| Tata Power Renewable Energy Limited | ||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long term bank facilities of Tata Power Renewable Energy Ltd (TPREL) to 'Positive' from 'Stable' and has reaffirmed the rating at ‘CRISIL AA'. The commercial paper rating has been reaffirmed at ‘CRISIL A1+’.
The revision in outlook reflects a corresponding revision in CRISIL Ratings' outlook on the long-term rating of TPREL’s parent, The Tata Power Company Limited (TPCL; ‘CRISIL AA/Positive/CRISIL A1+’). This reflects strong linkages of TPREL with the Parent.
The ratings factor in developments on the reorganisation of the renewable energy business of The Tata Power Company Ltd (TPCL) following announcement made in April 2022. With respect to the announcement to reorganize TPCL’s renewable business and investment by Blackrock Real Assets, both tranches of investment of Rs 2,000 crore each were received in Fiscal 2023, following which most of the structural changes were incorporated along with overall dilution of 11% equity stake by TPCL in TPREL. TPREL, therefore, is now the holding company for all the renewables businesses of TPCL, including engineering, procurement and construction (via 100% holding in Tata Power Solar System Limited (TPSSL)); electric vehicles; solar cell and module manufacturing (4 GW facility in TP Solar Ltd); and renewable generation. However, TPCL continues to be the holding company of TPREL.
The ratings reflects the TPREL’s strengths of integrated renewable business from expansion of its cell and module manufacturing business to renewable generation, (housed under TPREL and Walwhan Renewable Energy Ltd [WREL; ‘CRISIL AA/Positive’] along with its special-purpose vehicles [SPVs], and all other renewable energy generation assets housed under TPREL business). The renewable generation business includes large portfolio of wind (~1 gigawatt [GW]) and solar power (~3.2 GW) assets, diversified in terms of geography and counterparty; and having healthy revenue visibility driven by long-term power purchase agreements (PPAs). Further, TPREL has inhouse renewable EPC business currently housed under TPSSL (wholly owned subsidiary; CRISIL AA/Positive), which provides EPC services to TPREL as well as to third parties like NTPC and other central and private counterparties.
The ratings factor in the renewable generation segment’s operational track record of sizeable portfolio, healthy internal cash generation translating into comfortable consolidated average debt service coverage ratio (DSCR), and liquidity of around six months of debt servicing, These strengths are partially offset by exposure to receivables risk, implementation risk for new capacities (~3.7 GW), and risks inherent in wind and solar-powered renewable assets.
It also considers expectation of steady growth in revenue and profitability of EPC business on back of healthy order book of ~Rs. 16,000 Crore as on September 2023. Further, it is also expected to benefit from operational synergies through expansion in cell and module manufacturing unit from 1.1 GW facility to more than 5 GW facility (module manufacturing capacity commissioned in November 2023) over the medium term along with current reduction in imported cell and module cost should support timely and efficient execution of projects.
The ratings continue to factor strategic importance to, and strong financial and managerial support from, its parent, TPCL.
Further, TPREL has announced merger of its various subsidiaries/SPVs with itself, through the announcement in January 2023, which includes certain renewable generation entities (including WREL) and TPSSL. Currently, the board approval for the proposed merger has been received and is awaiting other requisite approvals. CRISIL Ratings understands that the proposed merger completion could take more than 12 months and hence developments on the said front will be monitorable. However, the proposed merger of TPREL’s subsidiaries with itself is not expected to have any material impact on the rating of TPREL as existing rating of the company takes consolidated approach of TPREL and its subsidiaries. |
CRISIL Ratings has combined the business and financial risk profiles of TPREL’s renewable generation portfolio, EPC business, solar cell and module manufacturing business along with other renewable business including solar pumps, EV charging and solar rooftops.
Furthermore, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support expected from TPCL to TPREL. The support factors in TPREL’s strategic importance to TPCL and the strong financial and managerial support received from the parent
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: Strategic importance to, and strong financial and managerial support from, the parent The capital employed in the TPREL is more than one-fourth of the overall capital employed of TPCL, indicating increasing importance of the renewables business to the parent. TPCL aims to achieve a portfolio of over 20 GW of renewable assets over the next five years and is targeting 50-60% of its generation capacity from non-fossil fuel assets over the next 7-8 years. The renewables portfolio provides strong economic incentive and helps diversify risk at the portfolio level.
The operational capacity of the TPREL group was ~4.2 GW (forming nearly 34% of generation capacity of TPCL) as of September 2023. Further, with expansion towards 4 GW cell and module manufacturing unit and backward integration are expected to add synergies and support overall growth strategies of TPCL. TPCL had infused unsecured perpetual securities (Rs 3,895 crore outstanding as on March 31, 2022), which were repaid in previous fiscal. The parent has also infused equity through right issue subscription of Rs. 5160 crore in the previous fiscal, as well. Besides, majority of the Board at TPREL consists of the senior management of TPCL. Owing to its strategic importance and strong economic incentive, the TPREL group will remain critical for the parent. Moreover, management shall adopt a calibrated expansion approach and is expected to receive need-based support from the parent.
Diversified business risk profile with presence across generation, EPC, and manufacturing for renewable energy business TPREL has around 4.2 gigawatt (GW) operational renewable generation capacity as on September 30, 2023 and ~3.7 GW of under construction renewable capacity. Further, it is undertaking expansion of its cell and module manufacturing capacity from existing 1.1 GW to nearly 5 GW by fiscal 2024, which is to be used for captive purposes. Additionally it also undertakes solar EPC business (captive as well as third party), which aides TPREL’s revenue as well as profitability. Its presence across the value chain of the renewable business from manufacturing to generation and other utility services like EV charging, solar pumps, roof top solar and EPC for support services, cushions it from project-specific issues and helps achieve operating efficiencies and helps in better working capital management at the group level.
Significant renewable generation portfolio with diversity in terms of geography and maturity TPREL (including all its renewable generation business) is one of the largest players in the Indian renewable energy space with around 4.2 GW of installed capacity excluding around 3.7 GW under-construction projects. The group has a diversified portfolio of solar-wind power capacity in the ratio 76:24 spread across 12 states. This helps mitigate the risk of resource and location-specific generation variability. The operational portfolio is fairly mature, with ~65% of the assets having track record of more than three years and around 90% having more than a year. The projects primarily have tier-I vendors, ensuring quality equipment to mitigate technology risk. The well-diversified portfolio with pan-India coverage and established operational track record will continue to support the credit risk profile.
Healthy revenue visibility across the value chain and low offtake risk combined with robust DSCR for renewable generation group Currently, renewable generation business, constitutes ~35% of the TPREL’s consolidated revenue and more than 80% of TPREL’s EBIDTA. Around 99% of the operational portfolio of renewable generation business has PPAs with tenure of 25 years, while the remaining has tenure of 13-15 years. Furthermore, the weighted average tariff of the portfolio is around Rs 4 per kilowatt-hour (kWh), leading to healthy overall returns. This lends high predictability and stability to revenue with low demand risk. Consolidated average DSCR for the portfolio is expected to remain robust.
Further, healthy revenue visibility from the EPC arm is also expected on the back on healthy order book. The company has robust order book as on September 2023 of Rs ~16,000 crore with significant portion of the same comprising of TPREL and public sector undertakings like NTPC Ltd, SJVN etc.
Weaknesses: Exposure to moderate receivables risk, mitigated by diversity in counterparties Long-term PPAs with distribution companies (discoms) having weak financial risk profiles and payment track record pose receivables risk. Consolidated receivables came down to ~3-4 months from around six months in as on March 31, 2022. As on September 30, 2022, receivables from discoms such as Tamil Nadu and Andhra Pradesh were above six months. However, due to LPS scheme, discoms have started paying the dues in installments and Tamil Nadu discoms, though have not opted under LPS scheme introduced by Ministry of Power under LPS Rules, 2022 but have started regularizing the payments. The weak financial health of the state discoms could , however, lead to increased delays in payments, which will continue to constrain the credit risk profile of the TPREL group and shall remain monitorable. This risk is mitigated by diversity in counterparties, with over 15 discoms, and liquid surplus of around six months of debt obligation maintained at the group level. The company is resorting to bill discounting to realise receivables faster.
*The Ministry of Power, Government of India has issued Electricity, (Late Payment Surcharge [LPS} and Related Matters) Rules, 2022 (LPS Rules 2022) to address the rising dues of the state power utilities, under which outstanding dues as on June 3, 2022, will be paid in equal monthly installments, depending on the amount outstanding as on June 2022, commencing from August 2022.
Susceptibility to risks inherent in operating renewable assets Cash flow of wind power projects is sensitive to plant load factor (PLF), which is entirely dependent on wind patterns that are inherently unpredictable. Several assets in TPREL’s wind portfolio have been underperforming its P90 historically, but the company has been looking to increase the PLF by improving operations and maintenance and machine availability. In case of a solar power plant, generation depends on irradiation levels around a plant’s location and annual degradation of the solar panels. Degradation of solar panels may increase exponentially in the later part of the life of an asset. Though geographical diversity mitigates the risk related to generation, exposure to inherent operational risks related to renewable power assets constrains the rating.
High implementation risk owing to ongoing expansion plan for cell and module manufacturing capacity as well as growth plans through organic or inorganic route The renewable generation business remains exposed to project risk with around 3.7 GW of capacity under construction. Nonetheless, CRISIL Ratings draws comfort from the group’s track record of execution and calibrated expansion strategy with prudent funding mix. The group is expected to commit substantial funds to a renewable project only if there is strong visibility on evacuation and PPA. Further, the company is exposed to project execution and stabilization risk related to the ongoing expansion of 4 GW manufacturing facility. CRISIL Ratings understands that the said capacity is expected to operationalize from fiscal 2024. However, timely commissioning of the manufacturing capacity without any material cost overruns will remain key monitorable.
Susceptibility to intense competition and regulatory changes for manufacturing and EPC businessThe competitive position of the company as a domestic component manufacturer in the on-grid solar photovoltaic (PV) segment remains constrained by the difference in pricing as compared to global peers. These players have large vertically integrated operations, including manufacturing of polysilicon, wafer and cells; and access to low-cost funding. Despite duties on module and panel imports, domestic manufacturing faces stiff competition from global players. Heightened competition in the manufacturing and EPC business leads to moderate profit margin. Growth also remains vulnerable to changes in government policies. However, the central government's focus on boosting domestic manufacturing through certain incentives and achieving a steep target of 500 GW should lend comfort in the long run. |
Liquidity: Strong Cash and cash equivalents for TPREL stood at around Rs 2500 crore as on September 30, 2023 while undrawn fund-based lines was around Rs 954 crore, as on September 30, 2023. Cash accrual is expected at over Rs 1,900 and 2400 crore each in fiscals 2024 and 2025. Any shortfall is expected to be met through refinancing or need-based support from the parent. Capital expenditure (capex) of around Rs 15,000 crore, expected over fiscals 2024 and 2025, towards commissioning of close to 3.7 GW capacity and commissioning of the 4 GW solar cell and module manufacturing facility , should be funded through a mix of debt and internal accrual. |
Outlook: Positive The outlook is based on CRISIL Ratings’ rating outlook on the debt instruments and bank facilities of TPCL. Change in the ratings or rating outlook on TPCL will lead to a similar rating action on TPREL.
CRISIL Ratings believes the TPREL group will continue to benefit from its strategic importance to its parent, due to its ability to generate substantial cash accrual supported by its integrated renewable business, healthy weighted average tariff, and a diversified portfolio. |
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About the Company TPREL, a subsidiary of TPCL, is the holding company for all the renewables businesses of TPCL, including engineering, procurement and construction; electric vehicles; solar cell and module manufacturing (4 GW facility); and renewable generation businesses post restructuring. Its renewable generation portfolio has operating generation capacity of ~4.2 GW, directly or indirectly through SPVs. Consolidated capacity of the TPREL group comprises ~1 GW wind and ~3.2 GW solar capacity across 15 states. The group has around 3.7 GW of capacities under construction. |
Key Financial Indicators - TPREL consolidated*
*Company reported |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||
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