India Ratings Upgrades Mundra Solar PV to ‘IND A-’; Outlook Stable

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The upgrade reflects the followingfactors: i) the ongoing change in MSPVL’s business model  towards a module manufacturing-cum-engineering procurement construction (EPC) business from pure cell and module manufacturing, ii) the receipt of subsidy under the Modified Special Incentive Package Scheme, which has led to a decline in the debt; iii) an increase in domestic content requirement (DCR)-based orders, which allow MSPVL to earn a premium on module prices, thereby leading to  higher EBITDA margins; iv) visibility on the (DCR) policy; v) the creation of a debt service reserve account (DSRA), which bolstered the liquidity position; and vi) a continued healthy order book. 

KEY RATING DRIVERS

Business Transition Underway: MSPVL has undertaken a shift towards becoming an integrated EPC company from being only a manufacturer of cells and modules. In this regard, the company is likely to benefit from three developments that are underway – i) the central public sector undertakings’ (CPSUs) scheme for setting up 12GW of grid-connected power projects over FY20-FY23; of this, 2.5GW has been awarded, and MSPVL has won a decent share of the same; ii) the setting up small decentralised solar energy capacity of up to 2MW under the KUSUM scheme; and iii) the government of India’s solar rooftop scheme. MSPVL intends to derive significant revenue from the non-utility scale business, as it would yield higher margins owing to its B2C nature as compared to the B2B nature of the ground-mounted EPC business. During FY20, MSPVL’s rooftop business generated revenue of INR3,996 million (FY19: INR1,785 million). Given the 100% DCR requirement associated with the CPSU scheme, the margins earned by MSPVL would continue to be healthy in the medium term owing to the company’s ability to command a premium on the imported cell prices.
Continued Support from Promoters: MSPVL continued to receive financial support from the promoter entities in the form of i) unsecured loans and compulsorily convertible debentures , subordinated to senior debt (FY20: INR7,180 million, FY19: INR5,060 million) (including zero percent compulsorily convertible debentures of INR4,500 million issued in FY19), and  ii) trade creditors (FY20: INR1,496 million, FY19: INR2,454 million). Additionally, the company is promoted by Adani Green Technology Limited, which is held by Adani Enterprises Ltd and Adani Properties Limited in the ratio of 51:49. AEL had initially given corporate guarantees till achievement of the commercial operation date or the creation of the DSRA, whichever was later. AEL’s guarantee fell off with the creation of the DSRA of INR597 million for one quarter in December 2018. The management has confirmed to Ind-Ra that, in case of any exigency, the promoters would step in to support the entity. Given that the project is a part of group’s strategic investment in the solar value chain, Ind-Ra believes the sponsors would continue to extend support, as and when necessary.

Term Debt to Decline Significantly by FY23: Ind-Ra expects MSPVL’s gross term debt to decline meaningfully by FY23 on the back of repayment of long-term debt through cash accruals, and believes the company would largely rely on short-term borrowings for working capital purposes with the transition in the business model. The company received capital subsidy of INR2,949 million and INR188 million in FY20 and 1QFY21, respectively, out of the cumulative subsidy receivable of INR3,421 million at FYE19. Of the same, the company utilised INR2,196 million towards debt repayments. Consequently, the term loan declined to INR9,445 million in FY20 (1QFY21: INR9,314 million; FY19: INR12,889 million), leading to the gross external debt falling to INR14,733 million in FY20 (1QFY21: INR16,786 million; FY19:  INR17,440 million).

However, MSPVL’s total debt, including loans from promoters, reduced only marginally to INR17,413 million in FY20 (FY19: INR17,996 million), as the increased scale of operations resulted in higher working capital borrowings and support from the promoters. The short-term loans, including loans from promoters, increased to INR2,681 million in FY20 (FY19: INR556 million). With the reduction in the term debt, the company’s credit profile would begin to be more closely aligned to that of an integrated EPC player. Ind-Ra expects the net leverage (including promotor debt) to fall below 3.0x in FY21 (FY20: 6.1x (including promoter debt); 5.2x on external debt), and the debt service coverage ratio to remain above 1.0x. MSPVL is likely to incur a discretionary capital expenditure of around INR4,000 million over FY22-FY23 for technological upgradation, which will be financed either through internal cash accruals or additional support from the promoter. MSPVL’s gross interest coverage was 1.6x (including promoter debt; 1.8x on external debt) in FY20.

Comfortable Order Book Visibility: As on 1 June 2020, MSPVL had an outstanding order book of 670MW (45% of the total capacity of 1,500MW), with an order book value of INR25,520 million (1.1x of FY20 revenue). EPC orders, including module sales, accounted for 90% of the order book, standalone domestic module sales orders constituted 9% and the exports accounted for the balance 1%. Additionally, MSPVL is in the advanced stages of discussion to tie-up another 325MW of the domestic module capacity. The company had executed an order book of 1,040MW in FY20 (FY19: 612MW, FY18: 577MW), with the EPC segment contributing 101MW. The increase in the contracted capacity for the EPC business is in line with MSPVL’s strategy to improve its focus on the same under the DCR segment.The company has also benefited from the extension of safeguard duty on the import of cells and modules from China, Thailand, and Vietnam till July 2021; the policy was implemented in July 2018 to make domestic modules more competitive. However, imports from China continue to be competitive, and hence, orders from independent power producers would remain limited.  Nevertheless, Ind-Ra expects the demand risk for MSPVL to be moderate, owing to the assured offtake for domestic module manufacturers through the CPSU Scheme till FY23.  In 1QFY21, although MSPVL’s shipment and sales were impacted by the COVID-19 outbreak and associated lockdown, the inventory built-up of 172MW at end-June 2020 (end-March 2020: 67 MW) will be supplied against the committed order book for the rest of FY21.
Strong Competitive Positioning to Improve Profitability in FY21: MSPVL has a market share of over 50% in domestic cell manufacturing. This gives the company order book visibility from module manufacturers and contractors that do not have their own cell manufacturing capacity, under the DCR market. In FY20, MSPVL was able to charge a premium on the average market price on modules due to the demand-supply mismatch between cell manufacturing capacity and the auctioned capacity in the DCR category. Therefore, the company reported an operating margin of USD3.5 cents/W in FY20 against a loss in FY19. MSPVL’s profitability is likely to improve further in FY21 on account of increased order book execution in the DCR segment. Ind-Ra expects MSPVL to maintain operating margin above USD3 cents/W on module sales till FY23 due to the likely receipt of orders under the CPSU scheme and the extension of the safeguard duty; post FY23, the margins are likely to decline due to higher competition, resulting from the capacity addition undertaken by the company’s peers. The inability to execute the order book in a timely manner and/or maintain the gross margin will be a key rating sensitivity.
MSPVL reported an EBITDA profit of INR2,854 million in FY20 (FY19: loss of INR195 million), driven by higher order book execution of 1,040MW (612MW). In FY19, the lack of clarity on the implementation of safeguard duty and related aspects for a major portion of the year, along with a considerable fall in solar module/wafer prices globally, had led to deferment of purchases by the developers, resulting in lower offtake and inventory mark downs. While MSPVL would continue to face the risk of fluctuations in raw material prices, the company tries to base the contract pricing on the point-in-time cost of materials and carries limited inventory of 40-45 days.  However, in case of any major variation in spot prices, MSPVL would remain susceptible to higher-than envisaged commodity price risk. MSPVL also takes forward-contracts from time–to-time for the procurement of raw material, though the exports provide a natural hedge to some extent to the payables. However, Ind-Ra believes MSPVL is exposed to currency fluctuation risk in trade credits from banks, which remained entirely unhedged at INR3,642 million at FYE20 (FY19: INR2,577 million).
Liquidity Indicator – Adequate: MSPVL’s liquidity derives comfort from the strong expected profitability, the large unutilised limits, and moderate debt obligations. The company’s usage of its fund-based limits of INR1,610 million remained low at around 7% for the 12 months ended May 2020; the non-fund based limits were almost fully utilised over the same period.  MSPVL’s working capital requirements declined in FY20 due to an increase in trade payables to INR4,231 million (FY19: INR2,919 million). The company’s trade payables will remain high till additional non-fund based limits are not tied up for the procurement of raw material that is not backed by letters of credit. MSPVL also has limited receivables risk due to contracted capacity with strong CPSU counterparties. Although MSPVL has scheduled repayments of INR1,146 million and INR1,468 million in FY21 and FY22, respectively, it is likely to prepay its long-term debt through increased cash accruals on the back of  higher EBITDA. Furthermore, as per the loan agreement document, 40% of the excess cash flow above 1.5 DSCR has to be utilised for the purpose of the mandatory prepayment of long-term debt at the instance of lenders. 

MSPVL’s liquidity also derives comfort from being part of the strong promotor group. The company has availed the Reserve Bank of India-prescribed moratorium/deferment on its debt facilities for March-August 2020.

RATING SENSITIVITIES

Positive: Improvement in industry-wide solar module realisation, resulting in a favourable operating environment coupled with order book visibility, leading to improved volumes with sustained gross margins will be positive for the ratings. 

Negative: Lower–than-expected execution of orders, leading to lower-than-expected EBITDA, resulting in the net leverage remaining above 3.5x, on a sustained basis, will be negative for the ratings.

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