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Singapore: Regulatory approval of a recovery in most of the revenue gap for Adani Electricity Mumbai Limited’s (AEML) obligor group (long-term senior secured US dollar bonds: BBB-) will strengthen cash flow from operations (CFO) by reversing working capital outflows of the past three years, says Fitch Ratings.

The Maharashtra Electricity Regulatory Commission (MERC) gave approval in its mid-term tariff review.

Recovery of the revenue gap of INR15.74 billion, including the carrying cost, has been approved after truing up for regulatory gap for financial years ending March 2020 (FY20), FY21, FY22 and FY23 (provisional). The regulator has approved the recovery of this revenue gap over the next two years, FY24 and FY25, for the current five-year control period ending FY25. The recovery is largely in line with Fitch’s expectations; AEML recorded a working capital deficit of around INR16 billion over FY20 to FY23, on account of regulatory asset build-up from accrued income.

The working capital release should lead to a higher CFO of around INR14 billion in FY24 (FY22: INR7.2 billion, FY23E: INR5 billion)and assist in reducing AEML’s net debt/EBITDA to below 5.0x by FYE25 (FY23E: 5.4x), even as we expect AEML to upstream INR22.5 billion over FY24 to FY25 to its shareholders.

Fitch’s adjusts AEML’s EBITDA for revenue gaps and therefore, EBITDA estimates would not be affected by this tariff review.

The large build-up of the revenue gap over past three years was due to a reduction in electricity demand during Covid-19, especially from higher-paying industrial and commercial consumers. More recently, surging fuel and power purchase costs added to the revenue gap in FY23. Part of the revenue gap increase was mitigated, as the regulator allowed some of the higher fuel costs to be passed to consumers through fuel-adjustment charges from July 2022.

The timely announcement of the mid-term tariff review, allowing recovery of most of past dues, strengthens MERC’s long record of delivering predictable outcomes. Minor variation in the approved revenue gap relative to that sought by the company – the approved revenue gap is lower by INR180 million or 1.2% – is largely related to calculations of wage increase and other operating costs on account of timing difference. Approval of more than a 98% revenue gap claimed by AEML, highlights that the differences are not material and would not have any meaningful impact on AEML’s credit profile.