Rationale

 The reaffirmation in ratings factors in ICRA's expectation of improved cash flows from Swelect Energy Systems Limited's (SESL/ the company) solar power production segment, which has an aggregate capacity of ~77 MW and long-term power purchase agreements (PPA) with various PSU entities such as Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), Solar Energy Corporation of India (SECI), Airport Authority of India (AAI) and Chamundeshwari Electricity Supply Corporation (CESC Mysore). The company has been making continuous investments in solar power projects, which have supported and improved its overall profitability (OPM increased to 22.2% in 9MFY2021 from 17.1% in FY2020) and fund flow from operations. The ratings also reflect the company's borrowing profile, primarily secured by collaterals in the form of fixed deposit and mutual funds, which lends healthy financial flexibility. Moreover, its healthy capital structure, as illustrated by a gearing of 0.3 times as on December 2020, provides comfort. The ratings also consider SESL's diversified business segments, comprising three primary segments—the solar panel/EPC segment, the alloys and casting segment that cater to the oil and gas and the engineering industries, and the solar power/independent power producer (IPP) segment that supplies power to PSU entities and private players. The ratings continue to favourably factor in SESL's established brand position, through HHV Solar Technologies, in the solar module manufacturing segment, with presence across the value chain. The solar panel/EPC segment manufactures solar photo voltaic (PV) modules, solar power generating systems (SPGS), module mounting structures (MMS) and is involved in the implementation of turnkey solar EPC (together referred as solar panels/EPC segment). The ratings, however, remain constrained the company's subdued profitability, reflected in its modest RoCE (6.3% in 9M FY2021 as against 1.1% in FY2020), primarily due to weak profitability from the solar panel/EPC segment (due to low capacity utilisation, moderate-scale of operation and stiff competition) and moderate returns from the IPP segment. The ratings factor in the operating risks faced by the solar IPP segment because of dependence on solar irradiance and the risk of devolvement of warranties inherent in the solar panel industry (however, there are no major instance of any warranty invocation in past). Nonetheless, an experienced managerial team and strict quality assurance mitigate this risk to some extent. Further, ICRA notes that the company's large investments in mutual funds (held as collateral) are inherently susceptible to market and credit risks. ICRA also takes into account the vulnerability of cash flows to regulatory risks (primarily IPP and solar panel manufacturing segments).