CRISIL downgrades Tata Power's NCD rating to 'AA'

CRISIL has revised its rating on The Tata Power Company Ltd's (Tata Power's) non-convertible debentures to 'AA/Stable' from 'AAA/Rating Watch with Negative Implications'. The negative watch on the short-term debt rating of 'P1+' has also been removed and the rating reaffirmed. The ratings were placed on negative watch in April 2007 following Tata Power's announcement that it was acquiring equity in Indonesian mines that will supply coal to the Mundra Ultra Mega Power Project (UMPP), and after factoring in increased clarity on the holding structure of the project. Earlier, in December 2006, CRISIL had placed the ratings on rating watch with developing implications, following the award of the UMPP to Tata Power.

In CRISIL's opinion, the huge capacity expansions and the attendant project implementation risks significantly alter Tata Power's business risk profile, from that of the earlier licensee model. Tata Power plans to almost quadruple its power generation capacity, to about 8700 mega watts (MW), over the next five years. This will result in a gradual but inevitable shift in Tata Power's business risk profile from the existing stable licensee business, to bid-out generation projects supplying power to new areas; the shift exposes the company to likely higher counterparty risk, and to constraints in passing on cost increases to its buyers.

CRISIL expects the expansions to be largely financed by debt (with peak consolidated debt of the order of Rs.220-260 billion), which would adversely impact Tata Power's financial risk profile. The company is expected to have a peak gearing of about 1.8 times during the construction phase, as compared to 0.89 times in March 2007.

The ratings in the high safety category continue to reflect CRISIL's favourable view on the risk profile of Tata Power's generation and distribution business, a stable licensee business that has regulated returns. The ratings are also supported by the company's superior management capability, stable and healthy accruals from existing businesses, and financial flexibility derived from robust liquidity. CRISIL believes that Tata Power also enjoys financial flexibility by virtue of potential support that can be engineered, if required, through other Tata group companies, and substantial investments in these companies which can be liquidated to meet future requirements if needed.

Outlook: Stable

CRISIL expects that Tata Power will continue to benefit from robust accruals from the existing licensee business, and will successfully commission its power projects within the stipulated time and budgeted costs. CRISIL also believes that the company is likely to manage further expansions in a manner which will not unduly stress its execution capabilities and debt protection measures. However, any incremental large debt-funded capital expenditure or significant delays in project commissioning could result in a negative bias to the rating.

About the company

Tata Power is the largest private power utility in India with installed generation capacity of about 2400 MW and a presence across the entire power business spectrum in generation (thermal, hydro, solar and wind), transmission, and distribution. The company's licensee businesses in Mumbai and Delhi contribute about 81 per cent of its consolidated revenues. Tata Power also supplies power to Tata Steel in Jharkhand and to Karnataka distribution companies as an independent power producer. Powerlinks Transmission Ltd, a joint venture with Power Grid Corporation of India Ltd, operates a 400 KV transmission line from Bhutan to Delhi. Tata Power's planned capacity additions of about 6300 MW include the Mundra UMPP (4000 MW), and the Maithon Power Project (1050 MW).

For the year ended March 31, 2007, Tata Power reported a consolidated net profit of Rs.7.8 billion on net revenues of Rs.64 billion, as against a net profit of Rs.7.5 billion on net revenues of Rs.56 billion in the previous year.

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