Fitch Affirms India's NTPC at 'BBB-'; Outlook Stable

Fitch Ratings - Singapore -: Fitch Ratings has affirmed India-based NTPC Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable. The agency has also affirmed NTPC's senior unsecured rating of 'BBB-', and the 'BBB-' ratings on the USD6 billion medium-term note programme and the notes issued under the programme.

NTPC's IDRs reflect its Standalone Credit Profile (SCP) of 'bbb-', which is underpinned by its regulated business model that enjoys high revenue and profit visibility, as long as the plants are available, irrespective of the actual off-take and fuel price fluctuations. We expect NTPC's net leverage, measured as net debt / EBITDA, to remain around 5x-6x in the medium term, commensurate with a 'bbb-' SCP, supported by stable cash flow generation and lower receivables, even as we expect the capex and dividend pay-outs to remain high.

If NTPC's SCP weakens to 'bb+', Fitch expects NTPC's ratings to benefit from a one-notch uplift resulting in its IDR staying the same, as we assess state linkages to be 'Strong' and state incentives to support as 'Moderate' to 'Strong', based on our Government-Related Entities Rating Criteria. We consider NTPC's key credit drivers, including its regulated business model and receivables risk, as largely independent of those for the Indian sovereign rating.

KEY RATING DRIVERS

'Strong' State Linkages: We regard the status, ownership and control of NTPC by the Indian government as 'Strong' as the government holds 51.1% of the company and controls its board and key decisions. However, NTPC's daily operations are conducted on commercial terms. We assess the state's support record as 'Strong'. NTPC has received state support less frequently than other state utilities because of its financial strength, but we expect the support to be forthcoming, if needed.

Moderate to Strong Support Incentive: The socio-political implications of a default by NTPC are 'Moderate', while the financial implications are 'Strong'. NTPC's default could affect about 20% of India's power supply, but state-owned Coal India, which produces most of the domestic coal, can be directed to supply coal to NTPC to allow it to continue operating, if needed. NTPC is one of India's key borrowers. We believe a default would have a significant impact on the availability and cost of financing for the state and other GREs.

Robust Business Model: Operating profits are stable because they are insulated from volume and price risk by favourable regulations. NTPC has long-term power purchase agreements for its plants, which allow changes in fuel costs to be passed through. NTPC's revenue and profit are regulated based on invested capital and a rate of return, as well as incentives under a transparent cost-plus model. There is a proven record of timely regulatory tariff reviews, which ensures reasonable cost recovery.

High Plant Availability Amid Coal Crunch: NTPC has been able to manage the coal inventory at most of its power plants, even as other coal-based plants faced shortages in the last couple of months and October 2021. This is reflected in NTPC's high average plant availability of 88.5% in the financial year to March 2022 (FY22) (FY21: 91.4%), above the benchmark of 85% for the current regulatory period. High plant availability also reduced total under-recoveries to INR4.5 billion in FY22 from INR6.0 billion in FY21.

NTPC aims to increase its coal inventory by raising imports and captive coal production to meet high generation demand. Electricity demand in India rose sharply by around 8% in FY22, driven by strong economic growth. However, the supply of domestic coal, which fuels about two-thirds of the power generated in India, has not kept pace. This has led to more daily power deficits and lower average inventory levels at coal power plants of around nine days.

Reducing Receivables: We expect NTPC's receivable days to increase slightly to 110 days in FY23 before stabilising at around 100 days in the medium term. Trade receivables, including unbilled revenue and bill discounting, fell to 99 days in FY22 (FY21: 146 days). The increase in FY23 is likely to be driven by higher costs for state utilities due to an increase in the use of imported coal at current high prices, and their inability to pass on the higher costs to customers promptly.

Weak Counterparties: Most of NTPC's customers are state utilities with weak operational and financial profiles. However, NTPC's receivable position is supported by its strong bargaining position as a low-cost electricity producer and major supplier to state utilities. Its receivables also benefit from letters of credit equal to 105% of average monthly payments, tripartite agreements between NTPC, the Reserve Bank of India and state governments, and supplementary agreements with all state utilities that provide first charge over customers' receivables.

Lower Capex Intensity: Fitch expects NTPC's capex intensity - measured by capex/revenue - to drop below 15% by FY25, from a high of 20.9% in FY21 (FY22: 18.4%), supported by higher revenue as new projects start operations, even as we expect capex to remain high at around INR255 billion a year (FY22: INR244.4 billion). NTPC's capex will be driven by spending to add renewable capacity to reach its target of 60GW by 2032 and Flue Gas Desulphurisation Systems for coal plants to meet environmental norms.

High Dividends: Fitch estimates dividend pay-outs to remain high at around 50% of the previous year's net income over the next three to four years (FY22: 49%).

Stable Leverage Profile: Fitch expects NTPC's net leverage to remain at around 5.5x in the medium term (FY22: 5.6x) supported by stable cash generation, although high capex and dividend payouts mean the company will continue to report negative free cash flow. NTPC plans to acquire commercially viable power generation and supply projects. Fitch has not factored in these plans into the ratings and will analyse the effect when they materialise.

DERIVATION SUMMARY

Similar to NTPC, Vietnam Electricity's (EVN, BB/Positive) ratings also reflect its SCP, which is at the same level as the Vietnam sovereign rating (BB/Positive). EVN owns and operates most of the country's installed power generation capacity and has a monopoly over Vietnam's electricity transmission and distribution. However, our assessment of EVN's SCP is constrained by the lack of a record of consistent application of electricity regulatory reform, including tariff adjustments that reflect cost changes.

NTPC's SCP is two notches above that of EVN, reflecting NTPC's stable operating profit due to a well-established regulatory return framework, which allows for timely pass-through of cost changes, despite its higher leverage.

We assess Power Grid Corporation of India Ltd's (POWERGRID, BBB-/Negative) SCP at 'bbb+', two notches above NTPC's SCP on account of POWERGRID's stronger financial profile and NTPC's direct exposure to weak state distribution utilities. In comparison, POWERGRID's counterparty risk is mitigated by a pool-based payment mechanism and a lower transmission tariff contribution in the total electricity tariff on average.

KEY ASSUMPTIONS

Fitch's Key Assumptions within our Rating Case for the Issuer:

- Revenue based on allowed costs, a return on equity of 15.5% and incentive income;

- Plants under construction to be commissioned as scheduled, leading to higher revenue and profitability;

- Renewable generation to increase, but its contribution to overall EBITDA to remain below 10% till FY26

- Receivable days to increase marginally to 110 in FY23 (FY22: 99) and stabilise at around 100 after that

- Capex to average around INR255 billion a year from FY23 to FY26 (FY22: INR244 billion);

- Dividend payout ratio to remain high at around 50% in FY22 (FY22: 49%)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- An upgrade of the sovereign rating, provided NTPC's SCP remains at 'bbb-' or the likelihood of state support strengthens.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A downgrade of India's ratings;

- NTPC's SCP could be lowered due to higher capex than Fitch expects, a significant deterioration in collections or unfavourable regulatory developments, which result in net leverage exceeding 6.0x (FY22: 5.6x) for a sustained period. However, if NTPC's SCP weakens to 'bb+', Fitch will apply a one-notch uplift, resulting in NPTC's IDR remaining at 'BBB-'.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. 

LIQUIDITY AND DEBT STRUCTURE

Strong Banking Access Supports Liquidity: Fitch expects NTPC to generate negative free cash flow due to higher capex and dividend payouts even as cash flow from operations is expected to remain strong in the medium term. NTPC has around INR277 billion of debt maturing in FY23, including short-term borrowings, against readily available cash of INR25.5 billion at FYE22.

Nevertheless, we believe NTPC can secure adequate funding to refinance its maturing debt and fund its free cash flow deficits, due to its strong position in India's power sector and linkages with the sovereign, which support its solid access to domestic banks and capital markets.

ISSUER PROFILE

NTPC is India's largest power generation utility. It has total operational capacity of around 69 GW, most of which are coal-based generation plants. NTPC accounts for 17% of the country's installed power-generation capacity and 24% of its electricity generation.

SUMMARY OF FINANCIAL ADJUSTMENTS

We treat INR88 billion of debt taken by NTPC's customers to make payments to the company as NTPC's debt, as such debt has recourse to NTPC under the borrowing terms.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

NTPC's ratings are linked to the credit quality of the Indian sovereign. If NTPC's SCP weakens to 'bb+', Fitch expects NTPC's ratings to benefit from a one-notch uplift resulting in its IDR being equalised with the sovereign based on our GRE criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.