Key Rating Drivers & Detailed Description

Strengths:

Stable cash flow from the O&M services business to support overall debt servicing:

The Group currently has ~13.5 GW of operating fleet under O&M. While the fleet under O&M reduces with decommissioning of WTGs, post completion of the design life, new generators delivered and commissioned get added to the fleet every fiscal. Revenue from O&M services has been steady as this is contractual activity over a fixed timeframe and at contracted price. Also, escalation in revenue is inbuilt into the contracts, ensuring stability of operating margin over a period. The Group has demonstrated stability in revenue and profitability of O&M services business even in stressed times in the past. Stable cash flow with earnings before interest, depreciation, tax and amortisation (EBIDTA) above Rs 700 crore per fiscal from the O&M services business is expected to support debt obligation.

SGSL, O&M services business, is in the process of raising NCDs of ~Rs. 2,100 crores, which would be utilized to retire the entire outstanding term loan in SEL. However, post consummation of NCD issuance in SGSL, cashflows of SGSL will be ringfenced for servicing NCD holders basis a well-defined waterfall mechanism.

Strong market position in the wind turbine segment supports the business risk profile

The Group has a successful track record of project execution with technical expertise, evident from the healthy market share of 30-35% in the WTG business over the past many years. The company’s healthy market position should help to obtain orders in the long run, subject to working capital availability. The order book as on 30th May 2023 was 1,542 MW.

Weaknesses:

Operating leverage in the WTG business

Sustenance of revenue in the WTG business is extremely critical on account of operating leverage arising from substantial fixed costs. In the past, on account of these fixed costs, the group has suffered substantial operating losses due to slowdown in revenue from this business. CRISIL Ratings understands the group had undertaken cost reduction activities in operations, manpower and other expenses, resulting in reduction of fixed costs to ~Rs 5.0 billion per fiscal from about Rs 10.0 billion in the past. However, any delay in execution of orders will result in fixed cost under recovery adversely impacting cash flow. While the measures undertaken may reduce operating leverage, it is expected to remain high and expose operating profitability to variability in revenue.

High operating leverage may result in losses in the WTG business in the event of lower-than-expected offtake. The company had order book of 1,542 megawatt (MW) as on 30th May 2023, which is likely to be executed over 12-24 months.  The company had been dependent on customer-backed financing to execute orders in the last fiscal which had constrained growth. Its near-term plans to avail additional project-specific funding remains a key monitorable.

Working capital-intensive operations:

The WTG business, accounting for over 65% of the overall revenue in FY2022, is highly working capital intensive. Furthermore, recovery of working capital over the next two fiscals is expected, which will support cash flow. In case of delays in recovery or in arranging for working capital requirement, overall liquidity may get constrained, impacting cash flow.

Modest financial risk profile at present:

Leverage and debt protection metrics are weak since SEL defaulted in the past and undergone restructuring. The company has refinanced its existing debt in May 2022 replacing 16 lenders with two new lenders. Further, the company has completed rights issue of Rs. 1200 crore and utilized Rs. 900 crores to prepay its debt obligation. The company had negative networth due to past losses which recently turned positive, majorly on account of the rights issue and gain on derecognition of OCDs and CCPS.

Liquidity: Adequate

The company has debt service obligation of more than Rs. 961 crores in fiscal 2024 and fiscal 2025 which it plans to repay from operating cash flows of ~Rs 1,450 crores over the next 2 fiscals. Further the unencumbered cash and equivalent stood around Rs. 367 crores as on March 31, 2023. The company has planned capex of about Rs 150 crore per fiscal over fiscal 2024 and 2025, which it plans to fund through internal accrual.

Key Financial Indicators

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