Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Azure Power Forty Three Pvt Ltd (Azure Power Forty Three; part of the Azure Power India [API] group) continue on 'Rating Watch with Negative Implications'.

 

CRISIL Ratings notes the filing Form 20-F with US Securities and Exchange Commission (SEC) by Azure Power Global Limited (parent holding company of APIPL), thus, releasing audited financials for Fiscal 2022 along with disclosures pertaining to Whistleblower complaints. The release happened within company’s committed timeline of October 31, 2023 and with minimal deviation from previously disclosed financials.

 

However, in the filings, there are disclosures regarding management identifying material weaknesses in the design and operating effectiveness of internal control over financial reporting in relation to land acquisition process, assets capitalisation, vendor selection criteria and monitoring of management review controls inter-alia including those related to significant estimates and financial statement closing process. The auditor has also qualified the opinion and mentioned that the group has not maintained effective internal control over financial reporting as of March 31, 2022. In relation to the investigations done for whistleblower allegations, the group has made an adjustment (decapitalization) of Rs 24.3 crore in the fixed assets based on certain benchmarking reports.

 

The audited reports for APIPL and Indian SPVs, are still awaited. Also, as per previous management disclosure, Fiscal 2023 audited financials are expected by December 31, 2023.

 

Shares of APGL continue to be suspended from trading on NYSE (since July 13, 2023), due to failure of timely filing of audited financials of fiscal 2022 and the half-year ended September 30, 2022, in violation of their listing rules.  Company has appealed  NYSE’s decision, for which hearing was held on October 16, 2023.  Outcome of the same is awaited and, if appeal is unsuccessful, shares will be delisted, and no further trading on the NYSE will be possible. The group's SEC reporting obligations under the US Securities Exchange Act of 1934 will continue even in case delisting happens. As per management, the delisting could trigger a technical default of the restricted group bonds only if the company ceases to file periodic reports with the US SEC and the group has articulated that they will continue to periodically file and be registered the SEC. However, any action by the bondholders will be monitored.

 

Further, the class action law suit against APGL filed in the US District Court alleging violations of U.S. securities laws still persists. As per 20-F filings, company sees no merit in the lawsuit and intends to defend the case vigorously. In case liabilities are withstanding, extent of damages arising out of the same, will be a monitorable.

The group has requested extension of timelines from domestic lenders for submission of fiscal 2022 and fiscal 2023 financials till 31 October 2023 and 31 December 2023 respectively and waivers for breached covenants due to events such as credit downgrades. Almost all lenders have provided the requisite approvals/extensions and according to management no lender had indicated any intention of debt acceleration, given comfort on project level securities and cash flows. That said, delay in the fiscal 2023 financials beyond committed deadlines and ability to take further extensions, will remain key monitorable. Further CRISIL will continue to monitor any material financial impact of whistleblower allegations on fiscal 2023 financials.

 

The operational performance of underlying assets and project cash flow of the group continue to be healthy, with debt levels remaining stable. The group continues to have healthy cash balance of over Rs 2,000 crore as on March 31, 2023, and benefits from the presence of strong and resourceful investors.

 

The ratings remain on watch negative, with ability of the group to timely release pending fiscal 2022 and fiscal 2023 audited financials, continued support from lenders and bondholders along with extent of material liability pertaining to whistleblower issues being key monitorables for watch resolution. The management has emphasized on their efforts to strengthen their internal control framework, and similar allegations with adverse impact in the future will also be monitored.

 

The ratings continue to 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), healthy operating performance and comfortable liquidity. 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.

 

These strengths are partially offset by average financial risk profile due to high leverage, and exposure to significant project implementation risks related to sizeable expansion plans and risks inherent in operating renewable energy assets.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of APIPL and its special purpose vehicles (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 shall 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 second-largest solar energy player in India with operational portfolio of 2.9 gigawatt (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 plant load factor (PLF) of 22.8% for fiscal 2023, improved from 21.6% in fiscal 2022.  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 listed on the NYSE and is majority held by CDPQ (53.4% as on March 31, 2022). CDPQ has investment experience of more than 55 years, with presence in more than 65 countries and net assets of over CAD 402 billion as on December 31, 2022. 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 USD124 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. Presence of strong investors with long-term investment outlook supports the financial flexibility of the API group.

In February 2022, APGL raised USD 250 million through a rights issue, which was 78% subscribed. The remaining was subscribed by CDPQ and OMERS through the backstop arrangement. Part of the proceeds were utilised to repay the short-term bridge loan and some corporate loans, eliminating near-term refinancing risk. The remaining funds have been kept as liquid buffer, to be utilised for growth and general corporate purpose.

 

The group has a range of marquee investors, supporting its ability to raise equity in a timely manner. It has raised equity of USD 625 million (more than Rs 4,500 crore) since fiscal 2017.

 

Furthermore, it has a strong track record of raising funds in the debt and capital markets in India and abroad. It has raised bonds against two restricted groups, comprising specific solar assets in Singapore. The group has also been able to refinance its debt in a timely manner at competitive rates.

 

Weaknesses

Exposure to project implementation risk related to large expansion plans

The group has aggressive expansion plans, with almost 1 GW of capacity to be commissioned every year over the next 4-5 years. It is implementing a manufacturing-linked tender for the 4-GW solar power project won in fiscal 2020. While the group has received a letter of award for the entire capacity, so far PPAs for 2,983 megawatt (MW) have been signed. The project will be spread over four years. However, 2.3 GW of these projects, which are in Andhra Pradesh, are stalled due to regulatory challenges. The company is working with the Solar Energy Corporation of India Ltd (SECI) to resolve the issue and the matter is sub-judice.

 

In addition, the group has wind and hybrid (solar and wind) projects with combined capacity of 470 MW. Of this, PPAs for 120 MW wind and 150 MW hybrid projects have been signed. While the group has a track record of timely fund infusion, sourcing of long-term funds in a timely manner will be a key monitorable.

 

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 around 8 times and 4 times, respectively, as on March 31, 2022, as per unaudited financials, as against 9 times and 5 times, respectively, a year earlier. Interest coverage ratio was modest at 1.1-1.3 times in the past three fiscals. Leverage and gearing are expected to remain high over the medium term as incremental capital expenditure (capex) for under-construction projects will be funded in a debt-to-equity ratio of 3:1. Also, refinancing risk persists, with bullet payment of around Rs 2,400 crore in fiscal 2025 and Rs 3,000 crore in fiscal 2027. However, the risk is mitigated by the group’s track record of timely refinancing at attractive terms supported by long remaining life of underlying assets and equity infusion.

 

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 of the group’s portfolio in fiscal 2020. 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 105 days as on September 30, 2022, against 120 days for fiscal 2022 and 118 days for the previous fiscal. The receivables remained stable because of the financial aid provided to state discoms.

 

Sustained operating performance of the portfolio and timely collection from counterparties will be key monitorables.

Liquidity: Adequate

Projected cash accrual of around Rs 900 crore per annum over the next two years will comfortably cover yearly debt obligation of around Rs 600 crore. Cash and equivalent stood at Rs 2,097 crore as on March 31, 2023, as per press release shared by the group. Annual capex over the next four years will be funded through a mix of debt and cash accrual.

Rating Sensitivity factors

Upward Factors

• Timely release of audited financials for fiscal 2023
• Ability of the company to successfully refinance its Nov 2024 bond repayment
• Sustained improvement in operating performance above P-90 level

 

Downward Factors

• Delay in release of financials beyond stated timeline for fiscal 2023
• Material action taken by the lenders including domestic lenders and bondholders
• Lower-than-expected PLF or large debt, weakening the average DSCR to below 1.2 times
• Sizeable stretch in receivables, weakening liquidity
• CDPQ ceases to be the single-largest shareholder

About the Company

Azure 43 is a 600-MW alternating current (897 MW direct current) solar photovoltaic power project in Bikaner, Rajasthan. The company is a subsidiary of APIPL, with its ultimate holding company being Azure Power Global Ltd (APGL). The project has been commissioned in December 2021. The project has signed a PPA with Solar Energy Corporation of India at a tariff of Rs 2.53 per kilowatt hour for 25 years.

 

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. APGL is listed on the NYSE, while its solar green bonds are listed on the Singapore Exchange. The group is backed by long-term investors such as CDPQ and OMERS.

Key Financial Indicators

Azure 43

Particulars	Unit	2021	2020*
Revenue	Rs crore	33	NA
Profit After Tax (PAT)	Rs crore	2	NA
PAT margin	%	6.9	NA
Adjusted debt/adjusted networth	Times	3.9	NA
Interest coverage	Times	3.9	NA

*Project under construction

 

API (Consolidated)

Particulars	Unit	2021	2020
Revenue	Rs crore	1,500	1,302
Profit after tax (PAT)	Rs crore	-359	-248
PAT margin	%	-23.9	-19
Adjusted debt/adjusted networth	Times	5.5	3.5
Interest coverage	Times	1.2	1.1

Note: The table reflects CRISIL Ratings-adjusted consolidated financials

 

APGL Financial indicators as per press release:

Particulars	Unit	FY23	FY22
		Unaudited	Audited
Revenue	Rs cr	2,109	1,834
Cash	Rs cr	2,097	2,331
Debt	Rs cr	13,140	12,879

Source: Company

Any other information: Not applicable