Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings on the bank facilities of Inox Wind Limited (IWL; part of INOXGFL group). Also, CRISIL Ratings has reaffirmed its ‘CRISIL PPMLD AA+ (CE)/CRISIL AA+ (CE)/Stable' ratings on principal-protected market-linked debentures (PPMLD) worth Rs 75 crore and non-convertible debentures (NCDs) worth Rs 149 crore . These facilities are backed by a corporate guarantee from Gujarat Fluorochemicals Ltd (GFL; ‘CRISIL AA+/Stable/CRISIL A1+’). CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) of Rs 100 crore at the request of the company and on independent confirmation from the debenture trustee. This is in line with the rating withdrawal policy of CRISIL Ratings.

 

CRISIL Ratings notes that the promoters have raised Rs 500 crore in August 2023 through dilution of their stake in IWL to institutional investors and infused the funds into the company. These proceeds will be used primarily to reduce the high external debt in IWL by ~Rs 400 crore over August and September 2023. This is in line with the management’s intent to significantly reduce external term debt in fiscal 2024 with plans to raise further equity through a rights issue. However, overall debt remains sizeable estimated at ~Rs 1960 crore as on July 31, 2023 compared with Rs 1,765 crore as on March 31, 2023. While the debt will come down by around Rs 400 crore over August and September 2023 with proceeds raised, however debt protection metrics will remain modest until expected turnaround in operations in the second half of fiscal 2024.

 

IWL had a healthy net order book of over 1,300 MW as on June 30, 2023 (including letter of intent from Adani for 501 MW), which provides revenue visibility for the near term. Operating profitability is expected to improve in the second half of fiscal 2024 with faster execution of orders, especially for the high-margin 3.3-megawatt (MW) turbines, inorganic acquisitions in the operations and maintenance (O&M) business and revival in the wind sector. The operating performance improved in the first quarter of fiscal 2024 driven by softening commodity prices and higher order execution. The management intends to scale down debt in the rest of fiscal 2024 with liquidity events including sale of the 50 MW project housed in the special purpose vehicle (SPV), Nani Virani, along with a likely rights issue.

 

The ability to scale up profitability with ramp-up in order execution and commercialisation of the 3.3 MW turbine, to manage increased scale of operations with no major reliance on working capital borrowings and to reduce debt will be key monitorables.

 

CRISIL Ratings also notes the planned merger of IWL and Inox Wind Energy Ltd (IWEL), which remains credit neutral and will simplify the group holding structure.

 

The ratings continue to reflect the strong support IWL receives from the INOXGFL group and the extensive experience of its promoters in the wind turbine business. These strengths are partially offset by subdued operating performance and large working capital requirement.

 

The ratings on the principal protected market linked debentures (PPMLD) and NCDs centrally factor in the unconditional and irrevocable corporate guarantee by Gujarat Fluorochemicals Ltd (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 PPMLD 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, Inox Green Energy Services Ltd (IGESL; ‘CRISIL BBB+/Stable/CRISIL AA+ (CE)/Stable/CRISIL A2’) and Resco Global Wind Services Pvt Ltd (Resco; ‘CRISIL BBB+/Stable/ CRISIL AA+ (CE)/Stable’). 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 IWEL, 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, IWL will deposit funds in the escrow account at least five business days before any 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 before 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 50 crore NCDs, the company will deposit funds in 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 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 PPMLD, the company will deposit funds into the escrow account at least seven business days before 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; or 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: The promoter group holds 64.6% stake in IWL post the recent dilution (the promoter family effectively holds ~49.3% stake), with the INOXGFL group maintaining complete control over operations. The INOXGFL group has extended support to IWL and IGESL through IWEL 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 in the past. Given the weak accrual, CRSIL Ratings expects timely support from the group, along with refinancing, to aid debt servicing in the near term. Expected improvement in operating performance over the near term, leading to reduction in requirement of support, will remain a key monitorable.

 

• Established track record: The promoter group has a track record of over 10 years in the wind turbine manufacturing business. IWL is a leading wind turbine manufacturer in India. Backed by the extensive experience of the promoters, revival in the wind sector and healthy order book of over 1,300 MW and commercialisation of the 3.3 MW turbine, IWL should witness a turnaround in its operations in the near term, which will be a key monitorable.

 

Weaknesses:

• Subdued operating performance: Performance remained weak in fiscal 2023 amid lower-than-expected execution because of the continued impact of Covid-19 induced disruptions and supply chain issues in China. Operating margin was negative for the past three fiscals. As a result, debt protection metrics were below average.

 

The company is executing projects from NTPC Ltd (NTPC; ‘CRISIL AAA/Stable/CRISIL A1+’), which should help turnaround the operating performance over the medium term. Furthermore, IWL has received Type C approval for production of its higher margin 3.3-MW turbines, which is expected to begin commercial production in the second half of fiscal 2024 (subject to timely receipt of approval for commissioning) and support profitability in the near term. Revival in project execution leading to healthy revenue growth and improvement in the operating margin remain key rating sensitivity factors.

 

• Large working capital requirement: Operations are working capital intensive, as reflected in receivables (net of provisions) of over Rs 1,000 crore as on March 31, 2023. Working capital requirement was large under the feed-in tariff (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 IWL has taken steps to reduce receivables by allocating some of the stuck machinery against new orders under the auction regime, the 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 cash flow. CRISIL Ratings will continue to monitor the ability of IWL to execute orders and ensure timely realisation of payments, leading to improvement in cash flow.

Liquidity: Adequate

Unencumbered cash and equivalents stood ~Rs 22 crore as on March 31, 2023. Liquidity is constrained by large working capital requirement. Given weak accrual, debt obligation of over Rs 600 crore in fiscal 2024 will be funded through timely support from the INOXGFL group.

 

However, the company derives financial flexibility as part of the INOXGFL group. The group companies have provided direct funds in the form of intercorporate deposits and advances for supplies and have helped IWL avail of funds from banks, supported by guarantees, letters of comfort or by pledging of their own funds.

 

Liquidity for NCDs and PPMLD: Strong

Liquidity for the rated NCDs and PPLMLD is supported by the guaranteed structure (unconditional and irrevocable guarantee from GFL), which should ensure timely servicing of debt. The guarantee will remain unaffected even if IWL faces bankruptcy; or in case of dissolution, insolvency or liquidation; or on winding up of proceedings initiated by or against the issuer.

Outlook: Stable

The business risk profile of IWL will be driven by its healthy order book and growing O&M portfolio. The financial risk profile will continue to be supported by the INOXGFL group.

Rating Sensitivity factors

Upward factors

• Higher revenue and operating margin above 10% leading to positive cash flow from operations
• Significant improvement in the working capital management, or equity infusion resulting in a better capital structure

 

Downward factors

• Significant change in the shareholding of, or support from, the INOXGFL group
• Lower-than-expected revenue leading to operating margin below 6 - 8% for IWL

 

Outlook for NCDs and PPMLD backed by guarantee: Stable

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

 

Rating sensitivity factors

Upward factors

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

 

Downward factors

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

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. It also provides associated services, such as O&M of wind turbines, project execution and infrastructure development for wind farms. 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 Windtech, which provides control systems and vets suppliers for other parts from across the world.

 

In the first quarter of fiscal 2024, the company's profit after tax (PAT) was negative Rs 64 crore and operating income was Rs 349 crore, against negative Rs 130 crore and Rs 211 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.

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Inox Green Energy Services Ltd	Full	Strong business and financial linkages
RESCO Global Wind Services Pvt Ltd	Full	Strong business and financial linkages