ICRA Lanka assigns [SL]BBB+ with Stable outlook for Lotus Hydro Power PLC.
|Instrument||Current Rated Amount|
|Issuer Rating||–||[SL]BBB+ (Stable); assigned|
ICRA Lanka Limited has assigned the issuer rating of [SL]BBB+ (Pronounced SL triple B plus) with Stable outlook for Lotus Hydro Power PLC (LHP or the Company).
ICRA Lanka has taken a consolidated view on Lotus Hydro Power PLC and its subsidiaries, given the significant operational and financial linkages among them.
The rating primarily factors in the Company’s satisfactory operational track record in the power sector since 2000, comfortable capital structure, healthy financial profile supported by comfortable profitability and healthy coverage matrices and the potential growth opportunities in the renewal energy sector. LHP currently operates four Mini Hydro Power Plants (MHPPs) accounting for a total power generation capacity of 4.9 MW. Sanquhar and Delta power plants are directly owned by LHP and Thebuwana and Stellenberg are 100% subsidiaries of LHP. The consolidated business is managed as one operation. The majority of the Company’s Power Purchase Agreements (PPA) with the Ceylon Electricity Board (CEB) are in place for the next 10-20 years, which provides strong revenue visibility over the long term. Given the government backing for CEB, the counterparty credit risk is expected to be limited, although, ICRA Lanka has noted that the payment cycle has stretched in FY2021 due to the pandemic. The Company reported healthy profit margins over the past five years. The profit margins remained volatile due to the vagaries of the monsoon. The Company reported a healthy capital structure due to low debt at the consolidated level. At a standalone level, LHP is debt-free. Going forward, ICRA Lanka envisages moderation in the capital structure with the issuance of the proposed LKR 1,000 Mn debenture. The Company reported healthy coverage ratios with a Debt Service Coverage Ratio (DSCR) of 14.3x in 9MFY2021 as compared to 4.8x in FY2020 and 4.6x in FY20219. The DSCR improved due to lower debt at a consolidated level as a result of the maturity of the existing debt. ICRA Lanka envisages that the DSCR ratio will continue to remain comfortable post the issuance of the proposed debenture.
The assigned rating also factors in the Company’s small scale of operations, its reliance on run-of-the-river MHPPs exposing it to vagaries of the Monsoons; the risk is accentuated by LHP’s current modest scale of operations which exposes cash flows to volatility. ICRA Lanka also has noted that close to 50% of the consolidated revenue is concentrated on Delta MHHP. This was due to the current attractive tariff from the existing PPA and healthy Plant Load Factor (PLF). The current PPA of Delta expires in Apr-21 and the renewed tariff under the new agreement is significantly lower than the previous tariff. This will reduce the consolidated revenue by ~25%. However, this risk is expected to be mitigated to a larger extent in the medium term by the Company’s aggressive expansion plans. ICRA Lanka views favourably the Company’s plans to scale up its capacity by 25-30 MW in the hydro and solar segments in the medium term. This will improve the future cash flows and generate a healthy return on investments. ICRA Lanka has witnessed an increase in working capital intensity to 67.1% in 9MFY2021 as compared to 60.4% in FY2020 and 16.1% in FY2019 due to delays in CEB’s payments. This is a common issue faced by the renewable energy industry. Due to comfortable cash flow generation, the Company has been able to maintain its operations without getting any working capital support from the Banks.
The Stable Outlook reflects the comfortable capital structure, comfortable financial profile and envisaged capacity expansion plans of LHP. The rating may be downgraded if there is a significant change in the capital structure and deterioration in financial profile.
Key Rating Drivers
Long Operating track record; LHP has been operating since 2000. The operational track record and group structure have enabled the Company to operate in an efficient manner while rationalising the overhead cost and maximising tax benefits. The rating considers favourably the experience of the Senior Management which has been with the Company since its inception. At the operational level, the Company is also supported by a qualified and experienced engineering team, complemented by a sizeable maintenance/operations team. The Engineering team has the expertise in Electrical and Civil engineering, with capabilities to operate power plants.
Comfortable capital structure and financial profile: The Company (at the consolidated level) maintained a comfortable capital structure with lower gearing (after adjusting for the Revaluation Reserve) of 0.04x in 9MFY2021 as compared to 0.08x in FY2020 and FY2019. The Capital structure at the consolidated level remains comfortable due to the standalone company being debt-free and the debt of the two subsidiaries getting paid off in FY2022-23. Going forward, LHP is planning to issue LKR 1,000 Mn debenture to fund the future expansion plans of the Company. This will moderate the capital structure of the Company. ICRA Lanka will closely monitor the effects on the capital structure post the issuance of the debenture. The financial profile of the consolidated entity remains comfortable with healthy profitability and coverage matrices. The Company maintained a comfortable OPM in the range of 60-70% over the past five years. During the same period, the generation capacity of LHP remained unchanged. The volatility in margins was due to vagaries of the monsoons. In FY2019, the NPM of the Company reduced due to impairment loss of LKR 24.7 Mn in Thebuwana MHPP. The Company maintained healthy DSCR and interest coverage over the past five years. It reported a DSCR of 14.3x in 9MFY2021 as compared to 4.8x in FY2020 and 4.6x in FY2019. The Interest Coverage Ratio improved to 50.3x in 9MFY2021 as compared to 19.6x in FY2020 and 20.7 in FY2019. The Coverage ratios improved in line with the maturity of existing debt at the consolidated level. ICRA Lanka envisages that the coverage ratios will moderate but remain comfortable post the issuance of LKR 1,000 Mn debenture.
Expansion plans; In the medium term, the Company intends to scale up its installed energy capacity up to 25-30 MW in the hydro and solar power segments. The Company is planning to fund the envisaged expansion plans by issuing a debenture. Given the GoSL’s focus on Non-Conventional Renewable Energy Sources (NCRE), ICRA Lanka views that the demand prospects augur well for the Company going forward.
Small scale of operations; LHP operates four MHPPs with a capacity of 4.9 MW. The Company’s reliance on run-of-the-river MHPPs exposes it to the vagaries of the Monsoons. The risk is accentuated by LHP’s current modest scale of operations which exposes cash flows to volatility. The expansion plans of LHP could partially mitigate the exposure to climatic risks, given that the current portfolio consists exclusively of run-of-the-river MHPPs.
A significant portion of the revenue is concentrated on a single project – Delta MHPP; Close to 50% of the consolidated revenue of LHP was concentrated in Delta MHHP in 9MFY2021 as compared to 48% in FY2020 and 38% in FY2019. LHP’s performance is therefor highly reliant on Delta. Delta has generated healthy returns over the past due to the attractive tariff of the existing PPA and its healthy PLF. The existing PPA of Delta expires in Apr-21 and the Company has already entered into a new PPA. ICRA Lanka has noted that the renewed tariff of the new PPA is significantly low as compared to the previous tariff. As a result, ICRA Lanka envisages a ~25% drop in consolidated revenue due to the new tariff. This will not impact the coverage matrices of LHP since all the existing debt will get settled in FY2023.
Increased working capital intensity; generally, over the recent past, the repayment cycle from CEB has stretched from 90-120 days to 180 days. LHP’s debtor’s days has increased to 243 days in 9MFY2021 as compared to 194 days in FY2020 and 53 days in FY2019 due to receivable balance related to Sanquhar MHPP. PPA of Sanquhar expired in Dec-18 and a new agreement was signed only in Jul-20. As a result, a receivable balance of ~LKR 64 Mn has been created during the transition period. The payment delays have increased the working capital intensity of the Company to 60.2% in 9MFY2021 as compared to 53.0% in FY2020 and 15.3% in FY2019. Although the stretched trade receivables from the operations have affected the overall working capital intensity, the trade receivables from CEB is generally regarded to have limited counterparty credit risk given GoSL backing.
Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.
Links to applicable criteria: https://icralanka.wpengine.com/corporate-rating-methodology
About the Company:
Lotus Hydro Power PLC (LHP) was incorporated in 2000 by Pussellawa Plantations and FLC Holdings (Pvt) Ltd as Hydro Power Free Lanka Pvt limited. Each Company held a 50% share of LHP. Aloysius Family was the main promoter of the Company. Mr Garry Seaton was the second-largest shareholder of Pussellawa Plantations with representation on the Board of LHP. In 2016, Mr Garry Seaton acquired LHP through Lotus Renewable Energy (Pvt) Limited (LEPL) by purchasing 72.14% stake from Pussellawa Plantations, Browns Power Holdings (Pvt) Ltd, FLMC Plantations (Pvt) Ltd and Lanka Orix Leasing Company PLC. LEPL holds 73.66% stake of LHP as in Dec-20 and it acts as an investment holding company investing in renewable energy and agriculture sectors based on its philosophy of undertaking Environment-friendly investments. In addition to Sri Lanka, LEPL Group has invested in solar projects in India and Australia. LHP owns four MHPPs with a generation capacity of 4.9 MW, two plants are directly under LHP and two plants through its subsidiaries Tebuwana Hydro Power (Pvt) Ltd and Stellenberg Hydro Power (Pvt) Ltd.
Key financial indicators (audited)
|In LKR Mn||FY2016||FY2017||FY2018||FY2019||FY2020||9MFY2021*|
|ROCE (%, adjusted for Revaluation Reserve)||9.9%||4.5%||7.9%||20.4%||8.1%||22.8%|
|NWC / OI (%)||-8.0%||4.7%||6.4%||15.3%||53.0%||60.2%|
|Networth (adjusted for Revaluation Reserve)||508.6||424.8||403.7||629.6||560.8||723.9|
|Gearing (x, adjusted for Revaluation Reserve)||0.28||0.29||0.21||0.08||0.08||0.04|
|OPBDITA/Interest & Finance Charges(x)||8.85||5.16||8.77||20.65||19.60||50.30|
|Total Debt/OPBDITA (x)||1.25||1.41||0.61||0.26||0.32||0.12|
|Debt Service Coverage Reserve Ratio (excl. short term debt)||2.69||1.74||2.69||4.62||4.77||14.25|
Rating history for last three years
|Dasith Fernando |
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