ICRA Lanka reaffirms the ratings of Vidullanka PLC
|Instrument||Current Rated Amount|
|Issuer Rating||–||[SL]A- (Stable) reaffirmed|
|Commercial Paper Programme (COR/IR/15/08)||100.00||[SL]A2+ reaffirmed|
|Commercial Paper Programme (COR/IR/20/01)||100.00||[SL]A2+ reaffirmed|
ICRA Lanka Limited has reaffirmed the Issuer rating of [SL]A- (pronounced SL A minus) with Stable outlook, assigned for Vidullanka PLC’s (“VLL”/ “the Company”). ICRA Lanka has also reaffirmed the short term rating of [SL]A2+ (pronounced [SL] A two plus) assigned to two of LKR 100.00 Mn each commercial paper programmes of the Company.
The assigned ratings consider positively the experience of the management team and the Company’s satisfactory operational track record in the power sector, which has permitted the Company to continue stable operational performance during FY2020 and 9MFY2021. During 9MFY2021, most of the domestic power plants of the Company have performed well amidst the favourable weather conditions that prevailed in Sri Lanka. The Company has diversified its operations through its investments in Muvumbe and Bukinda SHPPs, thereby reducing to some extent its reliance on run-of-the-river MHPPs in Sri Lanka which are exposed to vagaries of the monsoon. The Company’s first overseas hydropower project-Muvumbe SHPP in Uganda (6.5 MW), has performed well during FY2020 and 9MFY2021. VLL commissioned its second overseas Hydro project Bukinda SHPP (6.5 MW) in Jul-20. This project has demonstrated performance broadly in line with design expectations during the five months ended Dec-20. Going forward, VLL’s two overseas plants are expected to be the key revenue contributors with more than half of the total power generation of the Group coming from these plants. ICRA Lanka would closely monitor the performance of the projects in the medium term. Moreover, VLL’s investment in the Biomass energy project-Dehiattakandiya Dendro Power Plant (with 3.3 MW) and Rooftop solar projects have provided further diversification to its project portfolio. The ratings also draw comfort from VLL’s moderate financial profile, which is characterized by comfortable profitability (RoCE over 15%), moderate capital structure (with gearing of 1.1x as of Dec 31, 2020) and moderate coverage metrics.
The above rating strengths are partly offset by the Group’s increased working capital intensity, which is characterized by higher trade receivable levels during FY2020 and 9MFY2021. The stretched repayment cycle of CEB and receivable balance of Bambarabatuoya MHPP for the transition period between new PPA and old PPA were the reasons for the increase in debtors days. ICRA Lanka has noted that the CEB’s payment cycle has stretched in 9FY2021 from 90-120 days to 180 days due to the pandemic. As a result, the cash flows of the company were relatively stretched during the year. Nevertheless, given the government backing for CEB, the overall counterparty credit risk is expected to be limited in the long term . Given the strong revenue contribution envisaged from the overseas plants, VLL’s ability to manage such regulatory risk in the future would be a key monitorable. The ratings also take note of the declining tariff of the top revenue-generating plants in Sri Lanka, namely Lower Kothmale MHPP and Batathota MHPP from FY2023. Both plants contributed 35% of the total power generation revenue of VLL during 9MFY2021 as compared to 31% in FY2020.
The Stable Outlook reflects ICRA Lanka’s expectations that VLL would benefit from its diversified project portfolio going forward. The rating would be upgraded if the coverage, leverage and working capital indicators improve significantly in the medium term.
Key Rating Drivers
Diversification strategy; improved performance due to overseas investments: The Company has diversified its operations over the period to different geographies in and out of Sri Lanka. Initially, the Company’s operations were concentrated in the Southern part of the country, which is exposed to South-West monsoon. Subsequently, it diversified to the Eastern part of the Country through Rideepana and Udawela Mini Hydro Power Plants (“MHPP”). Eastern part of the country is exposed to the North-East monsoon which records relatively lower rainfall in the range of 100mm to 1,000mm as compared to the South West Monsoon in the range of 100mm to 3,000mm. As a result, Rideepana and Udawela are reporting lower Plant Load Factors (“PLF”). With the commissioning of Muvumbe SHPP in Mar-17 and Bukinda SHHPs in Jul-20, VLL has further diversified its geographical presence to African Region. Plants in Uganda reported high PLF due to better hydrological constant flow compared with the Sri Lankan conditions. Sri Lanka’s river catchment areas are within 10-100 square kilometres region, whereas in Uganda, this is generally within 800-2,000 square kilometres radius. In 9MFY2021, the Operating Income of VLL grew by 26.9% as compared to 12.6% in FY2020 and 31.5% in FY2019 mainly due to the consolidation of five months of revenue that came from Bukinda SHPP. In FY2020, 44.9% of the revenue from electricity generation of the Group came from Muvumbe SHPP in Uganda. With the commissioning of Bukinda SHPP in July-20, the contribution of plants in Uganda increased to 47% in 9MFY2021. Going forward, with the consolidation of full-year revenue of Bukinda SHPP, ICRA Lanka envisages 55-60% revenue contribution to the Group from the investments in Uganda. ICRA Lanka has also noted VLL’s diversification to other Non-Renewable Energy Sources (“NRES”). VLL has commissioned two Rooftop Solar plants with a capacity of 0.76 MW during 2020/2021. It has four new solar projects in the pipeline with a total capacity of 14 MW. Largest project being a 10 MW joint venture with Windforce PLC and Hi-Power Pvt limited, which would not impact the consolidated financial profile of the Company.
Moderate Financial Profile: VLL’s financial profile is characterized by comfortable profitability, moderate capital structure and moderate coverage metrics. The Company reported an Operating Profit Margin of 63.3% in 9MFY2021 as compared to 65.5% in FY2020 and 69.3% in FY2019. The profit margins moderated during the latest nine months, although it remains comfortable. The Net Profit Margin (NPM) of VLL remained volatile, as it was 36.7% in 9MFY2020 as compared to 25.1% in FY2020 and 41.1% in FY2019. NPM of the company moderated in FY2020 due to reduction in other income, increase in overhead expenses and increase in tax expenses of the local MHPPs. It was noted that most of the tax holidays available for local subsidiaries have ended and as a result, a tax rate of 14% applies. The Company has consistently reported healthy RoCE over the past five years except for FY2017. It reported a RoCE of 18.1% in 9MFY2021 as compared to 15.9% in FY2020 and 17.4% in FY2019. VLL reported a relatively moderate capital structure with a gearing ratio of 1.1 x in Dec-20 as compared to 1.1x in Mar-20 and 1.0x in Mar-19. ICRA Lanka views positively the proposed Rights Issue of LKR 250 Mn. The proceeds of the Rights Issue will be utilized to fund the investments in Solar plants. As such, VLL will scale up its operations going forward without highly leveraging its capital structure. The Debt Service Coverage Ratio of VLL, although improving, remained relatively moderate at 1.29x in 9MFY2021 as compared to 1.07x in FY2020 and 1.33x in FY2019. The liquidity profile has traditionally been adequate backed by liquid investments, besides access to bank funding, given their established relationship with financial institutions.
Experienced management team; good operational track record with projects operational since 2001; The ratings consider favourably the experience of the management team and VLL’s strong operational track record, which has enabled the Company to record growth in revenues and profits over the past several years. VLL currently operates nine Mini-Hydro Power Plants, two Rooftop Solar power plants and one Dendro Plant in Sri Lanka with a total local power generation capacity of 28.1 MW. The two overseas Small hydro projects in Uganda, have a total generation capacity of 13 MW. Initially, the Company has expanded and grown its business by undertaking several mini-hydro projects. Most of the local projects 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 a prudent selection of locations and strong control over operations and maintenance. VLL has also developed engineering expertise in the hydropower space over the past several years. This enables the Company to respond quickly to outages at their power plants and restore normal service with quick turnaround times.
Long term PPAs provide cashflow visibility: Except for Batathota MHPP, VLL’s domestic MHPPs have firm power purchase agreements (PPAs) with the CEB for 9-19 years. For Rooftop solar power plants, it has PPAs for the next 5-10 years. For the two Ugandan SHPPs which would contribute 55-60% of the total electricity generation revenue in the future, VLL has firm PPAs for the next 17-18 years with Uganda Electricity Transmission Company Limited (UETCL). These PPAs provide strong revenue visibility over the long term. Given the GoSL’s focus on Non-Conventional Renewable Energy Sources (NCRE), the demand prospects also augur well for the Company.
Declining tariffs for the local power plants: Lower Kothmale and Rideepana MHPP will move to the Second tier in FY2023 under the three-tier tariff structure. This will significantly reduce the tariff of the respective plants by 50-60%. And also, the PPA of Batathota MHPPs will expire in 2022. Presently it gets an attractive tariff under Avoided Cost basis. Once renewed it will get a tariff which will be significantly lower than its existing tariff. The new tariff will escalate 3% every year. Rideepana MHPP provides less than a 5% contribution to the total power generation revenue and its impact on the top line of VLL would remain minimal. Lower Kothmale and Batathota are the top two revenue contributors of the local power plants. In 9MFY2021, Lower Kothmale and Batathota contributed 19.7% and 15.3% to the total power generation revenue of VLL. Due to changes in the tariff, ICRA Lanka envisages ~LKR200-250 Mn revenue loss from FY2023 onwards. The revenue loss will be compensated by the envisaged Revenue from the Bukinda MHPP and the new solar projects.
Increasing working capital intensity: VLL’s debtor’s days has increased to 201 days in 9MFY2021 as compared to 148 days in FY2020 and 100 days in FY2019. The stretched repayment cycle of CEB, receivable balance of Bambarabatuoya MHPP for the transition period between new PPA and old PPA were the reasons for the increase in debtors days. The receivable balance of Bambarabatuoya MHPP was subsequently settled by the CEB. The stretched debtors days has increased the Working Capital Intensity to 40.4% in 9MFY2021 as compared to 21.4% in FY2020 and 27.7% in FY2019. CEB’s payment cycle stretched beyond 180 days due to lower collections from the end consumers during the pandemic. ICRA Lanka expects the payment delays from CEB to regularize in the medium term. 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. UETCL disputed the deemed energy payments of USD 270,000 in 2020 sighting force majeure due to the pandemic. This was a one-off incident and the receivable amount was closer to 5% of the total trade receivables as in Dec-20. Subsequently, the payment dispute was resolved in favour of VLL. The Company received closer to USD 227,000 from UETCL by the end of FY2021. ICRA Lanka will closely monitor the ability of the Management to recover its local and overseas trade receivables and this remains to be reviewed in the future.
Biomass Project: The rating also factors in VLL’s investments in the Dehiattakandiya Biomass plant. This project has an installed capacity of 3.3 MW and was commissioned in May 2019. This is a Joint Venture between OC Energy Lanka Ltd and Vidullanka PLC. OC Energy Lanka Ltd is a fully owned subsidiary of Obayashi Corporation of Japan and is expected to infuse their technical expertise into this project. The project is exposed to the risk of timely sourcing of fuelwood. Presently 95% of the firewood requirement is sourced from third party suppliers. The Company has planted 500 acres of fuelwood and this will provide a breakeven supply to the plant in the future. The operational efficiencies of this plant are critical for the successful turnaround of this project. Therefore, ICRA Lanka will continue to monitor the financial performance of this project going forward.
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:
Vidullanka PLC was incorporated in 1997 as a Board of Investment (BOI) venture. VLL constructs, operates and maintains MHPPs. At present, it operates eleven hydro power projects, two rooftop solar projects and one biomass (dendro) power project with a total capacity of 40.3 MW. VLL operates ten Power plants on its own and through subsidiaries, and four other plants through joint ventures/Associates. Vidul Engineering Ltd, a subsidiary of VLL is into designing of its plants and rendering of energy consultancy services to in-house operations and to third parties. VLL commenced the power generation of its first foreign power project, Muvumbe SHPP in Uganda in March 2017. The plant capacity of Muvumbe SHPP was designed at 6.5 MW. The second SHPP was commissioned in Uganda with a designed capacity of 6.5 MW on July 31, 2020. The Company diversified in to solar power by commissioning two rooftop solar projects in Dec-20 and Apr-21 with a designed capacity of 0.52 MW and 0.24 MW respectively.
Key financial indicators (audited)
|Revenue and profitability indicators-Figs are in LKR Mn (Consolidated Level)||FY17||FY18||FY19||FY20||9MFY21*|
|NWC / OI (%)||21.40%||8.20%||27.72%||21.36%||40.42%|
|OPBDITA/Interest & Finance Charges(x)||1.45||2.30||3.01||2.95||3.72|
|Total Debt/OPBDITA (x)||11.19||4.41||3.01||3.60||3.34|
Rating history for last four years
|Dasith Fernando |
Subsidiary of ICRA Limited
A Group Company of Moody's Investors Service
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