Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of Green Infra Solar Power Projects Limited (GISPPL; part of the Sembcorp Green Infra [SGI] group) to ‘CRISIL AA+’ from ‘CRISIL AA’ while removing the rating from ‘Rating Watch with Positive Implications’ and assigned a ‘Stable’ outlook to the long term rating

 

The rating upgrade follows the improved credit risk profile of the SGI group and increased strategic importance to the parent -- Sembcorp Utilities (SCU; a wholly owned subsidiary of Sembcorp Industries [SCI]).

 

The acquisition of Vector Green Energy Pvt Ltd (VGEPL), which has a portfolio of 519 megawatt (MW) of operational solar (496 MW) and wind (24 MW) assets across India and 64 MW of under-construction assets has strengthened the business risk profile of the group. The acquisition benefits the SGI group in terms of improving portfolio diversification, complementing the SGI group portfolio of 1,769 MW wind assets, and increasing revenue stability given the healthy performance of the assets of VGEPL. Following the acquisition, the counterparty profile remains healthy and diversified, with around 50% of the capacity tied up with strong counterparties, such as Solar Energy Corporation of India (SECI), NTPC Ltd and Gujarat Urja Vikas Nigam Ltd (GUVNL).

 

Further, the healthy DSCR and ample liquidity of the acquired portfolio of VGEPL has improved the financial risk profile of the consolidated group. Moreover, the group has refinanced most of its debt at competitive rates. In fiscal 2023, SCU, has extended corporate guarantees for over 80% of the group’s outstanding debt (40% as of July 2022), leading to better terms of debt. Hence, cost of debt has reduced considerably; moreover, around two-third of the outstanding debt of the group has a fixed rate of interest for up to the next 4-5 years. The repayment tenure has been smoothened out, thereby improving average debt service coverage ratio (DSCR).

 

Of the cost of equity acquisition of Rs 2,780 crore, Rs 1,980 crore was funded by the parent, SCU, Rs 275 crore through a short-term loan taken in Green Infra Wind Energy Ltd (GIWEL; rated ‘CRISIL AA+/Stable/CRISIL A1+’) and the remaining through the SGI group’s liquidity.

 

Debt of around Rs 2,100 crore in the assets of VGEPL has been taken over. The acquired portfolio also has a restricted group (RG) of 256 MW, with debt of around 1,200 crore (‘CRISIL AAA/Stable'). Assuming the RG continues following the acquisition, surplus cash flow of the RG after servicing of the RG debt should be available to the SGI group.

 

In December 2021, the group undertook restructuring of its entities in India such that the thermal and renewables businesses are now individually held as stepdown subsidiaries of SCI. The move was to enable better and focused management of both the businesses as separate units. This has strengthened focus on the renewable business, which is now held directly by the parent. Furthermore, in fiscal 2022, the group announced the merger of GIWEL with its holding entity, SGIL. This would make GIWEL the holding entity of all the renewable special-purpose vehicles (SPVs) in India and will significantly increase the company’s strategic importance to the group as well as to the parent. The move will also increase fungibility of cash flow between GIWEL and the group’s other renewable SPVs.

 

The rating continues to reflect the managerial and financial support that GIWEL derives from being part of the SGI group and from the ultimate parent, SCI.

 

The company benefits from the scale and diversity of its assets, strong revenue visibility and long-term power purchase agreements (PPAs). The rating remains constrained by exposure to risks inherent in operating renewable energy assets. Some of the underlying assets of the group have performed below expectation. However, the addition of VGEPL’s solar portfolio, which is relatively less volatile than wind, and has a healthy operating track record, is expected to benefit the SGI group’s performance going forward.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SGIL and its SPVs, including GISPPL. This is because all the entities, collectively referred to as the SGI group, are engaged in the renewable power generation business in India, have a common management and are critical to the group. The SGI group has a track record of supporting group entities, and excess cash flow after debt servicing in each SPV is largely available for use across the group. For VGEPL’s RG, surplus cash flow after servicing of the RG debt should be available to the SGI group. CRISIL Ratings has also factored in support from the ultimate parent, SCI, to arrive at the ratings of the SGI group.

 

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

• Diversified portfolio with a healthy financial risk profile

The group derives strength from its diverse portfolio of commissioned capacity of 2,289 MW of wind (1759 MW) and solar (530 MW) power including VGEPL’s acquired portfolio of 496 MW of solar power and 24 MW of wind power. The portfolio is diversified in terms of location and counterparty, with assets primarily spread across Karnataka, Rajasthan, Gujarat, Maharashtra, Madhya Pradesh, Tamil Nadu and Andhra Pradesh. Majority of the assets have long-term PPAs at predetermined tariffs with state and central counterparties, leading to healthy revenue visibility.

 

The group has utilised its cash accrual to reduce outstanding debt and has refinanced debt at lower rate of interest and longer tenure, thereby improving DSCR. Further, acquisition of VGEPL’s portfolio with its healthy DSCR and ample liquidity has further strengthened the financial risk profile. The consolidated debt per MW at Rs 3.8 crore remains healthy. The healthy financial risk profile should sustain over the medium term, given the diversified portfolio and revenue visibility through long-term PPAs.

 

The group has around 900 MW assets in the pipeline, though signing of PPAs in some cases is pending. Furthermore, initiation for some projects has been stalled amid pending clarity on the Great Indian Bustard case. Annual capital expenditure is expected at 150-200 MW over the medium term. Any significant deviation would be a rating sensitivity factor.

 

• Managerial and financial support from the ultimate parent

SCI has a track record of supporting its assets globally and in India in case of adverse situations. SCU has extended corporate guarantees for around 80% of the debt taken by the renewable business in India and has also financed majority of the acquisition cost of VGEPL, emphasising the importance of the SGI group to the parent. Given the parent’s stated long-term strategy of transforming from ‘brown to green’, the SGI group is expected to remain critical to SCI.

 

• Support derived from the SGI group

GISPPL benefits from the group’s demonstrated track record of execution and ramp-up of projects and support offered to SPVs in the renewable portfolio (for instance, aid extended to wind power projects on account of stretch in receivables of certain projects). The group is likely to maintain adequate liquidity to meet any exigency or shortfall. Any deviation from the policy of support will be a key rating sensitivity factor.

 

Weakness:

• Exposure to risks inherent in operating renewable assets

Cash flows of renewable power projects are sensitive to plant load factor (PLF), which depends entirely on wind and solar patterns, which in turn are inherently unpredictable. This could impact cash flow generation, thereby affecting debt-servicing ability. The wind assets have shown higher volatility over the past several years. The addition of VGEPL’s solar portfolio, which is relatively less volatile than wind and has a healthy operating track record would benefit the SGI group’s performance going forward. Healthy operating cash flow amid demonstration of asset performance in line with P-90 estimates over the medium term will be a key monitorable.

 

Furthermore, renewable assets are exposed to counterparty risk because of weak financial health of the state distribution companies (discoms), which could delay payments. For the SGI group, this risk is mitigated by diversity in counterparties and liquidity of around 14 months of debt servicing maintained at the group level as on December 31, 2022. Receivables amounted to Rs 475 crore as on March 31, 2022 (103 days of sales) and declined to around Rs 180 crore as on December 31, 2022 due to healthy collection efficiency and recovery of past dues from Andhra Pradesh and Telangana discoms.

Liquidity: Strong

Cash accrual, expected at Rs 1,300 crore in fiscals 2023 and 2024 each, should comfortably cover yearly debt obligation of around Rs 1,000 crore. Consolidated cash and equivalents stood at around Rs 1,200 crore as on December 31, 2022, which is equivalent to around 14 months of debt servicing. Further, the acquired portfolio also has cash balance of around Rs 600 crore, including debt service reserve account (DSRA) of six months in the RG and 9-12 months in other assets. Liquidity is further supported by need-based funds from SCI.

Outlook: Stable

The credit risk profile of the SGI group should remain healthy over the medium term with a healthy DSCR and availability of need-based support from the parent

Rating Sensitivity Factors

Upward factors

• Further reduction in debt, improving the financial metrics
• Ramp-up and stabilisation of the SGI group’s portfolio, with improvement in PLF performance over P-90 level
• Strengthening in the credit profile of ultimate parent SCI

 

Downward factors

• Weakening of credit quality or change in the support philosophy of SCI towards the SGI group
• Significant underperformance of assets impacting cash flow, leading to sharp reduction in DSCR
• Increase in receivables to over 150 days, weakening liquidity

About the Company

GISPPL is a majority held subsidiary of SGIL with a portfolio of 18 MW of operational solar power projects in Karnataka.

About SCI

SCI, 49.5% owned by Temasek Holdings Pvt Ltd (rated ‘AAA/Stable/A-1+’ by S&P Global Ratings), is a leading energy, water and urban development group operating across five continents. It has around 6 gigawatt (GW) of renewable energy capacity, 9 GW of conventional energy capacity and close to 9 million cubic metres of water treatment per day in operation and under development.  

Any other information: Not applicable