Ratings has withdrawn its rating on bonds worth Rs 24,491.5 crore (See ‘Annexure: Details of rating withdrawn’ for details) and short-term borrowing programme (fiscal 2022) of Rs 20,000 crore on the company's request as the outstanding against the same is nil and on receipt of confirmation from the debenture trustee. The withdrawal is in line with the policy of CRISIL Ratings.
Government of India (GoI) had announced, Revamped Distribution Sector Scheme (RDSS) reforms-based and results-linked scheme with an outlay of 3.04 lakh crore over a period of five years, which would be available till fiscal 2026. REC Ltd (REC) and PFC have been appointed as nodal lending agencies for facilitating the implementation of this scheme. The scheme aims to improve operational efficiencies and financial sustainability of distribution companies (discoms) by providing reform-linked financial assistance for strengthening the supply. In fiscal 2022, GoI announced late payment surcharge scheme to address dues of discoms to generation and transmission companies. PFC has extended financial assistance to various discoms under the rules, to clear their outstanding dues. PFC shall also act as the nodal agency to monitor implementation of these rules.
The consolidated asset quality improved in the first half of fiscal 2023, led by recoveries in large delinquent private sector exposures. On a consolidated basis, gross non-performing assets (NPAs) and net NPAs were lower at 4.4% and 1.3%, respectively, as on September 30, 2022, versus 5.0% and 1.6% on March 31, 2022. On a standalone basis, gross NPAs and net NPAs stood at 4.8% and 1.3%, respectively, as on September 30, 2022 as against 5.6% and 1.8% on March 31, 2022, (5.7% and 2.1% on March 31, 2021). Most of the NPA accounts are under a resolution process/or at advanced stages of resolution. Further, with most of the stress in the private sector recognised, there may not be further large private sector slippages in the near to medium term.
The ratings continue to reflect the strategic importance of PFC to the GoI, given the key role the company plays in financing the Indian power sector, and majority ownership by the government. The ratings also factor in a strong market position and adequate capitalisation and resource profile. These strengths are partially offset by inherent vulnerability of the asset quality to the weak credit risk profiles of borrowers and significant sectoral and customer concentration in revenue. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of PFC and its subsidiaries including REC. Furthermore, CRISIL Ratings factors in support from the majority owner, GoI, given the company’s key role in financing the Indian power sector.
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:
The company plays a major role in implementing government policies, and is important for financing India's power sector, particularly government sector power utilities (87% of the consolidated loan book as on September 30, 2022). PFC is the nodal agency for the development of ultra-mega power projects and the integrated power development scheme, RDSS and Late payment surcharge and is also the bid process coordinator for the Independent Transmission Projects scheme. It plays a developmental role in channelling finance to meet the power sector's large funding requirement, particularly of public sector utilities (PSUs). REC is also the nodal agency for channelling finance towards the rural electrification programme under the Deendayal Upadhyaya Gram Jyoti Yojana (formerly known as Rajiv Gandhi Grameen Vidyutikaran Yojana) and Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or Saubhagya scheme, and the National Electricity Fund Scheme. PFC and REC are the lending partners for the announced discom package.
GoI remains the majority shareholder, with a stake of 56% as on September 30, 2022. The government supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax exemption bonds. GoI has strong strategic reasons and a moral obligation to support PFC, both on an ongoing basis and in the event of distress, given the latter's role in implementing the government's power sector policies and GoI's majority ownership in the company.
PFC plays an important role in the Indian power sector, not only by providing finance but also by implementing GoI's power sector policies. The company, at a consolidated level, is the largest lender to the power sector with a share of over 30%, and plays a key role in channeling finance to PSUs. The gross consolidated loan book grew by 2% year-on-year to Rs 7.70 lakh crore as on September 30, 2022, from Rs 7.20 lakh crore a year earlier (Rs 7.6 lakh crore as on March 31, 2022). The share of PSUs in the consolidated loan book stood at 88% as on September 30, 2022. Loans outstanding to PSUs on a consolidated basis stood at Rs 6.7 lakh crore as on this date (Rs 6.3 lakh crore a year earlier).
As on September 30, 2022, on a standalone basis, Tier-I CAR was 21.1% and overall CAR 23.4% as on September 30, 2022, (23.5% and 3.5%, respectively, as on March 31, 2022). Capitalisation is expected to remain adequate over the medium term, supported by a demonstrated ability to raise capital through public issues. Networth to net NPA ratio on a standalone basis for PFC is 12.7 times as on September 30, 2022; 8.3 times as on March 31, 2022. Accretion to networth is supported by the ability to maintain good interest spreads and a low operating expense ratio. The standalone return on assets ratio was 3.1% and return on equity were 20.3% for the first half of fiscal 2023 (3.1% and 22.5%, respectively, for fiscal 2022). Ability to contain credit costs and hence improve profitability and capitalisation will remain a key monitorable.
Borrowing costs are competitive and the resource base, though wholesale, is diversified. Debt instruments have wide market acceptability, which is also reflective in its low cost of borrowing compared to peers (7.3% for the half year ended September 30, 2022). The consolidated resource profile as on September 30, 2022, comprises bonds (57%), term loans (20%), and other borrowings (1%). The company also has access to foreign currency borrowing, which comprised 21% of the total consolidated borrowing as on September 30, 2022 (20% as on March 31, 2022). On a standalone basis, foreign currency borrowings formed 18% of the total borrowings as on September 30, 2022. As per the board-approved policy for exchange rate risks, PFC has hedged 95% of its foreign currency borrowing with residual maturity of up to five years as on September 30, 2022. PFC has also received government approval to raise capital gain bonds under Section 54 EC; which should further support the resource profile. The company participated in the sixth tranche of issue of Bharat Bond exchange-traded fund (ETF) and raised Rs 1,180 crore for around 10 years maturity on April 14, 2032. With Bharat Bond ETF, the company has been able to establish an additional funding stream in the domestic market.
In fiscal 2017, extra budgetary resources of Rs 5,000 crore were raised on behalf of the GoI. These bonds will be fully serviced by the government through the general budget; hence, a separate government guarantee was not required for issue of these bonds. In its analytical treatment, CRISIL Ratings has assumed that PFC will ensure the bonds are serviced on time.
Weakness:
PFC's asset quality remains inherently vulnerable to the weak credit risk profiles of borrowers. The company caters only to the power sector, with 88% of its consolidated loan book as on September 30, 2022 to government sector power utilities (including generation, transmission, and discoms). PSUs, especially discoms, are an inherently weak asset class because of their poor financial risk profiles. Effective execution of various reform measures is extremely critical for PSUs to produce the desired positive impact, and broad-based political consensus is necessary to implement the much-needed tariff increases to ensure sustained improvement in their performance. NPAs and restructured assets from the PSU book had risen sharply in fiscal 2017 owing to alignment with the restructuring norms of Reserve Bank of India. However, the downgraded accounts had since been paying dues regularly, and a majority of them were upgraded in fiscal 2018. As on September 30, 2022, NPAs (stage III assets as per IND AS) were nil from this portfolio (nil as on March 31, 2022)
PFC (consolidated) also has 12% exposure to private sector power players, which have increasingly become more vulnerable to asset quality risks owing to issues such as lack of fuel availability, inability to pass on fuel price increases, and absence of long-term power purchase agreements for assured power offtake. PFC, on a consolidated basis, had gross NPAs (stage III assets as per IND-AS) of 4.4% as on September 30, 2022 (5.0% as on March 31, 2022), all from its private sector book. As on September 30, 2022, 46% of private sector loans have been recognised as stage III assets on which the company has a provision coverage of 63% on a consolidated basis. |
Liquidity: Superior Asset liability maturity (ALM) profile of PFC shows that liquidity position is superior. The mismatches in the ALM buckets up to one year given the relatively long tenure of its assets are managed mainly through unutilised bank lines; as of December 31, 2022, the structural liquidity of PFC had positive mismatches up to one year. Additionally, debt repayments are well staggered across months, supporting liquidity.
As on December 31, 2022, the company (on a standalone basis) had liquidity cushion of Rs 13,137 crore (Rs 5,791 crore of cash and equivalents and liquid investments and Rs 7,346 crore of unutilised cash credit lines), along with monthly inflows, against debt obligation of Rs 19,157 crore over the three months till March 2023. Further, PFC has raised long term debt of around Rs. 45,639 crore in the first nine months of fiscal 2023 through bonds, term loans from banks and capital market instruments. |
Outlook: Stable CRISIL Ratings believes GoI will retain its majority stake in PFC, which will continue to play a critical role in implementing government policies related to financing the Indian power sector over the medium term. The company is also likely to retain its strong position in the infrastructure-financing segment, while maintaining healthy capitalisation.
The rating on the perpetual bonds remains sensitive to the capital buffer maintained by PFC over regulatory capital requirements; rating transition on these instruments could potentially be sharper than that on other debt instruments and bank facilities |
Rating Sensitivity factors Downward factors
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About the Company PFC was established in 1986 by GoI as an institution dedicated to funding and developing the power sector in India. Until 1996, it lent exclusively to public sector entities. Since then, it has expanded its customer profile to include private sector power utilities and projects. PFC aims to promote balanced and integrated development of the power sector by providing finance to low-cost, efficient, and reliable projects.
In March 2019, PFC completed the acquisition of GoI’s 52.6% stake in REC for Rs 14,500 crore. PFC and REC will remain strategically important to the government, which would provide them timely, need-based support. They will continue to play their respective policy roles and will remain the nodal agencies for implementing power sector policies. Further, they are expected to operate all functions independently as they do currently.
On a consolidated basis, PFC reported profit after tax (PAT) of Rs 18,768 crore and total income (net of interest) of Rs 37,636 crore in fiscal 2022 (Rs 15,716 crore and 27,016 crore, respectively in the previous fiscal). On a standalone basis, PFC reported PAT of Rs 10,002 crore and total income (net of interest) of Rs 15,096 crore in fiscal 2022 as against Rs 8,444 crore and Rs 14,573 crore, respectively in the previous fiscal.
For the half year ended September 30, 2022, on a consolidated basis, PFC reported PAT of Rs 9,809 crore and total income (net of interest) of Rs 16,006 crore (Rs 9,578 crore and 15,709 crore, respectively, in the corresponding period of the previous fiscal). On a standalone basis, PFC reported PAT of Rs 5,108 crore and total income (net of interest) of Rs 7,969 crore for the nine months ended September 30, 2022 (Rs 5,032 crore and Rs 7,647 crore, respectively, in the corresponding period of the previous fiscal). |
Key Financial Indicators: (PFC; standalone)
Key financial (PFC; consolidated)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
Revision in instruments details based on data shared by client ^^Not yet issued @Part of borrowing programme for fiscal 2021 &Part of borrowing programme for fiscal 2020 ~Part of borrowing programme for fiscal 2019 *Part of borrowing programme for fiscal 2018 #Limit for working capital demand loan/overdraft facility/cash credit/line of credit/bank guarantee. Total working capital borrowing not to exceed board-approved limit of Rs 10,000 crore. However, quantum of sanctioned working capital facilities may be different from the Board-approved limit for outstanding working capital borrowing. **CRISIL Ratings has received an intimation from the issuer on early redemption of this instrument (ISIN INE134E08FP3) and is awaiting independent confirmation before withdrawal of rating on this instrument.
Annexure - Details of bank lenders & facilities*
This Annexure has been updated on 07-Feb-23 in line with the lender-wise facility details as on 31-Dec-22 received from the rated entity. *Bank Lenders are part of Borrowing program of company. $ Exchange rate as on December 31, 2022: 1 USD = INR 0.012 # Exchange rate as on December 31, 2022: 1 EUR = INR 0.011 & Exchange rate as on December 31, 2022: 1 JPY = INR 1.601
Annexure: Details of rating withdrawn
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Annexure – List of entities consolidated
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Criteria Details
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