Detailed Rationale

CRISIL Ratings' ratings on the bank facilities of Sterlite Power Transmission Ltd (SPTL) continues on 'Rating Watch with Developing Implications'

 

The ratings were placed on watch following the announcement by SPTL that it has filed an application of the Scheme of Demerger with the National Company Law Tribunal (NCLT) on October 10, 2023. By way of the demerger scheme, SPTL will transfer its infrastructure business, which includes engineering, procurement and construction (EPC) contracts for construction of power transmission lines, and its investments in various transmission special purpose vehicles (SPVs) in India and Brazil into Sterlite Grid 5 Ltd (SGL 5), currently a wholly owned subsidiary of STPL, subject to receipt of the required approvals. STPL will retain the products and master system integration (MSI) businesses (collectively called the solutions business).

 

As part of the scheme, SPTL has filed to issue shares in a ratio of 1:1 ratio to its existing shareholders. Consequently, the shareholding of SGL 5 will mirror that of SPTL. The demerger is intended to simplify the business structure, unlock the value of the infrastructure business for more growth opportunities and to enhance flexibility in accessing growth capital.

 

The overall demerger process is tentatively expected to be completed by the first quarter of fiscal 2025. The Appointed Date of the Scheme shall be January 1, 2023.

 

CRISIL Ratings will analyse the impact of the demerger on the credit risk profile of SPTL once the segregated financials are available for detailed analysis. CRISIL Ratings understands that a portion of the rated facilities may move to SGL 5, subject to requisite approvals. Hence, CRISIL Ratings will continue to closely monitor the said transaction and will remove the ratings from watch and take final rating action once there is clarity on the movement of the rated facilities and/or when transaction is concluded. SPTL will continue to meet the obligation on all the rated instruments in the interim.

 

SPTL clocked revenue from operations of Rs 3,937 crore in fiscal 2023 (Rs 3,805 crore in fiscal 2022). The earnings before interest, tax, depreciation and amortisation (Ebitda) margin from operations improved to 14.1% from 8.8%, aided by a strong uptick in margins across segments (products, MSI and EPC). Revenue remained steady in the first half of fiscal 2024, albeit with some moderation in margins across business lines. SPTL believes it is on track to achieving its projected financials for fiscal 2024.

 

Strong order book of ~Rs 4,300 crore for products and ~Rs 1,310 crore for MSI indicates healthy revenue visibility for the coming quarters. In the transmission EPC business, SPTL has been awarded three new projects under the Green Energy Corridor (GEC) in Rajasthan, and funding is in place for two of these.

 

The ratings continue to reflect the strong business risk profile of SPTL, backed by its established market position in the power transmission and solutions segments, healthy operating efficiency, and comfortable financial risk profile because of adequate debt protection metrics. These strengths are partially offset by exposure to project execution risk.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SPTL and its wholly owned subsidiary, Sterlite Convergence Ltd, as both are in the same business and have common management.

 

CRISIL Ratings has moderately integrated several transmission asset SPVs that SPTL holds in India and Brazil. As a policy, the management offers support via equity and covers any cost overrun in the domestic projects. Moreover, debt raised by the SPVs does not have any recourse to SPTL. These SPVs are held through intermediate holding companies and SPTL has provided an undertaking that these companies do not have any external debt, except Sterlite Grid Ltd 16 (SGL 16). CRISIL Ratings has fully consolidated the debt of SGL 16 as it is guaranteed by SPTL. The Brazilian business is expected to fund its requirement through own accrual or external equity support, with no further support from SPTL.

 

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 position across diversified business segments in the power transmission sector: SPTL has successfully commissioned 12 assets in India on a build, own, operate and manage basis, and has five more at varied stages of development. Of the commissioned assets, 11 have been sold to India Grid Trust (IndiGrid; ‘CRISIL AAA/CCR AAA/Stable’). SPTL is one of the largest private players in the domestic transmission space in terms of projects won based on levelised tariff. Of the 13 transmission projects won in Brazil, five have been sold, three have achieved COD and the remaining are in various stages of construction. Recently, SPTL was awarded three new projects in Rajasthan for the GEC under the tariff-based competitive bidding (TBCB) route.

 

SPTL has a strong presence in the power conductor and cable manufacturing business. The company upgrades the existing transmission network under the MSI division, where it has around 40% market share of the intra-state transmission space. Established market position across diversified segments should support growth in revenue and profitability over the medium term.

 

• Healthy operating efficiency: Operating margin should remain healthy over the medium term, aided by a strong order book in the solutions and transmission segments. Margins in the first half of fiscal 2024 have been impacted primarily by one-time cost adjustment in one of the infra projects close to commissioning. Operating efficiency is likely to improve over the medium term owing to significant project visibility and strong execution capabilities.

 

• Comfortable financial risk profile: The company has negligible long-term and working capital debt. It prepaid its long-term debt in fiscal 2021 through proceeds from the sale of the transmission SPVs. This improved the total outside liabilities to tangible networth (TOLTNW) ratio and gearing to 2.6 times and 0.5 time, respectively, as on March 31, 2021, from 4.6 times and 2.3 times, respectively, a year earlier. The TOLTNW improved to 2 times as on March 31, 2023, while gearing remained at 0.7 time. Interest coverage ratio moderated to 3.6 times in fiscal 2023 from 4 times in fiscal 2022 on account of higher interest due to increase in suppliers credit availed during fiscal 2023.

 

SPTL plans substantial expansion in the transmission infrastructure segment. Investments in transmission assets will be funded through internal cash accrual or equity from external sources.

 

To enable expansion without leveraging the balance sheet, SPTL had entered into a 50:50 partnership with AMP Capital for four of its under-construction assets in India, with an initial investment plan of USD 150 million (around Rs 1,100 crore). AMP Capital had already infused around Rs 800 crore in the projects as on March 31, 2023.

 

SPTL does not plan to make any further investment in Brazil. It has monetised its investment in the four transmission SPVs in Brazil, and the surplus generated, future monetisation, as well as local fundraising plans should cover equity commitments for under-construction projects over the medium term. Any significant investment in the Brazilian subsidiary will be a key monitorable.

 

SPTL’s existing borrowings include majorly short-term, non-fund-based working capital debt along with long-term debt raised at SGL 16. Any significant increase in long-term debt on account of major capex or investment in subsidiaries is a key monitorable.

 

Weakness:

• Exposure to project execution risk: The company faces execution risk inherent in infrastructure development projects as it has been building greenfield transmission infrastructure assets on its own in India and Brazil. These risks include delays in getting the requisite approvals for under-construction projects. SPTL, as the developer and EPC contractor, undertakes the entire implementation risk and is liable to support cost overruns, if any.

 

Currently, SPTL is implementing eight transmission projects in India at a total project cost of around Rs 13,000 crore. These are in varied stages of construction. Another project under GEC is in the pipeline.

 

Delays in getting right of way (RoW) approvals and forest clearances have impacted project execution in the past, resulting in cost overruns. In the past, the amount spent to meet such overruns has been claimed as additional tariff under the Change in Law clause. However, as these instances may lead to short-term liquidity mismatches, project execution risk remains monitorable.

Liquidity: Adequate

SPTL prepaid its long-term debt by utilising the proceeds from the sale of NER II and IndiGrid units. SPTL had term borrowing of Rs 100 crore as on December 31, 2023, Any further expansion in transmission assets is expected to be through internal accrual and external equity support. As on December 31, 2023, unencumbered cash balance stood over Rs 300 crore and unutilised bank limit averaged ~Rs 280 crore in the trailing six months.

Rating Sensitivity factors

Upward factors:

• Sustained improvement in the financial risk profile despite large, under-construction pipeline
• Strong revenue growth and operating margin above 15%, leading to higher-than-expected cash accrual

 

Downward factors:

• Consolidated net debt (excluding non-recourse project debt contracted by SPVs) of over Rs 750 crore
• Delay in resumption of no debt policy for equity funding of transmission projects in India or substantial change in stance of no support towards the Brazil business
• Significant and sustained weakening of operating profitability or cash flow

About the Company

SPTL is a part of the Vedanta group, which has diversified interests across metals, mining and oil and gas. Twin Star Overseas Ltd (a Vedanta group entity) holds 71.4% stake in SPTL, while the remaining is with public shareholders.

 

In June 2016, the power infrastructure business of Sterlite Technologies Ltd (‘CRISIL AA/Negative/CRISIL A1+’) was demerged into a new entity, SPTL.

 

SPTL is one of the largest private sector companies in bid-out transmission projects in India. It has a track record of timely project execution even in difficult terrains. The company has monetised 11 of its projects in India and recorded healthy equity gains in most of them.

 

The company is one of the largest manufacturers of power conductors and cables and has diversified presence across power transmission solution segments such as power conductors, power cables and MSI.

 

In November 2020, SPTL merged with its wholly owned subsidiary, Sterlite Power Grid Ventures Ltd (SPGVL).

 

SPTL is also the co-sponsor of IndiGrid, which was originally sponsored by SPGVL in October 2016. In September 2020, Kohlberg Kravis Roberts was inducted as the co-sponsor of the trust. In August 2020, SPGVL sold 14.7% of its stake in IndiGrid for Rs 840 crore. While the company does not hold any stake in IndiGrid as on March 31, 2022, it continues to be the co-sponsor of the trust.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-fund based limit^	NA	NA	NA	2275	NA	CRISIL A1/Watch Developing
NA	Non-fund based limit	NA	NA	NA	1170	NA	CRISIL A1/Watch Developing
NA	Non-fund based limit*	NA	NA	NA	520	NA	CRISIL A1/Watch Developing
NA	Non-fund based limit&	NA	NA	NA	150	NA	CRISIL A1/Watch Developing
NA	Non-fund based limit**	NA	NA	NA	200	NA	CRISIL A1/Watch Developing
NA	Proposed non-fund based limits	NA	NA	NA	210	NA	CRISIL A1/Watch Developing
NA	Fund- Based Facilities^	NA	NA	NA	155	NA	CRISIL A/Watch Developing
NA	Fund- Based Facilities	NA	NA	NA	20	NA	CRISIL A/Watch Developing
NA	Fund-Based Facilities*	NA	NA	NA	50	NA	CRISIL A/Watch Developing