­Strategically important role of DHBVNL in the state of Haryana
DHBVNL caters to the power requirements of the Southern Haryana Regions. The entity is systemically important and forms the backbone of the power distribution infrastructure for Haryana. DHBVNL has a consumer base of over 39 lakh consumers as on FY22. Government of Haryana (GoH) owns a 96.84% stake in the entity, thereby providing it adequate financial flexibility. DHBVNL's credit profile is also supported by its access to funds at low cost and its ability to mobilise financial resources from several financial institutions and multilateral development institutions. The rating also factors in the ongoing support extended by GoH to DHBVNL in the form of regular infusion of funds in the form of equity and guarantees extended by the state government for the incremental borrowings and timely payment of agricultural subsidy. The company received an aggregate subsidy of Rs. 2783.53 Cr in FY21. Since the support from GoH is central to the rating, the credit profile of Haryana state is of key importance. Any significant changes in the credit profile of GoH will be a key rating sensitivity. The outstanding debt of Haryana state as a percentage of GSDP remained modest at 30.70% for FY21 (RE). Any adverse movement in fiscal metrics of GoH is likely to have a bearing on the Haryana government’s support to state PSUs like DHBVNL. Any significant changes in the rating of GoH due to factors such as a prolonged slowdown in industrial activities or challenges faced by Haryana for factors such as socio-economic changes or other such events can have an impact in its fiscal indicators. Further, timely budget allocation and timely receipt of revenue or capital grants from GoH for servicing the debt obligations will remain a critical element in the credit profile of DHBVNL.

Diversified consumption mix and established regulatory processes in Haryana
DHBVNL has a favorable and diversified consumption mix with agricultural consumers accounting for Rs.291.10 Cr of total revenue, industrial connection (LT+HT) accounting for about Rs. 5,082.27 Cr, railways accounting for about Rs. 29.09 Cr, public works/municipal accounting for about Rs. 726.42 Cr, domestic and commercial connection accounting for Rs. 3,137.30 Cr and Rs. 1881.82 Cr respectively, while others account for about Rs.704.20 Cr in FY21. The company supplies power to railways and other public services like street lights and so on. DHBVNL has comparatively less agricultural consumers and the domestic, commercial and industrial consumption commands a higher tariff which augurs well for the revenues of the state utility. Besides that, the company maintains a monopoly in the entire region of South Haryana being the only licensed distributor and retail supplier of electricity in the said region. Acuité also notes that DHBVNL is regular in the filing of multi-year tariff (MYT) order, which provides near term tariff visibility. In accordance with the HERC (Terms and Conditions of Tariff) Regulations, 2005, DHBVNL files with HERC an application indicating the Annual Revenue Requirement (ARR) depending on the expected cost of distribution and return on equity. The cost of distribution is arrived at as per approved cost-plus tariff structure which ensured the full recovery of costs along with fixed return on equity. Revenue gap after inclusion of the true-up amount of FY21 comes to Rs. 249.67 Cr which the Haryana DISCOMs propose to meet through a continuation of existing tariff levels.

Securitization of cash-flows through an escrow mechanism
The facilities availed by DHBVNL is supported by a securitization of its operating cash-flows through an escrow mechanism. The stipulation made by the lender requires DHBVNL to route all collections/receipts/cash flows through the designated account at least to the extent of five times of the monthly debt servicing obligation, which includes both principal and interest. It also states that the entity shall make the repayment on a scheduled date of every month. Further, it stipulates that, in any instance of failing to adhere to aforesaid stipulations, the lender will exercise lien equivalent to monthly debt service obligations (Principal + Interest) on pooled cash flows commencing from the next day till the scheduled date of repayment (i.e. last day of every month). Acuité takes comfort from the aforesaid escrow mechanism apart from the unconditional and irrevocable guarantee provided by GoH and believes that adherence to the stipulated structure will remain a key rating sensitivity factor.

­Relatively poor operational efficiency
The transmission and distribution (T&D) losses have remained at 16.93%in FY21. The aggregate technical & commercial (AT&C) losses have stood at 15.97% in FY21. The company’s collection efficiency has remained above 96 percent through the last 10 years and stood above 100%in FY21. However, the entity, in order to limit the distribution and commercial losses, has concentrated its efforts to reduce power theft by digitalizing the payment systems, replacing old meters with digital meters and implement feeder franchise scheme in areas with high distribution losses and low collection efficiencies. DBHVNL also consistently invests in increasing substation capacity and strengthening the network to reduce the distribution losses under the Deendayal Upadhaya Gram Jyoti Yogana (DDUGJY) and Integrated Power Development Scheme (IPDS). It has cumulatively incurred a capex of over the last three years to augment its network. Further, DBHVNL has implemented Mhara Gaon JagMag Gaon (MGJG) and Feeder Sanitisation Schemes in rural and urban areas to curb power theft and to improve quality of services to consumers as line losses of Rural Domestic Feeders (RDS) contributes a significant portion of distribution losses. Acuité believes that curtailment of AT&C losses and sustainability of collection performance will remain a key rating sensitivity factor.

Moderate albeit improving financial risk profile
The capital structure as represented by debt-equity ratio remained at moderate level at 1.38 times during FY21 as against 1.56 times in FY20. The improvement in debt-equity is mainly on account of infusion of equity to the extent of Rs.220.70 core during FY21. Government of India launched UDAY scheme on 20th of November, 2015 and Haryana joined UDAY Scheme on 11th of March, 2016 (tripartite agreement among MoP, GoH & UHBVNL). UHBVNL +DHBVNL’s outstanding loan as on September 30, 2015 stood at Rs. 34,600 Cr. The State Government had taken over debt of 75% of outstanding amount i.e. Rs. 25,950 Cr. Discom bonds for the balance amount of Rs. 8,566 Cr were issued with the support of MoP for which the GoH has already provided guarantee. This has helped the DISCOM reduce its AT&C losses considerably and lowered the finance cost. Under this scheme, the State Government has to take over 75% of Discom’s debt outstanding as on September 30, 2015 over two years’ period upto FY16-17. The loan taken over by the state government was further converted into equity/ grant over a period of 5 years upto FY19-20 and in the meantime the interest cost on the portion not converted into equity/ grant had to be borne by the discom (licensee). The Licensee has borne interest cost of Rs. 79.39 Crore in FY19-20 on such loans (UDAY Bonds). Consequently, the tangible net worth of the company turned to positive in FY20 and has been improving over the past two years. The tangible net worth of the company remained at Rs. 2,597.45 crores as on March 31, 2021 as against Rs. 2,118.79 crores as on March 31, 2020. During FY21, the debt component mainly comprises of term loan from Rural Electrification Corporation to the tune of Rs. 2010.29 crore as on March 31, 2021. The increase in operating profit also resulted in improvement in interest coverage ratio from 1.62 times in FY20 to 2.29 times in FY21. The net cash accruals to total debt continues to remain at 0.16-0.20 times during FY20-21. The total outstanding liability to tangible net worth also improved to 3.69 times in FY21 vis-à-vis 4.40 times in FY20.

Susceptibility of performance to changes in the regulatory framework
DHBVNL’s revenues are influenced by the regulatory framework governing the power sector. Revenues of state distribution utilities like DHBVNL are determined by state electricity regulatory commissions. The Haryana Electricity Regulatory Commission (HERC) considers key parameters like the cost structure and expected to return on equity to arrive at distribution tariffs, wheeling & distribution and retail supply under MYT Framework (Multi Year Tariff). Presently, the company benefits from a HERC approved healthy return on equity (ROE) of 9.22% as on March 31, 2021. Acuité believes that significant changes in the regulatory environment will impinge on the credit profile of the company.