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    Tata Power Renewable Energy Limited: Rating of [ICRA]AA (Stable) reaffirmed for existing limits and assigned for enhanced limits


    May 10, 2022 - SeeNews Debt

     

      Tata Power Renewable Energy Limited: Rating of [ICRA]AA (Stable) reaffirmed for existing limits and assigned for enhanced limits

      Summary of rating action Instrument* Previous Rated Amount (Rs. crore) Current Rated Amount (Rs. crore) Rating Action

      Term Loan

      958.75

      958.75

      [ICRA]AA (Stable); reaffirmed

      Term Loan

      0.00

      1000.00

      [ICRA]AA (Stable); assigned

      Non-fund Based-Letter of Credit

      215.00

      215.00

      [ICRA]AA (Stable); reaffirmed

      Non-Convertible Debentures (NCD)

      440.00

      440.00

      [ICRA]AA (Stable); reaffirmed Total 1,613.75 2,613.75

      *Instrument details are provided in Annexure-1

      Rationale

      ICRA's rating for Tata Power Renewable Energy Limited (TPREL) factors in the company's strong financial flexibility from being a part of the Tata Group and the renewable energy segment being the focus area of growth for the parent, Tata Power Company Limited (TPCL; rated [ICRA]AA (Stable)). The rating is based on the consolidated business and financial risk profile of TPREL, which comprises Walwhan Renewable Energy Limited (WREL) and other subsidiaries as well as the wind capacity transferred from TPCL, aggregating to 3.14 GW.

      ICRA takes note of the recent announcement by TPCL regarding the proposal to bring the group's entire renewable business including the manufacturing, EPC and O&M services under TPREL, and the investment of Rs 4,000 crore by Blackrock Real Assets and Mubadala Investment Company (a sovereign investor of the Government of Abu Dhabi) in TPREL in exchange for a 10.53%1 stake in TPREL. The proposed capital infusion will enable TPREL to significantly scale up its renewable energy capacity over the next two to three years. The transaction is expected to be completed over the next two to three months, subject to the requisite approvals. TPCL will continue to be the majority shareholder in TPREL with shareholding of 89-90%.

      The rating continues to favourably reflects the strengths arising from the well-diversified renewable power portfolio across 11 states, which reduces the vulnerability of generation to location-specific issues, and a diversified customer mix, which partly mitigates the counterparty credit related risks. Further, the rating draws comfort from the demonstrated operating track record of the portfolio--73% of the portfolio has a track record of more than three years and 6% of the portfolio has an operational track record of one to three years. ICRA also takes note of the long-term power purchase agreements (PPAs) for the entire portfolio at fixed tariff rates (except for a small capacity of 21 MW, which has a medium-term PPA) with state distribution utilities (discoms) and central intermediary procurers, wherein 84% of the portfolio has a balance tenure of 15 to 25 years, providing strong visibility on revenues and cash flows. Further, the robust cash accruals from the operational portfolio and the prudent leveraging policy with cost competitive funding sources for the under-construction projects would support the profitability and coverage metrics of the company, going forward.

      The rating is, however, constrained by the exposure to the state discoms, which have weak-to-moderate financial profiles, particularly in Andhra Pradesh, Rajasthan and Tamil Nadu, which contribute to 28% of TPREL's overall portfolio. This constraint

      1 Final shareholding shall be between 9.76% to 11.43%

      www.icra .in

      Page | 2

      is partly offset by the diversified customer mix, with the presence of creditworthy offtakers such as NTPC Limited, NTPC Vidyut Vyapar Nigam Limited (NVVN), Solar Energy Corporation of India (SECI), Gujarat Urja Vikas Nigam Limited (GUVNL), Bangalore Electricity Supply Company Limited (BESCOM) and Mangalore Electricity Supply Company Limited (MESCOM). The receivables at the consolidated level continue to be high because of the tariff negotiation attempts by the discoms of Andhra Pradesh, the increase in dues from Rajasthan discoms and two of the Karnataka discoms and the continued delays from the Tamil Nadu utility. However, the company is offsetting the higher receivable position by discounting the dues from the discoms of Tamil Nadu and Rajasthan and the wind dues from Maharashtra State Electricity Distribution Company Limited (MSEDCL) with interest cost funded by the discoms, enabling an improved cash flow position. In case of the feed-in tariff based solar power projects in Tamil Nadu, the state regulator has issued an order restraining the operating PLF to a normative level of ~19%. The order is being contested by the company before the Appellate Tribunal for Electricity (APTEL).

      ICRA also takes note of the execution challenges in view of the Group's sizeable expansion plans in the renewable energy sector, with 243-MW solar capacity under construction in TPREL and another 1,298 MW in other subsidiaries of TPCL, which will now be transferred to TPREL. Nonetheless, ICRA draws comfort from the strong execution and financing track record of the Tata Power Group. Further, the ratings are constrained by risks that are typical to all renewable energy projects, including the exposure to the variation in wind power density and solar radiation associated with climatic conditions as revenues are linked to the actual units generated and exported, given the single-part nature of the tariff under the PPAs. This risk is partly mitigated by the demonstrated track record for majority of the portfolio.

      Also, the company remains exposed to the regulatory challenges of implementing the scheduling and forecasting framework for wind and solar power projects across the states. Further, ICRA notes that the power generation by the portfolio was impacted by the exposure to weak O&M partners for some of the wind power projects and module degradation & inverter issues for some of the solar power projects, which are being resolved by the Group by replacing the O&M partners and the equipment, wherever required. Also, the relatively high PPA tariff rates for the operational capacity (as compared with average power purchase cost of the utilities) expose the company to the risk of grid back-down as observed in some of the states in the past.

      The Stable outlook assigned to the rating reflects the benefits of the long-term PPAs at fixed tariff rates, a diversified asset profile and the experience of the management in developing and operating renewable power assets.

      Key rating drivers and their description

      Credit strengths

      Leading company in renewable energy sector in India with well-diversified portfolio - TPREL is one of the leading players in the renewable energy sector in India, with an operating capacity of 3.14 GW, comprising wind and solar mix of 26:74. The portfolio is well-diversified, with presence across 11 states, which reduces the vulnerability of generation to location-specific issues. Additionally, the company has a diversified customer mix, which partly mitigates the counterparty credit risk.

      Strong credit profile of TPREL's parent, TPCL - TPREL is a wholly owned subsidiary of TPCL, which is a leading company in the power sector with presence across generation, transmission and distribution. The renewable energy segment remains the focus area of growth for TPCL. The credit profile of TPCL remains strong, led by a reduction in the leverage level through monetisation of non-core assets and equity infusion, along with an expected improvement in the share of regulated business with the addition of the Odisha licensee business. While the Mundra UMPP remains a drag on TPCL's profitability, the reduction in the debt levels and the availability of profits from the coal companies in Indonesia in a tax-efficient manner post the merger of the Mundra UMPP with TPCL would mitigate this risk to a large extent. Further, the strong financial flexibility for being a part of the Tata Group is a comforting factor.

      www.icra .in

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      Long-term PPAs limit demand and tariff risks - The company has long-term PPAs for the entire portfolio at fixed tariff rates, except for a small capacity of 21 MW, which has a medium-term PPA. Moreover, 84% of TPREL's portfolio has a balance PPA tenure of 15 to 25 years, which limits demand and tariff risks.

      Established operating track record of portfolio - The portfolio has demonstrated a satisfactory operating track record, despite issues with some of the projects in the portfolio. About 73% of TPREL's portfolio has a track record of more than three years and another ~6% has an operational track record of one to three years.

      Coverage metrics expected to remain comfortable; proposed capital infusion of Rs 4,000 crore to aid capacity scale up - TPREL's coverage metrics are expected to be comfortable supported by the robust cash accruals from the operational portfolio having long-term PPAs and cost-competitive funding sources. The proposed capital infusion of Rs. 4000 crore by Blackrock led consortium in the form of equity and convertible securities would support the capacity scale up by TPREL over the medium term.

      Credit challenges

      Debt metrics sensitive to energy generation because of single-part tariff - TPREL is entirely dependent on power generation from the renewable power portfolio for its revenues and cash accruals, given the single-part tariff. As a result, any adverse variation in wind availability or solar radiation may impact the generation and consequently the cash flows. The generation by the wind power portfolio was adversely impacted by a weak wind season in FY2021. Also, the power generation by the portfolio was impacted by the exposure to weak O&M partners for some of the wind power projects and module degradation & inverter issues for some of the solar power projects. These issues are being resolved by replacing the O&M partners and the equipment, wherever required. While the performance of wind assets has improved in 9M FY2022, the generation from solar assets is relatively low due to an extended monsoon and cloud cover in some of the states.

      Counterparty credit risk due to exposure to state discoms with weak-to-moderate financial profiles - The company remains exposed to high counterparty credit risks, given the presence of long-term PPAs with the state discoms that have weak-to-moderate financial profiles such as that of Andhra Pradesh, Rajasthan and Tamil Nadu, which together constitute around 31% of the existing portfolio. The receivable position continues to be high at close to 210 days because of the tariff issue in Andhra Pradesh, the sizeable dues from Rajasthan discoms and two Karnataka discoms and the continued delays from the Tamil Nadu utility. Nonetheless, this is partly mitigated by the relatively better payment profile for the balance portfolio. Also, the company has discounted the dues from the Rajasthan, Tamil Nadu and Maharashtra discoms on a few occasions, with interest cost funded by the discoms, which has supported its cash flows.

      Execution and funding challenges because of Group's large expansion plans - The company's execution and funding challenges remain high because of the large expansion plans of the Group in the renewable energy sector. The company has 243-MW solar capacity under construction and another 1,298 MW is being developed in other subsidiaries of TPCL, entailing an aggregate capex of ~Rs. 7,671 crore, funded through debt and equity of 75:25. While the debt-funded capex would increase the leverage level and expose the Group to execution risks, comfort can be drawn from the strong execution and financing track record of the Tata Power Group and the long-term PPAs for these assets, enabling adequate cash flow generation post commissioning. Also, the risk of movement in key input costs for these projects is mitigated through fixed-price contracts with Tata Power Solar Systems Limited (TPSSL). Further, the construction progress for 220 MW under TPREL is in advance stages, with expected commissioning in the next two to three months.

      Exposure to interest rate risk; availability of cost competitive funding crucial for returns on upcoming capacity - The company's profitability and debt coverage metrics are exposed to the movements in interest rates, given the sizeable debt funding in the capital mix and the fixed tariff rates for the renewable energy projects. Further, the returns from the upcoming capacity remain dependent on the achievement of the design PLF levels and the availability of debt funding at a cost-competitive rate, especially in view of the very fine bid tariff rates.

      www.icra .in

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      Challenges of implementing forecasting and scheduling regulations - The company remains exposed to the regulatory challenges of implementing the scheduling and forecasting framework for wind and solar power projects across the states. This is mainly because of the variable nature of wind and solar power generation.

      Liquidity position: Adequate

      The company's liquidity is expected to remain adequate, supported by healthy cash flows from operations, cash and liquid investments of Rs. 114.60 crore (inclusive of restricted cash of Rs 36.78 crore towards DSRA, margin money etc.) as on January 31, 2022 and an undrawn working capital line of Rs. 195 crore. The access to the commercial paper (CP) market provides additional aid to the liquidity. The funding for the new projects is expected to be met through a mix of sources, including internal accruals, equity from TPCL and external debt.

      Rating sensitivities

      Positive factors: The rating for TPREL could be upgraded if the credit profile of Tata Power Company Limited improves.

      Negative factors: The rating could be downgraded if the credit profile of Tata Power Company Limited deteriorates. Further, the rating can be downgraded in case of a sharp deterioration in the generation performance, adversely impacting the debt coverage metrics. Also, a large debt-funded capital expansion without a commensurate increase in cash accruals or a significant deterioration in the payment cycle from offtakers will adversely impact the liquidity position and would be another negative trigger.

      Analytical approach Analytical Approach Comments Applicable Rating Methodologies

      Corporate Credit Rating Methodology

      Rating Methodology for Wind Power Producers

      Rating Methodology for Solar Power Producers Rating Approach - Implicit Parent or Group Support Parent/Group Support

      Parent Company: The Tata Power Company Limited;

      ICRA expects TPCL (rated [ICRA]AA (Stable)) to be willing to extend financial support to TPREL, should there be a need as TPREL is a wholly owned subsidiary of TPCL and the renewable energy segment remains the focus area of growth for TPCL. Consolidation/Standalone

      The rating is based on the consolidated business and financial profile of TPREL. The entities considered for consolidation are enlisted in Annexure-2.

      Company Profile

      TPREL, set up in 2007, is a wholly-owned subsidiary of TPCL. It is the primary investment vehicle for Tata Power Group's clean and renewable energy-based power generation capacity. The overall renewable portfolio of the Tata Power Group (including capacity on the books of TPCL and its subsidiaries) in India stands is 3.31 GW, comprising 2.03 GW on the books of TPREL, 1.01 GW of WREL, 43 MW of TPCL and 234 MW on the books of subsidiaries of TPCL and TPREL. Of this, the Group has ~30 MW rooftop solar capacity under TPREL and other subsidiaries. Until FY2021, TPCL had 379.6 MW of RE capacity on its books; however, it transferred 249.3 MW of wind assets to TPREL and 96.15 MW of wind assets to Tata Power Green Energy Limited (TPGEL) as a slump sale at the start of FY2022. This apart, TPREL has four solar power projects under construction with an aggregate capacity of 243 MW. Further, TPCL is developing 1,298 MW of solar and hybrid projects through its other subsidiaries, which will now be transferred to TPREL.

      www.icra .in

      Page | 5

      Key financial indicators (audited) Consolidated FY2020 FY2021 Operating Income (Rs. crore)

      2,176.77

      2,211.63 PAT (Rs. crore)

      157.76

      287.47 OPBDIT/OI (%)

      87.44%

      85.67% PAT/OI (%)

      7.25%

      13.00% Total Outside Liabilities/Tangible Net Worth (times)

      2.15

      2.21 Total Debt/OPBDIT (times)

      5.75

      5.66 Interest Coverage (times)

      2.05

      2.21

      PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, Taxes and Amortisation

      Source: Company data, ICRA Research

      www.icra .in

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      Status of non-cooperation with previous CRA: Not applicable

      Any other information: None

      Rating history for past three years Instrument Current Rating (FY2023) Chronology of Rating History for the past 3 years Type Amount Rated (Rs. crore) Amount Outstanding as on January 31, 2022 (Rs. crore) Date & Rating Date & Rating in FY2022 Date & Rating in FY2021 Date & Rating in FY2020 May 10, 2022 Mar 17, 2022 Jun 30, 2021 Jun 19, 2020 May 12, 2020 May 17, 2019 May 02, 2019 Apr 2, 2019 1

      Term loan

      Long-term

      958.75

      458.75

      [ICRA]AA (Stable)

      [ICRA]AA (Stable)

      [ICRA]AA (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      - 2

      Term loan

      Long-term

      1000.00

      0.00

      [ICRA]AA (Stable)

      -

      -

      -

      -

      -

      -

      - 3

      Non-fund Based

      Long-term

      215.00

      -

      [ICRA]AA (Sable)

      [ICRA]AA (Sable)

      [ICRA]AA (Sable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable) 4

      NCDs

      Long-term

      440.00

      440.00

      [ICRA]AA (Sable)

      [ICRA]AA (Sable)

      [ICRA]AA (Sable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      -

      - 5

      NCDs

      Long-term

      -

      -

      -

      -

      [ICRA]AA (Sable); Withdrawn

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      [ICRA]AA- (Stable)

      -

      -

      www.icra .in

      Page | 7

      Complexity level of the rated instrument Instrument Complexity Indicator

      Term Loan

      Simple

      Non-fund based, Letter of Credit

      Simple

      NCDs

      Very Simple

      The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated. It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's credit rating. It also does not indicate the complexity associated with analyzing an entity's financial, business, industry risks or complexity related to the structural, transactional, or legal aspects. Details on the complexity levels of the instruments, is available on ICRA's website: www.icra.in

      www.icra .in

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      Annexure-1: Instrument details ISIN No Instrument Name Date of Issuance / Sanction Coupon Rate Maturity Date Amount Rated (Rs. crore) Current Rating and Outlook NA

      Letter of Credit

      -

      -

      -

      215.00

      [ICRA]AA (Stable) NA

      Term loan

      February 2019

      7.90%

      March 2031

      458.75

      [ICRA]AA (Stable) NA

      Term loan

      February 2022

      6.45%^

      March 2040

      500.00

      [ICRA]AA (Stable) NA

      Term loan

      March 2022

      6.70%

      December 2039

      1000.00

      [ICRA]AA (Stable) INE607M07016

      NCD

      May-2019

      8.57%*

      May 2029

      440.00

      [ICRA]AA (Stable)

      Source: Company; *Linked to one-year MCLR of Kotak Mahindra Bank;^ linked to Repo rate with cap of 7.45% and floor of 5.70% for first four years

      Please click here to view details of lender-wise facilities rated by ICRA

      Annexure-2: List of entities considered for consolidated analysis: Company Name Ownership Consolidation Approach Walwhan Renewable Energy Limited

      100.00%

      Full Consolidation Poolavadi Windfarm Limited*

      74.00%

      Full Consolidation Nivade Windfarm Limited

      100.00%

      Full Consolidation Indo Rama Renewables Jath Limited

      100.00%

      Full Consolidation TP Kirnali Limited

      100.00%

      Full Consolidation TP Solar Limited

      100.00%

      Full Consolidation Vagarai Windfarm Limited**

      72.00%

      Full Consolidation Clean Sustainable Solar Energy Private Limited

      99.99%

      Full Consolidation Dreisatz Mysolar24 Private Limited

      100.00%

      Full Consolidation MI Mysolar24 Private Limited

      100.00%

      Full Consolidation Solarsys Renewable Energy Private Limited

      100.00%

      Full Consolidation Walwhan Solar Energy GJ Limited

      100.00%

      Full Consolidation Walwhan Solar Raj Limited

      100.00%

      Full Consolidation Walwhan Solar BH Limited

      100.00%

      Full Consolidation Walwhan Solar MH Limited

      100.00%

      Full Consolidation Walwhan Solar RJ Limited

      100.00%

      Full Consolidation Walwhan Solar AP Limited

      100.00%

      Full Consolidation Walwhan Solar KA Limited

      100.00%

      Full Consolidation Walwhan Solar MP Limited

      100.00%

      Full Consolidation Walwhan Solar PB Limited

      100.00%

      Full Consolidation Walwhan Energy RJ Limited

      100.00%

      Full Consolidation Walwhan Solar TN Limited

      100.00%

      Full Consolidation Walwhan Solar RJ Limited

      100.00%

      Full Consolidation Walwhan Urja Anjan Limited

      100.00%

      Full Consolidation Walwhan Urja India Limited

      100.00%

      Full Consolidation Northwest Energy Private Limited

      100.00%

      Full Consolidation

      *TPRRL has 74% of shareholding and voting power in Poolawadi Windfarm Limited. However, as per the shareholder agreement, TPREL has a call option to buy shares from the captive consumers at the face value or book value of the shares whichever is less

      **TPREL has 72% of shareholding and voting power in Vagarai Windfarm Limited. However, as per the shareholder agreement, TPREL has a call option to buy shares from the captive consumers at the face value of the shares. Accordingly, non-controlling interest has not been considered for the purpose of consolidation.

      www.icra .in

      Page | 9

      ANALYST CONTACTS

      Sabyasachi Majumdar

      +91 124 4545304

      sabyasachi@icraindia.com

      Girishkumar Kadam

      +91 22 6114 3441

      girishkumar@icraindia.com

      Vikram V

      +91 40 40676518

      vikram.v@icraindia.com

      Tushar Bharambe

      +91 22 6169 3347

      tushar.bharambe@icraindia.com

      RELATIONSHIP CONTACT

      L Shiva Kumar

      +91 22 6114 3406

      shivakumar@icraindia.com

      MEDIA AND PUBLIC RELATIONS CONTACT

      Ms. Naznin Prodhani

      Tel: +91 124 4545 860

      communications@icraindia.com

      Helpline for business queries

      +91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

      info@icraindia.com

      About ICRA Limited:

      ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency.

      Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody's Investors Service is ICRA's largest shareholder.

      For more information, visit www.icra.in

      ICRA Limited

      Registered Office

      B-710, Statesman House, 148, Barakhamba Road, New Delhi-110001

      Tel: +91 11 23357940-45

      Branches

      © Copyright, 2022 ICRA Limited. All Rights Reserved.

      Contents may be used freely with due acknowledgement to ICRA.

      ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA's current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

      Agency Website: http://www.icra.in

      ******

      SeeNews does not endorse in any way, the views, opinions or recommendations expressed above. The use of the information is subject to the terms and conditions as published by the original source, which you have to read and accept in full prior to the execution of any actions taken in reliance on information contained herein.

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