Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the Rs 1,000 crore proposed non-convertible debentures (NCDs) of Adani Electricity Mumbai Limited (AEML).

 

The rating continues to reflect the company’s robust business risk profile, with the regulated cost-plus-model supporting healthy return on equity and pass through of all operating and finance costs (related to regulated debt). The rating also factors in the comfortable regulatory track record of timely approving tariff orders resulting in the company’s regulatory assets (RA) remaining largely under control, and its strong operating metrics underpinned by low aggregate, technical and commercial (AT&C) losses. AEML has a healthy consumer base in its license region of Mumbai, which has resulted in low debtor cycle, given the ability to pass on tariff in a timely manner.

 

These strengths are partially offset by relatively high leverage and exposure to refinancing risk over the long term.

 

The rating also factors in the completion of most of the regulatory investigations into Adani Group. Regulatory investigations into two allegations are underway and are expected to be completed over the next three months. However, any regulatory/government action or investigation into Adani Group will remain monitorable and any material adverse impact of the same on the group or its entities will be a key rating sensitivity factor.

Key Rating Drivers & Detailed Description

Strengths:

Regulated business model leading to stable cash flow

AEML’s operations span across generation (500 MW thermal power plant at Dahanu – Adani Dahanu Thermal Power Station [ADTPS]), transmission (mainly transmission lines to supply power from ADTPS to Mumbai city and intra city lines for power distribution) and distribution. All these businesses are regulated by the Maharashtra Electricity Regulatory Commission (MERC). The company has a valid license till August 2036. The regulator allows for a cost-plus tariff regime, which ensures recovery of the entire operational cost and finance cost on the regulated debt, along with a fixed return on regulated equity (Rs 4,680 core as on September 30, 2023) of around 15.5% plus income tax.

 

The regulator follows a multi-year tariff (MYT) structure wherein the tariff for a five-year period is fixed (current MYT is for fiscals 2021-2025), considering the estimated cost and approved capital expenditure (capex). Also, MERC allows for mid-term tariff orders (typically in the third year of the MYT regime) to enable recovery of accrued RA and for covering any future cost escalations, through true ups. Also, it allows pass through of any short-term rise in power purchase cost (beyond estimates) through levy of fuel adjustment charges (FAC), to recover a part of the higher costs. This well-defined business model lends certainty and stability to the cash flow of AEML.

 

Regulatory track record of timely tariff orders keeping RA in check

The regulator has approved timely tariff orders in the past, factoring in cost escalation (if any) and allowing for recovery of RA. For example, RA were fully liquidated in fiscal 2020. Fall in consumption during fiscal 2021 (due to the Covid-19 pandemic) and rise in power purchase cost during fiscal 2022 and first half of fiscal 2023, led to a rise in RA to Rs 1,960 crore as on March 31, 2023 (Rs 850 crore as on March 31, 2022). However, MERC through its true-up order of March 2023, has approved recovery of Rs 642 crore (for April 2023 to March 2024), and Rs. 885 crore (for the period April 2024 to March 2025) through tariff. This has resulted in partial moderation of RA to Rs 1,560 crore as on September 30, 2023. The rest is expected to be recovered in the second half of fiscal 2024 and 2025. Timely release of these tariff orders and quantum of pass-through allowed in upcoming tariff orders are monitorable.

 

Strong operating metrics despite higher share of residential customers

AEML caters to various customer segments, with the residential segment constituting 45.8% of the total energy consumed during April to December 2023 vis-à-vis 44% in fiscal 2023. It was followed by the commercial segment, which held a share of 36.4% (37.9% in fiscal 2023) and the industrial segment, which formed 10.7% of the energy consumed (11.3% in fiscal 2023). Despite the higher share of the residential segment, AEML has brought down its AT&C losses to 5.35% in the first half of fiscal 2024 (below the normative level of 6.8%) from 8.2% in fiscal 2018.

 

Furthermore, given the higher per capita income in the Mumbai region, the company has been able to pass on tariff hikes (average realization for residential customers was around Rs 8.80/unit during first nine months of fiscal 2024 (Rs.7.61/unit in fiscal 2023)), resulting in a relatively stable tariff gap* (ranging from negative Rs 0.2 to Rs 0.2 per unit). AEML is expected to maintain the AT&C loss at the current level. Also, expected demand recovery over the medium term — led by addition of customers such as the Mumbai airport, data centers, Mumbai metro during fiscal 2024, along with post-pandemic recovery — will support volume growth and cash flow.

 

AEML competes with The Tata Power Company Ltd (‘CRISIL AA/Positive/CRISIL A1+’) in its distribution area. Over the years, the market share between the two entities has stabilized and is unlikely to change materially going forward. AEML also benefits from a wider distribution network created over the years. This, along with regulatory aversion to allow parallel networks (as it leads to higher cost of customers), should help the company sustain its current market share.

 

Moreover, the generation and transmission businesses maintain stable operating metrics, with plant availability factor (PAF) of ADTPS above 90% (above the normative level) and transmission network availability of almost 99%.

 

*Tariff gap is the difference between the average cost of supply (ACS) and average revenue realised (ARR)

 

Increase in PPAs at lower tariff to support lower power cost

The average power cost (including transmission charges) stood at Rs 5.64 per unit during the first nine months of fiscal 2024, as against Rs. 5.96 per unit for entire fiscal 2023 (Rs 5.25 unit in fiscal 2022), mainly due to a significant rise in the short-term power cost and coal prices. The PPA with Adani Dahanu Transmission Power Ltd (ADTPL) has been extended till March 2025. AEML plans to tie up RE RTC (Renewable Energy Round-The-Clock) of 1,000-1,500 MW to replace its medium-term PPAs at lower tariffs. This will help cushion the impact of incremental capex on tariffs and support the requirement to source at least 60% of power from renewable sources by fiscal 2027, committed as part of the sustainability linked bonds (of USD 0.3 billion) raised by the company.

 

Weaknesses:

Moderately higher leverage and moderate debt protection metrics

The foreign currency external debt of AEML stood at Rs 10,798 crore (USD 1,300 million) as of September 2023 (excluding sub-debt of Rs 2,342 crore (USD 282 million) from QIA). CRISIL Ratings understands that the entire foreign currency debt of AEML is fully hedged, which provides comfort. Post September 2023, the company completed a partial buy-back of USD120 million through a tender offer. This led to a reduction in debt to Rs 9,841 crore (USD 1,180 million) as of November 2023.

 

Consequently, leverage (the ratio of debt to earnings before interest, tax, depreciation and amortization (Ebitda) is expected to correct to 4.6-4.8 times as on March 31, 2024, from 5.0 times a year earlier. The outstanding external debt was significantly higher than the regulatory debt of Rs 3,190 crore (on which the regulator provides a fixed return) as on September 30, 2023. This is mainly owing to debt taken in 2018 during the acquisition of the business from Reliance Infrastructure Ltd.

 

Debt projection metrics are moderate with gearing at 3.2 times as on September 30, 2023, and interest coverage 2.5 times for the first half of fiscal 2024 (2.8 times as on March 31, 2023, and 1.6 times for fiscal 2023, respectively), though remaining adequate given the stable cashflow business model.

 

The external debt has covenants — net debt to regulated asset base (RAB) to be lower than 1.4 times and project life coverage ratio (PLCR) to be higher than 1.8 times. Also, surplus distribution is governed by debt service coverage ratio (DSCR) — 100% if the DSCR exceeds 1.55 times, 60% if between 1.45 and 1.55 times, 50% if between 1.35 and 1.45 times and 0% if under 1.35 times. Also, the company is required to maintain debt service reserve account (DSRA) equivalent of six months of debt obligation.

 

CRISIL Ratings understands that these covenants will be applicable for the proposed NCDs as well, which would be a rating sensitive factor. These covenants ensure availability of sufficient liquidity cushion to support debt servicing.

 

AEML is likely to undertake MERC approved annual capex of ~Rs 1,500 crore, on average, over the next three fiscals, mainly towards sustenance capex. As per regulatory norms, the company is likely to fund nearly 70% of the capex through debt and the remaining 30% through equity (which will be added to regulated equity, on which the company will earn a fixed return). This is expected to result in a rise in debt levels over the medium term. However, leverage (debt to Ebitda) is expected at 4.6-4.8 times with expected increase in Ebitda (as finance cost related to capex is passed on, along with compounding return on equity). During fiscal 2023 and the first half of fiscal 2024, AEML funded the debt portion through internal accrual to reduce the gap between actual and regulatory debt. Any significantly large, debt-funded or unapproved capex will result in higher leverage, and hence, remains a key monitorable.

 

Exposure to refinance risk in the longer run, albeit no near to medium term refinancing requirements

AEML’s outstanding external debt has a single bullet repayment in February 2030 (for USD 0.88 billion) and July 2031 (USD 0.3 billion), resulting in no significant principal repayment in the near term.

 

However, in the longer run, the company would remain exposed to refinancing risk, given that the license period left at the time of expiry would be only 5-6 years. That said, CRISIL Ratings expects low license rollover risk considering the following aspects a) the track record of successful rollovers over the past few decades, b) AEML has maintained operating metrics consistently above normative levels, and c) a large company owned distribution asset base with a well-established network, However, it will be a key rating sensitivity factor.

Bulk of AEML’s long-term debt is denominated in US dollars. CRISIL Ratings takes comfort from the fact that the US dollar debt (external and sub-debt from QIA) is fully hedged for both principal and interest payments, through cross currency swaps. Any change in this understanding will be a key rating sensitivity factor.             

Liquidity: Strong

Cash and equivalents stood at Rs 1,750 crore as on September 30, 2023. This included free cash of Rs 614 crore, DSRA of Rs 260 crore, capex and hedge reserve of Rs 774 crore and other reserves of Rs 102 crore. Net cash accrual is estimated at Rs 2,000-2,200 crore annually over the next few fiscals, which should be sufficient to meet annual debt obligations (mainly interest) of Rs 900-1,100 crore. Liquidity is supported by the unutilized working capital limit of around Rs 940 crore as on December 31, 2023 (of the total sanctioned fund-based working capital limit of Rs 1,590 crore). CRISIL Ratings understands that capex of almost Rs 1,500 crore in fiscal 2024 will primarily be funded through internal accrual, existing cash balance and expected inflow with recovery of RA. Capex beyond fiscal 2024 will be funded through internal accrual and debt, with annual accrual likely to be sufficient to cover 30% of the equity portion for the annual capex.

 

CRISIL Ratings notes that the inter-corporate deposit (ICD) of Rs 1,000 crore to Adani Properties (a group entity) was redeemed in fiscal 2024 and the proceeds used to buy back bonds of USD120 million through a tender offer. Any further material support to parent or group entities will remain monitorable.

Outlook: Stable

The business risk profile of AEML is expected to remain strong over the medium term, driven by stable cash flow from the regulated business. Sustained business performance and prudent capital allocation should support sustenance of the comfortable financial risk profile.

Rating Sensitivity Factors

Upward Factors

• Sustained increase in operating cash flow resulting in improved financial risk profile with better debt coverage ratios and lower-than-expected gearing
• Higher-than-expected deleveraging through surplus cash flow, with debt to Ebitda ratio below 4 times on a sustainable basis

 

Downward Factors

• Higher than expected debt-funded capex or lower-than-expected operating cash flow weakening the financial risk profile with leverage increasing to more than 6 times on sustainable basis
• Substantial and sustained increase in RA impacting annual operating cash accrual
• Significant incremental support to group entities negatively impacting the liquidity
• Adverse outcome of pending regulatory investigation constraining the financial flexibility of Adani Group, including AEML

 

Unsupported ratings: CRISIL AA+

Unsupported rating disclosure for ratings without ‘CE’ suffix, where the instruments are backed by specified support considerations, is in compliance with SEBI’s circular dated September 22, 2022.

Key drivers for unsupported ratings

CRISIL Ratings has combined the business and financial risk profiles of AEML and PDSL, as both are obligors for the external debt of AEML. However, PDSL does not have any meaningful operations and is debt free (as on date). Further, PDSL is not expected to see any change in its operating profile and also not expected to raise any debt as well as not expected to receive any support from AEML, going forward. Resultantly, the rating is mainly driven by AEML’s standalone credit profile. Any change in this understanding will be a key rating sensitivity factor. As a result, unsupported and supported ratings of AEML stand at the same level.

Key financial indicators – AMEL (Standalone) – CRISIL Ratings adjusted

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs.Crore	9436	7,628
Profit after tax (PAT)	Rs.Crore	95	122
PAT margin	%	1.0	1.6
Adjusted debt*/adjusted networth	Times	3.66	2.7
Adjusted interest coverage	Times	1.65	2.0^

*Excluding sub-debt from QIA

^Excluding forex gain/loss

For the first nine months of fiscal 2024, AEML reported operating income of Rs 7,844 crore and PAT of Rs 152 crore.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	1,000	Simple	CRISIL AA+/Stable

*Yet to be issued