With an edge over private players, power PSUs put capex above reducing debt

Better debt ratios, regulatory comfort place NTPC, NHPC at an advantage over private players

At a time when private sector power companies have been bringing down their debt levels, the country’s largest power generator, NTPC, and its peer, NHPC, have decided not to make this their priority owing to their capital expenditure requirements and comfortable balance sheets.

Even so, on April 26 this year, the government-owned NTPC reported that it ended the previous financial year with an outstanding standalone borrowing of Rs 1,15,758 crore—-24 per cent lWith an edge over private players, power PSUs put capex above reducing debtower than its outstanding borrowing of Rs 1,52,694 crore on March 31, 2020.

However, this figure does not include external commercial borrowings (ECBs) through bonds and syndicated loans that form over 28 per cent of the total long-term indebtedness of NTPC.

NTPC’s fresh loans during FY21 were Rs 25,855.50 crore, which was 10 per cent lower than Rs 28,775.62 in FY20. The company had to incur an additional expense of Rs 11,500 crore to buy out Union government in THDC India and NEEPCO in FY20. In 2020-21, the debt was primarily used for funding capital expenditure along with the refinancing of high-cost debt.

Hydropower major NHPC, on the other hand, has seen its long-term debt increase by Rs 4,302 crore in order to meet its capital expenditure requirements in the last three years. Since its debt-equity ratio is still low at 0.78, the company said it had no deleverage plans. “We would rather focus on achieving the target of our capes plan,” NHPC said in an emailed response.

The two government companies draw comfort from the fact that a good part of their power generation capacity was built under the regulated regime which mandated a stricter debt-equity ratio of 70:30. This is unlike projects outside of this regime, both in the PSUs and the private sector, which are largely funded on an 80:20 or 75:25 principle.

Being in the cost-plus model of business, the companies enjoy an advantage over  private sector peers which put up projects on the lowest tariff basis. “Our debt is serviced through tariffs under the regulations. Also, allowance of accelerated depreciation enables timely repayment of debt obligations. Our debt-equity ratio was at a comfortable level of 1.35 as on March 31, 2020 and is likely to be at the same level or lower, despite aggressive capex,” said NTPC.

The power major’s debt-equity ratio is expected to taper-off during FY22-26 on account of scheduled repayments of about Rs 78,000 crore. These loan repayments would be done from receipts of accelerated depreciation from newly added capacities that would bring in added revenues.

NTPC’s standalone capital expenditure for FY21 was planned at Rs 21,000 crore, of which Rs 12,383.49 crore was incurred in the first nine months of the year. “Our capex has been to the tune of over Rs 1.35 trillion over the past five years and our future investment plans are in line with the National Infrastructure Pipeline (NIP) initiative of the government, wherein NTPC is likely to incur capex of around Rs 1.2 trillion over the five-year period of FY20-FY25,” the company said in response to email queries. The capex also includes investment in environment control equipment mandated by the government.

According to estimates by Fitch, NTPC’s capex, including capitalised interest, would peak in FY22 at around Rs 35,000 crore, as it would not develop any new coal-based thermal power projects apart from those under construction. “Even as NTPC aims to add renewable capacity aggressively to reach its target of 32GW by 2032, we expect capex intensity to drop below 20 per cent by FY24 from around 30 per cent in FY21,” it said. Capex intensity is measured as a percentage of revenue, which Fitch expects to fall over the medium term due to decreasing capex and higher revenue as new projects start operations.

The lower capex would lead to a decline in NTPC’s net leverage, measured as net debt to EBITDA, from 6.5x in FY20 to 5.7x by FY23, Fitch said in a June 8 report.

Balance sheet financing allows NTPC to create the headroom for taking more loans after it repays debts for older power plants. “This helps in maintaining a comfortable debt-equity ratio. However, generally after 12-15 years of operation, the plant becomes almost debt-free,” said the company.

Though NTPC now has cumulative foreign currency bonds issuance worth $4.3 billion, of which $3.8 billion is outstanding, it passes any adverse exchange rate variations in tariff to power retailers, which is permissible under the regulatory guidelines. NHPC, however, has not raised any foreign currency bonds yet, though it says it continuously looks for the cheapest sources of finance.

“As of now, there is no dearth of liquidity in the domestic capital market and, with its highest credit credentials, NHPC is able to raise cheaper loans through domestic bonds,” said the company. During FY21, it raised Rs 2,250 crore from the domestic bond market through privately placed bonds which were entirely used for capital expenditure requirements.