OREANDA-NEWS. Fitch Ratings, Singapore, 10 January 2017: Fitch Ratings has assigned an expected rating of 'BBB-(EXP)' to India-based NTPC Limited's (BBB-/Stable) proposed senior unsecured notes; the notes are to be issued out of its USD4bn medium-term note programme.

The notes are rated at the same level as NTPC's senior unsecured debt rating as they will constitute the direct, unconditional, unsubordinated and unsecured obligations of NTPC. The final rating is contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Dominant Market Position: NTPC is the largest power generation company in India. It accounts for about 16% of the country's total installed power generation capacity, and about a quarter of electricity generation. Out of a total installed capacity of about 309 gigawatts (GW) in India as of end-November 2016, around 70% was thermal; NTPC contributes about 22% of the nation's thermal capacity.

Robust Business Model: NTPC's ratings benefit from stable operational cash flows due to the favourable regulatory framework. The company has long-term power purchase agreements (PPAs) for all of its plants, which allow for the pass-through of fixed costs as well as fuel costs. Its revenue and profit are regulated based on invested capital and a rate of return, and incentives under a transparent regulatory cost-plus model. There is regulatory certainty until March 2019, the end of the current five-year regulatory tariff period.

Offtake risks are limited at NTPC as the fixed costs for each plant are payable by the customer if the plant has achieved the regulatory benchmark availability - measured by the plant availability factor (PAF), which is set at 83% up to the financial year to end-March 2017 (FY17) - and will be reviewed thereafter. The plant availability rates in 2QFY17 were much higher at 90% (2QFY16: 88%) for the coal-based plants and 97% (2QFY16: 98%) for the gas-based plants. The current tariff block links the incentive income to achieving a plant load factor (PLF) of more than 85%, instead of PAF earlier. During 2QFY17, NTPC's coal-based power plants had an average PLF of 75% (2QFY16: 77%), with only five of its 17 coal-based plants having PLFs of over 85%. None of NTPC's seven gas-based plants had PLFs of over 85%.

Weak Counterparties: NTPC has managed its counterparty risks well, despite most of NTPC's customers being state utilities with weak financial profiles. NTPC's strong bargaining position - as the lowest-cost electricity producer and the supplier of a large share of electricity bought by the state utilities - helps to ensure timely payments. The payables are also backed by letters of credit equivalent to 105% of average monthly payments and the tripartite agreements between NTPC, the Reserve Bank of India and state governments. The above payment security mechanism - originally set to expire October 2016 - was extended by the Ministry of Power. NTPC is in the process of extending the agreements for another 10-15 years; according to management, 13 of 29 states have signed the agreements while the company says it expects the process to be completed soon for the rest. Nevertheless, NTPC has supplementary agreements with all state utilities that allow it to have first charge over customer's receivables in case the tripartite agreements were not extended.

High Capital Expenditure: NTPC has about 24GW of capacity under construction, with 19.8GW at the standalone level, all of which are under the cost-plus regime. The group also plans to increase its solar-based generation capacity. The capex risks are mitigated, in our view, as the company has strong experience in setting up power projects and by its policy of embarking on new projects only once the PPAs, allocated land, environmental clearances and fuel linkages are in place. NTPC's capex is likely to remain high at around INR300bn per year for the next couple of years, which will lead to negative FCF. Fitch expects leverage (net debt/EBITDA) to remain higher than the standalone guideline of 5.0x until FY18. NTPC's 1HFY17 capex was about INR134bn. Leverage is likely to start falling from FY18 as more projects are commissioned and profitability increases.

NTPC plans to bid for the so-called ultra-mega power plants - of 4GW capacity each - when they are offered. The company also plans to acquire state-owned thermal power plants. We expect NTPC to maintain its financial discipline while bidding for these projects. Fitch has not factored either of these events into its ratings, and will analyse the impact if and when they materialise.

Linkages with Sovereign: Fitch assesses the linkages between NTPC and the Indian sovereign (BBB-/Stable) as moderate. Fitch assesses NTPC's standalone credit profile at 'BBB-'. Based on the agency's Parent and Subsidiary Linkage criteria, Fitch will provide a one-notch rating uplift to NTPC's ratings if the company's standalone ratings were to be lower than that of the sovereign, provided that the linkages remain intact.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for issuer include

- Revenues are based on allowed costs, an ROE of 15.5% and incentive income

- Plants under construction will be commissioned as scheduled, which will lead to an increase in revenue and profitability

- Capex of about INR300bn per year over the next two years (FY17-FY18), and about INR350bn over FY19-FY20

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to positive rating action include:

- An upgrade of the sovereign rating, provided NTPC's rating linkages with the state of India remains intact;

- NTPC's standalone credit profile could be upgraded if its leverage remains below 4.0x (FY16E: 4.8x) on a sustained basis. However, its IDR will continue to be constrained by that of India, given the state's effective control of NTPC

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- A downgrade of India's ratings;

-Weakening in NTPC's standalone credit profile due to higher-than-expected capex; a significant deterioration in its collection; unfavourable regulatory developments; and net leverage exceeding 5.0x on a sustained basis

However, should NTPC's standalone credit profile fall below that of India, the company will benefit from a one-notch of rating uplift due to its state linkages, provided the linkages remain intact.

For the sovereign rating of India, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 18 July 2016:

The main factors that, individually or collectively, could lead to positive rating action are:

- Fiscal initiatives that would cause the general government debt burden to fall more rapidly than expected in the medium term;

- An improved business environment resulting from implemented reforms and persistently contained inflation, which would support higher private investment and real GDP growth

The main factors that, individually or collectively, could lead to negative rating action are:

- Further deviation of the already high public-debt burden from the peer median, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale sovereign financial support;

- Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current-account deficit, which would increase the risk of external funding stress