Detailed Rationale

CRISIL’s Ratings of ‘CRISIL A+/CRISIL A1+’ on the debt instruments of PTC India Financial Services Ltd (PFS) continue on ‘Rating Watch with Developing Implications’.

 

CRISIL Ratings has also withdrawn the rating on the non-convertible debentures worth Rs 101.25 crore as these have been redeemed. Refer the 'Annexure - Details of Rating Withdrawn' for the same. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.

 

On January 31, 2022, CRISIL Ratings had placed the ratings on the debt instruments of PFS on ‘Watch with developing implications’ following PFS’s announcement that all three independent directors of the company have resigned citing corporate governance lapses at the company. The independent directors, in their resignation letters, have referred to instances pertaining to, among others, appointment of a Whole-time Director and Chief Financial Officer, lack of information sharing on specific loan accounts and management’s inaction on corporate governance concerns raised by previous chairman of the company in August 2021. PFS, in turn, has refuted the allegations by the outgoing directors.

 

On March 29, 2022, PFS, through a board resolution, approved the appointment of four independent directors, as per the communication received from the promoter (PTC India Ltd). All the independent directors are common directors on the board of PTC India Ltd and PFS. The company has started conducting board meetings as part of normal course of business. Further, on April 27, 2022, PFS initiated the process to appoint M/s. CNK & Associates LLP (Chartered Accountants) to carry out a third party independent forensic audit on the issues highlighted by the erstwhile Independent Directors. On May 13, 2022, PFS received a communication from SEBI noting the appointment for common independent directors on the board of PFS. Further, SEBI has also advised PFS to not change the structure and composition of its board till the completion of forensic audit by M/s. CNK & Associates LLP (Chartered Accountants) and submission of report by risk management committee of PTC India Ltd.

 

CRISIL Ratings will monitor the impact of the ongoing developments in this event on the company’s incremental fund raising, as also any potential impact on the existing borrowings from any covenants or triggers linked to it. Also, the stance taken by the regulators post a formal engagement with the company with regard to penal actions, if any, will be a key monitorable. CRISIL Ratings will resolve the rating watch once greater clarity emerges on these aspects.

 

The ratings continue to factor in strong support from the promoter, PTC India Ltd (PTC; rated 'CRISIL A1+'), and the company’s adequate capitalisation and earnings profile. These strengths are partially offset by exposure to risks relating to asset quality, given the challenges faced by the power sector and modest market share in the infrastructure financing segment.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the business and financial risk profile of the company. The ratings also factor in the company's strategic importance to, and strong support likely to be provided by, the promoter, PTC.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from parent

PFS, promoted by PTC, remains strategically important to the parent, given the latter's objective of operating as an integrated player in the power sector. PFS offers financing solutions to entities in the power sector and complements PTC’s role by offering power-trading solutions. PTC has invested Rs 754.77 crore in PFS till date and holds a 64.99% stake in the company as on March 31, 2022. The parent continues to extend branding, strategic, management and funding support to the company. PFS benefits from the parent's strong domain knowledge and healthy customer relationships. PTC's chairman and managing director is PFS's non-executive chairman; additionally, the company now has five common directors. CRISIL Ratings believes that the parent will support PFS in meeting its debt obligations in a timely manner, in the event of a distress situation. PTC, will also have a strong moral obligation to support the subsidiary given the strong relationships and shared brand name between the two.

 

• Adequate capitalisation

Capital structure is marked by healthy networth of Rs 2,238 crore as on December 31, 2021. Tier 1 capital adequacy ratio (CAR) was at 22.1%, with overall CAR at 22.5% as on December 31, 2021, compared to 23.7% and 23.9%, respectively, as on March 31, 2021. Gearing stood at 3.4 times as on December 31, 2021 (4.3 times as on March 31, 2021), and is expected to be under 6.0 times on a steady-state basis. The company’s capital position also supports asset-side risks. Networth coverage for net non-performing assets (NPAs) was adequate at 8.8 times as on December 30, 2021 (6.8 times as on March 31, 2021). While the current capitalisation will support near-term growth plans, the ability to raise additional capital to fund large growth plans will remain a key monitorable in the medium term.

 

Weaknesses

• Asset quality risks arising from challenges faced by the power sector

PFS faces asset quality challenges, given its concentration in the power sector, weak financial health of state power distribution companies and exposure to private sector thermal power projects. To mitigate the risks, the company pruned its exposure to the thermal segment (which now stands at about 11%), and consequently expanded its renewable energy portfolio, which now accounts for around 33% of the total loan book as on December 31, 2021. However, given the nature of business, some amount of loans are still under moratorium and the impact of seasoning will be visible only over the medium term. Gross NPAs increased to 8.3% as on December 31, 2021, from 7.4% as on March 31, 2021, due to decline in loan book.

 

Nevertheless, with relatively high provision coverage at 69% as on December 31, 2021 (62% as on March 31, 2021), credit costs remained stable at 1.5%  (of average assets; annualised) for the first nine months ended fiscal 2022 as against 2.0% for fiscal 2021. Consequently, Profit after tax (PAT) was Rs 105 crore with return on average assets (RoA) of 1.3% for the first nine months ended fiscal 2022 as against Rs 26 crore and 0.2%, respectively, for fiscal 2021.

 

While PFS has resolution plans in place for large NPAs, and there has been some progress, timelines and ability to effect significant recoveries needs to be monitored; hence, the impact of asset quality and recoveries on its profitability will remain a key monitorable.

 

• Moderate market share in the infrastructure financing segment

PFS has a moderate market share in the infrastructure financing segment, with a net loan book of Rs 9,836 crore as on December 31, 2021 (Rs 9961 crore as on March 31, 2021). While PFS cautiously disbursed loans (incremental gross disbursement of Rs 3,508 crore in the nine months ended fiscal 2022 as against Rs 1,136 crore in the corresponding period of the previous fiscal), the company was not able to sanction new proposals without a fully functioning board during Q4FY22. The same is expected to impact the loan book of the company. While the company is planning to start evaluating new proposals, the ability of the company to normalise operations and start disbursements will need to be monitored.

Liquidity: Adequate

The analysis of the asset liability maturity profile of PFS, as of December 2021, shows nil negative cumulative mismatches in the one-year bucket, after adjusting for available unutilised bank lines. As on May 31, 2022, Cash balance (of Rs 142 crore), fixed deposits investments (of Rs 644 crore) and unutilised bank-lines (of Rs 1810 crore) should suffice to cover the maturing debt of Rs 583 crore for the next four months.

Rating Sensitivity factors

Upward factors

• Material improvement in the credit risk profile of PTC
• Significant improvement in the asset quality and competitive position of PFS, amid comfortable financial risk profile (RoA crosses 2.5% on a sustainable basis)

 

Downward factors

• Any adverse impact of the stand taken by the investors, lenders or regulators on account of the recent events on the business operations and financial flexibility of the company
• Decline in support from PTC, either by way of decline in its ownership below 50% or in the strategic importance of PFS to PTC
• Significant and consistent increase in delinquency, impacting profitability

About the Company

PFS was promoted by PTC, to provide financial services and related products and services to companies in the energy value chain. The company was incorporated in September 2006 and commenced operations in May 2007. PFS is registered with the RBI as an infrastructure-financing non-banking financial company. It provides loans (including mezzanine funding) to infrastructure projects with primary focus on renewable projects along with other projects of distribution, transmission, road under hybrid annuity model, sewage treatment and ports. The company also provides non-fund-based products and services to companies in the power sector. As on December 31, 2021, the gross loan book was Rs 9836 crore comprising 33% to renewables, 13% to thermal and hydro assets and the rest being others (including, transmission, distraction companies, road projects and water sanitation)

 

For the nine months ended fiscal 2022, PAT was Rs 105 crore on total income (net of interest expense) of Rs 293 crore, as against Rs 79 crore and Rs 180 crore, respectively, for the corresponding period last year.

Any other information: Not applicable