| Tata Power Solar Systems Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long term bank facilities of Tata Power Solar Systems Limited (TPSSL) to 'Positive' from 'Stable' and has reaffirmed the rating at ‘CRISIL AA'. The short-term rating and commercial paper has been reaffirmed at ‘CRISIL A1+’.
The revision in outlook reflects a corresponding revision in CRISIL Ratings' outlook on the long-term rating of TPSSL’s parent, Tata Power Renewable Energy Limited (TPREL; ‘CRISIL AA/Positive/CRISIL A1+’). This reflects strong linkages of TPSSL with the Parent.
Further, the ratings factor in developments on the reorganisation of the renewable energy business of Tata Power Company Ltd (TPCL) (‘CRISIL AA/Positive/CRISIL A1+’) following announcement made in April 2022. With respect to the announcement to reorganize TPCL’s renewable business and investment by Blackrock Real Assets, both tranches of investment of Rs 2,000 crore each were received in Fiscal 2023, following which most of the structural changes were incorporated along with, overall dilution of ~9-11% equity stake by TPCL in TPREL. TPREL, therefore, is now the holding company for all the renewables businesses of TPCL, including engineering, procurement and construction (via 100% holding in Tata Power Solar System Limited (TPSSL)); electric vehicles; solar cell and module manufacturing (4 GW facility in TP Solar Ltd); and renewable generation. However, TPCL continues to be the holding company of TPREL.
Further, TPREL has announced merger of its various subsidiaries/SPVs with itself, through the announcement in January 2023, which includes certain renewable generation entities (including WREL) and TPSSL. Currently, the board approval for the proposed merger has been received and is awaiting other requisite approvals. CRISIL Ratings understands that the proposed merger completion could take more than 12 months and hence developments on the said front will be monitorable. However, the proposed merger of TPREL’s subsidiaries with itself is not expected to have any material impact on the rating of TPREL as existing rating of the company takes consolidated approach of TPREL and its subsidiaries.
The ratings for TPSSL factors in high strategic importance of the company to the growth strategy of its parent, TPREL (‘CRISIL AA/Positive/ CRISIL A1+’), and expectation of steady growth in revenue and profitability supported by higher focus on the engineering, procurement and construction (EPC) business. The operations of the company shall support the expansion plans of TPREL, which is a renewable platform and key area of growth for ultimate parent, TPCL.
Further, during fiscal 2023, revenue declined to to Rs 6906 crore, decline by ~20% over fiscal 2022, despite healthy order book of ~Rs.7800 Crore as on March 2022. It was due to deferment in execution of some of the projects amid rising cost of material procurement. However, CRISIL understands that the company is in discussion with the respective client for the said projects and the matter is expected to be resolved soon. However, progress on the said matters and ramp up in execution of order book will remain key monitorable.
Eventhough, there was decline in revenue booked, margins remained healthy at ~4% as compared to 2.2% in fiscal 2022.
Further, order execution for this fiscal is expected to ramp up given substantial decline in imported module prices and healthy order book of TPSSL at ~Rs 16000 crore as on September 30, 2023.
In near term, revenue is expected to be driven by the large order book and growth in solar pump segment, while margins are also expected to improve, given the decline in module and cell prices globally. That said, captive module and cell manufacturing capacity of the parent (TPREL) at consolidated level has reached to over 5,000 megawatt (MW) from around 1,100 MW. This is expected to provide support to the operating margins of TPSSL over the medium term and developments on this front will remain a monitorable.
Orders from TPREL contributes significantly to the backlog of TPSSL and have helped to enhance competitiveness. Hence, TPSSL should play an important role in the expansion strategy of TPREL. With renewables being a key focus area for the parent, TPSSL should remain critical to the former’s overall growth strategy. The central government's focus on achieving its solar target of 100 gigawatt (GW) should also benefit TPSSL in the long run.
The ratings of TPSSL continue to factor in the strong operational, managerial and financial support TPSSL expects from its parent, TPREL, and the improving revenue visibility. These strengths are partially offset by modest financial risk profile and vulnerability to intense competition and unfavorable changes in regulations. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the extent of financial and managerial support available to TPSSL from Tata Power Renewable Energy Limited. |
Key Rating Drivers & Detailed Description Strengths:
TPSSL benefits from Tata Power’s brand in the domestic solar power market. Amid growing emphasis for solar power in India and Tata Power's increasing focus on renewable energy through its subsidiary TPREL, the company fits well into the parent's long-term plans to increase generation capacity from renewable sources. Operations and treasury are closely integrated and managed by TPREL. TPSSL will thus continue to play a central role in TPREL’s growth strategy and receive strong support from its parent.
TPSSL is one of India’s top companies to undertake EPC projects for setting up solar power plants. The current pipeline comprises orders from TPREL and the rest mainly from public sector undertakings. EPC contracts from players such as TPREL, NTPC Ltd and SJVN account for over 75% of the company's backlog. The company has robust order book as on September 2023 of Rs ~16,000 crore. Manufacturing operations remain moderate with less than 25% of orders comprising solar pumps and rooftop installations.
Weaknesses:
The competitive position of the company as a domestic component manufacturer in the on-grid solar photovoltaic (PV) segment remains constrained by the difference in pricing as compared to global peers. These players have large vertically integrated operations, including manufacturing of polysilicon, wafer and cells; and access to low-cost funding. Despite duties on module and panel imports, domestic manufacturing remains uncompetitive. Heightened competition in the EPC business leads to moderate profit margin. Growth also remains vulnerable to changes in government policies. However, the central government's focus on achieving a steep target of 100 GW should lend comfort in the long run.
Adjusted total debt to adjusted networth was 0.7 times as at March-2023. As of March-2023, TOL/TNW ratio moderated to 4.0 times from 6.3 times as on March 31, 2022. Debt protection metrics were healthy, with interest coverage ratio of 3.7 times in fiscal 2023. Though short-term debt is expected to increase over the medium term to support incremental working capital requirement, strong accrual along with no major debt-funded expansion will support healthy capital structure. |
Liquidity: Strong The company is expected to generate net cash accrual of Rs 450-550 crore and Rs. 600-700 for the fiscal 2023 and 2024, respectively with no debt repayment obligation in fiscal 2024 and fiscal 2025. Liquidity is also supported by unencumbered cash and equivalents of Rs ~135 crore as on September 2023 as well as need-based support from the parent. |
Outlook: Positive The outlook is based on CRISIL Ratings' rating outlook on TPREL's (parent of TPSSL) debt instruments and bank facilities.
The company will continue to benefit from the strong support it receives from TPREL. Revenue and profitability should ramp up over the medium term, backed by a healthy order flow. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company TPSSL was set up in 1989 as Tata BP Solar India Ltd, a 51:49 joint venture between the BP group and the Tata group. The company got its current name after Tata Power bought 51% equity stake from BP Alternative Energy Holdings Ltd in June 2012. Post structural changes due to Blackrock deal at TPREL level, 100% equity was transferred to TPREL from TPCL in fiscal 2023.TPSSL is among India's largest solar companies, manufacturing solar cells and modules, undertaking EPC of solar projects, and designing and developing other solar products. It has a solar PV manufacturing unit in Bengaluru with capacity of ~1.1 GW. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Interchangeable with non-fund based facilities |
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