Fitch's national ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings. The best risk within a country is rated 'AAA'. National ratings are designed for use mainly by local investors in local markets and are identified as 'AAA(ind)' for national ratings in India.

The ratings reflect the Indian government's direct support to NHPC; it funds 30 per cent to 40 per cent of NHPC's projects costs in the form of equity and guarantees over 90 per cent of the power producer's foreign currency debts (40 per cent of its total debt) as well as its debts from private sector banks (31 per cent of its total debt).

NHPC plans to almost triple its capacity from 2,475MW (March 04) to 6,506MW by the end of the 10th five-year plan (FY03 to FY07). These plans constitute a principal risk driver for NHPC, constraining its ratings at the current level. Fitch expects government backing for NHPC to remain intact even in case of significant time and cost overruns. Only if this support weakens materially would a review of NHPC's ratings be required.

Rising capex has driven up NHPC's net debt by 20 per cent in FY02, 10 per cent in FY03 and 4 per cent in FY04. Though this has pushed net debt to EBITDA to 7.5x from 6.7x in the last three years, equity injections of Rs34.6 billion during the same period has driven relative debt levels to 38 per cent of capitalisation from 44 per cent.

In FY04, NHPC generated Rs13.4bn of turnover and Rs10bn of EBITDA, whose margins have averaged a strong 74 per cent in the last three years, though financial distress of the state electricity boards had impaired receivables quality and cash profitability in the late 1990s and early 2000s. Though a government-backed settlement in 2001 has reduced risks in this regard, residual counter-party risks remain