ICRA Lanka reaffirms the ratings of Vidullanka PLC and assigns [SL]A2+ to the proposed additional Commercial Paper Programme
|Instrument*||Current Rated Amount|
|Issuer Rating||–||SL[A]- (Stable) reaffirmed|
|Commercial Paper Programme (COR/IR/15/08)||100.00||[SL]A2+ reaffirmed|
|Proposed – Commercial Paper Programme (COR/IR/20/01)||100.00||[SL]A2+ assigned|
ICRA Lanka Limited, subsidiary of ICRA Limited, a Group Company of Moody’s Investors Service, 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 the LKR 100.00 Mn outstanding commercial paper programme of the Company. ICRA Lanka has assigned short term rating of [SL]A2+ for the proposed additional LKR 100.00 Mn commercial paper programme of the Company.
The ratings take into account the improvements in the Company’s financial profile during FY2019 and 9MFY2020. During Q3FY2020, most of the local power plants of the Company have performed well amidst the favourable weather conditions that prevailed in Sri Lanka. The Company’s first overseas hydropower project-Muvumbe SHPP in Uganda (6.5 MW), which was commissioned in March CY2017, has also performed well during this period. Muvumbe SHPP was eligible to access Getfit grant facility, (this is available to projects under Getfit Programme, administered by the German KFW Development Bank). Over the past two years, the Company has received upto 70% of this facility, totaling to ~US$ 3.0 Mn. This has also partly helped the Group to perform well during this period under review. ICRA Lanka views positively the GoSL’s recent approvals on new tariff structure for expired PPAs that are under avoided cost tariff system. This would help the Company to renew its expired PPA of Bambarabatuoya MHPP (BBO) at a higher tariff and thereby, recover a total trade receivables of ~ LKR 100 Mn (after the new PPAs are signed). Although, the ratings factor in the Company’s sole reliance on run-of-the-river MHPPs which are exposed to vagaries of the monsoon, the Company’s recent Muvumbe SHPP, has provided effective diversification benefits to the overall financial performance of the Company during past two years. Moreover, during 9MFY2020, the Company has commissioned its first Biomass energy project-Dehiattakandiya Dendro Power Plant (with 3.3 MW) and going forward, this is also expected to provide further diversification to the Company’s project portfolio. The ratings also draw comfort from VLL’s healthy financial profile, which is characterized by robust profitability (RoCE in excess of 15%), moderate capital structure (with gearing of 1.0x as at Dec 31, 2019) and more than adequate 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 9MFY2020. The ratings also consider the various larger capex projects (including Timex Bukinda SHPP in Uganda) being undertaken, which would have an impact on the long term capital structure of the Company. Currently, the Company (at the standalone level) has sizable debts facilities, taken up for the equity infusions for its subsidiary entities. Although, the Company has restructured a larger portion of its short debt facilities during FY2019, the ability of the Company to further streamline/reduce its short term debt repayment commitments, given the increasing scale of the overall operation, would remain to be reviewed in the future.
The Stable Outlook reflects ICRA Lanka’s expectations that VLL would benefit from its diversified project portfolio going forward.
Key Rating Drivers
Engineering track record; good project appraisal systems: The ratings consider favourably the experience of the management team and VLL’s strong operational track record, which has enabled the Company to record healthy growth in revenues and profits over the past several years. VLL currently operates ten Mini-Hydro Power Plants (MHPPs) across Sri Lanka and the first overseas mini hydro project in Uganda, with a total generation capacity of 29 MW. The Company has expanded and grown its business by undertaking a number of mini hydro projects. Most 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. Despite its relatively small scale of operations, the Company has been efficiently managing its operations through prudent selection of locations and strong control over operations and maintenance. As a consequence, a majority of VLL’s plants have been running at peak achievable plant load factors (PLFs). VLL has also developed engineering expertise in the hydro power 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.
Diversification strategy; Although the Company’s operations were focused on the southern part of the country initially, which is under S/W Monsoon period, the Company had diversified geographically into the Eastern part of the country through Redeepana MHPP and the recently commissioned Udawela MHPP. Further, with Muvumbe SHPP in Uganda, the Company has further diversified its geographical presence into Africa. Currently, the Company is setting up its second Mini Hydropower project-Timex Bukinds SHPP in Uganda, which is expected to be commissioned in July CY2020. Sri Lanka’s river catchment areas are within 10-100 square kilometers region, whereas in Uganda, this is generally within 800-2,000 square kilometers radius, providing better hydrological constant flow compared with the Sri Lankan conditions. Moreover, as the revenue from overseas-operations is in USD, the revenues in rupee terms has a growth element due to exchange gains, given the depreciation of LKR, which in turn has improved the consolidated performance of the Company.
Increased cash flow visibility and limited counterparty risks: All of VLL’s domestic plants have firm power purchase agreements (PPAs) with the CEB for 15-20 years and these are extendable with 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), the demand prospects also augur well for the Company. ICRA Lanka also views positively the GoSL’s recent approval on the new tariff structure for the expired PPAs that are under avoided cost tariff system. This would help the Company to negotiate a higher tariff for the Company’s oldest power plant- Bambarabatuoya MHPP (BBO). The PPA of BBO had expired in FY2017. Although, the Company has been supplying its power generation to the Ceylon Electricity Board (CEB), VLL has not invoiced for the same to CEB (from 1st Jan CY2019) amidst the pending negotiations on the new PPA. Currently, the total trade receivables of this MHPP is about LKR 67 Mn and with the expected new tariff revision, which is effective from 1st Jan CY2019, the Company expects additional revenue of ~LKR 30 Mn. In addition to this, generally over the recent past, the repayment cycle from CEB has stretched over 90-100 days. This together with some pending deemed energy receivables of Muvumbe SHPP have increased the Company’s overall trade receivable levels during past two years. Although, the trade receivables from CEB, is generally regarded to have limited counterparty credit risk with the GoSL’s backing, ICRA Lanka will continue to monitor the ability of the management to recover its higher trade receivables and therefore, this remains to be reviewed in the future.
Comfortable Financial Profile: VLL’s financial profile is characterized by relatively robust profitability (ROCE in excess of 15-20%, except in FY17), relatively moderate capital structure (with moderate gearing of 1.0x as at 9MFY2020) and adequate coverage metrics. VLL’s liquidity profile has also traditionally been strong with adequate cash balances and liquid investments, besides access to bank funding, given their strong relationship with financial institutions. The Company, in the past, has also been able to raise equity funds successfully from the capital markets, which provides adequate comfort on the Company’s fund-raising-ability.
Fluctuations in rainfall leading to volatile cash flows: The Company’s power generation largely relies on run-of-the-river MHPPs which are exposed to vagaries of the monsoons. The risk is accentuated by VLL’s current modest scale of operations which exposes cash flows to volatility; during FY2017, severe drought conditions that prevailed in Sri Lanka had adversely affected the plant load factors of most mini hydro plants in Sri Lanka and consequently the profitability. During FY2017, the Company’s total power generation stood at 48.5 GWh, a 28% reduction from the previous year’s total power generation. However, currently, this risk is mitigated to a large extent by the recent geographical diversification as well as diversification into different NCRE segments.
New Investments in Biomass Project: The rating also factors in VLL’s investments in the recently commissioned Dehiattakandiya Biomass plant in Sri Lanka. 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. Although, the fuel supply risks of this project are minimal owing to the availability of sufficient fuel stocks from the Company’s own plantation estates, operational/mechanical efficiencies of this project are critical for the successful turnaround of this project. Therefore, ICRA Lanka will continue to monitor the financial performance of this project going forward.
Increased investments in Uganda: Vidullanka has been actively seeking to add more overseas power plants to its portfolio. During FY2018, the Company had fully acquired Timex Bukinda Hydro Ltd (Uganda), and commenced the construction of Bukinda SHPP (6.5 MW) in May CY2019. The total cost of this project is estimated at~ US$ 10 Mn. The Company has infused YTD ~US$ 2.0 Mn (as the equity) in this project, while the balance is financed through a syndicated loan facility. This project is expected to be completed by June CY2020. Although, this is expected to help diversify VLL’s revenue streams, the ability of the Company to minimize cost overruns, regulatory risks and thereby achieve commercialization of this plant within targeted timelines will be a sensitivity to the ratings.
Debt funded capital expansion is likely to result in adverse capital structure over the medium term: Going forward, ICRA Lanka expects some moderation in VLL’s debt metrics (i.e. TD/OPBDITA, NCA/Debt), due to high capital expenditures towards its expansion programme. Therefore, ICRA Lanka will continue to monitor the Company’s debt metrics going forward. Given the increased debt funded investments over the past two years, capital repayment obligations in FY2021 is expected to increase to ~LKR 500-600 Mn. Nevertheless, ICRA Lanka takes comfort from the financial flexibility of the Group which is expected to aid in timely refinancing.
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:
Incorporated in 1997 as a Board of Investment (BOI) venture, Vidullanka PLC (VLL) constructs, operates and maintains MHPPs. At present it operates ten Renewable Energy Power projects. VLL operates 7 plants on its own and through subsidiaries, and 3 power plants through joint ventures and associates. During FY2016, VLL increased its stake in one of its subsidiaries, Lower Kothmale Oya Hydro Power (Pvt) Ltd. During March CY2017, the Company commissioned its first overseas mini hydro power project in Uganda. During FY2018, the Company has also commissioned Udawela MHPP (1.4 MW) in Sri Lanka. Moreover, during FY2019, VLL has fully divested one of its JVs, Haloya MHPP. During 9MFY2020, the Company has commissioned its first Biomass energy project-Dehiattakandiya Dendro Power Plant (3.3 MW) through a JV with OC Energy Lanka Ltd, a subsidiary of Obayashi Corporation. With these developments, the Company has eight subsidiaries, three JVs and one associate company. 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. The Company had commissioned its first foreign power project, Muvumbe SHPP in Uganda in March 2017, while its second overseas mini hydro power project, Bukinda SHPP in Uganda(6.5 MW), is currently under construction. VLL also intends to diversify into other NCRE energy sources going forward. During FY2019 VLL’s total installed power generation capacity stood at 29.8 MW with an estimated energy potential of 108 GWh power annually.
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