Rating Rationale

Strengths
* Stable cash accrual from regulated businesses
Tata Power earns over 45% of EBITDA from its regulated businesses such as power generation and distribution in Mumbai, power distribution in New Delhi, the 1,050 MW capacity of MPL, and its transmission businesses. The balance life of the PPA for generation assets, including Maithon, CGPL and the renewable portfolio, spans over 15 years, and thus offers strong revenue visibility. Distribution licenses for Delhi and Mumbai also extend for another 19 years and 9 years, 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. CRISIL believes 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. Creation of an InvIT for its renewable portfolio could also lead to higher mix of regulated businesses.

* Diversified business risk profile with presence across generation, transmission, and distribution businesses and across energy sources
Tata Power had around 10.8 gigawatt (GW) capacity as on June 30, 2020 (excluding 1980 MW of Prayagraj Power Generation Co Ltd), including its thermal and clean energy generation businesses, which includes around 2.6 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 it to achieve operating efficiencies and better working capital management at the group level.

* Robust financial flexibility
Financial flexibility is strong, characterised by stable cash accrual from the existing businesses and adequate liquidity. Being a part of the Tata group, the company enjoys access to the capital market and the banking system. Post the preferential allotment, Tata Sons has a 45.2% shareholding in Tata Power, and the latter is recognised as one of the flagship companies.

Weaknesses
* Unviable project economics of CGPL and reducing dividends from coal companies
Losses incurred by CGPL on account of unviable project economics, adversely impact Tata Power's credit risk profile. CGPL's under-recoveries of fuel cost are primarily on account of the non-scalable variable charges component in the tariff.

Tata Power has supported CGPL by infusing about Rs 9,000 crore till March 31, 2020, in the form of perpetual securities, equity, and inter-company loans; in addition to the initial equity commitment of Rs 4,250 crore. CGPL has made efforts to improve operating efficiencies and minimise under recoveries through procurement of coal from various sources.

Coal mines in Indonesia offer a partial natural hedge to CGPL's operations. However, dividends from coal mines have been lower than CGPL's debt servicing requirements, thereby necessitating support from Tata Power. While the adoption of HPC recommendation has been delayed, under-recoveries are expected to reduce on account of low thermal coal prices. Nevertheless, implementation of the HPC's recommendations will shield CGPL from any hike in coal prices in the future. Given the current outlook on coal prices, CRISIL expects overall under-recoveries in the range of Rs 0.20-0.30 /kWh for the next two years. Under-recoveries at CGPL and implementation of the HPC recommendations would be a key monitorable.

* Moderate, albeit, improving financial risk profile
Tata Power has a moderately leveraged capital structure, with consolidated net debt to EBITDA ratio at 4.4 times and gearing of 2.6 times as on March 31, 2020. The equity infusion and divestment of non-core assets are likely to reduce net debt to EBITDA and gearing to 4.0 times and 1.9 times, respectively, by fiscal 2021. Net debt is estimated at about Rs 37,000-38,000 as on September 30 2020, down from Rs 44,331 crore as on March 31, 2020. Materialisation of the proposed renewable InvIT could enable the company further reduce net debt to EBITDA to below 3.5 times over the medium term.