September 28, 2013

Mumbai

Reliance Infrastructure Limited

Rating downgraded to ‘CRISIL A+/Negative’

(Refer to Annexure 1 for details on facilities)

CRISIL has downgraded its rating on Reliance Infrastructure Ltd’s (RInfra’s) debt programmes and long-term bank facilities to ‘CRISIL A+/Negative’ from ‘CRISIL AA-/Negative’. CRISIL has also withdrawn its rating on RInfra’s short-term debt on the company’s request as there is no CRISIL rated short-term debt outstanding currently.

The rating revision reflects lower revenue visibility in its engineering, procurement, and construction (EPC) business coupled with higher-than-expected exposure to RInfra’s group companies. The impact of these developments is partially offset by the incremental annual cash flow expected from the recovery of regulatory assets in its Mumbai distribution business.

RInfra’s EPC business has low revenue visibility considering the EPC order book of Rs.110 billion (as on March 31, 2013) which is 1.3 times its EPC revenues of around Rs.80 billion in 2012-13 (refers to financial year, April 1 to March 31). RInfra’s EPC order book has the potential to increase further due to captive opportunities from the group. However, CRISIL believes the current uncertainties in the infrastructure and power sector will limit any significant increase in the company’s EPC order book over the short term.

RInfra’s group company exposure increased significantly to Rs.126 billion as on March 31, 2013 from Rs.101 billion as on March 31, 2012, which is contrary to CRISIL’s expectations. As per the management, a significant portion of the group company exposure was utilised to fund Reliance Power Ltd’s (RPower’s) power projects, which potentially exposes RInfra to project-related risks. A part of this increase is also attributed by the management to cash-flow mismatches during project implementation. Although CRISIL expects the exposure to gradually reduce, the pace at which it will reduce will be a key rating sensitivity factor.

Furthermore, CRISIL believes that increase in group company exposure has weakened RInfra’s financial risk profile. The company’s liquid surplus parked in mutual funds and deposits decreased to Rs.3.3 billion as on March 31, 2013 from Rs.10.23 billion as on March 31, 2012. On the other hand, total debt increased to Rs.114.5 billion as on March 31, 2013 from Rs.91.89 billion as on March 31, 2012. CRISIL believes that R-Infra’s high debt servicing requirement and modest cash accruals will constrain its debt protection measures over medium term.

In August 2013, Maharashtra Electricity Regulatory Commission’s tariff order allowed RInfra to recover regulatory assets of Rs.55.5 billion, including carrying cost. This is expected to provide incremental annual cash flows of around Rs.9.25 billion to RInfra for next 6 years. The increased cross subsidy surcharge and wheeling charges from migrated consumers proposed under tariff order could help in strengthening the company’s business risk profile. Use of the cash from recovery of regulatory assets to repay debt can potentially ease the pressure on RInfra’s credit profile over the medium term. 

RInfra has an investment programme amounting to Rs.22 billion over the next 3 years in its infrastructure special purpose vehicles (SPVs) in roads, transmission projects, urban infrastructure and cement plants over the medium term. CRISIL believes that RInfra’s ability to reduce its group company exposure will be critical to funds its investment programme and reduce its debt levels. While most of the projects are likely to be revenue operational over the near to medium term, however due to back ended nature of returns on the equity invested in these projects, their cash flow contribution to R-Infra will remain low in the initial phase of their operations.

For arriving at the ratings, CRISIL has adopted a moderate integration approach with respect to RInfra’s SPVs, as the SPVs are majority-owned by RInfra and are in the same line of business. In line with this approach, CRISIL has factored in the equity and limited cost-overrun support from RInfra to the SPVs. CRISIL has also factored in the additional support that RInfra has articulated to provide to a few SPVs in the form of commitment to meet any shortfalls in servicing their debt. RInfra’s other associate companies—BSES Rajdhani Power Ltd and BSES Yamuna Power Ltd (RInfra holds 49 per cent stake in each of them) — have not been consolidated because CRISIL believes that RInfra’s support to these companies will be limited to its extent of ownership in these companies.

CRISIL has not consolidated RPower (in which RInfra has 36.5 per cent ownership) because CRISIL believes that RInfra will not provide any support beyond the equity capital that it has already invested in RPower. However, RInfra has strong business linkages with some of RPower’s projects as the EPC contractor. In the process, RInfra has provided temporary financial support to some of these projects. CRISIL has, therefore, factored the risk profile of these investments into its rating. If this support does not reduce significantly over the near term, CRISIL will re-evaluate its consolidation approach with respect to RPower.

CRISIL’s ratings continue to reflect RInfra’s stable cash flows supported by its leading market position in the regulated electricity distribution market in Mumbai, and its relatively healthy financial flexibility. These rating strengths are partially offset by the company’s exposure to risks related to the infrastructure project development business, and high financial exposure to group companies.

Outlook: Negative

The negative outlook reflects CRISIL’s belief that RInfra’s financial risk profile can weaken further if the company’s group exposures and debt do not come down. The ratings may be downgraded if the group company exposure and debt levels do not come down as envisaged. The outlook may be revised to ‘Stable’ if RInfra’s financial risk profile improves driven by reduction in company exposure and debt significantly over the next 9 to 12 months.

About the Company

RInfra is one of the main companies of the Reliance group. Promoters hold 48.34 per cent stake in RInfra as on June 30, 2013. Other companies in the group include Reliance Communications Ltd, Reliance Capital Ltd, Reliance MediaWorks Ltd and RPower.

RInfra’s principal business is distribution of electricity in its license area of suburban Mumbai. The company has an EPC division that undertakes EPC contracts primarily for RInfra’s infrastructure projects and for RPower. Besides, it also has the power generating assets of 941 MW which includes Dahanu power station (500 MW; supplies to Mumbai distribution), Samalkot power station (220 MW); and Goa power station (48 MW). RInfra also serves as the holding company for RInfra’s portfolio of infrastructure projects and owns 36.5 per cent in its associate company Reliance Power Limited.

Annexure 1 - Details of various bank facilities