Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Inox Green Energy Services Ltd (IGESL) to ‘CRISIL BBB+ Positive’ from ‘CRISIL BBB/Stable’.

 

Also, CRISIL Ratings has revised its outlook on Rs 75 crore principal-protected market-linked debentures (PPMLDs) and Rs 120 crore non-convertible debentures (NCDs) to ‘Positive’ from ‘Stable’ following revision in outlook on Gujarat Fluorochemicals Ltd (GFL; ‘CRISIL AA/Positive/CRISIL A1+’). This is because these facilities are backed by a corporate guarantee from GFL.

 

The upgrade reflects steps undertaken by the promoters in fiscal 2023 to reduce debt, which has led to improvement in the financial risk profile, though it remains average. Wind business has successfully raised Rs 740 crore through an initial public offering of IGESL. Proceeds of the fund raise were partly used to pare down debt. The financial risk profile was further supported by fund infusion of ~Rs 623 crore from the promoters to repay capital advances owed to GFL. The promoters infused ~Rs 260 crore in the first quarter of fiscal 2023. Total external gross debt for wind business was Rs 1,525 crore as on November 30, 2022.

 

The revision in outlook reflects expected improvement in the operating performance of the parent, Inox Wind Ltd (IWL), in fiscal 2023 driven by execution of orders won from a public sector undertaking (PSU), leading to better operating margin and financial risk profile.

 

The wind energy industry seems to be recovering following phasing out of feed-in-tariff (FiT) regime in February 2017 and is estimated to add 3-3.3 GW in fiscal 2023 and ~12.5 GW over fiscals 2024-2026 against annual capacity addition of 1-1.5 GW between fiscals 2017 and 2022. Performance of IWL will improve over the medium term driven by better execution, inorganic acquisitions in the operations and maintenance (O&M) business and launch of 3.3-MW turbines in the first half of fiscal 2024. The company has received an order of 350 MW (150 MW + 200 MW) from NTPC Renewable Energy Ltd (NTPC). The O&M business, which has high margins and long-term stable revenue, should support improvement in revenue on account of inorganic acquisitions. Timely execution of orders leading to healthy build-up of revenue and profit will be a rating sensitivity factor.

 

IWL executed a 50-MW project in fiscal 2023 housed in the special-purpose vehicle (SPV) Nani Virani for the second tranche of Solar Energy Corporation of India (SECI) auctions. The company has achieved financial closure for the project loan for this SPV and has drawn down ~Rs 164 crore. The SPV is expected to be down sold eliminating its total outstanding debt and further raise additional liquidity of ~Rs 100 crore leading to reduction in debt levels.

 

The operating performance of IWL remains weak on account of continued lower execution. IWL reported operating loss of Rs 69 crore and Rs 62 crore, respectively, in fiscals 2022 and 2021, against operating profit of Rs 67 crore in fiscal 2020. For the six months ended September 2022, operating loss was Rs 51 crore against operating profit of Rs 2 crore for the corresponding period of fiscal 2021. Debt protection metrics were subdued because of operating losses.

 

CRISIL Ratings has migrated its rating on bank facilities of Rs 50 crore in IGESL to ‘CRISIL BBB+/Positive’ from ‘CRISIL AA (CE)/Positive’ and from ‘CRISIL A1+ (CE)’ to ‘CRISIL A2’ on bank facilities of Rs 200 crore which was incidentally the unsupported rating for these facilities earlier. The rating migration is driven by revision in the CRISIL Ratings approach towards credit enhancement provided by the guarantee from GFL. The revised approach is based on guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank facilities. This rating migration is driven solely by regulatory guidance and does not reflect any change in the credit risk profile of the bank facilities of IGESL. For the rated bank loan facilities, CRISIL Ratings had factored in the strength of an unconditional and irrevocable deed of guarantee and an undertaking issued by GFL. Moreover, CRISIL Ratings had assessed the deed of guarantee and the undertaking as legally enforceable, irrevocable, unconditional, covering the entire amount and tenure of the rated facility and given it due consideration while assigning the suffix CE. However, based on the new regulatory guidance, deed of guarantee and undertaking from counterparties other than state or central government cannot be considered as credit enhancing support structures for assigning ‘CE’ ratings. For more details on the revised approach, kindly refer to the CRISIL Ratings criteria document, Criteria for rating instruments backed by guarantees.

 

The ratings continue to reflect the strong support from the INOX-GFL group, linkages with IWL and the structured payment mechanism of the company. These strengths are partially offset by subdued operating performance and large working capital requirement.

 

The ratings on the PPMLDs and NCDs centrally factor in the unconditional and irrevocable corporate guarantee extended by GFL. The payment mechanism is administered by the debenture trustee to ensure timely payment. IGESL will deposit funds in the escrow account at least seven business days prior to any coupon payment or redemption date. If IGESL fails to do so, the guarantors will make the requisite payment four business days prior to the final date of payment.

 

The rating on the guaranteed long-term facilities factors in the unconditional and irrevocable corporate guarantee and additional undertaking provided by GFL.

 

The guarantee and the undertaking together cover the principal, interest and other monies payable on these facilities. For the guaranteed bank facilities, as per the undertaking provided, if IGESL fails to make payment on the due date, the guarantor will make the requisite payment on invocation of corporate guarantee by the lender or within seven working days (for Rs 125 crore term loan) or seven calendar days (for Rs 50 crore term loan) from the final date of payment, whichever is earlier.

 

Adverse movement in the credit risk profile of the guarantor and non-adherence to the payment mechanism will be key rating sensitivity factors.

Analytical Approach

To arrive at the ratings on guaranteed bank facilities, PPMLDs and NCDs, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees.

 

For arriving at the ratings of non-guaranteed instruments, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to IGESL from IWL.

Key Rating Drivers & Detailed Description

Strengths:

• Structured payment mechanism: As per the undertaking for the guaranteed bank facilities, if IGESL fails to make payment on the due date, the guarantor will make the requisite payment either on invocation of the corporate guarantee by the lender or seven working days (for Rs 125 crore term loan) or seven calendar days (for Rs 50 crore term loan) from the final date of payment, whichever is earlier.

 

For the NCDs, IGESL will deposit funds into the escrow account at least seven business days prior to coupon payment or redemption date. If IGESL fails to do so, the guarantors will make the requisite payment three business days prior to the final date of payment.

 

For the PPMLDs, IGESL will deposit funds into the escrow account at least seven business days prior to coupon payment or redemption date. If IGESL fails to do so, the guarantors will make the requisite payment four business days prior to the final date of payment.

 

The payment structure is designed to ensure full and timely payment to the lender. The guarantee will remain unaffected even if IGESL faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up proceedings initiated by, or against, the issuer.

 

• Strong support from the Inox-GFL group: Inox Wind Energy Ltd holds 55.37% equity in IWL, while the promoter family holds 18.02%, giving the group complete control over operations. The INOX-GFL group has extended support to IWL and IGESL through Inox Wind Energy Ltd and GFL by enabling them to raise funds through NCDs, term debt and working capital facilities as and when required. Moreover, group entities have provided support through capital advances and intercorporate deposits. Steps taken by the management by way of fund infusion and proceeds from initial public offering have led to reduction in debt and repayment of capital advances, thereby improving the capital structure. Improvement in operating performance should decrease requirement of support.

 

• Strong linkages with IWL: IGESL is the O&M arm of IWL and undertakes O&M of projects post commissioning. The company has strong operational linkages with IWL as often, the projects have all three components: material supply, engineering, procurement and construction (EPC) and O&M. The company receives strong financial support from IWL through intercorporate deposits and optionally convertible debentures. Moreover, the entities have a common treasury.

 

Driven by the extensive experience of the promoters and a healthy order book, IWL should witness a turnaround in its operations over the medium term. This remains a key rating sensitivity factor.

 

Weaknesses

• Subdued operating performance: Performance was weak in fiscal 2022 amid lower-than-expected execution because of the continued impact of the Covid-19 pandemic. Operating margin was negative in fiscals 2022 and 2021. As a result, debt protection metrics were modest.

 

The company is executing projects won from NTPC, which should turn around the operating performance in the medium term. Furthermore, IWL is expected to launch 3.3-MW turbines, which should support project execution in fiscal 2024. Revival in project execution leading to healthy revenue growth and improvement in the operating margin will remain a key rating sensitivity factor.

 

• Large working capital requirement: Operations are working capital intensive, as reflected in receivables (net of provisions) of over Rs 1,100 crore as on March 31, 2022. Working capital requirement was large under the FiT regime as there were delays in commissioning or signing of power-purchase agreements (PPAs). The situation was compounded by an abrupt halt in signing of PPAs by distribution companies after the advent of wind auctions in February 2017. While the company has taken steps to reduce receivables by allocating some of the stuck machinery against new orders under the auction regime, receivables remain sizeable because of deferral in commissioning on account of delay in receipt of evacuation infrastructure.

 

Large working capital requirement and slow order execution have led to pressure on liquidity. CRISIL Ratings will continue to monitor the company’s ability to execute orders and ensure timely realisation of payments, leading to improvement in cash flow.

 

• Subdued debt protection metrics: Debt protection metrics remained constrained by operating loss in IWL over fiscals 2021 and 2022. The metrics may improve over the medium term, driven by improved operating performance.

Liquidity: Adequate

Liquidity of IGESL is in line with that of IWL. The liquidity is constrained by the large working capital requirement. Efficient working capital management following successful execution of orders and timely receipt of payments will remain a key monitorable.

 

Liquidity is strengthened by the financial flexibility derived by IWL from being part of the INOX-GFL group. The group companies have provided direct funds in the form of intercorporate deposits and advances for supplies and have enabled the company to avail funds from banks, supported by guarantees, letters of comfort or pledging of their own funds to provide liquidity support.

 

Liquidity for guaranteed bank facilities, NCDs and PPMLDs: Strong

Liquidity for the rated bank facilities, NCDs and PPMLDs backed by guarantee derives comfort from the guarantee structure (unconditional and irrevocable guarantee from GFL), which should ensure timely servicing of debt. The guarantee will remain unaffected even if the company faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up of proceedings initiated by or against the issuer.

 

Outlook for other bank facilities: Positive

CRISIL Ratings believes the credit risk profile of IGESL will continue to benefit from its strong linkages with IWL. The business risk profile of IWL may improve with order execution in the near term. The credit risk profile will continue to be supported by the INOX-GFL group.

 

Upside/downside scenario for other bank facility

• Change in the credit risk profile of IWL, leading to revision in rating by one or more notch

 

Outlook for guaranteed bank facilities, PPMLD and NCDs: Positive

The outlook on guaranteed bank facilities, PPMLDs and NCDs of IGESL reflects the outlook of CRISIL Ratings on the credit quality of GFL. The ratings will remain sensitive to any change in the credit view of CRISIL Ratings on GFL.

Rating Sensitivity factors

Upside/downside scenario for guaranteed bank facilities, PPMLDs and NCDs

• Change in the credit risk profiles of IWL and GFL leading to revision in rating by one or more notch

Adequacy of credit enhancement structure

GFL has provided an unconditional and irrevocable guarantee for the rated facilities and instruments, ensuring timely payment of interest and principal obligations.

Unsupported ratings-‘CRISIL BBB+’

CRISIL Ratings has introduced the suffix CE for instruments with an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

CRISIL Ratings has applied its parent notch-up framework for support available to IGESL from IWL.

About the Company

IGESL was incorporated as a wholly owned subsidiary of IWL in May 2012. The company offers O&M and common infrastructure facility services for wind turbine generators manufactured and supplied by IWL. It manages around 3,000 MW of wind turbine generators on pan-India basis.

About IWL

Incorporated in April 2009, IWL is a part of the INOXGFL group. The company manufactures nacelles, hubs, rotor blades and towers used to make wind turbines. IWL subsidiaries IGESL & Resco provides associated services, such as operations and maintenance of wind turbines, project execution and infrastructure development for wind farms respectively. The company has four units, one each at Una in Himachal Pradesh for nacelles and hubs; Rohika in Gujarat for blades and towers; Barwani in Madhya Pradesh for nacelles, hubs, blades and towers; and a newly tied-up nacelle manufacturing facility at Bhuj in Gujarat. IWL has a technical tie-up with AMSC Windtec, which provides control systems.

 

As of September 2022, the company's profit after tax (PAT) was negative Rs 264 crore on operating income of Rs 318 crore, against negative Rs 166 crore and Rs 335 crore, respectively, in the corresponding period of the previous fiscal.

 

About GFL

Gujarat Fluorochemicals Ltd (GFL) is a leading Indian Chemicals Company in Fluoropolymers, Fluorospecialities & Chemicals. It is the only PTFE / fluoropolymer manufacturer in India. Further, GFL is also developing products catering to new age businesses viz. EV- Batteries, Solar Panels & Hydrogen Fuel Cells. It has a diverse product portfolio, comprising caustic soda, chloromethanes, polytetrafluoroethylene (PTFE), hydrochlorofluorocarbon (HCFC) and value-added products. The company is one of the largest chemical players in India, with combined installed capacity of 65,000 TPA of HCFC, 16,200 TPA of PTFE, 134,750 TPA of caustic soda and 108,500 TPA of chloromethane.

List of covenants

* The guarantor irrevocably and unconditionally guarantees the debenture trustee, due and punctual payment of the entire obligation and the performance and discharge of all obligations by the issuer, in accordance with terms of the transaction documents.

* During the subsistence of the deed, the guarantor shall have no right to terminate its obligation under the deed, and any such right is excluded.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Bank guarantee	NA	NA	NA	200	NA	CRISIL A2
NA	Term loan	NA	NA	30-Sep-22	25	NA	CRISIL AA (CE)/Positive
NA	Term loan	NA	NA	28-Feb-26	24	NA	CRISIL BBB+/Positive
NA	Cash credit*	NA	NA	NA	50	NA	CRISIL BBB+/Positive
NA	Term loan	NA	NA	15-Jan-25	100	NA	CRISIL AA (CE)/Positive
INE510W07060	Non-convertible debentures	28-Sep-20	9.5%	28-Sep-23	120	Complex	CRISIL AA (CE)/Positive
INE510W08035	Long-term principal protected market linked debentures	20-Sep-22	GSEC LINKED	20-Sep-24	75	Highly Complex	CRISIL PPMLD AA (CE) r/Positive
NA	Term loan	NA	NA	28-Mar-24	50	NA	CRISIL AA (CE)/Positive

*Interchangeable with non-fund-based facilities