RAM Ratings Lanka upgrades Vidullanka PLC

RAM Ratings Lanka has upgraded Vidullanka PLC’s (“Vidullanka” or “the Company”) long-term corporate credit ratings to A- while its short-term rating has been reaffirmed at P2. The outlook on the long-term rating remains stable. Vidullanka operates two mini-hydro power plants (“MHPPs”) with a combined capacity of 5.2 MW, and has further invested in a joint venture MHPP with a capacity of 1.2 MW. The company offloads the electricity generated to the Ceylon Electricity Board (“CEB” or “the Utility”), a state utility company which is the sole customer.

The upgrade reflects the company’s improving financial profile and conservative funding strategy. Steady income and conservative strategy helped Vidullanka ease its debt levels, as the Company’s gearing ratio ameliorated from 0.32 times in FYE March 31, 2009 (“FY Mar 2009”) to 0.24 times in FY Mar 2010 (end-September 2010: 0.17 times). Over the short-term, the company’s debt levels are expected to recede further as long-term borrowings pared down using proceeds from a rights issue completed in November 2010. Going forward, we envisage the company’s gearing levels to remain below 0.45 times, even after factoring additional borrowings for new projects.

The upgrade also takes into consideration the company’s efforts to mitigate its dependence on its two main power plants. With regard to the new projects, the Company would only fund up to 60 percent of project cost with borrowings; the management’s conservative financial policy is viewed positively.

Meanwhile, the company’s ratings are supported by its sturdy financial profile, established track record, and favourable contract terms. Vidullanka’s operating profit before interest and tax (“OPBIT”) margins improved over the period to 52.22 percent by FY Mar 2010 (FY Mar 2009: 49.47 percent) and further to 69.39 percent by end-September 2010. The wider margins were supported by greater power generation.

This translated to better return on capital, which augmented to 30.33 percent and 21.04 percent over the same period (FY Mar 2009: 15.70 percent). With the company also retiring debts using internally-generated capital, its fund from operations (“FFO”) debt coverage ratio has strengthened from 0.73 times to 1.29 times. Moreover, with easing debt levels, the Company’s gearing ameliorated to 0.17 times by end-September 2010 from 0.32 times as at end-FY Mar 2010.

Vidullanka is an experienced player in the renewable energy sector, having built and commissioned four MHPPs. Moreover, none of the power plants have to-date not suffered any major internal outages. In addition, the Company’s subsidiary, Vidul Construction Limited (“VCL”) successfully completed the joint venture project on time. Under power purchase agreements (“PPA”) signed with the CEB, which is the Company’s sole customer, the national utility company is obliged to purchase all electricity generated by the MHPPs over the tenure of the contracts.