Strong Business Profile: The ratings continue to factor in NTPC’s strong dominant position in the Indian power sector, with 21% share (FY19: 22%, FY18: 23%) in overall generation and 25% share (24%, 23.3%) in thermal capacity with a consolidated thermal capacity of 62GW (55GW, 53.6GW).

The ratings are further supported by:

1.      NTPC operating on a cost-plus-regulated equity model, which allows a healthy return-on-equity and the recovery of reasonable costs and pass through of foreign exchange variation.

2.      the presence of long-term power purchase agreement (PPAs) with the offtakers

3.      the competitive cost of generation, given the operational efficiencies

4.      the adequate availability of domestic coal on account of fuel-supply agreements along with the commencement of captive coal mining operations (FY20: 11.2 million tonnes (mt), FY19: 9.3 mt)

5.      the presence of tri-partite arrangements (TPAs) with offtakers, which ensure timely payment receipts

6.      geographical and fuel-source diversification – coal (82%), gas (11%), hydro (6%), renewable (2%), and

7.      the importance of NTPC as a strategically-important vehicle for furthering the government of India’s (GoI) objectives in the power sector.

NTPC’s regulatory equity increased to INR611 billion at FYE20 (FYE19: INR540 billion, FYE18: INR509 billion) and the agency expects it to further increase to around INR900 billion by FYE23.

Strong Linkages with the GoI: The ratings continue to factor in the strong linkages of NTPC with the GoI, as reflected in the recent acquisitions of the GoI’s stake in North Eastern Electric Power Corporation Limited(NEEPCO)and THDC India Limited (THDC, ‘IND AA+’/RWE) by NTPC for an equity consideration of INR115 billion. Moreover, in order to tide over the liquidity crunch faced by discoms amid the COVID-19 led economic disruption, the GoI acting through the Ministry of Power also asked the central generators to give a rebate and defer collection of capacity charges. NTPC, on the direction of the Ministry of Power has also deferred the capacity charges of around INR21 billion and provided a rebate of INR13.6 billion to discoms during the lockdown. The company has previously acquired other state generation assets, such as Kanti Bijlee Utpadan Nigam Limited and Nabinagar Power Generating Company Limited.

At FYE20, the GoI held majority stake in NTPC (51%), though its overall holding has reduced gradually from 63% in FY17. The board and the senior management at NTPC are appointed by the GoI and the company is o strategically important to the government. Additionally, the GoI guaranteed NTPC’s INR19 billion of foreign currency loans at FYE20 (FYE19: INR18.9 billion).

Liquidity Indicator – Adequate: NTPC’s on balance sheet liquidity remains low with unencumbered cash balances at INR16.5 billion in FY20 (FY19: INR12.6 billion). However, the liquidity is supported by:

1.      the sanctioned fund-based working capital limits of INR35 billion with utilisation close to around 43% for the last 12 months ended August 2020

2.      its high financial flexibility given its ability to raise CPs at competitive rates due to its longstanding relationships in the domestic banking system and capital markets

3.      the healthy cash flow from operations after interest payment of INR112 billion in FY20 ; FY19: INR72 billion, and

4.      the competitive cost of borrowing with 6.81% average borrowing cost in FY20 (FY19: 6.92%). 

The liquidity for the group, however, remains dependent on the dividend/buybacks/bonus debenture issues worth INR37.5 billion in FY20 (FY19: INR65.3 billion), and capex including acquisitions and investments in joint ventures of INR471 billion (INR335 billion). The combination of high capex and dividend pay-outs has led to the group reporting continued negative free cash flow and hence the debt increasing to INR2,112 billion at FYE20 (FYE19: INR2,030 billion).  NTPC announced a share buyback worth INR22.75 billion on  2 November 2020. The agency believes the company’s capex plans of INR210 billion-250 billion would continue to lead to a negative free cash flow in the medium term. NTPC has annual debt repayments of INR108 billion in FY21 and INR148 billion in FY22, respectively. NTPC has also tied up long-term loans for its ongoing capex of up to INR150 billion and has access to capital markets for its future debt requirements. The management does not envisage any major refinancing requirement in FY21-FY23, although in case of any major increase in receivables, the short-term borrowings could increase.

Continued Fall in PLFs Despite Stable Plant Availability: The plant load factor (PLF) of NTPC’s coal-based plants declined to 68.2% in FY20 (FY19: 77.2%, FY18: 77.5%), and further to 62% in YTD August 2020 due to subdued growth of 1.8% in power demand (5%, 6.2%) and a 13% decline in demand in YTD August 2020 amid the COVID-19 led economic disruption. The decline in the coal PLF was due to the must-run status given to other generation sources including hydro, nuclear and renewables. However, with the demand ramping up, Ind-Ra expects a pickup in PLFs for 2HFY21 for NTPC. The PLF of NTPC’s gas-based plants also fell to 14.1% in FY20 (FY19: 21%; FY18: 25%) similarly. Even though the regasified liquefied natural gas prices have declined significantly, NTPC does not estimate a major pick up in the PLF of gas-based plants due to low demand and domestic gas availability and variable cost with regasified liquefied natural gas still remaining higher than the coal-based plants.

However, NTPC maintained a healthy plant availability factor for coal-based plants, which improved to 89.7% for FY20 (FY19: 87.1%, FY18: 86.02%) and gas-based plants at 94% (92%; 93%), above the normative level for both coal and gas based plants, thus ensuring fixed cost recovery; despite a decline in the PLF. Consequently, NTPC’s fixed-cost under-recovery declined to INR2.5 billion in FY20 (FY19: INR8 billion), although under-recoveries still continued in a few plants. 

Average Selling Price Increase Could Pressurise Offtake: NTPC’s average selling price increased to INR3.9/kWh in FY20 (FY19: 3.4/kWh), driven by the lower PLFs leading to higher per unit fixed cost; a higher fixed cost per unit for the new plants due to increased capital cost, and increased variable cost INR2.1/unit (INR1.92/unit) due to an increase in the coal cost. Ind-Ra expects the fixed cost per unit to increase in the medium term as NTPC commissions a bulk of its capital works in progress (CWIP) over FY20-FY23 and because of an incremental capex requirement for meeting the flue-gas desulfurisation (FGD) requirements in 64.85GW of the consolidated capacity, of which orders for 56.8GW had already been placed, as of FY20. However, NTPC continues to benefit from its fuel tie-ups with Coal India Limited and captive coal production from its Pakri Barwadih (Jharkhand) and Dulanga (Odisha)mines.

NTPC produced 11.2 million metric tonne (mmt) of captive coal in FY20 (FY19: 9.3mmt; FY18: 2.68mmt). The reliance on imported coal remains below 2% of the total requirement, however, the annual contracted quantity materialisations dipped marginally to 92.8% in FY20 (FY19: 95.4%; FY18: 94.8%). Ind-Ra believes a continued low PLF with high-availability declaration will make the per unit tariff higher for the discoms and hence, could result in a pushback. Globally, the share of gas and renewables capacity is increasing in the overall generation profile. Additionally, PLFs have remained low for the thermal plants in India. In this backdrop, Ind-Ra sees continued regulatory tightening financially and environmentally for coal-based plants, to ensure cost competitiveness and low environmental impact. Coal-based capacity faces the additional risk of lower levelized tariffs from renewables and gas costs, globally. However, NTPC is attempting to keep overall tariffs competitive both from fixed- and variable-cost perspectives. 

Substantial Increase in Debtors: NTPC’s debtors, including unbilled revenues, increased to INR326 billion in FY20 (FY19: INR211 billion) with a substantial rise from counterparties in Jammu & Kashmir, Uttar Pradesh, Karnataka and Telangana. Additionally, to tide over the delay in payment receipts, NPTC discounted bills of INR108 billion in FY20 (FY19: INR100 billion). The group further witnessed an increase in the net regulatory assets to INR64.56 billion as at FYE20 (FYE19:18.08billion). Ind-Ra expects the company’s receivables to decline by FYE21 on account of the liquidity schemes announced by the GoI for discoms. Though, disbursements under the scheme started in August 2020, the full disbursement of INR900 billion may face challenges on account of conditions attached to the packages and would be a key determinant of the debtors. Additionally, NTPC is also a counterparty for around 4GW of renewable energy assets under the developer mode, for which it has signed back-to-back PPAs with state discoms. Ind-Ra believes NTPC is likely to be the counterparty for more such projects, which would result in an increased risk on NTPC’s balance sheet till the health of the discoms improve. The regulatory balances, the agency believes, would get settled over a period of time as they are largely attributable to exchange differences and deferred tax.

Ind-Ra also takes comfort from NTPC’s 100% collection efficiency since FY04 post the one-time settlement scheme in 2003; a   payment security mechanism in the form of a letter of credit, backed by a TPA;  NTPC’s ability to regulate power, and the presence of late-payment surcharge that ensures there is no economic loss on delayed payments (FY20: INR16 billion, FY19: INR13 billion, FY18: INR5.1 billion). NTPC has successfully extended the TPA with 29 states/union territories for 10-15 years at end-January 2020; Ind-Ra believes the remaining states of Punjab and Haryana are also likely to sign the TPA.

Decline in CWIP due to Higher Commissioning: NTPC commissioned 5.3GW during FY20 (FY19: 2.2GW) and expects to commission additional 4.7GW and 6.9GW during FY21 and FY22, respectively. NTPC has 20.5GW under construction at the consolidated level with around 11GW at the standalone level, of which 2.3GW is solar power. Ind-Ra expects an annual capex of INR210 billion-250 billion on these projects over the next three-to-four years. NTPC plans to substantially increase the share of renewables in its portfolio to over 24.6% by 2032 from 1.7% in FY20, to avail fuel-diversification benefits.

Given the large commissioning done in FY20, NTPC’s CWIP as a percentage of gross block  declined to 26% at FYE20 (FYE19: 41%, FYE18: 38%) resulting in a lower proportion of non-EBITDA generating assets. Although the CWIP may not decline substantially in absolute terms in FY21 and FY22 on account of the planned FGD capex in FY21 and FY22, Ind-Ra believes the CWIP as a percentage of gross block will decline further owing to the accelerated pace of commissioning.

Ind-Ra believes as the project commissioning increases, EBITDA generation will rise. The agency believes construction risk is low-to-moderate, given NTPC’s experience in setting up power projects and its policy of starting projects only once PPAs, fuel supply agreements and clearances are in place.

Net Leverage to Remain Elevated: NTPC’s consolidated net leverage (net debt/EBITDA), although improved marginally, remained high at 6.4x in FY20 (FY19: 6.5x). NTPC’s EBITDA increased to INR315 billion in FY20 (FY19: INR267 billion, FY18: INR224 billion) owing to the commercial capacity commissioning of 5.3GW and the full year benefit of 2.2GW capacity commissioned in FY19. Historically, the capex incurred in FY20 was among the highest owing to the acquisition of NEEPCO and THDC for INR115 billion for 3.3GW of capacity completed on 27 March 2020.

Ind-Ra expects the net leverage to remain high even in FY21, given the high receivables, a likely delay in increase in EBITDA due to the delay in capacity commissioning due to COVID-19 and the rebate offered of around INR14 billion as directed by the GoI and the INR1,000 billion capex plan outlined by the company for FY19-FY24. Though, the company is not likely to pursue new thermal projects, the group would focus on increasing the renewable capacity to 32GW by FY32, which would entail significant capex.  Given the large capex plans; acquisitions; the possibility of receivables spiking given the financial health of the discoms, and pay-outs to shareholders, Ind-Ra believes the leverage would remain elevated, exceeding 5.5x over FY22-FY24. NTPC’s consolidated gross debt increased to INR2,112 billion at FYE20 (FYE19: INR2,030 billion) diversified across foreign currency debt, domestic debentures, domestic bank loans and commercial papers (27%/25%/40%/8%). Despite the high net leverage, NTPC’s regulated cost-plus return on equity model provides sufficient cash-flow predictability, thus allowing the business to have higher leverage than its category medians.  

Standalone Performance: At the standalone level, NTPC reported revenue of INR977 billion in FY20 (FY19: INR903.1 billion, FY18: INR834.5 billion), EBITDA of INR271 billion (INR227.7 billion, INR216.7 billion) and interest coverage (EBITDA/Gross Interest Expense) of 4.0x (4.8x, 5.4x) while net leverage was 6.2x at FYE20 (6.3x, 5.5x).