CRISIL has assigned its 'Provisional CRISIL AA(CE)/Negative' rating to the proposed non-convertible debentures (NCDs) of Inox Wind Limited (IWL) and has reaffirmed its ratings on the bank facilities and commercial paper at 'CRISIL BBB+/Stable/CRISIL A2'.
 
The rating on the proposed NCDs centrally factor in the unconditional and irrevocable corporate guarantee by Gujarat Fluorochemicals Ltd (GFCL; 'CRISIL AA/Negative/CRISIL A1+').
 
The guarantee and the undertaking together cover the principal, interest, and other monies payable on these facilities. For the proposed NCDs, the payment mechanism is administered by the debenture trustee to ensure timely payment. Any adverse movement in the credit risk profile of the guarantor and non-adherence to the payment mechanism are key rating sensitivity factors.
 
On May 27, 2020, CRISIL had downgraded the ratings to 'CRISIL BBB+/Stable/CRISIL A2' from 'CRISIL A-/Stable/CRISIL A2+'. The downgrade was mainly on account of weakening of the credit risk profile driven by a sustained weak operating performance and average liquidity. The performance was earlier expected to improve in fiscal 2020 given the healthy order book. However, operating income declined by 47% to Rs 767 crore in fiscal 2020 from Rs 1,441 crore in the previous fiscal. Furthermore, the operating margin weakened to 8.7% from 10.9%. The performance was impacted by the delay in order execution as the availability of central grid evacuation infrastructure from Power Grid Corporation of India Ltd (PGCIL) was delayed. In the first quarter of fiscal 2021, the operating performance remained subdued due to the impact of the Covid-19 pandemic, leading to operating income declining by 62% to Rs 97 crore and the operating margin turning negative.
 
The working capital cycle remains stretched, with consolidated gross receivables at Rs 1,322 crore as on March 31, 2020. Liquidity remains average because of high utilisation of the bank limit and minimal unencumbered cash and equivalents. The company has availed a bank limit supported by funds from group companies; this should help liquidity over the short term. Moreover, the proposed NCDs should help to reduce high-cost debt while enhancing liquidity to some extent.
 
The operating performance is expected to steadily improve in fiscal 2021 driven by a gradual execution of healthy orders of 1,374.7 megawatt (MW) as on June 30, 2020.  Timely execution of orders and realisation of payments thereafter will remain key monitorables.
 
The company has started execution of a large order from Continuum Power Trading (TN) Pvt Ltd (Continuum). IWL plans to divest stake in a special purpose vehicle holding 50 MW of ready-to-be-commissioned windfarms. It also intends to monetise stake in the operations and maintenance (O&M) business. These liquidity measures and other cost optimisation initiatives are likely to improve cash accrual and liquidity. Furthermore, removal of ceiling tariffs under the reverse auction by the Ministry of New and Renewable Energy, applicable for new auctions from fiscal 2021, is expected to benefit the industry over the medium term.
 
The ratings continue to reflect strong support from the Inox group and an established market position as a leading wind turbine manufacturer. These strengths are partially offset by large working capital requirement constraining liquidity, and a weaker-than-expected operating performance.

For arriving at the ratings on the NCDs, CRISIL has applied its criteria on rating instruments backed by guarantees.
 
For arriving at the ratings of non-guaranteed instruments, CRISIL has combined the business and financial risk profiles of IWL and its subsidiary, Inox Wind Infrastructure Services Ltd (IWISL). Both the companies, together referred to herein as IWL, are in related businesses and have common promoters.
 
CRISIL has applied its group notch-up framework to factor in the strong strategic and financial support from the Inox group, which includes GFL Ltd (GFL), GFCL, Inox Leisure Ltd ('CRISIL AA-/Negative/CRISIL A1+'), Inox Renewables Ltd, Inox India Pvt Ltd ('CRISIL A+/Stable/CRISIL A1+'), Inox Air Products Pvt Ltd ('CRISIL AA+/Stable/CRISIL A1+'), and their subsidiaries.
 
Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation.

Strengths
* Structured payment mechanism: For the payment of the proposed NCDs 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 one 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 the company 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: GFL holds 56.98% equity in IWL, while the promoter family holds 18.02%, thus giving the group complete control over operations. The Inox group has extended support to IWL and IWISL through GFL 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 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.

* Established market position: The company 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 till date, with total unexecuted orders at 1,374.7 MW as on June 30, 2020. Ability to successfully execute these orders should result in healthy revenue and cash flow visibility for fiscals 2021 and 2022. Completion of orders and receipt of timely payments will remain key monitorables.

The company has a technological collaboration with AMSC Windtech (a wholly owned subsidiary of American Superconductor Corporation [AMSC]), which provides access to the latest turbine technologies. Leveraging the technological tie-up, the company plans to launch the new 3.3 MW machines with largest rotor diameter of 146 metre during fiscal 2021. Continued technological collaboration with AMSC for new products and availability of grid connectivity for 500 MW should support the market position.

Weaknesses
* Large working capital requirement, impacting liquidity: The working capital cycle remains stretched, with gross receivables at Rs 1,322 crore as on March 31, 2020. Working capital intensity was high under the feed-in-tariff regime (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 auctions regime, receivables remain high due to 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 will continue to monitor the company's ability to execute orders and timely realisation of payments leading to an improvement in cash flow.

* Weaker-than-expected operating performance: The regulatory transition from a FIT regime to a competitive bid-auction-based regime and delayed availability of central grid evacuation infrastructure from PGCIL continued to affect the operating performance in fiscal 2020, which was weaker-than-expected on account of low execution of new orders in the fiscal.

The company commenced execution of orders of 250 MW from Continuum in the first quarter of fiscal 2021, along with other orders from reputed clients. Furthermore, it is undertaking execution of the ongoing project from a newly leased nacelle manufacturing facility in Bhuj, Gujarat; this is expected to result in improved profitability. Healthy revenue growth and improvement in the operating margin will remain key rating sensitivity factors.

Unutilised bank lines and unencumbered cash and equivalents stood at around Rs 30 crore as on March 31, 2020. Liquidity is constrained by large working capital requirement. Liquidity will be supported by expected healthy cash accrual in fiscal 2021 and moderate capital expenditure as the common infrastructure has already been set up. Any improvement in working capital management post successful execution of orders and timely receipt of payments remain key monitorables.

Liquidity is strengthened by the financial flexibility derived as part of the Inox group. The group companies have provided direct funds in the form of inter-corporate deposits and advances and have also 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 NCD's: Strong
Liquidity for the rated NCDs derives comfort from the guarantee structure (unconditional and irrevocable guarantee from GFCL), which should ensure timely repayment of debt. The guarantee will remain unaffected even if the company faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up proceedings initiated by or against the issuer.

CRISIL believes IWL will continue to benefit from the strong support from the Inox group. Healthy order book and its timely execution should increase the company's cash accrual.

Rating Sensitivity Factors
Upward factors
* Improvement in liquidity, driven by an increase in cash accrual and fructification of deleveraging plans
* Sustained increase in cash flow from operations with the operating margin at above 12%, and improvement in the working capital cycle

Downward factors
* Any material change in shareholding by, or diminution in support from, the Inox group
* Lower cash accrual on account of a fall in revenue or the operating margin remaining below 10%

Outlook for NCD's: Negative
The outlook on NCDs reflects CRISIL's outlook on the credit quality of GFCL.

Rating sensitivity factors for NCD's
Upward factors
* Revision in the credit risk profiles of GFCL, leading to improvement in rating by one or more notches

Downward factors
* Revision in the credit risk profiles of GFCL, leading to decline in rating by one or more notches
* Any non-adherence to the payment structure.

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

CRISIL 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.

CRISIL has combined the business and financial risk profiles of IWL and its subsidiary, IWISL. Both the companies, together referred to herein as IWL, are in related businesses and have common promoters. CRISIL has applied its group notch-up framework to factor in the strong strategic and financial support from the Inox group.

IWL, established in April 2009, is part of the Inox group. The company manufactures nacelles, hubs, rotor blades and towers used to make and assemble 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, 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.
 
IWL has a technical tie-up with AMSC Windtech, which provides control systems and vets suppliers for other parts from across the world.
 
For the three months ended June 30, 2020, operating income and profit after tax (PAT) were Rs 97 crore and a negative Rs 73 crore, respectively, against Rs 260 crore and a negative Rs 14 crore, respectively, for the corresponding period of the previous fiscal.

* The guarantor, irrevocably and unconditionally guarantees to the debenture trustee due and punctual payment of the entire obligations 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