Rationale

 The upgrade in the long-term rating assigned to The Tata Power Company Limited (TPCL) factors in the improvement in the operating and financial performance of the Tata Power Group across the power generation and distribution business over the past two fiscals. The growth in electricity demand and improved operating efficiencies, mainly in the Odisha distribution business, led to growth in the revenues and profitability of the distribution business. The growth in the renewable business was driven by the addition of new capacity and a stable generation performance. Also, the engineering, procurement, and construction (EPC) business in the solar power segment witnessed healthy growth in FY2024, led by a strong order book position and moderation in solar PV module prices. Further, the commissioning of the 4.3-GW cell and module manufacturing facility will support the growth, going forward. For the thermal assets, Maithon Power Limited (MPL) continues to report a healthy operating and financial performance, supported by the availability of long-term power purchase agreements (PPAs) under the cost-plus tariff mechanism. The performance of the Mundra asset improved in FY2023 and FY2024, following the fuel pass-through arrangement (subject to adjustment of profits from coal mining companies) under the Section 11 directive of the Electricity Act issued by the Ministry of Power. While the asset continued to report losses at the net level, this is offset by the profits from the coal mining companies. The decline in profits from the coal mining companies in FY2024 amid the moderation in international coal prices was partly offset by the improved operating profitability of the Mundra project. Also, the implementation of Late Payment Surcharge (LPS) rules enabled timely collections from the state distribution utilities (discoms) for the generation assets. Overall, the improved performance has allowed the company to reduce its net debt1 to adjusted EBITDA2 to 3.5 times in FY2023 and FY2024 from 4.6 times in FY2022 and enabled an improvement in the debt coverage metrics with the interest coverage ratio improving to 2.4 times in FY2024 from 2.0 times in FY2023 and 1.8 times in FY2022. Further, the rating continues to favourably factor in the superior financial flexibility of TPCL from being a part of the Tata Group, along with its large scale of operations and a diversified business profile with presence across the power sector value chain. The long-term PPAs for majority of the thermal, hydro and renewable assets aggregating to 14.7 GW (including the Resurgent platform) and the regulated returns from the distribution business in Mumbai, Delhi and Odisha provide stability to TPCL’s revenues and cash flows. Further, the thermal generation assets of the TPCL Group have long-term fuel supply agreements (FSAs) with the subsidiaries of Coal India Limited and coal mining companies in Indonesia, which limit fuel-related risks. Moreover, the operating efficiency of the distribution business in Mumbai and Delhi remains healthy and within the regulatory stipulated level. Also, the progress in reducing the aggregate technical & commercial losses (AT&C) in the Odisha distribution business remains better than the trajectory committed by the group at the time of acquisition. ICRA also draws comfort from the growing contribution from the renewable energy (RE) business, with the installed RE capacity increasing to 4.5 GW as of June 2024 from 4.0 GW as of June 2023. This is expected to scale up over the next three years, with an under-development capacity of 4.9 GW. The Group’s entire renewable business, including the manufacturing, EPC and O&M services, have been brought under Tata Power Renewable Energy Limited (TPREL), wherein Green Forest New Energies Bidco Ltd (UK) (a vehicle of Blackrock Real Assets and Mubadala Investment Company) has invested Rs. 4,000 crore for an 11.43% stake. However, the rating remains constrained by the slow progress in resolving the tariff issue for the Mundra Ultra Mega Power Plant (UMPP). The project is facing fuel cost under-recoveries owing to the mismatch between the bid tariff of the PPA and the contracted fuel cost following the changes in mining regulations in Indonesia. While the plant is currently operating under the Section 11 directive of the Ministry of Power with fuel cost pass-through along with adjustment of mining profits, a longterm resolution remains pending. The company continues to be in negotiations with the offtakers on a long-term compensatory tariff mechanism for pass-through of variable costs, subject to covenants. The rating also remains constrained by the Tata Power Group’s moderate leverage level despite the recent improvement and its large debt-funded capex plans, estimated at Rs. 15,000 crore in FY2025, mainly in the renewable portfolio. Also, the large capex plans would keep the Group exposed to execution and stabilisation risks. While the Group has sizeable debt repayments falling due over the near to medium term, ICRA takes comfort from the company’s track record of successfully refinancing its loans in a timely manner and raising debt at a competitive cost. Further, the rating factors in the risks arising from exposure to state distribution utilities in the generation portfolio and the large regulatory asset position in the distribution business. The Stable outlook assigned to the long-term rating of the company factors in the expectation of a healthy operating and financial performance driven by the diversified business profile, superior operating efficiencies and long-term offtake agreements for the generating portfolio.