Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Premier Energies Ltd (PEL) to 'Stable' from 'Negative’ and reaffirming the rating at 'CRISIL BBB+'; the short-term rating has been reaffirmed at 'CRISIL A2'. PEL is the operating and holding company of the Premier Energies group, which includes PEL and its subsidiaries.

 

The outlook revision factors in the healthy operating performance of the group with decent scale of operation and operating profitability, along with better liquidity profile. Consolidated revenue has increased to ~Rs. 1500 crore during first half of fiscal 2024 from Rs.1453 crore for the full fiscal 2023 (Rs 755 crore in fiscal 2022), while operating margin has improved to ~ 12% during current fiscal from ~ 6% in fiscal 2023. This was on account of increase in integrated operating capacity (increased to 2.7 GW of module and 2 GW of cell as on 31st December, 2023 against 1.05 GW in module and 0.75 GW in cell as on 31st December 2022), better utilization rates with healthy demand outlook and increasing share of export volumes at higher premium. Further, increase in operating cash accruals and improvement in working capital cycle has resulted in improved liquidity profile with consolidated free cash of ~Rs 50 crore and unutilized working capital limits of ~Rs 120 crore as on 19th December 2023.

 

Revenue visibility is healthy, with order book of around Rs 4,000 crore as on 23rd November 2023, along with expected sustenance of the robust operating margins at more than 12-14%. Timely execution of order book along with continued inflow of orders to support strong growth with operating margins at or above expectation along with sustenance of healthy liquidity and low working capital cycle will remain key rating sensitivity factor.

 

Ratings also factor in ongoing capex plan by the group to increase the capacity to 3.7 GW module and 3 GW of cell by fiscal 2025. Timely completion and stabilization of the same without material cost overruns will be a monitorable.

 

The ratings reflect the healthy business risk profile of the Premier Energies group, supported by its established market position in the domestic solar module manufacturing industry, 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 Government of India has given a one-time ALMM exemption on projects commissioned by March 2024.

 

The ratings are constrained by leveraged capital structure - albeit expected to improve going forward with expected improvement in operating cash accruals, susceptibility to intense competition, regulatory changes, volatility in raw material prices and timely stabilization of new capacities.

Analytical Approach

CRISIL Ratings has applied its criteria for rating entities in homogenous groups and combined the business and financial risk profiles of PEL and its subsidiaries, including Premier Energies Photovoltaic Pvt Ltd (PEPPL) and Premier Energies International Pvt Ltd (PEIPL). The entities, collectively referred to as the Premier Energies group, are in the same business, and have strong business and financial linkages and common promoters. Also, PEL has issued corporate guarantees for the debt facilities of its subsidiaries.

 

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 will continue to support the business. The group has one of the largest integrated (solar cell and module) manufacturing facilities (capacity-wise) in India and enjoys a sizeable share in the current installed capacity of 2 GW of cells and 2.7 GW of modules.

 

While the group had a module manufacturing line of 3 megawatt (MW) in 1995, its projects ranged from installing solar lanterns to village electrification and export of solar modules. It entered the solar EPC (engineering procurement and construction) 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 group is well-positioned 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. Government-approved schemes such as Kisan Urja Suraksha Utthan Mahabhiyan, Central Public Sector Undertaking and rooftop scheme are also pushing up demand.

 

Healthy order book providing revenue visibility

The group has a cumulative order book of ~1800 MW for modules and ~200 MW for cells (from reputed customers such as NTPC, IRCON, Shakti Pump), worth ~Rs.4,000cr to be executed over the next 4-6quarters, provides healthy revenue visibility. Revenue at a consolidated level is expected at around Rs 3,000 crore in fiscal 2024, In fiscal 2025, the group is likely to add another 1GW of module line and 1GW of TopCon cell line in order to further enhance its capacities and upgrade to the TopCon technology.

 

Increased scale of operations with improved operating margins

The group has witnessed increase in scale of operations to 2GW cell line and 2.7GW module line in December 2023 (0.75GW cell and 1.05GW module in December 2022), along with better utilization rates leading to two-fold increase in revenue from Rs 1,453 crore in fiscal 2023 to estimated Rs 3,000 crore in fiscal 2024. Further, operating margins has improved to ~12% during current fiscal from ~6% in fiscal 2023. Production and operating margin were impacted in the previous two fiscals on account of volatility in input prices, supply chain issues emanating from restrictions put in place by China to curb the Covid-19 pandemic, which led to non-availability of wafers and cells (key raw materials for cell and module manufacturing), along with delay in stabilization of PEPPL cell+module line operations. However, with stabilization of operational capacities, and improved supply chain dynamics have supported operating performance. Sustainability of margin in the near term will remain a key monitorable.

 

Weaknesses:

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

The group is exposed to increasing competition from domestic as well as imported modules. This is on account of large capacity additions planned in the domestic market to meet increasing demand. Furthermore, Indian manufacturers face competition from Chinese imports, which have witnessed significant reduction in module and cell prices during current fiscal due to supply glut in China amid restrictions imposed by US on Chinese imports. However, increasing integration of operations with new cell capacities and implementation of BCD provides the required support for the group to be cost-competitive against Chinese imports.  However, the risk of further material reduction in prices of imports impacting competitiveness of premier energy group will remain a key monitorable. Additionally, implementation of ALMM which is expected to boost demand for domestic modules will also remain a key monitorable as it can provide boost to company’s growth plans.

 

Though the group has price-variation clauses for most raw materials and undertakes order-backed procurement to mitigate this risk, any sharp rise in input cost may impact the demand levels in the domestic industry. Currently, the group has the second-largest cell manufacturing capacity at 2GW in India which helps its operating margins and supports it to cater to DCR module tenders. The capacity additions planned by other domestic players over the medium term and further intensification of competition will need to be monitored going forward.

 

Exposure to stabilisation and project execution risks

The group has set up a cell line with capacity of 1.25 GW and a module line of 1.4GW under a new entity PEIPL. PEIPL is promoted by PEL, which holds 74% equity while the rest is held by Azure. The cell line commenced operations in October 2023 and the module line in December 2023.

This poses stabilization related risks. Resultantly, timely completion of the project and commensurate ramp-up will remain key monitorable. The stabilization of these capacities needs to be tracked as there was a delay in the past while stabilizing PEPPL plant albeit due to other reasons. The company has learned from its past experience of stabilizing PEPPL plant and has taken the necessary steps to avoid occurrence of the same concerns for PEIPL line.

 

The group further plans to set up 1 GW module line under Premier Energies Global Environment Pvt Ltd (PEGEPL) and 1 GW TopCon cell line under PEPPL, which exposes it to project execution risk. CRISIL Ratings draws comfort from the group’s track record of executing projects under PEL, PEPPL and PEIPL.

 

Leveraged capital structure

The capital structure of the group is moderately leveraged with consolidated debt to Ebitda ratio (leverage ratio) and TOL/ TNW ratio (gearing ratio) at 8.28 times and 4.03 times respectively as on March 31, 2023 (10.15 time and 2.32 times respectively as on March 31, 2022). This has been on account of the debt-funded capital expenditure (capex) of around Rs 650 crore over the past two fiscals, along with volatile and reduce operating profitability during the past two fiscals. The debt coverage indicators have also remained moderate with interest coverage ratio and ratio of NCA to debt at 1.58 time and 0.05 times in fiscal 2023 (1.27 times and 0.03 times in fiscal 2022).  However, credit metrics are expected to improve over the medium term with expected gearing, NCA to debt and interest coverage ratios of 2.00 times, 0.30 times and 4.25 times in fiscal 2025. The improvement is to be supported by expected increase in profitability and net worth and the same will be a key monitorable.

 

Additionally, the group has sizeable capex plans in the long term with a target to achieve 20 GW module, 10 GW cell and 5 GW wafer capacities by fiscal 2028. It also plans to incur capex for technology upgradation. The said capex plans are expected to be funded through debt: equity mix of 70:30. Expected improvement in operating accruals is to support the equity requirement for the capex, though the group could also explore options for external equity raise to support the capex so that capital structure does not get impacted from current levels and shall be a key monitorable.

Liquidity: Adequate

Consolidated annual net cash accrual are expected to be ~Rs 250 crore in fiscal 2024 and ~Rs 400 crore in fiscal 2025 which should sufficiently cover debt obligation of ~Rs 150 crore in fiscal 2024 and ~Rs 250 crore in fiscal 2025. Additionally, bank limit utilisation (fund-based limit) was 70-80% (on average) over the 12 months through October 2023, which further supports liquidity profile. As on October 1, 2023, cash and equivalents at the group level stood at ~Rs 203 crore which also aids liquidity. This coupled with undrawn term debt line should suffice to fund incremental capex and working capital requirement.

Outlook: Stable

The Premier Energies group is expected to sustain growth in its operating performance amid healthy demand scenario, favourable government policies and increasing operational capacities. This should support in sustaining an adequate financial and liquidity profile.

Rating Sensitivity Factors

Upward Factors

• Healthy ramp-up of existing and upcoming capacities, coupled with operating margin sustaining at or above 12-13% at group level, resulting in significant improvement in operating cash accrual
• Improvement in debt coverage indicators backed by increased accrual and/or faster-than-expected debt reduction, leading to significant improvement in capital structure and debt coverage ratios from current levels

 

Downward Factors

• Slower-than-expected ramp-up in operations or higher costs, resulting in operating margin at or below 8-9% at group level, and thereby, significantly low cash accrual
• Substantial delays in project execution, resulting in time and cost overruns
• Stretched working capital cycle, leading to higher reliance on borrowing and moderation in liquidity profile

About the Group

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. It has a 300 MW operating module line at its plant in Annaram, Telangana. PEPPL, a 100% subsidiary of PEL, has a 1,000 MW module and 750 MW cell line located in Raviryala, Telangana. PEIPL, a 74% subsidiary of PEL, has set up a 1.4 GW module and 1.25 GW cell line in Telangana. Cumulatively, as of December 2023, the group has total module capacity of 2.7 GW and 2 GW of cell capacity. The group derives a small portion of revenue from solar EPC business.

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	12.00	NA	CRISIL BBB+/Stable
NA	Cash Credit**	NA	NA	NA	5.00	NA	CRISIL BBB+/Stable
NA	Cash Credit$	NA	NA	NA	2.00	NA	CRISIL BBB+/Stable
NA	Cash Credit^^	NA	NA	NA	7.00	NA	CRISIL BBB+/Stable
NA	Letter of credit	NA	NA	NA	18.75	NA	CRISIL A2
NA	Letter of credit & Bank Guarantee	NA	NA	NA	62.25	NA	CRISIL A2
NA	Letter of credit & Bank Guarantee#@	NA	NA	NA	66.00	NA	CRISIL A2
NA	Letter of credit & Bank Guarantee#	NA	NA	NA	16.00	NA	CRISIL A2
NA	Non-Fund Based Limit@	NA	NA	NA	6.00	NA	CRISIL A2
NA	Non-Fund Based Limit^	NA	NA	NA	35.00	NA	CRISIL A2
NA	Fund Based Facilities*	NA	NA	NA	4.00	NA	CRISIL BBB+/Stable
NA	Term loan	NA	NA	Mar-25	14.28	NA	CRISIL BBB+/Stable

*Credit Cards (Purchase)
^Pre Acceptance
@Credit equivalent limit
#Interchangable with Standby Letter of Credit
$Interchangeable with PCFC/PSFC
**FCNRB & Line of credit for STL
^^Interchangeable with Working Capital Demand Loan