Rationale

 ICRA has reaffirmed and withdrawn the long-term rating of [ICRA]AAA (Stable) assigned to the Rs. 531.60 crore bonds of Power Grid Corporation of India Limited (PGCIL) as there are no outstanding dues against the same. The redemption payments have been independently verified. The rating reaffirmation of Power Grid Corporation of India Limited (PGCIL) factors in the strategic role of the company in the Indian power sector as it is the largest power transmission utility. Further, its ownership and near monopoly in the inter-state transmission network, along with the low level of business risks in its core operations, support the rating action. The ratings also factor in the cost-plus transmission tariff structure for majority of the company’s operational assets (~96% of the total gross block) and PGCIL’s superior operating efficiency, indicated by the consistently high transmission line availability over the years. The ratings also take into account the capital expenditure being incurred and the resulting capitalisation of the transmission assets, which is expected to boost the company’s revenues and cash flows, going forward. ICRA continues to take into consideration the majority shareholding and support from the Government of India (GoI) (guarantees extended for some of PGCIL’s borrowing programmes) which enables the company to raise long-term funds at competitive rates. The ratings also note that majority of the company’s transmission lines are part of the inter-state transmission system (ISTS) network wherein the billing and collection is through a point of connection (PoC) mechanism and the licensee does not have direct exposure to a single discom. The Central Transmission Utility (CTU) receives the bills from all ISTS licensees and collects the payments from the counterparties (primarily state distribution utilities) that are part of the transmission service agreement (TSA). The timely collection by the CTU from the state distribution utilities is ensured by a payment security mechanism which comprises a letter of credit for 1.05 times of monthly billing as per the terms of the TSA, regulation of power supply in case of non-payment of dues and the option of invocation of a tripartite agreement among the RBI, Government of India and state governments.

PGCIL’s cash collections have been strong since 2003-04. ICRA believes that the collection efficiency will be sustained, going forward. The ratings, however, are constrained by the counterparty credit risk associated with the exposure to state distribution utilities, majority of which have weak-to-moderate financial profiles. Timely issuance of tariff orders, adequate tariff hikes to reduce revenue gaps, time-bound recovery of the regulatory assets and reduction of distribution loss levels, going forward, remain the imperatives for a sustained improvement in the health of the power distribution sector, reducing the counterparty credit risks for entities serving the power sector, including transmission companies such as PGCIL. The CTU’s function has been separated from PGCIL and a new entity, Central Transmission Utility of India Ltd (a subsidiary of PGCIL), has been designated as the CTU from April 2021. This entity will eventually be owned directly by the GoI. ICRA will continue to monitor the developments in this regard. The ratings consider the fact that new projects are awarded either on a nomination basis or through tariff-based competitive bidding. The returns for the projects awarded through competitive bidding are lower than RTM projects, given the high competitive intensity, although the proportion of such assets as a percentage of the total gross block remains low. While PGCIL is exposed to project execution risks, this has reduced from the earlier years due to the relatively low capital expenditure planned for the coming years. The Stable outlook on the [ICRA]AAA rating reflects ICRA’s opinion that PGCIL will continue to benefit from the cost-plus nature of the transmission tariff for majority of its assets, its satisfactory operational performance and the receipt of timely payments from its customers, primarily the state distribution utilities.