Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the Rs 600 crore proposed non-convertible debentures (NCDs) of Torrent Power Ltd (TPL) and reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the other debt instruments and bank facilities of the company. Also, CRISIL Ratings has withdrawn its rating on NCDs worth Rs 920 crore (see annexure: Details of rating withdrawn). The withdrawal is based on independent confirmation of redemption of these instruments and at the company’s request, in line with the CRISIL Ratings withdrawal policy.

 

The ratings on the bank facilities, NCDs, and commercial paper programme continue to reflect the strong profitability of TPL which, along with prudent and staggered capital expenditure (capex) plans, has aided sustained improvement in leverage, with net debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio reaching 2.0 times as on March 31, 2023, from more than 3 times in fiscal 2017. The ratings also factor in the expectation of steady profitability and net debt/Ebitda sustaining below 2.8 times, despite outflow towards incremental capex, over the medium term.

 

For fiscal 2023, Ebitda improved to around Rs 4,759 crore from Rs 3,610 crore for fiscal 2022 on account of addition of distribution business covering the Union Territories of Dadra and Nagar Haveli and Daman and Diu (DNH & DD, from April 1, 2022), strong performance in the franchisee distribution business segment led by lowering of losses, increase in power demand across all distribution areas, contribution from acquired renewable assets, and gain on trading of liquified natural gas (LNG).

 

In terms of operating performance, plant load factor (PLF) of the company’s lone thermal assets rose significantly as generation at its gas power plants suffered owing to high LNG prices. Transmission and distribution (T&D) losses across its licence and franchise distribution areas lowered further during the fiscal. PLFs of its renewable assets remained stable.

 

Operating performance is likely to continue to improve in the current fiscal with continued recovery in the franchise distribution business. Further focus on the licence distribution business with assured return on equity model, coupled with judicious expansion in renewable businesses, should help continued growth in Ebitda. The company has a capex outlay of around Rs 4,500 crore in its licence and franchise distribution business over the next couple of fiscals to strengthen and augment network. Also, it has a pipeline of 600 megawatt (MW) of renewable assets for which the capex outlay is around Rs 4,600 crore in the next two fiscals. Given the significant capex, leverage is likely to weaken in fiscal 2024, though remain below 2.8 times over the medium term as the assets scale up.

 

The ratings continue to factor in the stable cash flow from regulated businesses and the diversified business risk profile and strong liquidity of TPL. These strengths are partially offset by absence of long-term power purchase agreements (PPAs) for its 1,200 MW combined cycle gas power plant in Dahej (DGEN), Gujarat. CRISIL Ratings has factored in the operating losses arising from non-operation of the plant due to absence of PPAs, however, any improvement in cashflows from DGEN, owing to tie-up of PPAs or improvement in PLFs on a sustainable basis, supporting improvement in credit profile of the company will be a key rating sensitivity factor.

 

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

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 (in which TPL has 51% shareholding), and those of its special-purpose vehicles 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 (rated 'CRISIL AA+(CE)/Stable'), Latur Renewable Pvt Ltd (rated 'CRISIL AA+(CE)/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 transmission and distribution losses across circles (3.7% for Ahmedabad, 3.2% for Surat and 0.5% for Dahej in the distribution licence business; and 10% for Bhiwandi [Maharashtra] and 9.5% for Agra [Uttar Pradesh] in the distribution franchise business) in fiscal 2023. Further, for the Shil, Mumbra and Kalwa (SMK; Maharashtra) franchise distribution circle, it has seen T&D losses drop to 33.5% in fiscal 2023 from 44.9% at the time of takeover in fiscal 2021. The company will continue to benefit from stable cash flow, backed by a regulated tariff structure and high operating efficiency, and the performance of its distribution and generation businesses (AMGEN and SUGEN plants), both of which assure a 14-15.5% post-tax return on equity. Regulated businesses, on an average, formed about 60% of revenue and 77% of Ebitda over the last three fiscals. Increase in contribution from DNH & DD, 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 DNDD; second licensee for Dahej SEZ and DSIR; and the power distribution franchisee for Bhiwandi, Agra and SMK. With takeover of DNDD, TPL now sells power directly to more than 4.03 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

Financial risk profile has improved in the past few fiscals. Net gearing and net debt to Ebitda ratios stood at 0.9 time and 2.0 times, respectively, as on March 31, 2023, against 1.1 times and 3.2 times respectively, as on March 31, 2017. This was driven by high profitability and relatively lower capex. While leverage is likely to increase in fiscal 2024 because of increased capex outlay, net debt to Ebitda shall sustain below 2.8 times over the medium term.

 

Weakness:

Susceptibility to risk related to offtake for DGEN

The 1,200 MW DGEN plant, which accounts for about 30% of the total operational power generation capacity, is stranded due to lack of approved PPAs and non-availability of LNG at affordable prices. Though the unit operated at a Ltd PLF in fiscals 2020 and 2021, aided by favourable LNG prices and bilateral contracts, it would continue to report losses.

 

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

Liquidity: Strong

Expected annual cash accrual of over Rs 2,500 crore during fiscals 2024 and 2025 will be sufficient to meet yearly average term debt repayment of ~Rs 1,600 crore per annum. Liquidity is further supported by cash balance of around Rs 900 crore and unutilised fund-based limit of Rs 1,150 crore as on March 31, 2023. Also, the company has an unutilised capex line of Rs 300 crore. Capex for fiscals 2024 and 2025 are likely to be funded through a mix of internal accrual and debt.

 

ESG profile

CRISIL Ratings believes 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. It also continuously monitors projects based on environmental policy.
• The gas-based generation units are equipped with dry low NOx burners that keep emissions well below the 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.
• TPL has steadily increased the share of renewable energy in its overall portfolio, with more than 1 gigawatt (GW) of capacity already operational and another 0.7 GW in the pipeline.
• It compares favourably with peers in terms of gender diversity, with 8.53% of employees being women.
• The governance structure is characterised by 50% 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. TPL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

Business risk profile of TPL will remain strong over the medium term, driven by stable cash flow 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 material cash flow generation from DGEN, and

* Strong improvement in profitability and capital structure with sustenance of net debt/Ebitda below 2 times

 

Downward factors

* Larger-than-expected capex or debt-funded acquisitions resulting in material deterioration in capital structure

* Significantly lower than expected profitability and sustained net debt/Ebitda of more than 2.8 times

About the Company

TPL is engaged in the power generation and distribution business. It is a distribution licensee in Ahmedabad, Gandhinagar, Surat, Dahej SEZ, DSIR, and Dadra and Nagar Haveli and Daman and Diu; and the distribution franchisee for Bhiwandi, Agra and SMK. 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 (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 MWX2) WPP in Karnataka and 126 MW WPP in Maharashtra through its wholly owned subsidiaries, and a 50 MW WPP in Kutch through an associate company. Last year, TPL 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, LREHL Renewables India SPV1 Pvt Ltd, and Sunshakti Solar Power Projects Pvt Ltd. TPL is also implementing wind and solar projects with capacity of 736 MW.

Key Financial Indicators - TPL – Consolidated – CRISIL Ratings adjusted numbers

As on/for the period ended March 31		2023^	2022
Operating income	Rs crore	25,694	14,353
Adjusted profit after tax (PAT)	Rs crore	2,165	1,384*
PAT margin	%	8.4	9.6
Adjusted debt/adjusted networth*	Times	0.96	0.85
Interest coverage	Times	6.28	5.95

^based on abridged consolidated annual results

*adjusted for impairment loss of Rs 928 crore (net of tax).

Any other information: Not applicable