Rating Rationale
July 06, 2020 | Mumbai
Northern Power Distribution Company of Telangana Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1334.95 Crore
Long Term Rating CRISIL BB/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A4+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Northern Power Distribution Company of Telangana Limited (Northern Discom) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL BB' and has reaffirmed its 'CRISIL A4+' rating on the short-term facility.
 
The outlook revision reflects CRISIL's belief that the discoms liquidity profile is likely to remain under pressure over the near to medium term with overall receivables increasing from  Rs 3,278 crore as on March 31, 2019, to around Rs 6,300 crore as on March 31, 2020. This was driven by increase in state government dues (accounting for around 80% of receivables) from Rs 2,799 crore to around Rs 5,300 crore. Further, subsidy payments were delayed and subsidy receivables increased during the period. Northern Discom is managing its liquidity and debt obligations by stretching its power purchase payments (up from Rs 6,627 crore as on March 31, 2019, to around Rs 8,100 crore as on March 31, 2020). Sustained increase in the receivables during fiscal 2021 can further deteriorate the credit profile of the company. That said, any substantial improvement in government payment profile will be a key positive and CRISIL will continue monitoring the same.  
 
The operating performance of the discom continues to lag targets under the Ujwal DISCOM Assurance Yojana (UDAY), with aggregate technical and commercial (AT&C) losses increasing to around 35% and around 29% in fiscals 2020 and 2019, respectively, from 17.1% in fiscal 2018. Furthermore, the tariff-gap (the gap in average revenue requirement and average cost of supply) increased to Rs 2.1 per kilowatt hour (kWh) in fiscal 2019 from Rs 1.4 in fiscal 2018, on account of delay in subsidy payments by the state government, higher power cost, and no tariff increase over the past three years. While it is expected to reduce in fiscal 2020, the tariff gap will persist over the medium term because of the discom's sub-optimal consumer mix. Given continued operating losses, dependence on state government support should continue. The quantum and timing of fund flow from the state government will remain key rating sensitivity factors.
 
Debt increased to around Rs 7,300 crore as on March 31, 2020, from Rs 5,614 crore as on March 31, 2016 (pre-UDAY), due to increasing losses and rising receivables which were partially offset by additional funding from the state government and increase in payables.
 
The ratings continue to reflect the company's monopoly in the power distribution business in the designated service area. The strength is partially offset by a weak financial risk profile because of negative networth, low debt protection metrics, and large payables.

Key Rating Drivers & Detailed Description
Strength
* Monopoly in the power distribution business in the designated service area
Northern Discom plays a critical role in the development of its service area, which covers a large part of Telangana's agrarian economy. Also, there is limited threat from the open access system, as the open access charges that will be levied by the discom will largely compensate for the flight of any industrial consumer.
 
The consumer mix has a larger proportion of lower tariff payers in the agricultural segment (around 51% of total sold units) and a moderate proportion of industrial users (around 22%). To compensate for the revenue loss incurred on supply of power to agricultural customers, the state provides subsidies, which account for 40-50% of the discom's operating income.
 
CRISIL believes Northern Discom will maintain its monopoly in the long term, as competitors find it financially unviable to duplicate the network needed in the retail power supply business.
 
Weakness
* Weak financial risk profile
The financial risk profile is constrained by operating losses due to the persistent tariff gap. Tariff gap was around Rs 2.1/kWh in fiscal 2019 on account of zero hike in tariffs and delay in government subsidy payments. Furthermore, AT&C losses increased substantially to around, because of a steep fall in collection efficiency (79% in fiscal 2019 from 93.2% in fiscal 2018) as a result of increased government receivables. This is despite a fall in distribution losses (10.0% in fiscal 2019 from 11.0% in fiscal 2018). The tariff gap is estimated to have moderated in fiscal 2020 on account of increased offtake by higher-tariff lift irrigation projects (average realisation of around Rs 9/kWh compared to overall average realisation of around Rs 4.5/kWh in fiscal 2020) along with stable power cost.
 
Receivables (excluding subsidy) are estimated to have increased to around 290 days as on March 31, 2020, from 165 days as on March 31, 2018, because of delay in payments by state government (government dues account for ~80% of total debtors). Subsidy payments were also delayed, with subsidy receivables rising by around Rs 680 crore in fiscal 2020 to around Rs 3,500 crore. Losses and delay in government payments resulted in total debt increasing to around Rs 7,300 crore as on March 31, 2020 (Rs 6,626 crore as on March 31, 2019) from Rs 5,614 crore as on March 31, 2016 (pre-UDAY). Debt is expected to increase further because of operating losses due to the persisting tariff gap and delays in subsidy and operational receivables from the government.
 
While the state government has infused equity of around Rs 2,375 crore between fiscals 2018 and 2020, liquidity remains stretched due to the tariff gap and increasing receivables, and debt servicing is managed by stretching payables (to power producers).
 
CRISIL believes the discom's losses may continue over the medium term due to the persisting tariff gap and inadequate tariff hikes, resulting in higher debt levels. Owing to continued losses, Northern Discom is expected to remain dependent on the state government funding over the medium term.
Liquidity Stretched

Northern Discom maintained cash and equivalents of Rs 361 crore as on March 31, 2019. Liquidity remains stretched, with cash losses estimated over fiscals 2020 and 2021. Debt obligation shall be met through government support and by stretching payables to power producers. Cash credit facility of Rs 150 crore was utilised around 100% on average over the 12 months (through February 2020). Nevertheless, the liquidity profile is supported by its critical utility role and state government ownership. CRISIL believes Northern Discom's funding requirement, including expected annual capital expenditure of around Rs 700 crore, will be supported by the state government through equity infusion in addition to the approved tariff subsidies of around Rs 4,200 crore.

Outlook: Negative

Northern Discom's liquidity may stretch further if government dues and subsidy receivables continue to build up. Any substantial support from the state government to reduce the dues and subsidy receivables will be a positive.

Rating Sensitivity factors
Upward Factors
* Decline in receivable position of the company to 120-150 days on a sustained basis
* Elimination of tariff under-recovery, reducing the tariff gap

Downward Factors
* Increase in receivables beyond 330 days on a sustained basis, impacting liquidity
* Substantial increase in power purchase payables
* Any diminution or delay in support from the state government.
About the Company

Northern Discom is a state-owned power distribution utility. It distributes and supplies power to 18 districts of north Telangana: Warangal Urban, Warangal Rural, Jayashankar (Bhupalpalli), Mulugu, Jangoan, Mahabubabad, Karimnagar, Jagitial, Peddapalli, Rajanna (Sircilla), Khammam, Badradri (Kothagudem), Nizamabad, Kamareddy, Adilabad, Mancherial, Nirmal, Komaram Bheem (Asifabad). The company supplies power to over 57 lakh consumers through a network of 1,373 sub-stations, 262,609 kilometre lines and 242,539 distribution transformers.
 
In fiscal 2019, the company had a net loss of Rs 3,051 crore and operating income of Rs 10,543 crore, against a net loss of Rs 1,561 crore and operating income of Rs 8,982 crore in the previous fiscal. 

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 10,543 8,982
Profit After Tax (PAT) Rs crore (3,051) (1,561)
PAT Margin % -28.9 -17.4
Adjusted debt/adjusted networth Times -1.04 -1.32
PBDIT/Interest expenses Times -3.97 -2.33

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity level Rating assigned with outlook
NA Cash Credit NA NA NA 150 NA CRISIL BB/Negative
NA Letter of Credit NA NA NA 100 NA CRISIL A4+
NA Rupee Term loan Jun-2016 11.5% Jun-2029 983.99 NA CRISIL BB/Negative
NA Rupee Term loan Dec-2009 11.5% Dec-2022 100.96 NA CRISIL BB/Negative
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  1234.95  CRISIL BB/Negative      28-06-19  CRISIL BB/Stable  27-03-18  CRISIL BB/Stable      CRISIL BB/Positive 
Non Fund-based Bank Facilities  LT/ST  100.00  CRISIL A4+      28-06-19  CRISIL A4+  27-03-18  CRISIL A4+      CRISIL A4+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 150 CRISIL BB/Negative Cash Credit 150 CRISIL BB/Stable
Letter of Credit 100 CRISIL A4+ Letter of Credit 100 CRISIL A4+
Rupee Term Loan 1084.95 CRISIL BB/Negative Rupee Term Loan 1084.95 CRISIL BB/Stable
Total 1334.95 -- Total 1334.95 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Power Distribution Utilities
Rating criteria for manufaturing and service sector companies

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