Fitch Ratings Upgrades Adani Energy Solutions: BBB- Rating Amid US Investigation Concerns

Fitch Ratings has lifted Adani Energy Solutions Ltd (AESL) from its 'Ratings Watch Negative' status, marking the first upgrade from an international ratings agency following the US indictment.

The agency has confirmed AESL's long-term foreign and local-currency issuer default ratings (IDRs) at 'BBB-'. The ratings have been taken off the Rating Watch Negative list and now carry a Negative Outlook, as stated in their announcement.

Why Fitch Ratings upgraded Adani

Fitch attributed the affirmation of the ratings to the Adani group's demonstrated ability to secure adequate funding since the US indictment of certain board members from another group entity, Adani Green Energy Limited (AGEL), on November 20, 2024. The agency noted that the risks related to the group's liquidity and funding needs have lessened.

Nonetheless, the Negative Outlook reflects Fitch's concern that the ongoing US investigations may uncover weaknesses in the group's corporate governance practices, potentially leading to adverse rating actions in the near to medium term.

Fitch indicated that it would keep a close watch on the investigations for any signs of deficiencies in governance practices and internal controls, as well as their implications for AESL's financial flexibility.

Following the US indictment of group chairman Gautam Adani and two other senior executives in connection with an alleged bribery scheme to secure renewable energy contracts, the conglomerate has demonstrated considerable resilience, maintaining its credit profile and business performance intact.

Fitch indicated that the indictment related to alleged securities and wire fraud poses a corporate governance risk for AESL. A conviction or any revelations regarding deficiencies in the governance practices and internal controls of Adani group entities that emerge during the proceedings could exert pressure on the ratings. The agency believes that the ongoing legal matters and the results of the US investigations may hinder the group's access to funding, which could significantly impact AESL's growth strategies. However, the company does possess some flexibility in its capital expenditure plans.

Rising credibility of AESL

The rating agency further noted that AESL has maintained adequate access to funding since the US indictment, having secured Rs 5,100 crore from both onshore and offshore banking sources.

Additionally, the group company AGEL has successfully raised onshore funding to refinance its USD 1.1 billion construction-linked facility, which is set to mature in March 2025. Nevertheless, an increased dependence on onshore funding may elevate refinancing risks in the medium term.

AESL's credit profile is supported by India's stable and favorable regulatory framework. The revenue generated from its electricity transmission assets is anticipated to continue being a significant contributor to EBITDA in the medium term, even as the share from its smart metering segment grows.

Fitch said, "We believe Tariff-based Competitive Bidding (TBCB) projects provide less protection than the cost-plus model and are exposed to variations in cost of debt, but minimal operating costs reduce margin risk for TBCB assets. "We forecast capex to increase significantly to Rs 17,500 crore a year in FY25 and FY26 (FY24: Rs 4,000 crore), driven by transmission projects under construction and the smart metering business," the rating agency said.

AESL has successfully secured a contract to deploy 22.8 million smart meters across five Indian states, operating under a design, build, finance, own, operate, and transfer framework.

"We expect the EBITDA contribution from the smart metering business to reach above 25 per cent in FY26 (FY24: nil; FY25: 15 per cent), considering the fast cash conversion cycle. Cash generation starts once 5 per cent of contracted metre capacity or 25,000 metres, whichever is earlier, has been installed," it said.

The cash flow is vulnerable due to the fragile condition of India's state-owned power distribution companies; however, the availability of direct debit options for consumer bill payments to these utilities aids in the collection of outstanding payments.