The strong project pipeline provides confidence and should result in healthy growth for NHPC over the coming years.
Long-term growth opportunities along with a consistent cash flow and healthy return on investment have attracted investors to the power sector. NHPC, the country’s largest player in the hydro power generation space, is one such contender which has come out with an IPO. While the company has several inherent advantages and opportunities to grow in the long run, analysts believe that investment in the IPO may not yield significant gains in the near term due to the overhang of lower return on equity (RoE) and inherent risks of the business.
Stable foundation
NHPC currently owns and operates a total capacity of 5,175 mw consisting of 13 hydro based power projects in different states in the country. Most of these projects are backed by the long term power purchase agreement with the respective state utilities and earned an average price of Rs 2.03 per kwh for electricity supplied during 2008-09, which is considered good in a competitive tariff environment. On the operating parameters as well, NHPC demonstrated capacity utilisation in the range of 94 per cent in 2009, which is higher than the cumulative capacity index levels required under CERC regulations. This is also a reason that according to the tariff policy, the company enjoyed certain incentives. Although the company supply about 85 per cent of its power to state electricity boards (SEBs), the good part is that despite poor financial health of the SEBs NHPC has been able to recover 100 per cent of its dues as these payments are secured by the state and central governments.
| HOW THEY COMPARE | ||||
| BV (Rs) | P/BV (x) | PE (x) | RoNW (%) | |
| NHPC @ Rs 30 | 17.7 | 1.7 | 28 | 6.58 |
| NHPC @ Rs 36 | 18.2 | 2.0 | 33.0 | 6.6 |
| NTPC | 69.6 | 3.1 | 21.9 | 14.0 |
| Jaiprakash Hyd. | 21.9 | 3.8 | 28.4 | 13.3 |
| Tata Power | 389.2 | 3.3 | 22.0 | 15.4 |
| Reliance Power | 57.4 | 2.9 | 166.0 | 1.8 |
| NHPC P/BV is based on post issue capital. All the figures based on the FY09 financials of the companies. Financial ratio based on price taken on August 3. Source: CapitaLine, RHP | ||||
Powering ahead
To further leverage its capabilities and strengths, the company has drawn up aggressive plans to almost double its capacities to 9,467 mw by March 2013, for which, 11 hydro based power plants of 4,622 mw are already under construction. Additionally, the company has projects of 14,000 mw in the pipeline awaiting different clearances, and are likely to go on stream after 2013. While these are huge plans and may result in a substantial increase in NHPC’s revenue and profits, the expansion plans have taken toll on the company’s RoE which has stayed low at about 6 per cent. “NHPC’s RoE is low as compared to 14 per cent enjoyed by NTPC. However, it is due to the long gestation nature of hydro power projects as compared to the thermal power projects,” says Rabindra Nath Nayak, analyst, Systematix Shares.
For FY 2009 the company reported consolidated net worth of Rs 18,392.5 crore, out of which Rs 9,331 crore was deployed as capital work-in-progress or into projects which are yet to be commissioned, thus deflating the overall RoE. Adjusted for this and the cash balances of Rs 2,600 crore as on March 2009, the RoE from core operations is estimated at around 15 per cent which is in line with industry trends.
Room for improvement
Analysts however, believe that there is room for the RoE to improve further and thus, profits of the company. Under the new CERC tariff policy 2009, the RoE has been increased from 14 per cent to 15 with another 50 basis points as incentive for projects that are implemented on schedule. Additionally, “going forward, with the faster commissioning of ongoing projects, the company may improve the total RoE, as the percentage of regulated equity to total net worth improves further,” says Nayak.
| ISSUE DETAILS | |
| Price band | Rs 30-36 |
| Issue size | Rs 5,032-6,038 cr |
| Issue opens | 7-Aug |
| Issue closes | 40,037.0 |
The process however, will be gradual and spread over a few years. “Today, the ratios are not favourable due to substantial investment in the working capital. I do not expect the RoE to improve drastically, but one can expect the RoE to improve to about 9-9.5 per cent by 2013 as the projects go on stream,” says Girish Solanki, analyst, Angel Broking.
Inherent risks
It generally takes 5-7 years to commission a hydro power plant. Additionally, if there is any delays (which are common in the case of hydro power projects), expect the financials of the company to bear some of the brunt. In the case of NHPC as well, there have been delays and the company has revised the commissioning dates for a few of its ongoing projects. There are several reasons for the delay. For instance, Lachen hydroelectric project (210 mw) being set up at Sikkim is currently facing opposition from local communities, which has resulted in a delay in the survey and investigation works. Similarly, its largest project of 2,000 mw Subansiri in Arunachal Pradesh is delayed and is expected to go on stream by 2012. Other projects such as Parbati II (800 mw) and Teesta Low Dam (160 mw), too, face delays. These not only lead to loss of potential revenue, but also result in lower RoE for the company.
Conclusion
At the price band of Rs 30-36 per share, the issue is priced at a price-to-book value of 1.7-2 times on the post-IPO capital, which is relatively lower compared to its listed peers (see table How they compare). The lower valuations reflect the concerns pertaining to low returns (currently), project execution risks and long gestation period of its projects. On the bright side, the project pipeline is large and should ensure healthy growth going ahead. Investors can invest with a long-term perspective as the gains from ongoing projects and thus, higher returns will flow in the ensuing years.
