Fitch Ratings has affirmed Indian renewable power producer ReNew Energy Global Plc's (REGP) and onshore subsidiary ReNew Private Limited's (ReNew) Long-Term Issuer Default Rating at 'BB-' with a Stable Outlook.

Both are rated at same level due to their similar credit profiles, with REGP as the offshore holding company of the group. The agency has also affirmed the 'BB-' ratings on the US dollar notes issued by ReNew, India Clean Energy Holdings and Diamond II Limited. India Clean Energy Holdings and Diamond II Limited are fully owned subsidiaries of REGP.

The affirmation reflects REGP's large and growing portfolio of renewable power assets with long-term power purchase agreements (PPAs), improving receivables and adequate liquidity profile. We expect REGP's high capex for projects under construction to keep its EBITDA net leverage elevated in the near-to-medium term. However, we expect its interest cover, measured as EBITDA net interest cover, to remain adequate for its 'BB-' ratings.

Key Rating Drivers

Leading Producer: REGP's large and diversified portfolio provides economies of scale and operating advantages, mitigating concentration risk. Its power projects, including those under construction, are diversified by source and geography, which reduces risks from adverse climatic conditions. We expect REGP's solar project generation to remain at the historical plant load factor (PLF) of around 20%-22%, while the wind projects' PLF should increase marginally from the 25% historical level, in the medium term, as new projects with higher PLFs are commissioned.

Improved Receivables: We expect REGP's receivable days to improve to 125 in the year ending March 2024 (FY24) due to increasing exposure to sovereign-owned entities that make timely payments and the receipt of payments from state utilities under late payment surcharge rules. Receivable days improved to 152 in FY23 (FY22: 256) as state utilities made payments, especially those from Andhra Pradesh, which accounted for around 45% of receivables in FY22 and cleared a large part of their long outstanding dues in 12 monthly instalments, starting August 2022.

REGP's key counterparties, state-owned power-distribution utilities that account for about 60% of the current off-take, have weak credit profiles in general. However, we expect REGP's exposure to them to fall to around 40% by FY25, as a large part of its capacity under construction is tied up with counterparties with timely payment records.

High Capex: We expect REGP's EBITDA net leverage to remain above 6.0x over FY24-FY25 (FY23: 7.5x), driven by its large investment plans, before improving to around 6x by FY26 on enhanced earnings from its larger scale and improving receivables. We expect capex for capacity under construction to remain high at about INR105 billion a year in FY24 and FY25 (1HFY23: INR75 billion, FY23: INR86 billion). We expect REGP's capex intensity to drop below 100% after FY24 (FY24F: 131%), as its earnings rise from the commissioning of a large part of its under-construction projects.

Adequate Financial Profile: We expect REGP's consolidated EBITDA net interest cover to remain above 1.5x in the near-to-medium term, the key negative sensitivity for its 'BB-' ratings. Interest cover remains adequate as more than half of its borrowings are fixed rate, and the majority have long-dated maturity. REGP also has a record of selling stakes at the project level to support capex and maintain its financial profile. The stake increase by Canada Pension Plan Investment Board to more than a 50% economic interest in REGP could be beneficial in the medium-to-long term.

Price Certainty, Volume Risk: We believe the long-term PPAs for the group's operating assets offer price certainty and long-term cash flow visibility. We expect more than 90% of group capacity to be sold under PPAs with tenors of 20-25 years, even as REGP increases direct off-take with corporate PPAs. Production volume can still vary under the long-term PPAs because it is based on resource availability, which is affected by seasonal and climatic patterns.

Healthy Debt-Service Coverage: Fitch monitors the cash flow from operations (CFO)-based debt service coverage ratio (CFO + interest expense/scheduled project debt amortisations + interest expense) at the ReNew and/or REGP holding-company level and unrestricted projects to analyse liquidity at the unrestricted portfolio, excluding the three restricted groups. We expect the ratio to average around 1.2x in the medium term, higher than the negative sensitivity level of 1x, with an increase in cash generation from larger operational capacity and lower receivables.

No Notching for Subordination: We do not notch down the rating of the three US dollar notes issued by ReNew, India Clean Energy Holdings and Diamond II in light of our assessment of at least an average recovery for noteholders. The subordination risk is mitigated by the cash available for upstreaming from REGP's operating projects after servicing their own debt obligations.

Our view benefits from REGP's large scale and diversity of projects across geographies, resource types and counterparties. We also factor in the subordination of notes to prior-ranking project debt at operating entities in the group. We do not expect total debt at the ReNew and REGP holding-company level to increase materially in the near-to-medium term. However, a material increase in structural subordination risk at these holding companies could lead to negative rating action.

Currency Risk: REGP's earnings are in Indian rupees but its notes are in US dollars, resulting in exposure to foreign-exchange risk. REGP has mitigated this risk by substantially hedging the notes' coupon and principal.

Derivation Summary

Fitch views Greenko Energy Holdings (BB/Negative) and Concord New Energy Group Limited (CNE, BB-/Positive) as REGP's close peers. Greenko, like REGP, is one of India's leading power producers, with a focus on renewable energy. However, REGP's operating capacity has increased to more than Greenko's over the last few years.

REGP's resource risk is lower, with higher exposure of 54% to solar-based projects (Greenko: 29% solar and 11% hydro and others). Its counterparty risk is also lower, with 45% capacity contracted with sovereign-owned entities and the rest with state-owned distribution companies (40%) and direct sales (15%). Greenko's better credit assessment than ReNew is supported by the former's stronger financial access, benefitting from its strong shareholders, which enables the company to rely on fresh equity for investments and acquisitions, while utilising cash generated from operations to deleverage.

CNE is a renewable power operator in China with 3.6GW of attributable installed capacity of wind and solar farms. Its feed-in tariffs are stable and its counterparty risk is lower than that of REGP, as its revenue stream is mostly reliant on State Grid Corporation of China (A+/Stable) and China's Renewable Energy Subsidy Fund. In comparison, REGP is larger - allowing for diversity and granularity across multiple projects - and financial access has improved after its Nasdaq listing. They have similar financial profiles, resulting in the same overall rating assessment.

Continuum Green Energy Limited (CGEL, B+/Positive), another India-based renewable power producer, has lower counterparty risk than REGP, with more than 80% of capacity contracted with timely paying customers. However, CGEL's better counterparty profile is counteracted by high net leverage in the near term of above 10x.

This, along with ReNew's larger scale of diversified operating assets of 8.3GW and higher proportion of solar assets, results in CGEL's one-notch lower rating. The Positive Outlook on CGEL's rating reflects our expectation of an improvement in net leverage to around 6.0x by FY25, which would be comparable to ReNew's net leverage.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Plant-load factors in line with average historical performance or resource assessment studies

Plant-wise tariff in accordance with respective PPAs

Average receivable days to reduce to around 125 in FY24 (FY23: 152), helped by regular payments from state distribution companies under the government's late payment surcharge scheme and ReNew's increasing exposure to sovereign-owned entities

Asset-level EBITDA margins of 80%-93%, in line with historical performance or management guidance

Capex to remain high at about INR105 billion a year in FY24 and FY25 (1HFY23: INR75 billion, FY23: INR86 billion).

No dividend payout in the medium term

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Net debt/EBITDA below 5.0x on a sustained basis, provided there is no significant increase in REGP's business risk profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Operating EBITDA/net interest expense below 1.5x for a sustained period;

Material increase in structural subordination risk at ReNew and/or REGP holding-company level, measured by a sustained decline in their holding company-level CFO-based debt-service coverage ratios (including cash flow from unrestricted projects) to below 1.0x;

Significant and prolonged deterioration of the receivable position;

Failure to adequately mitigate foreign-exchange risk.

Liquidity and Debt Structure

Liquidity Supported by Market Access: REGP had cash and cash equivalents of INR77 billion at FYE23, against INR63 billion in debt maturing over the next 12 months, including short-term debt of INR42.5 billion. We expect the company to generate negative free cash flow in the near-to-medium term due to ongoing capacity additions. However, this is likely to be mitigated by REGP's policy of funding the equity portion of capex through a mix of capital recycling and internal accruals and its adequate access to onshore and offshore debt markets.

REGP has staggered debt maturities and benefits from a sound mix of debt in the form of amortising project-level loans, with tenors of between 13 and 23 years, and five tranches of US dollar notes totalling USD2.4 billion, with an earliest maturity date of April 2024.

Issuer Profile

ReNew is one of India's leading renewable-energy companies with a total capacity of about 13.8GW. The projects are spread across 10 states, and comprise wind, solar and hydro projects.

Summary of Financial Adjustments

Fitch adjusts REGP's EBITDA to exclude the proportion of net profit attributable to minorities at the project level in calculating the EBITDA net leverage ratio and EBITDA net interest expense ratio.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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