CRISIL upgrades Tata Power's outlook to positive

Tata Power on Wednesday said that CRISIL Ratings has upgraded Tata Power’s outlook to ‘positive’, expecting improvement in the company’s profitability position this fiscal year. The agency has upgraded its outlook on Tata Power from 'AA/Stable' to 'AA/Positive'. ”The rating on Tata Power's commercial paper programme and short-term bank facilities has been reaffirmed at 'CRISIL A1+'," it says in a release.

"The revision in outlook reflects the possibility of better-than-expected business risk profile if the improvement in operating profitability in fiscal 2024, across power generation and distribution business, sustains along with a continuing healthy financial performance with consolidated net leverage (ratio of net debt to adjusted earnings before interest, tax, depreciation and amortization--Ebitda) remaining within rating threshold, it adds.

As per the report, the increase in operating profitability of Tata Power since fiscal 2023 is mainly on account of better profitability of its Mundra Ultra Mega Power Project (Mundra plant), improved efficiency in Odisha discom business and continued growth in renewable energy (RE) business with steady capacity addition. Profitability during the last fiscal was also supported by higher margins in overseas coal mining business amid elevated coal prices.

Overall, CRISIL Ratings expects Tata Power’s consolidated adjusted Ebitda to be more than ₹12,000 crore each in fiscals 2024 and 2025 (was around ₹11,500 crore in fiscal 2023 and around ₹9,600 crore in fiscal 2022). Adjusted Ebitda was reported at ₹6,694 crore in the first half of fiscal 2024, the report adds.

"CRISIL Ratings has revised its outlook on the long-term bank facilities and non-convertible debentures of Tata Power to 'Positive' from 'Stable', while reaffirming its rating at 'CRISIL A'. The rating on Tata Power’s commercial paper programme and short-term bank facilities has been reaffirmed at ‘CRISIL A1+’," the filing said.

The filing states that the scale of operations has increased, resulting in improving operating efficiency and steady cashflow in thermal generation and regulated business is expected to support operating cash accrual. “This would be despite an expected reduction in earnings from the coal mining business, amid lower coal prices this fiscal. Increasing the level of integration in the RE business by setting up in-house module manufacturing and engineering, procurement and construction (EPC) business lends support.” it adds.

CRISIL Ratings also notes the presence of a large cash balance in Tata Power’s Odisha distribution business. However, the same has not been considered for net debt computation at this point as the cash is encumbered against customer deposits, the report states.

CRISIL Ratings expects healthy margins from Tata Power’s regulated and stable business to improve further on account of increase in growth capex, leading to healthy cashflows to support debt for the said capex along with sustenance of consolidated net leverage. Same shall be key monitorables also, it reports.