Windforce (Pvt) Ltd

ICRA Lanka assigns the issuer rating of [SL]AA- with Stable outlook for Windforce (Pvt) Ltd.

InstrumentCurrent Rated Amount
(LKR Mn)
Rating Action
Issuer Rating [SL]AA- (Stable); assigned

Rating action

ICRA Lanka Limited has assigned the issuer rating of [SL]AA- (Pronounced SL double A minus) with Stable outlook for Windforce (Pvt) Limited (WPL or the Company).

Rationale

ICRA Lanka has taken a consolidated view on Windforce (Pvt) Ltd and its subsidiaries, given the significant operational and financial linkages among them. The rating primarily factors in Windforce’s position as a leading private sector power producer in Sri Lanka with diversifications into wind, solar (roof top and ground solar) and mini hydro power segments.

The assigned rating considers positively the experience of the management team and the Company’s operational track record in the power sector. With the recent group restructuring exercise, the Company’s total power generation capacity has increased by additional 56MWs to 218 MWs in FY2021. Given its larger scale of operations in Sri Lanka, the Company has been efficiently managing its operations through prudent selection of energy sources, locations and strong control over operations and maintenance. Majority of the Company’s PPAs with the Ceylon Electricity Board (CEB) are in place for the next 10-20 years, which provides strong revenue visibility over the long term. ICRA Lanka also takes comfort from the precence of the main promoters of the group, namely Akbar Brothers (Pvt) Ltd and Hirdaramani (Pvt) Limited. This together with the Company’s strong liquidity profile with adequate cash balances and liquid investments, besides access to bank funding lines, given their strong relationship with financial institutions provides further comfort to the assigned rating. The rating further draws comfort from WFL’s healthy financial profile, which is characterized by robust profitability (average return on capital employed (RocE) in excess of 15%), comfortable capital structure (gearing of 0.35x as on March 31, 2020) and adequate coverage metrics.

The assigned rating also factors in the Company’s higher reliance on Wind Power Mills and run-of-the-river MHPPs, which are exposed to vagaries of the Monsoons in Sri Lanka. However, this risk is mitigated to a larger extent by the Company’s diversification efforts into geographies and other renewable energy sources. Although, the counterparty credit risk is limited to a larger extent given the government backing for CEB, delays from CEB have resulted in WFL’s stretched trade receivable levels from the local operation affecting the overall working capital intensity over the past two years. Also, the Company is exposed to the foreign currency risk of the USD denominated borrowings as the same is not fully hedged, albite this is mitigated to some extent from foreign currency cash flows from the overseas investments. The rating has also noted the Company’s larger capex projects, which are currently under various approval stages both in Sri Lanka and overseas. Going forward, the Company intends to raise new equity to fund these projects (at the standalone level) and therefore, the ability of the management to successfully commission these projects as envisaged remains to be reviewed in the future.  

Outlook: Stable

The Stable Outlook reflects ICRA Lanka’s expectations that WPL would benefit from its diversified project portfolio going forward.

Key Rating Drivers

Credit strengths

Strong operational track record, capable management and efficient organizational structure; The rating considers favourably the experience of the management team and WFL’s strong operational track record which have enabled the Company to record healthy growth in revenues and profits over the past several years. WPL has  undergone a restructuring exercise in January 2020 to consolidate all the operating power segments under one holding company. Previously hydro power segment was held seperately under Renewgen (Pvt) Limited. Post the restructuring, the Company holds 27 power projects as subsidiaries/sub-subsidiaries, associates and joint ventures. WPL currently operates as the Holding Company for its power plants which are diversified based on renewable energy sources and geographies. At the operational level, all the projects of the group have been undertaken through separate legal entities due to tax and other regulatory requirements in Sri Lanka. However, the business is managed as one operation. 

The Company has been efficiently managing its operations through strong control over operations and maintenance. The Company has a strong technical support team, consisting of 28 qualified and experienced Engineers in the fields of Mechanical, Electrical and Civil engineering, with capabilities to design and maintain the power plants. This enables the Company to respond quickly to outages at their power plants and restore normal service within quick turnaround times. As a consequence, a majority of WPL’s plants maintain a 99% Plant Availability Ratio.

Strong visible capital support from the promoters and limited debt envisaged in the future based on the capital raising initiatives; The main promoters of WPL are Akbar Brother (Pvt) Limited with a stake of 38.85% and Hirdaramani (Pvt) Ltd with a stake of 24.32%. The promoters have continued to support the growth of the Company during the past several years. Although, the Company intends to broaden its shareholder base with the proposed IPO, the main shareholders are expected to remain with the Company going forward. The future capital raising exercises would further strengthen the Company’s capital structure. In addition, the Company’s current group structure would also help to expand the business operation without significantly leveraging the balance sheet through prudent use of JV structures and also take advantage of the concessionary finances, which are available for renewable energy investments.

Diversification strategy and favourable long term outlook for renewable energy sector; All of WPL’s domestic power plants have firm power purchase agreements (PPAs) with the CEB for 15-20 years and are extendable upon mutual agreement after expiry. These PPAs have provided strong revenue visibility over the long term. 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. 

Presently, the Company’s current power generation capacity is largely concentrated on Wind, Solar and Hydropower sectors. Over the next two years, the Company intends to scale up further their installed energy capacity by additional 55 MWs in the wind, and other new renewable energy sources (including battery storage technology). This will help the Company to mitigate the risks of vagaries of monsoons to a larger extent. Moreover, given the less volatility in Plant Load Factor (PLF) of solar and wind power segments in Sri Lanka, the expansion into solar and wind segments would also provide further stabilization to the Company’s overall PLF levels going forwards. The Company carries EPC works for its group power investments and this has further helped the Company to benefit from the lower global raw material prices (compared to the market conditions). Moreover, the Company’s MHPPs are also located in the Central and Southern parts of the country, which has helped the hydropower segment to well diversify geographically.

Comfortable Financial Profile: Due to the recent restructuring, the Company’s total power generation capacity has increased significantly by additional 56 MWs during FY2021. Since the full-year consolidation of the WFL group takes place during FY2021, ICRA Lanka expects a significant improvement of the operational/financial performances of the Company during this period.  The operating profit margins have moderated over the past few years, largely attributable to the fact that the Company’s older PPAs under the wind power segment have shifted towards a lower tariff level under the three-tier tariff system. However, ICRA Lanka expects the Company to sustain its current operating profit margins going forward with the commissioning of 10 MWs-new solar power plant in Uganda during FY2021.

The Company has reported a net profit of LKR 1,897 Mn on total operating income of LKR 3,692 Mn in FY2020 compared with the net profit of LKR 1,483 Mn on total operating income of LKR 2,884 Mn in FY2019. The Company (at the consolidated level) maintains a moderate capital structure with healthy gearing of 0.35x as at FY2020 and coverage metrics (Interest Cover of 5.4x and Debt Service Cover Reserve of 2.24x in FY2020). The debts at the Standalone Company level is backed by cash cover and therefore, adjusted for the same, the net gearing level (at the consolidated level) would become even lower. The subsidiaries are servicing debts on their own and have adequate debt service covers (at the subsidiary levels). WPL’s financial profile is also characterized by healthy Return on Capital Employed (ROCE) of 15-20% over the past five years. WPL’s liquidity profile has also traditionally been strong with adequate cash balances, besides access to bank funding. The Company, in the past, has also been able to raise equity funding successfully from its promoters, which provides adequate comfort on the Company’s fund-raising-ability.

Credit challenges

Susceptibility of revenue to vagaries of monsoons leading to volatile cash flows: The Company’s revenue concentration on Wind and Hydro power generation currently stand at ~80% of the consolidated revenue in FY2020. ICRA Lanka notes that, during FY2017, severe drought conditions that prevailed in Sri Lanka had adversely affected the plant load factors of most mini hydro plants and windmills (to a lesser extent) in Sri Lanka and consequently the profitability. The revenue contribution of the Hydro plants would continue to remain volatile in line with the weather patterns. The wind power plants are also relying on South-West monsoon and North-East monsoons in Sri Lanka. The wind plants generally experience a dull period in March, April and November due to seasonality. However, this risk is mitigated to a larger extent by the recent diversifications into new geographies in Uganda, Pakistan and Ukraine as well as other energy sources.

Increased working capital intensity-albeit the lower counterparty risks; generally, over the recent past, the repayment cycle from CEB has stretched over 90-120 days. This together with the consolidation of Hydro power plants into WPL in Jan-2020, has increased overall trade receivable levels. Trade payment cycle from the Uganda Energy Authority is generally within 60days and these payments are in US$ terms. Although, the stretched trade receivables from the local operation has affected the overall working capital intensity, the trade receivables from CEB, is generally regarded to have limited counterparty credit risk given GoSL backing.

Foreign currency risk of the US Dollar-denominated debt; The Company (at the standalone level) has funded two of its foreign investments using USD denominated term loans which are secured through cash covers. This debt is being serviced partly using the dividend income of its overseas investments. Presently, the Company has not hedged the foreign currency risk of the facilities. Nevertheless, increasing dividend incomes from the overseas operations with the commissioning of new solar power plant in Uganda, would help the Company to mitigate this risk to a great extent.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria:  https://www.icralanka.com/corporate-rating-methodology

About the Company:

Windforce (Pvt) Ltd was incorporated in 2010. WPL is a leading renewable power producer in the country with the current total installed power generation capacity of ~218 MWs (including the associates/JVs). The main shareholders of the Company are Akbar Brothers (Pvt) Ltd (38.85%), Hirdaramani (Pvt) Ltd (24.32%), and Debug Computer Peripherals (Pvt) Ltd (14.29%). Initially, the Company had set up its first MHHP, with the commissioning of Seethagala hydropower plant (0.8 MW) in 2004. Subsequently, the company has organically expanded its portfolio of power plants by the commissioning of new MHPPs under Renewgen (Pvt) Ltd (RPL). During 2009/10, the Company has diversified into wind power segment by incorporating WPL. Since 2016, the Company has further diversified its power generation mix into solar space (both industrial solar and rooftop solar segments). In January 2020, the main promoters restructured the Windforce group by consolidating Wind, Solar and Hydropower segments under WPL through the acquisition of 100% stake of RPL. Post the restructuring, WPL has investments in 27 power projects as subsidiaries/sub-subsidiaries, associates and joint ventures. The plants are diversified into Wind, Solar and Hydro and are based in Sri Lanka, Uganda, Pakistan and Ukraine. The total plant capacity is ~218 MW and 55.31% is in Sri Lanka followed by 31.26% in Pakistan, 9.33% in Uganda and 4.09% in Ukraine.

Key financial indicators (audited)`
Revenue and profitability indicators-Figs are in LKR Mn (Consolidated Level)FY2016FY2017FY2018FY2019FY2020
Operating Income*         2,322         2,326         2,664         2,884         3,692
OPBDITA         2,016         1,955         2,028         2,208         2,587
PAT         1,538         1,427         1,674         1,483         1,897
ROCE (%)21.27%19.73%19.59%15.04%14.48%
NWC / OI (%)8.08%12.34%58.90%26.14%37.86%
Total Debt         3,641         3,540         3,821         4,513         6,225
Networth         4,619         5,561         6,753         7,890       16,347
Gearing (x)0.660.520.450.460.35
OPBDITA/Interest & Finance Charges(x)7.535.285.066.305.41
Total Debt/OPBDITA (x)1.811.811.882.042.41

*Adjusted based on ICRA’s Operating Income computation methodology

Rating history for last three years

Analysts

Dasith Fernando
Senior Analyst
+94-771540042
dasith@icralanka.com  

Danushka Perera
Head of Corporate Sector Ratings
+94-774781591
danushka@icralanka.com  

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