Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Prayagraj Power Generation Company Ltd (PPGCL) to ‘Positive’ from ‘Stable’ while reaffirming its rating at ‘CRISIL AA-‘. The short term rating has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook reflects expectation of healthy operating cash generation supporting sustenance of strong debt coverage metrics along with continued reduction in debt. This will be backed by sustained improvement in the operating performance of the company driven by above-normative availability and strong and improving plant load factor (PLF) given the criticality of the plant to Uttar Pradesh Power Corporation Ltd (UPPCL). It also factors in sustained improvement in the payment track record by UPPCL, reflected in receivables’ cycle of 60-70 days during fiscal 2023, as against 80-90 days in fiscal 2023 and ~180 days in fiscals 2019-2021, leading to limited utilization of fund-based working capital limits at below 10%. Sustenance of efficient working capital management with low receivable days will be a key monitorable.

 

The Company has witnessed debt reduction in fiscal 2023 on the back of prepayment of term loan of around Rs. 250 crore, covering its principal repayment liability till fiscal 2025. Further, the company is expected to utilize its operating cash accruals towards further material debt reduction which will be a key rating sensitivity factor. Additionally, the Company is having strong liquidity in the form of cash and cash equivalents and unutilized fund based limits, which provides comfort.

 

The ratings continue to factor in the benefits derived from the regulated nature of business, with a classic two-part tariff structure, 90% of capacity tied-up through long-term power purchase agreement (PPA) and long-term fuel supply agreement (FSA) for the capacity. It also factors in management and operational support from Tata Power Company Ltd (TPCL: 'CRISIL AA/Stable/CRISIL A1+') and financial flexibility owing to the presence of strong sponsors of Resurgent Power (Tata Power and ICICI Ventures Pvt Ltd holding ~26% and 10% in the platform, respectively). These strengths are partially offset by exposure to weak, though improving credit profiles of counterparties backed by LPS scheme being implemented.

Analytical Approach

CRISIL Ratings has followed standalone approach while assigning rating to bank loan ratings of Prayagraj Power Company Limited.

Key Rating Drivers & Detailed Description

Strengths: 

Strong cash flow visibility based on availability-based tariff, low offtake and fuel supply risks

The company has a regulated business model with fixed tariff, based on availability above normative level of 80%, and full pass-through of the fuel cost. On the offtake side, it has PPAs of 25 years with five distribution companies (discoms) of Uttar Pradesh for 90% of its capacity; the remaining power is sold in the open market on contract basis. Hence, the company is exposed to the risk of volatility in merchant rates and non-renewal of contracts. Pertinently, favorable position in the merit order dispatch (MOD) of Uttar Pradesh due to low variable cost of Rs 2.25-2.3 per kilowatt per hour (kwh) mitigates the offtake risk and increases the criticality and reliability of the company. Thus, fixed tariff and committed offtake by the counterparties provide cash flow visibility over the period of agreement.

 

On the supply side, the company has entered into a long-term FSA coterminous with the PPA with Northern Coalfield Ltd (NCL) for 6.95 million tonne per annum (MTPA) for meeting its coal requirement at 90% plant availability factor (PAF). Further, availability of adequate railway sidings for transport of coal from mines to plant mitigates the logistics risk.

 

Healthy financial risk profile

As on March 31, 2023, term debt stood at around Rs 4,262 crore against term debt of Rs 4,480 crore as on March 31, 2022. Due to prepayment of Rs 250 crore in March 2023, the company has negligible debt obligation over fiscals 2024-25. Nonetheless, the company will continue to prepay debt because of strong cash & equivalent of around Rs 321 crore as on March 2023 and availability of unutilised working capital limit equal to around three-four months of revenue. Pertinently, tail period of over four years post end of debt tenure exhibits healthy cushion to refinance the debt, improving cash flow coverage to over 1.5 times over the tenure of the project.

 

However, the company has outstanding liability towards capital creditors of Rs. 850 Cr which is currently under dispute and is expected to be settled during the current fiscal. The payment towards settlement of the said capital creditor will through mix of debt and internal accruals. While, credit metrics of the company are likely to remain healthy, however, developments on the said matter will be monitorable. Loan for FGD capex and repaying capital creditors have been sanctioned during the previous fiscal.

 

Notably, coupon payout at 14.3% per annum on Rs 1,279 crore compulsory convertible debentures (CCDs) will remain subordinate to debt obligation.

 

Strong operational and financial support due to presence of strong sponsors at Resurgent Power, including Tata Power and ICICI Ventures

The company has been taken over by Resurgent Power, which is owned by Tata Power (26%), ICICI Ventures (10%) and various foreign sovereign funds (54%). PPGCL enjoys financial flexibility owing to the presence of the strong sponsors of Resurgent Power, who have equal board representation. The company benefits from the strong knowhow of Tata Power, which has extensive experience in the power industry and manages the operations and maintenance of the company.

 

Weakness:

Exposure to weak, albeit improving counterparty credit profiles of Uttar Pradesh discoms

The company has signed offtake agreements with the discoms of Uttar Pradesh, which have weak, albeit improving credit risk profiles. Timely collection of dues is susceptible to the health of its counterparties, which can significantly impact debt servicing. However, over the period post takeover, receivables have improved to 60-70 days in fiscal 2023 from 80-90 days in fiscal 2022 and ~180 days in fiscals 2019-21. Added improvement in receivable days is due to LPS installments being received under LPS scheme. Resultantly, the Rs 1,200 crore fund-based working capital limit was utilised at below 10% in fiscal 2023. Further, the company has a debt service reserve account (DSRA) equivalent to one quarter of debt obligation. Timely collection of dues from the discoms will remain a key monitorable.

Liquidity: Superior

Net cash accrual (NCA) is expected at Rs 500-550 crore per annum in fiscals 2024 and 2025 against nil or neglibile term debt obligation. As of March 2023, the company had strong cash & equivalent of around Rs 321 crore including DSRA of Rs 128 crore and balance in liquid investments. Additionally, there is callable interest bearing intercorporate deposits (ICDs) of around Rs 250 crore extended to a group entity for a short period. The fund-based limit was utilized ~10% on average in the 12 months through March 2023 and was nil as on March 2023.

Outlook: Positive

PPGCL will continue to benefit from its steady operating performance above normative levels and is expected to maintain the healthy coverage ratios with expectation of prudent capital allocation towards debt reduction and capex.

Rating Sensitivity Factors

Upward Factors

• Sustenance of operating performance in terms of PAF remaining above normative levels (80%) and collection of receivables in a timely manner on sustained basis
• Faster than expected debt reduction leading to improvement in average DSCR over the remaining project life

 

Downward Factors

Outlook can be revised to Stable, in case of:

• Weakening of operational metrics with lower than expected cash accruals/ slower than expected debt reduction, resulting in lower than expected debt service coverage ratio
• Sustained increase in receivables to over 80-90 days leading to stretch in working capital cycle from current levels

About the Company

PPGCL was incorporated in February 2007 to set up a 1,980 MW (3*660) coal-based thermal power project in Uttar Pradesh. The commissioning for the three units was declared in phases in fiscals 2016, 2017 and 2018. The plants were under financial stress owing to cost overruns and working capital unavailability. The company was taken over by Resurgent Power, through its wholly owned subsidiary Renascent Power Ventures Pvt Ltd (Renascent Power) in December 2019. Resurgent Power signed a share purchase agreement with a consortium of lenders led by State Bank of India to acquire 75.01% stake in PPGCL. Resurgent Power is a power platform launched by Tata Power and ICICI Ventures, along with global investors, in September 2016. It targets operating and near-operating thermal/hydro/transmission assets and has a joint commitment of up to USD 850 million (Rs 6,000 crore) by Tata Power (26%) and other global players.

Key Financial Indicators

As on/for the period ended March 31	Units	2023	2022
Operating income	Rs crore	4,582	3,963
Profit after tax (PAT)	Rs crore	283	413
PAT margin	%	6.17	10.42
Adjusted debt/adjusted networth	Times	13.67	42.35
Adjusted interest coverage*	Times	1.83	1.85

   *finance charges excludes fair value adjustements

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Rupee term loan	NA	NA	Dec-2037	4,150	NA	CRISIL AA-/Positive
NA	Working capital facility*	NA	NA	NA	1,130	NA	CRISIL AA-/Positive
NA	Working capital facility	NA	NA	NA	70	NA	CRISIL AA-/Positive
NA	Bank guarantee	NA	NA	NA	100	NA	CRISIL A1+
NA	External commercial borrowings	NA	NA	Dec-2037	380	NA	CRISIL AA-/Positive
NA	Proposed long-term bank loan facility	NA	NA	NA	920	NA	CRISIL AA-/Positive

*Interchangeable with letter of credit to the extent of Rs 200 crore