Heavy capex preventing deleveraging by Indian renewable energy firms: S&P

Rating agency Standard and Poor’s (S&P) said that heavy capital expenditure and weak cash flows is preventing Indian renewable companies from deleveraging, i,e. reducing debt burden.

The multi-decade growth opportunities for renewable energy in India will result in persistently high leverage across the sector.

Abhishek Dangra, Global Ratings analyst, S&P, said "weaker operating performance, delayed receivables collections and high capital expenditure will weigh on credit profiles for Indian renewables. This is despite good industry fundamentals."

Renewables are economically competitive with traditional fuels and benefit from ambitious energy-transition targets in India.

A number of myths persist about Indian renewable projects. For example, wind and solar power generation can be unreliable, if weather conditions are not conducive. Assumptions on output can be too optimistic, leading to misses on cash flow.

Even the most conservative generation-probabilities were missed more than 40 per cent of the time, based on analysis of operating performance for individual projects of rated companies from 2016 to 2021. As a result, cash flows can be 10-17 per cent lower than management estimates, rating agency said.

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

"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, fresh equity will be spent on growth not deleveraging, said Dangra.

“We see incremental risks for companies with interest coverage below 1.5x or ratios of debt to EBITDA exceeding 6x”, the rating agency added.