OREANDA-NEWS. Fitch Ratings has assigned India-based NTPC Limited (NTPC) a Long-Term Local-Currency IDR of 'BBB-' with a Stable Outlook. At the same time, Fitch has assigned NTPC's proposed senior unsecured rupee-denominated notes, payable in US dollar, an expected rating of 'BBB-(emr)(EXP)'.

The notes, which are labelled green, will be issued out of NTPC's USD4bn medium-term note programme. Investors should note that, while the notes are denominated in rupees, both coupon payments and principal on maturity are settled in US dollars at the prevailing rupee-dollar exchange rate; as such, settlements are subject to transfer and convertibility risk on exchange operations involving the Indian rupee (and thus the rating on the notes can be no higher than India's Country Ceiling, currently 'BBB-').

The linkage of payments under the terms of the notes to the prevailing exchange rate means that Fitch does not regard the conversion of currencies at the transaction's initiation and maturity as altering the underlying local-currency nature of the note. Fitch's 'emr' suffix has been applied to the local-currency rating of the notes to reflect the fact that upon maturity the investor is paid in US dollars rather than the currency of the notes.

The notes are rated at the same level as NTPC's senior unsecured debt rating as they will constitute direct, unconditional, unsubordinated and unsecured obligations of NTPC. The final rating is contingent upon the receipt of final documents conforming to information already received. The proceeds of the proposed green notes, which are to be used for projects with environmental benefits, will be used for NTPC's renewable power generation projects.

KEY RATING DRIVERS

Dominant Market Position: NTPC is the largest power generation company in India. It accounts for about 16% of India's total installed power generation capacity, and about a quarter of electricity generation in the country. Out of a total installed capacity of 302GW in India, about 70% is thermal. NTPC contributes around 22% to the country'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 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 ending March 2017 (FY17) and will be reviewed thereafter. The plant availability rates in FY16 were much higher at 92% (FY15: 89%) for the coal-based plants and 97% (FY15: 92%) for the gas-based plants. The current tariff block links the incentive income to achieving plant load factor (PLF) of more than 85%, instead of PAF earlier. In FY16, NTPC's coal-based power plants had an average PLF of 79% (FY15: 80%), with 11 of its 17 coal-based plants having PLFs of less than 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 tri-partite agreements between NTPC, the Reserve Bank of India and state governments. The current agreements expire in October 2016; however, NTPC expects an extension for another 10 years. According to the management, 19 out of 29 states have already agreed to the extensions. 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 are 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 further. 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. NTPC's capex is likely to remain high at around INR300bn per year for the next couple of years, which will lead to negative free cash flows. Fitch expects leverage (net debt/EBITDA) to remain higher than the standalone guideline of 5.0x till FY18. Leverage is likely to reduce from FY18 as more projects are commissioned and profitability increases.

NTPC plans to bid for 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 that the linkages between NTPC and the Indian state (BBB-/Stable) are 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 the issuer include:

- Revenues are based on allowed costs, a return on equity 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 a year over the next two years (FY17-18), and about INR350bn over FY19-20

RATING SENSITIVITIES

Positive: Future development 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 remain intact

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

Negative: Future development 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 capital expenditure; 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