Credit profile of Indian power utilities likely to remain steady: Fitch

This is despite cash collection delays amid Covid-19 pandemic, as favourable regulatory frameworks ensure stable operating profits, rating agency says

The credit profile of regulated Indian power utilities like NTPC will remain largely unaffected despite cash collection delays amid the coronavirus pandemic. The rating of these entities is due to favourable regulatory frameworks that ensure stable operating profits, according to Fitch Ratings.

“We believe any delays in recovering accrued revenue will be recouped with interest costs, in line with slated regulations,” the rating agency said in a statement..

The assets of NTPC Limited (BBB-/Stable) and the Adani Electricity Mumbai Limited (AEML) obligor group (US dollar bonds: BBB-) are based on a cost-plus tariff framework. This provides regulatory certainty till March 2024 from the central regulator and till March 2025 under the Maharashtra regulator, when the current five-year tariff period ends.

These arrangements also cover most of Power Grid Corporation of India Ltd (POWERGRID, BBB-/Stable) and Adani Transmission Limited's (ATL, BBB-/Stable) projects. There is no price risk in return-based frameworks, so, if there are temporary tariff cuts, losses will be recovered in the next review, Fitch said.

The transmission assets at POWERGRID and ATL that are not covered by the framework are awarded under tariff-based competitive bidding (TBCB), with prices fixed for a duration of 25 to 30 years.

Revenue under both the cost-plus and TBCB frameworks is based on system availability and is not exposed to volume risk. NTPC's incentive income is linked to load factors, but is less than one per cent of total revenue.

The rated utilities' strong operating performance in excess of regulatory benchmarks supports long-term revenue visibility. Returns of TBCB projects are less protected than those under the cost-plus tariff model, but overall profitability should stay stable in light of low operating costs.

Fitch does not anticipate major operating issues during India's pandemic-related lockdown, as electricity supply and coal mining are classified as essential services.

However, the rated utilities' cash collection is likely to suffer. Most of NTPC, POWERGRID and ATL's customers are state-owned power distribution utilities. There (power utilities) operational and financial profiles will weaken from a drop in electricity demand and payment concessions to end-customers in light of India's lockdown.

The Adani Electricity Mumbai Ltd’s has direct exposure to retail customers in Mumbai, India's commercial hub. The partial payment moratorium offered by Maharashtra's electricity regulator to commercial and industrial customers will also affect AEML's cash collection, although minimally, rating agency added.