Rationale

 The upgrade in the long-term rating assigned to Tata Power Renewable Energy Limited (TPREL) factors in the improvement in the credit profile of its parent, The Tata Power Company Limited {TPCL; upgraded to [ICRA]AA+ (Stable) from [ICRA]AA (Positive)}, led by the improvement in its operating and financial performance across the generation and distribution businesses. The performance was supported by healthy electricity demand growth, improved operating efficiencies in the distribution business, scale-up in the renewable energy capacity, higher execution of the solar engineering, procurement & construction (EPC) business and operating the 4,150-MW Mundra UMPP under Section 11 of the Electricity Act. Also, the collections from the state distribution utilities improved following the implementation of the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 (LPS). Overall, the improved performance has allowed TPCL to strengthen its financial leverage and debt coverage metrics. The rating continues to factor in the company’s strong financial flexibility from being a part of the Tata Group and the focus of the parent, TPCL, on renewable energy as an area of growth. The rating is based on the consolidated business and financial risk profile of TPREL, which comprises Walwhan Renewable Energy Limited (WREL), Tata Power Solar Systems Limited (TPSSL) and other subsidiaries. The aggregate operating renewable capacity of the Group was 4.5 GW as of March 2024. The rating upgrade also factors in the scale up in revenues and profitability of TPREL led by the growth in operating capacity as well as improved execution in the solar EPC segment, leading to comfortable debt coverage metrics. Further, the rating continues to favourably reflect the strengths arising from the well-diversified renewable power portfolio across multiple states, which reduces the vulnerability of generation to location-specific issues. A diversified customer mix, which partly mitigates the counterparty credit related risks, also favours the rating. Further, the rating draws comfort from the demonstrated operating track record with close to 60% of the portfolio having a track record of at least three years. ICRA takes note of the availability of long-term power purchase agreements (PPAs) for the portfolio at fixed tariff rates with state distribution utilities (discoms), commercial & industrial customers and central intermediary procurers, with a weighted average balance PPA tenure of ~19 years, providing strong visibility on revenues and cash flows. Further, the healthy cash accruals from the operational portfolio and the availability of cost competitive funding sources for the under-construction projects would support the profitability and debt coverage metrics of the company, going forward. Also, ICRA takes note of the large order book position of Rs. 16,252 crore for TPSSL as of March 2024. ICRA notes that the Tata Power Group’s entire renewable business, including the manufacturing, EPC and O&M services, have been brought under TPREL, wherein Blackrock Real Assets and Mubadala Investment Company (a sovereign investor of the Government of Abu Dhabi) invested Rs 4,000 crore in FY2023. The capital infusion was used to scale up its renewable energy business and towards the 4.3-GW solar PV cell and module manufacturing facility. TPCL will continue to be the majority shareholder in TPREL with a shareholding of 88.57%. The rating is, however, constrained by the exposure to the state distribution utilities (discoms), which have weak-to-moderate financial profiles, particularly in Andhra Pradesh, two discoms in Karnataka, Madhya Pradesh, Maharashtra, Rajasthan and Tamil Nadu. This constraint 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), TPCL (Mumbai), Tata Power Delhi Distribution Limited (TPDDL) and Mangalore Electricity Supply Company Limited (MESCOM). Moreover, following the notification of the LPS rules by the Ministry of Power, Government of India, in June 2022, the discoms are clearing the bills in a regular manner. As a result, the receivables at the consolidated level have significantly improved over the past two years. A sustained track record of timely payments from the discoms remains a key monitorable for the company. ICRA also takes note of the execution challenges in view of the Group’s sizeable expansion plans in the renewable energy sector with ~4.9 GW under development involving a capex of Rs. 30,000 crore over the next two to three years. The Group remains exposed to the movement in solar PV module prices as well as the wind turbine generator cost. Nonetheless, ICRA draws comfort from the strong execution and financing track record of the Tata Power Group. Further, the rating is constrained by risks typical to all renewable energy projects, including the exposure to the variation in wind power density and solar radiation associated with climatic conditions, as the 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 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. However, these issues were resolved by the Group by replacing the O&M partners and the equipment, wherever required. Also, the relatively high PPA tariff rates for the older capacity (compared to the 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 long-term rating of TPREL 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.