Tariff revision likely to weaken operating performance of India's state-owned power companies

The Indian regulator's revised tariff norms for 2014-2019 could weaken the margins of state-owned utilities, says Standard & Poor's Ratings Services.

But the extent of the impact will differ among the three state-owned power companies that we rate in India: NTPC Ltd. (BBB-/Negative/--); NHPC Ltd. (BBB-/Negative/--); and Power Grid Corp. of India Ltd. (BBB-/Negative/--).

"While we think that the revised regulatory tariff structure is likely to weaken the operating performances of NTPC, NHPC, and Power Grid, it is unlikely to affect the ratings on these companies," said Standard & Poor's credit analyst Rajiv Vishwanathan. "This is because the ratings on these companies incorporate some level of government support, in accordance with our methodology to assess government-related entities."

We expect NTPC's EBITDA to decline 10 per cent-12 per cent and net income to fall under the new tariff structure - all else being equal. However, we anticipate that the EBITDA contribution from new marginal capacity will offset some of the impact of the tariff changes.

As a result, we expect minimal change in NTPC's absolute EBITDA in fiscal 2015 (year ending 31 March 2015) compared with our expectation of about Rs18,000 billion in fiscal 2014.

We forecast that the company's ratio of funds from operations (FFO) to debt will remain 13 per cent-17 per cent in fiscals 2015 and 2016.

NTPC's EBITDA and net income will be weaker largely because: (1) the company will not be able to enhance its return on equity as much, given that it will now have to use the 24 per cent-26 per cent effective tax rate from the 33 per cent corporate tax rate that it has been using so far; and (2) incentives will now be based on plant load factor (PLF) from the earlier plant availability factor (PAF).

Furthermore, NTPC's ability to earn incentives will depend on buyers' demand scheduling and actual purchase of power, even though the company is compensated for fixed charges based on its PAF. While NTPC's average PLF is higher than the benchmark of 85 per cent, the company may not be able to earn incentives on power plants which operate at a lower PLF.

The revised tariff norms are likely to have a smaller impact on NHPC and Power Grid, in our opinion. This is because NHPC and Power Grid currently apply the minimum alternate tax, which is closer to their effective tax rate.

In addition, Power Grid will continue to earn incentives linked to plant availability.

Nevertheless, the regulator has introduced stricter operational parameters for incentives through higher benchmark PLF for NHPC and higher benchmark PAF for Power Grid.

These revisions could reduce the companies' EBITDA by less than 5 per cent.

Consequently, we expect the FFO-to-debt ratio for NHPC to remain 17 per cent -21 per cent and for Power Grid to stay 8 per cent-10 per cent.