Key Rating Drivers & Detailed Description

Strengths:

Improved business risk profile marked by increase in tied-up capacity

Total tied-up capacity of DBPL increased to 76% during fiscal 2022 from 59% in fiscal 2021 with the signing of a new medium term PPA each with PTC and MPL for 150 megawatt (MW) and 50 MW power supply to Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) and Gujarat Urja Vikas Nigam Ltd (GUVNL), respectively. These PPAs have been signed at a tariff of Rs 4.04 per unit and Rs 3.18 per unit, respectively, while the cost of generation is low due to proximity to coal mines.

Moreover, the take-or-pay PPAs with TANGEDCO for 221 MW and Rajasthan distribution companies (discoms; through PTC) ensure complete recovery of fixed cost, subject to the plant achieving normative parameters. The company also supplies to Chhattisgarh discom for 60 MW at variable cost. Proximity and access to coal mines of Coal India Ltd ('CRISIL AAA/Stable/CRISIL A1+') ensure adequate fuel supply for the respective long-term PPAs, while the balance is sourced through e-auctions.

Besides, the company also has a long-term PPA of 360 MW with Chhattisgarh (CG), supplies under which are yet to commence. Chhattisgarh state electricity regulatory commission (CSERC) vide its February 2022 order has directed the state to assess its power demand and accordingly procure it from DBPL in case of any requirement. Currently, the remaining power is sold through bilateral contracts and in the power exchanges. Nevertheless, with almost 76% of the offtake being through firm offtake arrangements, DBPL’s ability to tie-up supplies for balance capacity would remain a key monitorable.

Established track record of healthy generation

The tariff structure of the PPAs allows the company to recover its entire fixed cost, provided the plant availability factor (PAF) exceeds the normative availability of 85%. PAF continues to be above normative requirement at 89% in fiscal 2022 (91% during the previous fiscal). It is expected to remain higher than the normative, driven by proximity to coal mines and healthy coal stock available at the plant. Nonetheless, coal availability and its impact on plant availability will remain a key monitorable.

Further, the company has demonstrated a healthy track record of generation despite only 76% of its installed capacity having PPAs. Plant load factor (PLF) improved to 82% in fiscal 2022 from 78% the previous fiscal, driven by higher demand. The company has also been able to sell around 39% of its supplies through bilateral trades or merchant sales (35% the previous year). Company has adequate bilateral arrangements in place till December 2022 and hence, is expected to continue supplying at around 80% PLF in fiscal 2023 as well. Renewal of bilateral contracts is expected over the medium term due to healthy power demand and low cost of generation.

Healthy operating efficiency driven by low cost of generation

Operating efficiency is driven by proximity to coal mines and railway siding. This ensures adequate coal supply and also lower coal handling, transportation costs and transit losses. Consequently, the variable cost of generation is low, which ensures favorable offtake through the respective PPAs. Moreover, DBPL has also been able to demonstrate robust volumes on bilateral/merchant at healthy net margins of around 175 paisa per unit as compared to 70-80 paise over the past few years. Ability to sustain volumes on short term at healthy profitability will be closely monitored.

Weaknesses

Exposure to weak financial risk profiles of counterparties

DBPL's counterparties have weak credit risk profiles. The overall receivables (unbilled revenue) increased to ~ 165 days during fiscals 2021 and 2020 from ~ 115 days during fiscals 2018 and 2019 due to delay in payments from the counterparties and build-up of ‘Change in law’ receivables leading to stretch in liquidity. The company receives late payment surcharge on delayed payments from discoms. However, the overall receivables reduced to 123 days as on March 31, 2022, from 172 days a year earlier mainly on account of receipts under Atma-Nirbhar Bharat package and part receipt of ‘Change-in-Law claims’. Timely collections during fiscal 2022, and presence of ‘Letter of Credit’ from the counterparties provides comfort. However, any further delay in payments from the counterparties and build-up of receivables may weaken the credit risk profile and will remain a key monitorable.

Moderate but improving debt protection metrics and capital structure

The debt-to-EBITDA ratio remained high at 3.7 times as on March 31, 2022 (4.9 and 5.1 times in fiscals 2021 and 2020, respectively) while the gearing ratio stood at 1.64 times (2.23 and 2.63 times) despite prepayment of Rs. 415 crore of loan during the fiscal. Company is implementing a FGD project at a cost of Rs 540 crore to be completed by end of current fiscal. Debt for the capex is fully tied-up. The management intends to prepay the loan over the medium term and hence gearing is expected to be less than ~ 1.5 times and debt to EBITDA to sustain around similar levels despite the FGD capex.

Annexure - Details of Instrument(s)

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