Fitch Ratings has assigned India-based NTPC (NTPC; BBB-/Stable) 4.375% USD 500 million senior unsecured notes due 2024 a final rating of 'BBB-'. The notes are issued out of its USD 2 billion medium-term note programme. The notes constitute direct, unconditional, unsubordinated and unsecured obligations of NTPC.
The assignment of the final rating follows a review of the final documentation materially conforming to the draft documentation previously received. The final rating is the same as the expected rating assigned on Nov. 19, 2014.
NTPC is rated a notch below its standalone profile of 'BBB', as its ratings are constrained by that of its 75% shareholder - the Indian State (BBB-/Stable). Fitch assesses that the linkages between NTPC and the sovereign are moderate, with strategic linkages being especially strong. Based on the agency's parent and subsidiary linkage criteria, Fitch will provide a one-notch rating uplift on the standalone credit profile of NTPC if the company's standalone ratings were to fall below that of the sovereign, provided that the linkages remain intact.
NTPC is the largest power generation company in India, accounting for a fourth of total power generated in the country. Of India's total installed power generation capacity of 255 gigawatts (GW), around two thirds is thermal. NTPC accounts for 23% of India's thermal power generation capacity.
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 its plants that allow for the pass-through of fixed costs as well as fuel costs. Its returns are regulated based on invested capital and a rate of return as per a transparent regulatory model. There are no off-take risks as the fixed costs are payable if the plant has achieved the regulatory benchmark availability. There is regulatory certainty until March 2019, the latest five-year regulatory tariff period.
Fitch expects the changes in the new tariff block are likely to affect NTPC's profitability by 8%-11% compared with Fitch's earlier estimates. The new tariff block has maintained the return on equity at 15.5%; however, the lower tax grossing rate and the linkage of incentives to plant load factor (PLF) will act as negatives. These will be partly offset by the benchmark availability rate for fixed costs pass-through reducing to 83% from the earlier 85% for the first three years; and provision for allowing recovery of water charges and capital spares.
