Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of The Tata Power Company Limited (Tata Power).

 

CRISIL Ratings has withdrawn its ratings on Rs 36 Cr of Non convertible debentures as the same were redeemed. The withdrawal is in line with CRISIL Rating’s withdrawal policy (See Annexure 'Details of rating withdrawn' for details). CRISIL Ratings has received independent confirmation and other relevant documents that these instruments are fully redeemed.

 

The rating reaffirmation reflects the improving business risk profile of the company with sustained improvement in operating profitability across the power generation and distribution business in line with expectations. The company has sustained its healthy financial risk profile, with consolidated net leverage (ratio of net debt[1] to adjusted earnings before interest, tax, depreciation and amortization [Ebitda]) of 3.71 times as on March 31, 2024, and expected to remain so over the medium term.

 

During fiscal 2024, the company reported healthy consolidated adjusted Ebitda[2] of more than Rs 12,000 crore (around Rs 11,500 crore in fiscal 2023 and around Rs 9,600 crore in fiscal 2022). This supported the capital expenditure (capex) of around Rs 13,333 crore and kept consolidated gross debt at around Rs 49,000 crore during the period. Further, during Q1-FY25, the operating profitability has remained strong with consolidated adjusted EBITDA of Rs. 12,055 crore and net debt of Rs 44,678 crore, in line with expectations.

 

The increase in operating profitability of Tata Power since fiscal 2023 is mainly on account of better profitability of its Mundra Ultra Mega Power Project (Mundra plant), improved efficiency of the Odisha distribution companies (discoms) and continued growth in the renewable energy (RE) business with steady capacity addition. The company continues to benefit from its integrated operations, robust power demand in the country supporting higher plant load factor (PLF) of its power plants, healthy execution in the RE segment, which has also been supported by moderating module prices. The improving operating profitability in distribution business, with reducing aggregate technical and commercial (AT&C) losses in Odisha and ongoing recovery of regulated assets in other discoms, have also helped.

 

As the company scales up operations, improving operating efficiency and steady cash creation in thermal generation and regulated business will support strong operating cash accrual, despite the reduction in earnings from coal mining business amid lower coal prices since last fiscal. Furthermore, increasing integration in the RE business through in-house module manufacturing and engineering, procurement, and construction (EPC) business will lend support going forward.

 

CRISIL Ratings expects the consolidated adjusted Ebitda of Tata Power to remain above Rs 13,000 crore in fiscal 2025 (Rs 12,055 crore in fiscal 2024 and around Rs 11,357 crore in fiscal 2023).

 

Tata Power has sizeable capex plans, mainly towards RE and distribution, over the medium term. The capex for fiscal 2024 was Rs.13,332 crore and is planned to be around Rs 15,000-20,000 crore in fiscal 2025. That said, CRISIL Ratings has taken note of the management’s intent to keep leverage in check. CRISIL Ratings expects that incremental debt is not likely to be more than ~50% of additional capex each fiscal. This will be supported by strong operating cash flow (with share of more than 80% from regulated distribution and steady generation business), which will keep consolidated net leverage comfortably below 4 times over the medium term. In fact, the consolidated leverage had reduced from ~ 4.5 times in fiscal 2022 to 3.8 times in fiscal 2023 and sustained below 4.0x in fiscal 2024.

 

CRISIL Ratings also notes the presence of large cash balance in Tata Power’s Odisha distribution business, though the same has not been considered for net debt computation as the cash is encumbered against customer deposits. If the said cash is deemed feasible by the company to be used to meet its funding requirements in the future, it will reduce the dependence on external financing and improve the leverage and liquidity profile.

 

The ratings also factor in the strong financial flexibility of Tata Power aided by being a part of the Tata group. The financial flexibility is also supported by the demonstrated ability of Tata Power to raise strategic growth funds (~Rs 4,000 crore raised during fiscal 2023 by selling ~10% stake in the RE business). This will help achieve the capex target while keeping leverage within the rating threshold.

 

CRISIL Ratings expects the healthy profitability of Tata Power’s regulated and stable business to improve on account of increase in growth capex, leading to healthy cash flow to support the said capex and sustenance of the consolidated net leverage. Same shall remain key monitorables.

[1]Net debt means gross consolidated debt adjusted for unencumbered cash and equivalents

[2]Adjusted Ebitda means consolidated operating profit of India businesses along with share of profits from joint ventures and associates

Analytical Approach

CRISIL Ratings has used a combination of full and proportionate consolidation of Tata Power companies.

 

CRISIL Ratings has fully consolidated the subsidiaries of Tata Power as these entities form the core of the company’s business. These include Tata Power’s Delhi Distribution Company Ltd (‘CRISIL A1+’); Maithon Power Ltd (MPL; ‘CRISIL AA+/Stable/CRISIL A1+’); Tata Power Renewable Energy Ltd (TPREL; ‘CRISIL AA+/Stable/CRISIL A1+’) Powerlinks Transmission Ltd (‘CRISIL AAA/Stable’), Tata Power Trading Company Ltd; Industrial Energy Ltd; and the special-purpose vehicles formed for the acquisition of coal entities in Indonesia, including Bhira Investments, Bhivpuri Investments and Khopoli Investments.

 

CRISIL Ratings has proportionately consolidated the share in profit after tax (PAT) for certain joint ventures and associate companies to the extent of Tata Power’s shareholding in them, to reflect support to the extent of its interests in these businesses. These companies include coal-operating entities in Indonesia: 30% in PT Kaltim Prima Coal and 26% in PT Baramulti Suksessarana Tbk.

 

CRISIL Ratings has treated Tata Power’s investment in Prayagraj Power Generation Co Ltd (Prayagraj) as a financial investment, given the minority stake held in the platform company, Resurgent Ventures Power Ventures Pte Ltd (Resurgent).

 

Please refer Annexure - List of entities consolidated, which captures the list of Tata Power companies, and their analytical treatment of consolidation,

Key Rating Drivers & Detailed Description

Strengths:

Stable cash accrual from regulated and renewable businesses

Tata Power earns more than 80% of Ebitda from its regulated and RE businesses, such as power generation, including the Mundra plant and distribution in Mumbai, power distribution in New Delhi, the 1050 megawatt (MW) capacity of MPL, and its transmission businesses. The balance life of the power purchase agreement (PPA) for generation assets, including MPL, the Mundra plant and the RE portfolio, spans more than 15 years, thus offering strong revenue visibility. Furthermore, the Mundra plant has been operating under Section 11 of the Electricity Act, 2003 (wherein the government has asked power generating companies to operate and maintain output to avoid any outage due to high demand), which has been extended till September 2024. Furthermore, discussions for supplementary PPAs for the Mundra plant are ongoing. The PPA of the power generation business for Mumbai (Trombay assets of around 930 MW) was extended by five years in November 2023. Distribution licenses with fixed returns for Mumbai, Delhi and Odisha are valid for another 15, 6 and 22 years, respectively. Significant improvement has been seen in operating efficiency of the Odisha discoms, surpassing AT&C targets set by the regulator for fiscal 2023. On the RE side, current generation capacity is ~10 gigawatt (GW) with ~4.7 GW operational and the balance under construction. The remaining PPA life of more than 12-15 years provides visibility for steady income over the medium term. Furthermore, backward integration in solar module manufacturing and decline in imported module prices will improve order execution of engineering, procurement and construction (EPC) contracts and generation capacities over the medium term. The proportion of cash flow from the regulated and RE businesses is expected to remain high, driven by the company’s focus on adding licenses in the distribution sector and RE generation segment.

 

Diversified business risk profile with presence across RE, generation, transmission and distribution businesses and across energy types

Tata Power had around 12.92 GW of capacity as on June 30, 2024 (excluding 1,980 MW of Prayagraj), including its thermal and clean energy generation businesses, which include around 4.7 GW (operational capacity) of RE capacity through TPREL. Its presence across the power value chain (generation, transmission and distribution, power trading, as well as fuel supply [imported coal mining and shipping]) cushions it from project-specific issues and helps achieve operating efficiency and better working capital management at the group level. Furthermore, ongoing commissioning and ramp up of solar cell plus module manufacturing capacity under TP Solar (Tata Power’s step-down subsidiary) will further mitigate risks related to project execution as the company focuses on growing in the RE space. While the module manufacturing capacity was commissioned in fiscal 2024, cell manufacturing capacity was commissioned in September 2024.

 

Strong financial flexibility

The company has strong financial flexibility, driven by stable and healthy cash accrual from the existing businesses and adequate liquidity. Though there are sizeable repayments due over the near to medium term, past trends of timely refinancing supported by being a part of the Tata group, which increases access to the capital market and the banking system, provides comfort. Tata Group has a 46.86% shareholding in Tata Power and the latter is one of the flagship companies of the group. Tata Power has also demonstrated its ability to raise funds (sold a minority stake in the RE business while TPCL still holds ~ 90% in the RE business) to support its business, which aides its financial flexibility.

 

Weaknesses:

Unviable project economics of Mundra plant in the past, plant operations and profitability supported by Section 11 of the Electricity Act

Losses incurred by the Mundra plant (previously housed under CGPL and merged into Tata Power on March 31, 2022) on account of unviable project economics adversely impacted Tata Power’s operating earnings during the past few years. The Mundra plant’s under-recoveries of fuel cost are primarily on account of the non-escalable variable charges component in the tariff. The plant has made efforts to improve operating efficiency and minimise under-recoveries by procuring coal from various sources. Coal mines in Indonesia offer a partial natural hedge to the Mundra plant’s operations. While profits from overseas coal mining companies helped support under-recoveries for the Mundra plant in fiscals 2022 and 2023, higher operating rates of the plant under continued extension of Section 11 (since May 2022) with full variable cost passthrough (except its share of profit in procurement of coal from own mines) has helped improve operating profitability since fiscal 2023.

 

Healthy power demand in the country and the continued extension of Section 11 provide visibility of operations for the Mundra plant. The plant is also in discussions with counterparties for finalising long-term supplementary PPAs with expected full fuel cost passthrough. However, progress in finalisation of the supplementary PPAs will remain a key monitorable.

 

Moderate leverage, expected to remain comfortable over the medium term despite healthy capex plans

Consolidated net leverage and gearing of ~3.7 and ~1.3 times, respectively, as on March 31, 2024, indicate a moderate capital structure for the company. Tata Power incurred capex of Rs 13,332 crore in fiscal 2024 and plans capex of Rs 15,000-Rs 20000 crore in fiscal 2025. CRISIL Ratings expects the said annual capex to be funded in a debt-equity mix of 1:1 or better. The capex is expected to boost operating profitability over the medium term with likely increase in revenue and operational integration. Thus, the net leverage is expected to remain comfortably within the rating threshold of less than 4.0x.

 

CRISIL Ratings has taken note of the sizeable debt obligation over the medium term. However, the company has a track record of successful and timely refinancing loans and of raising debt at competitive costs. Furthermore, the ratings factor in the management’s intent to elongate the debt tenure to support liquidity. This is reflected in the increase in the share of long-term debt in consolidated debt to 86% as on December 31, 2023, from 69% as on September 30, 2023, and 60% as on March 31, 2023.

Liquidity: Strong

Cash accrual was Rs. 8066 crore for fiscal 2024 and is expected above Rs 8,000 crore in fiscal 2025, which will help fund majority of the capex. While operating cash accrual will support the ongoing capex, maturing debt (around Rs 6,500 crore) in fiscal 2025 is expected to be largely refinanced given the strength of the company’s cash flow. As of 30th June 2024, consolidated cash and equivalents stood at Rs 10,630 crore. This includes cash lien marked for security deposits at distribution entities of nearly Rs 6,500 crore. Unutilised bank line of ~Rs 1,360 crore as of June 2024 also supports liquidity. Additionally, need-based support from the Tata group bolsters the financial flexibility for Tata Power.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes the Environment, Social, and Governance (ESG) profile of Tata Power supports its already strong credit risk profile.

 

The power sector has a significant impact on the environment owing to higher emissions, water consumption and waste generation. This is because the generation of conventional power involves high dependence on natural resources, mainly coal. The sector has a social impact as operations affect the local community and involve health hazards. Tata Power is focused on mitigating its environmental and social risks.

 

Key ESG highlights

 

• The company aims to become carbon neutral before 2045, 100% fly ash utilisation and zero waste to landfill before 2030. It is progressively reducing its dependence on fresh water and is taking measures such as rainwater harvesting to achieve water neutrality before 2030.
• It plans to increase its clean and green portfolio to 80% by 2030 and 100% before 2045.
• It aims to impact 80 million lives directly by 2027 through its corporate social responsibility (CSR) activities and achieve zero fatality across all entities
• Gender diversity is on par with peers, with around 10% women in leadership positions and ~8% in overall full-time workforce.
• The governance structure is characterised by 50% of its board comprising independent directors. Further, there is a split in the chairman and CEO positions. The company has a committee at the board level to address investor grievances and put out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of Tata Power to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

Given the regulated and stable nature of its businesses, Tata Power will likely generate strong and steady cash accrual over the medium term and sustain its healthy credit risk profile.

Rating Sensitivity Factors

Upward Factors

• More-than-expected improvement in business risk profile, supporting significant increase in annual operating profit on a sustained basis, resulting in better than expected return on capital employed
• Consolidated adjusted net leverage (ratio of net debt to adjusted Ebitda) sustaining below 2.5-3.0 times times

 

Downward Factors

• Net debt to Ebitda ratio above 4.0-4.3 times on sustained basis
• Any major debt-funded acquisition, weakening the financial risk profile

About the Company

Tata Power is India's largest integrated private power utility, with installed generation capacity of 12.9 GW as on June 30, 2024 (excluding 1.98 GW through a platform structure). The company is present across the power business spectrum, from generation (thermal, hydro, solar and wind) to transmission and distribution.

 

CGPL was formed to implement the Mundra plant, which has five units of 800 MW each. CGPL has been merged with Tata Power post receipt of the National Company Law Tribunal approval for the same dated March 31, 2022.

 

MPL, Tata Power's 74% joint venture with Damodar Valley Corporation, operates the Maithon project, which has two units of 525 MW each.

 

Powerlinks Transmission Ltd operates a 400-kV transmission line from Bhutan to Delhi.

 

Tata Power holds 30% and 26% stake in Indonesian coal mining companies, PT Kaltim Prima Coal and PT Baramulti Suksessarana Tbk, respectively. It had signed an agreement to sell 30% stake in Arutmin to the Bakrie family for USD 400 million (around Rs 2,800 crore), a majority of which has been realised.

 

The company also has a large dedicated RE portfolio under its subsidiary TPREL with ~10 GW of generation portfolio with ~4.7 GW operational and the balance under construction (800-1000 MW expected to be commissioned by the end of calendar year 2025). The company has also integrated backward with the commissioning of 4 GW solar module manufacturing facility in Tamil Nadu. Cell manufacturing facility is expected to be commissioned in the first half of fiscal 2025. The solar module and cell manufacturing facilities will support both, the EPC (order book of Rs 13,018 crore as on June 30, 2024) and generation portfolio of the company. It is also present in supportive segments such as EV charging, rooftop solar and solar pumps.

 

Tata Power has also acquired the 344-circuit km (cKm) TP Bikaner-III Neemrana-II Transmission Ltd to evacuate 7.7 GW of RE from the Bikaner complex in Rajasthan. It has also received letter of intent from REC development and Consultancy Ltd to acquire 160 cKm Jalpura Khurja transmission line connecting the Jalpura substation with the Khurja power plant.

 

In September 2016, Tata Power and ICICI Venture partnered to launch a power platform, Resurgent Power Ventures Pte Ltd (Resurgent), in Singapore, along with global investors. Resurgent will invest in operational and near-operational thermal, hydro, and transmission assets. In December 2019, Renascent Power Ventures Pvt Ltd, a wholly owned subsidiary of Resurgent, completed the acquisition of 75.01% stake in Prayagraj, which owns and operates a 1,980 MW supercritical power plant in Uttar Pradesh.  Furthermore, Resurgent acquired South East UP Power Transmission Company Ltd (intra state transmission asset in Uttar Pradesh; total length of ~1500 km) in fiscal 2023, as part of stressed asset resolution process.

Any other information: Not Applicable