India Ratings upgrades Adani Green Energy to ‘IND AA-’ from ‘IND A+’ with stable outlook

• The upgrade reflects AGEL’s strong operational asset performance, increased annual capacity additions, and healthy counterparty diversification

NE BUSINESS BUREAU

AHMEDABAD, MAY 30

India Ratings and Research (Ind-Ra) has elevated the Long-Term Issuer Rating of Adani Green Energy Limited (AGEL) from ‘IND A+’ to ‘IND AA-‘, with a Stable outlook. This significant upgrade underscores AGEL’s robust operational performance, enhanced execution capabilities, and improved financial health, on May 30.

The upgrade reflects AGEL’s strong operational asset performance, increased annual capacity additions, and healthy counterparty diversification. Ind-Ra noted the company’s strategic move to earmark funds for the repayment of a USD750 million bond and its collaboration with Total Energies SE, which facilitates asset monetization while retaining consolidation benefits, as per an official release.

AGEL’s financial performance has seen considerable improvement, with revenue rising to Rs 92.2 billion in FY24 from Ra 77.9 billion in FY23. The EBITDA also saw a substantial increase, reaching Rs 72.9 billion in FY24 from Rs 49.3 billion the previous year. The EBITDA margin improved to 79% from 63%, and the net adjusted debt to EBITDA ratio moderated to 6.5x from 8.0x in FY23.

The instrument-wise rating actions are as follows:

Details of Instruments

Analytical Approach

Ind-Ra continues to fully consolidate AGEL and its subsidiaries to arrive at the ratings and has analysed the cash flow upstreaming available to AGEL from its subsidiaries as per the bond documentation. As per various bond documents entered into by SPVs/subsidiaries, funds can be upstreamed after meeting the respective restricted payment conditions.

Detailed Rationale of the Rating Action

The upgrade factors in the continued strong operational asset performance, ii) strong execution scale-up, with annual capacity additions likely to be 4GW-5GW annually over the medium term from the earlier 2.5-3.5GW; and iii) healthy counterparty diversification and reduction in receivables, leading to an increase in the (cash flow from operations – interest)/EBITDA conversion compared to historical levels. The upgrade also reflects  AGEL’s change in policy with respect to the  leveraging of the holding company, as the company has now earmarked funds towards the repayment of USD750 million holdco bond. In addition, the upgrade factors in the creation of a platform within AGEL with Total Energies SE, which allows for part asset monetisation while retaining consolidation benefits, the equity infusion by the promoters through warrants of which 25% has already been received, and the continued ability of the company to tie up both debt and raise equity to ensure fully funded under-construction portfolio. The ratings also reflect Ind-Ra’s expectation of favorable operational to under-construction book ratio, given the operational capacity of  nearly 10.9 GW, and an increase in annual capacity addition targets to 5GW and the amortising structure of the debt as against bulleted structures earlier, which ensure amortisation  of debt, leading to 15% tail life for the projects, thus lowering the refinance and tail risks. The above factors have jointly contributed to a moderation in the leverage to more reasonable levels of 5.5-6.5x from the historically high levels of 9.0x.

The ratings continues to factor in i) AGEL’s robust execution track record; ii) the strong operational performance of its assets with plant load factors (PLFs) between P50-P90 levels of the operational assets; iii) healthy diversification among counterparties, with majority of counterparties belonging to highest credit quality; iv) portfolio diversification achieved both geographically and in generation sources across wind and solar; and v) healthy cash upstreaming from the operating SPVs when the restricted covenants are met, thus allowing for debt servicing at the holdco.
List of Key Rating Drivers

Strengths

• Largest renewable developer in India
• Sound operating parameters of operational assets
• Healthy free cash flow to equity; promoter infusion covers equity commitments
• Construction facility ensures debt funding for capex plan
• USD750 million holdco bond repayment
• Improvement in leverage

Weakness

• Large under-construction (UC) portfolio provides growth visibility – risks managed
• Forex exposure

Detailed Description of Key Rating Drivers

Largest Renewable developer in India: AGEL increased its operational capacity to 10.9GW at FYE24 (FYE23: 8.1GW; FYE22: 5.4GW), backed by healthy execution. The operational portfolio has a healthy diversification, with counterparties rated ‘AA+’ and above (Solar Energy Corporation of India Limited/NTPC Limited (IND AAA/Stable) and Adani Electricity Mumbai Limited (IND AA+/Stable)) forming 72% of the  same, with 6% as merchant exposure. Additionally, solar forms 68% of the operational portfolio, followed by wind and hybrid at 13% and 20%, respectively.  The tilt towards stronger counterparties, solar portfolio, and high DC:AC ratio of 1.4x lower the variability in both generation and cash flow generation, thereby aiding the leveraging levels. The portfolio has tended to perform between P50-P75 levels against the P90.

 Sound Operating Parameters of Operational Assets: Supported by healthy operational performance (solar/wind capacity utilisation factor – FY24: 24.5%/29.4% , FY23:24.7%/25.2%; FY22: 23.8%/30.8%) and continuous capacity addition (2.8GW, 2.7GW, 2GW),  AGEL’s consolidated EBITDA increased to a healthy INR73 billion in FY24 (FY23: INR55 billion, FY22: INR35.1  billion), while the run-rate EBITDA(excluding other income)  stood at INR92 billion (INR67 billion, INR55 billion). Ind-Ra opines the company would continue to generate a healthy run rate EBITDA/MW and given the minimal tax outgo and absence of any unfavourable working capital changes, a high proportion of the same should translate to cash flow from operations per MW.

Healthy Free Cash Flow to Equity; Promoter Infusion Covers Equity Commitments: Given the strong cash flow from operations, 70%-75% of the same has been utilised towards meeting interest and principal obligations on senior debt; the balance has been   available towards meeting the equity requirements for new projects and for servicing the subordinated debt from Total Energies and the promoters. This coupled with the balance promoter warrant money infusion of INR70 billion over FY25-FY26 and equity investment from investors would ensure adequate availability of equity for the  under-construction portfolio. Ind-Ra expects the annual capex run rate to be stepped up to INR240 billion-300 billion over FY25-FY27 from about INR160 billion in FY24. The same would entail an annual equity requirement of INR180  billion over FY25-FY27, of which nearly INR70 billion would be promoter funds, INR85 billon-110 billion would be internally generated and the balance could be generated from the equity program.

Construction Facility Ensures Debt Funding for Capex plan:  As 80% – 85% of the capex is likely to be financed through debt, AGEL’s ability to ensure a timely debt tie-up for the special purpose vehicles (SPVs) remains a key rating monitorable. Ind-Ra believes the debt tie-up is achievable, given the capital management philosophy of AGEL. AGEL uses letters of credit or revolving credit facilities at the holding company (holdco) level to initially place procurement contracts. Within the next three-to-six months, revolving construction facilities will be secured at the SPV level, freeing up the letters of credit at the holdco level. Once the assets become operational and have stabilised, AGEL would refinance the debt to release the revolving construction facilities, which could be used for funding other upcoming projects, thereby rotating the funds, resulting in mitigating the funding tie-up risk. As of March 2024, at the holdco level, AGEL had INR89 billion of non-fund-based facilities and USD3.4 billion of revolving construction facilities for the SPVs, with the total usage of construction facility standing at USD1.8 billion. During FY24, AGEL successfully refinanced USD500 million RG1 bonds with USD409 million 18 Year USD bonds and prepayment of USD91 million.

USD750 Million Holdco Bond Repayment: During FY24, AGEL defeased USD750 million holdco bonds that were due in September 2024. The defeasance of the holdco bonds was financed through USD300 million asset monetisation received from Total Energies, USD281 million received from promoter preferential allotment, and USD169 million from the debt service reserve account and other reserve accounts. Also, the company changed the agreement with Total Energies to effect a change in the nature of the investment to compulsorily convertible debentures (CCDs) with no guaranteed returns from earlier stapled instruments with guaranteed returns. The fund raise from Total Energies was executed through 50% share sale in Adani Renewable Energy Nine Limited (1,050MW assets). Ind-Ra understands that any leverage at the holdco would be relatively small and would be utilised for meeting cash flow timing mismatches for project funding rather than as an equity bridge.

 KEY FINANCIAL INDICATORS- Consolidated

Status of Non-Cooperation with previous rating agency

Not applicable

Rating History

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Complexity Level of the Instruments