Detailed Rationale

CRISIL Ratings has placed its long-term rating of ‘CRISIL AA (CE)’ on the bank facilities of Talwandi Sabo Power Limited (TSPL; part of the Vedanta group) on 'Rating Watch with Negative Implications'. Also, the rating on short-term bank facilities and commercial paper of TSPL has been reaffirmed at ‘CRISIL A1+ (CE)’.

 

The rating action factors a similar rating action on the long-term rating of TSPL’s parent, Vedanta Ltd (Vedanta; ‘CRISIL AA/RWNI/CRISIL A1+’) pursuant to a corporate announcement[1] by Vedanta to demerge its aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into separate standalone listed entities. This is because rating takes into account the support TSPL derives from its parent, Vedanta.

 

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

[1] dated September 29, 2023

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

TSPL is a wholly owned subsidiary of Vedanta, which is of high significance to the parent, given Vedanta’s diversified operations, including power generation business. Further, Vedanta has provided an unconditional and irrevocable guarantee to TSPL's bank facilities and commercial paper. 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. As part of this tariff structure, it receives a fixed capacity charge (quoted at the time of bidding) while fuel costs are completely passed through, subject to maintenance of minimum 80% plant availability on an annual basis. This mitigates offtake risk and provides strong visibility of cash flow. Average plant availability was 82% and 76% during fiscals 2023 and 2022, respectively, thus enabling recovery of fixed charge as per the PPA. PAF should remain above normative levels going forward, though this will remain a key 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, in line with the Case-II competitive bidding guidelines of the Government of India. However, the returns from the project have been lower than expected since its commissioning. The returns were partly impacted by under-recovery of capacity charges on account of disputes related to mega power status benefits, assessment of gross calorific value of coal (GCV), yield loss during washing, among others. Receivables of Rs 1,476 crore remained disputed as on March 31, 2023.

 

DSCR should remain modest because of under-recovery of capacity charges (related to mega power status) in the near term. The competitively bid tariff, coupled with under-recovery of capacity charges, has resulted in modest financial risk profile. This is reflected in leverage (net debt to EBITDA ratio) of 5.8 times as on March 31, 2023 (6.7 times as on March 31, 2022). Return on capital employed was also subdued at ~6.3% for fiscal 2023 ( 5.6% for fiscal 2022).

 

Exposure to counterparty risk, leading to stretched receivables

Though TSPL has low offtake risk due to its long-term PPA with PSPCL, it faces the risk of delayed payments by the counterparty. Most distribution companies (discoms) in the country, including PSPCL, have weak financial risk profiles due to increased 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 so far. However, excluding disputed receivables, average receivables for TSPL have largely been paid within the credit period.

 

Total trade receivables (including disputed receivables) stood at Rs 2,288 crore as on March 31, 2023 (Rs 2,307 crore as on March 31, 2022 and Rs 2,024 crore in fiscal 2021). While receivables have improved since March 2019 (Rs 2,648 crore), with recovery of GCV charges, the moderate counterparty risk profile of the Punjab discom continues to weigh on the company's working capital cycle.

Liquidity: Strong

The guarantee structure (unconditional and irrevocable guarantee by Vedanta) ensures timely repayment of debt. TSPL is expected to generate annual cash accrual of Rs 600-700 crore, against scheduled debt repayment of Rs 652 crore in fiscal 2024. Liquidity is also supported by financial flexibility derived from being a subsidiary of Vedanta, which has strong liquidity.

Rating Sensitivity Factors

Upward factor

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

 

Downward factors

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

Adequacy of credit enhancement structure

The guarantee provided by Vedanta is unconditional and irrevocable and covers the entire rated amount. For both the Rupee term loans and short-term loans, the rating is being reaffirmed as RBI 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 A+ :

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

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of TSPL. CRISIL Ratings has also factored in the support that TSPL is likely to receive from its 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 63.9% stake in the company. Vedanta’s 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, Talwandi Sabo Power Ltd. 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	2023	2022
Revenue	Rs crore	5,801	4,406
Profit after tax (PAT)	Rs crore	-70	-122
PAT margin	%	-1.2	-2.8
Debt/networth	Times	2.25	2.35
Interest coverage	Times	1.52	1.40

*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 debt service coverage ratio (DSCR) of not less than 1.10 times
2. In case long-term debt rating of Vedanta Ltd (guarantor and promoter company) falls one notch below A, the company shall create 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% p.a. shall be charged over and above the applicable interest rate.
3.  

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

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Commercial paper programme	NA	NA	7-365 days	250	Simple	CRISIL A1+ (CE)
NA	Rupee term loan	16-Dec-2015	NA	31-Mar-2030	1,564	NA	CRISIL AA (CE)/Watch Negative
NA	Rupee term loan	29-Sep-2017	NA	31-Mar-2030	235	NA	CRISIL AA (CE)/Watch Negative
NA	Rupee term loan	29 Sep-2017	NA	31-Mar-2030	225	NA	CRISIL AA (CE)/Watch Negative
NA	Rupee term loan	12-March 2019	NA	30-June-2030	484	NA	CRISIL AA (CE)/Watch Negative
NA	Rupee term loan	01-June-2020	NA	30-May-2036	3,777.43	NA	CRISIL AA (CE)/Watch Negative
NA	Short term loan	July-2022*	NA	Jan-2023*	250	NA	CRISIL A1+ (CE)

All the above facilities are guaranteed by Vedanta Ltd;

*To be drawn in tranches, repayment of each tranche will be six months from the date of drawdown.