Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB+/Positive/CRISIL A2’ ratings to the bank facilities of Premier Energies Photovoltaic Private Limited (PEPPL).

 

The ratings factor in the strong managerial and financial support that PEPPL shall receive from its parent, Premier Energies Ltd (PEL; rated 'CRISIL BBB+/Positive/CRISIL A2'). The ratings further consider the healthy business risk profile of the group (includes PEL, PEPPL and other wholly-owned subsidiaries of PEL) supported by healthy market position with strong presence in the domestic solar module manufacturing industry, extensive experience of the promoters in the solar module manufacturing industry and robust demand scenario with government thrust on the solar industry, supported by policies in the form of basic customs duty (BCD) and product-linked incentive (PLI) scheme.

 

The positive outlook reflects the expectation of ramp-up in the business volumes post stabilisation of the recently commissioned capacity, also supported by the robust order book position providing revenue visibility for the next 12-15 months.

 

These strengths are partially offset by the project stabilisation risk for the recently commissioned capital expenditure (capex), high leverage levels given the recently commissioned capex, and high competitive intensity in the industry with substantial increase in the domestic module manufacturing capacity expected.

Analytical Approach: Standalone

Investment from PEL (parent) in the form of compulsorily convertible debentures (CCD) has been considered as quasi equity as the same is subordinated to senior debt and is expected to remain in the system over the medium term.

 

Also CRISIL Ratings have applied the parent notch-up framework to factor in the strong financial and business support to PEPPL from its parent PEL.

Key Rating Drivers & Detailed Description

Strengths

Strong managerial and financial support from PEL

PEPPL is likely to benefit from the strong managerial and financial support available from the parent, PEL, and the rich experience of its promoter in the industry. PEL has infused Rs 118 crore in the form of equity/quasi equity instruments to fund the recently commissioned capex in PEPPL consisting of a 750 MW module and cell manufacturing line. In addition, PEL has also provided corporate guarantee for the project debt raised by PEPPL. Thus, CRISIL Ratings believes that PEPPL will continue to receive timely support from the parent. Any change in the stance of support will be a rating sensitivity factor.

 

Established market presence with long-standing experience of the promoter in the solar industry

The over 25 years of experience of the promoter in the solar industry and strong relationship with stakeholders across the industry should continue to support the business. The group is one of the largest integrated (solar cell and module) manufacturing facilities (capacity-wise) in India and enjoys a 12% capacity share in the current installed capacity of 1.25 GW of modules. With another expansion plan in place, the total module manufacturing capacity of the company is likely to reach 2.0 GW and the cell capacity to 2.128 GW by the end of fiscal 2023.

 

While the group had a small module manufacturing line of 3MW in 1995, its projects ranged from installing solar lanterns, village electrifications to export of solar modules. The group also forayed into the solar engineering procurement and construction (EPC) segment in 2011, however, currently they intend to focus on the module and cell manufacturing business.

 

Favourable demand outlook for solar industry

Amid growing emphasis for solar power in India, the company fits well to absorb the demand arising from the long-term plans of the government to increase generation capacity from renewable sources. The introduction of protectionist measures by the government such as BCD: 40% and 25% on imported solar modules and solar cells, respectively, from April 2022 and implementation of ALMM coupled with incentivising the domestic manufacturers under the PLI scheme increase the cost competitiveness of domestic modules vis-à-vis that of imported ones. In addition, government approved schemes such as Kisan Urja Surksha Utthan Mahaabhiyan, Central Public Sector Undertaking (CPSU), and The New Rooftop are expected to further provide orders to domestic cell and module manufacturers.

 

Recently commissioned capex under PEPPL expected to stabilise in the near term

In July 2021, PEPPL commissioned a 750 MW module and cell manufacturing line, which currently is in the stabilisation phase. It is expected that these facilities will start operating at optimum utilisation levels from February-March 2022, which along with heathy order book is expected to substantially improve the revenue profile of the company. The capacity will also allow the company to service the demand for Mono-PERC (Passivated Emitter and Rear Cell)/Bifacial technology which along with the economies of scale is also expected to drive improvement in the operating margin over the medium term.

 

Healthy standalone order book providing revenue visibility

The company currently has an order book of ~1004 MW (~Rs 1750 crore) for modules and cells (from various reputed customers such as O2 Power and Tata Power Solar ('CRISIL AA/Stable/A1+')), which will be executed over the next 12-15 months providing healthy revenue visibility.

 

Weaknesses

Susceptibility to intense competition, regulatory changes and raw material prices

The company is exposed to intense competition given the large capacity additions being planned in the domestic market with various levels of integration. The implementation of BCD will make Indian players cost-competitive, compared with their Chinese counterparts, however, the risk of significant reduction in selling prices by Chinese players to lessen the impact of BCD persists. Also, growth is vulnerable to changes in government policies and regulations, as it can impact demand.

 

Silicon wafer, the main input in the manufacture of cells, is primarily imported from China. Prices of key inputs such as polysilicon, aluminium and copper have risen sharply in recent months and are likely to remain stable in the near term. Though the company has price-variation clauses for majority of the raw materials and undertakes order-backed procurement to mitigate this risk, any sharp rise in input cost will need to be managed effectively.

 

Domestic players have significant capacity additions planned over the medium term, which can further intensify the competitive landscape of the industry.

 

Moderate capitalisation and debt coverage indicators

The capital structure of the company is likely to remain moderately leveraged because of the ongoing debt-funded capex. While the leverage levels will increase in the interim, CRISIL Ratings believes that the offtake risk for the company may remain low considering the strong focus of the government on solar segment and price benefits available with protectionist measures in place. However, the ability of the company to scale-up operations post the completion of ongoing capacity expansion and improve its leverage and coverage metrics remain a key monitorable.

 

Given the limited operations and high debt levels in the current fiscal, gearing is expected to be elevated at 3.5 times, though likely to substantially moderate in fiscal 2023. Similarly, while interest cover may remain subdued in fiscal 2022, it may improve above 3 times in fiscal 2023 on the back of ramp-up in business operations.

Liquidity: Adequate

Liquidity is supported by the strong financial and business support from parent PEL, given the high criticality of PEPPL. Cumulative net cash accrual expected at ~Rs 90 crore during fiscals 2022 and 2023 would sufficiently cover the principal debt repayments of ~Rs 40 crore during the period.

Outlook: Positive

The group will continue to benefit from its established market position and the experience of its promoter in the solar module manufacturing business. The positive outlook reflects the expectation of ramp-up in the business volumes of PEL with stabilisation of the capacity, also supported by the robust order book position.

Rating Sensitivity Factors

Upward Factors

• Improvement in the credit profile of PEL by one notch
• Improvement in debt coverage indicators on the back of better accruals and/or faster-than-expected debt reduction

 

Downward Factors

• Weakening of the credit profile of PEL by one notch.
• Change in the stance of support to PEPPL from PEL
• Slow ramp-up in business operations coupled with profitability levels at 7-8% on a sustained basis

About the Company

PEPPL founded in 2019 is a wholly-owned subsidiary of PEL. PEPPL is engaged in manufacturing of solar photovoltaic cells and modules at its facility in Sangareddy district near Hyderabad - with a total annual module production capacity of 750 MW and solar cell manufacturing line of 750 MW.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021*	2020
Operating income	Rs crore	7.05	0
Reported profit after tax	Rs crore	-16	0.1
PAT margin	%	-2.26	0.00
Adjusted debt/Adjusted networth	Times	2.62	6.94
Interest coverage	Times	5.05	23.14

*Provisional unaudited

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	Cash credit1	NA	NA	NA	20.0	NA	CRISIL BBB+/Positive
NA	Cash credit2	NA	NA	NA	7.50	NA	CRISIL BBB+/Positive
NA	Cash credit3	NA	NA	NA	2.00	NA	CRISIL BBB+/Positive
NA	Loan equivalent risk limits	NA	NA	NA	3.00	NA	CRISIL A2
NA	Letter of credit4	NA	NA	NA	40.0	NA	CRISIL A2
NA	Letter of credit5	NA	NA	NA	48.0	NA	CRISIL A2
NA	Bank guarantee6	NA	NA	NA	12.50	NA	CRISIL A2
NA	Proposed fund-based bank limits	NA	NA	NA	117.0	NA	CRISIL A2

1 Interchangeable with LC of Rs. 20 crore. Contains a sub-limit for SBLC and Sales Bill Discounting of Rs. 10.0 crore each

2 Interchangeable with WCDL of Rs. 7.50 crore and with FCNRB of Rs. 7.50 crore

3 Interchangeable with WCDL of Rs. 2.00 crore

4 Includes a sub-limit of Rs. 25.00 crore for BG and Rs. 20.00 crore for SBLC (Buyers credit)

5 Interchangeable with LC (FLC) of Rs. 48.00 crore and includes a sub-limit of Rs. 5.00 crore for Bank Guarantee

6 Interchangeable with LC of Rs. 12.50 crore and includes a sub-limit of Rs. 7.50 crore for SBLC (Buyers credit)