Detailed Rationale

CRISIL Ratings has downgraded its rating on the bank facilities of Sandhya Hydro Power Projects Balargha Pvt Ltd (SHPPBPL) to ‘CRISIL BBB-’ from ‘CRISIL BBB’ while the rating continues to be on ‘Rating Watch with Developing Implications’.

 

The rating action follows reduction in liquidity levels as the plant operations continue to remain suspended due to floods in Himachal Pradesh in July 2023 and the company has been required to service its debt obligation during the period. This has resulted in decline in cash reserves in the form of debt service reserve account (DSRA) and other free cash maintained by the company to around three months as on October 9, 2023, against around four months as on July 11, 2023.

 

CRISIL Ratings had placed the rating of SHPPBPL on developing watch in July 2023, following the shutdown of operations of the 9-megawatt (MW) hydropower plant of the company on the Parbati river in the Kullu district of Himachal Pradesh on July 9, 2023, as a result of 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 the second half of September 2023, CRISIL Ratings understands that basis the initial assessment by the company, the restoration work is going on and is expected to be completed in 4-6 months. Also, basis the discussions with the company’s management, CRISIL Ratings understands the company has requested for grant of moratorium from the lender – Power Finance Corporation (PFC), in line with Himachal Pradesh’s guidelines for declaring the event as a natural calamity. Further developments on the said front along with timely approval by the lender and the insurance company as well as any further material dip in the liquidity levels of the company, will be a key rating sensitivity factor. Timing of cash flow from insurance claim settlement as well as nature and extent of support to be provided by PFC will be a key monitorable.

 

CRISIL Ratings will monitor timing of cash flow and developments on the status of the plant and timeline to resume operations, while ascertaining the impact on the business and financial risk profiles of SHPPBPL.

 

As on date, the company has cash and equivalent of Rs 2.9 crore (including DSRA of Rs 2 crore) against monthly debt obligation of around Rs 1 crore. CRISIL Ratings understands that the company has a comprehensive insurance policy amounting to Rs 105 crore along with loss of profit claim of Rs 28 crore. Also, as on date, the total external debt outstanding is Rs 60.8 crore. Furthermore, CRISIL Ratings understands that the promoters have sufficient wherewithal to infuse liquidity and support the company in case of any distress that may arise due to timing mismatch of cash flow. Any deviation in this understanding or significant mismatch in cash flow timing will be a key rating sensitivity factor. Also, the lender is in the process of evaluating the situation. Any action of the lender in the context of the situation will be a key monitorable. 

 

The rating continues to factor in low offtake risk with the entire exportable capacity fully tied up with group captive (GC) consumers. The offtakers 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 reducing liquidity levels, with the company having sufficient liquidity to meet its near-term debt obligation. The Rs 5 crore incentive to be received from the state government of Himachal Pradesh is expected to shore-up liquidity in the near term, however, the timing of receipt of the incentive is a key monitorable. Furthermore, the company remains exposed to hydrology-related risks.

 

In fiscal 2023, plant load factor (PLF) was 74.8% (calculated on plant capacity of 9 MW), which was lower as compared to 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% compared to 90.3% seen in the first quarter of fiscal 2022, owing to weak water flow in April 2023 due to delayed snow fall. 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: In fiscal 2023, PLF was 74.8%, which was lower compared to 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 over this period.

 

However, generation in this fiscal will be impacted as the plant is likely to remain shut during July – December 2023 (while restoration work is expected to be completed by end of the fourth quarter this 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.

 

Also, CRISIL Ratings understands that the company has taken insurance to cover for cash flow in such cases, which should cover for 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: The company 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. SHPPBPL has 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: With plant operations being temporarily shut and lenders confirmation on the company’s request for the grant of moratorium on debt servicing still awaited, the company has been servicing debt through debtor realisation and utilisation of DSRA. As a result, total liquidity (in the form of DSRA as well other free cash by SHPPBPL) as on October 9, 2023, was three months of debt servicing, reduced from four months as on July 11, 2023.

 

CRISIL Ratings understands that approvals from the lender and insurance company are awaited. However, the management is expecting to receive it by mid of November 2023 which should support the company till the asset resumes operations. Further developments on this front against expectations will be a key monitorable.

 

• Susceptibility of water flow to hydrology risk and upstream projects: The 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 the 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: Adequate

Liquidity is adequate, with about three months of total liquidity in the form of DSRA (Rs 2 crore as on October 9, 2023) and available free cash (Rs 0.94 crore as on October 9, 2023) against monthly debt obligation of ~Rs 1 crore (including interest and principal). 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 132-kV transmission line, leading to higher cash flow and replenishment of the DSRA balance to six months of debt obligation
• Faster-than-expected debt reduction aided by surplus cash flow and stable receivables cycle, resulting in higher debt service coverage ratio (DSCR) over the remaining tenure of the loan

 

Downwar factors:

• Any significant cash flow mismatch resulting in severe liquidity crunch and liquidity cover falling materially lower than expectations (currently at around 3 months)
• Delay in counterparty payments or lower PLF levels, weakening DSCR and liquidity
• Significant change in the tariff structure or any other regulatory measure 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

 

Any other information: Not applicable