KEY RATING DRIVERS
Market Leadership: NTPC has maintained its dominant position in the Indian power sector, with a share of 23% in FY18 (FY17: 22%) in all-India generation at a standalone level and a 13.4% share at a standalone capacity level (13.3%). The company had a capacity of 46GW at FYE18 (FYE17: 44GW) and generation of 266 billion kWh (250 billion kWh) at the standalone level. Its share in the overall thermal capacity is likely to increase in view of i) limited upcoming coal-based capacity by the private sector ii) limited addition of gas-based plants and iii) NTPC only likely taking up the bulk of the share, even in coal-based capacity addition.
Offtake Risk Remains Low: NTPC’s average selling price stayed low at INR3.23/kWh in FY18 (FY17: INR3.30/kWh; FY16: INR3.19/kWh; FY15: INR3.28/kWh) on account of its ability to procure low-cost domestic coal at notified prices from Coal India Limited compared with international prices. NTPC is further protected by its fuel supply agreements, memorandum of understanding and bridge linkages with Coal India and its subsidiaries, its ability to blend imported coal to meet shortfall, if any, and undertake coal production from captive coal blocks.
High Collection Efficiency: NTPC, despite dealing with state power utilities, has maintained a high collection efficiency of around 100% since FY04, post the one-time settlement scheme of 2003, on account of the payment security mechanism. It offers a rebate on timely payment to customers, resulting in a debtor period of 33 days in FY18 (FY17: 32 days). The company has a robust payment security mechanism in place in the form of a letter of credit backed by a tripartite agreement (TPA). The TPA signed between state governments, the government of India and the Reserve Bank of India ensures that any default in payment by the distribution companies of a state can be recovered directly from the account of the respective state government with the Reserve Bank of India. The original TPA, signed during FY01, was valid until October 2016. However, NTPC has successfully extended the TPA with 27 states/union territories for 10-15 years; the remaining states are also likely to sign the TPA.
Sustained Fixed Cost Recovery Despite Low PLF: NTPC has been able to maintain a healthy plant availability factor for coal-based plants (FY18: 86.02%: FY17: 91.62%) above the normative level, thus ensuring a full fixed cost recovery, despite a decline in the plant load factor (PLF). The PLF of NTPC’s coal-based plants declined to 77.90% in FY18 (FY17: 78.59%; FY16: 78.61%; FY15: 80.2%) in line with the decline at the all-India level to 60.7% (59.9%; 62.3%; 64.5 %). The decline in the thermal PLF was due to a lower off-take by state power utilities and a muted demand environment. However, Ind-Ra expects a rebound in the PLFs driven by i) high demand for power from all key sectors; the demand is likely to increase 6%-7% in FY19 ii) continued reliance on thermal generation despite growth in renewable sector and iii) low capacity addition expectation for the thermal sector.
Capitalisation to Exceed Capex: NTPC’s capacity addition pace accelerated considerably; it added 10GW during FY13-FY17. Over the years, the rate of increase in capital work in progress (CWIP) had outstripped the pace of commissioning. Hence, as a percentage of gross block, CWIP significantly increased to 45% at FYE17. However, in FY18, the pace of project commissioning outpaced the pace of addition to CWIP, leading to a decline in CWIP, as a percentage of gross block, to 39%.
Ind-Ra expects around 15GW of more capacity to be added over FY19-FY22, with annual capex likely to be at INR200 billion-220 billion. Ind-Ra believes that as project commissioning increases, debt drawdown would reduce and EBITDA generation would rise, leading to a fall in leverage.
Net Leverage to Reduce: NTPC’s net leverage (net debt/EBITDA) is likely to decline below 5.0x from FY19 as i) the pace of project capitalisation exceeds the pace of capex and ii) EBITDA would improve, along with an improvement in efficiency and PLF, driven by the full benefits of NTPC’s 7.9GW capacity commissioned over FY16-FY18. The leverage increased as expected by Ind-Ra to 5.5x in FY18 (FY17: 4.95x), driven by an increase in gross debt to INR1,216 billion (INR1,068 billion) and gradual ramp-up in EBITDA.
Moderate Liquidity: NTPC’s unencumbered cash balances remained low at INR26.7 billion (FY17: INR14.5 billion). Although NTPC generated cash flow from operations (FY18: INR192 billion; FY17: INR200 billion), high dividend payments (INR48.6 billion; INR 43billion), net interest cost (INR76 billion; INR67 billion) and capex led to a negative free cash flow (INR132 billion; negative INR151 billion). The company has annual debt repayments of about INR60 billion each in FY19 and FY20. Despite the high net leverage, NTPC’s regulated cost plus return on equity model provides sufficient predictability to cash flows, thus allowing the business to have higher leverage than category medians. NTPC also enjoys sanctioned working capital limits of INR170 billion and high financial flexibility through its ability to manage its liquidity and refinance its long-term liabilities.
Government Ownership: As of September 2018, the government of India held the majority of the stake in NTPC (61.77%). NTPC was accorded the status of Maharatna Company in May 2010. Furthermore, the board and the senior management at NTPC are appointed by the government of India. NTPC is also strategically important for the government, given its dominant position in the power sector. As a result, the ratings continue to factor in a strong probability of support to NTPC from the government in case required, as demonstrated in the past.
Coal Imports to Increase: Although NTPC’s dependence on imported coal reduced over the years, with imported coal representing only 0.3 million metric tonnes (mmt) or 0.2% (of the overall coal usage of 168.5mmt in FY18 (FY17: 0.7% of the total 160.4mmt usage). The dependence is likely to increase on account of i) higher coal requirements owing to an increase in capacity and electricity demand, ii) stagnant domestic coal production and iii) unlikely further diversion of domestic coal to the power sector.
NTPC’s coal imports are likely to increase to 5mmt in FY19. However, NTPC has ramped up production from captive coal blocks (FY18: 2.68mmt; FY17: 0.2mmt) and is likely to produce 7.8mmt in FY19 from the Pakri Barwadih and Dulanga mines providing additional coal availability.
PLF of Gas-Based Power Plants to Decline Further: NTPC’s average PLF of gas-based plants remained low at 25% for FY18 (FY17: 24%; FY16: 25%) owing to low supplies under existing agreements and zero supplies from KG-D6. As a result, NTPC’s gas-based power generation remained low at 8.8 billion units in FY18 (8.6 billion units; 8.9 billion units). However, the average plant availability remained high at 93% in FY18 (FY17: 93%; FY16: 97%) as the company was able to show availability on spot LNG. Ind-Ra does not expect NTPC’s PLF to increase over the next one-two years due to lack of clarity on fuel availability.
Risks and Competing Sources: NTPC runs its
plants on a cost plus return on equity model of 15.5%, along with incentive for
better than normative operations. If the regulator lowers the return on equity
for the next control period of FY20-FY24, it could lead to lower profitability
and incentive income. Any further tightening of operational norms would lower incentives.
In addition, the risk of increased production from renewables, where tariffs are
significantly low, could result in a lower offtake for thermal power plants,
which could pressurise NTPC’s thermal PLF. However, NTPC ensures that its
overall tariff remains low through access to domestic coal linkages and
competitive capital cost per MW, and that it, thus, does not face any difficulty
in terms of offtake.
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.
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