OREANDA-NEWS. Fitch Ratings has affirmed NTPC Limited's (NTPC) Long-Term Issuer Default Rating at 'BBB-'. The Outlook is Stable. At the same time, the agency has affirmed NTPC's senior unsecured rating of 'BBB-' and the 'BBB-' ratings on its USD4bn medium term note programme.

NTPC's ratings benefit from its regulated business model, which provides certainty of cashflows, and its dominant market position. The company has managed its counterparty risk well with 100% collection efficiency for the past 12 years despite the weak financial position of many of its customers. The company's high capex requirements are likely to lead to negative free cash flows over the next three to four years. The high capex and the bonus debenture issue of INR103bn in the financial year ended March 2015 (FY15) led to an increase in the leverage to 4.43x at FYE15 from 2.97x at FYE14 and has led to a weakening of the company's standalone credit profile.

Fitch assesses that the linkages between NTPC and the Indian state (BBB-/Stable) are moderate to high, with strategic linkages being especially strong. Based on the agency's parent and subsidiary linkage criteria, Fitch will provide a one-notch rating uplift on the standalone credit profile of NTPC if the company's standalone ratings were to be lower than the sovereign, provided that the linkages remain intact.

KEY RATING DRIVERS

Dominant Market Position: NTPC is the largest power generation company in India, accounting for a fourth of total power generated in the country. Of India's total installed power generation capacity of 269 gigawatts (GW), around two-thirds is thermal. NTPC accounts for 23% of India's thermal power generation 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 its plants, which allow for the pass-through of fixed costs as well as fuel costs. Offtake risks are limited as the fixed costs for each plant are payable by the customers if the plant has achieved the regulatory benchmark availability. Its revenue and profit are regulated based on invested capital and a rate of return and incentives under a transparent regulatory model. There is regulatory certainty until March 2019, the end of the latest five-year regulatory tariff period.

New Tariff Measures Affect Profitability: The new tariff block that was effective from April 2014 affected NTPC's FY15 profitability, with EBITDA falling to INR165bn in FY15 from INR174bn in FY14. The new tariff block has maintained the return on equity at 15.5%; however, the lower tax grossing rate and the linkage of incentives to plant load factor (PLF) led to lower profitability. These were partly offset by the benchmark availability rate for fixed-cost pass through declining to 83% from the earlier 85%, with all of NTPC's plants achieving availability of more than 83% in FY15.

In FY15, NTPC's coal-based power plants had an average PLF of 80.2% (FY14: 81.5%), with 12 of its 17 coal-based plants having PLFs of less than 85%. None of NTPC's seven gas-based plants have PLFs of over 85%. The plant availability rates in FY15 were much higher at 88.7% (FY14: 91.8%) for the coal-based plants and 92.2% (FY14: 95.2%) for the gas-based plants.

Weak Counterparties: NTPC has managed its counterparty risks well despite most of NTPC's customers being state utilities with weak financial profiles. The payables are backed by letters of credit equivalent to 105% of average monthly payments and the tri-partite agreement between NTPC, Reserve Bank of India and state governments, which runs until 2016. The company has signed supplementary agreements with all the state utilities that allow it to have first charge over customers' receivables. 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 - also helps to ensure timely payments.

High Capital Expenditure: NTPC's capex is likely to remain at over INR200bn a year, which will lead to negative free cash flows. The capex risks are mitigated 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. The capex is likely to remain high as the company also plans to increase capacity from solar power plants.

In addition, NTPC plans to bid for two ultra-mega power plants - with 4GW capacity each - and it is assessing the acquisition of distressed power plants that may still be under construction. Fitch has not factored in either of these events into its ratings, and will analyse the impact if and when they materialise.

Standalone Rating Affected: The fall in profitability, negative free cash flows due to the high capex needs, and NTPC's issuance of bonus debentures of INR103bn led to a sharp increase in financial leverage (net debt/ EBITDA) to 4.4x at FYE15 from 2.97x at FYE14. Fitch expects the leverage to reduce from FY17 onward, assuming no ultra-mega power plants or acquisitions come through; though it is expected to remain above previous expectations. The change in the credit profile has led to Fitch's reassessment of the standalone profile at 'BBB-' from 'BBB' earlier.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue is based on a return on equity of 15.5% and the allowed costs plus incentives
- Plants under construction will be commissioned as scheduled, which will lead to an increase in revenue
- Profitability will be in line with that in FY15

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade in India's rating to 'BBB'.

Negative: Future developments that may, individually or collectively, lead to negative rating action include
-A downgrade of India's ratings

For the sovereign rating of India, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 9 April 2015.

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

- Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected
- An improved business environment resulting from implemented reforms and structurally lower inflation levels, which would support higher investment and real GDP growth

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

- Deviation from the fiscal consolidation path, leading to persistence of the high public debt burden, or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale financial support from the sovereign
- 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.