Fitch Ratings has affirmed India-based NTPC Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'.

The Outlook is Stable. The agency has also affirmed NTPC's senior unsecured rating of 'BBB-', and the 'BBB-' ratings on the USD6 billion medium-term note programme and the notes issued under the programme.

NTPC's IDRs reflect its Standalone Credit Profile (SCP) of 'bbb-', which is underpinned by its regulated business model that enjoys high revenue and profit visibility as long as the plants are available, irrespective of actual off-take and fuel price fluctuations. We expect NTPC to maintain high headroom for its 'bbb-' SCP, taking into account our leverage expectations.

We forecast NTPC's EBITDA net leverage to range between 5.0x and 5.2x over the medium term, rising from 4.8x in the financial year ended March 2023 (FY23) (FY22: 5.5x). This is driven by the company's continued high capex intensity and dividend pay-outs, as well as Fitch's assumption of increased receivable days to 100 by FY26 (FY23: 83).

NTPC's leverage is likely to remain below 5x if its receivable days remain lower than our current assumption for a sustained period, which would result in an upward revision of its SCP to 'bbb'.

Key Rating Drivers

Robust Business Model: NTPC's operating profits are stable, insulated from volume and price risk by favourable regulations. It has long-term power purchase agreements for its plants that allow changes in fuel costs to be passed through. Revenue and profit are regulated based on invested capital and a rate of return, as well as incentives, under a transparent cost-plus model. NTPC has a proven record of timely regulatory tariff reviews, ensuring reasonable cost recovery. We expect the EBITDA contribution from renewable projects it obtained through competitive bids to grow, but remain below 10% until FY27.

High Plant Availability: The average availability of NTPC's coal-based plants improved to 92.6% in FY23 (FY22: 88.8%), above the current regulatory benchmark of 85%. The higher availability reflects NTPC's ability to manage coal inventories at its power plants, even as other coal-based plants faced coal availability issues in 1QFY23, and improvements in general coal availability over the last nine months. High plant availability and increased plant load factors led to higher incentive income and a reduction in total under-recoveries in FY23.

Adequate Coal Supply: The improvements in coal availability in India were due to higher domestic supply and an increase in coal imports to 55.6 million tonnes (MT) in FY23, a 106% yoy increase. Coal production at NTPC's mines rose to 23.2 MT in FY23 (FY22: 14.0 MT), with production ramping up at new mines. NTPC's coal inventory has risen to around 16 days (June 2022: around 13 days), compared to the country's average of 13 days.

Reduced Receivables, Weak Counterparties: We expect receivables to increase slightly to 100 days in the medium term. Trade receivables, including unbilled revenue and bill discounting, fell to 83 days in FY23 (FY22: 98 days), largely due to payments received under late payment surcharge rules. Fitch expects receivables to increase in the medium term, as operational and financial profiles of state utilities remain weak and there is no structural improvement in their ability to promptly pass on higher costs to customers.

NTPC's receivable position is supported by its strong bargaining position as a low-cost electricity producer and major supplier to state utilities. Its receivables also benefit from letters of credit that are equivalent to 105% of average monthly payments; tripartite agreements among NTPC, the Reserve Bank of India and state governments; and supplementary agreements with all state utilities that provide first charge over customers' receivables.

Stable Leverage Profile; High Capex: Fitch expects net leverage to average around 5.0x in the medium term, supported by stable cash generation, even as high capex and dividends payouts mean the company will continue to report negative free cash flow. We expect capex intensity - measured by capex/revenue - to remain at around 15% in the medium term, below the high of 20.9% in FY21 (FY23: 14.1%) on higher revenue as new projects start operations. This is despite our expectation that capex will remain high at around INR300 billion a year (FY23: INR248 billion).

Capex would consist of spending on renewable capacities, brownfield thermal coal capacities and on flue gas desulphurisation systems for its coal plants to meet environmental norms. Fitch estimates dividend pay-outs to remain high at around 50% of the previous year's net income over the next three to four years (FY23: 43%).

'Strong' State Linkages: We regard the status, ownership and control of NTPC by the Indian government as 'Strong', as the government owns 51.1% of the company and controls its board and key decisions. However, NTPC's daily operations are conducted on commercial terms. We assess the state's support record as 'Strong'. NTPC has received state support less frequently than other state utilities because of its financial strength, but we expect the support to be forthcoming, if needed.

Moderate to Strong Support Incentive: The socio-political implications of a default by NTPC are 'Moderate', while the financial implications are 'Strong'. NTPC's default could affect about 25% of India's power supply. However, state-owned Coal India, which produces most of the country's domestic coal, can be directed to supply coal to NTPC to allow it to continue operating, if needed. We believe a default would have a significant impact on the availability and cost of financing for the state and other government-related entities (GREs), as NTPC is one of India's key borrowers.

Potential One-Notch Uplift: NTPC's ratings benefit from a one-notch uplift, based on our 'Moderate' to 'Strong' assessment of the GRE factors, resulting in its IDR staying the same even if its SCP weakens to 'bb+'. We consider its key credit drivers, including its regulated business model and receivables risk, as largely independent of those for the Indian sovereign rating (BBB-/Stable).

Derivation Summary

Vietnam Electricity's (EVN, BB/Positive) ratings, similar to those of NTPC, reflect its SCP, which is at the same level as Vietnam's sovereign rating (BB/Positive). EVN owns and operates most of the country's installed power generation capacity and has a monopoly over Vietnam's electricity transmission and distribution. However, our assessment of EVN's SCP is constrained by the lack of a record of consistent application of electricity regulatory reform, including tariff adjustments that reflect cost changes.

NTPC's SCP is two notches above that of EVN, reflecting NTPC's stable operating profit due to a well-established regulatory return framework that allows for timely pass-through of cost changes, despite its higher leverage.

We assess Power Grid Corporation of India Ltd's (POWERGRID, BBB-/Stable) SCP at 'bbb+', two notches above NTPC's SCP, on account of POWERGRID's stronger financial profile and NTPC's direct exposure to weak state distribution utilities. In comparison, POWERGRID's counterparty risk is mitigated by a pool-based payment mechanism and a lower transmission tariff contribution to the total electricity tariff on average.

Key Assumptions

Fitch's Key Assumptions Within our Rating Case for the Issuer:

Revenue based on allowed costs, return on equity of 15.5% and incentive income;

Operating capacity to increase by around 4.5GW a year, with 2GW of thermal capacity and 2.5GW of renewable capacity to be added each year on average;

Renewable generation to increase, but its contribution to overall EBITDA to remain below 10% until FY27;

Receivable days to increase marginally to 100 by FY26 (FY23: 83);

Capex to remain high at around INR300 billion a year (FY23: INR248 billion);

Dividend pay-outs to remain high at around 50% of the previous year's net income (FY23: 43%).

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

An upgrade of the sovereign rating, provided NTPC's SCP remains at 'bbb-' or the likelihood of state support strengthens.

NTPC's SCP could be upgraded if its EBITDA net leverage remains below 5.0x (FY23 estimate: 4.8x) for a sustained period. However, given the state's effective control of NTPC, its IDR will be capped by India's rating.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

A downgrade of India's ratings.

NTPC's SCP could be lowered due to higher capex than Fitch expects, a significant deterioration in collections or unfavourable regulatory developments, resulting in net debt to EBITDA exceeding 6.0x for a sustained period.

For the sovereign rating on India, the following rating sensitivities were outlined by Fitch in our Rating Action Commentary dated 8 May 2023:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Public Finances: Rising general government debt/GDP ratio, for instance, from insufficient fiscal consolidation.

Macro: A structurally weaker real GDP growth outlook that further weighs on the debt trajectory.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Public Finances: Implementation of a credible medium-term fiscal strategy to bring general government debt and the interest/revenue ratio down towards the levels of 'BBB' category peers.

Macro: Higher medium-term investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Banking Access Supports Liquidity: Fitch expects NTPC to generate negative free cash flow due to higher capex and dividend payouts, even as cash flow from operations is expected to remain strong in the medium term. NTPC has around INR319 billion of debt maturing in FY24, including short-term borrowings, against readily available cash of INR21.6 billion at FYE23.

Nevertheless, we believe NTPC can secure adequate funding to refinance its maturing debt and fund its free cash flow deficits, due to its strong position in India's power sector and linkages with the sovereign, which support its solid access to domestic banks and capital markets.

Issuer Profile

NTPC is India's largest power generation utility. It has total operational capacity of around 72GW, most of which are coal-based generation plants. NTPC accounts for 17% of the country's installed power-generation capacity and 25% of its electricity generation.

Summary of Financial Adjustments

We treat INR84 billion of debt taken by NTPC's customers to make payments to the company as NTPC's debt, as such debt has recourse to NTPC under the borrowing terms.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

NTPC's ratings are linked to the credit quality of the Indian sovereign.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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