Moody's affirms Adani Electricity's Baa3 rating

Singapore, May 11 : Moody's Investors Service has affirmed Baa3 senior secured bond rating of Adani Electricity Mumbai Ltd (AEML).
But the outlook remains negative. AEML owns and operates an integrated utility business in Mumbai which is regulated by Maharashtra Economic Regulatory Commission (MERC).
The servicing of the rated USD bond is supported by an obligor group that includes AEML and Power Distribution Service Ltd (PDSL), a majority owned subsidiary of Adani Transmission Ltd set up primarily to provide asset management services to AEML.
"The negative outlook continues to reflect the potential for downgrade if India's sovereign rating is downgraded, given AEML's domestic focused business," says Spencer Ng, Moody's Vice President and Senior Analyst.
"At the same time, the affirmation of the Baa3 senior secured rating considers AEML's predictable cash flow, underpinned by the mature and supportive regulatory framework in Maharashtra, solid operating track record and the quality of its diversified customer base in Mumbai," he said.
However, AEML's rating is constrained by the company's high financial leverage due to its plans to partly fund its planned capital expenditure with debt, and its exposure to competition from other licensed distributors in its catchment areas.
Over the next two to three years, Moody's expects AEML's funds from operations to debt to dip below the minimum tolerance level of 9 per cent for its Baa3 rating before recovering in fiscal year ending March 31, 2024, on the back of a likely increase in approved capital expenditure in the final two years of the tariff control period.
The projected weakening in AEML's credit metrics is caused by additional debt incurred to partly fund its planned capital expenditure, as well as lower interest income due to its reduced cash balance.
Moody's said its financial projections assume that the company's capital spending over the next two years will be in line with the level approved by the regulator in the latest tariff order.
Under MERC regulation, AEML can recover the shortfall between actual and approved revenue caused by lower volume sales at the next tariff review which will support AEML's medium-term financial profile against adverse impact from lower demand caused by the pandemic.
However, lower cash receipts from its customers will reduce AEML's cash buffer until its tariffs are adjusted from early 2023 after the mid-term tariff review. The mid-term review process is due to commence in November 2022.
"We expect management to adopt a measured approach towards additional projects, and to only proceed with projects that have received in-principle approval and can be funded without compromising the company's credit metrics," said Ng.
AEML owns and operates an integrated utility business in Mumbai. Its business includes distribution and transmission networks, an electricity retail business and a 500 megawatt power station in Dahanu.