Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities of Sandhya Hydro Power Projects Balargha Pvt Ltd (SHPPBPL) to ‘CRISIL BB+’ from ‘CRISIL BBB-’ and revised the rating to ‘Rating Watch with Negative Implications’ from ‘Rating Watch with Developing Implications’. 

 

The rating action follows depletion in liquidity levels as plant operations continue to remain suspended due to floods in Himachal Pradesh in July 2023, and the company needed to service its debt obligation during this period. It has received a moratorium of 12 months on principal repayments starting from November 2023, but requires to continue servicing the monthly interest payments. This has led to a significant decline in cash reserves, maintained through a debt service reserve account (DSRA), to one month as on December 22, 2023. DSRA is expected to be nil post the debt servicing for December 2023, against three months as on October 9, 2023.

 

However, CRISIL Ratings has taken note of the promoter’s commitment to support the debt servicing in full and timely manner for the company and will infuse the funds in advance, when required. The ratings factors in the promoter’s commitment and track record of fund infusion in the company. However, any delay in fund infusion beyond the expected timelines will remain a key rating sensitivity factor. Resultantly, in the absence of any surplus liquidity for interest servicing and timing sensitivity around infusion to be done by promoters for debt servicing, ratings have been placed on ‘Watch with negative implications.’

 

CRISIL Ratings had placed its rating on Watch with developing implications in July 2023, following the shutdown of operations of the 9-megawatt (MW) hydropower plant located on the Parbati river in the Kullu district of Himachal Pradesh on July 9, 2023. The shutdown was due to heavy rainfall and surge in water flow in the project area, coupled with damage to the power evacuation infrastructure. Following the receding water levels during October 2023 and basis the site report submitted by the project monitoring agency appointed by Power Finance Corporation, CRISIL Ratings understands that restoration work is going on and the project should resume operations from February 2024 (civil work is expected to continue till the first quarter of fiscal 2025). Further, the total project cost, estimated around Rs 15 crore, is likely to funded through a mix of funds infused by the promoter (Rs 3 crore; same has been infused as on December 22, 2023), term loan of Rs 7.5 crore (to be disbursed by PFC by end of December 2023) and insurance claim receipts (partial claim of Rs 5-6 crore expected to be received in January 2024).

 

CRISIL Ratings will continue to monitor the timing of cash flow for funding the restoration cost and developments on the status of the plant and timeline to resume operations.

 

The rating continues to factor in the low offtake risk with the entire exportable capacity fully tied up with group captive (GC) consumers. Off-takers include Bharti Airtel Ltd (Airtel; ‘CRISIL AA+/Stable/CRISIL A1+’) and a clutch of Delhi-based hospitals and hotels, with healthy credit risk profiles, along with a track record of timely payments. The rating drives comfort from the potential for generation, as indicated by long-term historical water flow data.

 

These strengths are partially offset by minimal liquidity levels and exposure to hydrology-related risks.

 

In fiscal 2023, the plant load factor (PLF) was 74.8% (calculated on plant capacity of 9 MW), lower than 80.6% in fiscal 2022. This was on account of low water flow during December 2022 and January 2023. Furthermore, in the first three months of fiscal 2024, PLF was 79.4%, as compared to 90.3% seen in the first quarter of fiscal 2022, owing to weak water flow in April 2023, amidst delay in snowfall. Generation subsequently improved in June 2023 and was in line with levels seen in previous few fiscals.

 

Going forward, shift to the 132-kilovolt (kV) transmission line of Himachal Pradesh Power Transmission Corporation Ltd (HPPTCL) is expected to result in lower losses for the company from the current levels and is expected to result in higher cash flow. Operationalisation of the line has been delayed and is now expected by September 2024 (earlier expected by the first half of fiscal 2024).

Analytical Approach

SHPPBPL has been assessed as a standalone entity.

Key Rating Drivers & Detailed Description

Strengths

Healthy counterparty mix

The company has tied up the entire exportable capacity with GC customers that have long-term power purchase agreements (PPAs) of 12-15 years at an average tariff of Rs 5.5 per unit. The counterparty mix includes Airtel, with an offtake share of nearly 30%, and the remaining comprises Delhi-based hospitals and hotels with healthy credit risk profiles. This is also reflected in the stable payment cycle for the past 15 months ending June 2023, with most payments received within 30 days. Furthermore, competitive project tariff in comparison with commercial grid tariff provides healthy economic viability to buyers. Any change in tariff viability will remain a rating sensitivity factor.

 

Furthermore, considering the current situation, CRISIL Ratings understands that up till now no penalty has been levied by any of the off takers on the company as suspension of plant operations due to natural calamity coming under the ambit of force majeure clause.

 

Healthy generation potential of the project, despite lower-than-expected PLF in fiscal 2023

The PLF was 74.8% in fiscal 2023, as against 80.6% in fiscal 2022. Despite being run-of-the-river, the project is not entirely dependent on the monsoon, as it is located on the perennial Parbati river in Himachal Pradesh. Data of over three decades indicates adequate water flow, supporting the project's healthy generation potential even during the lowest water flow observed during this period.

 

However, generation during fiscal 2024 will be impacted as the plant may remain shut between July and January 2024 (while civil work is expected to be completed by first quarter of next fiscal, plant is expected to resume generation from January 2024). Going forward, sustenance of generation at healthy PLFs, as seen historically, will be a key monitorable.

 

CRISIL Ratings further understands that the company has sought insurance to cover cash flow in such cases, which should act as a shield against any loss of generation. However, timing and receipt of these proceeds will be a key monitorable.

 

Connectivity to 132-kV evacuation system, though delayed, to support liquidity

SHPPBPL was using the 33-kV system of Himachal Pradesh State Electricity Board (HPSEB), resulting in transmission losses of nearly 8.5%, in addition to lower plant availability and penal charges for frequent failures in the HPSEB grid. It has now signed a connectivity agreement with HPPTCL to connect to the latter’s upcoming 132-kV transmission line, which would provide permanent evacuation infrastructure to the project. Shift to this new line will result in reduction in transmission losses, lower charges and higher plant availability given the stability of the high voltage line. The line was earlier expected to be operational by the first half of fiscal 2024, however, has been seeing delays. It is now expected to be operational by September 2024 and its commissioning will remain a key monitorable.

 

Weaknesses

Reduced liquidity level with SHPPBPL due to part usage of DSRA for meeting debt obligation Despite the temporary shutdown in plant operations, the company has been servicing its debt obligations through realisation of receivables and utilisation of the DSRA. While it has received a moratorium of 12 months on principal repayments starting from November 2023, it needs to service its interest obligations during the said period. As a result, the DSRA has reduced to one month as on December 22, 2023, from three months as on October 9, 2023.

 

CRISIL Ratings understands that the debt obligation for January 2024 will be met through funds infused by the promoters, while that from February 2024 will be met via project cashflows, as the plant should resume operations by then. In case of any shortfall in project cash generation, promoters are expected to continue to support the project beyond January 2024 as well. Any deviation from this understanding will be a key rating sensitivity factor.

 

Further, CRISIL Ratings understands that cash flows expected to be received in the coming few months (disbursement of Rs 7.5 crore term loan from PFC, insurance claim receipts and HP state government incentive) will be deployed towards project restoration. Hence, DSRA as per stipulated sanction terms, is likely to recouped from project cash flows over the medium term. Replenishment of DSRA as per required terms will be a key monitorable.

 

Susceptibility of water flow to hydrology risk and upstream projects

Water level in the Parbati river peaks during the summer and monsoon months (April-September). More the even inflow into the river, the longer the peak power generation period, and vice versa. Hence, power generation will depend on availability of adequate water flow. NHPC Ltd is developing Parbati-II, an 800-MW hydropower project about 5 kilometres upstream of SHPPBPL. Once this project is operational, the water flow available to the company may reduce, diminishing its PLF. While CRISIL Ratings has factored in this reduction in its base assessment, any material deviation will remain a key rating sensitivity factor.

Liquidity: Stretched

Liquidity is stretched, with company having sufficient liquidity (in the form of DSRA) to service its December 2023 debt obligations only. Though debt servicing (interest only since company has received moratorium on principal repayments) for January 2024 will be met through funds infused by promoters, infusion will be done around the due date. Company has received moratorium of twelve months on principal repayments and same will resume from November 2024. Further, CRISIL Ratings understands that the company has a comprehensive insurance policy of Rs 105 crore along with loss of profit claim (Rs 28 crore) against present outstanding debt of Rs 60.8 crore. Also, CRISIL Ratings understands that in case of any liquidity shortfall, either for meeting project restoration cost or debt servicing, will be provided by the promoters.

Rating Sensitivity factors

Upward factors

• Sustained PLF generation at more than 85%
• Commissioning of the project leading to healthy operational cash generation against debt servicing, as per expectation and creation of the DSRA balance for six months of debt obligation.
• Faster-than-expected debt reduction, aided by surplus cash flow and a stable receivables cycle, resulting in higher DSCRs over the remaining tenure of the loan

 

Downward factors

• Significant stretch in liquidity mainly due to delay in fund infusion towards debt servicing against expectation of the same to be done well in advance.
• Significantly higher-than-expected debt-funded project restoration cost (current estimate of around Rs 15 crore) weakening future DSCR and liquidity.
• Significant change in the tariff structure or any other regulatory measures, weakening the overall revenue profile

About the Company

SHPPBPL was incorporated as a special purpose vehicle to implement a run-of-the-river 9-MW (with 10% continuous overload capability) small hydropower project in Kullu. The project is situated on the perennial Parbati river, one of the main tributaries of Beas river. The project was commissioned in January 2018 and commenced sales to GC customers in April that year. It has PPAs of 12-15 years with Airtel and hospitals and hotels based in Delhi, under the GC structure. SHPPBPL is a 100% subsidiary of Skyzen Infrabuild Pvt Ltd, which is a subsidiary of Continuum Energy Pte Ltd (Singapore).

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	28	28
Profit after tax (PAT)	Rs crore	-0.8	10
PAT margin	%	2.9	35.3
Interest coverage	Times	1.31	1.98
Adjusted debt*/adjusted networth	Times	3.95	4.27

* includes promoter loans

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Rupee term loan	NA	NA	Sep-40	75.00	NA	CRISIL BB+/Watch Negative
NA	Proposed long-term bank loan facility	NA	NA	NA	8.09	NA	CRISIL BB+/Watch Negative