RPT-Fitch Affirms India's NHPC at 'BBB-'/Stable
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Aug 26 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed India-based NHPC Limited's (NHPC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable.
Key Rating Drivers
Dominant hydro power player: NHPC's ratings benefit from its position as the largest hydro power producer with 14.5% of the country's hydel capacity. It has around 40 years of experience in constructing and operating hydel projects. Its operations are diversified with 17 projects across six states, with no single project accounting for more than 20% of the capacity.
Stable cash flows: NHPC does not have any offtake risks as it has long-term power purchase agreements for all of its plants. The company also benefits from a favourable regulatory regime, wherein there is cost pass-through, including all operational costs as well as depreciation and interest costs. Most hydro projects have been prone to construction delay, due to the inaccessible locations, and hence cost overruns. The regulations provide for 85% of the overruns to be included in the provisional tariff computation.
Counterparty risks: NHPC's customers are largely state electricity boards - with weak financial positions. As most of NHPC's plants are located in the north and north-eastern states, the allocation of power is mostly to these states. The revenue concentration reflects the population density of the particular states, with the top five customers accounting for around 60% of revenues and the top 10 for 80%. NHPC has, however, enjoyed high collection efficiency, as its receivables are backed by letters of credit.
High capex: NHPC is likely to have a high level of capital expenditure of around INR30bn to INR40bn per annum; it has six projects with a combined capacity of 4,050MW under construction. The company has faced execution issues with work stoppage at one of its largest projects under construction, Subansiri Lower (2,000MW) located in Arunachal Pradesh, due to local resistance.
The company also has 10 projects which are at environmental and forest clearances stages - five solely owned (5,115MW) and the rest by JVs (3,686MW). Given the high level of future capex, free cash flows of the company are likely to be negative.
Comfortable credit profile: NHPC has a comfortable credit profile with net debt/ EBITDA of 2.9x in the financial year to March 2013 (FY12: 2.4x). Fitch expects that net leverage will increase over the next three to four years, due to the high capex, but will remain below 4x. Interest coverage (EBITDA/gross interest) has also been comfortable at 2.7x in FY13 and 3.7x in FY12. The company also enjoys healthy liquidity with cash of INR82bn in FY13 (INR80bn in FY12), ready access to capital markets and strong banking relationships.
Sovereign linkages: NHPC has moderate to strong linkages with its 86% shareholder - the Government of India. Given the low level of tangible support and guarantees provided by the government, Fitch would provide only a single-notch uplift for potential support under its bottom-up rating approach. However, because NHPC's standalone rating of 'BBB-' is the same as the sovereign rating, no uplift has been provided. Should the standalone credit profile weaken relative to the sovereign rating, potentially if net debt/ EBITDA exceeds 4.5x on a sustained basis, due to customer payables build-up leading to liquidity pressures, or if there is an unfavourable regulatory change, a one- notch support would be provided.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade of the sovereign rating
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A downgrade of the sovereign rating