Fitch Ratings has affirmed India-based hydropower producer NHPC long-term foreign and local currency issuer default ratings (IDRs) at 'BBB-'. The outlook is stable.
NHPC benefits from a favourable regulatory regime, where it is able to pass through to its customers all operational costs, and depreciation and interest costs. A 15.5%-16.5% return on regulatory equity is also built into its tariff structure. The current tariff formula covers the five years from April 2014 to March 2019. NHPC's revenue increased to Rs 74 billion in the financial year ended March 2014 (FY14) from Rs 64 billion in FY13 after four new projects started operation.
NHPC's ratings also benefit from its position as the largest hydropower producer in India with 15.9% of the country's hydropower capacity. It has around 40 years of experience in constructing and operating hydropower projects. Its operations are diversified with 20 projects across seven states, with no project accounting for more than 20% of the capacity.
NHPC has a high level of capital expenditure, with 3,290MW of capacity under construction. The company also has 10 projects that are waiting for environmental and forest approvals - five standalone projects with total capacity of 5,115MW and five joint-venture plants with total capacity of 3,536MW. Given the high level of future capex, Fitch expects the company to post negative free cash flows.
Most hydropower projects are prone to construction delays and cost overruns due to their inaccessible locations. Indian regulations allow 85% of the overruns to be included in the provisional tariff computation. Work at NHPC's 2000MW Subansiri project and 160 MW Teesta Lower Dam IV (TLD IV) has stalled, and the costs of Rs 12.7 billion for both projects were expensed in FY14 and Rs 4.6 billion in 9MFY15. This led to a fall in NHPC's net profits to Rs 12 billion in FY14 from Rs 26 billion in FY13.
Shares of the company declined Rs 0.2, or 1.02%, to trade at Rs 19.45. The total volume of shares traded was 423,945 at the BSE (2.39 p.m., Monday).
