By Nitin Bansal

India Ratings and Research (Ind-Ra) has placed THDC India Limited’s (THDC) Long-Term Issuer Rating of ‘IND AA+’ on Rating Watch Evolving (RWE). The Outlook was Stable. The instrument-wise rating actions are as follows: 

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Rating Watch

Rating Action

Non-convertible debentures (NCDs)

INE812V07013

3 October 2016

7.59

3 October 2026

INR6

IND AA+/RWE

Placed on RWE

NCDs

INE812V07021

6 September 2019

8.75

6 September 2029

INR15

IND AA+/RWE

Placed on RWE


KEY RATING DRIVERS

The RWE follows the in-principle approval accorded by NTPC’s (‘IND AAA’/Stable) board of directors, on 27 January 2020, for the acquisition of government of India’s (GoI) entire equity stake in THDC (i.e. 74.5% of paid-up share capital of THDC). The Cabinet Committee on Economic Affairs (CCEA) in their meeting on 21 November 2019 had accorded in-principal approval for the strategic sale of entire equity stake held by the GoI in THDC and North Eastern Electric Power Corporation Ltd to NTPC Limited, along with the transfer of management control.

Ind-Ra will evaluate THDC’s business and financial profile post the completion of proposed transaction. 

Operations Under Cost-Plus Model: THDC operates its hydropower plants under the cost-plus return on equity framework, outlined by Central Electricity Regulatory Commission (CERC), thus ensuring a reasonable recovery of costs, pass-through of forex risks and guaranteed return on equity. The new hydro and thermal plants being set up by THDC will also be covered under the CERC regulations, thereby reducing the operating cash flow risk.

Efficient Operations: THDC’s two operational hydro plants – Tehri Hydroelectric Project (THEP) and Koteshwar Hydroelectric Project (KHEP) – continued to achieve better-than-normative levels of operational performance in FY19. This is reflected in the higher availability and higher-than-design energy generation levels over the seven years ended FY19. 

During FY19, the plant availability factors of THEP and KHEP were 84.5% (FY18: 79.3%, FY17: 82.1%) and 68% (68.4%, 70.9%) compared with the normative availability of 77.0% and 67.0%, respectively. Furthermore, the actual generation at both plants remained above design energy over FY14-FY19. Higher availability and higher generation than design energy led to a healthy capacity incentive, secondary energy and deviation settlement charges, which totaled INR1.17 billion in FY19 (INR0.685 billion). Ind-Ra expects THDC to continue to earn healthy incentive income over the control period of FY19-FY24. 

Increase in Receivables: THDC’s receivables increased to INR17 billion in FY19 (FY18: INR13.1 billion) on account of the additional billing allowed post the receipt of tariff orders for the plants. Bulk of the receivables’ increase came in from discoms of Uttar Pradesh and Jammu and Kashmir as the debtors increased to INR12.2 billion (INR6.2 billion) and INR2.2 billion (INR1.6 billion), respectively. The debtors continued to rise during 9MFY20 (INR20.2 billion) from both Uttar Pradesh and Jammu and Kashmir contributing around 60% and 11% of the overall debtors. THDC is working towards improving the collection period by offering incentives such as discounts on prompt payments, relying on multiple counterparties and diversion of power from one state to another or from one discom to another within a state. 

Comfortable Credit Metrics: In FY19, THDC’s net leverage (net debt/EBITDA) declined to 2.0x (FY18: 2.4x, FY17: 2.9x) and gross interest coverage improved to 12.1x (FY18: 7.4x, FY17: 5.6x). The improvement in leverage and coverage was the result of a significant jump in EBITDA to INR21.4 billion in FY19 (FY18: INR16 billion) due to the additional billing of INR4.5 billion for KHEP and INR3.1 billion towards the late payment surcharge. THDC’s term debt against operational projects declined to INR12.3 billion in FY19 (FY18: INR16.1 billion), while the gross debt increased to INR44.1 billion (INR40.7 billion) as the debt against under construction projects, primarily Tehri Pump Storage Project (PSP)/ Vishnugad Hydroelectric Project/ Dhukwan Small Hydro Project, increased to INR25.5 billion (INR18.1 billion). Ind-Ra expects THDC’s net leverage to increase to around 3.5x in FY20 and to around 5x in FY21 in view of debt drawdown for under-construction projects. 

Liquidity Indicator - Adequate: THDC’s liquidity remained comfortable in FY19, with strong cash flow from operations of INR13.6 billion (FY18: INR21.7 billion), cash balances of INR0.45 billion (FY18: INR0.61 billion) and an overdraft facility of INR14 billion, for which the average utilisation was 43% for the last 12-months ended December 2019. The company has scheduled repayments of INR5.12 billion in FY20 and FY21 each. Ind-Ra expects the debt service coverage ratio for THDC to remain strong over FY20 and FY21, given the likely capitalisation of interest on the under-construction projects.

Tehri PSP Likely to Operate as Grid Asset: Although power purchase agreements have been signed for the Tehri PSP with the discoms of Delhi, Rajasthan, Haryana and Uttarakhand, the ability of these states to buy power at high tariffs in view of a high-conversion cost in addition to the original cost of power remains to be seen. Ind-Ra believes that one of the ways to operate the Tehri PSP as a feasible project is to consider the plant as a grid asset, providing stability to the grid. Alternatively, the GoI could look at various means to lower its per unit tariff.


RATING SENSITIVITIES

The RWE indicates that the ratings may be affirmed, downgraded or upgraded upon resolution. Ind-Ra will resolve the RWE within six months or upon evaluating the impact of the scheme of arrangement on the business and credit profile of THDC, whichever is earlier.


COMPANY PROFILE

Incorporated in 1988, THDC is a Mini Ratna Category-I and Schedule A central public sector enterprise. THDC is a joint venture between the GoI and the government of Uttar Pradesh. THDC has two operational hydropower plants in Uttarakhand: THEP (1,000MW) and KHEP (400MW). In addition, it has two wind power projects in Gujarat: Patan (50MW) and Devbhumi Dwarka (63MW).

FINANCIAL SUMMARY

Particulars

FY19

FY18

Revenue (INR billion)

27.7

21.9

EBITDA (INR billion)

21.4

16.8

EBITDA margin (%)

77.4

76.7

Interest coverage (x)

12.1

7.4

Net leverage (x)

2.0

2.4

Source: Ind-Ra, THDC

 


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating/Rating Watch

25 September 2019

9 October 2018

13 October 2017

Issuer rating

Long-term

-

IND AA+/RWE

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

NCDs

Long-term

INR21

IND AA+/RWE

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Nitin Bansal

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687290

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121