Indian renewable energy companies will have persistent, high leverage: S&P Global Ratings

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Indian renewable energy companies will have persistent high leverage when chasing multi-decadal growth, according to a report released by S&P Global Ratings.

The report is titled India Renewables: Growth Trumps Deleveraging.

Despite the good industry fundamentals, “weaker operating performance, delayed receivables collections and high capital expenditure will weigh on credit profiles of Indian renewables,” S&P Global Ratings’ analyst Abhishek Dangra was quoted as saying in a press release.

Power generation from the green energy sources seems to fall significantly short of targets, which affects the companies' ability to service debt while funding their growth in an expanding sector.

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Generation estimates, even by the most conservative standards, were missed more than 40 prcent of the time, based on the agency’s study of projects of rated companies from 2016 to 2021. This led cash flows to be lower than management estimates, by 10-14 percent.

In a July 2021 report, IEA recorded the variability of India’s renewable energy sources. “India’s renewable-rich states (including Karnataka, Rajasthan, Tamil Nadu and Gujarat) have a higher share of variable renewable energy (VRE) than most countries internationally,” it stated. The variability makes integration into the main power grid harder and the transition to green energy slower.

Receivables will remain stretched for the industry, stated the release. “This is because the sector is reliant on state distribution companies, which frequently delay payments due to weak financial health,” it added.

The strong backers of this sector may lead investors to believe that the companies may improve their debt profile. But the rating agency is less optimistic.

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“Strong financial sponsors and equity-financing opportunities have led some investors to assume that this sector will be able to improve their ratios of income to debt… However, in our view, fresh equity will be spent on growth not deleveraging,” Dangra said.

The rating agency sees risks for companies with interest coverage below 1.5x or ratios of debt to EBITDA exceeding 6x.