Moody's revises outlook on Adani Transmission to stable, affirms Baa3 rating

Moody's Investors Service has revised the outlook on Adani Transmission Limited's (ATL) rating to stable from negative.

At the same time, Moody's has affirmed ATL's Baa3 senior secured bond ratings. Ahmedabad-based ATL is the largest private sector participant in India's power transmission market.

"The change in ATL's outlook to stable reflects expected improvement in the company's financial position over the next 12 to 18 months, underpinned by incremental earnings contributions from the Mumbai integrated utility business acquired last year and recently completed greenfield projects," said Spencer Ng, a Moody's Vice President and senior analyst.

"The change in outlook also considers the partial equity credit ascribed to subordinated loans from its promoter, after factoring in recent changes made to the terms of these instruments," adds Ng.

Over the next 12 to 18 months, Moody's expects the company's consolidated funds from operations to net debt to improve to the mid 7 per cent range, which is above -- but would remain close to -- the minimum tolerance level of 7 per cent set for the bonds' Baa3 ratings, after factoring in additional debt to be incurred to help fund capital expenditure.

The affirmation of the Baa3 senior secured bond ratings considers ATL's predictable cash flow profile that is underpinned by the stable and mature regulatory framework for the power transmission and distribution industry. It also considers the company's solid operating track record, its sizable asset portfolio and its exposure to execution risk and funding requirements.

The company's medium-term credit profile will likely be driven by its growth strategy and funding plans. In particular, a material increase in higher risk investments outside of ATL's core transmission and distribution business, or a shift from its commitment to fund at least 30 per cent of future capital expenditure through retained cash flow or committed equity infusion, could exert negative pressure on its rating.

ATL expects annual capital expenditure to increase to Rs 2,500 crore to 3,000 crore over the next two years, which would create a material funding requirement for the company. At the same time, ATL's actual capital spending requirement will depend on the regulatory determination for the Mumbai utility business in April 2020 and the company's success in winning new greenfield bids to add to the four transmission line projects already underway.

ATL's financial position could improve further if it completes its planned equity raising in the second half of 2019, and applies part of the proceeds to repay some of the outstanding loans from its promoter. The additional buffer in its leverage position that would result from these repayments would provide ATL with greater flexibility to pursue its growth initiatives.

"The ratings also recognise the commitment of ATL's management and its promoter to maintain an investment-grade rating profile, as evidenced by the promoter's capital infusion in April to strengthen the company's liquidity profile," Ng added in a statement on Friday.