Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Powerica Ltd (Powerica) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’ and has reaffirmed the ‘CRISIL A1+’ rating on the short-term bank facilities.

 

The rating upgrade reflects Powerica's improving business risk profile, driven by its strong market share and steady growth in the DG set business, reflected by increased turnover and margins. In the first nine months of fiscal 2024, the company reported 18% on-year growth in the DG segment with EBITDA margin of 10.77%, driven by higher demand with prebuying of CPCB II engines and further supported by incremental revenues coming from CPCB-4 compliant engines which are 20-30% costlier. Moreover, order book of ~Rs. 700 crores as of February 2024, provides revenue visibility over the near term. Revenue growth from the DG set business is expected to remain stable over the medium term, supported by a strong competitive position and healthy demand especially from the data centre industry.

 

The rating also takes into account the wind business (comprising wind power and wind EPC) where the EBITDA margins improved from 44% in 9M FY23 to 52% in 9M FY24 on account of improvement in (PLFs) across operational wind assets, though it still remains below P-90 levels. The improvement in margin is expected to be sustained over the medium term resulting in healthy cash accruals for the company. 

 

The company has sold two wind assets totaling 26.4 MW in Tamil Nadu. The Company has used the proceeds and internal accruals to reduce term debt to Rs 402 crore by December 2023 (from Rs 699 crore as of March 2023) strengthening the financial risk profile. Going forward, the company intends to undertake constructing of two 50 MW wind assets in Gujarat, with about 70% funding from debt and the rest from internal accruals, expected to be commissioned from fiscal 2026. The timely commissioning of the same and achievement to PLFs close to P-90 levels will be key monitorable.

 

The financial risk profile is expected to be remain healthy supported by strong internal accrual generation, sizeable net worth, healthy debt protection metrics and comfortable liquidity. While the company will be adding debt to fund the capex to set-up 100 MW of wind capacity, the net debt profile of the company is expected to remain comfortable supported by healthy cash accruals and limited dividend outflow.

 

The ratings continue to reflect Powerica’s strong market position and competitive advantage on account of being one of the three original equipment manufacturers (OEM) for Cummins India Ltd (Cummins); extensive experience of its promoters in the DG set industry along with diversification benefits it enjoys from wind power assets and MSLG and wind EPC segments. These strengths are partially offset by cyclicality in the DG set business and inherent risk of variability in wind speed and pattern.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Powerica and all its subsidiaries, as they have strong business and financial linkages.

 

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:

• Established market position in the DG set industry: Powerica has an established market position in the domestic DG set manufacturing business with a presence of more than three decades. As one of the three OEMs for DG sets for Cummins, Powerica utilises Cummins' engines and alternators. This segment constitutes the company's core business, contributing over 82% of revenue and 50% of EBITDA in the first nine months of fiscal 2024. With an 18% year-on-year revenue growth and an EBIDTA margin of 10.8% during this period, driven by prebuying of CPCB II and steady demand from data centres, the segment has shown robust performance. The launch of CPCB IV in July 2023, coupled with the ability to pass on increased costs to customers, further supported this growth.

 

• Diversification benefits from wind power assets and aided by wind EPC and MSLG segments: The company also enjoys diversification benefits from wind power business which provides additional cash flow and supports overall EBITDA. The company has cumulative capacity of 279.55 MW spread across 11 wind assets in Gujarat. The company sold two wind assets having a total capacity of 26.4 MW located in Tamil Nadu. The weighted average PLFs also improved in the first nine months of fiscal 2024, leading to enhanced EBITDA margins. The wind business in totality accounted for over 15% of Powerica’s total revenue and 43% of EBITDA in the first nine months of fiscal 2024. The company continues to receive in a timely manner outstanding dues from the two Tamil Nadu wind assets under the LPS scheme. Going forward, the company intends to undertake construction of two wind assets of 50 MW each out of which ~70% will be funded through debt and remaining through internal accruals.

 

The contribution from wind EPC and MSLG segments depends solely on the order book. The current order book stands at ~Rs 100 crore for the MSLG and Rs 169 crore for the wind EPC business.

 

• Healthy financial risk profile: The financial risk profile is backed by steady cash accruals with capex in the medium term of ~Rs 780 crore to be funded 70% through debt and remaining through internal accruals, and sizeable networth of more than Rs 900 crore along with strong liquidity. As on December 31, 2023, debt reduced to ~Rs 402 crore from Rs 699 crore as on March 31, 2023, as the company utilised higher accruals and the proceeds from the sale of two wind asset to prepay the term debt. The wind projects have been prudently funded leading to strong debt service coverage ratios (DSCRs) while gearing is expected to remain at 0.4-0.6 time in the medium term (including the year of capex).

 

Weaknesses:

• Cyclicality in the DG set business: Powerica’s DG set business is cyclical in nature and is exposed to changes in the economic cycle. Post pandemic DG set business has reported a strong turnaround on the back of fresh capex across industries and new demand from data centres. The outlook is further supported by order book upwards of Rs 700 crore as of February 2024. Further, with transition to more expensive CPCB-IV compliant engines by July 2024, the company is expected to benefit from the remaining short supply of CPCB-II engines till June 2024.

 

• Counterparty payment risks in wind power and inherent risk of variability in wind speed and pattern: Powerica is susceptible to counterparty payment risks arising from receivable exposure to distribution companies (discoms). This risk was high in the case of Tamil Nadu Electricity Board (TNEB) in Tamil Nadu, which has a relatively weaker financial profile. However, in fiscal 24 Powerica has sold 2 wind assets of 26.4 MW located in Tamil Nadu. As on date the company has exposure (82% of tied up capacity) to Gujarat Urja Vikas Nigam Ltd (GUVNL) and remaining with Solar Energy Corporation of India (SECI), which have a strong payment track record, the risk is mitigated substantially.

 

Powerica has outstanding dues of Rs 28 crores pertaining to receivables from July 2020 to March 2022 from TNEB. However, with Tamil Nadu subscribing to LPS scheme, Payment commenced from August 2022. All dues from Tamil Nadu wind assets are being received on time till date and interest at a rate of 6% is accruing on previous dues.

 

The company is also exposed to inherent wind variability risk as wind power generation is highly vulnerable to seasonality and variance in wind intensity. Variation in wind speed and pattern could lead to a lower operating PLF, impacting average debt service coverage ratio of the wind assets. However, with healthy cash accruals and liquidity, Powerica’s repayment capability is expected to remain strong even though debt is expected to rise to ~Rs 2 crore/MW.

Liquidity: Strong

Liquidity is backed by sizeable cash equivalent and liquid investments of Rs 391 crore, and unutilised fund-based working capital bank limits of Rs 98 crore as of December 2023. Available liquidity and expected annual cash accrual of Rs 280-300 crore in medium term, should comfortably cover term debt obligation of Rs 50-60 crore.

Outlook: Stable

CRISIL Ratings believes the business risk profile of Powerica will remain strong over the medium term, driven by steady demand and profitability in the crore DG segment, with steady cash flows and growing contribution from its wind assets; and diversification to wind EPC and MSLG segments.

Rating Sensitivity factors

Upward Factors:

• Double-digit increase in the scale of operations in the DG set business on a sustained basis with overall operating margins of 16-18% leading to higher-than-expected cash accruals.
• Sustained track record of PLF performance above P90 levels for total wind capacity, along with faster-than-expected deleveraging

 

Downward Factors:

• Significant decline in revenue and reduction in EBITDA margin in the DG segment resulting in weakening the overall margin below 12% on a sustained basis.
• Higher than expected capex adversely impacting liquidity and financial risk profile.

About the Company

Established in 1984, Powerica is promoted by Mr Naresh Oberoi and Mr Kharati Ram Puri. Currently fully owned by the Oberoi family. The company is a GOEM for Cummins and uses the latter’s engines and alternators (alternators are sourced from Cummins Generator Technologies India Ltd, a group company of Cummins) for manufacturing DG sets. It also sells DG sets of Hyundai Heavy Industries Co. Ltd., Korea.

 

Powerica entered the power generation business in fiscal 2008 by setting up six wind energy-based units of 800-kilowatt (kW) capacity each in Jamnagar, Gujarat. As on date, the company operates wind projects with a cumulative capacity of around 279.55 MW across Gujarat.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022	2021
Operating revenue	Rs crore	2379	1,486	890
Profit after tax (PAT)	Rs crore	106	24	(16)
PAT margin	%	4.5%	1.6%	(1.8)
Adjusted debt/adjusted networth*	Times	0.89	0.98	0.84
Adjusted interest coverage	Times	6.90	5.22	4.14

*Debt includes capex creditors

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Paramount Windfarms Pvt Ltd	Full consolidation	Subsidiary
Vartaman Wind Energy Pvt Ltd	Full consolidation	Subsidiary
Powerica Renewable Infra Pvt Ltd*#	Full consolidation	Subsidiary
Powerica Power Systems (Fze)	Full consolidation	Subsidiary

*As on Dec 31, 2023, Company has sold off Airpower Windfarms Private Limited.

#Name changed from Airstream Windfarms Pvt Ltd on November 01, 2023