| Jindal Power Limited | ||||||
| Ratings revised to 'Watch with Developing Implications' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating watch on the bank facilities of Jindal Power Limited (JPL) to ‘Rating Watch with Developing Implications’ from ‘Rating Watch with Negative Implications’.
CRISIL Ratings has been applying its parent notch-up framework to factor in the support available to JPL from Jindal Steel & Power Ltd (JSPL; ‘CRISIL A+/Positive/CRISIL A1+’; 96.4% stake in JPL) and the existing financial and managerial linkages with the parent. However, JSPL has announced that it will divest its entire stake in JPL to Worldone Pvt Ltd (Worldone), another entity of the promoter group, for Rs 3,015 crore. The proposed divestment offer also includes transfer of non-convertible redeemable preference shares (RPS) of around Rs 6,800 crore issued by JPL, along with JSPL liability of Rs 4,386 crore towards capital advances and loans from JPL. This will be in addition to the cash consideration of Rs 3,015 crore and is intended to remove financial linkages between JSPL and JPL.
The rating watch reflects that CRISIL Ratings is re-evaluating the strength of the linkages with JSPL and is in the process of assessing the ability of Worldone to provide any distress support to JPL as the deal proposes to change the parentage of JPL and remove linkages between JSPL and JPL. Also, information on financing for the acquisition by Worldone was awaited.
While the deal has received approvals from the shareholders of JSPL (Securities and Exchange Board of India and Competition Commission of India, thereby increasing the likelihood of successful completion of the deal, other requisite approvals (including from lenders of JSPL and JPL) are yet to come. Further developments on the proposed divestment, along with clarity on the contours of financing for the acquisition by Worldone, will be key monitorables for resolving the watch.
However, the revision in rating watch to ‘Developing’ from ‘Negative’ reflects the continued improvement in the operating profitability of JPL during the current fiscal, supported by robust plant load factor (PLF), healthy merchant power rates on account of improved power demand and timely receivables realisations. Hence, operating profitability (earnings before interest tax depreciation and amortisation {Ebitda}) improved to more than Rs 1,650 crore (excluding one-time non-cash expense for provisions) in the first nine months of fiscal 2022 against Rs 1,450 crore in the corresponding period of fiscal 2021. The Ebitda is expected to increase to more than Rs 2,000 crore for fiscal 2022 against around Rs 1,800 crore in fiscal 2021 (Rs 1,250 crore in 2020).
Increased operating cash accrual during fiscal 2022 and recovery of past dues from Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) have boosted liquidity; which is reflected in prepayment of more than Rs 1,000 crore of term debt during the current quarter of the fiscal. The company is also expected to witness reduction in interest rate for its outstanding debt from fiscal 2023. These factors, along with higher profitability, are expected to support improvement in the debt coverage metrics of JPL.
Furthermore, the Gare Palma (IV/I) coal mine (won in an auction in November 2020) has recently been commissioned and production is expected to commence soon. Also, the company has recently executed 3-year PPAs (power purchase agreements) for 340 megawatt (MW) with REMC Ltd (a joint venture of the ministry of railways and RITES Ltd).
The ratings continue to reflect the cost-efficient power generation capacity of JPL owing to low capital cost and its advantageous location, increasing fuel security and improved operating performance supported by enhanced liquidity because of partial realisation of outstanding dues from TANGEDCO. These strengths are partially offset by absence of long-term PPAs for about three-fourth of the installed capacity (3,400 MW), which constrains optimum utilisation; moderate counterparty risk with TANGEDCO being the largest buyer (around 49% of the 810-MW capacity tied up through long-term PPAs); and large debt on account of significant advances to JSPL. |
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 a common management and strong operational and financial linkages.
While JSPL is looking to divest JPL, it will extend any need-based support to the company in the interim. Hence, CRISIL Ratings has applied its parent notch-up framework to factor in the support available to JPL from JSPL given the existing financial and managerial linkages with the parent.
CRISIL Ratings has treated the non-convertible RPS subscribed by JSPL as 75% equity and 25% debt. This is because the preference shares have a sizeable equity component as they are subscribed to by the promoter, have a long tenure (with residual maturity of more than 15 years), are subordinated to existing borrowing and have a 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 * Cost-efficient operations 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, the recently commissioned Gare Palma (IV/I) coal mine (reserve of around 39 million tonne and production capacity of 6 million tonne per annum) will improve fuel security, with captive and linkage coal availability increasing to more than 50% from 24% currently. Also, the mine has conveyor belt connectivity with the existing plants of JPL, which will further reduce logistic cost and support lower coal cost. The mine is expected to commence production from March 2022, and its successful ramp-up will be a key monitorable.
* Improved operating performance supported by enhanced liquidity: In fiscal 2021, liquidity improved owing to recovery of dues of around Rs 430 crore from TANGEDCO in the third quarter (around Rs 350 crore more received in April 2021), and moratorium availed on debt servicing in the first-half of the fiscal under the Covid-19 Regulatory Package of the Reserve Bank of India. Enhanced liquidity and increased availability of coal at reduced cost have supported higher production rates (monthly PLF improved to over 50% in the last quarter of fiscal 2021 from 22% in April 2020, resulting in PLF of 43% in 2021 against 32% in 2020) and better operating profitability in fiscal 2021. Furthermore, operating performance has improved in the current fiscal, as reflected in average PLF of 46% over the 10 months through fiscal 2022. The Ebitda increased to more than Rs 1,650 crore (excluding one-time non-cash expense for provisions) in the first nine months of fiscal 2022 against around Rs 1,450 crore in the corresponding period previous fiscal. Expected improvement in power demand, healthy merchant power rates, and moderate coal cost should result in a strong operating performance over the medium term.
* Support from the parent because of financial and managerial linkages JSPL currently owns 96.4% in JPL and controls its strategic and operational decisions, apart from having oversight in financial matters. The existing high financial linkages between the entities are reflected in significant loans and advances extended by JPL to JSPL, against which the former receives annual interest payment that supplements its cash flow. Also, JSPL holds the recently issued non-convertible preference shares of JPL. Given the focus of JSPL on the steel business and on deleveraging its balance sheet, the parent wants to divest its shareholding in JPL. However, according to the JSPL management, it is committed to extending any need-based support to JPL in the interim. Any change in parent support philosophy towards JPL will be a key rating sensitivity factor.
Weaknesses * Exposure to offtake risk: Around 75% of the current capacity does not have long-term PPAs, 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 tried to utilise the untied capacity for merchant sales. However, this was impacted by fuel availability and volume risk in the spot market, resulting in sub-optimal utilisation over the past years. JPL has recently executed 3-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 will enhance cash flow from the power business over the medium term.
* 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 higher aggregate technical and commercial losses. Hence, high share of state discoms as counterparties results in risk of delayed payments. For JPL, 400 MW (around 49%) of 810 MW of the existing long-term PPA-tied capacity has TANGEDCO as a counterparty, which has delayed payments in the past few fiscals (receivables over 180 days as on March 31, 2020, up from over 90 days as on March 31, 2018). However, partial recovery of dues from TANGEDCO (Rs 1,730 crore as on March 31, 2020) and increased share of merchant sales (which have a faster collection cycle) helped to reduce receivables to around 130 days as on June 30, 2021. Timely payment from counterparties and recovery of dues from TANGEDCO will remain key monitorables.
* Large debt because of sizeable loans and advances to JSPL constraining JPL’s debt metrics; albeit expected to improve going ahead: Although the current capacity was set up at a highly competitive capital cost, debt has been high (Rs 6,278 crore as on March 31, 2021, and Rs 7,277 crore as on March 31, 2020) on account of significant loans and advances extended to JSPL (Rs 4,386 crore currently, including Rs 2,854 crore for purchasing captive power plants from JSPL). While JPL has been receiving annual interest payment from JSPL, the principal obligation is met through cash accrual. This, along with increased debt obligation, has resulted in a modest annual debt service coverage ratio (DSCR) of less than 1.3 times over the past three fiscals. However, with expected improvement in operating profitability and recent pre-payment of more than Rs 1,000 crore of term loan, the annual DSCR should improve and is expected to remain healthy despite moderately large debt obligation over the medium term. The company is discussion with lenders for reduction in rate of interest, which can further support debt metrics. |
Liquidity: Adequate Cash accrual (including interest payment from JSPL) is expected at more than Rs 1,800 crore and around Rs 2,000 crore in fiscals 2022 and 2023, respectively, against scheduled debt obligation of Rs 897 crore in fiscal 2022 and around Rs 615 crore in fiscal 2023. Liquidity is also supported by unencumbered cash and equivalents of Rs 824 crore and unutilised working capital limit of around Rs 360 crore as on February 27, 2022. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1995, JPL is part of the OP Jindal group. The company is currently 96.43% owned by JSPL (one of India's major steel producers). JPL generates thermal power with IPP capacity of 3,400 MW at Tamnar, Chhattisgarh.
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Key Financial Indicators (consolidated; CRISIL Ratings-adjusted numbers)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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