Fitch Ratings has removed energy infrastructure company Adani Energy Solutions Ltd (AESL) from its 'Ratings Watch Negative' list, the first upgrade by an international ratings agency since the US indictment.
Fitch affirmed AESL long-term foreign and local-currency issuer default ratings (IDRs) at 'BBB-'.
"The ratings have been removed from Rating Watch Negative and assigned a Negative Outlook," it said in a statement.
Fitch said it affirmed the ratings as the Adani group has demonstrated adequate funding access since the US indictment of certain board members of another group entity, Adani Green Energy Limited (AGEL), on November 20, 2024.
"We believe the risks associated with the group's liquidity and funding requirements have moderated," it said.
"However, the outlook is negative to reflect our view that the proceedings and outcome of the US investigations could reveal that the group's corporate governance practices are weaker than we expected and lead to negative rating action in the near to medium term."
Fitch said it will monitor the investigations for any evidence of weakness in the entities' governance practices and internal controls, and the impact on AESL's financial flexibility.
Since the US indictment of group chairman Gautam Adani and two other key executives in an alleged bribery scheme to win renewable energy supply contracts, the conglomerate has shown solid resilience with no compromise on the credit profile and business performance.
Fitch said the indictment for alleged securities and wire fraud reflects a corporate governance risk for AESL.
A conviction or any indication of weaknesses in Adani group entities' governance practices and internal controls that may come to light as part of the process could put pressure on the ratings.
"We believe the proceedings and the outcome of the US investigations could hamper the group's funding access.
"This could affect AESL's growth plans significantly, although it has some flexibility in its capex plans," it said.
The rating agency went on to add that AESL has demonstrated adequate funding access since the US indictment, having drawn Rs 5,100 crore from onshore and offshore banking facilities.
The group company, AGEL, has also raised onshore funding to refinance its $1.1 billion construction-linked facility, which was due in March 2025.
"Nonetheless, increased reliance on onshore funding could heighten refinancing risk over the medium term," it said.
AESL's credit profile benefits from India's stable and favourable regulatory environment.
"We expect revenue for its (electricity) transmission assets to continue contributing a large majority of EBITDA in the medium term, even as the contribution from its smart metering business increases," it said.
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 won a bid to install 22.8 million smart meters across five Indian states, under a design, build, finance, own, operate and transfer structure.
"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.
Its cash flow is exposed to India's weak state-owned power distribution entities, although direct debit facilities for consumer bill payments to distribution utilities facilitate the recovery of dues.
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