Fitch: Indian power sector outlook stable to negative

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Fitch Ratings has today said, in a just published Special Report, that the Outlook for the Indian power sector for 2010 remains Stable to Negative.

The agency notes that on the positive side, the demand/supply balance will continue to remain tight in 2010, investor interest will continue to be strong, and policy and institutional support from government of India (GoI) will not decline.

However, negative factors for the sector, including difficulties in passing power purchase costs to end-customers, the slow progress of the state power utilities (SPUs) in reducing commercial and technical losses, and delays faced by the power sector companies in implementing an ambitious capex programme, are likely to persist in 2010.

Fitch expects that most ratings will remain stable during 2010 barring those exposed to deterioration in financial leverage arising from execution delays, large capex plans and a build-up of regulatory assets.

The level of capex required in India's power sector is likely to ensure continued investor interest in the sector.

Both equity and debt investor interest is likely to stay strong during 2010, despite the very large investments seen in 2009. NHPC Limited ('BBB-'/Stable) raised INR40bn through an IPO in 2009 while NTPC Limited ('BBB-'/Stable) and Rural Electrification Corporation Limited ('BBB-'/Stable) are likely to approach equity markets in 2010.

Fitch believes that large power producers, especially those owned by the GoI, will continue to have strong access to the capital markets, and will be able to raise sufficient funds for their major capex programmes. Some of the new-entrant power generators are likely to raise equity through IPOs.

The SPUs, particularly those operating in power distribution, continue to face difficulties in recovering reasonable costs and return on equity, as regulators try to protect consumers from tariff shocks. Fitch expects the weak operational and financial performances of SPUs to linger on to form a key structural weakness for the Indian power sector.

Fitch does not expect the shortage of generation capacity to ease in the short term, and notes that new power stations are taking longer-than-expected to come through. The agency anticipates that only 30% of the new capacity planned during the 11th five-year economic plan (2007-2012) will be completed in the first three years to end-March 2010.

Demand for power remains robust despite the slowdown in GDP growth to 6.4% in 2009 (2003-2007: 8.8%). Fitch's 7% forecast in GDP growth for 2010, and 8% for 2011, is likely lead to power demand growth increasing again.

Fitch expects that domestic coal will continue to be the fuel of choice, with coal imports providing a back-up source of supply.

Fitch expects short-term power prices to face upward pressure during the peak summer season, though further regulatory intervention to keep prices down cannot be ruled out.

The special report, entitled 'Indian Power Sector Outlook 2010: Riding on Investor Interest', is available from www.fitchratings.com.