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 (NLC). Also, CRISIL Ratings has withdrawn its rating on bank facilities worth Rs 58.1 crore at the company’s request and on independent confirmation of their repayment. The withdrawal is in line with CRISIL Ratings withdrawal policy.

 

The rating factors the company’s strategic importance to the Government of India reflected in dominant shareholding and company being a nodal agency for lignite mining. The company also has strong business risk profile, backed by high operating efficiency, regulated cash flow and captive fuel availability for its power plants and healthy financial risk profile owing to comfortable capital structure and liquidity. These strengths are partially offset by exposure to risks related to weak counterparty and implementation of large ongoing capacity expansion projects.

 

During fiscal 2024, earnings before interest, tax, depreciation and amortisation (EBITDA) margin decreased to 29.1% as against 37.3% during fiscal 2023 owing to challenges being faced by the company to meet fuel requirement leading to lower power generation in select plants. However, the performance is expected to improve fiscal 2025 onwards with the company taking corrective steps to meet fuel requirement. The timely commissioning of the upcoming 1,980 megawatt (MW) thermal power plant will support operating performance over the medium term.

 

The financial risk profile is also expected to remain healthy despite large planned capital expenditure (capex) over the medium term, which shall result in increase in adjusted gearing but the same will remain within the Central Electricity Regulatory Commission (CERC) stipulated norm.

Analytical Approach

The team has combined the business and financial risk profiles of NLC and its subsidiaries and joint ventures (JVs) due to the stated position of the management of providing complete financial and managerial support.

 

 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 proven 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 14% 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 a consolidated basis, the company owns and operates thermal power plants with combined capacity of 4,640 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 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 NLC Tamil Nadu Power Limited’s (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. EBITDA margin stood at 29.1% during fiscal 2024 (37.3% during fiscal 2023). Commissioning of Neyveli Uttar Pradesh Power Limited (NUPPL) (JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd) plant of 1,980 MW capacity during fiscal 2025, will support cash flow over the medium term.

 

• Healthy financial risk profile: While gearing (including under construction debt) decreased to 1.17 times as on March 31, 2024, from 1.28 times a year earlier, it is expected to increase over the medium term due to increase in overall borrowings due to the ongoing 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 has sizeable capex plans totaling Rs ~35,000 crore over fiscals 2025-2028 towards expanding its thermal and renewable energy portfolio to more than 10 gigawatt (GW) (from 6 GW as on March 31, 2024), Despite this and expected regular dividend payout, the financial risk profile should continue to be healthy over the medium term backed by robust capital structure, strong liquidity position 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 risk of irregular cash flow due to inherent weak credit risk profiles of key consumers, which are primarily state distribution companies. However, consolidated receivables (excluding unbilled revenue and bill discounting) have significantly decreased over the past three fiscals and stood at 113 days as on March 31, 2024, as against 239 days as on March 31, 2021. 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 65% of the outstanding receivables (including CERC recoverable from TANGEDCO) as on March 31, 2024. 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 segments. 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 stabilisation phase. Also, one of the main projects, NUPPL, is now on track to commence operations in a phased manner during the 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 around Rs 3,750 crore in fiscal 2025 and Rs 4,500-5,000 crore annually over fiscals 2026-2027 will comfortably cover debt obligation of around Rs 1,406 crore in fiscal 2025 and Rs 2,100-2,200 crore each in fiscals 2026 and 2027. NLC had liquid surplus of Rs 1,471 crore as on March 31, 2024, majority of which remained unencumbered. Liquidity is also supported by bank limit of around Rs 3,500 crore (drawing power of Rs 1,982 crore), which remained unutilised over the 12 months through July 2024. 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

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 NLC towards the environment
• Company is adopting green mining technologies for minimising 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 characterized 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 the 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 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.

 

For fiscal 2024, operating income decreased by 18.4% to Rs 13,499 crore while profit after tax (PAT) stood at Rs 1,857 crore. During the first three months of fiscal 2025, operating income increased by 1.8% to Rs 3,376 crore and PAT stood at 567 crore.

Key Financial Indicators (consolidated)*

As on / for the period ended March 31	Unit	2024	2023
Total income	Rs crore	13,499	16,544
Profit after tax (PAT)	Rs crore	1,857	1,413
PAT margin	%	13.8	8.5
Adjusted debt / adjusted networth	Times	1.17	1.28
Adjusted interest coverage	Times	5.30	6.58

*As per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable