Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AA/Stable' rating to the non-convertible debentures of The Tata Power Company Limited (Tata Power) and has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and existing debt instruments. CRISIL Ratings has withdrawn its ratings on Rs 230 Cr of Non convertible debentures as the same were redeemed. The withdrawal is in line with CRISIL Rating’s withdrawal policy (See Annexure 'Details of rating withdrawn' for details). CRISIL Ratings has received independent confirmation and other relevant documents that these instruments are fully redeemed.

 

The rating continues to reflect Tata Power's stable cash accrual from the regulated businesses, which account for about 40-45% of total EBITDA; the diversified business risk profile and strong financial flexibility, being a part of the Tata group. These strengths, however, are partially offset by losses in CGPL (now merged with Tata Power) on account of unviable project economics, and moderate debt protection metrics.

 

Tata Power reported an increase of ~8% in operating profitability on-year basis, on the back of improved performance of regulated business, increasing share of renewable business and healthy margins from its coal companies. Operating profitability remains strong for the renewable businesses driven by commissioning of new renewable capacities. Healthy operational performance above normative levels continue across regulated generation and distribution businesses.

 

CRISIL Ratings believes that the group’s debt protection metrics will remain comfortable, with adjusted net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratio to remain comfortably within the rating thresholds over the next couple of years. CRISIL Ratings also notes the management’s intent to maintain adjusted net debt to EBITDA ratio sustainably below 3.5 times over the medium term. Sustenance of healthy operating profitability with increasing share of relatively stable and low risk regulated and renewable businesses along with healthy capital structure and high financial flexibility will be key monitorables.

 

Further, final tranche of Rs. 2,000 Crore was received by TPREL in February 2023 towards dilution of ~11.43% equity in Tata Power Renewable Energy Limited (TPREL) to GreenForest New Energies Bidco, basis which most of the structural changes were incorporated. TPREL, is now the holding company for all the renewables businesses of TPCL, including engineering, procurement and construction; electric vehicles; solar cell and module manufacturing; and renewable generation. TPREL has further announced to merge few of its subsidiaries with it, process for which is expected to take more than 12 months nearly.  However, TPCL continues to be the holding company of TPREL

Analytical Approach

For arriving at its ratings, CRISIL Ratings has used a combination of full and proportionate consolidation of Tata Power's companies.

 

CRISIL Ratings has fully consolidated the subsidiaries of Tata Power because these entities form a core of the company’s business risk profile. These include Tata Power's Delhi Distribution Company Ltd (rated ‘CRISIL A1+’); Maithon Power Ltd (MPL; rated ‘CRISIL AA/Stable/CRISIL A1+’); Tata Power Renewable Energy Ltd (TPREL; rated ‘CRISIL AA/Stable/CRISIL A1+’) and Walwhan Renewable Energy Ltd (WREL; rated ‘CRISIL AA/Stable’); Tata Power Solar Systems Limited (TPSSL; rated ‘CRISIL AA/Stable/A1+’), Powerlinks Transmission Ltd (CRISIL AAA/Stable'), Tata Power Trading Company Ltd; Industrial Energy Ltd; and the special-purpose vehicles formed for the acquisition of coal entities in Indonesia, including Bhira Investments, Bhivpuri Investments and Khopoli Investments.

 

CRISIL Ratings has also proportionately consolidated certain joint ventures and associate companies to the extent of Tata Power’s shareholding in these entities, to reflect support to the extent of its interests in these businesses. These companies include coal-operating entities in Indonesia: 30% in PT Kaltim Prima Coal and 26% in PT Baramulti Suksessarana Tbk.

 

CRISIL Ratings has treated Tata Power's investment in Prayagraj Power Generation Co Ltd (Prayagraj) as a financial investment, given the minority stake held in the platform company, Resurgent Ventures Power Ventures Pte Ltd (Resurgent).

 

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:

Stable cash accrual from regulated businesses

Tata Power earns over 40-45% of EBITDA from its regulated businesses, such as power generation and distribution in Mumbai, power distribution in New Delhi, the 1,050 megawatt (MW) capacity of MPL, and its transmission businesses. The balance life of the PPA for generation assets, including MPL, CGPL and the renewable portfolio, spans for over more than 15 years, thus offering strong revenue visibility. Distribution licenses for Mumbai and Delhi were also extended for 19 years and 9 years, till fiscal 2039 and fiscal 2029 respectively. The PPA of the power generation business for Mumbai (Trombay assets for around 930 MW) is valid till fiscal 2024, and subject to renewal risk. The proportion of cash flows from the regulated businesses could increase over the medium term, driven by the company's focus on adding new licenses in the distribution sector, coupled with regulated capex in its existing generation, transmission and distribution assets.

 

Diversified business risk profile with presence across generation, transmission, and distribution businesses and across energy types

Tata Power had around 12.1 gigawatt (GW) operational capacity as on March 31, 2023 (excluding 1,980 MW of Prayagraj Power Generation Co Ltd), including its thermal and clean energy generation businesses, which include around 3.87 GW of renewable energy capacity through TPREL and WREL. Its presence across the value chain of the power sector (generation, transmission and distribution, power trading, as well as fuel supply [imported coal mining and shipping]) cushions it from project-specific issues and helps achieve operating efficiencies and better working capital management at the group level.

 

Strong financial flexibility

Financial flexibility is strong, characterized by stable cash accrual from the existing businesses and adequate liquidity. Being a part of the Tata group, Tata Power enjoys access to the capital market and the banking system.  Tata Sons has a 45.2% shareholding in Tata Power and the latter is recognized as one of the flagship companies.

 

Weaknesses:

Unviable project economics of Mundra Plant

Losses incurred by the Mundra ultra mega power project (UMPP) (“Mundra”) (previously housed under CGPL and merged into Tata Power on March 31, 2022) on account of unviable project economics adversely impact Tata Power's credit risk profile. Mundra’s under-recoveries of fuel cost are primarily on account of the non-escalable variable charges component in the tariff. Mundra has made efforts to improve operating efficiencies and minimize under-recoveries by procuring coal from various sources. Coal mines in Indonesia offer a partial natural hedge to Mundra’s operations. However, dividends from coal mines have been lower than Mundra’s debt-servicing requirements, thereby necessitating support from Tata Power.

 

Post invocation of Section 11 of the Electricity Act by the Government of India in May 2022 (directing imported coal power plants to operate at full capacity), the plant has begun selling power to Maharashtra and Gujarat (in Fiscal 2023, the arrangement was valid till December 2022). The said arrangement is on full cost pass thru basis, subject to true up. It is current valid from March 16, 2023 to June 2023. Presently 5 (out of 5 units with installed capacity of 4000 MW) are running in full capacity.

 

Mundra is also in advanced stages of finalizing the supplementary PPAs with Gujarat and Maharashtra, which will become the template for other 3 counterparties as well.

 

With improvement in plant utilization levels and sale of power as per pricing mechanism under Section 11 of the Electricity Act, under-recoveries for Mundra are expected to further reduce. However, progress in finalization of supplementary PPAs with counterparties will remain a key monitorable going forward.

 

Moderate leverage, although a correction is expected over the medium term

Tata Power has a moderate capital structure, with consolidated adjusted net debt to EBITDA and gearing of around 3 times and 1.6 times, respectively as on March-2023. Gross debt marginally rose to Rs 48,974 crore as on March--2023 from Rs 47,590 crore as on March-2022, led by increased borrowing in renewable businesses, Odisha discoms and Coal SPVs. While company is focusing on renewable and distribution business, CRISIL Ratings believes that the group’s debt protection metrics will remain comfortably within the rating thresholds over the next couple of years

Outlook: Stable

Given the regulated nature of Tata Power's business, the company shall generate healthy cash accrual over the medium term and sustain its credit risk profile.

Rating Sensitivity factors

Upward factors

• Significant improvement in business risk profile, with increasing proportion of consolidated profitability from the regulated businesses resulting in higher return on capital, and
• Net debt to EBITDA ratio sustaining below 2.5 times

 

Downward factors

• Expectation of net debt to EBITDA ratio sustaining above 4.5 times
• Any major debt-funded acquisition which weakens the company's financial risk profile

About the Company

Tata Power is India's largest integrated private power utility, with installed generation capacity of 12.1 GW as on March 31, 2023 (excluding 1.98 GW through a platform structure). The company is present across the power business spectrum, from generation (thermal, hydro, solar and wind) to transmission and distribution.

 

CGPL was formed to implement the Mundra Ultra Mega Power Plant (UMPP), which has five units of 800 MW each. CGPL has been merged with Tata Power post receipt of NCLT approval for the same dated March 31, 2022.

 

MPL, Tata Power's 74% joint venture with Damodar Valley Corporation, operates the Maithon project, which has two units of 525 MW each.

 

Powerlinks Transmission Ltd operates a 400-kilovolt transmission line from Bhutan to Delhi.

 

Tata Power holds 30% and 26% stake in Indonesian coal mining companies, PT Kaltim Prima Coal and PT Baramulti Suksessarana Tbk, respectively. It had signed a definitive agreement to sell 30% stake in Arutmin to the Bakrie family for USD 400 million (around Rs 2,800 crore) of which USD 140 million (around Rs 980 crore) is already realised.

 

In September 2016, Tata Power and ICICI Venture partnered to launch a power platform (known as Resurgent Power Ventures Pte Ltd [Resurgent]) in Singapore, along with global investors. Resurgent will invest in operational and near-operational thermal, hydro, and transmission assets. In December 2019, Renascent Power Ventures Pvt Ltd, a wholly owned subsidiary of Resurgent, completed the acquisition of 75.01% stake in Prayagraj, which owns and operates a 1,980 MW supercritical power plant in Uttar Pradesh. 

 

Further, transmission assets namely, NRSS XXXVI Transmission Ltd. (total length of 153 kms , spread across Uttrakhand, Rajasthan and Haryana)  and South East UP Power Transmission Company Ltd. (total length of ~1500 kms; intra state transmission asset in Uttar Pradesh) were also acquired under the platform in fiscal year 2023, as part of stressed asset resolution process.

Any other information: Not applicable