India Ratings Assigns IREDA’s Tax-free Bonds 'IND AA+’/Stable

India Ratings and Research (Ind-Ra) has announced that it has assigned Indian Renewable Energy Development Agency’s (IREDA) INR20bn tax-free bonds an 'IND AA+' rating with a Stable Outlook.

KEY RATING DRIVERS

IREDA is a public policy institution of sovereign government. Although banks and several other institutes provide funding for renewable projects, IREDA is the nodal agency solely responsible for funding renewable energy projects. Its systemic importance is reflected in the federal government providing guarantees for IREDA’s multilateral debt, which formed 57% of its borrowings at FYE15. It on an average contributed 14.38% annually to renewable energy capacity additions over FY09-FY15. As the importance of renewable energy is increasing globally, the significance of IREDA will only increase as the government of India (GoI) has increased its target of renewable energy generation capacity to 175GW by 2022. Though IREDA’s market share has tripped from FY13, Ind-Ra believes its role in meeting the funding gap by way of innovative financing will strengthen further.

Important Vehicle for MNRE: IREDA is an important vehicle for the Ministry of Non-Renewable Energy (MNRE) for incentivising the sector and attracting investments by way of grants/subsidies and low-cost borrowings. It is the programme administrator of all MNRE schemes such as the generation-based incentive scheme for wind and solar power projects, roof-top solar power programme, capital subsidy scheme for solar water heating systems. Ind-Ra believes IREDA will continue to play a crucial role in the development of India’s renewable energy sector, which is at its nascent stage, and also will reiterate GoI’s commitment of bringing down emissions by 20%-25% from 2005 levels by 2020.

Sovereign Support: IREDA is a 100% GoI-owned non-deposit accepting non-banking financial company (NBFC), created to fund renewable energy projects. GoI provides financial support to IREDA in form of regular equity infusions (FY11-FY15: INR490m annually on an average) and by guaranteeing a majority of its long-term debt (FYE15: 57%). Also, IREDA is authorised to raise low-cost funds by issuing tax-free bonds so as to reduce the on-lending cost of financing infrastructure projects. GoI exercises strong operational and managerial control over IREDA through its board representation. IREDA has been accorded the status of ‘Mini Ratna’ in June 2015 and hence GoI would no longer infuse equity in IREDA. However, Ind-Ra believes GoI support in the form of guaranteeing multilateral debt and authorisation to issue tax-free bonds will continue.

NPA Norms: Being a government-owned NBFC and registered with the Reserve Bank of India, IREDA is exempted from following prudential norms for NBFCs relating to non-performing assets (NPAs). In this regard, it follows norms adopted by its board and approved by MNRE. It does follow all other prudential norms prescribed by the Reserve Bank of India for NBFCs.

Volatile Asset Quality:  IREDA is exposed to the weak credit profile of its borrowers emanating from technological constraints, shortage of transmission infrastructure, low feed in tariff, and the weak financial profile of distribution companies. IREDA brought down its gross NPAs to 3.9% at FYE14 from 19.9% in FY07. In FY15, the gross NPAs increased to 5.4% due to fresh slippages to the tune of INR1.81bn. Most of the stress emanated from biomass, cogeneration, small hydro and energy efficiency portfolios which contributed 28%, 21%, 40% and 10%, respectively, to the gross NPAs in FY15. Though these sectors accounted for 98.76% of the NPAs at FYE15, comfort is drawn from their lower share in the loan book (FYE15: 39.14%)

Sanctions Picking Up: During FY11-FY15, IREDA’s disbursements (20.95% CAGR) grew at a faster pace than the sanctions (9.83%). After the lacklustre growth of 1.9% in FY14, sanctions picked up in FY15 and grew 19.1% yoy to INR45.5bn on account of a boost in solar (67.9% yoy) and wind (42.9% yoy) energy projects. At FYE15, it made cumulative sanctions of INR308.26bn and disbursed a total of INR169.39bn since inception.

Dropping Net Interest Margins: Despite access to low-cost borrowings (sovereign guaranteed loans and issuance of tax-free bonds), IREDA’s net interest margin fell to 3.54% in FY15 and 4.66% in FY14 from 5.13% in FY13. This has been due to the fall in the yield to 10.46% in FY15 and 10.99% in FY14 from 11.45% in FY13 and increased hedging cost during the same period. However, IREDA may benefit from the reversal of the interest rate scenario in the domestic market in terms of its domestic borrowings.

RATING SENSITIVITIES

Positive: Further strengthening of IREDA’s linkages with GoI along with strong growth in its market share could lead to a positive rating action.

Negative: Weakening of IREDA’s operational and managerial linkages with GoI and a rise in NPAs would be a negative rating trigger.