Windforce PLC

ICRA Lanka reaffirms the issuer rating of WindForce PLC.

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

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of [SL]AA- (Pronounced SL double A minus) with Stable outlook assigned to WindForce PLC (WF or the Group).

Rationale

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

The rating reaffirmation considers the experience of the management team and the Group’s operational track record in the power sector. Given its large scale of operations in Sri Lanka and overseas, the Group has been efficiently managing its operations through prudent selection of energy sources, locations and strong control over operations and maintenance. ICRA Lanka also takes comfort from the presence of the main promoters of the group, namely Akbar Brothers (Pvt) Ltd and Hirdaramani (Pvt) Limited.

Majority of the Group’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 takes note of the Group’s improved financial profile, which is characterized by robust profitability (net profit margin increased to 55% during 9MFY22 from 46% in FY21), comfortable capital structure (gearing of 0.28x as of Dec-21) and healthy coverage metrics (interest cover of 11.06x in 9MFY22 and 8.58x in FY21). This together with the Company’s strong liquidity profile (liquidity cover of 1.9x as of Dec-21 and 1.4x as of Mar-21), with adequate liquid investments and unutilized bank funding lines provides further comfort to the assigned rating.

However, the rating factors  the Group’s higher reliance on Wind Power Mills and run-of-the-river MHPPs, which are exposed to vagaries of the Monsoons in Sri Lanka. This risk is mitigated to a larger extent by the Group’s diversification efforts into geographies and other renewable energy sources. ICRA Lanka also notes the Group’s significant exposure to the single buyer CEB given the weakening financial profile of the state electricity provider. Although, the counterparty credit risk is limited to a larger extent given the government backing for CEB, delays from CEB have resulted in stretched trade receivable levels from the local operation affecting the overall working capital intensity during the year. Also, the Group is exposed to the foreign currency risk of the USD denominated borrowings as the same is not fully hedged. However, this is mitigated to some extent from foreign currency cash flows from the overseas investments. The rating has also factored the Group’s capex projects, which are currently under various approval stages both in Sri Lanka and overseas and 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 the Group would benefit from its diversified project portfolio going forward. The outlook could be revised to Negative in case of extended repayment cycles from the CEB, affecting the overall cash flows of the company, and in case of significant weakening of the operating performance, affecting the coverage indicators.

Key Rating Drivers

Credit strengths

Market leadership in the NCRE segment in Sri Lanka; WindForce PLC is currently a leading player in the renewable energy sector with a total power generation capacity of ~222MWs. The Group has been a dominant player in Sri Lanka’s wind power industry since its first project in 2010. In addition to its dominant presence in the local wind power space, the Group has further diversified into large scale, ground and rooftop solar power generation systems and mini hydro plants, both locally and overseas, while expanding its reach to Pakistan, Uganda and Ukraine. The Group’s total installed capacity consist of 69.2MW of Wind power, 126.3MW of Solar power and 26.3MW of Hydro power. The Group’s current structure also helps 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.

The Group listed on the Colombo Stock Exchange on April 2021, thus marking yet another milestone in the decade long journey. The main promoters of the Group are Akbar Brother (Pvt) Limited with a stake of 35.91% and Hirdaramani (Pvt) Ltd with a stake of 20.67%. The promoters have continued to support the growth of the Company during the past several years.

Comfortable financial profile characterized by healthy profitability; The Group has reported a net profit margin of ~50% and an OPBITDA margin of ~75% on average, during the last 4 years. During 9MFY22, the revenue grew by 5%, driven by the healthy Plant Load Factors (PLF) observed in the Hydro power segment, due to the favorable rainfall patterns experienced during the period. While the macro-economic parameters such as the exchange rate and inflation took a toll on the operating costs, the upward revision of the corresponding tariff rates (linked to the USD/LKR rate and CCPI index) contributed towards maintaining stable operating margins during the period. Net profit level of the Group increased by 27% in 9MFY22 from that of FY21, recording a margin of 55%, driven by the increased profit share from the associates and the reduced interest costs. The healthy operating profitability has continued on to strengthen the coverage indicators further, to 11.06x in 9MFY22 from 8.58x inf FY21 and 5.53x in FY20.

The Group’s project portfolio being dominated by fairly new projects operating within the first tier of the 3-tier tariff structure has given more comfort in terms of performance outlook and debt serviceability.

Diversification strategy and favorable long term outlook for renewable energy sector; As of Dec-21, 62% of the total power generated by the Group was represented by Wind power while Solar power represented 22% and 17% by Hydro Power. Majority of the power plants are based in Sri Lanka where Wind power is concentrated in the Northern and North Western provinces and Hydro power in the Central, Uva and Sabaragamuwa provinces. All of WF’s domestic power plants have firm power purchase agreements (PPAs) in place with the CEB for 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 notes that the demand prospects stand well for the Group going forward. 

The Group has several projects in the pipeline including wind and solar projects. Given the less volatility in Plant Load Factor (PLF) of solar /wind power segments in Sri Lanka, the expansion into those segments would also provide further stabilization in the Group’s overall PLF levels going forward.

Credit challenges

Increasing working capital intensity with delayed payments from local authorities; With the ongoing macro-economic crisis, there has been significant delays in the payments from the local authorities, where the group’s debtor days increased to 211 days in 9MFY22 from 140 days in FY21. While the management is actively engaging in discussions and negotiations with the regulators for a payment plan, given the large scale in operations, the Group is in a better position to absorb these disruptions in the working capital cycle, as opposed to the smaller scale players who are forced to exit the market.

Declining tariff structure; majority of the power plants are operating under the 3 tier tariff structure, which offers different tariff rates depending on the tier that the power plant falls into (the first tier offers the highest tariff rate and as the plant progresses into the next two tires the tariff rate declines). The operating and maintenance cost element, which is used in determiining the tariff rate, is linked to the movement of the USD/LKR exchange rate and the Colombo Consumer Price Index. While the tariff rate is revised periodically, as the cost element also increases in absolute terms, and the net impact is insignificant. According the to the agreed upon tariff rates in the PPAs there is a visible declining trend in the revenue driver, which is an industry risk. A growth in revenue can be achieved through the increasing of PLF and addition of capacity.

Foreign currency risk of the USD denominated borrowings; as of December-21 the Group had a total USD denominated borrowing of USD 5.2 Mn. The same is not hedged though mitigated to some extent from foreign currency cash flows from the investments. Amidst the ongoing economic situation in the country and the depreciation of the currency, the corresponding rupee value of the USD borrowings has increased by ~59% as of April-22, from Dec-21. However, the total dividend income from the foreign entities during FY21 amounted to USD 1.2 Mn and the forecasted dividend income for FY23 is USD 2.4Mn with the commissioning of new projects. The annual outflow for the repayment of these borrowings on average is ~USD 1Mn. In addition, the Group has a reserve of USD 2Mn which provides further comfort over foreign debt serviceability and foreign currency exposure.

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 PLC was incorporated in 2010. The Group is a leading renewable power producer in the country with a current total installed power generation capacity of ~222 MWs (including the associates/JVs). The main shareholders of the Company are Akbar Brothers (Pvt) Ltd (35.91%), Hirdaramani (Pvt) Ltd (20.67%). 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 group by consolidating Wind, Solar and Hydropower segments under WF through the acquisition of 100% stake of RPL. Post the restructuring, WF has investments in 28 power projects as subsidiaries/sub-subsidiaries, associates and joint ventures. Subsequently, the Group was listed on the Colombo Stock Exchange on April 2021. The plants are diversified into Wind, Solar and Hydro and are based in Sri Lanka, Uganda, Pakistan and Ukraine. Out of the total plant capacity, 55.4% is in Sri Lanka followed by 30.7% in Pakistan, 9.2% in Uganda and 4.8% in Ukraine.

Key financial indicators (Consolidated)
Revenue and profitability indicators-Figs are in LKR MnFY2018FY2019FY2020FY20219MFY2022
Operating Income*2,6642,8843,6924,7083,716
OPBDITA2,0282,2082,5873,6102,846
PAT1,6741,4831,8972,1462,052
ROCE (%)19.59%15.04%14.48%10.6%11.1%
NWC / OI (%)58.90%26.14%37.86%108.2%63.8%
Total Debt3,8214,5136,2256,3135,840
Networth6,7537,89016,34720,95920,922
Gearing (x)0.450.460.350.280.26
OPBDITA/Interest & Finance Charges(x)5.066.305.418.5811.06
Total Debt/OPBDITA (x)1.882.042.411.751.54

*Adjusted based on ICRA’s Operating Income computation methodology

Rating history for last three years

Analysts
Gangulee Weerakoon
+94-774781591
gangulee@icralanka.com

Nithya Debaddi
+91-9908912213
nithya.debaddi@icralanka.com

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