Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Positive/CRISIL A2’ ratings on the bank facilities of Premier Energies Limited (PEL).

 

The ratings continue to reflect the healthy business risk profile of PEL supported by its established market position in the domestic solar module manufacturing industry, the extensive experience of the promoter, and robust demand supported by government thrust on capacity addition and favourable policies in the form of approved list of module manufacturers (ALMM), basic customs duty (BCD) and production-linked incentive (PLI) scheme.

 

The ‘Positive’ outlook reflects the expected ramp-up in business volumes and profitability driven by stabilisation of the recently commissioned capacity as well as the robust order book, providing revenue visibility for the next 12-15 months, and timely commissioning of planned capital expenditure (capex).

 

These strengths are partially offset by exposure to project stabilisation risks for the recently commissioned capex, moderate project execution risk for the planned capex resulting in substantial rise in leverage and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of PEL and its subsidiaries as they have operational and financial fungibility.

 

Also, CRISIL Ratings has treated compulsory convertible debentures from the private equity investor, GEF Capital Partners, as quasi-equity instruments as the debentures are subordinate to senior debt and will remain in the business over the medium term against nil coupon outflow.

 

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

• Established market presence and longstanding experience of the promoter in the solar industry

The promoter’s experience of over 25 years in the solar industry and strong relationships with stakeholders across the industry will continue to support the business. The premier group companies are one of the largest integrated (solar cell and module) manufacturing facilities (capacity-wise) in India and enjoys a 12% capacity share in the current installed capacity of about 1 GW of modules. With another expansion plan in place, the total module manufacturing capacity of the company is expected above 2 GW for cell and module capacity in fiscal 2023.

 

While the group had a module manufacturing line of 3 MW in 1995, its projects ranged from installing solar lanterns to village electrification and export of solar modules. It entered the solar engineering procurement and construction (EPC) segment in 2011 but is now focused on the module and cell manufacturing business.

 

• Favourable demand outlook for the solar industry

Amid growing emphasis for solar power in India, the company is positioned well to absorb the demand arising from the long-term plans of the government to increase generation from renewable sources. Introduction of protectionist measures by the government, such as BCD of 40% and 25% on imported solar modules and solar cells, respectively, from April 2022 and implementation of ALMM along with incentivising domestic players under the PLI scheme increase the cost competitiveness of domestic modules vis-à-vis that of imported ones. In addition, government-approved schemes such as Kisan Urja Suraksha Utthan Mahabhiyan, Central Public Sector Undertaking (CPSU) and rooftop scheme, will further push up demand.

 

• Recently commissioned capex expected to stabilise in the near term

In July 2021, the company commissioned 500 MW module and cell manufacturing line, which is in the stabilisation phase. Another 250 MW is likely to be commissioned in May 2022. These facilities will start operating at optimum utilisation in the near term, which along with heathy orders should substantially improve the revenue of the company. The capacity will also allow the company to service demand for mono-PERC (passivated emitter and rear cell)/bifacial technology, which along with the economies of scale is also expected to drive improvement in operating margins over the medium term.

 

• Healthy order book providing revenue visibility

The group companies have a cumulative order book of ~900 MW (~Rs 2,000 crore) for modules and cells (from reputed customers such as O2 Power and L&T), which will be executed over the next 12-15 months, providing healthy revenue visibility. Revenue is expected at Rs 950-1,000 crore in fiscal 2022, lower than expectation, owing to the impact of the third wave on operations, delay in getting working capital lines and stabilisation issues in the new capacity. Also commissioning of 250 MW capacity was delayed and the capacity is now expected to be commissioned in May 2022 which along with healthy order book provides revenue visibility.

 

Weaknesses:

• Susceptibility to intense competition, regulatory changes and volatility in raw material prices

The company is exposed to increasing competition given the large capacity additions planned in the domestic market with various levels of integration. The implementation of BCD will make Indian players more cost-competitive than their Chinese counterparts; however, the risk of significant reduction in prices by Chinese players to lessen the impact of BCD persists. Also, growth is vulnerable to changes in government policies and regulations as it can impact demand.

 

Silicon wafer, the main input in the manufacture of cells, is primarily imported from China. Prices of key inputs such as polysilicon, aluminium and copper have risen sharply lately. Though the company has price-variation clauses for majority of its raw materials and undertakes order-backed procurement to mitigate this risk, any sharp rise in input cost will need to be managed effectively.

 

Significant capacity additions planned by domestic players over the medium term may further intensify the competition.

 

• Exposure to project execution risks

The company’s plan to increase capacity by adding 750 MW module and 1,378 MW cell manufacturing line or optimal combination within the same range has been put on hold. It has now entered into agreement with Azure Power India Pvt Ltd (Azure) to install a 1,000-MW cell and module line. The plant will be set up as a joint venture (Premier, 74%; Azure, 26%) and total expected cash outlay of Rs 700 crore will be funded through Rs 45 crore equity from Azure, Rs 130 crore equity which was infused by GEF Capital Partners in the last fiscal, and debt. Financial closure is likely in the near term, and the plant is expected to commence operations end of fiscal 2023. Also, as part of the agreement, Azure will offtake around 30% capacity which, along with healthy demand, mitigates demand risk. Azure is expected to infuse Rs 55 crore in PEL in fiscal 2023, which should support the liquidity of the company. Also, PEL and Premier Energies Photovoltaic Pvt Ltd (PEPPL; 'CRISIL BBB+/Positive/CRISIL A2') have planned capex of Rs ~50 crore towards capacity expansion of ~500 MW, which will be funded through equity infused by GEF Capital Partners and internal accrual.

 

While this exposes the company to project execution risk, CRISIL Ratings draws comfort from the track record of the company with the recently commissioned capacity. However, timely completion of the project and commensurate ramp-up will remain key monitorables.

 

• Moderate capitalisation and debt coverage indicators

The capital structure of the company is likely to remain moderately leveraged because of the debt-funded capex. While the leverage will increase in the interim, CRISIL Ratings believes the offtake risk will remain low considering the strong focus of the government on the solar segment, price benefits and protectionist measures. However, the ability of the company to scale up operations post completion of the ongoing capex and improve its leverage and coverage metrics will remain a key monitorable.

 

While gearing is expected to increase to ~1.8 times as on March 31, 2023, due to debt-funded capex, the interest coverage ratio may hover at 2.8-3 times over the medium term. The company received subsidy of Rs ~32 crore for PEPPL which has been used to prepay debt and is expected to receive additional Rs ~24 crore in fiscal 2023 which will also be used to reduce debt. As a pure-play module manufacturer, the working capital cycle will remain stable. Inventory is estimated to have increased in fiscal 2022 owing to importing higher than anticipated raw materials and cells for order execution fiscal 2023 onwards. The working capital requirement is likely to reduce over the medium term, including inventory of 60-90 days and similar credit from suppliers.

Liquidity: Adequate

Cumulative net cash accrual of ~Rs 250 crore in fiscals 2023 and 2024 will sufficiently cover debt obligation of ~Rs 140 crore. Bank limit utilisation averaged 60-70% and cash and equivalent stood at Rs 180 crore across PEL and PEPPL, which support liquidity. Enhancement of the working capital limit is in the pipeline, and once sanctioned, will cushion liquidity amid growing scale of operations.

Outlook: Positive

The company will continue to benefit from its established market position and the extensive experience of the promoter in the solar module manufacturing business. The ‘Positive’ outlook reflects the expected ramp-up in volumes and margin driven by stabilisation of capacity, robust order book and timely commissioning of capex.

Rating Sensitivity factors

Upward factors

• Healthy ramp-up of commissioned capacity, with revenue at Rs 1,300-1,400 crore on a sustained basis, while maintaining healthy profitability
• Improvement in debt coverage indicators backed by better accrual and/or faster-than-expected debt reduction

 
Downward factors

• Slow ramp-up in operations and operating margin at 7-8% on a sustained basis
• Substantial delays in project execution resulting in time and cost overruns
• Stretched working capital cycle leading to higher reliance on borrowing

About the Company

Incorporated in 1995 by Mr Surender Pal Singh, PEL is one of the largest integrated (solar cell and module) manufacturing facilities (capacity wise) in India. Its facility in Sangareddy, Telangana, has total module production capacity of 1,250 MW and solar cell manufacturing line of 750 MW. The company is undergoing capacity expansion, which will enhance the cell and module capacity above 2 GW.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	771	955
Reported profit after tax (PAT)	Rs crore	26	43
PAT margin	%	3.6	4.5
Adjusted debt / adjusted networth	Times	1.2	1.2
Interest coverage	Times	4.0	3.2

 

Status of non cooperation with previous CRA:

PEL did not cooperate with Brickwork Ratings India Pvt Ltd (BRICKWORKS), which has classified it as non-cooperative vide release dated January 24, 2022. The reason provided by BRICKWORKS is non-furnishing of information for monitoring of rating.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Facility	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating
NA	Cash Credit *	NA	NA	NA	5	NA	CRISIL BBB+/Positive
NA	Cash Credit	NA	NA	NA	26	NA	CRISIL BBB+/Positive
NA	Cash Credit $$	NA	NA	NA	3	NA	CRISIL BBB+/Positive
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	3.75	NA	CRISIL BBB+/Positive
NA	Letter of Credit	NA	NA	NA	42	NA	CRISIL A2
NA	Letter of Credit $	NA	NA	NA	8	NA	CRISIL A2
NA	Letter of Credit *	NA	NA	NA	33	NA	CRISIL A2
NA	Standby Letter of Credit	NA	NA	NA	8	NA	CRISIL A2
NA	Bank Guarantee	NA	NA	NA	64	NA	CRISIL A2
NA	Bank Guarantee ^	NA	NA	NA	8	NA	CRISIL A2
NA	Bank Guarantee **	NA	NA	NA	21.25	NA	CRISIL A2

*interchangeable with standby letter of credit

**interchangeable with letter of credit

$interchangeable with bank guarantee and SBLC

$$interchangeable with working capital demand loan (WCDL)

^ interchangeable with letter of credit and SBLC

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Premier Energies Ltd	Full	Wholly owned subsidiary
Premier Energies Photovoltaic Pvt Ltd		Wholly owned subsidiary
Premier Solar Powertech Pvt Ltd		Subsidiary
Premier Energies Global Environment Pvt Ltd		Wholly owned subsidiary
Premier Photovoltaic Gajwel Pvt Ltd		Wholly owned subsidiary