Detailed Rationale

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

 

The group has completed the release of audited financials for fiscal 2022 along with disclosures pertaining to whistleblower complaints, for all entities coming under the purview of the API group. The audited reports have minimal deviation from previously disclosed financials.

 

In line with the previously disclosed 20-F filing for Azure Power Global Ltd (APGL), the global parent of APIPL, consolidated audited financial statement of APIPL consists of 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 financial statements and internal controls of APIPL and has mentioned that the group had 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.

 

As per the press release by APGL dated November 28, 2023, the group has committed a timeline to its bondholders, with annual report for fiscal 2023 expected to be filed on or before April 30, 2024. Failing this will trigger a technical default which may result in acceleration of bond repayments. Previously, the group had requested extension of timelines from domestic lenders for submission of fiscal 2023 financials till December 31, 2023, and is now in the process of requesting for further extensions.  According to management, they have already received the required extensions from a few lenders and no lender has indicated any intention of debt acceleration, given comfort on project level securities and cash flows.

 

The ratings remain on watch negative, with the ability of the group to timely release fiscal 2023 audited financials and continued support from lenders for further extensions being key monitorable. Further CRISIL Ratings will continue to monitor any material financial impact of whistleblower allegations on fiscal 2023 financials. 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.

 

Moreover, the class action lawsuit against APGL filed in the US district court, alleging violations of US securities laws, persists. The group maintains its stance that it sees no merit in the lawsuit and intends to defend the case vigorously. CRISIL Ratings understands from the management that the plaintiff has also filed a Second Amendment. In case liabilities are withstanding, the extent of damages arising out of these will be monitorable.

 

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.

 

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.

 

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 one of the 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 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. The group has received a letter of award for the entire capacity, and so far PPAs for 3,033 megawatt (MW) have been signed. The project will be spread over four-six 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 signed PPAs for 120 MW wind and 150 MW hybrid projects. 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 audited 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 is expected to improve post fiscal 2022 with commissioning of a few projects, but overall leverage and gearing to remain high over the medium term due to incremental capital expenditure (capex) requirement for under-construction projects. 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 2097 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 with no material impact on account of whistle-blower allegations
• Ability of the company to successfully refinance its November 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 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 API (Consolidated)

Particulars	Unit	2022 Audited	2021 Audited
Revenue	Rs crore	1,808	1,500
Profit after tax (PAT)	Rs crore	28	(359)
PAT margin	%	1.5	(23.9)
Adjusted debt / adjusted networth	Times	3.7	5.5
Interest coverage	Times	1.3	1.2

Note: The table reflects CRISIL Ratings-adjusted consolidated financials

 

APGL Financial indicators:

Particulars	Unit	FY23 Unaudited	FY22 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