Adani Transmission, AEML Outlook Upgraded to Stable by Moody's

Introduction

Moody's Ratings has upgraded the outlook for Adani Transmission Step-One Ltd (ATSOL) and Adani Electricity Mumbai Ltd (AEML) to 'Stable' from 'Negative'. The rating agency announced the decision on January 15, affirming the investment-grade Baa3 senior secured ratings for both entities. This move signals growing confidence in the financial stability and operational performance of these key Adani Group companies over the next 12 to 18 months.

Rationale for the Outlook Revision

The upgrade to a stable outlook is rooted in Moody's expectation that both ATSOL and AEML will maintain solid access to liquidity and sustain financial metrics consistent with their current ratings. The decision also considers the strong credit linkages between ATSOL and its parent company, Adani Energy Solutions Ltd (AESL). These links include guarantees on bonds and default provisions tied to AESL's credit profile, which is supported by a diversified portfolio of regulated transmission and distribution assets that ensure stable operating performance.

Key Financial Metrics and Projections

Moody's provided specific financial projections that underpin its decision. For AEML, the agency anticipates that its cash flow from operations (pre-working capital) to debt ratio will remain in the 10.5% to 11.5% range over the next one to two years. This stability is attributed to predictable cash flows from its regulated electricity distribution business in Mumbai and recent deleveraging efforts. For the parent company, AESL, despite facing substantial capital expenditure over the next two years, Moody's expects it to implement timely measures to protect its credit metrics. The agency projects that AESL's funds from operations to net debt will stay marginally above the 7.5% tolerance threshold.

A Broader View on Adani Ports (APSEZ)

In a separate but related assessment, Moody's noted that Adani Ports and Special Economic Zone Ltd (APSEZ) is also expected to maintain a credit profile consistent with its Baa3 rating. The agency highlighted APSEZ's robust financial standing, which is supported by the discretionary nature of its planned growth capital expenditure and its continued access to diverse funding sources. This indicates a stable financial outlook for another one of the Adani Group's flagship companies.

Rating Agency Consensus

The action from Moody's aligns with recent outlook revisions from other major international rating agencies, S&P and Fitch, creating a consensus on the improved stability of Adani Group entities. This collective sentiment reflects restored access to funding and reduced downside risk following the conclusion of most regulatory investigations without findings of wrongdoing.

Restored Market Confidence and Capital Access

The positive rating actions are supported by the Adani Group's demonstrated ability to access capital markets. Moody's noted that the group has successfully completed several debt transactions, including refinancing and securing new loan facilities at reasonable costs. Furthermore, high-profile equity investments from institutional investors like GQG and the Qatar Investment Authority have underscored the group's continued access to the equity market, reinforcing investor confidence.

Navigating Legal and Regulatory Scrutiny

While the outlook is positive, Moody's confirmed it will continue to monitor ongoing US legal proceedings involving senior executives at another Adani Group entity. The agency cautioned that any significant negative developments could still affect the group's access to capital and its ability to achieve its growth objectives. However, Moody's also pointed out that the Indian Supreme Court's decision to entrust the Securities and Exchange Board of India (SEBI) with completing its investigation has curbed potential tail risk in a downside scenario.

Path to Future Rating Adjustments

Looking ahead, Moody's stated that a further upgrade of the ratings is unlikely without an improvement in India's sovereign rating. Conversely, a downgrade could be considered if there is a sustained weakening in the companies' credit metrics. Adverse outcomes from the ongoing legal proceedings that significantly impair liquidity or operational performance could also trigger a negative rating action.

Conclusion

The upgrade of the outlook to 'Stable' by Moody's for Adani Transmission Step-One Ltd and Adani Electricity Mumbai Ltd marks a significant milestone for the Adani Group. It reflects a broader consensus among rating agencies about the group's improved financial health, operational stability, and restored access to capital. While legal risks remain a point of observation, the current assessment points toward a period of stability, supported by predictable cash flows and a disciplined approach to managing future capital expenditures.