Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the bank facilities of DB Power Limited (DBPL) at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

CRISIL Ratings has also withdrawn its rating on Rs.1262.25 crore of bank loan facilities upon request from the entity and receipt of requisite documentation in line with the withdrawal policy of CRISIL Ratings.

 

CRISIL Ratings had, on February 21, 2023, upgraded the rating due to improvement in the financial risk profile of DBPL, driven by sustenance of strong operating performance, further prepayment of debt and enhancement of liquidity. It also reflects the expected sustaining of healthy business risk profile.

 

Operating performance was strong during the nine months through December 2022 and high cash accrual was driven by greater-than-expected power demand and healthy sales in the short-term market. Earnings before interest, tax, depreciation and amortisation (Ebitda) was Rs 1,091 crore during this period against Rs 1,504 crore during fiscal 2022. Operating performance is expected to sustain over the medium term owing to steady healthy power demand and low cost of generation.

 

Prepaying debt of Rs 310 crore in the current fiscal (Rs 415 crore in fiscal 2022) significantly improved debt protection metrics. Debt to Ebitda ratio improved to 3.3 times during the first nine months of fiscal 2023 from 3.6 times in fiscal 2022, and is expected to sustain at a similar level over the medium term due to debt prepayment plans, and despite the upcoming flue gas desulphurisation (FGD) capital expenditure (capex) of ~Rs 540 crore. Liquidity has also strengthened, with total cash and equivalents of Rs 1,396 crore as on December 31, 2022 (Rs 1,128 crore as on March 31, 2022). With significant improvement in receivables (77 days as on December 2022, against 119 days as on March 2022), unutilised bank limit also improved to Rs 715 crore from Rs 381 crore.

 

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

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 64% tied-up capacity

The company has long- and medium-term power purchase agreements (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 221 megawatt (MW) and Rajasthan distribution companies (discoms; through PTC India [PTC; rated ‘CRISIL A1+’]) for 330 MW. 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. Under medium term, the company has a 3-year PPA with TANGEDCO (through PTC) for 100 MW (net capacity) and with Gujarat Urja Vikas Nigam Ltd (GUVNL; through Manikaran Power Ltd) for 50 MW (net capacity). These take the total tied-up capacity to a healthy 64%.

 

The company also received a letter of intent for supply of 150 MW of power to TANGEDCO (through PTC) during fiscal 2022, which was yet to commence. However, the company did not execute the PPA. It has currently bid for 100 MW under the 4.5 gigawatt medium-term power procurement tender (PPT) floated by PFC Consulting Ltd for 5 years and emerged as a successful bidder and await issuance of Letter of Intent to commence supply. The company has also been pre-qualified to participate for 340 MW in the 3,000 MW long-term (15 years) PPA floated by GUVNL.

 

Besides, DBPL has a long-term PPA of 360 MW with Chhattisgarh discom, supply under which is yet to commence. Chhattisgarh State Electricity Regulatory Commission, through its February 2022 order, has directed the state to assess its power demand and accordingly procure it from DBPL. Currently, the remaining power is sold through bilateral contracts and power exchanges. Nevertheless, the ability to tie up balance capacity will remain a key monitorable.

 

Established track record of healthy generation

The tariff structure of the PPAs allows the company to recover its entire fixed cost, provided the plant availability factor (PAF) exceeds the normative level of 85% (was above this level during the nine months through December 2022; 89% and 91% during fiscals 2022 and 2021, respectively). The PAF is expected to remain higher than the normative level over the medium term, backed by proximity to coal mines and healthy coal stock availability. Nonetheless, coal availability and its impact on plant availability will be key monitorables.

 

Furthermore, the company has demonstrated a healthy track record of generation despite PPAs for only 64% of its installed capacity. Plant load factor (PLF) was healthy at around 70% during the nine months through December 2022 (82% and 78% in fiscals 2022 and 2021, respectively). Also, the company was able to sell around 39% of its supply through bilateral trades or merchant sales in fiscal 2022 (35% in fiscal 2021). With adequate bilateral arrangements in place, the plant is expected to supply at 70-80% PLF in fiscal 2023. The bilateral contracts are likely to be renewed over the medium term, which will be a key monitorable.

 

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. The company also demonstrated robust volumes on bilateral/merchant sales with healthy net margin of around Rs 1.75 per unit in fiscal 2022, against Rs 0.7-0.8 per unit over the past few fiscals. Ability to sustain volumes in the short term at healthy profitability will be closely monitored.

 

Weaknesses:

Exposure to weak counterparties

Receivables (including unbilled revenue) increased to 172 days and 184 days as on March 31, 2021, and March 31, 2020, respectively, from 122 days and 117 days as on March 31, 2019, and March 31, 2018, respectively, because of delay in payments by counterparties and build-up of change-in-law receivables that led to stretched liquidity. The company receives late payment surcharge on delayed payments from discoms. However, receivables improved to 119 days as on March 31, 2022, on account of receipts under the Atmanirbhar Bharat package and part receipt of change-in-law claims. The receivables further fell to ~77 days as on December 31, 2022, with receipt of ~ Rs. 400 crore from TANGEDCO relating to prior claims, as well as 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. However, any delay in payments and build-up of receivables may weaken credit risk profile and will remain a key monitorable.

 

Modest, though improving, financial risk profile

Debt to Ebitda ratio was weak at 3.6 times as on March 31, 2022 (4.9 times and 5.1 times as on March 31, 2021, and March 31, 2020, respectively) and gearing moderate at 1.64 times (2.23 times and 2.63 times, respectively) despite prepayment of Rs 415 crore of loan. With better operating performance and prepayment of debt of Rs 310 crore in the current fiscal, debt to Ebitda ratio improved to 3.3 times as on December 31, 2022. Also, the company is implementing an FGD project at a cost of Rs 540 crore (debt fully tied up), to be completed by June 2023. The management intends to prepay the loan over the medium term, which will remain a key monitorable.

Liquidity: Strong

Cash and equivalent stood at Rs 1,396 crore (including debt service reserve account of two quarters of debt obligation [Rs 422 crore]) while bank limit of Rs 715 crore (total fund-based bank limit of Rs 775 crore) was unutilised as on December 31, 2022. Expected cash accrual of more than Rs 600 crore per annum will adequately cover yearly debt obligation of Rs 300-400 crore over the medium term - The unutilised bank limit should be adequate to meet working capital requirement. However, sustenance of liquidity will be closely monitored.

Outlook: Stable

The business risk profile should remain healthy over the medium term on the back of a 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

• Higher-than-expected prepayment of debt leading to significant and sustained improvement in financial risk profile, sustenance of operating performance with PAF more than normative levels (85%), PLFs remaining healthy, and profitability being maintained
• Significant improvement in business risk profile through tie-up of remaining capacities and corresponding fuel supply arrangements
• Sustained improvement in receivables from counterparties

 

Downward Factors

• Weakening of operating performance with PAF remaining below normative levels (85%) and reduction in PLFs impacting cash flow
• Lower-than-expected prepayment of debt or larger-than-expected capex weakening financial risk profile
• Material delay in payments from counterparties adversely affecting liquidity.

About the Company

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

Key Financial Indicators

As on/for the period ended March 31	Unit	2022	2021
Operating income	Rs crore	3,377	2,823
Profit after tax (PAT)	Rs crore	591	312
PAT margin	%	17.5	11.0
Adjusted debt/adjusted networth	Times	1.64	2.23
Adjusted interest coverage	Times	3.2	2.1

*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-2035	5062.75	NA	CRISIL AA-/Stable
NA	Long Term Loan	NA	NA	Apr-2035	1137.25	NA	Withdrawn
NA	Fund-Based Facilities	NA	NA	NA	775	NA	CRISIL AA-/Stable
NA	Fund-Based Facilities	NA	NA	NA	125	NA	Withdrawn
NA	Non-Fund Based Limit	NA	NA	NA	600	NA	CRISIL A1+

*Includes foreign currency term loans at an exchange rate of Rs. 82.7862 per USD