| Sterlite Power Transmission Limited | ||||||
| Rating outlook revised to 'Negative'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facility of Sterlite Power Transmission Limited (SPTL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL A’; the short-term rating has been reaffirmed at ‘CRISIL A1’.
The outlook revision reflects the expected weakening of business risk profile if operating performance takes longer than expected to rebound or project execution risk remains elevated over the medium term. While operating performance improved in fiscal 2022 on-year, it was lower than the earlier expectations of CRISIL Ratings because Covid-19 restrictions, extended monsoon and delay in securing right-of-way (RoW) hampered project execution. SPTL plans to raise Rs 250 crore through issuance of non-convertible debentures (NCDs) at a subsidiary, Sterlite Grid 16 Ltd (SGL 16) primarily to fund cost overruns in an ongoing project on account of increase in land compensation rates by the government.
Operating performance is likely to recover in fiscal 2023 with expected resolution of most of these issues. This will be aided by healthy order pipeline of Rs 3,000 crore in the products business as on March 31, 2022, and of Rs 2,000 crore in the transmission EPC (engineering, procurement and construction) business (to be executed in fiscal 2023). Awarding of new transmission projects is also expected to pick up after a slow fiscal 2022. Sale of a completed transmission project that had been delayed by 4-6 months is now expected to be completed in the first-half of fiscal 2023, proceeds from which are likely to be used to prepay a part of the NCDs. Timely rebound of operating performance and resumption of the no-debt policy for sponsor contribution to project SPVs are key monitorables.
Despite lower profits in fiscal 2022, financial risk profile remains adequate with nil long-term and minimal working capital debt.
The ratings continue to reflect the strong business risk profile of SPTL, backed by its established market position in the power transmission and solutions segments, healthy operating efficiency, and comfortable financial risk profile because of strong debt protection metrics. These strengths are partially offset by exposure to project execution risk. |
Analytical Approach To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of SPTL and its wholly owned subsidiary, Sterlite Convergence Ltd, as both are in the same business and have common management.
CRISIL Ratings has moderately integrated several transmission asset SPVs that SPTL holds in India and Brazil. As a policy, the management offers support via equity and covers any cost overrun in the domestic projects. Moreover, debt raised by the SPVs does not have any recourse to SPTL. These SPVs are held through intermediate holding companies and SPTL has provided an undertaking that these companies do not have any external debt, except SGL 16. CRISIL Ratings has fully consolidated the debt at SGL 16 as it is guaranteed by SPTL. The Brazilian business is expected to fund its future requirement through own accrual or external equity support, with no further support from SPTL.
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:
SPTL has so far successfully commissioned 11 assets in India on a build, own, operate and manage basis, and has six more at varied stages of development. Ten of the commissioned assets have been sold to India Grid Trust (IndiGrid, rated ‘CRISIL AAA/CCR AAA/Stable’) while the remaining, Khargone Transmission Ltd, will be sold to IndiGrid in the short term (as per the signed framework agreement). SPTL is one of the largest private players in the domestic transmission space in terms of projects won based on levelised tariff. Of the 10 transmission projects the company has won in Brazil, 4 have been sold and the remaining are at various stages of construction.
SPTL also has a strong presence in the power conductor and cable manufacturing business, with 20% and 10% market share, respectively. The company upgrades the existing transmission network under the master system integration (MSI) division, where it has around 50% market share of intra-state transmission space. Established market position across diversified segments should support growth in revenue and profitability over the medium term.
Operating margin should improve over the medium term, aided by strong order book in the solutions and transmission segments. The solutions business had an order book of over Rs 3,000 crore as on March 31, 2022, which is to be executed over the next 12-18 months. The company has six EPC projects. Due to delayed execution in fiscal 2022, operating efficiency was impacted. However, gross margin remained intact due to the company’s hedging policy that protects against volatility in raw material prices. Operating efficiency is likely to improve over the medium term with significant project visibility and strong execution capabilities.
The company has nil long-term and minimal working capital debt. It prepaid its long-term debt in fiscal 2021 through proceeds from the sale of the transmission SPVs. This improved total outside liabilities to tangible networth ratio and gearing to 2.6 times and 0.5 time, respectively, as on March 31, 2021, from 4.6 times and 2.3 times, respectively, in the previous fiscal. The ratios are estimated to improve further to 2.3 times and 0.2 time, respectively, as on March 31, 2022.
Interest coverage ratio is estimated to improve to over 4 times in fiscal 2022 from 1.6 times and 0.2 time, respectively, for fiscals 2021 and 2020.
The company plans to raise Rs 250 crore debt in its susbidiary, SGL 16, and utilise it to fund the cost overrun and capex in the ongoing projects.
The company has substantial expansion plans in the transmission infrastructure segment. However, future investments in transmission assets will be funded through internal cash accrual or equity raised from external sources.
To enable expansion without leveraging balance sheet, SPTL had entered into a 50:50 partnership with AMP Capital for four of its under-construction assets in India, with an initial investment plan of USD 150 million (around Rs 1,100 crore). AMP had already infused around Rs 650 crore in the projects till February 28, 2022.
SPTL does not plan to make any further investment in Brazil. It has monetised its investment in the four transmission SPVs in Brazil and the surplus generated, future monetisation, as well as local fundraising plans should cover equity commitments for under-construction projects over the medium term. Any significant investment in the Brazilian subsidiary will be a key monitorable.
Going forward, SPTL intends to be long-term net-debt-free and only have short-term non-fund based working capital debt on its books. Any significant increase in debt due to major capital expenditure or investment in subsidiaries is a key rating sensitivity factor.
Weakness:
The company faces execution risk inherent in infrastructure development projects as it has been building greenfield transmission infrastructure assets on its own in India and Brazil. These risks include delays in getting requisite approvals for projects under construction. SPTL, as the developer and EPC contractor, undertakes the entire implementation risk and is liable to support cost overruns, if any.
Currently, SPTL is implementing 6 transmission projects in India at a total project cost of about Rs 8,000 crore. These are at varied stages of construction, with 4 expected to be completed in fiscal 2023 and the remaining in 2024.
Delays in getting RoW approvals and forest clearances have impacted project execution in the past, resulting in cost overruns. In the past, the amount spent to meet such overruns has been claimed as additional tariff under the Change in Law clause. However, these instances may lead to short-term liquidity mismatches and hence SPTL’s exposure to project execution risk remains a key monitorable.
SPTL intends to borrow a medium term NCD to fund one such overrun in an ongoing project. The debt is proposed to be repaid from internal accrual, additional tariff through change in law claims and future asset sales. |
Liquidity: Adequate SPTL prepaid its long-term debt by utilising the proceeds from the sale of NER II and IndiGrid units. Further expansion in transmission assets is expected to be funded through internal accrual and external equity support. As on December 31, 2021, unencumbered cash balance stood at around Rs 200 crore and unutilised bank limit was Rs 330 crore. No long-term borrowings are proposed at the SPTL level in line with the company’s financial policy of deleveraging the parent entity. The company intends to avail a medium-term NCD at SGL 16 in the first quarter of fiscal 2023. SGL 16’s shell company structure would result in a higher coupon rate for the proposed borrowing. |
Outlook: Negative Credit risk profile may weaken over the medium term in case pace of project execution does not pick up in line with expectations, leading to weaker cash accrual and sustenance of high project risk. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company SPTL is a part of the Vedanta group that has diversified interests across metals, mining and oil and gas. Twin Star Overseas Ltd (a Vedanta group entity) holds 71.4% stake in SPTL while the remaining is with public shareholders.
In June 2016, the power infrastructure business of Sterlite Technologies Ltd (rated ‘CRISIL AA/Negative/CRISIL A1+’) was demerged into a new entity, SPTL.
SPTL is one of the largest private sector companies in bid-out transmission projects in India. It has a track record of timely project execution even in difficult terrains. The company has monetised 10 of its projects in India and recorded healthy equity gains in most of them.
The company is one of the largest manufacturers of power conductors and cables with diversified presence across power transmission solution segments such as power conductors, power cables and MSI.
In November 2020, SPTL merged with its wholly owned subsidiary, Sterlite Power Grid Ventures Ltd (SPGVL).
SPTL is also the co-sponsor of IndiGrid, which was originally sponsored by SPGVL in October 2016. In September 2020, Kohlberg Kravis Roberts (KKR) was inducted as the co-sponsor of the trust. In August 2020, SPGVL sold 14.7% of its stake in IndiGrid for Rs 840 crore. While the company does not hold any stake in IndiGrid as on March 31, 2022, it continues to be the co-sponsor of the trust.
For fiscal 2022, SPTL is estimated to have a profit after tax (PAT) of Rs 200 crore on revenue of Rs 3,600 crore, against PAT and revenue of Rs 363 crore and Rs 2,952 crore, respectively, for fiscal 2021. |
Key Financial Indicators (pro-forma numbers post-merger)
The merger was effective from November 2020; above numbers are prepared on a provisional basis consolidating the standalone figures for SPTL and SPGVL. |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 26-Apr-22 in line with the lender-wise facility details as on 06-Dec-21 received from the rated entity.
Criteria Details
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