NHPC’s low ratings ignore the benefits of adding new projects

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In the age of green energy investments, hydropower producer NHPC Ltd should have been the darling of investors. But the stock continues to languish as it trades below its book value.

The financial performance for the June quarter was moderate. Revenue only rose 4% and profits fell as the company provided a one-time rebate to electricity distribution companies (discoms). Production fell 5% due to plant closures and poor water availability. Trade receivables increased during the quarter.

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Despite this, the company maintained the deadlines for adding capacity, providing visibility into growth. The 800 megawatt (MW) Parbati II power project is expected to be commissioned in the next fiscal year. After that, it plans to add the 2000 MW Subansiri lower power project in fiscal years 24 to 25.

When completed, NHPC’s regulated equity base is expected to increase by 71% from current levels. Like NTPC Ltd, NHPC is also assured of a minimum return on regulated equity and strong expansion can significantly increase profits.

Still, investors are wary. Part of the reason is skepticism about the timelines for commissioning projects. Parbati II and Subansiri Lower were initially scheduled to be commissioned in fiscal year 2018.

“Although the restart of work at Lower Subansiri is positive, progress in this area should be monitored,” Motilal Oswal Financial Services Ltd said in a note.

Above all, the cost of the project increased sharply due to long delays. A significant portion of the company’s funds have been tied up in ongoing capital work. With the company speeding up execution of these projects and looking to bid on upcoming solar projects, capital spending is expected to increase in the near term.

Some fear that this could weigh on short-term rates of return, until construction projects are put into operation. “The Capex execution rate, on the other hand, is expected to increase as the company invests / explores new projects, which should reduce FCF (free cash flow) and drag RoE (return on equity) to short term, ”add analysts at Motilal Oswal.

Even so, valuations at 0.6 times the FY22 price to book value and 7.5 times the price multiple to earnings reflect investor concerns.

In addition, the two projects mentioned above have power purchase agreements. Work on the Parbati II project is progressing well and NHPC plans to generate electricity on a trial basis.

While this brings the project (Parbati II) closer to commissioning, a strong operational capacity base and low equity valuation provide a good dividend yield.

“We remain positive on NHPC due to its rich dividend yield, with a dividend of Rs 1.5 / share (8% yield), the growth of the 800 MW commissioning of Parbati II and the resolution of the long-standing embargo on the construction of the large Subansiri project, ”analysts at Kotak Institutional Equities said in a note.

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