Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on bank facilities and commercial paper of TAQA Neyveli Power Company Private Limited (TAQA Neyveli).

 

The ratings continue to reflect the company’s strong business risk profile, backed by a favourable tariff structure and healthy operating efficiency, robust financial risk profile, and support expected from the parent, Abu Dhabi National Energy Company (TAQA), if required. These strengths are partially offset by exposure to counterparty risk and support to group companies (including dividend payout).

Analytical Approach

The ratings on TAQA Neyveli factor in support expected from the parent, TAQA. CRISIL Ratings also believes TAQA Neyveli will, in case of exigencies, receive distress support from TAQA for timely repayment of debt, considering the ownership and shared name. 

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; ‘CRISIL A (CE)/Negative’) 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% in the ten fiscals through 2020, resulting in recovery of the entire fixed cost, along with annual incentives. The availability was impacted in the current fiscal (75.7% during April – November 2020) due to technical failure in the turbine and is expected to affect the recovery of fixed cost to some extent. However, the technical issue was corrected in December 2020 and availability should improve and remain above normative levels going forward. The plant load factor (PLF) (33.3% and 61.7% during the eight months of the current fiscal and previous fiscal, respectively) was also impacted by lower demand due to Covid-19 pandemic. While PLF may improve over the medium term with recovery of demand, it does not impact fixed cost recovery.

 

• Strong financial risk profile

Debt protection metrics are robust aided by healthy cash accrual and absence of long-term debt. The company repaid project debt in fiscal 2015, and has not availed any term debt since. Working capital limit of Rs 50 crore has been largely unutilised, as operations are managed efficiently. Cash and equivalents (Rs 29 crore as on November 30, 2020) also supports liquidity. Capital expenditure (capex) of about Rs 410 crore, towards adhering to fuel emission norms over the next two years, will be funded through debt (70%) and equity (30%, mainly through internal accrual). Dividend outflow will be dependent on the equity requirements for the capex and working capital requirements. 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 approval for tariff revision, will remain key monitorables.

 

• Support from the parent, TAQA, if required

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. Recently (effective from July 1, 2020), TAQA merged with AD Power consolidating generation, transmission and distribution assets of the entities. This has created a leading integrated utility in the Emirate of Abu Dhabi and is expected to strengthen 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. Its losses increased to Rs 12,623 crore in fiscal 2019 (provisional) from Rs 7,599 crore the previous fiscal. Aggregate technical and commercial (AT&C) losses reduced marginally to 15.08% from 15.96%. While it is a significant improvement from 24.7% in fiscal 2015, it remains much higher than the Ujwal Discom Assurance Yojana (UDAY) target of 13.8%. Tamil Nadu had taken over a part of TANGEDCO's debt under UDAY (Rs 22,815 crore in fiscal 2017). However, with nil tariff revision since fiscal 2015 and continued losses, external debt continued to be high at around Rs 1,13,438 crore as on March 31, 2019 (provisional) as against Rs 1,01,173 crore a year ago.

 

While the receivables (excluding unbilled revenue) from TANGEDCO remained under control (Rs 175 – 185 crore) during fiscals 2018 and 2019, it increased to Rs 264 crore due to the national lockdown imposed in March 2020 to contain the spread of Covid-19. It further increased to Rs 365 crore as on November 30, 2020 due to delay in the payments from TANGEDCO. The company has received some funds from PFC/REC liquidity infusion in December 2020 and has eased the working capital intensity to some extent. However, the financial health of TANGEDCO and the receivables position, will remain key rating sensitivity factors for TAQA Neyveli.

 

• 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 fiscal 2020, the company had not declared dividend as it needed to meet the liquidity requirement during the current fiscal impacted by Covid-19 pandemic as well as for equity contribution for the upcoming capex (to adhere to energy efficiency norms). Extent of dividend payout will remain a key rating sensitivity factor.

 

In the past, TAQA Neyveli had supported its parent’s renewable energy project, Himachal Sorang Power Pvt Ltd, in India. This project, even after multiple time and cost overruns, failed to commence operations due to an accident in fiscal 2016. TAQA Neyveli had fully provided for its investment of Rs 102 crore in the project in fiscal 2016. Though CRISIL Ratings does not expect any fresh investment by TAQA Neyveli in any new projects, any additional support by the company to group entities will remain a key rating sensitivity factor.

Liquidity: Strong

Cash and equivalents reduced to Rs 29 crore as on November 30, 2020 from Rs 128 crore a year ago mainly owing to delays in the payments from TANGEDCO. However, liquidity is supported by largely unutilised bank lines (over the 12 months through November 2020) of Rs 50 crore, ability to defer the dividend payout and no debt during the four fiscals through 2020. Capex for the energy efficiency unit, is to be funded through debt (70%) and internal accrual (30%), through a lower dividend payout. CRISIL Ratings thus expects internal accrual, cash and equivalent, and unutilised bank limit to be sufficient to cover the incremental capex and working capital requirements.

Outlook: Stable

CRISIL Ratings believes TAQA Neyveli will maintain its stable cash flow over the medium term, driven by its availability-based tariff structure, assuring full recovery of fixed cost, subject to the specified operating performance parameters being met.

Rating Sensitivity factors

Upward factors

• Significant and sustained improvement in realisations from TANGEDCO, keeping overall receivables below 60 days
• Timely completion of ongoing capex without further cost overruns, and its recovery through tariff revision, along with healthy operating performance

 

Downward factors

• Significant delay in receipt of payment from TANGEDCO, weakening liquidity
• Weakening of financial risk profile, due to considerable increase in debt on account of cost overrun in implementing the Flue gas desulphurization capex, or lower than 80% of project cost approved by the regulator
• Substantial support to group companies (including dividend payout)

About the Company

TAQA Neyveli, a wholly-owned subsidiary of TAQA, owns and operates a 250-megawatt lignite-based power plant at Neyveli in Tamil Nadu. It has a long-term PPA, valid till fiscal 2032, with TANGEDCO. TAQA is the ultimate holding company of TAQA Neyveli through its subsidiaries, CMS Generation Neyveli Ltd and TAQA Power Investments (India) BV, each of which have a 50% stake in TAQA Neyveli.

Key Financial Indicators*

As on/for the period ended March 31		2020	2019
Operating Income	Rs crore	711	642
Profit after tax (PAT)	Rs crore	135	129
PAT margin	%	19.0	20.1
Adjusted debt/adjusted networth	Times	0.0	0.0
Adjusted Interest coverage	Times	32	259

 

*As per CRISIL Ratings’ analytical adjustment

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating Assigned with Outlook
NA	Bank Guarantee**	NA	NA	NA	50	NA	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	50	NA	CRISIL AA-/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	25	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	300	NA	CRISIL AA-/Stable
NA	Commercial Paper	NA	NA	7-365 days	50	Simple	CRISIL A1+

**Interchangeable with letter of credit

*Interchangeable with working capital demand loan