Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Talwandi Sabo Power Ltd (TSPL; part of the Vedanta group) to ‘CRISIL AA (CE)’ from ‘CRISIL AA- (CE)’ while revising the watch to ‘Rating Watch with Developing Implications’ from ‘Rating Watch with Positive Implications’. Furthermore, CRISIL Ratings has reaffirmed its rating on the short-term bank facilities at ‘CRISIL A1+ (CE)’.

 

The rating upgrade and change in rating watch is in line with the rating upgrade and change in rating watch for the bank facilities and debt instruments of the parent company, Vedanta Ltd (Vedanta), on account of the expected material improvement in the consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]), along with improved capital structure with reduction in debt and leverage to below rating thresholds. Furthermore, the rating upgrade factors the improvement in the overall credit profile of Vedanta with better financial flexibility by increasing operating cash accrual and reducing debt, especially at Vedanta Resources Ltd (VRL; rated ‘B-/Positive‘ by S&P Global Ratings). The parent’s ratings are on watch as reorganisation-cum-demerger exercise is still underway and will need requisite approvals, including from shareholders and lenders, through the NCLT (National Company Law Tribunal) process, and could take a few quarters for completion.

 

CRISIL Ratings has upgraded the unsupported rating to ‘CRISIL AA-’ from ‘CRISIL A+’, on account of the improvement in the rating of the parent, Vedanta.

 

The ratings continue to reflect the unconditional and irrevocable corporate guarantee extended by the parent, Vedanta, for the debt programmes and bank facilities of TSPL. The ratings also factor in TSPL’s limited exposure to offtake and fuel supply risk, and the availability-based tariff structure that ensures steady cash flow and regulated returns. These strengths are partially offset by the modest DSCR because of under-recovery of capacity charges and exposure to counterparty risk, given the weak credit risk profile of Punjab State Power Corporation Ltd (PSPCL).

Analytical Approach

CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The (CE) suffix reflects the payment structure that is designed to ensure full and time-bound payment to lenders.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from Vedanta, reflected in unconditional and irrevocable corporate guarantee for debt facilities of TSPL: As a wholly owned subsidiary, TSPL is of high significance to the parent, Vedanta, which has presence across a diverse range of businesses, including power generation. Vedanta has provided an unconditional and irrevocable guarantee for the bank facilities of TSPL. The guarantee covers the entire principal and interest obligation on the facilities.

 

• Low offtake and fuel supply risk, and availability-based tariff structure supporting cash flow: TSPL has tied up its total capacity of 1,980 megawatt (MW) through a 25-year power purchase agreement (PPA) with PSPCL. Under the two-part tariff structure, the company receives a fixed capacity charge (quoted at the time of bidding), subject to maintenance of minimum 80% plant availability annually, while fuel cost is fully passed through. This mitigates offtake risk and provides strong visibility of cash flow. Average plant availability was 88% during the first half of the current fiscal and 82% during fiscal 2024 (as against 82% and 76% during fiscals 2023 and 2022, respectively), thus enabling recovery of fixed charge as per the PPA. The plant availability factor (PAF) should exceed the normative level going forward, though this will remain monitorable.

 

Weaknesses:

• Below-average DSCR due to under-recovery of capacity charges in the near term; resulting in modest standalone financial risk profile: Vedanta was awarded the project under TSPL by the Punjab State Electricity Board as per the Case-II competitive bidding guidelines of the Government of India. However, returns from the project have been lower-than-expected since its commissioning. Returns were partly impacted by under-recovery of capacity charges, owing to disputes related to mega power status benefits, assessment of gross calorific value of coal (GCV), yield loss during washing, among other factors. Receivables of Rs 1,695 crore remained disputed as on September 30, 2024 (Rs. 1,620 crores as on March 31, 2024, and Rs 1,476 crore as on March 31, 2023). CRISIL Ratings understands that more than 70% of these are pertaining to the mega power project status dispute, on which hearings are ongoing in the Supreme Court. A favourable outcome for TSPL will significantly bolster the liquidity of the company, and will remain monitorable.

 

The DSCR is expected to improve due to reduction in debt and adequate plant availability resulting in recovery of capacity charges in the near term. The competitive bid tariff, along with under-recovery of capacity charges, has resulted in a modest financial risk profile in the past. This is reflected in leverage (net debt to earnings before interest, tax, depreciation and amortisation [EBITDA] ratio) of 5.7 times as on March 31, 2024 (5.8 times as on March 31, 2023). Return on capital employed was also subdued around 6.4% for fiscal 2024 (6.3% for fiscal 2023). However, net leverage is expected to improve over the medium term.

 

• Exposure to counterparty risk, leading to stretched receivables: Though TSPL faces low offtake risk due to its long-term PPA with PSPCL, it remains exposed to the risk of delay in payments from the counterparty. Most distribution companies (discoms) in the country, including PSPCL, have weak financial risk profile due to the widening gap between average cost of supply and average revenue realised, and higher aggregate technical and commercial (AT&C) losses. This leads to stretched receivables, as evident from the payment track record seen so far. However, excluding disputed receivables, average receivables for TSPL have largely been paid within the credit period.

 

Total trade receivables (including disputed ones) stood at Rs 2,166 crore as on March 31, 2024 (Rs 2,288 crore as on March 31, 2023, and Rs 2,307 crore as on March 31, 2022). While receivables have improved since March 2019 (from Rs 2,648 crore), with recovery of GCV charges, the moderate counterparty risk profile of the Punjab discom continues to weigh on the working capital cycle.

Liquidity: Strong

The guaranteed structure (unconditional and irrevocable guarantee by Vedanta) ensures timely repayment of debt. TSPL is likely to generate annual cash accrual of Rs 1,000-1,100 crore, against scheduled debt obligation (including interest) of Rs 1,200-1,300 crore in fiscal 2025. While there will be a shortfall in the accrual to meet the debt obligations (including interest) in fiscal 2025, timely receipt of payments and support from PSPCL is expected to help mitigate the same. Liquidity is also supported by financial flexibility derived from being a subsidiary of Vedanta, which has strong liquidity. Moreover, any recovery from the disputed receivables will support TSPL’s liquidity profile.

Rating sensitivity factors

Upward factors:

• Change in the credit risk profile of the guarantor, resulting in a rating upgrade by 1 notch
• Higher-than-expected free cash flow generation, supporting material reduction in debt, and resulting in significant improvement in debt coverage metrics and capital structure

 

Downward factors:

• Weakening credit risk profile of the guarantor, leading to a downgrade in the rating by 1 notch
• Non-adherence to the payment structure, which is critical to ensure performance of credit enhancement mechanism.

Adequacy of credit enhancement structure

The unconditional and irrevocable guarantee provided by Vedanta covers the entire rated amount. For the rupee term loans and short-term loans, the rating is being reaffirmed as the Reserve Bank of India has permitted the previous approach of factoring the credit enhancement, based on the existing corporate guarantee, till the residual tenure of the loan.

 

To assess Vedanta, CRISIL Ratings has combined the business and financial risk profiles of Vedanta and its subsidiaries, including TSPL. CRISIL Ratings believes the instruments will have a high degree of safety regarding timely servicing of financial obligation.

Unsupported ratings: CRISIL AA-

CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the circular dated June 13, 2019, issued by Securities and Exchange Board of India.

Key drivers for unsupported ratings

To arrive at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of TSPL and factored in the support likely from the parent, Vedanta. This is because of the high moral obligation of Vedanta towards TSPL, due to the corporate guarantee provided for all borrowings of TSPL, board presence and treasury oversight by Vedanta.

About the Company

TSPL, a wholly owned subsidiary of Vedanta, has built a coal-based power plant with capacity of 1,980 MW in Talwandi Sabo, Punjab. The three units of 660 MW each were commissioned in July 2014, November 2015 and August 2016, respectively.

About the Group

Vedanta is a diversified metals, mining, power, and oil and gas company. London-based Vedanta Resources Ltd holds 56.3% stake in the company. Operations include copper, iron ore and aluminium assets at Jharsuguda and Lanjigarh in Odisha, and power (2,400-MW and 1,215-MW captive power plants for the aluminium business). The company also has aluminium operations through its subsidiary, Bharat Aluminium Company Ltd (BALCO). Also, a part of the power business (1,980 MW) is conducted through wholly owned subsidiary, TSPL. The oil and gas business has now been merged with Vedanta and the group operates the zinc business through Hindustan Zinc Ltd (HZL) and Zinc International in South Africa and Namibia. In June 2018, Vedanta, through its wholly owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL Steels Ltd (ESL, current operational capacity of 1.5 million tonne per annum [MTPA]) for Rs 5,320 crore. However, effective from March 25, 2020, VSL has been merged with ESL and Vedanta now directly holds 95.5% share in ESL.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue	Rs crore	5,316	5,801
Profit after tax (PAT)	Rs crore	602	-70
PAT margin	%	11.3	-1.2
Debt/networth	Times	1.77	2.25
Interest coverage	Times	2.52	1.52

*As per analytical adjustments made by CRISIL Ratings

List of covenants

The material covenants of the instruments are as follows:

1. TSPL shall maintain a minimum annual DSCR of not less than 1.10 times.
2. In case the long-term debt rating of Vedanta (guarantor and promoter company) falls one notch below ‘A’, the company shall create a DSRA for one quarter within one year from the date of rating downgrade. In case the DSRA is not created within the stipulated timeline, an additional interest rate of 0.25% per annum shall be charged over and above the applicable interest rate.

 

The above covenants pertain to the rupee term loan from Power Finance Corporation Ltd.

Any other information:

Payment mechanism for long-term loans:

Particulars	Timeline
Scheduled due date for payment of interest and principal by TSPL, as per the sanction letter	T day
Timeline for the guarantor to make the payment	T+7 business days*

For a few bank facilities it is 10 days.