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NHPC (NHPC)
Utilities
Low-cost generator with no fuel risk. We upgrade NHPC to BUY (from REDUCE
previously), as the recent underperformance offers an opportune entry point with a
20% upside to our fair value estimate. In our view, the current macro concerns over the
overall utility space least affect NHPC—a low-cost producer with no fuel risk, while the
CMP of Rs23/share implies no value ascribed to the growth portfolio and trading
multiples of 1X P/B and 14X P/E on FY2012E net worth and earnings, respectively.
Correction offers an entry point; CMP ascribes no value to growth portfolio
NHPC has corrected by 28% over the past six months offering an attractive entry point with 20%
upside to our fair value of Rs28/share. NHPC offers a stable stream of operational cash flow driven
by regulated returns on 5,270 MW of operational capacity (valued at Rs12.5/share) whereas
investment and cash and equivalents account for another Rs10/share. NHPC is trading at attractive
valuations of 1X FY2012E book and 14X on FY2012E earnings. We upgrade NHPC to BUY and
retain our target price of Rs28/share and earning estimate of Rs1.7/share for FY2012E.
Insulated from deteriorating demand-supply imbalance of fuel
NHPC, with its entire capacity being hydro, is insulated from deteriorating demand-supply
imbalance for both coal and gas. Hydro generation insulates NHPC from any adverse movement in
either pricing or availability of fuel—a macro concern across most other utilities in the generation
space. NHPC’s generation is contingent on external factors such as water flow, though risk to
earnings is limited since NHPC sells through a regulated route under a cost-plus environment.
Low-cost generation ensures minimal off-take risk in merit order of dispatch
In our view, being a low-cost generator limits the off-take risk for NHPC as hydro-based
generation makes NHPC one of the lowest-cost producers of power in India. Deteriorating
financials of State Electricity Boards (SEBs) have raised questions on their ability to buy high-cost
power, and as NHPC ranks highest in the merit order of dispatch, it limits off-take risk. We
highlight that the cost of generation for a hydel plant continues to decline as debt repayment
reduces the interest burden over time.
Upgrade to BUY with a target price of Rs28/share
We upgrade NHPC to BUY (from REDUCE) and retain our target price of Rs28/share. Our valuation
includes (1) Rs18/share for operational as well as under-construction power projects and (2)
Rs10/share for cash and cash equivalents and CWIP for development projects not included in
SOTP.
Execution slippages could be a dampener
NHPC’s earnings growth will be driven by 4,500 MW of capacity under construction and any
delay in commissioning remains a key downside risk to our earnings and valuation estimates.
We highlight that uncertainties inherent in the implementation of hydropower projects
could result in delays and cost overruns as has been witnessed with projects under
construction, though the same are compensated through approval of higher project costs
for explained delays and cost overruns.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NHPC (NHPC)
Utilities
Low-cost generator with no fuel risk. We upgrade NHPC to BUY (from REDUCE
previously), as the recent underperformance offers an opportune entry point with a
20% upside to our fair value estimate. In our view, the current macro concerns over the
overall utility space least affect NHPC—a low-cost producer with no fuel risk, while the
CMP of Rs23/share implies no value ascribed to the growth portfolio and trading
multiples of 1X P/B and 14X P/E on FY2012E net worth and earnings, respectively.
Correction offers an entry point; CMP ascribes no value to growth portfolio
NHPC has corrected by 28% over the past six months offering an attractive entry point with 20%
upside to our fair value of Rs28/share. NHPC offers a stable stream of operational cash flow driven
by regulated returns on 5,270 MW of operational capacity (valued at Rs12.5/share) whereas
investment and cash and equivalents account for another Rs10/share. NHPC is trading at attractive
valuations of 1X FY2012E book and 14X on FY2012E earnings. We upgrade NHPC to BUY and
retain our target price of Rs28/share and earning estimate of Rs1.7/share for FY2012E.
Insulated from deteriorating demand-supply imbalance of fuel
NHPC, with its entire capacity being hydro, is insulated from deteriorating demand-supply
imbalance for both coal and gas. Hydro generation insulates NHPC from any adverse movement in
either pricing or availability of fuel—a macro concern across most other utilities in the generation
space. NHPC’s generation is contingent on external factors such as water flow, though risk to
earnings is limited since NHPC sells through a regulated route under a cost-plus environment.
Low-cost generation ensures minimal off-take risk in merit order of dispatch
In our view, being a low-cost generator limits the off-take risk for NHPC as hydro-based
generation makes NHPC one of the lowest-cost producers of power in India. Deteriorating
financials of State Electricity Boards (SEBs) have raised questions on their ability to buy high-cost
power, and as NHPC ranks highest in the merit order of dispatch, it limits off-take risk. We
highlight that the cost of generation for a hydel plant continues to decline as debt repayment
reduces the interest burden over time.
Upgrade to BUY with a target price of Rs28/share
We upgrade NHPC to BUY (from REDUCE) and retain our target price of Rs28/share. Our valuation
includes (1) Rs18/share for operational as well as under-construction power projects and (2)
Rs10/share for cash and cash equivalents and CWIP for development projects not included in
SOTP.
Execution slippages could be a dampener
NHPC’s earnings growth will be driven by 4,500 MW of capacity under construction and any
delay in commissioning remains a key downside risk to our earnings and valuation estimates.
We highlight that uncertainties inherent in the implementation of hydropower projects
could result in delays and cost overruns as has been witnessed with projects under
construction, though the same are compensated through approval of higher project costs
for explained delays and cost overruns.
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