Detailed Rationale

CRISIL Ratings’ ratings on the NCDs and bank facilities of Inox Wind Infrastructure Services Ltd (IWISL) continue to centrally factor in the strong linkages with parent, Inox Wind Ltd (IWL; ‘CRISIL BBB/Stable/CRISIL A3+’). IWISL is a wholly owned subsidiary of IWL and mainly offers engineering, procurement and commissioning (EPC), operations and maintenance (O&M) and common infrastructure facility services for wind turbine generators manufactured and supplied by IWL.

 

On August 03, 2021, IWL’s rating was downgraded to CRISIL BBB/Stable/CRISIL A3+ from CRISIL BBB+/Stable/CRISIL A2 on account of weakening of its credit risk profile. The operating performance of IWL was earlier expected to improve in fiscal 2021 given the healthy order book. However, operating income declined by 6% to Rs 718 crore in fiscal 2021 from Rs 767 crore in the previous fiscal because of lower execution, partly because of the impact of the Covid-19 pandemic. Operating margin was also impacted, as IWL sold the stuck inventory at lower prices. Operating profit was further impacted by provision on receivables of Rs 95 crore in fiscal 2021. Consequently, IWL reported operating loss of Rs 64 crore in fiscal 2021 against operating profit of Rs 67 crore in fiscal 2020.

 

The operating performance of IWL in the first quarter of fiscal 2022 remained impacted by the second wave of the Covid-19 pandemic; however, it was better than the first quarter of the previous fiscal, with operating income increasing by over 75% to Rs 169 crore along with modest earnings before interest, taxes, depreciation and amortisation of 1.6%. Performance is expected to revive in the near term owing to improved execution as well as launch of 3-megawatt (MW) turbines during the year. Timely execution of orders leading to healthy build-up of revenue and profit for IWL will remain a rating sensitivity factor.

 

The financial risk profile of IWL further weakened in fiscal 2021, as the total debt increased to Rs 1,564 crore from Rs 1,121 crore in fiscal 2020 to finance the cash flow requirement of the company. Consequently, the capital structure was also impacted, with gearing increasing to 1.21 times in fiscal 2021 from 0.68 time in fiscal 2020. Debt protection metrics were weak because of operating losses in fiscal 2021.

 

The rating on the NCDs centrally factors in the unconditional and irrevocable corporate guarantee by Gujarat Fluorochemicals Ltd (GFCL; ‘CRISIL AA/Negative/CRISIL A1+’). The ratings on the other NCDs and long-term and short-term facilities centrally factor in the unconditional and irrevocable corporate guarantee jointly provided by Inox Wind Energy Ltd and GFCL and an additional undertaking provided by these entities.

 

The guarantee and the undertaking together cover the principal, interest and other monies payable on these facilities. For the NCDs, the payment mechanism is administered by the debenture trustee to ensure timely payment. For the guaranteed bank facilities, as per the undertaking provided, if IWISL fails to make payment on the due date, the guarantor will make the requisite payment either on invocation of a corporate guarantee by the lender or in 15 (for cash credit and non-fund-based facilities)/seven (for term loan) working days from the final date of payment, whichever is earlier. Any adverse movement in the credit risk profile of the guarantor and non-adherence to the payment mechanism are key rating sensitivity factors.

Analytical Approach

For arriving at the ratings on the long-term and short-term bank facilities and the NCDs, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees.

 

For rating the long-term bank facility, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to IWISL from IWL.

Key Rating Drivers & Detailed Description

Strengths:

• Structured payment mechanism: As per the undertaking for the guaranteed bank facilities, if IWISL 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 15 (for cash credit and non-fund-based facilities)/7 (for term loan) working days from the final date of payment, whichever is earlier.

 

For the NCDs, IWISL will deposit funds into the escrow account at least seven business days prior to any coupon payment or redemption date. If IWISL fails to do so, the guarantors will make the requisite payment three business day 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 IWISL 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 group: Inox Wind Energy holds 55.37% equity in IWL, while the promoters hold 18.02%, thus giving the group complete control over the operations. The Inox group has extended support to IWL and IWISL through Inox Wind Energy and GFCL by enabling them to raise funds through NCDs, term debt and working capital facilities as and when required. Group entities have also supported liquidity through significant capital advances and inter-corporate deposits. The promoters maintain their stance of financial and managerial support to the company given its strategic importance to the group.

 

The Inox group is the largest polytetrafluoroethylene (PTFE) manufacturer in India and among the top four globally. It is also among the leading manufacturers of hydrochlorofluorocarbon (HCFC), which is used in refrigeration and air conditioning, among other industries. It is among the leading wind turbine manufacturers in India. The group’s leading market position, along with its diversified revenue stream, will continue to support the business risk profile.

 

• Strong linkages with IWL: IWISL is the EPC arm of IWL, which undertakes project execution once material is supplied by IWL. IWISL also undertakes O&M of these projects once they have been commissioned. There are strong operational linkages, as more often than not, the projects have all three components: material supply, EPC and O&M. The company also receives strong financial support from IWL in the form of inter-corporate deposits and optionally convertible debentures. The treasury operations are common for both the entities.

 

IWL is a leading wind turbine manufacturer in India. It has maintained a healthy market position by directly winning orders of 850 MW in the four central and two state auctions to date, with total unexecuted orders at 1,324.7 MW as on March 31, 2021. Ability to successfully execute these orders should result in healthy revenue and cash flow visibility in fiscal 2022. Timely execution of orders and receipt of payments will remain a rating sensitivity factor.

 

The linkages between IWISL and IWL should remain strong, thereby supporting the rating on the long-term bank facility of IWISL.

 

Weaknesses

• Large working capital requirement impacting liquidity: The working capital cycle remains stretched, with receivables (net of provisions) at Rs 1,049 crore as on March 31, 2021. Working capital intensity was high under the feed-in-tariff 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 high because of deferral in commissioning on account of delay in receipt of the evacuation infrastructure.

 

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

 

• Weaker-than-expected operating performance: Fiscal 2021 performance for IWL remained weak, with lower-than-expected execution, in part because of the impact of the Covid-19 pandemic. Operating margin was significantly impacted, as the company disposed of stuck inventory at lower prices, leading to negative operating margin in fiscal 2021.

 

IWL is currently executing orders of 250 MW from Continuum Green Energy (India) Pvt Ltd along with projects that were auctioned by Solar Energy Corporation of India during the second tranche in its own special purpose vehicle, Nani Virani Wind Energy Pvt Ltd. Furthermore, it is expected to launch 3-MW turbines, which should further support project execution in fiscal 2022. Revival in project execution leading to healthy revenue growth and improvement in the operating margin will remain a key rating sensitivity factor.

 

• Weak debt protection metrics: Debt protection metrics remained weak, with IWL reporting operating losses in fiscal 2021. The metrics are expected to improve with better operating performance.

Liquidity: Adequate

The adequate liquidity is in line with the overall liquidity of IWL. The capital expenditure should remain moderate, as the common infrastructure has already been completed. However, liquidity is constrained by the large working capital requirement. Any improvement in the working capital cycle following the successful execution of orders remains a key monitorable. Nevertheless, liquidity is strengthened by financial flexibility from being part of the Inox group.

Outlook Stable

IWISL might be impacted by continued slow execution of the order book.

 

Outlook for long-term facilities and NCDs: Negative

The outlook on the long-term bank facilities and NCDs of IWISL reflects the outlook of CRISIL Ratings on the credit quality of Inox Wind Energy and GFCL. The ratings will remain sensitive to any change in the credit view of CRISIL Ratings on these entities.

Rating Sensitivity factors

Upward/downward factors for long-term bank facility

• Any change in the credit risk profile of IWL leading to revision in rating by one or more notches

 

Upward/downward factors for long-term bank facilities and NCDs

• Any change in the credit risk profiles of Inox Wind Energy and GFCL leading to revision in ratings by one or more notches

Adequacy of credit enhancement structure

Inox Wind Energy Ltd and GFCL have provided an unconditional and irrevocable guarantee for the rated facilities/instruments, thus ensuring timely payment of the interest and principal obligations.

Unsupported ratings CRISIL BBB 

CRISIL Ratings has introduced the 'CE' suffix 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

For arriving at the unsupported rating, CRISIL Ratings has applied its parent notch-up framework for support available from IWL to IWISL.

List of covenants

* The guarantor irrevocably and unconditionally guarantees to the debenture trustee due and punctual payment of the entire obligation and the performance and/or discharge of all obligations by the issuer, in accordance with the 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 A1+(CE)
NA	Term loan	NA	NA	30-Sep-22	25	NA	CRISIL AA (CE)/Negative
NA	Term loan	NA	NA	28-Feb-26	24	NA	CRISIL BBB/Stable
NA	Cash credit*	NA	NA	NA	50	NA	CRISIL AA (CE)/Negative
NA	Term loan	NA	NA	15-Jan-25	100	NA	CRISIL AA (CE)/Negative
INE510W07060	Debentures	28-Sep-20	0.095	28-Sep-23	195	Complex	CRISIL AA (CE)/Negative

*Interchangeable with non-fund-based facilities