Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on the non-convertible debentures and long-term bank facilities of NLC India Ltd (NLCIL).

 

The rating continues to reflect the strong business risk profile of NLCIL, backed by high operating efficiency, regulated cash flow and captive fuel availability for its power plants. The rating also factors in the company’s strategic importance to the Government of India and healthy financial risk profile because of comfortable capital structure and liquidity. These strengths are partially offset by exposure to risks related to counterparty and implementation of the ongoing capacity expansion projects.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NLCIL and its joint ventures (JVs)—NLC Tamil Nadu Power Ltd (NTPL; 89% held by NLC) and Neyveli Uttar Pradesh Power Ltd (NUPPL; 51% held by NLC)—due to the stated position of the management of providing complete financial and managerial support to the JVs. In case of exigencies, NLC is expected to receive distress support from the government for timely servicing of debt, considering the company’s strategic role in meeting significant power requirement of several southern states and the government’s 72.2% ownership in the entity.

 

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:

• Strategic importance to the government: NLC is the nodal agency for lignite mining in India and is backed by its sizeable reserves. India had total measured proved lignite reserves of 7,511.52 million tonne (MT) of which NLC had 5,203.50 MT (~69%). The company is a major provider of power for south India and meets around 10% of the power requirement of Tamil Nadu. The government has granted Navratna status to NLC and is a dominant shareholder in the company. The government had provided guarantees for the foreign currency borrowing of the company in the past and is expected to continue to offer need-based support.

 

• Regulated cash flow under the classic two-part tariff structure: On consolidated basis, the company owns and operates thermal power plants with combined capacity of 4,640 megawatt (MW). The plants have long-term power purchase agreements (PPAs) with a regulated two-part tariff structure; this ensures recovery of all fixed expenses—including debt obligation—and fixed return on equity based on the achievement of performance benchmarks mandated by the Central Electricity Regulatory Commission (CERC). Moreover, owned lignite and coal mines and depreciated plants allow the company to price its power lower than other suppliers in south India, making it a preferred supplier and adding stability to cash flow.

 

• Healthy operating efficiency and captive fuel availability: Ownership of lignite mines mitigates risks related to availability and price of fuel and has enabled the company to operate above normative levels for most of its plants despite their vintage status. The captive lignite mines should be sufficient to meet fuel requirement for about 20 years. Fuel requirement for the coal based NTPL plant is partly met through a coal swapping arrangement entered with NTPC Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) wherein Mahanadi Coalfields Ltd supplies 2.4 million tonne per annum (MTPA) coal to NTPL in lieu of the coal from NLC’s Talabira, Odisha mines. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin stood at 31% during the first nine months of fiscal 2024 (37.4% in the corresponding period of previous fiscal). Commissioning of NUPPL (JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd) plant of 1,980 MW capacity during current fiscal 2025, will support cash flow over the medium term.

 

• Healthy financial risk profile: While gearing (including under construction debt) is estimated at 1.26 times as on March 31, 2024, from 1.28 times in the previous fiscal, it is expected to increase in the medium term due to increase in overall borrowings due to the ongoing capital expenditure (capex), though it is expected to be well within the CERC-stipulated norm of 2.33 times (debt-equity ratio of 70:30). The company (on a consolidated basis) had un-utilized fund-based bank limit of around Rs 5,000 crore as on December 31, 2023 (total limits of Rs 5,000 crore). Bank limit utilisation (excluding commercial papers [CPs] and Bill discounting limit) averaged 3.52% over the 12 months through December 2023. Despite large capex plans and expected regular dividend payout, the financial risk profile, especially liquidity, will remain strong over the medium term backed by robust capital structure, un-utilized bank limit and sizeable cash accrual. Larger-than-expected capex, adversely impacting cash position, will remain a key monitorable.

 

Weaknesses:

• Exposure to counterparty risks: The company is exposed to receivables collection risk given the weak credit risk profiles of key consumers, which are primarily state distribution companies. Consolidated receivables (excluding unbilled revenue and bill discounting) have been estimated at 78 days as on March 31, 2024, as against 107 days in the previous fiscal. This was mainly driven by new late payment surcharge rules, 2022 under which the company is receiving part of receivables in instalments from multiple discoms including Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO; the generation and distribution arm of the erstwhile Tamil Nadu Electricity Board) as well as timely collections from the other counterparties.

 

However, more than half of the power generated is sold to TANGEDCO, which accounted for around 75% of the outstanding receivables (including CERC recoverable from TANGEDCO) as on December 31, 2023. The credit risk profile of the counterparty is weak as poor operating performance and absence of periodic tariff revision led to substantial loss from operations. Nevertheless, comfort is drawn from payment security mechanisms which include letter of credit and Reserve Bank of India’s tripartite agreement.

 

• Exposure to project implementation risks: The company is implementing large projects in thermal, renewable and mining segment. The major ongoing projects are 1,980-MW coal-based thermal power plant under JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, 650 MW renewable power (wind and solar) projects and various other mining projects in Odisha, Tamil Nadu and Uttar Pradesh. In addition, it is implementing flue gas desulphurization (FGD) project in its existing plants to meet the energy norms prescribed by the central government. Moreover, it has capex plans in the thermal and renewable segments.

 

The upcoming capacities will be insulated from demand and fuel supply risks due to the long-term PPAs and adequate fuel availability. However, the company may face risks related to time and cost overruns (as seen in some of its newly commissioned and ongoing projects) primarily due to delay in obtaining clearances, supply of equipment and technical issues during the stabilization phase. Also, one of the main projects, NUPPL, is now on track to commence operations in phase manner during current fiscal. The main reason for delay in NUPPL commissioning was due to financial stress faced by project engineering, procurement and construction (EPC) contractor, however, company is now directly making payment to vendors. Further, delays can impact profitability depending on the extent of cost overrun allowed, as a pass-through by CERC. Consequently, timely commissioning of the project without time and cost overrun will be a key monitorable.

Liquidity: Superior

Expected cash accrual of over Rs 3,000 crore will comfortably cover debt obligation of around Rs 1,654 crore in fiscal 2025. Liquidity is also supported by largely unutilised bank limit of around Rs 5,000 crore as of December 2023. Overall, cash accrual, cash and equivalent and unutilised bank lines will sufficiently cover debt obligation, incremental capex and working capital requirement in fiscal 2025.

 

Environment, social and governance (ESG) Profile of NLC India Ltd.

CRISIL Ratings believes NLC’s ESG profile supports its already strong credit risk profile. 

The power sector has a significant impact on the environment owing to higher emissions, water consumption and waste generation. This is because generation of conventional power involves high dependence on natural resources, mainly coal. The sector has a social impact as its operations affect local community and involve health hazards. NLC is focused on mitigating its environmental and social risks.

 

Key ESG highlights

• ESG disclosures of the company are evolving, and it is in the process of further strengthening the disclosures going forward
• NLC’s installed power generation capacities include a 23.6% share of renewable energy
• Company has a well-defined environment policy, which covers all the activities undertaken by NLCIL towards the environment
• Company is adopting green mining technologies for minimizing the impact of mining activities on the environment and implementing super critical boilers of 800 MW with less specific fuel consumption and CO2 emission at thermal power plant at Talabira
• The governance structure is characterised by 34% of its board comprising independent directors

Outlook: Stable

CRISIL Ratings believes the company’s business risk profile will remain strong over the medium term, backed by efficient operations and fuel security. Financial risk profile is expected to continue to be healthy, driven by conservative gearing and adequate liquidity.

Rating Sensitivity factors

Downward factors:

• Any change in the support philosophy of the government or any divestment below 51% government shareholding leading to change in control.
• Significant weakening of the operating performance of power plants and delays in implementation of capex impacting business and financial risk profiles
• Delay in recovery of dues from counterparties (receivables beyond 365 days) impacting liquidity
• Higher-than-expected capex or any sizeable debt-funded acquisition weakening gearing to more than 2 times

About the Company

NLC operates lignite and coal mines and thermal power stations in Neyveli and Tuticorin (NTPL) in Tamil Nadu and Barsingsar, Rajasthan and Odisha. It sells power to the state utilities of Tamil Nadu, Telangana, Rajasthan, Andhra Pradesh, Kerala, Karnataka and the Union Territory of Puducherry. The company has four lignite mines and one coal block with combined mining capacity of 50.1 MTPA, and six thermal power stations with combined generation capacity of 4,640 MW. In addition, NLC operates a 1,380.06-MW solar power plant and a 51-MW wind power plant. It was awarded the Navratna status in fiscal 2011.

 

On a consolidated basis, for the nine months through December 2023, profit after tax (PAT) was Rs 1,754 crore on total income of Rs 9,458 crore, against Rs 590 crore and Rs 11,031 crore, respectively, in the corresponding period previous fiscal.

Key Financial Indicators(consolidated)*

As on / for the period ended March 31	Unit	2023	2022
Total income	Rs crore	16,544	12,626
Profit after tax (PAT)	Rs crore	1,413	1,104
PAT margin	%	8.5	8.7
Adjusted debt / adjusted net-worth	Times	1.28	1.62
Adjusted interest coverage	Times	6.6	5.0

*As per analytical adjustment made by CRISIL Ratings

Status of non cooperation with previous CRA:

NLC has not cooperated with Brickwork Ratings which has classified it as issuer not cooperative through release dated April 13, 2023. The reason provided is due to information insufficiency and lack of management cooperation.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit#	NA	NA	NA	4000	NA	CRISIL AAA/Stable
NA	Letter of credit and bank guarantee#	NA	NA	NA	1000	NA	CRISIL AAA/Stable
NA	Term Loan	NA	NA	NA	581	NA	CRISIL AAA/Stable
NA	Term Loan	NA	NA	NA	1078	NA	CRISIL AAA/Stable
INE589A08027	Non-convertible debentures	31-Jul-2020	5.34%	11-Apr-2025	500	Simple	CRISIL AAA/Stable
INE589A08035	Non-convertible debentures	12-Feb-2021	6.05%	12-Feb-2026	1,175	Simple	CRISIL AAA/Stable
INE589A08043	Non-convertible debentures	20-Dec-2021	6.85%	13-Apr-2032	500	Simple	CRISIL AAA/Stable
NA	Non-convertible debentures*	NA	NA	NA	825	Simple	CRISIL AAA/Stable

#100% One-way interchangeability from fund-based working capital to non-fund-based working capital

*Not yet issued