Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of Sterlite Power Transmission Limited (SPTL) on ‘Rating Watch with Developing Implications’.

 

The rating watch follows the announcement by SPTL that it has filed an application of the Scheme of Demerger with the NCLT on 10th October 2023. By way of demerger scheme SPTL will transfer its infrastructure business which includes Engineering, Procurement and Construction (‘EPC’) contracts for construction of power transmission lines and its investments in various transmission SPVs in India and Brazil into Sterlite Grid 5 Limited (SGL 5), currently a wholly owned subsidiary of STPL, subject to receipt of required approvals. Accordingly, the Products and MSI businesses (collectively called solutions business) will be retained by STPL.

 

As part of the scheme, SPTL has also filed to issue shares in a 1:1 ratio to SPTL’s existing shareholders and consequently SGL 5’s shareholding will mirror SPTL. The demerger is intended to simplify business structure, unlock the value of infrastructure business for more growth opportunities and to have more flexibility in accessing growth capital. SPTL is also in advanced stage of discussion with investors for partnership in the demerged infra business.

 

The overall demerger process is expected to be completed in approximately 6 months from the date of filing of the Scheme with the NCLT i.e., by April 2024. The Appointed Date of the Scheme shall be January 01, 2023.

 

CRISIL Ratings would analyse the impact of demerger on the credit risk profile of SPTL once the segregated financials are available for detailed analysis. CRISIL Ratings understands that a portion of the rated facilities may move under the resulting company, subject to requisite approvals. Thus, CRISIL Ratings will continue to closely monitor the said transaction and will remove the ratings from watch and take a final rating action once there is clarity on movement of these rated facilities and/ or when transaction is concluded. That said, SPTL will continue to meet the debt servicing obligations on all the rated instruments meanwhile.

 

SPTL’s EBITDA and EBITDA margins from operations improved to Rs 558 crores in 14.1% respectively in fiscal 23 (fiscal 2022: Rs 337 crore, 8.8%). The improvement was largely aided by strong uptick in margins across segments including products, MSI and EPC business. Strong order book of ~Rs 5,200 crore as on March 31, 2023, indicates healthy revenue visibility in coming quarters.

 

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 adequate debt protection metrics. These strengths are partially offset by exposure to project execution risk.

Analytical Approach

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:

• Established market position across diversified business segments in the power transmission sector: SPTL has successfully commissioned 12 assets in India on a build, own, operate and manage basis, and has five more at varied stages of development. Of the commissioned assets, 11 have been sold to India Grid Trust (IndiGrid; ‘CRISIL AAA/CCR AAA/Stable’). SPTL is one of the largest private players in the domestic transmission space in terms of projects won based on levelized tariff. Of the 13 transmission projects won in Brazil, five have been sold, three projects have achieved COD and remaining are in various stages of construction.

 

SPTL also has a strong presence in the power conductor and cable manufacturing business,. The company upgrades the existing transmission network under the master system integration (MSI) division, where it has around 40% market share of the intra-state transmission space. Established market position across diversified segments should support growth in revenue and profitability over the medium term.

 

• Healthy operating efficiency: Operating margin should continue to remain healthy 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 5,000 crore as on March 31, 2023, to be executed over the next 12-18 months. The company has seven EPC projects.. Operating efficiency is likely to improve over the medium term owing to significant project visibility and strong execution capabilities.

 

• Comfortable financial risk profile: The company has minimal long term and working capital debt. It prepaid its long-term debt in fiscal 2021 through proceeds from the sale of the transmission SPVs. This improved the 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. TOL/TNW further improved to 2 times in fiscal 23 while gearing remained at 0.7 times, respectively, as on March 31, 2023. Further interest coverage ratio moderated to 3.6 times in fiscal 2023 (fiscal 22: 4 times) on account of higher interest due to increase in suppliers credit availed during fiscal 23.

 

In fiscal 2023, SPTL raised 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 (commissioned in January 2023). Of the NCD, Rs 75 crore of this was repaid in March 2023 taking the outstanding amount to Rs 175 crore as on March 31, 2023.

 

SPTL 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 the 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 Capital had already infused around Rs 800 crore in the projects as on March 31, 2023.

 

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.

 

SPTL’s existing borrowings include majorly short-term non-fund-based working capital debt along with long term debt raised at SGL 16. Any significant increase in long term debt on account of major capex or investment in subsidiaries is a key monitorable.

 

Weakness:

• Exposure to project execution risk: 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 the requisite approvals for under-construction projects. 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 seven transmission projects in India at a total project cost of about Rs 7,500 crore. These are in varied stages of construction.

 

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 exposure of project execution risk remains a key monitorable.

Liquidity: Adequate

SPTL prepaid its long-term debt by utilising the proceeds from the sale of NER II and IndiGrid units. Other than the outstanding Rs 175 crore as on 31 March 2023 taken for cost overruns in a project, any further expansion in transmission assets is expected to be funded through internal accrual and external equity support. As on March 31, 2023, unencumbered cash balance stood at over Rs 400 crore and unutilised bank limit at Rs 330 crore.

Rating Sensitivity factors

Upward Factors:

• Sustained improvement in financial risk profile despite large, under-construction pipeline
• Strong revenue growth and operating margin above 15%, leading to higher-than-expected cash accrual

 

Downward Factors:

• Consolidated net debt (excluding non-recourse project debt contracted by SPVs) of over Rs 750 crore
• Delay in resumption of no debt policy for equity funding of transmission projects in India or substantial change in stance of no support towards the Brazil business
• Significant and sustained weakening of operating profitability or cash flow

About the Company

SPTL is a part of the Vedanta group, which 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 (‘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 11 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 and has 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 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.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-fund-based limit	NA	NA	NA	3820	NA	CRISIL A1/Watch Developing
NA	Proposed non-fund based limit	NA	NA	NA	530	NA	CRISIL A1/Watch Developing
NA	Fund-Based Facilities^	NA	NA	NA	180	NA	CRISIL A/Watch Developing
NA	Fund-Based Facilities	NA	NA	NA	170	NA	CRISIL A/Watch Developing
NA	Fund-Based Facilities**	NA	NA	NA	50	NA	CRISIL A/Watch Developing

**Convertible to an extent of Rs.25 crore to non-fund-based limits

^ Convertible from fund-based to non-fund-based limits