Case 018Sector economicsCore
Suvika Renewables owns 2 GW of solar at a 24% plant load factor selling power at Rs 2.6 a unit, which gives revenue of about Rs 1,093 crore. With Rs 7,000 crore of debt at 9%, is debt service covered?
1The situation
Suvika Renewables owns 2,000 MW of solar plants selling power under long-term contracts at a fixed Rs 2.6 a unit, where one unit is one kilowatt hour. The plants run at a 24% plant load factor: over a year they produce 24% of what they would at full output every hour. Operating costs, maintenance, land lease and insurance, are about Rs 130 crore a year.
The plants carry Rs 7,000 crore of project debt at 9%, repaid in equal annual instalments over 18 years. Lenders on projects like this usually want cash flow of at least 1.2 times debt service. Assume little cash tax in the early years because of depreciation.
2Your task
Work out revenue from first principles, compare cash with debt service, and say how much room there is.
Quick check
Roughly how many times does Suvika's cash cover a year's debt service?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Covered, but only just: cash of about Rs 963 crore covers annual debt service of about Rs 799 crore 1.20 times. 2,000 MW for 8,760 hours at 24% is 4,205 million units, worth about Rs 1,093 crore at Rs 2.6. Less Rs 130 crore of costs leaves about Rs 963 crore. Cover falls below 1.2x if the load factor slips under 23.9%, and below 1.0x under 20.4%.
Step 1How do you get revenue from capacity?
A 1 kW rooftop panel cannot run at full power at night or under cloud, so over a year it produces a fraction of 1 kW x 8,760 hours; that fraction is the plant load factorActual output over a year as a share of what the plant would produce running at full capacity every hour of the year.. Revenue is capacity x hours in a year x load factor x tariff, and each term is checkable. 2,000 MW x 8,760 hours x 24% is 4.205 billion kWh, 420.5 crore units. At Rs 2.6 a unit that is about Rs 1,093 crore, matching the headline.
Step 2Is debt service covered?
Debt service is interest plus principal, and on an 18 year loan at 9% repaid in equal instalments it is about Rs 799 crore a year: Rs 630 crore of interest and Rs 169 crore of principal in year one. Cash of about Rs 963 crore covers that 1.20 times, right at the 1.2x level lenders usually ask for. A candidate who compares cash with interest alone reports 1.5x and misses that principal must be paid too.
| Rs crore, year one | Amount |
|---|---|
| Units sold, crore kWh | 420.5 |
| Revenue at Rs 2.6 a unit | 1,093.2 |
| Operating costs | (130.0) |
| Cash available for debt service | 963.2 |
| Interest at 9% | 630.0 |
| Principal | 169.5 |
| Debt service | 799.5 |
| Cover | 1.20x |
Step 3Where is the risk hiding?
In two places. First the load factor: each point is worth about Rs 46 crore of revenue, and costs and debt service do not move. At a 22% load factor cover falls to 1.09x, and below 20.4% the plants cannot pay their lenders at all. A weak monsoon year or panels degrading faster than planned would do it. Second, timing: the sun does not arrive evenly. Monsoon months generate far less, and in those months cash falls short of a monthly share of debt service, so the project needs a reserve account that is filled in the dry months.
The view: the project is financeable but has no margin for error. A research note would flag that equity holders get very little cash until the debt amortises, and that the equity value is highly sensitive to the load factor, which is exactly the number to verify with actual monthly generation data rather than the design estimate.
Where candidates lose it
The common error is comparing cash with interest only, finding 1.5x, and calling the debt comfortable. On amortising project debt the principal is paid every year from the same cash, and the true cover is about 1.2x.
The second is working in annual averages and missing that a solar plant earns most of its cash in a few dry months. A lender cares whether the monsoon quarter can pay its instalment.
What the interviewer asks next
- How much would refinancing at 8% over 20 years raise cover?
- Panel output degrades about half a per cent a year. What does that do to cover by year ten?
- How would you value Suvika's equity given the debt schedule?
Company names and figures are illustrative.