Renewable energy business is a high-growth area in India, though falling asset prices and competitive bidding for new power purchase agreements may lead to volatility in returns on investments, S&P Global Ratings said today.
“We believe the renewable energy business is a high-growth area in India, given the government’s focus on increasing capacities for renewable energy and priority dispatch,” it said in a statement.
However, falling asset prices and competitive bidding for new power purchase agreements (PPAs) can expose renewable energy assets to volatility of returns on investments, it said.
It added that such assets also face greater volatility of cash flows due to seasonality and inherent uncertainty of wind/hydro/solar patterns, resulting in resource risks.
The agency further said that Tata Power’s business position is unlikely to materially change after the acquisition of Welspun Renewable Energy.
S&P Global Ratings further said that its corporate credit rating on Tata Power Ltd (B+/Stable) is not immediately affected by the company’s acquisition of Welspun Renewable Energy for an enterprise value of Rs 92.49 billion.
Tata Power indicated that it intends to maintain leverage at the current improved levels post-acquisition through strategic measures.
If the acquisition is fully debt funded, Tata Power’s debt will increase by about 25 per cent, and its financials and the rating will be pressured.
“We believe Tata Power will share further details on its capital structure in due course.Tata Power’s operating performance in the fiscal year ended March 2016 was above our expectations. Cash flows were stronger due to stable earnings from the company’s regulated distribution business and lower losses in the unregulated Mundra project,” it said.
A sharp reduction in coal prices led to lower losses for the Mundra project, where the sale price for the PPA is fixed.
“The company’s ratio of funds from operations to debt was stronger at about 12 per cent for the fiscal ended March 2016, against our expectation of about 9 per cent,” it said.
The company will likely emerge as one of the larger renewable energy players in India but overall, renewable energy accounts for less than 30 per cent of the country’s power generation.
“We believe Tata Power will need to manage its liquidity appropriately as the planned short-term bridge facility could accentuate the pressure from high short-term debt and continuing covenant breach at the Mundra project. However, Tata Power has satisfactory banking relationships and access to support from its promoters if required,” it said.