Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Focused and predictable business model:

In addition to tripartite-backed public-private partnership (PPP) projects, IDF-NBFCs are permitted to invest in (i) Public-private-partnership (PPP) infrastructure projects without a project authority and (ii) Non-PPP infrastructure projects, however they can finance only projects that have completed at least one year of satisfactory commercial operations. Such investments will not have asset quality protection through the in-built credit enhancement provided by the tripartite agreement, thereby exposing IDF-NBFCs to the inherent risks in these projects. Nevertheless, asset quality of these operational projects is expected to remain stable, given lower risks compared to non-operational projects.

Given that IDF-NBFCs are permitted to refinance operational projects across the spectrum, it has resulted in greater diversification in the business plan of Infradebt, across both sectors and projects. The company, nevertheless, proposes to diversify only into assets that carry low credit risk and/or in sectors with a good recovery track record such as solar, wind, and transmission projects. Assets in the renewables sector, which are expected to constitute a significant portion of the non-tripartite portfolio, will have average credit quality equivalent to CRISIL Ratings adequate-safety category and a minimum investment-grade rating. Additionally, there could be selective exposure to assets in the hotels and hospitals sectors, among others. The category of the projects, which are not backed by tripartite agreements, will have average credit quality equivalent to CRISIL Ratings adequate-safety category. Infradebt's business model will, therefore, remain focused and predictable.

Experienced management team and expectation of prudent policies:

Infradebt has a strong professional management team that has been able to build the business in a niche segment. Management is expected to follow prudent policies in scaling-up and diversifying the portfolio.

Comfortable capitalisation:

Capitalisation, as measured by the leverage ratio, remains an important driver of the credit risk profile of Infradebt. As per the regulatory framework, the fundamental element of asset protection through lending to the operational projects (with at least one year of satisfactory commercial operations) enables IDF-NBFCs to operate at a higher leverage than other NBFCs. Infradebt had a gearing of 5.9 times as on September 30, 2022 (6.0 times as on March 31, 2022). CRISIL Ratings' has factored in a leverage of 9 times in the initial years of operation, with scope for the leverage to increase as enforceability of the tripartite agreement is established and business performance is demonstrated. CRISIL Ratings believes the leverage provides healthy coverage against potential asset-side risks. Further, Infradebt has demonstrated its ability to raise additional equity capital in the past. Networth stood at Rs 2531 crore as on September 30, 2022 (Rs 2386 crore as on March 31, 2022).

Weakness:

Exposed to concentration risks in loan portfolio

Concentration limits for tripartite-backed projects allow IDF-NBFCs to refinance up to 50% of their total capital funds in individual projects, with additional exposure permitted through Board and RBI approval depending on the quantum. However, in non-tripartite backed projects, IDF-NBFCs can invest a maximum of 25% of owned funds in a single project, and 40% of owned funds in projects of a single group of borrowers. The company remains vulnerable to concentration risks inherent in its wholesale loan book. As on September 30, 2022, the top 10 exposures accounted for 29% of the loan book (31% as on March 31, 2022).

As on September 30, 2022, Infradebt had exposure of Rs 253 crore to the two operating special purpose vehicles (SPVs) of Infrastructure & Leasing Financial Services (IL&FS) group, which have been classified as stage II and stage III respectively.

Overall asset quality remains comfortable with gross stage 3 asset at 0.7% as on September 30, 2022 (0.8% as on March 31, 2022). Infradebt has provided 30% against this as on September 30, 2022. The collection efficiency remains healthy at more than 99% in first half of fiscal 2023 (excluding stage III assets). Also, almost all the projects continue to have adequate liquidity buffer in the form of debt service reserve account (DSRA) and/or working capital lines and also have a strong sponsor support.

The company has adequate risk mitigant available in all its exposures; performance in the current operating environment will remain a key monitorable.