Press Release Energy Efficiency Services Limited

1 1 CARE Ratings Limited Press Release Energy Efficiency Services Limited May 30, 2018 Ratings Instrument Amount (Rs. crore) Rating1 Rating Action Short-term Bank Facilities Term Loan 510 CARE A1+ (A One Plus) Removed from credit watch; Rating Reaffirmed Long-term/ Short-term Bank Facilities 490 CARE AA; Stable / CARE A1+ (Double A; Outlook: Stable / A One Plus) Removed from credit watch; Rating Reaffirmed Total Facilities (Rs One Thousand crore only) Non-Convertible Debenture issue (NCD I) 500 (Five hundred crore only) CARE AA; Stable (Double A; Outlook: Stable) Removed from credit watch; Rating Reaffirmed Non-Convertible Debenture issue (NCD II) 450 (Four hundred & fifty crore only) CARE AA; Stable (Double A; Outlook: Stable) Removed from credit watch; Rating Reaffirmed Non-Convertible Debenture issue (NCD III) 500 (Five hundred crore only) CARE AA; Stable (Double A; Outlook: Stable) Removed from credit watch.

2 Rating Reaffirmed Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings for the bank facilities and instruments of Energy Efficiency Services Limited (EESL) have been removed from Credit Watch under Developing Implications as the complete information regarding the acquisition of Edina Power Services Limited (Edina) by EESL Ltd through its UK based Joint venture, EESL EnergyPro Assets Ltd (EEPAL) has now been provided by the Company and CARE has analyzed its possible impact on the credit risk profile of EESL and subsequently removed the ratings from credit watch. The ratings reaffirmation continues to derive strength from the strategic importance of the company being a key agency for implementing national programs for Energy Efficiency , 100% ownership of Government of India (GoI) owned PSUs and significant growth in operations led by the ongoing programs viz Unnat Jyoti by Affordable LEDs for All scheme (UJALA; erstwhile known as Domestic Efficient Lighting Program; DELP) and Street Lighting National Program (SLNP).

3 The ratings also draws comfort from the consistent equity infusion from the promoting PSUs as well as the cost-plus model followed by EESL and revenue collection structure for the existing programs which ensures adequate returns for the company. These rating strengths are, however, partially offset by the short track record of operations, elongated operating cycle characterized by increased collection period in FY17 (refers to period from April 01 to March 31) and counterparty credit risk on account of weak financial profile of discoms and urban local bodies. However, the counterparty credit risk gets mitigated to a certain extent in UJALA where more than 70% of the payment is being received upfront and remaining amount being recovered through on-bill financing (OBF). Also, for SLNP, the company follows a fixed annuity model where the payment is made through an escrow structure.

4 Going forward, continuation of the ownership pattern, support by GoI and ability of the company to successfully execute its flagship programs while achieving comfortable profitability, efficient management of working capital requirements and maintaining the envisaged capital structure shall be the key rating sensitivities. Detailed description of the key rating drivers 1 Complete definitions of the ratings assigned are available at and in other CARE publications 2 CARE Ratings Limited Press Release Key Rating Strengths Ownership and support by the Government of India: EESL is strategically important entity for GoI to promote and create market for Energy Efficiency and conservation projects in India. EESL is a JV of PSU companies and administered by Ministry of Power, GoI. EESL works closely with Bureau of Energy Efficiency (BEE) and is leading the market related activities of the National Mission for Enhanced Energy Efficiency (NMEEE), one of the 8 national missions under Prime Minister s National Action Plan on Climate Change.

5 Strategic role in creating the markets for Energy Efficiency products: EESL is set up as a Joint Venture of PSUs (Public Sector Undertakings) viz. National Thermal Power Corporation Limited (NTPC), Power Finance Corporation Limited (PFC), Rural Electrification Corporation Limited (REC) and Power Grid Corporation of India Limited (PGCIL) under the administrative control of Ministry of Power to create and sustain markets for Energy Efficiency in the country. There has been consistent support to EESL in the form of regular equity infusion and government guarantee for its borrowings from overseas agencies. Ongoing Programs: EESL s current major programs include distribution of LED bulbs (UJALA) and converting the conventional street lights with LED street lights (Street Lighting National Program; SLNP). EESL is also implementing various programs and providing consultancy Services dedicated to the conservation of Energy by improving the Energy Efficiency of the systems.

6 Furthermore, during the FY17 (refers to the period April 01 to March 31) and current financial year, the company has diversified to other areas of Energy Efficiency like Energy efficient fans and Energy efficient tube lights, smart metering program, super-efficient air-conditioning programs & Electric vehicles programs which are envisaged to grow in the future. Further in March 2018, EESL acquired Edina to support its strategy of adopting natural gas-based technologies to halve power cost, for large commercial establishments. The company is exploring opportunities to include gas engines to produce cooling, heat and electricity to halve power cost for establishments like hotels, hospitals and malls. The combined heat and power technology is a tri- generation model most suited for operations where there is a 24-hour requirement of all the three -electricity, hot water and cooling.

7 EESL s proposed model for trigeneration will be similar to their existing model for other ongoing programs in India. EESL intends to provide metered heating, cooling and power through a type of Power Purchase Agreement that will also include bearing upfront capital costs and annual turnkey servicing and maintenance for 10-15 years. Clients will pay them from Energy savings generated. Annuity based income stream alongwith cost plus model that ensures adequate returns: The investments and sales made by EESL in its major programs viz. UJALA and SLNP are paid back in the form of regular installments. The annuities and prices are determined based on the cost of the project along with factoring required return, which ensures adequate returns over the invested capital. The upfront investment made by EESL is paid back through either upfront payment or OBF or discom cost recovery model.

8 For LED distribution under UJALA program, the buyers also have the option to pay the complete amount upfront which accounts for more than 70% of the overall LED bulb sales while the balance accrues from the on-bill financing scheme. For SLNP, EESL s model is based on deemed Energy savings where after the implementation of project, the urban local bodies pays to EESL the annuity amount over the project life based on Energy savings. The recovery model for tube light distribution program is completely through upfront payment while the fans are sold under both schemes viz upfront payment and on-bill financing. Further, the new schemes of Smart metering, Energy efficient buildings & electric vehicle program will also follow the annuity based model. Strong growth in operating income; however, initial stage of operations: EESL is currently in growth stage of operations with its major ongoing programs getting a boost in FY17 which has led to healthy growth in operating income with a total operating income of crore in FY17 as compared to crore in FY16 registering a growth of 53%.

9 During FY17, the income from sales of LED bulb (under UJALA program) accounts for around 74% of the total operating income. Key Rating Weaknesses Counter-party credit risk: For the SLNP and UJALA programs, EESL receives the annuity based income from urban local bodies and discoms. With the weak financial health of urban local bodies and discoms, the realizations are subjected to counter party credit risk. There has also been an increase in the operating cycle of EESL in FY17 on account of increase in the collection period from 33 days as on March 31, 2016 to 105 days as on March 31, 2017 due to delayed receivables 3 CARE Ratings Limited Press Release which majorly accrue to EESL from government controlled entities (both central & State government). Further the increasing proportion in total sales from the new business streams which are annuity based has also elongated the collection period.

10 The creditor s period is increasing due to a staggered payments structure being followed by EESL. The Company has not experienced any significant impairment losses in respect of trade receivables in the past years. However, the company has in-place adequate security mechanism to recover the amount. The collection under OBF scheme where amount is to be recovered from discoms, there is a separate line item for LED bulbs in the electricity bills which is added to consumer bill after approval from concerned state s electricity regulatory commission. The amount collected is credited to separate account of the discom. Also, for the street lighting program, EESL is having appropriate payment security mechanism through escrow arrangements, state government guarantees as well as revolving letter of credits. Analytical approach: Standalone Applicable Criteria CARE s Policy on Default Recognition CARE s methodology for Factoring Linkages in Ratings Criteria for placing rating on credit watch CARE s Methodology for Short-term Instruments Financial Ratios Non Financial Sector About the Company Energy Efficiency Services Limited (EESL) was established in 2009 as a joint venture of PSUs and administered by Ministry of Power, GoI.