India Ratings Assigns JSW Renewable Energy (Vijayanagar)’s RTL ‘IND A+’/Stable; Affirms Existing Ratings – EQ Mag

India Ratings and Research (Ind-Ra) has taken the following ratings actions on JSW Renewable Energy (Vijayanagar) Limited’s (JREVL) debt instruments:

$Ind-Ra has affirmed the unsupported rating of ‘IND A+’/Stable for the same amount and maturity, in compliance with the Securities Exchange Board of India’s circular dated 13 June 2019, which requires credit rating agencies to disclose unsupported ratings without factoring in the explicit credit enhancement (CE) and supported rating after factoring in the explicit CE.

*The long-term RTL facility has been tied up as long-term finance to fund the project cost, and part of the proceeds will be utilised to repay the LC facilities at the time of maturity.

Ind-Ra has equated the rating of LC facility of INR2,500 million with those of JREVL’s 74% ultimate parent JSW Energy Limited (JEL; ‘IND AA’/Stable), as the latter has extended an unconditional and irrevocable pre-default guarantee against them. JEL holds 74% stake in JREVL through its 100% subsidiary JSW Future Energy Limited (JSWFEL).

The ratings reflect timely completion of solar power project and the comfort derived from management’s confirmation of support from JEL during the construction and stabilisation period, strong revenue visibility in the form of a long-term power purchase agreement (PPA) at a healthy tariff with a strong counterparty, JSW Steel Limited (‘IND AA’/Stable) and the sponsor’s demonstrated track operating record in the power sector. Furthermore, the debt service coverage ratio (DSCR) at over 1.45x under Ind-Ra’s base case estimates is resilient to a combination of operational stresses. The ratings also benefit from the minimum guaranteed power offtake clause in the PPA and no termination at convenience, which cushions JREVL’s revenue against any downturn.

The ratings, however, are constrained by the construction risk in the wind project and the limited operational track record of the solar project.

Key Rating Drivers

Revenue Secured by Long-Term PPA with Strong Counterparty: The ratings are anchored by the presence of a 25-year PPA with JSW Steel for the entire project capacity of 825MW at a fixed tariff. The PPA specifies a round-the-clock contracted capacity of 275MW with a minimum annual supply equivalent to 80% of the contracted capacity, failing which penalties will be levied at the PPA tariff. The presence of long-term PPA assures cash flows to the project and largely mitigates the revenue risk. Furthermore, the PPA can be terminated by either party, only if the event of default clause is breached by the other party. The PPA includes provision for liquidated damages in case of a shortfall in the supply from JREVL, lower compensation from the customer in case the energy offtake is lower than minimum offtake obligation, and a payment security mechanism. On an average, JSW Steel has been making payments within the stipulated due date since the commencement of supply of power in April 2022.

Adequate Sponsor Experience: JEL, which owns 74% stake in JREVL through JSWFEL, is engaged in power generation and transmission, primarily in Karnataka, Maharashtra, Rajasthan, and Himachal Pradesh. The company has its presence across the power sectors, including generation, power transmission, mining, power plant equipment manufacturing and power trading. JEL has a total generation capacity of 4,784MW, of which 3,158MW is thermal power, 1,391MW is hydropower and 235MW is solar power. JSW Steel owns the balance 26% stake in JREVL. JSW Steel, a member of the JSW Group, is an integrated manufacturer of a diverse range of steel products with a total steel-making capacity of 28 million tonnes per annum. It is among the leading producers and exporters of coated flat steel products with an export presence in over 100 countries.

JEL, being a new entrant in renewable energy (RE), lacks a track record in commissioning RE projects. However, Ind-Ra believes the existing under construction wind project would be completed within the estimated cost of INR40.52 billion, in view of JEL being a major player in the power sector and given its track record of completing projects within the approved cost and time. Also, JEL, on a standalone basis, had unencumbered cash and cash equivalents of INR16.02 billion and an undrawn working capital limit of INR15,000 million as of 30 September 2022. At the sponsor level, the cash flow from operations would be sufficient for meeting the equity requirements of the under construction projects.

Corporate Guarantee and Sponsor Undertakings: JEL has extended a pre-default corporate guarantee towards the LC facility of INR2,500 million and a post-default guarantee for another INR5,100 million LC facility. The project will continue to benefit from this until the maturity of these LCs. Furthermore, for the RTL, the sponsor has undertaken to fund any cost overrun in implementing the project, security creation, ensuring that the project revenue matches with the lender’s base case for at least two of the initial three years from the commercial operations date, creation of a debt service reserve account equivalent to one quarter of debt service requirement in accordance with the terms of financing document, among others. Ind-Ra believes the project will continue to receive the managerial and financial support from the sponsors during the entire construction and operational phase. Any change in the group’s policy of timely supporting the project is a key rating sensitivity.

Liquidity Indicator – Adequate: Ind-Ra believes should the generational level be equal to P90 level, the DSCR will be adequate to cover stresses in the operations and maintenance (O&M) expenses and interest rates. Equity requirement from JEL and JSW Steel are INR9,723.6 million and INR3,416.4 million, respectively. As on 30 September 2022, INR5,420 million of the equity was infused in the project in the form of paid-up share capital as well as loans from parent/ sponsor. Additionally, INR770 million of equity has been infused by JSW Steel to adhere to the regulatory norms regarding group captive arrangements. The solar project has been receiving payments from JSW Steel within the due date since the commencement of supply of power in mid-April 2022. Also, a comfortable average DSCR of above 1.45x in Ind-Ra’s base case provides adequate internal liquidity buffer for timely debt servicing. Ind-Ra believes should the generational level be equal to or above P90 level, the DSCR will be adequate to cover moderate stresses in the O&M expenses and interest rates.

Nascent Stages of Implementation of Wind Project: JREVL is developing an 825MW hybrid plant (225MW solar and 600MW wind) at a project cost of INR52.55 billion, which is being funded in a debt-equity ratio of 75:25. The agency draws comfort from the group’s track record of timely project execution. As per management, the entire solar capacity built on 960 acres of land has achieved commercial operations in August 2022, wherein the supply of power to JSW Steel has commenced from mid-April 2022 for the operational capacity. JREVL shall build another 22km dedicated transmission line connecting the wind power sub-station to the solar power sub-station, which is further connected to the Vijayanagar thermal plant sub-station.

For the wind power plant, 223 land parcels are spread across several villages, and 151 land parcels have been acquired (68%) till end-October 2022. The balance, which is part of a forest, government and private land are under various stage of approvals and would be acquired over the near term. The project shall be implemented by the company itself on a descoped model, wherein wind turbine generators (WTGs) shall be procured from renowned manufacturers. The timeline for completion of the wind project is 31 March 2024, as confirmed by management. Given the completion of construction of solar power project within the scheduled timelines and expertise of JSW Group in executing large infrastructure projects, the construction and completion risks are moderate. The timely commissioning of the project without any major debt-funded cost-overrun remains a key rating monitorable.

Comfortable Debt Profile: The total envisaged promoter’s contribution in the project cost would be brought in by way of equity share capital, quasi equity and/or subordinated loans from the promoter or its associate companies. JSW Steel (captive power procurer) shall hold a 26% stake in JREVL, as per group captive regulation, and infuse 26% of the equity requirement before the scheduled COD. JREVL has tied up long-term debt amounting to INR39,400 million, as envisaged. As per the amortisation schedule, the term loan is repayable over 68 and 65 quarterly instalments, commencing from 30 September 2023 and 31 March 2025 for the solar and wind project, respectively. The project has a sufficient tail period of about six years. In addition, the term loans have standard project finance features, including a cash flow waterfall, a DSCR-linked cash sweep mechanism and a DSRA equivalent to one quarter of principal and interest payments to be created within 12 months of COD. Management has confirmed that the part of disbursals from the RTL will be utilised to repay the existing LC facilities of INR7,600 million (INR5,590 million outstanding as on 30 September 2022) at the time of maturity.

Moderate Technology Risk: JREVL plans to procure WTGs from M/s GE Wind Energy, a US-headquartered WTG supplier with an installed capacity of over 62GW worldwide. According to the wind resource assessment report, GE Wind Energy’s 2.7MW WTGs having a hub height of 130 metres and a rotor diameter of 132 metres are selected for this project. The project’s revenue and operating cash flows are directly correlated with wind speed. Thus, the accuracy of the wind assessment studies and energy production forecasts done by wind forecaster (TUV Rheinland (India) Pvt Ltd) is critical. Management has procured polycrystalline-based solar module technology from Tier 1 supplier JA Solar International Limited and inverters from Sineng Electric Company Limited. Furthermore, the polycrystalline-based solar module technology has an operational record of over 30 years, thereby mitigating technology risks to a greater extent. Ind-Ra has assumed P90-PLF for its base case projections as per the solar resource assessment study done by Tata Consulting Engineers Limited and wind resource assessment by TUV Rheinland (India) Pvt Ltd. The actual performance of wind and solar plant will need to be monitored after the plant becomes fully operational.

Moderate Operating Risk: The O&M of the entire solar plant will be carried out by Sterling and Wilson Solar Limited for a period of one year from commissioning. The complexity of solar project operations is inherently low. Power generation in line with P90 estimates and efficient operations of the plant are of paramount importance to the ratings. A substantial increase in operating expenses, beyond Ind-Ra’s base case estimates, could impact the ratings.

Rating Sensitivities

For CE Rating
Positive: An upgrade of JEL’s rating will lead to a positive rating action.
Negative: A downgrade of guarantor’s rating, absent sponsor support or any transgression from the stipulated mechanism could result in a negative rating action.

For Unsupported Rating
Positive: Successful commissioning of majority of the project capacity within the scheduled timelines will lead to a positive rating action.

Negative: Future developments that may, individually or collectively, lead to a rating downgrade are:
– delays in project completion,
– deterioration in the credit profile of the sponsor,
– deterioration in the credit profile of the off-taker.

Company Profile

JREVL, a wholly-owned subsidiary of JSWFEL, which in turn is wholly owned by JEL is implementing a 825MW project, comprising of 225MW of solar power project and 600MW of wind power project in Bellary district of Karnataka.

The 100% capacity will be supplied on captive basis to JSW Steel. As per management, the solar project commenced full commercial operations in August 2022, while the wind project is estimated to commence commercial operations estimated COD in March 2024.

FINANCIAL SUMMARY

Solicitation Disclosures