Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and non convertible debentures of The Tata Power Company Limited (Tata Power) to ‘Positive’ from ‘Stable’ while reaffirming its rating at ‘CRISIL AA’. The rating on Tata Power's commercial paper programme and short-term bank facilities has been reaffirmed at 'CRISIL A1+'.

 

The revision in outlook reflects the possibility of better-than-expected business risk profile if the improvement in operating profitability in fiscal 2024, across power generation and distribution business, sustains along with a continuing healthy financial performance with consolidated net leverage (ratio of net debt[1] to adjusted earnings before interest, tax, depreciation and amortization--Ebitda) remaining within rating threshold.

 

The increase in operating profitability of Tata Power since fiscal 2023 is mainly on account of better profitability of its Mundra Ultra Mega Power Project (Mundra plant), improved efficiency in Odisha discom business and continued growth in renewable energy (RE) business with steady capacity addition. Profitability during last fiscal was also supported by higher margins in overseas coal mining business amid elevated coal prices.

 

Going forward, increased scale of operations, improving operating efficiency and steady cash creation in thermal generation and regulated business is expected to support strong operating cash accrual. This would be despite an expected reduction in earnings from coal mining business, amid lower coal prices this fiscal. Furthermore, increasing the level of integration in the RE business by setting up in-house module manufacturing and engineering, procurement and construction (EPC) business lends support.

 

Overall, CRISIL Ratings expects Tata Power’s consolidated adjusted Ebitda[2] to be more than Rs 12,000 crore each in fiscals 2024 and 2025 (was around Rs 11,500 crore in fiscal 2023 and around Rs 9,600 crore in fiscal 2022). Adjusted Ebitda was reported at Rs 6,694 crore in the first half of fiscal 2024.

 

The ‘Positive’ outlook also reflects the possibility of consolidated financial leverage[3] (net debt to adjusted Ebitda) sustaining below the rating threshold of 3.8-4.0x (consolidated leverage has already reduced from ~ 4.5 times in fiscal 2022 to 3.8 times in fiscal 2023). CRISIL Ratings notes the company’s capital expenditure (capex) plans (mainly towards RE and distribution business) over the medium term. However, CRISIL understands that addition in debt is not expected to be more than ~50% of total additional capex incurred during the year. Further, expectation of strong operating cash generation (with share of more than 80% from regulated distribution and steady generation business), is expected to sustain consolidated net leverage comfortably below 3.8-4.0x over the medium term and could result in rating upgrade.

 

CRISIL Ratings also notes the presence of large cash balance in Tata Power’s Odisha distribution business, however, the same has not been considered for net debt computation at this point as the cash is encumbered against customer deposits. In case, the said cash is allowed by the regulator to be used by the company to meet its funding requirements in the future, it will reduce the dependence on external financing and would further improve the company’s leverage and liquidity profile.

 

The ratings also factor in the strong financial flexibility of Tata Power, aided by being a part of the Tata group. Further, financial flexibility of Tata Power is supported by its demonstrated ability to raise strategic growth funds (raised ~ Rs 4,000 crore during fiscal 2023 by selling  stake of ~ 10% in RE business). The same provides support towards achieving the targeted capex plans while keeping leverage levels within the rating threshold.

 

Overall, CRISIL Ratings expects healthy margins from Tata Power’s regulated and stable business to improve further on account of increase in growth capex, leading to healthy cashflows to support debt for the said capex along with sustenance of consolidated net leverage. Same shall be key monitorables also.

 

CRISIL Ratings has withdrawn its ratings on Rs 36 crore of non-convertible debentures as the same were redeemed. The withdrawal is in line with CRISIL Ratings’ 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.

[1]Net debt means gross consolidated debt adjusted for unencumbered cash and equivalents (changed from earlier approach wherein net debt included adjustment for entire cash and equivalents from consolidated gross debt)

[2]Adjusted Ebitda means consolidated operating profit of India businesses along with share of profits from joint ventures and associates (changed from earlier approach wherein adjusted Ebitda included share of Ebitda from joint ventures and associates, included overseas businesses).

[3]As per earlier approach for calculating net debt and adjusted Ebitda, financial leverage would have been 2.8 times in fiscal 2023 and 3.4 times in fiscal 2022.

Analytical Approach

CRISIL Ratings has used a combination of full and proportionate consolidation of Tata Power companies.

 

CRISIL Ratings has fully consolidated the subsidiaries of Tata Power because these entities form the core of the company’s business. These include Tata Power's Delhi Distribution Company Ltd (rated ‘CRISIL A1+’); Maithon Power Ltd (MPL; rated ‘CRISIL AA/Positive/CRISIL A1+’); Tata Power Renewable Energy Ltd (TPREL; rated ‘CRISIL AA/Positive/CRISIL 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 the share in profit after tax* (PAT) for certain joint ventures and associate companies to the extent of Tata Power’s shareholding in them, 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).

 

*Changed from earlier approach of adding proportionate share in Ebidta

 

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 and renewable businesses

Tata Power earns ~80% of Ebitda from its regulated and renewable businesses, such as power generation including Mundra plant and distribution in Mumbai, power distribution in New Delhi, the 1050 megawatt (MW) capacity of MPL, and its transmission businesses. The balance life of the power purchase agreement (PPA) for generation assets, including MPL, Mundra plant and the renewable portfolio, spans more than 15 years, thus offering strong revenue visibility. Further, Mundra plant has been operating under Section 11 arrangement , which has been extended till June 2024. Furthermore, supplementary PPAs are also under discussion for the Mundra plant. The PPA of the power generation business for Mumbai (Trombay assets for around 930 MW) is valid till fiscal 2024 and is expected to get extended given the electricity demand. Distribution licenses with fixed returns (RoE) for Mumbai, Delhi and Odisha are valid for another 15, 6 and 22 years, respectively. Significant improvement has been witnessed in operating efficiency of Odisha Discoms, surpassing AT&C targets set by the regulator for fiscal 2023. On the renewable side, current generation capacity is ~7.5 gigawatt (GW) with ~4.2 GW operational and balance under construction. The remaining PPA life of more than 12-15 years and tie-up of long-term PPAs provide visibility for steady income over the medium term. Further, with backward integration in solar module manufacturing and decline in imported module prices, high order execution of engineering, procurement and construction (EPC) contracts and generation capacities is expected to materialize over the medium term. The proportion of cash flow from the regulated and renewable businesses is expected to remain constant, driven by the company's focus on adding new licenses in the distribution sector and renewable generation segment.

 

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

Tata Power had around 12.4 GW of capacity as on November 10, 2023 (excluding 1,980 MW of Prayagraj Power Generation Co Ltd), including its thermal and clean energy generation businesses, which include around 4.2 GW (operational capacity) of renewable energy capacity through TPREL and Walwhan Renewable Energy Limited. 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 efficiency and better working capital management at the group level. Further,  commissioning of solar module manufacturing capacity under TP Solar (Tata Power’s step-down subsidiary) will further mitigate risks related to project execution as the company focuses on growing in renewable space.

 

Strong financial flexibility

Financial flexibility is strong, characterised by stable and healthy cash accrual from the existing businesses and adequate liquidity. Though there are sizeable repayments due over near to medium term but past trends of timely refinancing supported by being a part of the Tata group, which increases the accessibility to the capital market and the banking system, provides comfort.  Tata Group has a 46.86% shareholding in Tata Power and the latter is recognised as one of the flagship companies. Further, Tata Power has demonstrated its ability to raise  funds (sold a minority stake in RE business while TPCL still holds ~ 90% in RE business) tp support its business, which also aides its financial flexibility.

 

Weaknesses:

Unviable project economics of Mundra plant in the past, plant operations and profitability supported by Section 11 of Electricity Act

Losses incurred by the Mundra plant (previously housed under CGPL and merged into Tata Power on March 31, 2022) on account of unviable project economics adversely impacted Tata Power's operating earnings during the past few years. Mundra’s under-recoveries of fuel cost are primarily on account of the non-escalable variable charges component in the tariff. Mundra plant has made efforts to improve operating efficiency and minimise under-recoveries by procuring coal from various sources. Coal mines in Indonesia offer a partial natural hedge to Mundra plant’s operations. While profits from overseas coal mining companies helped in supporting under recoveries for Mundra plant in fiscals 20022 and 2023, higher operating rates of the plant under continued extension of Section 11 arrangement (since May 2022) with full variable cost pass through (except its share of profit of procurement of coal from own mines) has helped improve operating profitability of the plant since last fiscal.

 

Mundra plant is also in discussions with counterparties for finalising the long-term supplementary PPAs with expected full fuel cost pass through mechanism. However, progress in finalization of supplementary PPAs with counterparties will remain a key monitorable.

 

Moderate leverage, expected to remain comfortable in the near-to-medium term despite healthy capex plans

With consolidated net leverage and gearing of around ~3.8* and ~1.5 times respectively,  Tata Power has a moderate capital structure, as on March 31, 2023.Although, Tata Power has healthy capex plans over the medium term, with planned capex of around of Rs 12000 crore in fiscal 2024, it is expected to be funded in debt: equity mix of 1:1 or better. Further, the capex is also expected to support the growth in operating profitability over the medium term with likely increase in scale of operations and integration levels. Thus, net leverage is expected to remain comfortably within the rating threshold.

 

Further, CRISIL Ratings also takes note of sizeable debt repayments falling due over the near-to-medium term. However, the company has a track record of successfully refinancing its loans in a timely manner and raising debt at competitive costs. Furthermore, the ratings factor the management’s intent to elongate the debt tenure, to support its liquidity profile. This is reflected in the increase in share of long-term debt in Tata Power’s consolidated debt to 69% as on September 30, 2023 from 60% as on March 31, 2023.

Liquidity: Strong

Cash accrual is projected at Rs 5,500-6,500 crore for fiscal 2024, which will largely meet ~50% of the annual capex requirement of around Rs 12,000 crore. Of which ~Rs. 5000 crore has already been incurred during the first half of the current fiscal. Debt maturity of around Rs 9,000 crore in fiscal 2024 is largely expected to be refinanced given the strength of the company’s cash flows. As of September 2023, consolidated cash and equivalents stood at Rs 10,773 crore, which includes cash liened marked for security deposits at distribution entities of nearly Rs 5807 crore. Further, unutilised bank lines as on October 2023, of about Rs 1,265 crore also supports liquidity. Additionally, need-based support from Tata group bolsters the financial flexibility for Tata Power.

 

Environment, social, and governance (ESG)profile

CRISIL Ratings believes that Tata Power’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The power sector has a significant impact on the environment owing to higher emissions, water consumption and waste generation. This is because the generation of conventional power involves high dependence on natural resources mainly coal. The sector has a social impact due to its nature of operations affecting local community and health hazards involved. Tata Power is focused on mitigating its environmental and social risks.

 

Key ESG highlights

• Company aims to become carbon neutral before 2045, 100% fly ash utilisation and zero waste to landfill before 2030. Company is progressively reducing its dependence on freshwater and is taking measures such as rainwater harvesting to achieve water neutrality before 2030
• It also plans to increase clean and green portfolio to 80% by 2030 and 100% before 2045.
• It aims to impact 80 million lives directly by 2027 through its corporate social responsibility (CSR) activities and achieve zero fatality across all entities
• Gender diversity on par with peers, with around 10% of its employees being women in leadership positions and ~8% in overall full time workforce.
• The governance structure is characterised by 50% of its board comprising independent directors. Further, there is split in the chairman and CEO positions. It has a committee at the board level to address investor grievances and put out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of Tata Power to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Positive

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

Rating Sensitivity Factors

Upward Factors

• Sustenance of annual operating profits at or above Rs 12000 crore, supported by improved  business risk profile resulting in healthy return on capital,
• Consolidated net leverage (ratio of net debt/ adjusted Ebidta) sustaining at or below 3.8-4.0 times*

 

Downward Factors

Rating outlook can be revised to ‘Stable’ in case of:

• Expectation of net debt to Ebitda ratio sustaining above 4.0-4.3 times
• Any major debt-funded acquisition, which weakens the company's financial risk profile

 

*The value in the positive trigger has been revised upward from 2.5 times earlier, as the company is expected to have the ability to withstand a higher leverage, given the increased scale of operations and expansion in the share of regulated distribution and renewable businesses in its revenue and profitability.

About the Company

Tata Power is India's largest integrated private power utility, with installed generation capacity of 12.4 GW as on November 10, 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 plant, which has five units of 800 MW each. CGPL has been merged with Tata Power post receipt of the National Company Law Tribunal 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-kV 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 an agreement to sell 30% stake in Arutmin to the Bakrie family for USD 400 million (around Rs 2,800 crore) of which majority amount is already realised.

 

It also has a large dedicated renewable portfolio under its subsidiary TPREL with ~7.5 GW of renewable generation portfolio with ~4.2 GW operational capacity and balance under construction. ~800-1000 MW is expected to commission by the end of fiscal 2024. The company has also expanded backward with commissioning of 4 GW TopCon solar module manufacturing facility in Tamil Nadu. Cell manufacturing facility is expected to commission late current fiscal. Solar manufacturing facility is expected to support both EPC (order book of Rs. 15870 crore as on September 30, 2023) and generation portfolio of the company. It is also present in other supportive arrangements like EV charging, rooftop solar and solar pumps.

 

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 kilometre (km), spread across Uttrakhand, Rajasthan and Haryana)  and South East UP Power Transmission Company Ltd (total length of ~1500 km; intra state transmission asset in Uttar Pradesh) were also acquired under the Resurgent in fiscal year 2023, as part of stressed asset resolution process.

Any other information: Not applicable