Detailed Rationale

CRISIL Ratings has upgraded its rating on the bank loan facilities of Adani Power Limited (APL) to ‘CRISIL AA-/Stable’ from ‘CRISIL A/Stable’.

 

The rating upgrade follows the strong improvement in the business and financial risk profiles of APL. This is driven by better-than-expected operating performance backed by timely commissioning and ramp-up of the Godda power plant (1.6 gigawatt [GW]), ramp-up at the Mahan power plant (1.2 GW), full recovery of pending regulatory dues related to claims for fuel costs as passthrough under change in law clauses of existing power purchase agreements (PPAs) and continued improvement in receivables. This has supported by strong cash accrual in fiscal 2024, which has been utilised for prepayment of portion of external debt, leading to more-than-expected correction in the leverage and healthy improvement in liquidity.

 

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

 

APL has recovered majority of pending regulatory dues, including carrying costs and late payment surcharge (LPS) between April and October 2023 from counterparties, post resolution of the matter in APL’s favour through the order of Supreme Court of India in March and April 2023. Also, APL has been receiving monthly receivables on a timely basis, including recurring regulatory claims, supporting its operating cash flow. The operating performance of APL has been strong with robust plant load factor (PLF) and healthy operating margin. The company had better-than-expected operating earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 10,041 crore for fiscal 2023 and Rs 7,926 crore for the first half of fiscal 2024 (Rs 10,280 crore in fiscal 2022).

 

CRISIL Ratings believes the operating performance of APL will continue to benefit from 81% of total capacities tied up under long-term PPAs, further ramp-up at the Godda and Mahan power plants, healthy utilisation of merchant capacities backed by strong power demand outlook for the country over the medium term, and robust fuel supply arrangements (FSAs). APL’s consolidated operating Ebitda will likely remain healthy over Rs 12,000 crore per annum for fiscals 2024 and 2025. However, any moderation in power demand leading to lower-than-expected volume and profitability for APL will remain monitorable.

 

Strong operating cash flow and proceeds of regulatory dues in fiscal 2024 have been used towards partial repayment of unsecured perpetual securities (UPS) and unsecured loans from the group (Rs 8,435 crore repaid) and towards partial prepayment of Rs 1,150 crore of external debt. This led to a reduction in consolidated net leverage (ratio of net external debt to operating Ebitda) to 2.6 times as of September 2023 from 3.3 times as of March 2023 (around 4 times as of March 2022), with further improvement expected over the medium term, backed by healthy cash accrual.

 

CRISIL Ratings notes that APL has significant capital expenditure (capex) in the pipeline. This includes organic and inorganic expansion of around 6 GW, expenditure for flue gas desulphurisation (FGD), and capex related to development of coal mine and maintenance. APL’s aggregate capex outlay is expected over Rs 47,000 crore over the next 4-5 fiscals, of which, up to 70% is likely to be funded through debt and the remaining through internal accrual. CRISIL Ratings expects operating cash accrual to be sufficient to meet the equity requirement of capex as well as annual debt obligation. CRISIL Ratings has taken note of the management’s commitment to maintain the ratio of net external debt to operating Ebitda (on trailing 12 months basis) at or below 2.5 times hereon. Timely execution and funding of the planned capex, without impacting the capital structure or liquidity profile, will be a key monitorable.

 

The improvement in APL’s liquidity is reflected in strong net cash accrual which should be sufficient to meet the principal debt obligation over the medium term. As on September 30, 2023, unencumbered cash and liquid investments, including unutilised working capital limits, stood around Rs 3,214 crore, including debt service reserve account (DSRA), which is sufficient to meet scheduled debt obligations for six months.

 

The rating continues to factor in the strong market position of APL, presence of long-term/medium-term PPAs for 81% of operational capacities with corresponding FSAs for nearly 75% of operational domestic coal-based capacities, the geographically diversified portfolio of coal-based power-plants and counterparties, and healthy financial risk profile. These strengths are partially offset by exposure to risk related to lower merchant power demand and tariffs due to untied capacity (nearly 20% of total operational capacity), exposure to counterparty risk on account of weak to moderate credit profiles of some distribution companies (discoms).

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of APL (merged entity) and its subsidiaries, given the strong operational, financial and managerial linkages among the entities.

 

CRISIL Ratings has treated UPS of around Rs 9,180 crore as on September 30, 2023 (Rs 13,215 crore as on March 31, 2023), as 100% equity as these are perpetual with no maturity or redemption. Call option for their redemption is available with the issuer (APL) and interest on these securities is cumulative. The UPS can be redeemed with the lender’s consent and through distributable surplus.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position with diversified portfolio of coal-based power plants across geographies:

APL is one of India’s largest independent power producers with operational thermal power capacity of 15.25 GW, equivalent to over 16% of the overall capacity of private producers and around 7% of the total domestic capacity. With under-construction projects, APL is looking to further scale up operations and strengthen its market position. Its plants are in various territories and terrains in India, ranging from near-pitheads to coastal areas. APL has extensive experience in working with a range of power plant technologies from subcritical/supercritical technologies to ultra-supercritical technologies. Of its operational portfolio, 44% is based on imported coal and 48% is near pitheads having the lowest cost of generation.

 

• Healthy business risk profile with high level of long-term PPAs and FSAs:

APL has tied up around 81% of its gross power generation capacity with multiple counterparties under long-term/medium-term PPAs, with escalable tariff structure for majority of these PPAs, providing good revenue visibility. APL has tied-up nearly 83% (1,320 megawatt [MW] of 1,600 MW) of under-construction capacity for Phase II of its subsidiary, Mahan Energen Ltd (MEL), with discoms in Madhya Pradesh, including provision for raw material linkages. The untied capacities are near pitheads, which supports raw material sourcing and reduces cost of generation. The diversified counterparty mix mitigates any concentration risk.

 

Also, APL has FSAs for around 75% of its domestic coal-based thermal power generation capacity. CRISIL Ratings expects higher materialisation under these FSAs to continue, resulting in relatively lower reliance on alternative coal sources. However, the ability to claim alternate fuel costs as passthrough under change in law claims for the respective PPAs post resolution of the regulatory matter has strengthened the business risk profile. For the imported coal-based plants, APL benefits from Adani Group’s presence in overseas coal mining and its sourcing ability, which mitigates raw material availability risk for these capacities to a certain extent.

 

• Improving business and operating performance

The business risk profile of APL has strengthened with the execution of the supplementary power purchase agreement (SPPA) with Haryana discoms effectively revising the capacity to 1,200 megawatt (MW) on net basis (gross: 1,320 MW) from 1,424 MW on net basis (gross: 1,566 MW). This revision in capacity through the SPPA has resulted in APL supplying the power only from two units of Phase IV (1,980 MW) of the Mundra plant as against three units earlier. This has allowed APL to tap any opportunities available in the long-term/short-term markets through the third unit (660 MW) of Phase IV of the Mundra plant.

 

• Healthy financial risk profile and debt protection metrics

External debt reduced during the first half of fiscal 2024 due to partial prepayment and scheduled repayment through operating cash flow, including proceeds of old regulatory dues. The ratio of net external debt to operating Ebitda was around 2.6 times as of September 2023 (around 3.3 times as of March 2023) and is expected to improve over the medium term. Reduction in external debt led to improvement in interest coverage to around 4.4 times for the first half of fiscal 2024 and it is expected to remain around 4 times for the full fiscal (around 4.3 times in fiscal 2023). While the financial risk profile is expected to improve over the medium term, timely implementation of the planned capex will be the key risk going forward.

 

Overall, CRISIL Ratings expects the consolidated net external debt to operating Ebitda ratio to remain sustainably below 2.5 times as articulated by the management, and the same will remain a key monitorable.

 

APL’s long-term debt, initially availed through various special-purpose vehicles (SPVs) with diverse covenants from multiple lenders, was consolidated into APL in fiscal 2023. To ensure consistent operations and a unified set of covenants for its long-term debt, APL is in the advanced stage of refinancing the debt.

 

Weaknesses:

• Exposure to merchant market demand and pricing risk

Around 20% of the capacity does not have any PPA tied up, resulting in exposure to offtake and price risks. APL has been able to utilise the untied capacity for merchant power sales, which led to improved PLF and realisations over the past few years, backed by higher power demand across India. Also, the said capacities benefit from being near pitheads, which lowers fuel supply risk. However, ability to sustain higher merchant sales with healthy margins, thereby supporting robust cash accrual over the long term, depends on various factors, including power demand-supply dynamics and fuel availability in the country, and will be monitorable.

 

• Exposure to counterparty risk having moderately weak credit profile

While APL has witnessed timely recovery of receivables over the past years, some discoms have average to weak credit profiles. At times, this may result in a delay in collection of bills, leading to cash flow mismatches, which is partially mitigated with presence of letter of credit mechanism and DSRA. Overall receivables have moderated post recovery of old regulatory dues during the first half of fiscal 2024, but receivables from Bangladesh Power Development Board (BPDB) have accumulated. While collection from BPDB is improving steadily on monthly basis, further improvement in the monthly collections as well as sustenance of receivables from other counterparties will remain monitorable.

 

• Exposure to risk associated with brownfield expansion and growth through acquisitions

APL is implementing a brownfield project under Phase II of MEL at a cost of Rs 7.6 crore per MW. This project is at initial stage of execution and has a scheduled completion operation date (SCOD) in fiscal 2028. APL also has two more brownfield projects of 1.6 GW each in the pipeline at similar project cost per MW. While these projects are in the planning stage, execution risk is mitigated by the availability of land and expectation of timely financial closure. Also, these projects are to be funded in debt-to-equity ratio of 70:30, with equity to be funded through internal accrual. The fact that APL executed the greenfield Godda plant on time despite the pandemic and recently achieved financial closure for Mahan Phase II provides comfort.

 

The company also needs to undertake capex of around Rs 9,000 crore towards FGD till December 2026, across all its plants, except Mundra (Phase IV). Other capex of over Rs 2,500 crore mainly includes development of the Gondkhari coal mine and maintenance capex. However, timely completion of the planned capex without any cost overrun will remain monitorable.

 

APL also plans to expand through the inorganic route and is in the process of acquiring around 1.1 GW of capacities. The planned acquisition of Coastal Energen is underway and is expected to be completed in the next six months. That said, APL has a consistent track record of turning around newly acquired merchant plants. While the management has articulated that APL does not have any other firm acquisition plans as of now, any debt-funded acquisition beyond the planned expenditure will remain a key rating sensitivity factor.

Liquidity: Strong

Liquidity will be supported by strong net cash accrual of Rs 11,000-12,000 crore over fiscals 2024 and 2025, which should be sufficient to meet the principal debt obligation of Rs 3,500-4,000 crore over the medium term. As on September 30, 2023, the company had unencumbered cash and liquid investments, of around Rs 3,214 crore, including unutilised working capital limits and DSRA. The entire fund-based working capital limits of Rs 4,616 crores was unutilised (drawing power of Rs 459 crores as of September 2023). Excluding the average annual capex requirement (Rs 9,000-10,000 crore) over the next 4-5 fiscals, the company has sufficient liquid surplus to meet the scheduled debt obligation over the next six months. The equity portion of the capex is likely to be funded through internal accrual.

Outlook Stable

The business risk profile is expected to be supported by sustenance of healthy operational performance over the medium term, led by strong operating efficiency, resulting in robust cash accrual for debt servicing as well as meeting the equity requirements for the planned capex. While APL is not expected to require any group support over the medium term, need-based group support will likely continue.

Rating Sensitivity factors

Upward factors

• Significant and sustained improvement in the operating performance leading to significant improvement in the liquidity position
• Faster-than-expected deleveraging leading to net debt to operating Ebitda sustaining below 2.5 times over the medium to long term and average DSCR above 2 times over the debt tenure
• Sustained improvement in receivables from counterparties, including BPDB

 

Downward factors

• Weakening operating performance with plant availability factor (PAF) remaining below normative levels for existing capacities having PPAs, leading to delay in fixed cost recoveries or lower PLFs of merchant capacities impacting operating cash flow
• Weaker-than-expected cash flow or larger-than-expected, debt-funded growth capex (organic or inorganic) resulting in external net debt to operating Ebitda ratio exceeding 3.0-3.5 times on sustained basis with DSCR falling below 1.7-1.8 times over the remaining debt tenure
• Adverse outcome for pending regulatory investigation constraining financial flexibility of Adani Group, including APL

About the Company

APL, part of Adani Group, is the largest private sector thermal power producer in India, with a portfolio of 16.85 GW of assets. Out of this, 15.25 GW is operational and 1.6 GW is under construction. The power plants are located across the country, in Maharashtra, Karnataka, Rajasthan, Chhattisgarh, Gujarat, Madhya Pradesh and Jharkhand. APL has a diversified set of counterparties.

Key Financial Indicators(CRISIL Ratings adjusted numbers):

As on/for the period ended March 31		2023	2022
Revenue	Rs crore	38,023	26,625
Profit after tax (PAT)	Rs crore	10,727	4,912
PAT margin	%	27.7	17.5
Adjusted debt/adjusted networth	Times	1.2	2.3
Interest coverage	Times	4.3	3.4

Based on nine-months of fiscal 2024 financials, APL reported (consolidated) operating income of Rs 36,988 crore and net profit of Rs 18,091 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	Rupee Term Loan	NA	9%^	Sep - 34	16,154.25	NA	CRISIL AA-/Stable
NA	External Commercial Borrowings	NA		Jun - 28	976.58	NA	CRISIL AA-/Stable
NA	Working Capital Facility	NA	NA	NA	8,880.05	NA	CRISIL AA-/Stable
NA	Bank Guarantee	NA	NA	NA	1,995.29	NA	CRISIL AA-/Stable
NA	Bill Discounting	NA	NA	NA	2,000.00	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	7,930.46	NA	CRISIL AA-/Stable
NA	Proposed Bank Guarantee	NA	NA	NA	63.37	NA	CRISIL AA-/Stable

^Weighted average rate of interest on trailing 12 months basis