Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the non-convertible debentures of Adani Energy Solutions Ltd (AESL).

 

The rating factors in the strong business risk profile of AESL’s transmission and distribution business, its healthy financial flexibility and established track record of operations in the transmission and distribution business. That said, the ratings are constrained by exposure to implementation risk in the large under-construction portfolio and high funding requirement, especially equity capital for growth.

 

The rating also factors in completion of most of the regulatory investigations within the Adani group (following the release of the report by Hindenburg Research). Any regulatory/government action or investigation, having a material adverse impact on the group or its entities, will be a key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has evaluated the consolidated credit profile of the businesses / verticals of AESL (namely transmission, distribution and smart meter), present in its underlying special-purpose vehicles (SPVs) including Adani Electricity Mumbai Ltd, smart meter business and transmission SPVs such as Adani Transmission Step-One Ltd. In addition, CRISIL Ratings has also assessed adequacy of cashflow and liquidity at AESL (on a standalone basis).

 

This is because AESL has direct control over these SPVs/ entities, including their operations and treasury. AESL is expected to provide need-based support to these entities in case of exigencies and access surplus cash reserves of each SPV/Restricted Group (RG) post satisfaction of covenants related to restricted payment/distribution as per the facility documents.

 

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:

• Healthy business profile in power distribution and transmission business driven by healthy visibility in cash flow via long-term contracts, diversity of portfolio and diversified counterparty mix: AESL’s business profile is driven by capabilities in developing and operating large and diverse portfolio of assets across different verticals - namely transmission, distribution and smart meter - in power distribution and transmission segments.

 

AESL is the largest private sector transmission developer and operator in India. It has a large and diverse portfolio of 26 operational transmission SPVs (as on March 31, 2024), which have a predictable revenue profile through transmission service agreements (TSAs) spread over 35 years. Revenue for transmission assets is fixed in nature, with either the cost-plus model (return on investment) or competitively bid fixed tariffs (TBCB assets) lending visibility. Assets are spread across 14 states and have a healthy counterparty mix with around 60% benefiting from the point-of-connection (PoC) mechanism. Under PoC, transmission charges are pooled and distributed among licensees in proportion to their annual transmission charges, thereby assuring timely payments.

 

AESL’s business profile also gets supported through established distribution business in Mumbai, housed under AEML. Here, the cost-plus tariff regime ensures recovery of the entire operational and finance cost on the regulated debt, along with a fixed return on regulated equity (around 15.5% plus income tax) and a valid license till August 2036. This regulatory regime provides stability to revenue.

 

AESL is also developing smart meters, wherein revenue/cash flow is supported by long-term fixed price contracts with state discoms. Further, the counterparty payment risk is mitigated by presence of the direct debit facility (DDF) facility.

 

• Established track record of operations in the transmission and distribution business: AESL has a unique position in India’s private transmission and distribution industry through its position as the largest private transmission developer in India, and presence in other businesses such as distribution and smart meters. This is further enhanced by The Adani group’s presence in thermal and green power generation business. This has helped AESL maintain a healthy operational track record.

 

Under its transmission business, AESL has achieved a healthy availability track record of around 99.7%, on an average for the past few years, demonstrating strong operating performance across assets, much higher than normative line availability of 98.0%. This will enable the company to earn availability-linked incentives as well. Performance is backed by operations and maintenance (O&M) capabilities leveraging upon new-age technology, economies of scale (healthy presence across transmission corridors) and best-in-industry technical capabilities.

 

AESL also has a healthy track record of operations in the distribution business. The Mumbai distribution business has a favourable demographic profile, with the residential segment constituting 50% of the energy consumed in fiscal 2024, followed by the commercial segment (38%) and the industrial segment (12%). Despite a higher share of the residential segment, AEML has brought down its aggregate technical and commercial (AT&C) losses to 5.3% in fiscal 2024 (below the normative level of 6.8%), from 8.1% in fiscal 2018.

 

• Healthy financial flexibility: AESL has a demonstrated track record of raising both equity and debt capital. For debt capital, company raises funds from the domestic and international markets.  AESL has also raised debt via innovative structures such as external borrowing with long tenors of over 30 years and a revolving debt facility of USD 700 million. Proceeds have been used to fund the under-construction transmission and smart meter business in underlying SPVs.

 

Financial flexibility is also supported by low foreign exchange risk on external debt, as it uses various hedging instruments such as forwards, full currency swap, principal only swap etc to mitigate this risk. The forex risk is assessed to be low since AESL maintains the policy of hedging its entire foreign exposure either over the entire tenure of the bond or through rolling one-year contracts.

 

On equity capital, AESL has secured equity investments from marquee investors in the past. It has raised USD 452 million from Qatar Investment Authority in 2019 and USD 500 million from International Holding Company PJSC in 2023. Apart from this, the company also received secondary equity investment from GQG Partners in 2023.

 

Weaknesses:

• Exposure to implementation risk in the large under-construction portfolio: AESL plans to incur significant capital expenditure under its transmission and smart meter business, which exposes the company to implementation risks of cost and time overruns. It has nine transmission assets under various stages of implementation as on March 31, 2024, with a combined project cost of Rs 17,000 crore, vis-à-vis the current operational transmission asset base of Rs 31,400 crore. The company must get relevant clearances pertaining to land, right-of-way, no-objection certificates from relevant government authorities, liaise with various stakeholders, and tackle on-ground issues to ensure timely completion of projects. Further, these projects also remain exposed to risks such as input cost escalation or change in scope.  

 

In the smart meters business, AESL is implementing nine contracts to install 22.8 million smart meters, which involves capital expenditure (capex) of Rs 12,300 crore. Implementation and operation of smart meters have a limited track record in India and the company may be exposed to risks such as unavailability of site or other on-ground compliance issues. Although contracts have the provision to de-scope meters and allied infrastructure, which is not implemented on account of such reasons, working of the business model is yet to be ascertained. 

 

• High funding requirement especially equity capital for growth: AESL has high capital requirement to fund growth, especially equity funds, given the planned capex of around Rs 30,000 crore under its transmission and smart meter business over the next 2-3 years. The company has announced its plan to raise Rs 12,500 crore in fiscal 2025 and shall utilise the funds to fund its growth. Traction of fund raising would remain a key monitorable.

 

Further, AESL’s current external debt profile is dominated by foreign and domestic bonds/ loans with varying tenures, some of which have bullet maturities. Timely refinancing of bullet maturities, with the earliest material bullet of USD 500 million in August 2026, is expected, as the management plans of putting a refinance plan 12 months in advance.

Liquidity: Strong

Consolidated: Free cash and equivalents stood at Rs 1,920 crore as on March 31, 2024. Apart from this, the company also has a contingency reserve (Rs 340 crore) and Rs 2,357 crore in the form of debt service reserve account (DSRA) /margin money. Liquidity is also supported by the unutilized working capital limit of around Rs 1,437 crore as on March 31, 2024 (of the total sanctioned fund-based limit of Rs 3,885 crore). CRISIL Ratings understands that the company has capex plans of Rs 30,000 crore, spread over the next 2-3 years, which will be funded through internal accrual, existing cash balance, equity (yet to be raised) and debt. Expected net cash accrual of Rs 5,800-6,200 crore for fiscal 2025, should suffice to cover annual debt of Rs 3,900-4,100 crore.

 

Standalone: AESL has free cash of around Rs 17 crore as on March 31, 2024. Capex plans are being executed in subsidiaries (direct and indirect) for which debt funds are expected to be raised at individual subsidiaries and equity is expected to be funded through consolidated cash, accruals and planned equity raise. AESL has access to free cash /upstreaming of underlying SPVs which is expected to be over Rs. 1,200-1,300 crore in fiscal 2025 (assuming certain funds being retained at SPV level and no upstreaming from smart meter and distribution business)

Outlook: Stable

AESL is expected to benefit from stable cash flows from its operational transmission portfolio and increase in the operational asset base.

Rating Sensitivity factors

Upward factors:

• Significant reduction in project implementation risk (through timely commissioning of planned capex at ~Rs 30,000 crore over the next 2-3 years) and establishment of working of smart meter business model
• Higher-than-expected deleveraging through surplus cash flow/equity or improvement in business and financial profiles of business segments/ verticals

 

Downward factors:

• Higher-than-expected debt-funded capex (through delay in raising of equity) and/ or weakening in business or financial profile of business segments/ verticals.
• Any significant time/cost overrun in the under-construction portfolio, resulting in adverse impact on liquidity, or a significant ramp up in proportion of under-construction portfolio, vis-à-vis operational asset base (from expectation of capex at ~Rs 30,000 crore over the next 2-3 years)

About the Company

AESL houses the transmission & distribution business of the Adani group. Assets are housed under individual SPVs, in which the company holds a 100% stake (except for AEML, in which it holds 74.9% stake). As of March 31, 2024, AESL had a portfolio of 26 operational transmission SPVs, nine under-construction transmission assets, distribution business in Mumbai housed under AEML (catering to 3 million customers in Mumbai city) and distribution business in Mundra special economic zone. AESL is the largest privately operating transmission line company in India. The company has also ventured into the smart meters business and has bagged nine contracts, involving installation of 22.8 million smart meters.

Any other information

AESL has an ongoing litigation with Reliance Infrastructure Ltd, pertaining to the Mumbai distribution business housed under AEML. Any adverse outcome, leading to material cash outflows, is a key monitorable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Non Convertible Debentures#	NA	NA	NA	1000	Simple	CRISIL AA+/Stable

#Not yet issued