Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil A-/Stable/Crisil A2+’ ratings on the bank facilities of Swelect Energy Systems Limited (SESL; part of the Swelect group).

 

Also, Crisil Ratings has reassigned its rating on the non-convertible debentures (NCDs) of Restricted group (RG) of Swelect Energy Systems Limited (SESL;50 MW) and its 7 subsidiaries (63 MW) namely Swelect Clean Energy Private Limited (Clean), Swelect Renewable Energy Private Limited (Renewable), SWELECT Sun Energy Private Limited (Sun), SWELECT Green Energy Solutions Private Limited (Green), Swelect Taiyo Energy Private Limited (Taiyo), Swelect Re Power Private Limited (RE) and Noel Media Advertising Private Limited (Noel) to ‘Crisil A (CE) /Stable’ from 'Crisil A-/Stable'.

 

Surplus cash flow post servicing of debt in the entities, will be available to meet any shortfall in other entities within the restricted group, thus supporting the consolidated debt service coverage ratio (DSCR). As part of the structure, all the eight entities have undertaken an intercompany agreement, that any surplus amount in the entities, pertaining to RG assets, shall be utilised first to cover any shortfall in debt servicing or maintenance of reserves in RG assets, before being distributed to SESL or other group entities which also shall be done only on bi annual basis. The 17 assets under this structure should have a DSCR of 1.25 times, offering adequate diversification and stability of cash flow.

 

The ratings continue to reflect the established market position and diversified reach of the Swelect group in the solar industry, the extensive experience of its promoters and the low offtake or counterparty credit risk. The ratings also factor in the healthy capital structure and co-obligor structure of pooled assets offering benefits of diversification and restricted payment and cash trap conditions. These strengths are partially offset by exposure to regulatory risk, change in climatic conditions and intense competition in the renewable energy sector.

Analytical Approach

To arrive at the rating, Crisil Ratings has combined the business and financial risk profiles of the IPP business of Swelect Energy Systems Limited and 7 subsidiaries, since the group has availed NCDs under a restricted group (RG) structure, by pooling assets of 50 MW in the parent and 63 MW in seven subsidiaries. This is inline with the criteria for rating entities in homogeneous groups. Crisil Ratings has equated the rating for the NCDs of all SPVs and the parent as the entities are in a homogeneous group, engaged in operating solar power assets, have a common management and treasury team, and are a part of the RG structure. Each SPV acts as a co-obligor to the other. Post debt servicing in each SPV, excess cash flows are largely available for use across the group on a bi-annual basis.

 

To arrive at the rating on the bank facilities, Crisil Ratings has changed its approach and is now consolidating SESL and all its subsidiaries except the RG assets.

 

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:

Healthy diversity in business verticals supports its sustainability and extensive experience of its promoters: The promoters have total industry experience of over three decades and have been in the solar photovoltaic (PV) module manufacturing business since 2012. SESL was incorporated in 1984 by Mr R Chellapan, a first-generation technocrat. It was used to manufacture uninterruptible power systems (UPS) under the Numeric brand. With sale of its UPS business in May 2012, the company changed its name to SESL.  It is currently engaged in the sale of solar and wind power, manufacture of PV inverters, solar charge controllers and solar junction boxes and manufacturing solar modules with capacity close to 1 GW. The turnover from solar module business is likely to offset the expected decline in revenue from casting business in fiscal 2025. SESL also undertakes rooftop installation and engineering, procurement and construction (EPC) contracts for solar power projects.  The group’s product basket is diversified, mitigating the risk of obsolescence in case of new technology coming into the market.

 

Low offtake and counterparty credit risk: The company has entered into power-purchase agreements (PPAs) with tenures ranging from 10-25 years at competitive tariffs, thus mitigating demand risk significantly. The group has an installed capacity of around 140 MW of solar and wind power assets. It caters to various counterparties such as Solar Energy Corporation of India (SECI), TANGEDCO, Chamundeshwari Electricity Supply Corporation (CESC), Airports Authority of India (AAI), and Hatsun Agro, among others.

 

Healthy capital structure: Lower reliance on external debt has helped the group maintain a low total outside liabilities to adjusted networth ratio of less than one time for the three fiscals ending March 31, 2024.

 

Co-obligor structure of pooled assets providing diversity benefit: The group has pooled 50 MW of projects within SESL and 63 MW of projects across 7 subsidiaries under a co-obligor structure, wherein all pooled entities are co-obligors for each other’s debt obligations. These assets are located in multiple geographies and cater to multiple counterparties. The co-obligor structure will ensure that surplus cash flow, post servicing of debt in any of the projects, will be available to cover the shortfall in other projects, thus supporting the consolidated DSCR.

 

Additionally, as part of structure conditions, all the entities have entered into an intercompany agreement, that surplus amount in any project will be utilised to make good any shortfall in debt servicing or maintenance of reserves in other projects before distribution to other businesses of the parent or other group entities of SESL.

 

RG is separated from the rest of the Swelect group. This is because all payments and distributions to the Swelect group from RG, can happen only after restricted payment conditions are met.

 

Restricted payment and cash trap conditions: Restricted payment conditions, which are part of the structure conditions, provide extra liquidity in response to any stress in performance of the RG, with regard to operations and receivables. Two key restricted payment conditions (for any distribution/ payment to rest of the Swelect group), which are part of the structure, necessitate that the DSCR of RG assets should be above 1.2 times and debt to earnings before interest, depreciation, tax and amortisation ratio should be less than 5.5 times.

 

Cash flow will be projected based on the latest resource assessment report, as per the fixed methodology provided by consultants. This will address any downside to assumption of repowering and arresting of degradation. Moreover, in case of any permanent loss in generation capability, reflected in reduction of DSCR below 1.2 times, surplus cash post debt servicing could be used to reduce debt at the earliest available opportunity, as per the stated policy. Non-adherence to these conditions and covenants remains a rating sensitivity factor.

 

Weaknesses:

Susceptibility to risks inherent in renewable power projects: : The PLF for solar power projects is exposed to variability in climatic conditions and equipment and evacuation related risks. Given that the sensitivity of cash flow of a solar power project is highest for PLF, these risks could severely impair debt-servicing and free cash flows of such projects.

 

Susceptibility to intense competition and regulatory changes for manufacturing and EPC business: SESL’s competitive position as a domestic component manufacturer in the on-grid solar photovoltaic (PV) segment remains constrained by difference in pricing, as compared to global peers. These players have large vertically integrated operations. They manufacture polysilicon, wafer and cells and enjoy access to low-cost funding. Despite the duties imposed on imported modules and panels, domestic manufacturers face stiff competition from global players. Heightened competition in manufacturing and EPC businesses leads to a moderate profit margin. Growth also remains vulnerable to changes in government policies. However, the central government’s focus on boosting domestic manufacturing via incentives, and achieving a steep target of 500 GW, should lend comfort in the long run.

Liquidity: Strong

Bank limit utilisation averaged 73% for the 12 months ended December 31, 2024. Expected cash flow will suffice to cover the debt obligation over the medium term. The group has raised debt of Rs 290 crore to refinance the existing debt availed for solar loans and that availed against mutual funds. Subsequently, a portion of mutual funds has been freed up and the group now has free liquidity of Rs 180-190 crore. A significant portion of the same will be used to fund expansion plans.

 

The RG structure maintains a debt service reserve account equivalent to two quarters of debt servicing as on March 31, 2025, in the form of fixed deposits. The co-obligor pool should have adequate liquidity, driven by cash flow for debt servicing of nearly Rs 60 crore in fiscal 2026. SPVs need to have debt servicing requirement of less than Rs 47.7 crore in fiscal 2026.

 

Moreover, the surplus cash flow from the independent power producer (IPP) business other than the RG structure, would be used to service debt as and when required for other business. Cash flows will be available once in every six months. Timeliness of liquidity build-up and continued cash flow fungibility among all business segments would remain monitorable.

Outlook: Stable

Crisil Ratings believes the group will maintain a stable debt servicing coverage ratio (DSCR) over the medium term, backed by steady cash inflows.

Rating sensitivity factors

Upward factors

• Substantial growth in revenue and operating margin (to over 20%) with sustained PLF
• Improvement in financial risk profile

 

Downward factors

• Weaker-than-expected growth in revenue and decline in profitability to less than 17%, leading to lower cash accrual
• Stretch in payment cycle, lower-than-expected PLF, or major capex plans or acquisition, straining the financial risk profile or liquidity

Adequacy of credit enhancement structure

Companies under restricted group have undertaken an intercompany agreement to support shortfall in NCD of any of the entities.

Unsupported ratings - ‘Crisil A-’

Unsupported rating disclosure for ratings without ‘CE’ suffix, where the instruments are backed by specified support considerations, is in compliance with SEBI’s circular dated September 22, 2022.

Key drivers for unsupported ratings

For arriving at the unsupported rating, Crisil Ratings has combined the financial and business risk profiles of SESL and all its subsidiaries.

About the Group

Incorporated in 1994, SESL is the flagship company of the Swelect group. Earlier known as Numeric Power Systems Ltd, it is engaged in the sale of solar power, manufacture of PV inverters, solar charge controllers and solar junction boxes. SESL also undertakes rooftop installation and EPC contracts for solar power projects. The registered office of the group is in Chennai. Mr R. Chellappan manages the daily operations of the group, supported by a professional team. The group has sold its foundry business.

 

RG has solar power projects of 113 MW. It comprises of 50 MW of SESL and its 7 SPVs namely Clean, Renewable, Sun, Green, Taiyo, RE and Noel having 12 MW, 11 MW, 16 MW, 12 MW, 7 MW, 4 MW and 1 MW operational solar power projects, respectively.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31#	Unit	2024	2023
Operating income*	Rs.Crore	237.30	245.70
Reported profit after tax	Rs.Crore	63.10	5.54
PAT margins	%	26.59	2.25
Adjusted Debt/Adjusted Networth	Times	0.67	0.69
Interest coverage	Times	1.54	2.12

*Adjusted for foundry business

#Crisil Ratings Adjusted numbers

Any other information: Not Applicable