Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Inox Wind Limited (IWL) to ‘CRISIL BBB+/Positive/CRISIL A2’ from ‘CRISIL BBB/Stable/CRISIL A3+’.

 

CRISIL Ratings has also revised its outlook on Rs 99 crore non-convertible debentures (NCDs), Rs 150 crore NCDs and Rs 75 crore long term principal-protected market-linked debentures (PPMLDs) 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 profile, though it remains average. Wind business has successfully raised Rs 740 crore through an initial public offering of Inox Green Energy Services Ltd (IGESL; ‘CRISIL BBB+/Positive/CRISIL AA (CE)/Positive/CRISIL A2’). 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 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 32.1 crore in IWL to ‘CRISIL BBB+/Positive’ from ‘CRISIL AA (CE)/Positive’ which was incidentally the unsupported rating for these facilities earlier. The rating migration is driven by the 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 loan 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 IWL. Earlier, CRISIL Ratings had factored in the strength of an unconditional and irrevocable deed of guarantee and an undertaking issued by GFL for the rated bank facilities.  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 reflect the strong support from the INOXGFL group, the structured payment mechanism of the company and its established track record in the wind turbine business. 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 by GFL. The payment mechanism is administered by the debenture trustee to ensure timely payment. The guarantee covers the principal, interest and other monies payable on these facilities.

 

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 NCDs and PPMLDs backed by the corporate guarantee of GFL, CRISIL Ratings has applied its criteria for rating instruments backed by guarantees.

 

For arriving at the ratings of non-guaranteed instruments, CRISIL Ratings has combined the business and financial risk profiles of IWL and its subsidiaries, IGESL and Resco Global Wind Services Pvt Ltd (Resco; ‘CRISIL AA              (CE)/Positive’). These entities, collectively referred to as IWL, are in related businesses and have common promoters.

 

CRISIL Ratings has applied its group notch-up framework to factor in the strong strategic and financial support provided by the INOXGFL group, which includes Inox Wind Energy Ltd, IWL, GFL and their subsidiaries.

 

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:

Structured payment mechanism: For NCDs worth Rs 99 crore, the company will deposit funds in the escrow account at least five business days prior to coupon payment or redemption date (that is, T-5). If it fails to do so, the guarantors will make the requisite payment three business days prior to the due date (T-3). Or else, there will be an invocation by the debenture trustee on T-3 and payment will be received by T-1.

 

For the Rs 150 crore NCDs, the company will deposit funds in the escrow account at least seven business days prior to coupon payment or redemption date. If it fails to do so, the guarantors will make the requisite payment five business days prior to the due date. If not, there will be an invocation by the debenture trustee on T-5 and payment will be received by T-1.

 

For PPMLDs, the company will deposit funds into the escrow account at least seven business days prior to any coupon payment or redemption date. If it fails to do so, the guarantors will make the requisite payment four business days prior to the final date of payment. Or else, there will be an invocation by the debenture trustee on T-3 and payment will be received by T-1.

 

The payment structure is designed to ensure full and timely payment to the lender. 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.

 

Strong support from the INOXGFL 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 INOXGFL 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 the requirement of support.

 

Established track record: The promoter group has a track record of over 10 years in the wind turbine business. IWL is a leading wind turbine manufacturer in India. Backed by the extensive experience of the promoters and its healthy order book, IWL should witness a turnaround in its operations from fiscal 2023, which will be a key monitorable.

 

Weakness:

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.

Liquidity: Adequate

Unencumbered cash and equivalent stood at around Rs 111 crore as on November 30, 2022. 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 a part of the INOXGFL 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 NCDs and PPMLDs: Strong

Liquidity for the rated 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: Positive

The business risk profile of IWL will improve in fiscal 2023 driven by order execution. The credit risk profile will continue to be supported by the INOXGFL group.

 

Rating Sensitivity Factors

Upward Factors

• Improvement in liquidity driven by increase in cash accrual and deleveraging
• Increase in cash flow, with higher revenue and stable operating margin of more than 10%
• Significant improvement in working capital management leading to a better capital structure

 

Downward Factors

• Material change in the shareholding of, or support from, the INOXGFL group
• Lower cash accrual on account of decline in revenue and fall in operating margin to less than 8%

 

Outlook for NCDs and PPMLDs backed by guarantee: Positive

The outlook reflects CRISIL Ratings' outlook on the credit quality of GFL.

 

Rating Sensitivity Factors

Upward Factors

• Revision in the credit risk profile of GFL leading to rating upgrade

 

Downward Factors

• Revision in the credit risk profile of GFL leading to rating downgrade
• Non-adherence to the payment structure

Adequacy of credit enhancement structure

GFL has provided an unconditional and irrevocable guarantee for the rated 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 combined the business and financial risk profiles of IWL and its subsidiaries, IGESL and Resco, as they are in related businesses and have common promoters. Also, CRISIL Ratings has applied its group notch-up framework to factor in the strong strategic and financial support received from the INOXGFL group.

About the Company

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. Also, it provides associated services such as O&M of wind turbines, project execution and infrastructure development for wind farms. The company has a nacelles and hubs unit in Una, Himachal Pradesh; a blades and towers unit in Rohika, Gujarat; a nacelles, hubs, blades and towers unit in Barwani, Madhya Pradesh; and a leased nacelle facility in Bhuj. 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.

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 obligations under the deed, and any such right is excluded.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Facility type	Date of allotment	Coupon rate (%)	Maturity date	Amount (Rs.Crore)	Complexity level	Rating
NA	Cash credit*	NA	NA	NA	37.3	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	35	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	0.5	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	15	NA	CRISIL BBB+/Positive
NA	Cash credit#	NA	NA	NA	15	NA	CRISIL BBB+/Positive
NA	Cash credit**	NA	NA	NA	65	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	32.1	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	5	NA	CRISIL BBB+/Positive
NA	Cash credit	NA	NA	NA	10	NA	CRISIL BBB+/Positive
NA	Letter of credit##	NA	NA	NA	215	NA	CRISIL A2
NA	Letter of credit^	NA	NA	NA	100	NA	CRISIL A2
NA	Letter of credit	NA	NA	NA	101	NA	CRISIL A2
NA	Bank guarantee	NA	NA	NA	50	NA	CRISIL A2
NA	Bank guarantee^^	NA	NA	NA	50	NA	CRISIL A2
NA	Bank guarantee	NA	NA	NA	75	NA	CRISIL A2
NA	Bank guarantee	NA	NA	NA	15.5	NA	CRISIL A2
NA	Proposed letter of credit and bank guarantee	NA	NA	NA	428.6	NA	CRISIL A2
INE066P07018	Non-convertible debentures	10-Nov-20	9.5%	10-Nov-23	150	Complex	CRISIL AA(CE)/Positive
INE066P07026	Non-convertible debentures	9-Jun-22	9.75%	21-Apr-24	49	Complex	CRISIL AA(CE)/Positive
INE066P07034	Non-convertible debentures	9-Jun-22	9.75%	30-Apr-25	50	Complex	CRISIL AA(CE)/Positive
INE066P08016	Long term principal-protected market-linked debentures	28-Oct-22	Variable-Others	28-Oct-24	75	Highly Complex	CRISIL PPMLD AAr(CE)/Positive
NA	Commercial paper	NA	NA	7 to 365 Days	200	Simple	CRISIL A2

*Rs 37.3 crore is interchangeable with letter of credit / bank guarantee
**Rs 25 crore limit is interchangeable with letter of credit and bank guarantee each
#Rs 15 crore is interchangeable with letter of credit
##Rs 215 crore is interchangeable with bank guarantee
^Rs 100 crore is interchangeable with bank guarantee
^^Rs 50 crore is interchangeable with letter of credit