Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Premier Energies Ltd (PEL, part of the Premier Energies group) to ‘CRISIL A-/Positive/CRISIL A2+’ from ‘CRISIL BBB+/Stable/CRISIL A2’. The Premier Energies group includes Premier Energies Ltd (PEL) and its subsidiaries.

 

The rating upgrade is driven by strong improvement in business profile with increased scale of operations, healthy utilization rates and operating profitability, along with material improvement in financial profile with increased operating cash accruals and significant fund raising through recent Initial Public Offer (IPO) in September 2024, which resulted in fresh issuance with net proceeds of Rs 1,239 crores which will support ongoing capex and capital structure of the group.

 

The utilization rates in both cells and modules segments have ramped up significantly since last year, with effective average utilization rates of 81% for cells and 60% for modules in FY2024 (41% and 43% respectively in FY2023). The effective utilization rates have remained at similar levels in the current fiscal as well, indicating increased operational efficiency. The increased utilization was driven by healthy domestic as well as export demand for cells and modules along with stabilization of new capacities added by the group over the past 1-2 years. Implementation of approved list of module manufacturers (ALMM) scheme in April 2024 and increasing share of projects with Domestic Content Requirement (DCR) are leading to healthy demand for domestic modules and cells and should support healthy utilisation rates going forward as well. At a consolidated level, the group reported an operating income of Rs 3,159 crores and earnings before interest, taxes, depreciation, and amortization (Ebitda) of Rs 493 crores during fiscal 2024 (15.6% EBITDA margin) as compared to revenue of Rs 1,442 crores and EBITDA of Rs 92 crores, during fiscal 2023 (6.4% EBITDA margin). Further during Q1FY2025, the consolidated operating income and ebitda was Rs 1,657 crores and Rs 370 crores respectively (22% EBITDA margin). Also, healthy consolidated order book of Rs 5,474 crores as on September 30, 2024 provides good revenue visibility for the current fiscal as well.

 

CRISIL Ratings has also taken note of the ongoing capex plans of ~ Rs 4,000 crore by the group, wherein the  group plans to add 1 GW of TopCon cell in PEPPL and 4 GW Module line + 4 GW TopCon Cell line in PEGEPL over the next couple of years, for which land and enabling infrastructure is understood to be in place. Further, IPO proceeds as well as operating cash accruals are expected to support a sizeable part of the ongoing capex, although the group has tied up adequate term loans for the said capex plans. While the planned capex will enable further increase in scale of operations with higher cell level integration, timely completion and stabilization of the planned capacity expansion without any time and cost overruns will be key monitorable.

 

The rating action is also supported by PEL’s strong financial risk profile which is likely to remain healthy despite the sizeable capex over the medium term, supported by increasing operating cash accruals, healthy networth and reduced leverage. As on March 2024, the company’s net leverage (ratio of net debt to EBITDA), and interest coverage ratio stood at 2.0, and 4.2 times respectively, improved from the levels of 5.4 and 1.6 times respectively in FY2023. Further, the same is expected to remain healthy over the medium term. The positive outlook reflects CRISIL Ratings’ expectation that the group will witness continued increase in scale of operations with high utilization rates, timely commissioning and ramp up of capacities, along with sustenance of healthy financial profile and liquidity, at or above current levels, which can result in a rating upgrade.

 

The ratings continue to reflect PEL’s 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 ALMM, basic customs duty (BCD) and a proposed approved list of cell manufacturers (ALCM) similar to ALMM which is likely to boost demand for domestic cells. However, susceptibility to intense competition, regulatory changes, volatility in raw material prices and timely stabilization of new capacities will remain key monitorables going forward.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PEL and its subsidiaries and associates to arrive at the ratings

 

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 total domestic installed capacity with its current installed capacity of 2 GW of cells and 4.1 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 domestic demand outlook for the solar industry which should support increasing volumes: 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. Further, MNRE is looking to introduce an approved list of models and manufacturers for solar PV cells (ALCM). Under ALCM, all modules approved under ALMM are required to use cells from ALCM list. Further, all projects where ALMM is applicable also need to use cells from ALCM list. This will support the demand for domestic cells.

 

• Healthy order book providing revenue visibility: The group has a cumulative order book of ~1545 MW for modules and ~2797 MW for cells (from reputed customers such as NTPC, IRCON, Shakti Pump), worth ~Rs.5,474 crores to be executed over the next 3-4 quarters. This translated to an order book to sales ratio of 1.7 (vis-à-vis FY24 operating income). The order book is expected to be delivered over the next 3-4 quarters thereby, providing ample revenue visibility and indicating a continued increase in the scale of operations.

 

• Increased scale of operations with improved operating margins: The group has witnessed increase in scale of operations to 2GW cell line and 3.4GW module line in March 2024 (4.1 GW installed module capacity currently). Driven by increased capacities and better utilization rates, revenue increased from Rs 1,442 crores in fiscal 2023 to Rs 3,159 crores in fiscal 2024. Additionally, operating margins also improved from ~6.4% in fiscal 2023 to ~15.6% during fiscal 2024 and further improved to 22.3% in Q1 of fiscal 2025. Stabilization of operational capacities and improved supply chain dynamics have supported operating performance with higher capacity utilization. Further, higher share of exports also boosted margins in fiscal 2024. However, sustainability of margin in the near term will remain a key monitorable.

 

• Improved financial profile with increasing scale and recent fund raise through IPO: The financial profile of the group significantly improved in fiscal 2024 with its net leverage and interest coverage ratios improving to 2.0 and 4.2 times respectively from 5.4 and 1.6 times in fiscal 2023.  The financial profile is likely to further improve in fiscal 2025 on account of healthy operational performance and the successful IPO funding. The group’s gearing ratio is expected to witness a significant improvement from 4.4 times in fiscal 2024 to 2.3 times in fiscal 2025. Furthermore, the group’s net leverage is expected to remain below 2.0 times while its interest coverage is likely to remain healthy at 3.5-4.0 times.

 

Weaknesses:

• Susceptibility to intense competition, regulatory changes, and volatility in raw material prices: PEL 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 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 and ALMM 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.

 

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: PEL is undertaking sizeable capacity expansion with addition of 1 GW of TopCon cell in PEPPL and 4 GW Module line + 4 GW TopCon Cell line in PEGEPL. This will enable it to become an almost fully-integrated player leading to economies of scale.

 

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 albeit due to other reasons. The company has learned from its past experience of stabilizing plants and has taken the necessary steps to avoid occurrence of the same concerns for PEIPL line. CRISIL Ratings draws comfort from the group’s track record of executing projects in both modules and cells segments.

Liquidity: Adequate

Consolidated annual net cash accrual was Rs 327 crores in fiscal 2024 and is expected to be around ~Rs 571 crores in fiscal 2025 which should sufficiently cover debt and interest obligation of ~Rs 250-300 crores in fiscal 2025. This coupled with undrawn term debt line should suffice to fund incremental capex and working capital requirement.

Outlook: Positive

PEL is expected to sustain the growth momentum in its operating performance amid healthy demand scenario, favourable government policies and increasing operational capacities. This is likely to result in an expansion in its scale of operations and support strong financial and liquidity profile.

Rating sensitivity factors

Upward factors

• Healthy utilization rates and increasing sales volume, coupled with consolidated operating margin sustaining at or above 13-15% at group level, resulting in significant improvement in operating cash accruals from current levels
• 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

Downward factors

• Slower-than-expected ramp-up in operating rates or materially lower than expected realisations, resulting in consolidated operating margin sustaining below 12-14%, and thereby, significantly lower than expected cash accruals
• Substantial delays in project execution, resulting in material time and cost overruns, leading to higher than expected debt funded capex and weakening of the capital structure
• Stretched working capital cycle, leading to higher reliance on borrowing and moderation in liquidity from current levels

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. It has a 300 MW operating module line at its plant in Annaram, Telangana. PEPPL, a 100% subsidiary of PEL, has a 1,400 MW module and 750 MW cell line located in Raviryala, Telangana. PEIPL, a 74% subsidiary of PEL, has set up a 1.6 GW module and 1.25 GW cell line in Telangana. PEGEPL, a 100% subsidiary of PEL, also has 1.1 GW of module manufacturing capacity. Cumulatively, as of June 2024, the group has total module capacity of 4.1 GW and 2 GW of cell capacity. The group derives a small portion of revenue from solar EPC business.

Any other information: Not Applicable