Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the long-term bank facilities and commercial paper of Tata Power Renewable Energy Limited (TPREL).

 

The ratings continue to reflect the TPREL group’s (TPREL and Walwhan Renewable Energy Pvt Ltd [WREL, rated ‘CRISIL AA/Stable’] along with all its special-purpose vehicles {SPVs}, renewable assets housed under Tata Power standalone and Tata Power Solar System Ltd) large portfolio of wind power (~0.9 gigawatt (GW)) and solar power (~ 2.4 GW) renewable assets well-diversified both in terms of geography and counterparty; and healthy revenue visibility driven by long-term power purchase agreements (PPAs). Additionally, the ratings factor in the operational track record of sizeable portfolio, healthy internal cash generation translating into comfortable consolidated average debt service coverage ratio (DSCR), expected liquidity of around 6 months of debt servicing, and strategic importance and strong financial and managerial support received by the TPREL group from its parent. These strengths are partially offset by exposure to receivables risk, implementation risk for new capacities (~ 1.5 GW), and to risks inherent in wind and solar-powered renewable assets.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TPREL, WREL, all of their SPVs, renewable assets in The Tata Power Company Ltd - TPCL (standalone) and renewable assets in Tata Power Solar Systems Ltd, collectively referred to as the TPREL group. This is in-line with CRISIL Ratings’ criteria for rating entities in homogenous groups.

 

The group houses all the wind and solar renewable power assets of TPCL. All the entities under the group are in the same business and have common management and treasury. Furthermore post-debt servicing, excess cash flow would be available for covering any shortfall across the group. Moreover, liquidity is maintained at TPREL and WREL in the form of working capital limit and cash. TPREL has demonstrated a track record of supporting WREL and its SPVs.

 

After arriving at the ratings of the TPREL group, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support expected from Tata Power. The support factors in TPREL’s strategic importance to Tata Power and the strong financial and managerial support provided to TPREL from the parent company.

 

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

Strategic importance to, and strong financial and managerial support from, the parent

The capital employed in the TPREL group is around one-fourth of the overall capital employed of TPCL, indicating the increasing importance of the renewable business in the overall strategy of the parent. Further, TPCL plans to have 50-60% of its total generation capacity from non-fossil fuel assets over the next 7-8 years. The renewable portfolio provides strong economic incentive and helps diversify risk at the portfolio level. The operational capacity of the TPREL group has progressively grown to ~ 3.3 GW as on March 2022. The parent has supported the TPREL group by infusing unsecured perpetual securities of Rs 3,895 crore, as on March 31, 2021. It had also extended corporate guarantee to a part of the debt contracted by TPREL and WREL to refinance their high-cost debt in the past and therefore could do the same in the future as well. Besides, the senior management of Tata Power is present on the board of TPREL and WREL. Given the strategic importance and strong economic incentive, the TPREL group will remain critical for Tata Power. Moreover, management shall adopt a calibrated expansion approach and is expected to receive need-based support from the parent.

 

Well-diversified portfolio in terms of geography and maturity

The TPREL group is one of the largest players in the Indian renewable energy space with around 3.3 GW of installed capacity and around 1.5 GW in under-construction projects. The group has a well-diversified proportion of solar-wind power capacity of 72:28 and geographical spread across 12 states. This helps mitigate risk of resource and location-specific generation variability. The operational portfolio is fairly matured, ~60% of which has a track record of above 3 years, and nearly 80% having maturity of more than a year. The projects primarily have Tier-I vendors ensuring quality equipment to mitigate technology risk. The well-diversified portfolio with pan-India coverage and established operational track record will continue to support the credit risk profile.

 

Healthy revenue visibility and low offtake risk combined with robust DSCR

Around 98% of the operational portfolio has PPAs with a 25-year tenure, while the rest have a tenure of 13-15 years. Furthermore, the weighted average tariff of portfolio is over Rs 5 per kilowatt-hour (kWh), leading to healthy overall returns. This lends high predictability and stability to revenue with low demand risk. Consolidated average DSCR for the portfolio is expected to remain robust.

 

Weaknesses

Exposure to moderate receivables risk, mitigated by diversity in counterparties

Long-term PPAs with distribution companies (discoms) having relatively weaker financial risk profiles and payment track record pose receivables risk. Receivables at a consolidated level for TPREL has improved to below 6 months level in fiscal 2022 from around 6 months in fiscal 2021. As on March 31, 2022, receivables from discoms such as Tamil Nadu and Andhra Pradesh were at above 6 months. The weak financial health of the state discoms could lead to increased delays in payments, which continues to constrain the standalone credit risk profile of the TPREL group. This risk is mitigated by diversity in counterparties with over 15 discoms and expected liquidity of around 6 months of debt servicing maintained at the group level. The company is also resorting to bill discounting to faster realise receivables.

 

Exposure to risks inherent in operating renewable assets

Cash flow of wind power projects is sensitive to plant load factor (PLF), which is entirely dependent on wind patterns that are inherently unpredictable. Several assets in TPREL’s wind portfolio have been underperforming its P90 historically, but the company has been looking to increase the PLF by improving operations and maintenance and machine availability. Also, in case of a solar power plant, generation depends on irradiation levels around a plant’s location and annual degradation of the solar panels. Degradation of solar panels may increase exponentially in the later part of the life of an asset. Though geographical diversity mitigates the risk related to generation, exposure to inherent operational risks related to renewable power assets constrains the rating.

 

Susceptibility to implementation risk owing to growth plans through organic or inorganic route

The group remains exposed to project risk with around 1.5 GW of capacity under construction. Nonetheless, CRISIL Ratings draws comfort from the group’s track record of execution and calibrated expansion strategy with prudent funding mix. The group is expected to commit substantial funds to a renewable project only if there is a strong visibility on evacuation and PPA.

Liquidity: Strong

Cash and cash equivalents for TPREL stood at about Rs 300 crore as on April 30, 2022 while undrawn fund-based lines was Rs 293 crore, as on March 31, 2022. Cash accrual is expected at over Rs 1,200 crore each in fiscals 2022 and 2023. Any shortfall is expected to be met through refinancing or need-based support from the parent. Capital expenditure (capex) of around Rs 4000 crore, expected over fiscals 2023 and 2024, towards commissioning of close to 1.5 GW capacity, should be funded through a mix of debt and internal accrual.

Outlook: Stable

The outlook is based on CRISIL Ratings’ rating outlook on the debt instruments and bank facilities of Tata Power. Any change in the ratings or rating outlook on Tata Power will lead to a corresponding change in the rating or rating outlook on TPREL.

 

CRISIL Ratings believes the TPREL group will benefit from its strategic importance to Tata Power, due to its ability to generate substantial cash accrual supported by healthy weighted average tariff and P90 PLFs. Also, a diversified portfolio will continue to support the credit risk profile.

Rating Sensitivity Factors

Upward Factors

• Upgrade in the rating of TPCL by 1 notch
• Significant reduction in debt

 

Downward Factors

• Downgrade in the rating of TPCL
• Materially higher than expected debt funded capex/acquisition
• Significant deterioration in PLFs or decline in tariffs adversely impacting the DSCR of the group
• Substantial decline in expected liquidity from around 6 months of debt servicing or significant delay in payment by counterparties

About the Company

TPREL, a wholly-owned subsidiary of Tata Power, has an operating capacity of ~3.3 GW.  This includes ~3.2 GW renewable capacity from TPREL – consolidated level and remaining from Tata Power standalone and other group companies. The consolidated capacity of TPREL group comprises ~0.9 GW wind and ~2.4 GW solar capacity located in 12 states.

 

TPREL has around 1.5 GW of capacities under construction.

Any other information: Not applicable