Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Healthy revenue visibility and established operating track record

Total tied-up capacity of SEIL increased to ~90% of the net available capacity during fiscal 2022 from 53% in fiscal 2021 with the signing of three new long-term PPAs – 300 MW with PTC India Ltd (‘CRISIL A1+’) and 625 MW with Southern, Eastern and Central discoms (distribution companies) of Andhra Pradesh (AP) and 100 MW medium term PPA with Gujarat Urja Vikas Nigam Ltd (GUVNL). These PPAs, except GUVNL, have been won at competitively bid tariffs and the company has partial long-term fuel linkages to back them.

The 625 MW PPA signed with AP discoms is yet to commence as the transmission line is under implementation. However, the company already has a long-term fuel supply agreement (FSA) signed for this PPA. This capacity, along with the 10% net available capacity not tied up in long-term PPAs, is currently being sold at merchant rates.

The tariff structure of the PPAs allows the company to recover its entire fixed cost, provided the plant availability factor (PAF) exceeds the normative availability of 85%. PAF continues to be above normative requirement at 90% in fiscal 2022 (91% during the previous fiscal). It is expected to remain higher than the normative, driven by adequate fuel supply and healthy coal stock available at the plants. Nonetheless, coal availability and its impact on plant availability will remain key monitorables.

Furthermore, the company has demonstrated a healthy track record of generation despite 15% installed capacity not having long-term PPAs. For P1, plant load factor (PLF) improved to 81% in fiscal 2022 from 78% previous fiscal, driven by higher demand. For P2, PLF dipped to 66% in fiscal 2022 from 80% the previous fiscal due to scheduled maintenance activity in the plant.

Operating efficiency is driven by well-planned logistics for supply of coal from the mine to the plant. This ensures adequate coal supply, lowers transportation costs, and minimises transit losses. Consequently, the variable cost of generation is low, which ensures favourable offtake through the respective PPAs. Moreover, SEIL has also been able to demonstrate robust volumes in the merchant market in fiscals 2021 and 2022 due to high demand and increased tariff. Ability to sustain volumes on short term at healthy profitability will be closely monitored.

The 570 MW PPA with Telangana discom is due to expire in fiscal 2024 and hence subject to renewal risk. Ability to renew the existing PPAs at favourable terms and tie up PPAs for balance capacity would be a key monitorable.

Healthy financial risk profile

After the restructuring, the debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio has improved to 3.8 times as on March 31, 2022, from 4.5 times as on March 31, 2021, while gearing improved to 0.8 time from 1.2 times. The long tenor of existing debt and strong operating metrics should result in a healthy debt service coverage ratio, comfortably sustaining above 1.5 times on an average. SEIL plans to incur a capital expenditure (capex) of Rs 2,000 crore for implementing a flue gas desulfurisation (FGD) project. This would be partially funded through debt, which is yet to be tied up. Liquidity is strong, with a debt service reserve account for one quarter of ensuing debt obligation for the debt in P1 and 2 quarters for that in P2. Bank limit of around Rs 3,000 crore further shores up liquidity.

Strong managerial and financial support from the parent

SCI has supported its assets globally during adverse situations. It has infused funds in SEIL on multiple occasions and has extended guarantees for some of the debt raised in India. In fiscal 2022, SEIL repaid ~Rs 5,200 crore of promoter liabilities (debt and accrued interest) without utilizing project cash flows, leading to considerable improvement in the financial risk profile. The company, being the primary contributor to the conventional energy business of the group, is critical to the business of SCI and shall continue to benefit from the managerial and need-based financial support of the parent. Any deviation from this will be a key rating sensitivity factor.

Weakness:

Exposure to weak counterparties

The counterparties of SEIL have weak credit risk profiles. Receivables were high at 175 days as on March 31, 2022 (despite around 40% of the total capacity being sold at merchant rates with low receivables), due to delay in payments from counterparties, in particular the Telangana discom. Of the Rs 3,698 crore of receivables outstanding as on March 31, 2022, 78% were from the Telangana discom while 13% were from the AP discoms. With the signing of the new PPA with AP discoms, the exposure to weak counterparties would further increase.

While presence of a revolving letter of credit from all the counterparties as well as healthy liquidity maintained by the company provide comfort, any further build-up of receivables and delayed collections from counterparties resulting in weakening of the credit risk profile will remain key monitorables.

Exposure to merchant prices

With 10% of the net available capacity not tied up in long-term PPAs and the 625 MW PPA yet to operationalise, a sizable portion of SEIL’s capacity is dependent on bilateral or power exchange trade and is vulnerable to fluctuations in merchant prices.

Furthermore, the 570 MW PPA with Telangana discom is due to expire in fiscal 2024 and hence subject to renewal risk. The expiry of the PPA would further increase the capacity being sold at merchant prices. Due to inherent variability in merchant prices, this may expose the company to a quantum of power sold at a rate exceeding the variable cost of generation or significantly reduce its PLFs. Strong power demand forecast over the medium term, and prevailing high merchant tariffs support the likelihood of the renewal of the PPA; the same will remain a monitorable. However, ability to maintain operating margin at healthy level over the medium term will remain a rating sensitivity factor.