Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of DB Power Limited (DBPL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’ and reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities of the company. CRISIL Ratings has also withdrawn its rating on Rs 612.75 crore of bank facilities upon receipt of documents which are in line with the withdrawal policy of CRISIL Ratings.

 

The upgrade reflects better-than-expected improvement in the business and financial risk profiles of DBPL, driven by the increase in the tied-up capacity by 323 megawatt (MW) (~25%) by way of new long-term power purchase agreement (PPA) with Gujarat Urja Vikas Nigam Ltd (GUVNL) at healthy fixed tariff with complete pass-through of variable cost, sustenance of improved operating performance and healthy debt protection metrics on the back of partial prepayment and refinancing of the debt at lower rate of interest during the first half of fiscal 2024. The credit risk profile of DBPL will continue to be supported by healthy performance and sustenance of strong liquidity.

 

Operating performance remains strong during the first half of fiscal 2024, with plant load factor (PLF) increasing to 83% from 73% in fiscal 2023, while the plant availability factor (PAF) remained above normative levels. This is driven by healthy offtake by existing counterparties and healthy sales in the short-term market through bilateral contracts as well as power exchanges. The company benefits from the low cost of generation due to timely procurement of coal through fuel supply agreement and auctions, proximity to coal mines and own railway siding facility. This led to an increase in the earnings before interest, taxes, depreciation and amortisation (Ebitda) to Rs 980 crore during the first half of fiscal 2024 as compared to Rs 902 crore for the same period last fiscal (Rs 1,346 crore for  fiscal 2023). Operating performance is expected to sustain, driven by adequate capacity tie-ups over the medium term and high power demand.

 

The financial risk profile improved significantly during the first half of fiscal 2024, with an enhancement in capital structure and healthy debt protection metrics due to prepayment of debt worth Rs 197 crore and refinancing of the debt at lower rate of interest. Gearing improved to 1.4 times and debt-to-Ebitda ratio to 3.5 times as on March 31, 2023, from 1.6 times and 3.6 times, respectively, a year ago. Gearing may go below 1.1 times and debt-to-Ebitda to sustain at similar levels over the medium term as there are no major capital expenditure (capex). Liquidity also improved, with total cash and equivalents of Rs 1,400 crore as on September 30, 2023 (Rs 1,334 crore as on March 31, 2023).

 

The ratings reflect the healthy business risk profile of DBPL, supported by its established track record of generation, strong operating efficiency (driven by low cost of generation) and healthy financial risk profile. These strengths are partially offset by exposure to weak counterparties, interest rate risk and volatility in raw material cost.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of DBPL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile, supported by 87% tied-up capacity

The company has long- and medium-term PPAs, with various counterparties. Under the long-term PPAs, it has take-or-pay PPAs with Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) for 220 MW and Rajasthan distribution companies (discoms; through PTC India [PTC; ‘CRISIL A1+/RWDI’]) for 330 MW (gross capacities). This ensures complete recovery of fixed cost subject to the plant achieving normative parameters. DBPL also supplies 60 MW to Chhattisgarh discom at variable cost. The company has a three-year PPA with TANGEDCO (through PTC) for 106 MW (gross capacity). Further, DBPL has executed a new long-term PPA with GUVNL for 323 MW for 15 years. This PPA has healthy fixed tariff with complete pass-through of variable cost. Fuel supply for new PPA is the responsibility of the off taker which provides comfort. With this new PPA, total tied-up capacity has increased to a healthy 87%.

 

• Established track record of healthy generation

The tariff structure of the PPAs allows the company to recover its entire fixed cost, provided the PAF exceeds the normative level of 85% (was above this level for the first five months of fiscal 2024 and during the past three fiscals). In case of the GUVNL PPA, the minimum PAF requirement is higher at 90%. The PAF is expected to remain higher than the normative level over the medium term, backed by proximity to coal mines, increased coal linkages and healthy coal stock availability. Nonetheless, coal availability and its impact on PAF will be key monitorables.

 

Furthermore, the company has demonstrated a healthy track record of generation. PLF was healthy at around 83% for the first half of fiscal 2024 (73% in fiscal 2023 and 82% in fiscal 2022). Also, the company was able to sell around 33% of its supply through bilateral trades or merchant sales in the first half of fiscal 2024 (against ~40% in fiscals 2023 and 2022).

 

• Sound operating efficiency, driven by low cost of generation

Operating efficiency is backed by proximity to coal mines and railway siding, which ensures adequate coal supply, and lower coal handling and transportation costs and transit losses. This results in low variable cost of generation and ensures favourable offtake through the PPAs. This has also enabled the company to sell healthy volumes through bilateral/merchant arrangements at strong average margins which has improved over the years. Ability to sustain volumes in the short term at healthy profitability will be closely monitored.

 

• Healthy financial risk profile

Debt to Ebitda ratio was healthy at 3.3 times as on September 30, 2023 (3.5 times as on March 31, 2023, and 3.6 times on March 31, 2022) and gearing at 1.1 times (1.4 times and 1.6 times, respectively). The improvement is due to healthy operating performance and reduction of debt due to prepayment of Rs 197 crore during the first half of fiscal 2024. Further, DBPL has undertaken refinancing of long-term debt at a lower rate of interest, which improved debt service coverage ratio (DSCR). Also, downward revision in budgeted flue-gas desulfurisation construction cost by Rs 100 crore supports the credit risk profile of the company. Any large, debt-funded capex, adversely impacting the overall financial risk profile, will remain a key monitorable. 

Weaknesses:

• Vulnerability to weak counterparties

Receivables (including unbilled revenue) position improved to ~61 days as on March 31, 2023, after witnessing a peak of ~184 days as on March 31, 2020, on account of receipts under the Atmanirbhar Bharat package, part receipt of change-in-law claims and timely receipt of payments from the counterparties supported by implementation of the new Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. While receivables level should sustain under these new rules, letters of credit from counterparties provide comfort. The addition of GUVNL as a counterparty has improved the overall counterparty mix as GUVNL has demonstrated a healthy track record of timely payments in the past. However, any delay in payments and build-up of receivables may weaken the credit risk profile and will remain a key monitorable.

 

• Susceptibility to interest rate risk

Interest rates on the company’s term loan and the working capital facilities are linked to marginal cost of the fund-based lending rate (MCLR). Hence, any increase in the MCLR can lead to higher-than-expected interest expenses and thereby weaken the financial risk profile. The changes in interest rates will be a key monitorable.

 

• Exposure to volatility in coal costs

The company does not have a complete linkage of its coal requirement and must procure a portion of its requirement from electronic auctions. The electronic auction premiums are very volatile and hence, can add to unexpected costs for the company in times of coal shortage, which can lead to very high premiums over linkage coal costs. However, coal linkages have increased from existing ~50% of the requirement to ~ 75% of requirement post execution of the new long-term PPA.

Liquidity: Strong

Cash and equivalent stood at Rs 1,380 crore (including debt service reserve account (DSRA) of one quarter of debt obligation) while the entire bank limit of Rs 775 crore was unutilised as on September 30, 2023. Expected cash accrual of Rs 600-700 crore per annum will adequately cover yearly debt obligation of Rs 400-500 crore over the medium term. However, sustenance of liquidity will be closely monitored.

Outlook: Stable

The business risk profile should remain healthy owing to steady operational performance. Liquidity in the form of a DSRA and undrawn bank lines amidst steady realisations support the financial risk profile.

Rating Sensitivity factors

Upward factors

• Significant and sustained improvement in the financial risk profile, leading to faster-than-expected deleveraging, leading to improvement in average DSCR to 2 times over the remaining debt tenure
• Significant improvement in business risk profile through tie-up of remaining capacities and corresponding fuel supply arrangements, sustenance of operating performance with PAF more than normative levels (90%), PLFs remaining healthy
• Sustained improvement in receivables from counterparties

 

Downward factors

• Weakening of operating performance, with PAF remaining below normative levels (90%) and reduction in PLFs, impacting cash flow
• Larger-than-expected, debt-funded capex, leading to decline in average DSCR to below 1.6 times over the remaining debt tenure
• Material delay in payments from counterparties adversely affecting liquidity.

About the Company

DBPL, a part of the Dainik Bhaskar group, operates a coal-based thermal power plant of 1,200 MW (2 x 600 MW) in Sakti district, Chhattisgarh. The project has received equity contribution from large global private equity firms such as Warburg Pincus and TRG. The plant commenced operations in fiscal 2016.

Key Financial Indicators

As on/for the period ended March 31		2023	2022
Operating income	Rs crore	3,397	3,377
Profit after tax (PAT)	Rs crore	564	591
PAT margin	%	16.6	17.5
Adjusted debt/adjusted networth	Times	1.35	1.64
Adjusted interest coverage	Times	3.25	3.15

    * As per analytical adjustments made by CRISIL Ratings

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	Long Term Loan	NA	NA	Apr-35	4450	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Apr-35	612.75	NA	Withdrawn
NA	Fund-Based Facilities	NA	NA	NA	775	NA	CRISIL AA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	600	NA	CRISIL A1+