NHPC (Downgrade to HOLD) - 4QFY11 - Result Update (IFIN)

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Delay in capacity addition estimated, Downgrade to HOLD

Adjusted PAT up by 15% in FY11: After adjustment of prior period items, depreciation impact, income tax, fixed charges and other adjustments, APAT for FY11 on a like to like basis is up by 15% at Rs 19.94 bn vs APAT of Rs 17.39 bn in FY10. This is in contrast to 4% YoY increase reported in RPAT of FY11.   

Capacity addition highlights: We envisage delays in the capacity addition schedule estimated by us earlier. NHPC (Standalone) shall add a capacity of 1035 MW in FY12E, 177 MW in FY13E, 660 MW in FY14E and 2300 MW in FY15E. As majority of the capacity addition is expected towards the end of each financial year, NHPC shall reap earnings from incremental units sold of 1% in FY12E, 16% in FY13E and 4% in FY14E.

RoE in FY11 grossed up with full tax rates: In 4QFY11, RoE for FY11 was grossed up with corporate tax rate as against MAT rate for FY10. This entailed earning tax arbitrage opportunity and boosted EPS by near Rs 0.18 in 4QFY11. In our base case model, we have estimated tax arbitrage opportunity to continue upto FY12E.

Downgrade to HOLD:: We downgrade our rating to HOLD with a 12-month based revised target price of Rs 28 noting (1) Core RoE of 8% in FY11 vs 6.3% reported 2) Major delays estimated in capacity addition scheduled for 4 of 10 projects under construction and  totaling to ~1.3 GW 3) For projects under construction, 84% of the normative equity contribution required has been infused at Rs 75 bn and going forward interest costs shall dampen earnings 4) Leverage ratio to stabilize at 2.0x till FY14E 5) Equity funding is in place.

Valuations and Recommendation: At CMP of Rs 24.6, NHPC trades at a PB(x) of 1.2x FY12E and 1.1x FY13E. On account of above changes, we revise our target price to Rs 28.