Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facility of Azure Power Forty Pvt Ltd (Azure Power Forty; part of the Azure Power India [API] group) from ‘Rating Watch with Developing Implications'. The rating has been upgraded to ‘CRISIL A-’ from ‘CRISIL BBB+’ and has been assigned a ‘Stable’ outlook.

 

The rating upgrade and removal of developing watch factors in improvement in the financial flexibility of the group along with continued comfortable operating performance. The group has released audited financials of fiscal 2024 in July 2024 (within 120 days of the end of the financial year) after the release of its fiscal 2023 financials in February 2024. Subsequently, the group has also released audited financials of all the special-purpose vehicles (SPVs) including Azure Power Forty.

 

Additionally, the group has been able to demonstrate its improved financial flexibility with timely refinancing of its restricted group bonds (around 20% of the total outstanding debt) well within the timelines along with refinancing of existing loans in one SPV at competitive rates. The penal charges on interest rates linked to non-submission of fiscal 2023 audited financials have also been regularised.

 

The operating performance of the group remains comfortable, as reflected in average plant load factor (PLF) of 22.3% for fiscal 2024, compared with 21.6% in fiscal 2022.

 

However, the class action lawsuit against Azure Power Global Ltd (APGL) filed in a US district court, alleging violations of US securities laws, is still ongoing. The management has communicated that the plaintiff has also filed a second amendment for which hearing is pending. As per management, it is difficult to ascertain the extent of liabilities from the ongoing litigation. While CRISIL Ratings derives comfort from the comfortable liquidity position at the group level, the extent of liabilities through court action or any other means out of these pending litigations will be monitorable.

 

CRISIL Ratings also takes cognizance of the strengthening of internal controls in areas such as enterprise risk management practices, standard operating procedures for construction, land acquisition, internal financial controls and internal audits. The group has been regularly conducting audit and the Audit and Risk Committee of the Board has been regularly reviewing the audit plans and the outcome, as part of the governance framework to ensure financial controls and avoid lapses as incurred in the past.

 

The ratings also factor in the strong market position of the API group as a leading player in solar energy, its diversified portfolio with high revenue visibility due to long-term power purchase agreements (PPAs), and comfortable operating performance and liquidity. Around 73% of the capacity of the group is tied up with strong counterparties such as NTPC, Solar Energy Corporation of India (SECI) and Gujarat Urja Vikas Nigam Ltd (GUVNL). The performance of underlying operational assets and the project cash flow of the group continues to improve with healthy performance of new assets, in line with the P-90 level, with debt levels remaining stable. The liquidity in the system continues to remain adequate, as reflected by consolidated cash balance of Rs 1,562 crore as on March 31, 2024.

 

The ratings also benefit from the presence of strong and resourceful investors and expected support from the shareholders. Majority shareholding is by Caisse de Depot et Placement du Quebec (CPDQ; rated ‘AAA/Stable/A-1+’ by S&P Global Ratings) and Ontario Municipal Employees’ Retirement System (OMERS), which are large Canadian funds with a long-term investment outlook.

 

While the group has limited under construction pipeline at present, it intends to participate in future bids and build further capacity. Any large capacity building and its funding would remain monitorable. The group has already terminated the PPA for the manufacturing-linked tender signed with SECI for 2.33 gigawatt (GW) and has opted to withdraw from the balance 700 megawatt (MW), out of the 3.03 GW projects as well.

 

In fiscal 2023, the group also executed PPAs with SECI for 150-MW solar-wind hybrid project and wind project of 120 MW. While the estimated time for completion for the hybrid project is November 2025, for the wind project, the group has appealed against the tariff adoption order by Central Electricity Regulatory Commission (CERC) as there was a delay in tariff adoption exceeding 16 months and the tariffs are no longer competitive.

 

These strengths are partially offset by average financial risk profile due to high leverage and exposure to risks inherent in operating renewable energy assets.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Azure Power India Pvt Ltd (APIPL) and its SPVs, collectively referred to as the API group, as the entities have significant business, financial and managerial linkages, are in the same business and enjoy cash flow fungibility. Also, the management has articulated that it views all the group companies as a single unit and it will extend support during adversity.

 

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 and diversified portfolio: The API group is the one of the largest solar energy players in India with an operational portfolio of ~3 GW. It has capacity-weighted average operational track record of around five years. The group started operations in 2008 and has a diversified portfolio in terms of location and counterparty. Its assets are in 13 states and have long-term PPAs of 25 years at pre-determined tariffs with over 10 state and central counterparties.

 

• Improving operating performance: The operating performance of the commissioned capacity was satisfactory, as reflected in average PLF of 22.3% for fiscal 2024, compared with 21.6% in fiscal 2022 (as per the company). While the PLFs for assets commissioned before fiscal 2019 remain below P-90, the management has taken corrective steps to improve performance. Sustenance of operating performance above the P-90 benchmark will be a key rating sensitivity factor.

 

• Support from strong investors, CDPQ and OMERS: APGL, the immediate parent of APIPL, is majority held by CDPQ (53.4% as on March 31, 2024). CDPQ has investment experience of more than 55 years, with presence in more than 65 countries and net assets of over ~CAD 450 billion as on June 30, 2024. It has infused USD 400 million in APGL over the past five fiscals, increasing its stake to 53.4% from 20.3% in fiscal 2017. OMERS, with net assets of USD 124 billion as on December 31, 2022, acquired the 19.4% stake of International Finance Corporation in APGL in fiscal 2021 and now holds 23.4% stake.

 

CRISIL Ratings notes that CDPQ has been actively involved in guiding the group in strengthening the company's risk management practices. CDPQ, through its representation on the board and various committees, is also involved in financing decisions, investment plans and oversight of operations. It continues as a strategic long-term investor in the platform and its stake is expected to remain above 50% in the group. CDPQ and OMERS, which jointly hold around 75% shareholding at the group level, have maintained their stance of backing the Azure group and providing need-based support in case of a funding mismatch.

 

The presence of strong investors with long-term investment outlook supports the financial flexibility of the API group. Furthermore, it has a strong track record of raising funds in the debt and capital markets in India and abroad in the past. The group has raised equity of USD 625 million (more than Rs 4,500 crore) since fiscal 2017. It has raised bonds against two restricted group (RGs), comprising specific solar assets in Singapore. The group has also been able to refinance its debt in a timely manner at competitive rates.

 

Weaknesses:

• Average financial risk profile: The group’s financial risk profile is constrained by large debt and modest debt protection metrics. Leverage (ratio of debt to earnings before interest, tax, depreciation and amortisation) and gearing were high at 6.7 times and 3 times, respectively, as on March 31, 2024, as per audited financials, as against 6.9 times and 3 times, respectively, a year earlier. Interest coverage ratio (considering external debt) was healthy at 2.6-3.3 times in the past two fiscals.

 

Furthermore, refinancing risk persists, with bullet payment due of around Rs 3,000 crore for RG3 in fiscal 2027. However, the group has demonstrated timely refinancing of Rs 2,450 crore for RG2. The ability of the group to refinance debt at competitive rates is a key monitorable. However, the risk is moderated by the group’s track record of timely refinancing at attractive terms supported by the long remaining life of underlying assets and equity infusion.

 

Leverage and gearing are expected to remain high over the medium term. While the group does not currently have an under-construction pipeline, the quantum of incremental capital expenditure (capex) requirement to fulfil the group’s growth strategy in the future, will be critical for the rating.

 

• Exposure to risks inherent in operating renewable energy assets: Cash flow of renewable solar projects is sensitive to PLF, which depends entirely on solar irradiation patterns that are inherently unpredictable. This was one of the factors impacting the operating performance, resulting in weaker-than-P90 performance in some of the group’s assets in fiscal 2023.

 

Moreover, the counterparties are state distribution companies (discoms), several of which have weak credit risk profiles. However, for the API group, 70% of the capacity has strong buyers, resulting in receivables of around 80 days for fiscal 2024, improved from around 100 days for fiscal 2023. The receivables remained stable because of the financial aid provided to state discoms.

 

The sustained operating performance of the portfolio and timely collection from counterparties will be monitorables.

Liquidity: Adequate

Projected cash accrual of around Rs 1,800 crore per annum over the next two years will comfortably cover yearly debt obligation of around Rs 1,500 crore. Cash and equivalent stood at Rs 1,562 crore as on March 31, 2024. There are no significant under-construction projects as on date.  

Outlook: Stable

CRISIL Ratings believes the API group will continue to benefit from steady improvement in the performance of operational projects. The credit risk profile of the group will likely remain healthy over the medium term backed by comfortable debt service coverage ratio (DSCR).

Rating sensitivity factors

Upward factors:

• Sustained improvement in operating performance to above P-90 level
• Significant improvement in financial flexibility through timely and satisfactory resolution of the ongoing legal proceedings

 

Downward factors:

• Higher-than-expected payout arising from the class action lawsuit
• Material action taken by the lenders including domestic lenders and bondholders
• Lower-than-expected PLF, large debt or higher-than-expected expenses weakening the average DSCR to below 1.2 times
• CDPQ ceases to be the single-largest shareholder
• Sizeable stretch in receivables, weakening liquidity

About the Company

Azure Power Forty is a 90-MW alternating current (AC) solar photovoltaic power project in Assam. The company is a subsidiary of APIPL, with APGL being the ultimate holding company. The project has been completed and has commenced AC capacity from April 2022. It has signed a 25-year PPA with Assam Power Distribution Co Ltd at tariff of Rs 3.34 per kilowatt-hour. Around 25 MW of the plant was adversely affected by the floods in May 2022; however, the capacity has been restored and generation resumed from June 2023.

About the Group

Incorporated in 2008, APIPL is the holding company for the API group’s renewable assets in India. It is wholly owned by APGL.

The API group is a leading solar power producer in India with operational portfolio of 3 GW. The solar bonds of APGL are listed on the Singapore Exchange. The group is backed by long-term investors such as CDPQ and OMERS.

Key Financial Indicators

Azure Power Forty

Particulars	Unit	2024 Audited	2023 Audited
Revenue	Rs crore	64	74
Profit after tax (PAT)	Rs crore	-4	6
PAT margin	%	NM	8.3
Adjusted debt / adjusted networth	Times	2.5	2.6
Interest coverage	Times	1.4	1.9

Not meaningful; project under construction

 

API (consolidated)

Particulars	Unit	2024 Audited	2023 Audited
Revenue	Rs crore	2,134	2,180
Profit after tax (PAT)	Rs crore	(134)	(155)
PAT margin	%	(6.2)	(7.1)
Adjusted debt / adjusted networth	Times	3.3	3.4
Interest coverage	Times	1.5	1.7

Note: The table reflects CRISIL Ratings-adjusted consolidated financials

Any other information: Not Applicable