Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Waaree Energies Limited (WEL; part of the Waaree group) to ‘CRISIL BBB+/Positive/CRISIL A2’ from ‘CRISIL BBB/Stable/CRISIL A3+’.

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The upgrade reflects healthy revenue growth in fiscal 2023 driven by strong order pipeline and favourable government policies for domestic solar PV (photovoltaic) module players. The company has recorded revenue of around ~Rs 3,713 crore during the first nine months of fiscal 2023 and is expected to register healthy growth rate for the full fiscal 2023. In fiscal 2022, revenue grew ~47% to Rs 2,905 crore backed by healthy order flow, and operating margin expanded 100 basis points (bps) to 6.3%, underpinning sustainability of its margin profile. Confirmed orders of around ~Rs 28,000 crore (as of date), bulk of which are export, as overseas customers (mainly from the US) turn to Indian producers with rising barriers for Chinese imports, provide strong near-term revenue visibility. The company should also benefit from healthy domestic demand for solar PV modules owing to large solar energy installation targets of the government and better price competitiveness, with imposition of basic custom duty* (BCD) on solar modules and cells.

 

WEL has doubled its capacity over the past fiscal, with its module manufacturing capacity increasing to 4 GW as on March 31, 2022, from 2 GW a year earlier. The company is expanding module capacity by an additional 5 GW and solar cell manufacturing capacity by 5.4 GW at total outlay of Rs 3,500 crore over fiscals 2023 and 2024. Of this, 3 GW has already been made operational by December 2022, taking its installed module capacity to 7 GW (as on December 1, 2022). The remaining 2 GW of module capacity is likely to be operational over the next few months, while the 5.4 GW cell capacity is expected to be commissioned by March 2024. This should support execution of existing orders. Further, of the total capex of ~Rs 3,549 crore, the company has raised equity of ~Rs 1,000 crore through private placement, significantly improving its network and is looking to tie-up debt of ~Rs 2,050 crore with lenders. Despite the capital expenditure (capex), the financial risk profile of the Waaree group should remain above-average supported by strong networth (aided by recent fund raise and profitable operations) and steady cash accrual.

 

These strengths are partially offset by exposure to project risk pertaining to upcoming capacities and, susceptibility to rising competition in the domestic market and volatility in prices of key inputs (such as solar cell and wafers). Furthermore, ability to sustain its margin profile amid competitive pressures and volatile input prices will remain a key monitorable.

 

*BCD of 40% and 25% on imported solar modules and solar cells, respectively, imposed from April 1, 2022.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of WEL and its subsidiaries, collectively known as the Waaree group, as the entities have financial and operational fungibility.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established market presence, and extensive experience of the promoters

The promoters have industry experience of over three decades and have been in the solar PV module manufacturing business since 2007. The Waaree group was incorporated in 1989 by Mr Hitesh Doshi and Mr Viren Doshi. The group was initially into instrumentation and manufacturing of pressure gauges and valves. In 2007, it shifted its focus to solar power by setting up a 30-MW solar module manufacturing facility. Currently, WEL is the India’s largest solar PV module players with operational capacity of 7 GW (as on December 1, 2022). The group has an established position and clientele across India and overseas. In fiscal 2022, it derived ~55% revenue from domestic utility scale sale, ~24% from export and the remaining from franchisees. Over the medium term, revenue growth will be mainly driven by export sales, with export orders forming ~81% of the order book as of August 2022. Strong order book and significant increase in scale bolster the business risk profile.

 

Significant order pipeline led by export provides strong revenue visibility

The company’s revenue grew ~47% to Rs 2,905 crore in fiscal 2022, ahead of expectations, owing to strong order flow from domestic and export segments. As of date, its order book stood at ~Rs 28,000 crore which corresponds to module deliveries of ~10 GW to be executed over next 2.5 years. Furthermore, 80-85% of the orders (confirmed + pipeline) are from export markets including the US, Canada and Europe amongst others. Apart from the existing orderbook, the group is looking to partner with IPPs to ensure steady offtake going forward. This provides strong medium-term revenue visibility. On the domestic front, the government’s high targets in renewable energy installation for the next decade, implementation of approved list of models and manufacturers (ALMM) scheme, imposition of BCD and production-linked incentive (PLI) schemes, and government schemes (with domestic content requirement clause) should lead to healthy demand.

 

Financial risk profile to sustain despite the large capex

Gearing was strong at 0.75 time while total outside liabilities to adjusted networth ratio was high at 4.1 times (owing to significant inflow of customer advances) as on March 31, 2022. Debt protection metrics were healthy, reflected in interest coverage ratio of ~5 times in fiscal 2022.

 

The group is undertaking capex of ~Rs 3,549 crore over fiscals 2023 and 2024 to add 5 GW module capacity (3 GW already operational) and 5.4 GW cell capacity (to be operational by March 2024). Of this, ~Rs 1,500 crore will be funded through equity and the remaining through debt.

 

While debt is expected to increase over the medium term, owing to the large capex, the debt protection metrics are expected to sustain with interest coverage ratio expected at 4-5 times over the medium term aided by incremental cashflow from the expanded capacity and pick-up in profitability with commissioning of its cell capacity by March 2024.

 

Weaknesses:

Susceptibility to increasing competition and volatility in raw material prices

The company is exposed to competitive pressure because of large capacity additions being planned in the domestic market with various levels of integration. Further, though implementation of BCD will make Indian players cost-competitive, compared with Chinese players, the risk of significant reduction in prices by Chinese players to lessen the impact of BCD persists. Also, the business is vulnerable to changes in government policies and regulations as they may impact domestic demand.

Operating margin rose to ~6.3% in fiscal 2022 from 5.3% aided by higher order flow despite rise in prices of key raw materials. Prices of key raw materials such as polysilicon, aluminum and copper have been volatile over the past quarters. Though WEL has pass-through clauses for majority of its orders and undertakes order-backed procurement to mitigate this risk, any sharp rise in input cost will need to be managed effectively as raw material cost accounts for 70-80% of the operating income. Ability of the company to fully pass on price volatility and sustenance of its margin profile will remain key monitorables.

 

Exposure to project execution and stabilisation risks

The capex outlay is expected ~Rs 3,549 crore over fiscals 2023 and 2024, to add 5 GW of module capacity (3 GW already operational) and 5.4 GW of cell capacity. Of this, ~Rs 1,500 crore will be funded through equity and the balance through debt. WEL has raised ~Rs 1,000 crore during year-to-date in fiscal 2023, bolstering its networth, while the remaining equity is expected to be funded through internal accrual and existing cash balance. Further, it is in the process of tying up ~Rs 2,050 crore of debt. Though WEL has set up PV module capacities earlier, the scope of this project includes backward integration to manufacture solar cells. While the ongoing capex exposes the company to project execution risk, CRISIL Ratings draws comfort from the track record of the company in commissioning sizeable capacities (2 GW in fiscal 2022 and 3 GW in fiscal 2023). Further, these plants following commissioning will remain exposed to stabilisation risks. Resultantly, timely completion of the project and commensurate ramp-up will remain key monitorables.

Liquidity: Adequate

Consolidated cash and equivalent stood at Rs 536 crore (at a consolidated level) as on March 31, 2022. Further, unutilised fund-based working capital limit of WEL stood at ~Rs 104 crore as on September 30, 2022. Cash accrual over the next two fiscals will be sufficient to meet debt obligation. Also, WEL has been receiving customer advances against orders. With incremental rise in orders, this should cushion liquidity to some extent. Capex will be funded through a mix of existing cash, internal accrual and debt sanctions.

Outlook: Positive

WEL will continue to benefit from its established market position and the extensive experience of the promoters in the solar module manufacturing business. The ‘Positive’ outlook reflects expected ramp-up in volumes and operating margin driven by stabilisation of upcoming capacities, robust order book and timely commissioning of capex

Rating Sensitivity Factors

Upward Factors

• Healthy ramp-up of existing and upcoming capacities, along with operating margin sustaining at or above 8-10% at consolidated level, resulting in significant increase in operating cash accrual
• Significant improvement in the financial risk profile and liquidity

 

Downward Factors

• Slower-than-expected ramp-up in operations or higher cost resulting in operating margin at 5% or below at consolidated level, leading to lower cash accrual
• Substantial delays in project execution, resulting in time and cost overruns
• Stretched working capital cycle, leading to higher reliance on borrowing

About the Group

Incorporated in 2007, WEL is the flagship company of the Waaree group. The company manufactures solar PV modules. It also undertakes solar engineering, procurement and construction (EPC) projects in India and overseas, and trades in solar products. Its manufacturing facilities are in Gujarat. It has 7 GW of solar module capacity and is setting up additional 2 GW solar module and 5.4 GW solar cell capacities.

 

The Waaree group is promoted by the Mumbai-based entrepreneur, Mr Hitesh Doshi, and his family members, and started operations in 1989 through Waaree Instruments Ltd. Over the years, the group branched out into different business verticals. Mr Hitesh Doshi and his brother, Mr Viren Doshi, manage the daily operations and are supported by a professional team.

Any other information: Not applicable