Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Tata Power Solar Systems Ltd (TPSSL) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive' and has reaffirmed its ‘CRISIL A1+’ rating on the short-term facilities and commercial paper programme.

 

The upgrade reflects a corresponding upgrade in the long-term rating of TPSSL’s parent, Tata Power Renewable Energy Ltd (TPREL; ‘CRISIL AA+/Stable/CRISIL A1+’). This reflects strong linkages between WREL and its parent.

 

Further, the ratings factor in developments on the reorganisation of the renewable energy business of The Tata Power Company Ltd (TPCL) (‘CRISIL AA+/Stable/CRISIL A1+’) following the announcement made in April 2022. With respect to the announcement to reorganize TPCL’s renewable business and investment led 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 9-11% equity stake by TPCL in TPREL. TPREL, therefore, is now the holding company for all the renewables businesses of TPCL. It includes engineering, procurement and construction (EPC via 100% holding in TPSSL); electric vehicles; solar cell and module manufacturing (4 gigawatt facility in TPSSL); and renewable generation. However, TPCL continues to be the holding company of TPREL.

 

Further, TPREL has announced the merger of its various subsidiaries/special purpose vehicles (SPVs) with itself, through the announcement in January 2023, which includes certain renewable generation entities (including Walwhan Renewable Energy Ltd (WREL)) and TPSSL. It has received board approval for the proposed merger and is awaiting other requisite approvals. CRISIL Ratings understands that the proposed merger is likely to be completed in the current fiscal. 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 a consolidated approach of TPREL and its subsidiaries.

 

The ratings for TPSSL factor in the strategic importance of the company to the growth strategy of its parent, TPREL (‘CRISIL AA+/Stable/CRISIL A1+’), and expectation of steady growth in revenue and profitability supported by higher focus on the EPC business. The operations of the company shall support the expansion plans of TPREL, which is a renewable platform and key area of growth for the ultimate parent, TPCL.

 

Further, revenue declined by 20% over fiscal 2022 to Rs 6,906 crore in fiscal 2023, despite healthy order book of ~Rs 7800 crore as of March 2022. This was due to deferment in execution of some of the projects amid rising cost of material procurement.  However, CRISIL Ratings understands that the company is in discussion with the respective clients for the said projects and the matter is expected to be resolved soon. Nonetheless, progress on the said matter and ramp up in execution of order book will remain key monitorables.

 

Even though, there was a decline in the revenue booked, margins remained healthy at ~4% as compared to 2.2% in fiscal 2022.

 

Also, order execution for this fiscal is expected to ramp up given the substantial decline in imported module prices and healthy order book of TPSSL at ~Rs 15,885 crore as on December 31, 2023.

 

In the near term, revenue is expected to be driven by the large order book and growth in solar pump segment, while margins are also expected to improve, given the decline in module and cell prices globally. That said, captive module and cell manufacturing capacity of the parent (TPREL) at a consolidated level has reached to over 5,000 megawatt (MW) from around 1,100 MW. This is expected to provide support to the operating margin of TPSSL over the medium term and developments on this front will remain monitorable.

 

Orders from TPREL contribute significantly to the backlog of TPSSL and have helped to enhance competitiveness. Hence, TPSSL should play an important role in the expansion strategy of TPREL. With renewable energy being a key focus area for the parent, TPSSL should remain critical to the former’s overall growth strategy. The central government's focus on achieving its solar target of 100 GW should also benefit TPSSL in the long run.

 

The ratings of TPSSL continue to factor in the strong operational, managerial and financial support TPSSL expects from its parent, TPREL, and the improving revenue visibility. These strengths are partially offset by the modest financial risk profile and vulnerability to intense competition and unfavourable changes in regulations.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of financial and managerial support available to TPSSL from TPREL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational, managerial and financial support from TPREL: TPSSL benefits from Tata Power’s brand in the domestic solar power market. Amid growing emphasis for solar power in India and Tata Power's increasing focus on renewable energy through its subsidiary TPREL, the company fits well into the parent's long-term plans to increase generation capacity from renewable sources. Operations and treasury are closely integrated and managed by TPREL. TPSSL will thus continue to play a central role in TPREL’s growth strategy and receive strong support from the parent.

 

• Increasing orders providing revenue visibility: TPSSL is one of India’s top companies to undertake EPC projects for setting up solar power plants. The current pipeline comprises orders from TPREL and the rest mainly from public sector undertakings. EPC contracts from players such as TPREL, National Thermal Power Corporation(NTPC Ltd) and SJVN account for over 75% of the company's backlog. The company has robust order book of ~Rs 15,885 crore as on December 31, 2023. Manufacturing operations remain moderate with less than 25% of orders comprising solar pumps and rooftop installations.

 

Weaknesses:

• Susceptibility to intense competition and regulatory changes: The 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 remains uncompetitive. Heightened competition in the EPC business leads to moderate profit margin. Growth also remains vulnerable to changes in government policies. However, the central government's focus on achieving a steep target of 100 GW should support in the long run.

 

• Modest financial risk profile: Adjusted total debt to adjusted networth was 0.7 times as on March 31, 2023.Total outside liabilities to adjusted networth (TOLTNW) ratio moderated to 4.0 time as on March 31, 2023, from 6.3 times a year earlier. Debt protection metrics were healthy, with an interest coverage ratio of 3.7 times in fiscal 2023. Though short-term debt is expected to increase over the medium term to support incremental working capital requirements, strong accrual along with no major debt-funded expansion will aid healthy capital structure.

Liquidity: Strong

Cash and cash equivalents for TPREL homogenous group were around Rs 560 crore as on December 31, 2023, while undrawn fund-based lines of TPREL was around Rs 697 crore. Liquidity is also supported by unencumbered cash and equivalents of Rs ~145 crore as on January 31, 2024 as well as need-based support from the parent.

Outlook: Stable

The outlook is based on CRISIL Ratings' outlook on TPREL's (parent of TPSSL) debt instruments and bank facilities.

 

The company will continue to benefit from the strong support it receives from TPREL. Revenue and profitability should ramp up over the medium term, backed by healthy order flow.

Rating Sensitivity factors

Upward factors

• Upgrade in the parent’s rating by 1 notch
• Significantly higher revenue and profitability resulting in fairly large significantly higher than expected operating cash accruals, strengthening company’s financial risk profile

 

Downward scenario

• Downgrade in the parent’s rating by 1 notch
• Change in the support philosophy of TPREL towards TPSSL
• Significantly lower revenue and profitability or changes in government policies constraining order execution.

About the Company

TPSSL was set up in 1989 as Tata BP Solar India Ltd, a 51:49 joint venture between the BP group and the Tata group. The company got its current name after Tata Power bought 51% equity stake from BP Alternative Energy Holdings Ltd in June 2012. Post structural changes due to Black Rock deal at TPREL level, 100% equity was transferred to TPREL from TPCL in fiscal 2023.TPSSL is among India's largest solar companies, manufacturing solar cells and modules, undertaking EPC of solar projects, and designing and developing other solar products. It has a solar photovoltaic manufacturing unit in Bengaluru with capacity of ~1.1 GW.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	1,200	Simple	CRISIL A1+
NA	Fund-based facilities^	NA	NA	NA	2,344	NA	CRISIL AA+/Stable
NA	Proposed non-fund based limits	NA	NA	NA	250	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	6,383	NA	CRISIL A1+
NA	Term Loan	NA	NA	31-Oct-2023	90	NA	CRISIL AA+/Stable
NA	Proposed working capital facility	NA	NA	NA	560	NA	CRISIL AA+/Stable

^Interchangeable with non-fund based facilities