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A Value Pick
ƒ Significant underperformance on execution delays
ƒ Current stock price not factoring in any capacity additions
ƒ Valuations cheap - worst case fair value of INR29
ƒ Upgrade to BUY with P/B based TP of INR32
Upgrade to BUY
We upgrade NHPC from HOLD to a BUY
after its significant underperformance of
32% over the last year versus MSCI due
to execution delays on new hydro projects
as expected. We now believe the stock
offers a 36%. We retain our P/B based TP
of INR32. We have refined our P/B based
valuation. We split NHPC’s FY12E
BV/share of INR22.6 into the regulated
equity, which works out to INR9.2/share
and INR13.4/share of equity invested in
Capital Work in Progress (CWIP), cash
and other items. We value the regulated
equity at 2.0x P/B as it is the equity invested in operational hydro projects
earning a regulated ROE of 15.5%. We value the remaining equity at
1.0x P/B to arrive at our TP of INR32/share. (Exhibit 2)
Trading at absurd valuations
We are assuming that NHPC is set to add 1.4GW of power generation
capacity in FY12. In the worst case, if all the projects get delayed by one
year, our FY12 EPS estimate would go down by 18% to INR1.52 and our
FY12E regulated equity/share would reduce to INR6.26/share and the
equity stuck in CWIP, cash and other items becomes INR16. Using the
same valuation methodology, our worst case fair value works out to
INR29.
What are the catalysts for the stock?
Current stock price of NHPC implies that the market is ignoring any
planned capacity additions by NHPC. Hence completion of any hydro
power plant will be a catalyst for the stock – the earliest plants i.e the 231
MW Chamera III and the 44 MW Nimoo Bazgoo power plants are
scheduled to be completed by Sep 2011.
Operational Hydro plants are low risk
We acknowledge that the execution of new hydro power projects is
fraught with huge risks. However, hydro projects, once operational are
cash cows as operational risk is very low as there is no fuel risk. Hydro
plants last for more than 35 years compared to 25 years for a thermal
power plant and hydro power gets scheduled even if it has a high initial
cost as technically only hydro plants have the ability to handle rapid
variations in demand during peak hours apart from open cycle gas
turbines.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A Value Pick
ƒ Significant underperformance on execution delays
ƒ Current stock price not factoring in any capacity additions
ƒ Valuations cheap - worst case fair value of INR29
ƒ Upgrade to BUY with P/B based TP of INR32
Upgrade to BUY
We upgrade NHPC from HOLD to a BUY
after its significant underperformance of
32% over the last year versus MSCI due
to execution delays on new hydro projects
as expected. We now believe the stock
offers a 36%. We retain our P/B based TP
of INR32. We have refined our P/B based
valuation. We split NHPC’s FY12E
BV/share of INR22.6 into the regulated
equity, which works out to INR9.2/share
and INR13.4/share of equity invested in
Capital Work in Progress (CWIP), cash
and other items. We value the regulated
equity at 2.0x P/B as it is the equity invested in operational hydro projects
earning a regulated ROE of 15.5%. We value the remaining equity at
1.0x P/B to arrive at our TP of INR32/share. (Exhibit 2)
Trading at absurd valuations
We are assuming that NHPC is set to add 1.4GW of power generation
capacity in FY12. In the worst case, if all the projects get delayed by one
year, our FY12 EPS estimate would go down by 18% to INR1.52 and our
FY12E regulated equity/share would reduce to INR6.26/share and the
equity stuck in CWIP, cash and other items becomes INR16. Using the
same valuation methodology, our worst case fair value works out to
INR29.
What are the catalysts for the stock?
Current stock price of NHPC implies that the market is ignoring any
planned capacity additions by NHPC. Hence completion of any hydro
power plant will be a catalyst for the stock – the earliest plants i.e the 231
MW Chamera III and the 44 MW Nimoo Bazgoo power plants are
scheduled to be completed by Sep 2011.
Operational Hydro plants are low risk
We acknowledge that the execution of new hydro power projects is
fraught with huge risks. However, hydro projects, once operational are
cash cows as operational risk is very low as there is no fuel risk. Hydro
plants last for more than 35 years compared to 25 years for a thermal
power plant and hydro power gets scheduled even if it has a high initial
cost as technically only hydro plants have the ability to handle rapid
variations in demand during peak hours apart from open cycle gas
turbines.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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