Analytical Approach: Ind-Ra has considered the consolidated profile of NTPC and its
subsidiaries for the ratings, in light of the funds infused in them by NTPC and
the operational and strategic linkages among the entities.
KEY RATING DRIVERS
Market Leadership: NTPC has maintained a dominant position in the Indian power sector, with a share of 25% in FY19 (FY18: 23%) in generation and a 24% (23.3%) share in thermal capacity. The company had a consolidated thermal capacity of 58GW at end-9MFY20 (FYE19: 55GW, FYE18: 53.6GW) and generation capacity of 191 billion kWh (306 billion kWh, 294 billion kWh). Ind-Ra expects NTPC’s share in generation to increase in the medium term, due to (i) a pickup in demand (ii) the limited addition of coal-based capacities by the private sector in both thermal and gas-based capacities and (iii) a slowdown in the renewable capacity addition.
Sustained Fixed Cost Recovery, Despite Low PLF: NTPC maintained a healthy plant availability factor for coal-based plants at 87.8% for 9MFY20 (FY19: 87.1%, FY18: 86.02%) and gas-based plants at 94% (92%; 93%), above the normative level, thus ensuring fixed cost recovery; despite a decline in the plant load factor (PLF). However, NTPC faced a fixed-cost under-recovery of INR8 billion in FY19 and INR3.8 billion for 9MFY20, given under-recoveries in some plants. The PLF of NTPC’s coal-based plants declined to 67.13% in 9MFY20 (FY19: 77.2%, FY18: 77.5%), in line with the decline at the all-India level to 55.8% (61.1%, 59.9%). The PLF of its gas-based plants also fell to 14.68% (21%; 25%) similarly. The decline in the coal PLF was due to a higher generation from hydro stations, given favourable monsoons and reservoir levels, a capacity ramp-up at Kudankulam Nuclear Power Plant and a private sector plant, combined with a muted demand. The PLF of gas-based plants declined due to low domestic gas availability and the low allocation to the power sector in the gas allocation policy. Ind-Ra opines a pick-up in both thermal and gas PLFs is contingent upon a demand growth revival, capacity additions in the renewable sector and the improved performance of gas-based plants, given the decline in imported liquified natural gas prices.
Liquidity Indicator - Adequate: Although NTPC’s consolidated gross debt increased to INR1,631.7 billion at FYE19 (FYE18: INR1,313.7 billion), it was diversified across foreign currency debt, domestic debentures, domestic bank loans and commercial papers (25%/22%/44%/10%). Also, its unencumbered cash balances remained low at INR11.5 billion in FY19 (FY18: INR30.5 billion). Although NTPC generated positive cash flow from operations (FY19: INR164 billion, FY18: INR197 billion), increased dividend payments (INR60 billion, INR48.7 billion), higher net interest cost (INR107 billion; INR83.6 billion) and aggressive capex (INR219.7 billion, INR187.7 billion) led to a negative free cash flow (INR223 billion, negative INR123.5 billion). NTPC has annual debt repayments of INR90 billion-100 billion each over FY20-FY23. 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 category medians ensuring average borrowing costs at 6.86% during 9MFY20 (9MFY19: 6.92%). NTPC’s liquidity is also supported by sanctioned working capital limits of INR170 billion and high financial flexibility, given its longstanding relationships in domestic banking system and bond markets.
Government Ownership: At end-December 2019, the government of India (GoI) held the majority stake in NTPC (54.14%), though its overall holding has come down from 63% in FY17. The board and the senior management at NTPC are appointed by the GoI. NTPC is also strategically important to the government, given its dominant position in the power sector. In addition, the GoI guaranteed NTPC’s INR18.9 billion of foreign currency loans at FYE19 (FYE18: INR20.3 billion). As a result, the ratings continue to factor in a strong probability of support to NTPC from the GoI, if required.
Average Selling Price Increase Could Pressurise Offtake: NTPC’s average selling price increased to INR3.81/kWh in 9MFY20 (9MFY19: INR3.47/kwh, FY19: 3.4/kWh, FY18: 3.2/kWh), driven by a lower coal PLF (9MFY20: 67.13%, 9MFY19: 76.09%) and gas PLF (14.68%, 21.98%), a higher fixed cost per unit for the new plants as they have higher capital cost, increased imported coal blending (2.15mt, 0.38mt) and higher transportation charges. Additionally, the fixed cost per unit is likely to see an increase in the medium term as NTPC commissions a bulk of its capital works in progress (CWIP) over FY20-FY22 and because of an incremental capex requirement for meeting the flue-gas desulfurisation requirements in 64.85GW of the consolidated capacity, of which orders for 46.87GW have already been placed as of 9MFY20. However, NTPC continues to benefit from its fuel tie-ups with Coal India Limited and captive coal production from its Pakri Barwadih and Dulanga mines. NTPC produced 7mmt of captive coal during 9MFY20 (FY19: 9.3mmt FY18: 2.68mmt).
During 9MFY20, domestic coal production remained benign, resulting in increased reliance on imported coal, which Ind-Ra expects to reduce in FY21. This expectation is based on an improvement in the domestic coal situation, higher production from captive mines (expectation - FY20: 10.5mt, FY21: 18mt) and improved annual contracted quantity (172mt) materialisations (9MFY20: 91.45%, FY19: 95.4%, FY18: 94.8%) from Coal India. However, a continued low PLF with high availability declaration, makes the per unit tariff higher for the distribution companies and hence could result in a pushback.
Substantial Increase in Debtors: NTPC’s debtors increased to INR217 billion in 1HFY20 (FY19: INR101 billion, FY18: INR88 billion) with a substantial rise from counterparties in Jammu & Kashmir, Uttar Pradesh, Karnataka and Telangana. The payments prior to the introduction of the letter of credit mechanism implementation have not come through leading to the build-up as counterparties are focussing on fulfilling current payments. This resulted in higher debt. However, Ind-Ra takes comfort from i) NTPC’s 100% collection efficiency since FY04 post the one-time settlement scheme in 2003, ii) the payment security mechanism in the form of a letter of credit, backed by a tripartite agreement (TPA), iii) NTPC’s ability to regulate power and iv) the presence of late payment surcharge that ensures no economic loss on delayed payments (9MFY20: INR10 billion, FY19: INR13 billion, FY18: INR5.1 billion). The TPA signed among state governments, the GoI and the Reserve Bank of India ensures that any default in the payment by any state distribution companies can be recovered directly from the account of the respective state government with the Reserve Bank of India. NTPC has successfully extended the TPA with 29 states/union territories for 10-15 years at end-January 2020; the remaining states of Punjab and Haryana are also likely to sign the TPA.
Large Commissioning Pipeline to Lower CWIP: NTPC commissioned 3GW during 9MFY20 (FY19: 1.5GW, FY18: 3.1GW) and expects to commission 5.3GW and 4.5GW during FY20 and FY21, respectively. Ind-Ra believes this is a considerable pace of capacity addition compared to the four years (FY16-FY19) it took to commission the last 10GW. NTPC has 19GW under construction at the consolidated level with around 13GW at the standalone level, of which 370MW is solar. Ind-Ra expects annual capex of INR250 billion-300 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% by 2032 from 1.6%, to avail fuel diversification benefits.
Given the large project commissioning pipeline, NTPC’s CWIP as a percentage of gross block (GB) remained high at 41% at FYE19 (FYE18: 38%, FYE17: 48%), resulting in a higher debt, as EBITDA generation would begin post project commissioning. However, as the commissioning pace is likely to be accelerated, CWIP as a percentage of GB is likely to decline. Ind-Ra believes as project commissioning increases, debt drawdown will reduce and EBITDA generation will rise, leading to a fall in the leverage. 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 power purchase agreements, fuel supply agreements and clearances are in place.
Net Leverage to Remain Elevated in Medium Term: NTPC’s consolidated net leverage (net debt/EBITDA) remained higher than expected at 6.7x in FY19 (FY18: 5.7x), because the capacity commissioning was pushed to FY20 from FY19, leading to lower-than-expected EBITDA generation (9MFY20: INR213 billion FY19: INR241 billion, FY18: INR224 billion). Ind-Ra expects the net leverage to remain high even in FY20, given the high receivables and gradual EBITDA ramp up of the capacity commissioned in FY20 coupled with low PLFs. NTPC’s leverage in FY19 was also impacted by the acquisition of Barauni Thermal Power plant for INR21 billion and cash return to shareholders (dividends and interest on bonus debentures) of INR68.7 billion (FY18: INR57 billion. Leverage will also increase, driven by NTPC’s plan to buy out the GoI stake in THDC India Limited (THDC, ‘IND AA+/RWE) and North Eastern Electric Power Corporation Limited, given their combined net worth is above INR140 billion. NTPC expects the transaction to be completed in FY20 or 1QFY21. In line with the cash outflow expected for the acquisition, NTPC has not considered any interim dividend for FY20. As receivable days moderate and under construction capacity comes on-stream, the leverage is likely to decline to about 5.5x over the medium term.
Regulatory Risks and
Competing Sources: NTPC operates its plants on a cost-plus
return on equity model of 15.5%, along with the recovery of reasonable costs
and incentive for better-than-normative operations. NTPC’s regulatory equity
stood at INR540 billion at FYE19 (FYE18: INR509 billion). 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 additionally faces the risk of lower levelised
tariffs from renewables and gas costs globally. However, NTPC is attempting to keep
overall tariffs competitive both from fixed cost and variable cost perspectives.
COMPLEXITY LEVEL OF INSTRUMENTS
details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
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