Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA+/Stable/CRISIL A1+’ ratings on the bank facilities and non-convertible debentures (NCDs) of Torrent Power Ltd (TPL). Furthermore, Crisil Ratings has withdrawn its rating from NCDs of Rs.240 crore upon their redemption and in line with the withdrawal policy of Crisil Ratings.

 

The ratings continue to reflect the strong and steady profitability of TPL which, along with prudent and staggered capital expenditure (capex) plans, has aided the healthy net leverage, with net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 2.2 times as on March 31, 2024 (1.9 times as on March 31, 2023, and more than 3 times as on March 31, 2017).

 

The performance of the company has been healthy during the first half of fiscal 2025, wherein the Ebitda improved to Rs 3,066 crore from Rs 2,406 crore in the corresponding period previous fiscal on account of strong performance in the generation business due to a healthy power demand across the country, which led to high sales in the merchant markets, as well as invocation of Section 11 of the Electricity Act for gas-based plants for the first time, during the first quarter of fiscal 2025. Furthermore, there was an improvement in performance in the distribution business, led by lower losses, an increase in power demand across all distribution areas and contribution from renewable assets, as well as increase in contribution from its 1,200 megawatt (MW) combined cycle gas power plant in Dahej (DGEN), Gujarat.

 

Plant load factor (PLF) of the company’s lone thermal asset continued to be high in the first half of fiscal 2025 as demand for power in the country continued to grow. The company’s gas power plants also operated at higher PLFs in the first half of fiscal 2025 compared with the previous fiscal as natural gas prices eased. Transmission and distribution (T&D) losses across licence and franchise distribution areas, except in Surat, Dahej and Bhiwandi, were lower than in the previous fiscal. The PLFs of the renewable assets remained steady and largely in line with expectations.

 

Operating performance is likely to continue to improve in the current and next fiscals with steady recovery in the franchise distribution business. Furthermore, focus on the licence distribution business with assured return on equity model, healthy power demand outlook for the country supporting improvement in PLFs of thermal capacities, coupled with judicious expansion in renewable businesses, should help continued growth in Ebitda over the medium term.

 

That said, Crisil Ratings has taken note of the company’s sizeable capex plan of Rs 22,000-25,000 crore during fiscals 2025-2027. The planned capital outlay includes expenditure of Rs 19,000-20,000 crore for under-construction renewable projects of 3 gigawatt (GW), Rs 1,200-1,400 crore to be incurred on two transmission projects being undertaken by the company, along with capex outlay of around Rs 4,000 crore in its license and franchise distribution business over the next couple of fiscals to strengthen and augment network.

 

The said, the capex is expected to be funded in a debt: equity ratio of 70:30 or 75:25. Crisil Ratings has taken note of the recent fund raising undertaken by TPL, wherein the company raised Rs 3,500 crore through qualified institutional placement (QIP) during the third quarter of this fiscal. Crisil Ratings expects that the said QIP, along with healthy operating cash generation, should comfortably cover the equity requirements of the planned capex as well as the operational requirements of the company. Furthermore, almost the entire renewable project pipeline is contracted with long-term PPAs and are with heathy counterparty mix, which mitigates the demand and payment risk for the project’s future cash flows. Additionally, Crisil Ratings understands that the company has secured necessary land and evacuation approvals for a significant majority of these projects which, along with the company’s execution track record over the past years, provides comfort against execution risk.

 

Given the significant capex, net leverage is likely to increase over the medium term wherein it is expected to peak in fiscal 2026, before correcting from fiscal 2027. While net leverage should remain comfortably below 2.5 times in fiscal 2025, Crisil Ratings expects it to exceed 3 times in 2026. However, with expected increase in Ebitda from new projects from fiscal 2027 onwards, the net leverage is likely to witness moderation and should remain comfortably within rating thresholds.

 

Crisil Ratings understands the company may augment its generation capacity through the inorganic route to support increasing demand in its distribution regions. Also, from a growth perspective, it may enter new distribution areas. However, the company’s management has guided to keep net leverage and capital structure within the rating threshold on a sustainable basis. Conversion of any such opportunity that the company may come across to expand capacity or distribution area will be monitorable.

 

The ratings continue to factor in the stable cash flow from regulated businesses, the diversified business risk profile and strong liquidity of TPL. These strengths are partially offset by ongoing project risk, and absence of long-term PPAs for its 1,200 MW combined cycle gas power plant in Dahej (DGEN). Timely progress on planned capex along with improvement in cash flow from the Dahej plant owing to tie-up of PPAs or improvement in PLFs on a sustainable basis, supporting improvement in the credit risk profile, will be a key rating sensitivity factor.

Analytical Approach

Crisil Ratings has fully consolidated the business and financial risk profiles of TPL along with Dadra and Nagar Haveli and Daman and Diu Power Distribution Corporation Ltd (TPL has 51% shareholding), and its special-purpose vehicles (SPVs) engaged in the renewable business (considering 100% ownership of the parent and strong operational and financial linkages among the entities). The renewable SPVs include Jodhpur Wind Farms Pvt Ltd ('Crisil AA+(CE)/Stable'), Latur Renewable Pvt Ltd ('Crisil AA+ (CE)/Stable'), Torrent Saurya Urja 2 Pvt Ltd ('Crisil AA/Stable') and Torrent Solargen Ltd (‘Crisil AA/Stable’), among others.

 

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:

Strong operating profile and regulated tariff framework

High operational efficiency is reflected in low T&D losses across circles (4.2% for Ahmedabad, 2.8% for Surat [Gujarat] and 0.4% for Dahej in the distribution licence business; and 9.6% for Bhiwandi [Maharashtra] and 9.2% for Agra [Uttar Pradesh] in the distribution franchise business) in fiscal 2024. Furthermore, for the Shil, Mumbra and Kalwa (SMK; Maharashtra) franchise distribution circle, the T&D losses dropped to 30% in fiscal 2024 from 33.5% in fiscal 2023 and from 44.9% at the time of takeover in fiscal 2021. The company will continue to benefit from stable cash flow, backed by regulated tariff structure and high operating efficiency, and the performance of its distribution and generation businesses (Ahmedabad and Surat plants), both of which assure 14-15.5% post-tax return on equity. Regulated businesses, on average, accounted for about 60% of the revenue and 77% of the Ebitda over the last three fiscals. Increase in contribution from Dadra Nagar Haveli and Daman & Diu (DNHDD), ramp-up of the Dholera Special Industrial Region (DSIR; Gujarat) and Dahej (Gujarat), further lowering of T&D losses in SMK and increased contribution from the renewables segment are likely to enhance return profile in the long term. Capital allocation will remain skewed significantly towards the regulated and renewable businesses.

 

Robust market position of the power distribution business with diverse consumer base

TPL enjoys a strong market position, being the sole power distribution licensee for Ahmedabad, Surat, Gandhinagar, and DNHDD; second licensee for Dahej Special Economic Zone (SEZ) and DSIR; and the power distribution franchisee for Bhiwandi, Agra and SMK. With the takeover of DNDD, TPL now sells power directly to more than 4 million consumers across the domestic, industrial and commercial divisions. An urban-centric and diversified customer base enables collection efficiency of nearly 100% in Ahmedabad, Gandhinagar, Surat and Dahej SEZ.

 

Strong financial risk profile

The financial risk profile has improved in the past few fiscals. Net gearing remained flat at 0.9 time as on March 31, 2024, compared to previous fiscal, while net debt to Ebitda ratio increased to 2.2 times from 1.9 times. This increase was on account of lower earnings in fiscal 2024, which were higher during fiscal 2023 on account of one-time gains from sale of LNG.

 

While net leverage is likely to increase to above 3.0 times during fiscal 2026 on account of capex outlay of Rs 22,000-25,000 crore over the next 2-3 fiscals (expected to be funded through a debt to equity mix of 70:30 or 75:25), it shall sustain below 2.8-3.0 times over the medium term on the back of increased cash generation from the commissioned capacity, as well as healthy profitability from the transmission and distribution business.

 

Weaknesses:

Exposure to implementation risks of under-construction portfolio

Over the next 2-3 fiscals, TPL has a significant pipeline of renewable projects of 3 GW under implementation, for a capex outlay of Rs 19,000-20,000 crores; along with capex for two new transmission projects at an outlay of Rs 1,270 crore. Furthermore, the company is planning to implement pumped storage projects of 3 GW over the medium term with a capex outlay of more than Rs 13,000 crore, for which Energy Storage Facility Agreement has been executed with Maharashtra State Electricity Distribution Corporation Ltd (MSEDCL) for supplying 2 GW/16 GWh capacity for a period of 40 years. This exposes the company to significant project risks and risks of implementation of the under-construction portfolio. The company is also exploring opportunities in green hydrogen space; however, Crisil Ratings understands that there is no material capital commitment yet. Further, the said projects, once finalized, will have a long gestation period. Developments on this front will remain monitorable.

 

That said, healthy cash generation from commissioning of renewable projects, availability of funds from QIP to support the equity requirements of the projects, staggered nature of the capex, as well as availability of majority of land as well as evacuation approvals, along with an experienced management that has a strong vintage of implementing projects, offsets the project risk.

 

However, timely commissioning and ramp up of the ongoing projects, without material cost overruns will be monitorable.

 

Susceptibility to risk related to offtake for DGEN

The 1,200 MW DGEN plant, which accounts for about 30% of the operational power generation capacity, has been stranded because of lack of approved PPAs and non-availability of LNG at affordable prices. The unit operated at limited PLF in fiscals 2020, 2021 and the first half of fiscal 2024, aided by favourable LNG prices and bilateral contracts. However, on account of healthy power demand in the country, which led to high realisations in the merchant markets and led to invocation of Section 11 of the Electricity Act during the first quarter of fiscal 2025, there was an increase in contribution from DGEN, which operated at PLF of 29% during the first half of fiscal 2025 against only 7% during the same period previous fiscal. Crisil Ratings expects the contribution from DGEN to improve over the medium term on account of healthy power demand in the country.

 

While Crisil Ratings has factored in the operating losses arising from non-operation of the plant due to absence of PPAs, any sustained material improvement in cash flows from DGEN owing to tie-up of PPAs or improvement in PLFs on a sustainable basis, supporting improvement in the credit risk profile of the company will be a key rating sensitivity factor.

Liquidity: Strong

Expected annual cash accrual of Rs 2,900-3,300 crore in fiscals 2025 and 2026 will sufficiently cover yearly term debt obligation of Rs 1,300-1,500 crore. Cash balance of around Rs 1,350 crore as on September 30, 2024, and unutilised fund-based limit of Rs 1,500 crore as on December 31, 2024, also support liquidity. Furthermore, the company has unutilized capex lines of Rs. 1,064 crores.

 

ESG profile

The environment, social and governance (ESG) profile of TPL 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 generation of conventional power involves high dependence on natural resources, mainly coal. The sector has a social impact as its operations affect local community and involve health hazards. TPL is focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• The company has a well-defined environment policy that covers all the activities undertaken by TPL and its subsidiaries towards environment conservation. In addition, the company continuously monitors projects based on environmental policy.
• The gas-based generation units are equipped with dry low nitrogen oxide (NOX) burners that keep the emissions well below regulatory norms. Stack air quality at coal-based generation unit is ensured through the installation of electrostatic precipitators with state-of-the-art control systems. Dust suppression and extraction systems are used in coal stock and feeding areas to maintain the ambient air quality.
• The company has steadily increased the share of renewable energy in its overall portfolio, with more than 1.6 GW of capacity already operational and another 3 GW in the pipeline.
• It compares favourably with peers in terms of gender diversity, with 9% of employees being women.
• The governance structure is characterised by 56% of the board comprising independent directors, split in chairman and CEO positions, and presence of an investor grievance redressal mechanism and extensive disclosures.

 

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

Outlook: Stable

The business risk profile of TPL will remain strong over the medium term, driven by stable cash flows from the regulated and renewables businesses. Sustained business performance and prudent capital allocation should support healthy financial risk profile.

Rating Sensitivity Factors

Upward Factors

• PPAs getting tied up and sustained material cash flow generation from DGEN
• Strong improvement in profitability and capital structure, with sustenance of net debt to Ebitda ratio below 2 times

 

Downward Factors

• Larger-than-expected capex or debt-funded acquisitions resulting in material weakening of capital structure
• Significantly lower-than-expected profitability and net debt to Ebitda ratio of more than 3.0-3.5* times on a sustained basis
• Material time and cost overruns in the ongoing projects, resulting in significantly lower than expected cash generation

 

*The value in the downward trigger has been revised upward from 2.8 times earlier, as the company is expected to have the ability to withstand a higher net leverage, given the increased scale of operations over the past few years and continued high share of regulated distribution and renewable businesses in its revenue and profitability.

About the Company

TPL is engaged in the power generation, transmission, and distribution business. It is a distribution licensee in Ahmedabad, Gandhinagar, Surat, Dahej SEZ, Dholera SIR, and Dadra and Nagar Haveli and Daman and Diu; and the distribution franchisee for Bhiwandi, Agra and SMK (Shil, Mumbra, Kalwa). Its power generation plants are in Sabarmati (AMGEN, a 362-MW coal-based station) in Ahmedabad, Surat (1,147.5 MW gas-based SUGEN plant with 382.5 MW expansion), and Dahej SEZ (1,200 MW gas-based combined cycle DGEN power plant). The renewable portfolio includes 49.6 MW wind power plant (WPP) in Lalpur, 51 MW solar power plant in Charanka, 252 MW Suzlon WPP in Kutch and Bhavnagar, 50.9 MW WPP in Mahidad, and 87 MW GENSU solar power plant in Surat (all in Gujarat).

 

The company also has a 120 MW (60 MW X 2) WPP in Karnataka, 126 MW WPP in Maharashtra, 50 MW WPP in Kutch (Gujarat), 115 MW WPP in Devbhoomi Dwarka (Gujarat) and 300 MW Solar Power Project in Surel & Babra (Gujarat) through its wholly owned subsidiaries. Furthermore, TPL had added a renewable portfolio of 281 MW (156 MW wind + 125 MW solar) through acquisition of Surya Vidyut Ltd, Visual Percept Solar Projects Pvt Ltd, Torrent Saurya Urja 6 Pvt Ltd (earlier LREHL Renewables India SPV1 Pvt Ltd), and Sunshakti Solar Power Projects Pvt Ltd. TPL is also implementing wind and solar projects with capacity of 2,965 MW (including 784 MW of commercial and industrial projects of which ~41 MW have been commissioned). The company is also planning to implement 3 GW of Pumped Storage Hydro Power of which Energy Storage Facility Agreement has already been executed for 2 GW / 16 GWh capacity with MSEDCL for 40 years.

Key Financial Indicators (Consolidated; Crisil Ratings-adjusted numbers)

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs crore	27,268	25,903
Adjusted profit after tax (PAT)	Rs crore	1,895	2,162
PAT margin	%	6.9	8.3
Adjusted debt/adjusted networth	Times	0.92	0.91
Interest coverage	Times	5.18	6.24

 

Any other information: Not Applicable