A good monsoon means most of India’s hydro power projects will have sufficient water to run their plants at optimum levels. This, along with fuel availability and pricing issues, is making the National Hydroelectric Power Corporation (NHPC), India’s largest hydro power producer, a preferred pick among analysts. Apart from the advantages of low cost and minimum fuel risk, NHPC is expected to deliver good financial performance and returns in the coming years. Analysts expect the stock — down 36 per cent since its September 2009 listing to Rs 23.05 now — to get re-rated.
FUEL SECURED
Compared to coal, water is a much cheaper fuel. Even its availability is not an issue, thanks to a good monsoon over the past two years, ensuring a better plant availability factor (PAF). The plant load factor (PLF) of hydro power players (including NHPC) has been stable compared to declining PLFs faced by its thermal counterparts, thanks to coal shortage. Also, the company is relatively better placed in terms of off-take risk as hydro power is cheaper than thermal power. Further, any cost over-runs, which are higher and more prevalent in hydro power projects due to a long gestation period (5-7 years required for commissioning) have historically been a pass-through.
POTENTIAL BOOST TO RETURNS
The inclusion of capital work-in-progress (CWIP) in the calculation of return on equity (RoE) for hydro power producers is expected to be announced soon. Also, the decision to increase equity investments for some of its pipeline projects will lead to higher yield on surplus cash, compared to fixed deposits (yielding 6-7 per cent after tax). Both will boost NHPC’s single-digit RoE (of 7-8 per cent) significantly, as CWIP and cash currently form 50 per cent of its total assets.
| EXPECTED TO IMPROVE | ||
| In Rs crore | FY11 | FY12E |
| Total operating income | 5,144 | 5,779 |
| % change y-o-y | -0.3 | 12.3 |
| Operating profit | 4,288 | 4,108 |
| % change y-o-y | 3.9 | -4.2 |
| Net profit | 2,316 | 2,322 |
| % change y-o-y | 6.5 | 0.2 |
| EPS (Rs) | 1.9 | 1.9 |
| % change y-o-y | 6.2 | -0.7 |
| E: Estimates; Consolidated figures Source: CapitaLine, Analyst reports | ||
Last, the company’s decision to gross up ROEs at a normal tax rate instead of minimum alternate tax (MAT), depending on the capacity addition achieved in FY12, will be an added positive. Unlike the National Thermal Power Corporation (NTPC), which has been exposed to competitive bidding for future projects from the beginning of this year, NHPC will continue to work under a cost-plus-RoE model till 2015.
OTHER CATALYSTS
The company has added just 120 Mw in last four years, leading to the stock’s correction. However, of the total 4,502 Mw under construction (over 60 per cent of the total Rs 30,000 crore has been spent already), 1,212 Mw is expected to be bunched up for addition in FY12 and FY13. This will increase its current total capacity of 5,295 Mw (including subsidiary NHDC) by 23 per cent by FY13. Besides, projects worth 16,000 Mw are under various stages of development. Apart from pursuing opportunities in state projects through joint ventures to counter private competition, the company is also looking outside India (generation projects, consulting activities).
REASONABLE VALUATION
Due to fuel issues of thermal power companies, NHPC has outperformed NTPC in the last six months, as its stock is down four per cent compared to the latter’s 13 per cent fall.
Analysts feel the risk-reward with regards NHPC is favourable as its low-return structure, delays in capacity addition and higher execution risks are factored into its valuation of one time FY13 estimated book value compared to NTPC’s 1.7 times.
