ICRA revises rating for NCDs, bank lines of PTC India
ICRA has revised the rating from [ICRA]A+ to [ICRA]A assigned to Rs 700 crore Non-convertible Debenture (NCD) programme and Rs 425 crore long term bank lines of PTC India Financial Services Limited (PFS). The outlook on the long-term rating is 'Stable'.
August 28, 2012 / 18:46 IST
ICRA has revised the rating from [ICRA]A+ to [ICRA]A assigned to Rs 700 crore Non-convertible Debenture (NCD) programme and Rs 425 crore long term bank lines of PTC India Financial Services Limited (PFS). The outlook on the long-term rating is 'Stable'. Further, ICRA has withdrawn the rating assigned to Rs 100 crore Commercial Paper (CP) programme of PFS on request of company as there is no amount outstanding against the rated instrument.
ICRA has also withdrawn the rating assigned to Rs 100 crore NCD programme on maturity of instrument. The revision in rating factors in continued vulnerability of some of the PFS’ funded exposures considering the current policy stance. The vulnerability is arising due to concern on gas/coal availability, lack of end use Power Purchase Agreements (PPAs) in some of the PFS’ funded projects, higher counter party risk arising due to weak financials of state power utilities. The revised ratings are supported by PFS’ parentage (60% owned by PTC India Limited, or PTC) and its strategic fit in PTC’s operations. The ratings also factor in PFS’ good capital structure, diversified funding profile, experienced management team and adequate profitability.ICRA has taken note of Government of India’s (GoI) directive to Coal India to commit a minimum of 80% of coal supply to power plants that have entered into long-term PPAs with power distribution companies and have been commissioned/ would get commissioned on or before March 31, 2015 which could reduce the fuel supply concerns of some of PFS’ funded projects. However, some projects funded by PFS do not have end use PPAs with power distribution companies which could impact their ability to get firm fuel linkage (in the form of FSA) from Coal India, however these projects are expected to commission over next 1-3 years and thus have time to enter into firm end use PPAs. In addition, counter party credit risk remains high for number of PFS’ borrowers, given their exposure to state power utilities that have been reporting significant losses for quite some time, however PFS’ does not have any direct exposure to state distribution entities and strong promoters of some of these projects mitigate part of the risk. ICRA continues to closely monitor the developments in the power sector, and has taken note of the Shunglu Committee report on the “Financial Position of Distribution Entities and its recommendations, the Appellate Tribunal of Electricity (APTEL) recommendations on timely tariff finalization by SERCs, the revision/ proposed revision in power sale tariffs by certain states. A timely implementation of the aforesaid recommendations and also speeding up of technical and commercial loss measures by state utilities will thus be critical for maintaining the health of the power sector companies.PFS, established with the mandate of providing financial services in the energy value chain, is likely to remain important for PTC in fulfilling its objective of offering complete energy solutions. This in turn is likely to ensure strong funding, management and operational support from PTC. Further, sizeable fund requirement in power sector along with PFS’ close association with PTC and a product offerings including ‘debt and equity’ could offer good growth avenues to PFS, even though PFS’ ability to take significant exposures in big power projects may remain limited owing to its net worth which remains relatively lower (Rs. 1,195 crore as on June 30, 2012) compared to main lenders active in the segment. Nevertheless, Infrastructure Finance Company (IFC) status of PFS increases its capacity to take larger exposures. Further, given the nature of its business, concentration risk is likely to remain high for PFS ( though reduced to some extent over last two years), until it reaches to significant level of total asset base wherein individual exposure represents smaller proportion of total asset base. Besides, PFS’ portfolio is exposed to project related risks while its ability to liquidate investments would depend on the external environment. The project related risk is mitigated to an extent by experienced management team of PFS, its close association with PTC and various stages of implementation in different projects which is likely to improve further with the growth in total asset base. The underlying risks could reduce and the liquidity of PFS’ investments could improve gradually as the portfolio of PFS grows and the mix changes in favour of operational projects. ICRA has taken note of the profitable sale/exit by PFS in case of its investment in Ind Barath Powergencom and Indian Energy Exchange which boosted its profitability in 2011-12.ICRA expects PFS to maintain a moderate capital structure and comfortable liquidity position over medium term. As a policy, PFS intends to fund entire equity investments through its net worth and entire lending book (including mezzanine funding, intermediate funding) through a mix of net worth and market borrowings. As on Mar-12, PFS’ net worth was Rs.1,172 crore while its equity investments and lending book were Rs.417 crore and Rs.1,270 crore respectively. PFS intends to maintain a maximum gearing of five times in lending book2 (as on Mar-12 gearing is around 1 times). Going forward PFS’ gearing is likely to increase given higher growth expectation and sizeable undisbursed sanctions. As for funding profile, so far PFS has been able to keep its funding cost under control despite rising interest rate scenario as it could raise low cost funds such as ECBs and infrastructure bonds (around half of its total borrowings) while going forward the incremental cost of funds will largely depend on its ability to raise low cost funds in the form of ECBs as infrastructure bonds are expected to discontinued. Further, PFS plans to keep its ALM well matched and therefore has got the sanctions from banks for long term loans to match its long term assets and raised funds through long term NCDs while relatively shorter term borrowings (short term NCDs) will be utilised to fund short term lending (mainly mezzanine financing). Overall, PFS’ credit profile would be dependent on PTC’s credit risk profile, and its own ability to establish a good track record and maintain adequate capitalisation levels.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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