Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the bond programme of SJVN Limited (SJVN). CRISIL Ratings has also withdrawn its rating on the company’s commercial paper programme of Rs.900 crore at the company’s request as there is no amount outstanding against the rated amount. The withdrawal is in line with the CRISIL Ratings' withdrawal policy.

 

The ratings reflect SJVN’s strong business risk profile, driven by stable cash flow, robust financial risk profile and the strategic importance of the company to the Government of India. These strengths are partially offset by exposure to risks related to the implementation of large capital expenditure (capex) projects and weak credit risk profiles of customers.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SJVN and its subsidiaries and joint ventures (JVs). This is because all these entities, collectively referred to as SJVN, are under a common management and have strong business and financial linkages.

 

The ratings also factor in the support expected from the central government, which owns 59.92% stake in the company and is under the administrative control of the Ministry of Power with its nominee on the board. Moreover, the government has guaranteed a part of the debt (around Rs 1,500 crore as on March 31, 2022). Furthermore, the company is playing an active role in achieving the government’s objective of cross-border hydropower development as well as achieving the target of renewable capacity addition in the country. The government has granted Miniratna status to SJVN and is expected to continue providing need-based support.

 

Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong business risk profile, driven by stability of cash flow

SJVN has a stable operational portfolio of 1,912 megawatt (MW) of hydropower plants that form more than 90% of the total operational capacity. These plants have long-term power purchase agreements (PPAs) and regulated tariff structure that allow recovery of the entire cost, including a fixed return on equity based on approved capital cost, subject to achievement of normative parameters notified by the Central Electricity Regulatory Commission (CERC) for each plant. The company has a decade-long track record of operating at more than normative level, resulting in high stability in cash flow. The plant availability factor for both the hydro power plants (Nathpa Jhakri and Rampur-Himachal Pradesh) was 106% during fiscal 2022 (105% during the previous fiscal as well), which is well above the normative levels of 90% and 85%, respectively. The remaining wind and solar power assets of 103.2 MW also have healthy tariff and provide additional cash flow. CRISIL Ratings believes SJVN’s operating performance is likely to sustain over the medium term as the regulated tariff structure should provide stability to cash flow.

 

Robust financial risk profile

The financial risk profile is supported by comfortable debt protection metrics and healthy capital structure. Gearing was low at 0.5 time and cash and equivalents large at around Rs 2,900 crore as on March 31, 2022, despite significant dividend payouts over the past years. A part of the debt comprises a foreign currency loan for its Rampur Bushahr hydro power plant that is guaranteed by the state government. The gearing ratio, although expected to increase, should remain comfortable, despite significant capital expenditure (capex) planned over the next few years. The upcoming capex will be funded in a debt-to-equity ratio of 70:30 or 80:20 and the equity contribution will be funded through internal cash accrual.

 

Strategic importance to and support from the government

The central government holds a majority equity stake of 59.92% in SJVN, while the Government of Himachal Pradesh has a 26.85% stake. The company plays a key role in achieving the central government’s objective of optimally tapping the hydropower potential in the northern region, as well as cross-border hydropower development. Furthermore, it is under the administrative control of the Ministry of Power, whose nominee is on SJVN’s board. The Miniratna status gives it greater operational autonomy and discretion to set up projects, up to Rs 500 crore, without the express consent of the government. Also, the government’s majority ownership provides access to need-based or viability gap funding support. Furthermore, the government has guaranteed the entire debt of the Rampur hydro power project (around Rs 1,500 crore as on March 31, 2022).

 

Weaknesses:

Exposure to risks related to large ongoing projects

The company has planned capex of more than Rs 50,000 crore over the next 10 years across the hydro, thermal and solar segments. The under-construction hydro power projects have an aggregate capacity of 1,836 MW (including through subsidiaries and JVs) and are located in Nepal, Bhutan, Himachal Pradesh and Uttarakhand while the others are in the pre-construction, investment approval and survey and investigation stages. The thermal coal-based plant of 1,320 MW at Buxar, Bihar, has 85% of its capacity tied-up in the state, while a coal block has been allocated for meeting fuel requirement. Its implementation is being supported by NTPC Ltd (‘CRISIL AAA/Stable/CRISIL A1+') through consultancy services. These hydro and thermal projects would have their costs recoverable under the regulated regime of CERC, subject to achievement of stipulated normative availability norms. In case of any cost or time overruns arising in any of them, regulatory approval will be required for pass-through tariff. Any disallowance of costs may impact the cash flow available for debt servicing. In addition, the company is executing multiple solar projects of around 1.5 GW, which is expected to be completed during the next 2-3 years. The company is also planning to expand its renewables portfolio by adding another 15 GW of solar capacities by fiscal 2030. 

 

All these projects will be funded in a debt-to-equity ratio of 70:30 or 80:20. Consequently, debt is expected to increase to more than Rs 25,000 crore in the next five years from around Rs 7,000 crore as on March 31, 2022. Cash accrual from the operational and upcoming projects will be largely sufficient to fund the equity requirement for the capex. Moreover, the company is also in the process of securitisation of part of the cash flows from NJHPS. However, execution risks in these large projects and the long gestation of hydro power projects should moderate the return on capital over the medium term. Furthermore, two hydro projects of 900 MW and 600 MW in Nepal and Bhutan, respectively, are being implemented through inter-governmental agreements and two more of 679 MW and 490 MW have also been awarded to SJVN recently. This has exposed the company to geo-political risks as well. Given the large expansion plans, the company will remain exposed to project implementation risks, over the medium term, and timely execution of these projects will remain a key rating sensitivity factor.

 

Exposure to weak credit profiles of counterparties

The company has PPAs with various state electricity distribution companies (discoms) that have weak financial health and, therefore, SJVN is exposed to the risk of delays in payments. Regular receivables (excluding unbilled revenue and bills discounted) as on March 31, 2022, reduced to Rs 574 crore as on March 31, 2022 (equivalent to 87 days) compared to Rs 853 crore a year earlier (equivalent to 127 days), due to receipt of the Aatmanirbhar Bharat package and timely collections of current dues. More than 90% of the dues as on March 31, 2022, were from Jammu & Kashmir. The receivables are expected to reduce over the medium term with the new Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. The counterparty risks are mitigated by the presence of various payment security mechanisms, such as sales backed by letters of credit, tripartite agreements between the central government, the Reserve Bank of India (RBI) and state governments, and incentive schemes for timely payment. Timely collection of receivables will remain a key monitorable.

Liquidity: Superior

Cash and equivalents (around Rs 2,900 crore as on March 31, 2022), annual cash accrual  and unutilised bank lines (more than Rs 250 crore as on July 31, 2022 factoring loan against fixed deposits, working capital demand loan and short term loan) should be adequate for meeting debt obligation and capex requirement. Despite large capex commitment, the company is expected to maintain liquidity of over Rs 1,000 crore at all times. The dividend outflow will also be in accordance with the funds required for capex. Commissioning of under-implementation capacities at regular intervals will support cash accrual and liquidity.

Outlook: Stable

CRISIL Ratings believes SJVN will maintain its credit risk profile over the medium term, backed by efficient operations, regulated tariff structure and comfortable debt protection metrics. However, it will remain exposed to project implementation risks for its ongoing capacity expansion.

 

ESG profile

CRISIL Ratings believes that SJVN’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The power sector has a significant impact on the environment owing to higher emissions, water consumption and waste generation. This is because generation of conventional power involves high dependence on natural resources, mainly coal. However, SJVN is into renewable energy generation and hence it has no dependence on fossil fuels such as coal/gas. The sector also has a social impact due to its nature of operations affecting local community and health hazards involved. SJVN is focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• ESG disclosures of the company are evolving and are being strengthened.
• SJVN is currently a 100% renewable energy company and aims to become one of the largest players in the sector in India with a target of 50 GW by 2040.
• Company has a well-defined environment policy, which covers all the activities undertaken by SJVN towards the environment. In addition, the company continuously monitors the projects based on environmental policy. 
• SJVN has been engaging locals around the projects/offices for activities such as vehicle hiring, material handling, hospitality, housekeeping, waste handling and horticulture. This has created direct and indirect employment of local populace and also led to entrepreneur development. 
• The governance structure is characterised by more than 40% of the company’s board comprising independent directors. However, there is no split in chairman and MD positions. It has a committee at board level to address investor grievances and also puts out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. SJVN’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowings in its overall debt and access to both domestic and foreign markets.

Rating Sensitivity factors

Upward Factors

• Significant equity infusion, leading to substantial improvement in the financial risk profile
• Sustained increase in cash flow, along with timely commissioning of projects within stipulated cost, and sustenance of low receivables

 

Downward Factors

• Any change in the support philosophy or significant reduction in the shareholding of the central government
• Substantial time and cost overruns in under-construction projects, leading to weakening of the financial risk profile
• Weakening of operating performance or sustained delays in recovery of dues from customers, impacting cash flow and debt servicing

About the Company

SJVN, a Miniratna, Category-I and Schedule –‘A’ Central Public Sector Entity under the administrative control of the Ministry of Power, was incorporated on May 24, 1988, as a JV of the central government and Himachal Pradesh state government. SJVN is now a listed company with 59.92% and 26.85% shares, respectively, with these two governments and the remaining 13.23% with the public.

 

The company operates in the power generation segment with total hydropower capacity of 1,912 MW in Himachal Pradesh, wind capacity of 97.6 MW in Maharashtra and Gujarat, and solar capacity of 5.6 MW in Gujarat. In addition, it operates 86 km 400 KV transmission line across the Indo-Nepal border through a JV with Powergrid Corporation of India Ltd and IL&FS. SJVN is presently implementing hydro, thermal and solar power projects in Himachal Pradesh, Uttarakhand, Bihar and Gujarat, as well as in neighbouring Nepal and Bhutan.

Key Financial Indicators (Consolidated)*

Particulars	Unit	2022**	2021
Operating income	Rs.Crore	2478	3,051
Profit After Tax (PAT)	Rs.Crore	990	1,646
PAT Margin	%	33.9	53.9
Adjusted debt/Adjusted networth	Times	0.5	0.2
Adjusted interest coverage	Times	12.2	100.2

*As per analytical adjustments made by CRISIL Ratings

**based on abridged financials published by SJVN in stock exchange

Any other information: Not applicable