Fitch affirms Adani Transmission at 'BBB-'; Outlook negative

21 Feb 2022 , 12:51 PM

Fitch Ratings has affirmed India-based Adani Transmission Limited‘s (ATL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Negative Outlook and Long-Term Local-Currency IDR at ‘BBB-‘ with a Stable Outlook.

The Negative Outlook on the Foreign-Currency IDR reflects the Negative Outlook on India’s sovereign rating (BBB-/Negative). The rating is not directly constrained by the sovereign rating, but cannot exceed the Country Ceiling of ‘BBB-‘ to reflect the transfer and convertibility risk associated with foreign-currency obligations.

The Country Ceiling may be revised down if the sovereign IDR is downgraded.

ATL’s ratings reflect its business profile, which is supported by a regulated asset base, a payment pooling mechanism for transmission assets, diversified counterparty exposure and established record in executing and operating transmission projects.

We expect ATL’s net leverage, measured as net debt/EBITDA, to remain commensurate with the rating over the medium term. Net leverage is likely to increase temporarily above 6.0x, our downgrade trigger, in financial year ending March 2023 (FY23), but should come down well below 6.0x by FY24.

KEY RATING DRIVERS

Pandemic – Marginal Impact: ATL’s revenue has not been affected by the lower electricity transmission volume due to reduced demand during India’s Covid-19 pandemic-related lockdowns, as its revenue is based on the availability of its transmission lines. However, cash collection was affected as longer transmission business receivable days, including unbilled revenue, of 143 days in 1HFY22, from 102 days in FY20 (FY21: 114). ATL is exposed to weak state-owned distribution companies, but the payment pooling mechanism supports its receivables position.

We believe higher working-capital costs due to delays in recovering revenue will be recouped during the mid-term tariff review. The pandemic also slowed the construction pace of ATL’s assets, resulting in transmission capex of INR27.6 billion in FY21, against our estimate of INR51.0 billion. However, we do not expect ATL to face penalties for these delays, as the pandemic is considered a force majeure event for under-construction projects, allowing developers to extend commissioning deadlines.

Financial Profile Adjustment: Fitch deconsolidates the EBITDA and debt of ATL’s restricted groups – the obligor group of ATL’s 74.9% subsidiary, Adani Electricity Mumbai Limited (AEML, senior secured rating: BBB-), and another restricted group with seven transmission SPVs – to calculate ATL’s credit metrics. The cash outflow from the restricted groups follows the cash-flow waterfall mechanism as per the indenture of the borrowings. ATL’s EBITDA instead incorporates our expectation of the cash to be received from the restricted groups.

High Capex, Leverage Rise Temporarily: We expect net leverage to reach 6.4x in FY23 (FY22 estimate: 6.0x, FY21: 5.0x) and for net coverage to dip below 2.0x (FY21: 4.3x) on high capex, which we forecast to average at around INR47 billion a year till FY24. However, net leverage should fall below and net coverage rise above our downgrade triggers for ATL’s rating – 6.0x and 2.0x, respectively – by FY24, supported by higher EBITDA from additional capacity along with expected cash upstreaming from AEML.

We expect ATL to receive INR13.2 billion in cash from AEML in FY24; post compliance with the waterfall structure defined in the indenture of AEML’s bonds. ATL should maintain its record of prudently bidding for new projects to achieve a robust return on investment and ensure that its financial profile does not deteriorate beyond our expectations. We include investments in committed projects in our rating case and will reassess ATL’s business and financial profile upon any new acquisitions.

Supportive Regulatory Framework: ATL’s credit profile benefits from a stable and favourable regulatory environment, as most Indian regulators have a long record of delivering predictable outcomes. Revenue for four of ATL’s key operating transmission assets is based on a cost-plus tariff framework and will continue to contribute above 40% of EBITDA up to FY24. The balance is from transmission assets under a tariff-based competitive bidding (TBCB) mechanism, which provides less protection than the cost-plus tariff model.

Availability-Linked Revenue Visibility: Revenue under both the cost-plus and TBCB frameworks is based on system availability and is not exposed to volume risk. The low operating risk profile of transmission assets and ATL’s strong operating performance in excess of regulatory benchmarks provide the company with long-term revenue visibility. ATL maintained high asset availability of 99.6% in 9MFY22 (FY21: 99.9%), well above the regulatory benchmark of 98.0% for alternating-current systems and 95.0% for high-voltage direct-current systems.

Diversified Counterparties: We expect Maharashtra State Transmission Utility’s (STU) contribution to ATL’s EBITDA to drop below 35% by FY24, from about 52% in FY21. The central transmission utility and STUs from other states will make up around 52% and 15%, respectively, of ATL’s EBITDA in FY24. ATL receives payments from statutory bodies, as transmission assets in India do not have a direct bilateral counterparty. The central transmission utility has a lower payment delay risk than STUs.