Fitch retains stable outlook on power sector in 2015

Rating agency Fitch today retained its stable outlook on India's power sector in 2015 but warned producers and grid operators will continue to face challenges by way of high capex levels and fuel shortages leading to negative free cash-flow in the medium-term.
The sector faces lower profitability and possible uptick in acquisitions in the generation segment. However, rating outlook remains stable for the next year as the sector continues to have strong operating cash flows and healthy balance sheets, a Fitch report said.
"We believe high capex needs of most of the rated utilities will be balanced by their steady operating cash flow.

"We see liquidity remaining fairly strong despite some negative implications for certain issuers from regulatory developments and therefore retain our stable outlook," it said.
While the new tariff order passed in 2014 will have some negative implications for state-run power producer NTPC, there is regulatory certainty on rates until FY19, it added.
The industry is likely to expand capacity by 15-18 GW in 2015 despite fuel supply shortages, but plant load factor (PLF) will be low, the rating outfit maintained.

Fitch expects further consolidation in 2015, with stronger power generation companies looking to acquire smaller, distressed generation assets and coal upstream entities to improve vertical integration and fuel security.

It noted that NTPC is looking at acquiring private power plants under construction, including distressed assets, apart from buying stakes in coal mines abroad as global coal prices are low.
There is also the possibility of merger for NHPC as the government is considering bringing together smaller state-owned hydle power firms under NHPC.
The report said credit profile of the industry remains steady with net leverage likely to peak over the next couple of years but warned NTPC and PowerGrid will continue to face regulatory issues until FY19.
On the capex front, it said investments will remain high, driven largely by capacity growth.

Noting that the sector is hit by non-availability of fuel, it said fuel supply for coal-fired plants (which account for around 60 per cent of capacity) will continue to remain a challenge in the New Year.
Coal-based plant load factors have been constantly falling to 65.6 per cent in FY14 from 70.1 per cent in FY13.
Fitch said India's gas production is also unlikely to rise in 2015 and gas power PLFs, which fell to 36 per cent in FY14 from 56 per cent in FY13, should remain stressed.