Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Jindal Power Limited (JPL) from ‘Rating Watch with Developing Implications' and has upgraded its ratings to ‘CRISIL A+/CRISIL A1’ from ‘CRISIL A-/CRISIL A2+' and assigned a 'Stable' outlook to the long term rating.

 

The ratings were placed on watch as CRISIL Ratings was in the process of assessing the ability of Worldone Pvt Ltd (Worldone) to provide distress support to JPL and interest on loans and advances, earlier given by JPL to Jindal Steel and Power Ltd. (JSPL) and proposed to be transferred to Worldone, as the divestment deal proposes to change the parentage of JPL. Also, information on financing for the acquisition by Worldone was awaited, which was a key monitorable for resolving the watch.

 

That said, CRISIL Ratings had revised its rating watch to ‘Developing’ from ‘Negative’ because of continued improvement in the operating profitability of JPL during the first nine months of fiscal 2022, resulting in reduced reliance of JPL on non-operating income in the form of interest income on loans and advances given to its parent. The watch is now being resolved on account of conclusion of stake transfer from JSPL to Worldone and clarity received on key contours of financing availed by Worldone. On May 30, 2022, Worldone paid Rs 3,015 crore to JSPL for acquiring the latter’s stake in JPL. The acquisition was funded through around Rs 2,500 crore debt and the remaining was provided by the promoters. CRISIL Ratings understands that debt availed by Worldone is non-recourse to JPL, with no cross-default linkages between JPL and Worldone. Furthermore, lenders of Worldone do not have direct access to the cash flow of JPL as JPL’s cash flow is routed through trust and retention account (TRA) mechanism with secured lenders. Also, cash surplus to be repatriated from JPL will be subject to availability of sufficient profit and after obtaining approval from the lenders of JPL.

 

The upgrade factors in material improvement in JPL’s operating performance in fiscal 2022 driven by robust plant load factor (PLF) and healthy tariff rates (Rs 4.54 in fiscal 2022 against Rs 3.73 in fiscal 2021) on account of improved power demand. The improvement in operating performance was also aided by efficient coal supply management owing to advantageous location of JPL’s plant and continued reduction in receivables, including part payment of past dues by Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO), a key counterparty accounting for around 35% of JPL’s tied-up capacity. Operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]) improved to Rs 2,742 crore (excluding one-time non-cash expense for provisions) in fiscal 2022 from Rs 1,829 crore in fiscal 2021.

 

The rating upgrade also factors in strong improvement in business risk profile, led by high operating efficiency because of material improvement in fuel availability and reduced cost of production post ramp-up of recently commissioned captive Gare Palma (IV/I) coal mine (started production in March 2022). Revenue visibility increased on account of increase in tied-up capacity to ~35% from ~25%, post execution of 3-year PPAs (power purchase agreements) for 340 MW with REMC Ltd (joint venture of the Ministry of Railways and RITES Ltd) at remunerative tariff of Rs 3.54 per unit. The captive coal mine increased fuel availability from ~25% (supply linkages for tied-up capacities) to 60-65% (captive mine covering ~30% and remaining through linkages for PPA tied-up capacities). Further, price of captive coal being 20-30% less than linkage coal should help reduce fuel cost significantly from fiscal 2023, thereby improving cost competitiveness of JPL in the merchant market. Hence, while tied-up capacity remains moderate around 35%, consistent improvement in merchant sales and increased cost competitiveness mitigate the offtake risk.

 

The upgrade also factors in strong improvement in the financial risk profile supported by significant decline in debt during the past fiscal (Rs 4,603 crore in March 2022, against Rs 6,289 crore in March 2021), including prepayment of Rs 1,100 crore in fiscal 2022. This, along with expected improvement in operating profitability over the medium term, is expected to improve leverage and debt coverage ratios. Additionally, liquidity witnessed significant improvement, with cash and equivalent of Rs 1,328 crore as on March 31, 2022 (Rs 352 crore a year earlier). Fund-based limit of Rs 650 crore was unutilised as on May 20, 2022.

 

The rating factors in the expectation of sustained improvement in operating profitability over the medium term with expected EBITDA of more than Rs 3,000 crore in fiscal 2023. This will be backed by higher PLF on account of robust power demand, increased tied-up capacity and healthy merchant rates as well as improved operating efficiency owing to reduction in cost of production. JPL is, therefore, expected to witness surplus cash generation (post scheduled debt repayment), which can support faster debt reduction, and further support the credit profile of the company, Hence, sustenance of healthy PLFs supporting strong operating cash accruals and utilisation of the surplus operating cash towards repayment of outstanding debt of JPL will be a key rating monitorable.

 

CRISIL Ratings notes that the company may explore inorganic growth opportunities, however it is understood from the management that the same will be in power business only, at competitive pricing, and mainly towards operational assets. Also, CRISIL Ratings understands that the same will not result in any additional debt on JPL’s balance sheet over the next two years and the current focus of the management is reduction of existing debt of JPL. Any developments on this front will remain key monitorable.

 

The ratings reflect the company’s sound cost efficiency driven by low capital cost, advantageous location, increasing fuel security and improved operating performance. These strengths are partially offset by absence of long-term PPAs for about two-third of the installed capacity (3,400 MW), which constrains optimum utilization, moderate counterparty risk with TANGEDCO being the largest buyer; and significant exposure to group companies in the form of loans and advances.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JPL and its subsidiaries, collectively referred to as JPL, as these entities have common management and strong operational and financial linkages.

 

CRISIL Ratings has treated non-convertible RPS subscribed by Worldone as 75% equity and 25% debt. This is because the preference shares have a sizeable equity component as they are subscribed by the promoter, subordinate to existing borrowing and have long tenure (with residual maturity of more than 15 years) and provision for deferral of coupon payments.

 

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:

Sound cost efficiency aided by low capital cost and proximity to coal mines: The operating cost for the 3,400 MW independent power plants (IPPs) of JPL in Chhattisgarh is low. These plants have low capital cost (around Rs 4.4 crore per MW) and are close to coal mines. Proximity to raw material sources (within 30 kilometres) results in access to coal at competitive rates because of lower logistics cost, despite limited coal linkages. The low cost of generation results in a favourable merit order position while supplying power to distribution companies (discoms), thereby allowing the company to sell power in merchant markets and bid competitively for power tenders.

 

Improving fuel security with captive coal linkage: After the deallocation of coal mines in fiscal 2014, the company has limited coal linkages (capacity of 1,200 MW but coal sourcing limited to the extent of PPAs, which is 810 MW). The absence of long-term linkage coal is partially offset by proximity of the plant to multiple coal mines. Furthermore, in March 2022, JPL commissioned its Gare Palma (IV/I) coal mine (reserve of around 39 MT and production capacity of 6 MTPA), which has improved JPL’s fuel security, with captive and linkage coal availability increasing to 60-65% from around 25%. Further, the captive mine will support cost reduction as captive coal is ~ 30% cheaper than current coal cost for JPL. Also, the mine has conveyor belt connectivity with the existing plants of JPL, which will further reduce logistic cost and support lower coal cost from fiscal 2023.

 

Strong improvement in operating performance; addition of new PPA capacities to further provide support over the medium term:. Enhanced liquidity (partial recovery of dues from TANGEDCO) and increased availability of coal at reduced cost supported higher production rates in fiscal 2021 (PLF of 43% in fiscal 2021, against 32% in fiscal 2020). In fiscal 2022, because of healthy improvement in power demand, JPL witnessed increased merchant sales, leading to PLF of 50%. This, along with, improvement in the tariff rates, which averaged Rs 4.54/unit as against Rs 3.74/unit in fiscal 2021, Ebitda increased to around Rs 2,742 crore (excluding one-time non-cash expense for provisions) in fiscal 2022 from Rs 1,829 crore in fiscal 2021. JPL has medium-term PPAs for 340 MW with the Indian railways, which provides improved revenue visibility. This, along with expectation of healthy power demand and merchant power rates, and reduction in fuel cost should result in strong operating performance over the medium term.

 

Significant improvement in the financial risk profile:

Strong operating cash accrual and better collection efficiency helped reduce debt by around Rs 1,700 crore (prepayment of Rs 1,100 crore in fiscal 2022) to Rs 4,603 crore in fiscal 2022. Furthermore, the liquidity improved significantly to Rs 1,328 crore (cash and equivalent) as on March 31, 2022, from Rs 332 crore a year earlier. Additionally, fund based limits of Rs 650 crore remains unutilised as on May 20, 2022. Current liquidity (including cash & equivalents and unutilised fund based working capital limits) is sufficient to meet nearly 24 months of scheduled repayments (including interest payment) of JPL. Going forward, as the company is expected to generate healthy cash accruals, the financial risk profile is expected to remain healthy over the medium term.

 

Weaknesses:

Exposure to offtake risk due to limited PPA; mitigated by high cost competitiveness: Around 65% (excluding short-term PPA with JSPL for 6% of capacity) of the capacity is not tied up, resulting in exposure to offtake and price risks. While JPL has been trying to increase long-term PPAs, discoms are shying away from entering into new agreements with thermal plants and are focusing on renewables instead. The company has been trying to utilise the untied capacity for merchant sales. While JPL’s operating rates were impacted by fuel availability and volume risk in the spot market, resulting in suboptimal utilisation in the recent past, merchant power sales improved because of higher power demand and increased liquidity for coal procurement. However, the ability of JPL to maintain healthy operating rate and stable cash accrual over the long term is yet to be seen. That said, JPL has recently executed three-year PPAs of 340 MW with REMC Ltd, which increases the tied-up capacity of JPL (including medium term and long term PPAs) to around 35% and is expected to start supplying by October 2022, which should enhance cash flow from the power business over the medium term. Furthermore, availability of captive coal will help reduce fuel cost significantly from fiscal 2023, thereby improving cost competitiveness of JPL in the merchant market. Sustenance of healthy operating rates at competitive margins will remain a key monitorable..

 

Exposure to counterparty risk, albeit expected to be mitigated by increased merchant sales: Most discoms in India have weak financial risk profiles on account of increased gap between the average cost of supply and average revenue realised led by high aggregate technical and commercial losses. Hence, high share of state discoms as counterparties results in risk of delayed payments. For JPL, 400 MW of 810 MW of the existing long-term PPA-tied capacity has TANGEDCO as a counterparty, which has delayed payments in the past. However, partial recovery of dues from TANGEDCO from fiscal 2020 (reducing from Rs 1,730 crore as on March 31, 2020, to Rs 916 crore as on March 31, 2022) and increased share of merchant sales (which have a faster collection cycle) helped to reduce receivables to around 69 days as on March 31, 2022, from 184 days as on March 31, 2020. Also, letter of credit backed payment mechanism from the discoms provides comfort against the recovery of dues by JPL. Timely payment from counterparties and recovery of dues from TANGEDCO will remain key monitorables.

Liquidity: Strong

As on March 31, 2022, cash and liquid investments stood at ~Rs 1,328 crore. Fund-based limit of Rs 650 crore remained unutilised. In the absence of any major planned capital expenditure (capex), the company has sufficient liquid surplus to meet two years of debt obligation (including interest). Expected cash accrual of more than Rs 3,000 crore and more than Rs 2,500 crore in fiscals 2023 and 2024, respectively, will comfortably cover debt obligation of Rs 612 crore and Rs 652 crore, respectively.

Outlook: Stable

The business risk profile should be supported by sustenance of healthy operational performance over the medium term, led by strong operating efficiencies, while financial risk profile expected to remain healthy with continued debt reduction.

Rating Sensitivity Factors

Upward factors

• Tie-up of new PPAs at remunerative tariffs leading to increased revenue visibility, improved operating profitability and healthy annual DSCR on a sustained basis
• Significantly higher than expected profitability along with timely collections from the counterparties, supporting increased cash accruals and faster than expected debt reduction with prepayment of 10-20% of JPL’s outstanding long-term debt (other than scheduled debt repayments).

 

Downward factors

• Weakening of operating performance because of lower-than-expected PLF or significant increase in coal cost impacting cash flow
• Material delays in payment from counterparties resulting in significant stretch in receivable position from current levels, and  adversely impacting  the liquidity
• Higher than expected debt funded capex, weakening the financial risk profile

Any other information: Not applicable