Ind-Ra affirms NTPC at ‘IND AAA’

India Ratings & Research (Ind-Ra) has affirmed NTPC Limited’s Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook and Short-Term Issuer Rating at ‘IND A1+’.

Key Rating Drivers:

The affirmation reflects NTPC’s dominant position in the Indian power sector with an 18.4% share on a consolidated basis and a 16% share on a standalone basis in the overall power capacity in India as of FYE13. NTPC at a standalone level generated 232 billion kwh in FY13 (year end March), 25.4% of all India generation. The company achieved a higher plant load factor (PLF) of 83% than all-India average of 70% in FY13, although it declined from 91% in FY09.

The ratings factor in the low off-take risks for the power generated in NTPC’s plants because of its low average selling price per unit (INR2.96/kwh), firm power purchase agreements, a geographically diversified customer and generating base and strong operational and strategic linkages with the Indian government. The ratings also factor in the cost-plus regulatory regime under which NTPC operates its plants, ensuring stable cash flows with foreign exchange rate variations as a pass-through in tariff. NTPC through efficient operations has been able to meet the operating standards set by the regulator. The ratings continue to reflect NTPC’s financial flexibility emanating from its large cash balances (FY13: INR168bn), comfortable net financial leverage (FY13: 2.5x; FY12: 2.5x) and access to domestic and foreign debt.

The decline in PLF in FY13 was because of the lower availability of domestic coal. NTPC had to rely on 9.2mmt of imported coal (5.95% of total coal requirement) in FY13 and e-auction coal. However, the quantity of imported coal was limited by the boiler design. NTPC had fuel supply agreements (FSAs) for plants commissioned up to FY09; however, as Coal India Limited stopped signing FSAs post FY09, domestic coal availability for NTPC’s plants declined. Only post a presidential directive, CIL agreed to enter into FSAs. Post resolution of the issues related to quantity, quality and penalty among others, FSAs for capacity of 14,010MW have now been successfully executed.

The PLF of NTPC’s gas-based plants fell to 56% in FY13 from 65% in FY12 due to a decline in gas availability (FY13: 10.67mmscmd, FY12: 13.09mmscmd) post a fall in output from KG-D6. However, the fixed cost could still be recovered as the availability of the plants remained high at 93.2% in FY13 (FY12: 93.8%).

NTPC’s standalone ratings are moderated by high counterparty risks stemming from weak state power utilities (SPUs); however, the company has so far efficiently managed receivables. Collections from SPUs have been 100% since FY04 and have been backed by letters of credit. As of FYE13, NTPC had monthly letters of credit of INR59bn from counterparties. The payment security mechanism till October 2016 was under the provisions of the one-time settlement scheme. Post 2016, payments would be secured by way of the creation of a first charge on receivables of distribution companies (discoms).

The tariff hikes implemented by most state discoms and the finalisation of a financial restructuring package bode well for the financial health of discoms, the major customers of NTPC. Also, the company faces regulatory risk, in terms of modifications to the existing guidelines of operation by Central Electricity Regulatory Commission. NTPC could recover its fixed costs depending upon the availability of its plants, however, incentive/dis-incentive income would depend on the regulations finalised.

The ratings also factor in NTPC’s large capex programme with 20GW of capacity under construction. Also, the company expects to incur capex of INR175bn-INR225bn every year over the next three to four years. However, it is unlikely to affect the leverage profile.

Rating Sensitivities:

A significant build-up of dues from customers, higher-than-expected capex combined with lower-than-projected profitability could affect NTPC's standalone credit profile. However, if the company's standalone rating were to weaken, the agency could incorporate implied support from the government into the ratings.