Rating Rationale

Strengths:
* Strategic importance to the Indian government: NLC is the nodal agency for lignite mining in India, backed by its sizeable reserves. The company's plants are a major source of power for South India. The government has granted the Navratna status to NLC, and continues to be dominant shareholder with 82.8% stake in the company. Furthermore, GoI has provided guarantees for NLC's foreign currency borrowings in the past, and is expected to continue providing need-based support.

* Regulated cash flow under the classic two-part tariff structure: NLC, on a consolidated basis, owns and operates thermal power plants with combined capacity of 4,240 megawatt (MW), including the 1,000-MW coal-based capacity under NTPL, commissioned in August 2015. All 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 Central Electricity Regulatory Commission (CERC). Moreover, the owned lignite mines and depreciated plants allow the company to price its power lower than other suppliers in southern India, which makes it the preferred supplier and adds stability to cash flow.

* Healthy operating efficiency and adequate fuel availability: NLC's ownership of lignite mines mitigates risks related to availability and price of fuel; it has also 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 the fuel requirement for about 20 years. Fuel requirement for the coal-based NTPL plant is met partly through a 3.0-million-tonne-per-annum (mtpa) fuel supply agreement with Mahanadi Coal fields, and through imports. However, for 31% of the installed capacity'including TPS-II and the vintage TPS-I in Neyveli (Tamil Nadu), and the Barsingsar plant in Rajasthan' operating efficiency is expected to remain subdued over the near term due to technical issues.

* Strong financial risk profile, driven by healthy capital structure and liquidity: Gearing, on a consolidated basis, stood at 1.00 time as on March 31, 2018 (0.96 time as on March 31, 2017), despite the ongoing capex, and remains well within the CERC-stipulated norm of 70:30. Liquidity was healthy, with cash and cash equivalents of Rs 360 crore as on September 30, 2018, and bank limit of Rs 2,200 crore, (average utulisation of 30% in the 12 months ending September 30, 2018). Buyback of 9.28% shares in November 2018, was funded through the internal accrual. Comfortable liquidity (including undrawn bank lines) and steady accrual should continue to provide coverage for debt obligation, besides meeting the funding commitment towards the ongoing projects.

Weaknesses:
* Exposure to counterparty risks: Exposure to receivables collection risk persists, given the weak credit risk profile of key consumers, which are primarily state distribution companies (discoms). Receivables rose to 210 days as on March 31, 2018, from 199 days in the previous fiscal. Nearly half the power generated is sold to Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO; the generation and distribution arm of the erstwhile Tamil Nadu Electricity Board). TANGEDCO's credit risk profile was weak, as poor operating performance, and absence of periodic tariff revision, led to substantial loss from operations. While TANGEDCO is still in the red, its performance has improved, due to implementation of the financial restructuring package, increase in tariff, and support from the state government, through higher subsidies. TANGEDCO's financial risk profile is also likely to improve, as it has joined the Ujjwal Discom Assurance Yojana resulting in takeover of part of its debt by the state government and repricing of remaining debt at low rates. Nevertheless, NLC will remain exposed to counterparty risk, and therefore, timely recovery of receivables will continue to be a key rating sensitivity factor.

* Risks related to implementation of the ongoing capacity expansion projects: Exposure to project implementation risk persists due to the ongoing large capacity expansion programme. The upcoming capacity will be insulated from demand and fuel supply risk, owing to the long-term PPA and adequate fuel availability. However, the company will face risks relating to time and cost overruns (as seen in some of its newly commissioned projects), primarily due to delay in obtaining clearances and supply of equipment, and technical issues during the stabilisation phase. These delays can impact profitability, depending on the extent of cost overruns allowed, as a pass-through by CERC. The long-term expansion plan includes development of 4,720 MW of projects on a standalone basis, and 1,980 MW through NUPPL, a 51:49 JV with Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, entailing capital expenditure (capex) of Rs 51,000 crore. Besides, there are over 1,200 MW of renewable projects under implementation. Total annual capex is estimated to be around Rs 7,000 crore till fiscal 2020. While NLC has sufficient cash accrual and liquidity to fund its equity contribution for the proposed expansion, timely commissioning of the projects without any cost overrun and higher-than-expected capex will remain key rating sensitivity factors.

Liquidity: Strong
NLC generates healthy cash accrual. Consolidated accrual of Rs 2,410 crore in fiscal 2018 (Rs 1,911 crore in the previous year) sufficed to cover the maturing debt of around Rs 817 crore. Bank limit (sanctioned limit of Rs 2200 crore) utilisation averaged 30% in the 12 months ended September 30, 2018. Cash and bank balance outstanding as on September 30, 2018 was Rs 360 crore.