Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Adani Power Ltd (APL) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’.

 

The revision in outlook reflects CRISIL Ratings’ expectation that business and financial risk profile of APL may improve considerably in the near term on account of robust power demand, remunerative tariffs in merchant power and benign coal prices resulting in sustained deleveraging of balance sheet. This also follows a significantly better-than-expected operating performance, full recovery of past pending regulatory dues, and healthy improvement in the liquidity profile during fiscal 2024. The performance is likely to sustain in fiscal 2025 and could lead to strengthening of credit metrics.

 

The operating performance of APL has been strong with robust plant load factor (PLF) and healthy operating margins. The company had better-than-expected operating earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 18,789 crore for fiscal 2024 and Rs 11,692 crore for the first six months of fiscal 2025. The PLFs for fiscal 2024 stood at ~65% and around 72% for H1 FY2025. Further, resolution of all the major past regulatory matters is complete leading to cash inflow (APL has recovered majority of pending regulatory dues, including carrying costs and late payment surcharge) and providing revenue visibility for future years.

 

CRISIL Ratings believes the operating performance of APL will continue to benefit from 83% of total capacities tied up under long-term PPAs, healthy utilisation of merchant capacities backed by strong power demand outlook for the country over the medium term, and robust fuel supply arrangements (FSAs). APL’s consolidated operating Ebitda will likely range around Rs 20,000 crore per annum for fiscals 2025 and 2026. However, any moderation in power demand leading to lower-than-expected volume and profitability for APL will remain monitorable.

 

This healthy performance has led to a reduction in consolidated net leverage (ratio of net external debt to operating Ebitda) to 1.6 times as of March 2024 from 3.3 times as of March 2023 (around 4 times as of March 2022). This improvement is expected to sustain, backed by healthy cash accrual.

 

CRISIL Ratings notes that APL has significant capital expenditure (capex) in the pipeline. This includes organic and inorganic expansion to reach a total installed capacity of 30GW by 2030, expenditure for flue gas desulphurisation (FGD), and maintenance. CRISIL Ratings expects operating cash accrual to be sufficient to meet the equity requirement of capex as well as annual debt obligation while maintaining its liquidity reserve and capex reserve. CRISIL Ratings has taken note of the management’s commitment to maintain the ratio of net external debt to operating Ebitda (on trailing 12 months basis) at or below 2.5 times hereon. Further, as per the corporate debt term sheet, the company has to maintain liquidity reserve of 1.25x of ensuing debt servicing for following 1 year (P+I) and capex reserve equal to next six months of funding requirement (unfunded capex portion), which provides additional comfort. Timely execution of the planned capex and tie-up of capacities with long term/ medium term PPAs, without impacting the capital structure or liquidity profile, will be a key monitorable.

 

The rating continues to factor in the strong market position of APL, presence of long-term/medium-term PPAs for 83% of operational capacities with corresponding FSAs for nearly 56% of operational capacities, the geographically diversified portfolio of coal-based power-plants and counterparties, and healthy financial risk profile. These strengths are partially offset by exposure to risk related to lower merchant power demand and tariffs due to untied capacity (nearly 17% of total operational capacity), exposure to counterparty risk on account of weak to moderate credit profiles of some distribution companies (discoms).

 

The company has a power plant under a subsidiary, Adani Power (Jharkhand) Ltd (APJL), in Godda, Jharkhand, with capacity of 1,600 megawatt. The ratings remain unaffected by the recent developments in Bangladesh. The plant normally runs a receivables cycle of ~6 months. While receivables increased for August 2024, the management expects it to normalise over the next few months and the same is visible from the collections in October 2024. Further, the PPA with BPDB provides protection to the company in form of letter of credit (equivalent to ~2 months of dues) and sovereign guarantee from Government of Bangladesh as additional security mechanisms. CRISIL Ratings will continue to monitor the developments in this regard and factor it into its rating.

 

The rating also factors in the 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 combined the business and financial risk profiles of APL (merged entity) and its subsidiaries, given the strong operational, financial and managerial linkages among the entities.

 

CRISIL Ratings has treated UPS of around Rs 7,315 crore as on March 31, 2024 (Rs 13,215 crore as on March 31, 2023), as 100% equity as these are perpetual with no maturity or redemption. Call option for their redemption is available with the issuer (APL) and interest on these securities is cumulative. The UPS can be redeemed with the lender’s consent and through distributable surplus.

 

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:

• Strong market position with diversified portfolio of coal-based power plants across geographies: APL is one of India’s largest independent power producers with operational thermal power capacity of 17.55 GW, equivalent to ~7% of the total capacity in the country. With under-construction projects, APL is looking to further scale up operations and strengthen its market position. Its plants are in various territories and terrains in India, ranging from near-pitheads to coastal areas. APL has extensive experience in working with a range of power plant technologies from subcritical/supercritical technologies to ultra-supercritical technologies. Of its operational portfolio, 49% is based on imported coal.

 

• Healthy business risk profile with high level of long-term PPAs and FSAs: APL has tied up around 83% of its gross power generation capacity with multiple counterparties under long-term/medium-term PPAs, with escalable tariff structure for majority of these PPAs, providing good revenue visibility. APL has tied-up nearly 83% (1,320 megawatt [MW] of 1,600 MW) of under-construction capacity for Phase II of its subsidiary, Mahan Energen Ltd (MEL), with discoms in Madhya Pradesh and has also been selected as L1 bidder with Maharashtra State Electricity Distribution Company Limited for its 1600MW under-construction project in Raipur. The untied capacities are near pitheads, which supports raw material sourcing and reduces cost of generation. The diversified counterparty mix mitigates any concentration risk.

 

Also, APL has FSAs for around 56% of its coal-based thermal power generation capacity. CRISIL Ratings expects higher materialisation under these FSAs to continue, resulting in relatively lower reliance on alternative coal sources. However, the ability to claim alternate fuel costs as passthrough under change in law claims for the respective PPAs post resolution of the regulatory matter has strengthened the business risk profile. For the imported coal-based plants, APL benefits from Adani Group’s presence in overseas coal mining and its sourcing ability, which mitigates raw material availability risk for these capacities to a certain extent.

 

• Healthy financial risk profile and debt protection metrics: External debt reduced in fiscal 2024 due to partial prepayment and scheduled repayment through operating cash flow, including proceeds of old regulatory dues. The ratio of net external debt to operating Ebitda improved to 1.6 times as of March 2024 (around 2.6 times as of September 2023 and 3.3 times as of March 2023) and is expected to sustain over the medium term. Healthy uptick in earnings lead to improvement in interest coverage to around 5.6 times in fiscal 2024 and it is expected to remain above 4 times in the medium term (around 3 times in fiscal 2023). While the financial risk profile is expected to improve over the medium term, timely implementation of the planned capex will be the key risk going forward.

 

Overall, CRISIL Ratings expects the consolidated net external debt to operating Ebitda ratio to remain sustainably below 2.5 times as articulated by the management, and the same will remain a key monitorable.

 

Further, as per the corporate debt term sheet, the company has to maintain liquidity reserve of 1.25x of ensuing debt servicing for following 1 year (P+I) and capex reserve equal to next six months of funding requirement (unfunded capex portion), which provides additional comfort.

 

Weaknesses:

• Exposure to merchant market demand and pricing risk: Around 17% of the capacity does not have any PPA tied up, resulting in exposure to offtake and price risks. APL has been able to utilise the untied capacity for merchant power sales, which led to improved PLF and realisations over the past few years, backed by higher power demand across India. Also, the said capacities benefit from being near pitheads, which lowers fuel supply risk. However, ability to sustain higher merchant sales with healthy margins, thereby supporting robust cash accrual over the long term, depends on various factors, including power demand-supply dynamics and fuel availability in the country, and will be monitorable.

 

• Exposure to counterparty risk having moderately weak credit profile: While APL has witnessed timely recovery of receivables over the past years, some discoms have average to weak credit profiles. At times, this may result in a delay in collection of bills, leading to cash flow mismatches, which is partially mitigated with presence of letter of credit mechanism and DSRA. Overall receivables have moderated post recovery of old regulatory dues, but receivables from Bangladesh Power Development Board (BPDB) have accumulated. While collection from BPDB is improving steadily on monthly basis post the political developments in Bangladesh in August 2024, further improvement in the monthly collections as well as sustenance of receivables (from other counterparties as well) will remain monitorable.

 

• Exposure to risk associated with brownfield expansion and growth through acquisitions: APL is implementing 11.20 GW brownfield expansion projects of 1.60 GW each consisting of 800 MW Ultra-supercritical units; which are expected to be implemented in a staggered manner over the next 4-5 years. These projects are in the planning stage, however, execution risk is mitigated to some extent by the availability of land and Adani Power’s vast experience in the sector. The fact that APL executed the greenfield Godda plant on time despite the pandemic and recently achieved financial closure for Mahan Phase II provides comfort.

 

The company also needs to undertake capex of around Rs 9,000 crore towards FGD till December 2026, across all its plants, except Mundra (Phase IV). However, timely completion of the planned capex without any cost overrun will remain monitorable.

 

APL also plans to expand through the inorganic route and has recently acquired 2.3GW of operational thermal capacities. The company continues to be on a lookout for lucrative projects available in the market. That said, APL has a consistent track record of turning around newly acquired merchant plants.

Liquidity: Strong

Liquidity will be supported by strong net cash accrual of over Rs 15,000 crore over fiscals 2025 and 2026, which should be sufficient to meet the principal debt obligation over the medium term. As on June 30, 2024, the company had unencumbered cash and liquid investments, of around Rs 7,395 crore, including DSRA and liquidity reserve. The company also had fund-based working capital buffer of Rs 1,446 crores (constrained by drawing power). The company plans to utilize its surplus funds to meet its capex requirement and will be raising debt as per the requirement.

Outlook: Positive

The business and financial risk profile of APL is likely to improve sustainably in the near term on account of robust power demand, remunerative tariffs in merchant power and benign coal prices resulting in considerable deleveraging of balance sheet.

Rating sensitivity factors

Upward factors

• Significant and sustained improvement in the operating performance leading to significant improvement in the liquidity position
• Faster-than-expected deleveraging leading to net debt to operating Ebitda sustaining below 2.5 times over the medium to long term and average DSCR above 2 times over the debt tenure
• Sustained improvement in receivables from counterparties, including BPDB

 

Downward factors

• Weakening operating performance with plant availability factor (PAF) remaining below normative levels for existing capacities having PPAs, leading to delay in fixed cost recoveries or lower PLFs of merchant capacities impacting operating cash flow
• Weaker-than-expected cash flow or larger-than-expected, debt-funded growth capex (organic or inorganic) resulting in external net debt to operating Ebitda ratio exceeding 3.0-3.5 times on sustained basis with DSCR falling below 1.7-1.8 times over the remaining debt tenure
• Adverse outcome for pending regulatory investigation constraining financial flexibility of Adani Group, including APL

About the Company

APL, part of Adani Group, is the largest private sector thermal power producer in India, with an operational portfolio of 17.55 GW of assets. The power plants are located across the country, in Maharashtra, Karnataka, Rajasthan, Chhattisgarh, Gujarat, Madhya Pradesh, Tamil Nadu and Jharkhand. APL has a diversified set of counterparties.

 

For first six months of fiscal 2025, APL has reported revenue from operation of Rs 28,294.5 crore and PAT of Rs 7,210.3 crore as against Rs 23,996.1 crore and Rs 15,353.6 crore, respectively, during the corresponding period last fiscal.

Any other information: Not Applicable