Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Inox Wind Limited (IWL; a part of INOXGFL group) to ‘Stable’ from ‘Positive’ while reaffirming the rating at ‘CRISIL BBB+’. The short term rating has been reaffirmed at ‘CRISIL A2’’. CRISIL Ratings has withdrawn its rating on the Rs 200 crore of commercial paper basis client request. This is in line with CRISIL Ratings’ withdrawal policy.

CRISIL Ratings has also upgraded its ratings on Rs 99 crore non-convertible debentures (NCDs), Rs 150 crore NCDs and Rs 75 crore PPMLD (long term principal protected market linked debentures) to 'CRISIL AA+(CE)/CRISIL PPMLD AA+(CE)/Stable' from 'CRISIL AA(CE)/CRISIL PPMLD AA(CE)/Positive' basis similar rating action on Gujarat Fluorochemicals Ltd (GFL; ‘CRISIL AA+/Stable/CRISIL A1+’). These facilities are backed by a corporate guarantee from GFL.

The revision in outlook reflects CRISIL Ratings’ lower-than-expected operating performance for IWL in fiscal 2023 with revenues of Rs 740 crore and earnings before interest, tax, depreciation and amortisation (EBITDA) loss of ~Rs 250 crore compared to Rs 630 crore and Rs 295 crore (loss), respectively, in fiscal 2022. This was due to lower-than-expected execution of orders owing to supply chain issues with 104 MW supplied in fiscal 2023 and one-off items such as debtors provisioning impacting operating profitability. The company had a healthy net order book of over 1300 MW as on June 30, 2023 (including letter of intent from Adani for 501 MW), which provides revenue visibility for the near term. Operating profitability should also improve in the near term with increased execution of orders especially for the higher margin 3.3-megawatt (MW) turbines, inorganic acquisitions in operations and maintenance (O&M) business and revival in the overall wind sector. While operating performance has shown improvement in the first quarter of fiscal 2024 driven by softening of commodity prices, ramp up in order execution leading to sustained growth in revenue with further improvement in profitability would be a key monitorable.

Moreover, external debt remained elevated against CRISIL Ratings expectations and is estimated at ~Rs 1765 crore as on March 31, 2023 compared to Rs 1750 crore a year earlier. This is despite significant fund infusion of over Rs 1300 crore by promoters in fiscal 2023 towards loss funding, working capital requirement, capex towards common infrastructure development and repayment of capital advances by GFL. The management however articulated to reduce the external term debt in fiscal 2024 with plans to raise further equity through rights issue and promoter dilution. However. overall debt may remain sizeable given the likely increase in working capital requirement due to increased scale of operations. CRISIL Ratings also notes the planned merger between IWL and Inox Wind Energy Ltd  (IWEL), which remains credit neutral while simplifying the group holding structure.

IWL executed a 50-MW project in fiscal 2023 housed in the special-purpose vehicle (SPV) Nani Virani for the second tranche of Solar Energy Corporation of India (SECI) auctions. The SPV is expected to be sold to raise an additional liquidity of ~Rs 100 crore.

The ratings continue to reflect the strong support from INOXGFL group and the extensive experience of its promoters in the wind turbine business. These strengths are partially offset by subdued operating performance and large working capital requirement.

The ratings on PPMLD and NCDs centrally factor in the unconditional and irrevocable corporate guarantee by GFL. The payment mechanism is administered by the debenture trustee to ensure timely payment. The guarantee covers the principal, interest and other monies payable on these facilities.

Adverse movement in the credit risk profile of the guarantor and non-adherence to the payment mechanism are key rating sensitivity factors.

Analytical Approach

For arriving at the ratings on the NCDs, PPMLD backed by the corporate guarantee of GFL, CRISIL Ratings has applied its criteria for rating instruments backed by guarantees.

For arriving at the ratings of non-guaranteed instruments, CRISIL Ratings has combined the business and financial risk profiles of IWL and its subsidiaries, Inox Green Energy Services Ltd (IGESL; CRISIL BBB+/Stable/CRISIL AA+ (CE)/Stable/CRISIL A2) and Resco Global Wind Services Pvt Ltd (Resco; CRISIL BBB+/Stable/ CRISIL AA+ (CE)/Stable). These entities, collectively referred to as IWL, are in related businesses and have common promoters.

CRISIL Ratings has applied its group notch-up framework to factor in the strong strategic and financial support provided by the INOXGFL group, which includes IWEL, IWL, GFL and their subsidiaries.

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:

• Structured payment mechanism: For NCDs worth Rs 99 crore, the company will deposit funds in the escrow account at least five business days prior to any coupon payment or redemption date (that is, T-5). If it fails to do so, the guarantors will make the requisite payment three business days prior to the due date (that is, T-3). Or else, there will be an invocation by the debenture trustee on T-3 and payment will be received by T-1.

 

For the Rs 150 crore NCDs, the company will deposit funds in the escrow account at least seven business days prior to any coupon payment or redemption date. If it fails to do so, the guarantors will make the requisite payment five business days prior to the due date. If not, there will be an invocation by the debenture trustee on T-5 and payment will be received by T-1.

 

For PPMLD, the company will deposit funds into the escrow account at least seven business days prior to any coupon payment or redemption date. If it fails to do so, the guarantors will make the requisite payment four business days prior to the final date of payment. Or else, there will be an invocation by the debenture trustee on T-3 and payment will be received by T-1.

 

The payment structure is designed to ensure full and timely payment to the lender. The guarantee will remain unaffected even if the company faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up of proceedings initiated by or against the issuer.

 

• Strong support from the INOXGFL group: IWEL holds 54.7% equity in IWL, while the promoter family holds 17.31%, giving the group complete control over operations. The INOXGFL group has extended support to IWL and IGESL through IWEL and GFL by enabling them to raise funds through NCDs, term debt and working capital facilities as and when required. Moreover, group entities have provided support through capital advances and intercorporate deposits in the past. Given the negative accruals, CRSIL Ratings expects timely support from the group alongwith refinancing to aid debt servicing in the near term. Expected improvement in operating performance over the near term leading to reduction in requirement of support will remain key monitorable.

 

• Established track record: The promoter group has a track record of over 10 years in the wind turbine manufacturing business. IWL is a leading wind turbine manufacturer in India. Backed by the extensive experience of the promoters, revival in the wind sector and healthy order book of over 1300 MW, IWL should witness a turnaround in its operations in the near term, which will be a key monitorable.

 

Weaknesses:

• Subdued operating performance: Performance remained weak in fiscal 2023 amid lower-than-expected execution because of the continued impact of Covid-19 induced disruptions and supply chain issues in China. Operating margin was negative for the past three fiscals. As a result, debt protection metrics were below average.

 

The company is executing projects won from NTPC Ltd (NTPC; rated CRISIL AAA/Stable/CRISILA1+), which should turnaround the operating performance in the medium term. Furthermore, IWL has received Type C approval for production of its higher margin 3.3-MW turbines, which is expected to begin commercial production in the second half of fiscal 2024 (subject to timely receipt of approval for commissioning) and support profitability in the near term. Revival in project execution leading to healthy revenue growth and improvement in operating margin will remain key rating sensitivity factors.

 

• Large working capital requirement: Operations are working capital intensive, as reflected in receivables (net of provisions) of over Rs 1000 crore as on March 31, 2023. Working capital requirement was large under the FiT regime as there were delays in commissioning or signing of power-purchase agreements (PPAs). The situation was compounded by an abrupt halt in signing of PPAs by distribution companies after the advent of wind auctions in February 2017. While the company has taken steps to reduce receivables by allocating some of the stuck machinery against new orders under the auction regime, they remain sizeable because of deferral in commissioning on account of delay in receipt of evacuation infrastructure.

 

Large working capital requirement and slow order execution have led to pressure on cash flows. CRISIL Ratings will continue to monitor the company’s ability to execute orders and ensure timely realisation of payments, leading to improvement in cash flow.

Liquidity: Adequate

Unencumbered cash and equivalents stood at around Rs 22 crore as on March 31, 2023. Liquidity is constrained by the large working capital requirements. Given weak accruals, debt repayments of over Rs 600 crore due in fiscal 2024 will be made via timely support from the group.

 

Liquidity is strengthened by the financial flexibility derived by IWL from being a part of the INOXGFL group. The group companies have provided direct funds in the form of intercorporate deposits and advances for supplies and have enabled the company to avail funds from banks, supported by guarantees, letters of comfort or pledging of their own funds to provide liquidity support.

 

Liquidity for NCDs and PPMLD: Strong

Liquidity for the rated NCDs and PPLMLD derives comfort from the guaranteed structure (unconditional and irrevocable guarantee from GFL), which should ensure timely servicing of debt. The guarantee will remain unaffected even if the company faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up of proceedings initiated by or against the issuer.

Outlook: Stable

The business risk profile of IWL will be driven by healthy order book and growing operations and maintenance portfolio. The financial risk profile will continue to be supported by the INOXGFL group.

Rating Sensitivity Factors

Upward Factors

• Higher revenue along with operating margin sustaining above 10% leading to positive cash flow from operations for IWL
• Significant improvement in working capital management or equity infusion leading to a better capital structure for IWL

 

Downward Factors

• Significant change in the shareholding of, or support from, the INOXGFL group
• Lower-than-expected revenue leading to margins below 6 - 8% for IWL

 

Outlook for NCDs and PPMLD backed by guarantee: Stable

The outlook reflects CRISIL Ratings' outlook on the credit quality of GFL.

 

Rating Sensitivity Factors

Upward Factors

• Revision in the credit risk profile of GFL leading to improvement in the rating

 

Downward Factors

• Revision in the credit risk profile of GFL leading to decline in the rating
• Non-adherence to the payment structure

Adequacy of credit enhancement structure

GFL has provided an unconditional and irrevocable guarantee for the rated instruments, ensuring timely payment of interest and principal obligations.

Unsupported ratings: ‘CRISIL BBB+’

CRISIL Ratings has introduced the 'CE' suffix for instruments with an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

CRISIL Ratings has combined the business and financial risk profiles of IWL and its subsidiaries, IGESL and RESCO, as they are in related businesses and have common promoters. Also, CRISIL Ratings has applied its group notch-up framework to factor in the strong strategic and financial support received from the INOXGFL group.

About the Company

Incorporated in April 2009, IWL is a part of the INOXGFL group. The company manufactures nacelles, hubs, rotor blades and towers used to make wind turbines. It also provides associated services, such as operations and maintenance of wind turbines, project execution and infrastructure development for wind farms. The company has four units, one each at Una in Himachal Pradesh for nacelles and hubs; Rohika in Gujarat for blades and towers; Barwani in Madhya Pradesh for nacelles, hubs, blades and towers; and a newly tied-up nacelle manufacturing facility at Bhuj in Gujarat. IWL has a technical tie-up with AMSC Windtech, which provides control systems and vets suppliers for other parts from across the world.

 

In the first quarter ended June 2023, the company's profit after tax (PAT) was negative Rs 64 crore on operating income of Rs 349 crore against negative Rs 130 crore and Rs 211 crore, respectively, in the corresponding period of the previous fiscal.

List of covenants

• The guarantor irrevocably and unconditionally guarantees to the debenture trustee due and punctual payment of the entire obligation and the performance and/or discharge of all obligations by the issuer, in accordance with the terms of the transaction documents.
• During the subsistence of the deed, the guarantor shall have no right to terminate its obligations under the deed, and any such right is excluded.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Facility type	Date of allotment	Coupon rate (%)	Maturity date	Amount (Rs.Crore)	Complexity level	Rating
NA	Cash credit**	NA	NA	NA	25	NA	CRISIL BBB+/Stable
NA	Cash credit	NA	NA	NA	97.6	NA	CRISIL BBB+/Stable
NA	Letter of credit##	NA	NA	NA	215	NA	CRISIL A2
NA	Letter of credit^	NA	NA	NA	100	NA	CRISIL A2
NA	Letter of credit	NA	NA	NA	436	NA	CRISIL A2
NA	Bank guarantee	NA	NA	NA	210	NA	CRISIL A2
NA	Bank guarantee^^	NA	NA	NA	50	NA	CRISIL A2
NA	Term Loan	NA	NA	31-Mar-26	9	NA	CRISIL BBB+/Stable
NA	Proposed letter of credit and bank guarantee	NA	NA	NA	107.4	NA	CRISIL A2
INE066P07018	Non-convertible debentures	10-Nov-20	9.5%	10-Nov-23	150	Complex	CRISIL AA+(CE)/Stable
INE066P07026	Non-convertible debentures	9-Jun-22	9.75%	21-Apr-24	49	Complex	CRISIL AA+(CE)/Stable
INE066P07034	Non-convertible debentures	9-Jun-22	9.75%	30-Apr-25	50	Complex	CRISIL AA+(CE)/Stable
INE066P08016	Long term principal-protected market-linked debentures	28-Oct-22	Variable-Others	28-Oct-24	75	Highly Complex	CRISIL PPMLD AA+(CE)/Stable
NA	Commercial paper	NA	NA	7 to 365 Days	200	Simple	Withdrawn

^^Rs.50 Crore is interchangeable with Letter of credit

**Rs.25 Crore Limits is interchangeable with Letter of credit & bank guarantee each 

##Rs.215 Crore is interchangeable with Bank Guarantee

^Rs.100 Crores is Interchangable with Bank Guarantee