The ratings take into account NTPC's status as a leading public sector utility and its market prominence as the largest generator in India, accounting for some 20 per cent of the country's generating capacity. As the largest supplier of power to the state electricity boards (SEBs), the SEBs' escalating financial crisis during the late 1990s impaired NTPC's cash flows. Though a government-backed settlement in 2001 has set the sector on the recovery track, significant risks remain.

"The ratings could go up if the sector continues to strengthen and relevant risks continue to diminish over the medium term," said Fitch director of global power (Asia) Charles Chang. Chang noted that the settlement's credit protection measures have already led to steady improvements in NTPC's collection rates on invoices, which reached 100 per cent in FY04.

NTPC's ratings also reflect the company's strong operating record, its cost competitiveness relative to its domestic peers and its substantial financial flexibility. In FY04, NTPC generated Rs198.4 billion in revenues and Rs49.2bn in EBITDA. In the six months ended 30 September 2004, it generated Rs105.6bn in revenues and Rs27.3bn in EBITDA.

Its efficient operations and its rational tariff regime support NTPC's margins. The agency says that high plant availability and cost competitiveness have ensured high utilisation rates at NTPC plants, which have supported both revenue and profit levels. Although a tariff adjustment in FY02 has reduced EBITDA margins from the upper 30 per cent range to the higher 20 per cent range, they are comparable with NTPC's international peers.

NTPC's substantial financial flexibility is characterised by its low leverage, its strong coverage ratios and its well-balanced debt maturity profile. The company's IPO and its inaugural international bond issue this year have not only raised significant cash resources for its capex plans, they have further enhanced NTPC's access to domestic and international capital markets.

Fitch points out that NTPC has maintained low debt levels and robust interest coverage since the late 1990s despite rising capital outlays and modest cash outflows. Net debt to EBITDA was 1.8x in FY04, having remained at or below 2.1x since 1998, while EBITDA/net interest was 6.1x in FY04, having remained above 6x in the last five years.

NTPC plans to double its capacity over the next eight years. But the capex required for this will push up debt levels and exert significant pressure on NTPC's credit ratios. But cash flows from new facilities should help keep the coverage ratios at appropriate levels for the rating assigned.