Key Rating Drivers & Detailed Description

Strengths

Strong business risk profile

The company’s take-or-pay power purchase agreement (PPA) with the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) ensures complete recovery of fixed cost, subject to the plant achieving normative parameters. Proximity and access to coal mines of NLC India Ltd ('CRISIL AAA/Stable') ensure fuel supply. Healthy operating efficiency emanates from plant availability exceeding the norm of 68.5%. The company has maintained availability of over 80% for the 10 fiscals through 2020, resulting in recovery of the entire fixed cost, along with annual incentives. The availability was impacted in fiscal 2021 (79.19%) due to technical failure in the turbine. However, the technical issue was corrected in December 2020 and availability has improved in fiscal 2022 (84.8% during April to November 2021). The availability should remain above normative levels going forward. Plant load factor (PLF) (72.1% and 33.3% during the eight months of fiscal 2022 and fiscal 2021, respectively) improved with increase in power demand that was impacted during fiscal 2021 due to the Covid-19 pandemic.

Strong financial risk profile

Debt protection metrics should remain robust, aided by healthy cash accrual and absence of long-term debt. The company repaid project debt in fiscal 2015, and has not availed of any term debt since then. Utilisation of the working capital limit worth Rs 50 crore has been low at 17% (for the 12 months through November 2021), as operations are managed efficiently. Cash and equivalents (Rs 29 crore as on November 30, 2021) also aid liquidity. Further, the company is in the process of enhancing the working capital lines by additional Rs 150 crore, which will further improve liquidity. Timelines for capital expenditure (capex) of about Rs 410 crore, towards adhering to fuel emission norms, have been revised from December 2022 to December 2024. This will be funded through debt (70%) and equity (30%, mainly through internal accrual). While the company has not provided dividend over the last two fiscals, going forward, the dividend outflow, will be dependent on the existing cash balance, equity requirement for the capex and incremental working capital requirement. Nonetheless, financial risk profile will remain healthy as amount incurred towards capex, is expected to be recovered through tariff revision. Timely implementation of the capex, within expected cost and capital cost approval for tariff revision, will remain key monitorables.

Need-based support from parent, TAQA

TAQA Neyveli, TAQA’s first investment in India, remains strategically important to the parent, because of profit generation and nil debt. TAQA also provides operational and management support to TAQA Neyveli through the latter’s senior management. TAQA's ownership and shared name, and TAQA Neyveli's strategic importance to the parent, will translate into support for TAQA Neyveli, if required. TAQA merged with AD Power effective from July 1, 2020, consolidating generation, transmission and distribution assets of the entities. This created a leading integrated utility in the Emirate of Abu Dhabi and boosted the financial risk profile of the entity.

Weaknesses

Exposure to counterparty risk because of sole customer, TANGEDCO

Cash flow remains susceptible to the risk of delays in payment by the sole customer, TANGEDCO, which remains a loss-making entity. This is due to the gap between average cost of supply and average revenue realised (ACS-ARR) which remains high (Rs 0.93 per unit in fiscal 2020 and Rs 1.13 per unit in fiscal 2019). The elevated ACS-ARR gap is because of no revision in tariff since fiscal 2015.

While the receivables (excluding unbilled revenue) from TANGEDCO remained under control (Rs 175-185 crore) during fiscals 2018 and 2019, it increased to around Rs 530 crore (as on November 30, 2021) over the last two years due to delay in the payments from TANGEDCO. The management has taken various efforts to improve the receivables position and so the working capital intensity is not expected to further balloon significantly over the medium term. However, financial health of TANGEDCO and the receivables cycle, will remain key rating sensitivity factors.

Support to group companies (including dividend payout)

TAQA Neyveli has traditionally followed a high dividend payout policy (as reflected in payout of Rs 140 crore, Rs 132 crore and Rs 94 crore in fiscals 2017, 2018 and 2019, respectively). However, during fiscals 2020 and 2021, the company had not declared dividend as it needed to meet the liquidity requirement impacted by delay in payments from TANGEDCO. The extent of dividend payout will depend on the working capital position and equity contribution requirements for the upcoming capex (to adhere to energy efficiency norms). In addition, TAQA Neyveli is not likely to make any fresh investments in new projects. However, extent of dividend payout or any additional support to group entities will remain key rating sensitivity factor.

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