Moody's Investors Service has affirmed the Baa3 issuer rating for NTPC (NTPC) and concurrently upgraded NTPC's baseline credit assessment (BCA) to baa3 from ba1. The rating outlook is stable.
''The upgrade of NTPC's BCA to baa3 reflects its dominant position in India's power generation sector, accounting for roughly a quarter of the nation's electricity. More prominently, its unique arrangement with the State Electricity Boards (SEBs), through the implementation of the 'One Time Settlement Scheme' (OTSS) ensures payment security,'' says Ray Tay, a Moody's vice president and senior analyst.
''NTPC is a low-cost power producer that is well-positioned to benefit from India's growing demand for electricity,'' he adds.
Since the implementation of the OTSS in FYE03/2004, the SEBs has maintained a good payment track record. Upon expiry of the OTSS in 2016, Moody's expects NTPC to migrate to an escrow arrangement with the SEB's to ensure payment.
''However, NTPC's significant capex plans will weaken the company's financial metrics,'' says Tay.
NTPC plans to increase its total energy capacity by almost 8,000 megawatts (MW) to 51,242MW by FY2017 in order to meet strong demand growth. It has total capacity under construction of 23,854 MW as of September 2014.
Nonetheless, Moody's believes NTPC's strong operating profile, solid liquidity and demonstrated access to low-cost funding are supportive of its plans to expand its power generation capacity through 2017.
As India's largest and most efficient power producer, NTPC is best positioned to build much-needed capacity as well as benefit from demand growth.
While fuel security remains a significant challenge for the Indian power sector, NTPC's longstanding committed coal supply, via its Coal Supply Agreement with Coal India Limited, enables it to maintain its operations at the highest level of plant load factor in India. NTPC's ability to import coal and its ability to pass through such costs may also mitigate any supply shortfall from Coal India.
NTPC's Baa3 rating will no longer factor in any uplift from the Government of India due to its high BCA of baa3 relative to India's sovereign rating of Baa3. Nevertheless, Moody's believes that the government will continue to provide a high level of support in the event that extraordinary financial support is required, particularly in light of its 75% ownership of NTPC.
The stable rating outlook reflects Moody's expectation that NTPC will continue to generate relatively predictable cash flows for its regulated power business owing to its competitive position, and will maintain its sound liquidity profile.
NTPC's rating could be upgraded if India's sovereign rating is upgraded and if NTPC's underlying credit quality remains consistent with its current BCA of baa3. Absent an upgrade to the sovereign rating, an upgrade to NTPC's ratings is very unlikely because the company's business profile is highly dependent on India's economy.
Downward pressure on the rating could emerge if there are unfavorable regulatory developments which could negatively affect the company's financial position. A sovereign downgrade could also impact the rating negatively.
Although NTPC's financial profile is strong, it has been weakening as a result of capex. Hence, continued deterioration in its financial profile will pressure its BCA. Similarly, acquisitions of a significant size which introduce risks related to cost pass-through may also impact its BCA.
Shares of the company gained Rs 0.5, or 0.34%, to trade at Rs 146.65. The total volume of shares traded was 51,910 at the BSE (10.13 a.m., Tuesday).
