NHPC:Stable earnings though at rich valuations, retain SELL.: Kotak Sec

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NHPC (NHPC)
Utilities
Stable earnings though at rich valuations, retain SELL. NHPC reported results in
line with estimates, with 10% yoy growth in generation aided by commissioning of
Sewa II (120 MW) in June 2010. NHPC incurred a capex of Rs18 bn in 1HFY11 signaling
likely slippages in commissioning schedules. NHPC is currently trading at 19X on
FY2012E earnings and 1.4X P/B and accordingly we maintain our SELL rating noting
expensive valuations and 10% downside to our fair value.


Monsoon and capacity addition boost generation
NHPC reported revenues of Rs12.4 bn (22% qoq, 4% yoy), operating profit of Rs10.2 bn (25%
qoq, 2% yoy) and net income of Rs6.9 bn (28% qoq, 12% yoy) against our estimates of Rs12.5
bn, Rs10.1 bn and Rs6.3 bn, respectively. We note that operational results are not comparable
sequentially due to the seasonal nature of the business. NHPC’s estimated gross generation in
2QFY11 was 7,130 MU (9.5% yoy) implying an average realization of Rs1.7/kwh and average
O&M of 31p/kwh. Yearly growth in generation was primarily on account of commissioning of 120
MW of Sewa II during 2QFY11. PAT was marginally ahead of our estimate because of higher other
income.

Muted capital expenditure in 1HFY11 not encouraging
NHPC incurred a capex of Rs18.4 bn in 1HFY11 as against a guidance of ~Rs49 bn for the full year
FY2011E, implying a likely slowdown in execution of projects under construction. We note that
with plans to increase its capacity from 5,295 MW to 9,797 MW in the next four years, NHPC’s
revenues and net income growth are contingent on timely commissioning of these projects and
any slippages in execution remain a key risk to our earnings estimate.

Retain SELL on rich valuations and 10% downside to fair valuation
We retain our SELL rating (target price of Rs28/share) on account of rich valuations and lack of any
near-term triggers for the stock. Our valuation includes (1) Rs19/share for operational as well as
under construction power projects and (2) Rs8/share for cash and cash equivalents. NHPC is richly
valued at a P/B of 1.4X on FY2012E book (our target price implies a P/B of 1.3X). We believe that
risk to earnings from delayed project execution along with lack of visibility on any favourable
regulatory change will likely keep the stock performance muted in near term. We note that an
improvement in overall profitability (on the back of anticipated favorable regulatory changes) by
300 bps increases our fair value estimate by Rs3/share, already factored in CMP. We have revised
our EPS estimate to Rs1.3/share (previously Rs1.4/share) in FY2011E and Rs1.6/share (previously
Rs1.7/share) in FY2012E as we adjust for minor commissioning delays.