NHPC Ltd -In-line 1Q12 results; project delays, subdued RoE are key concerns Credit Suisse,

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● Adjusting for one-time items, NHPC’s 1Q12 recurring profit at Rs6 bn
was robust (+16% YoY and 3% ahead of our estimates).
Performance was driven by the finalisation of tariff orders for nine out
of its 12 operating projects (approved tariffs are higher than
provisional tariffs) and higher income from incentives led by robust
PAF at 91.9%, and 10.5% YoY increase in generation.
● Recent changes in the National Tariff Policy 2006 provide an
extension of five years to NHPC to continue implementing projects
on a cost-plus-assured RoE model, in line with our estimates.
● Potential of grossing up RoE at corporate tax rate during FY12 and
the decision to increase equity investments for some of its pipeline
projects to increase yield on its surplus cash are positives.
● We raise our EPS for FY12 by 3%. However, with blended RoE
expected to remain subdued at 8–10% over the medium term led by
a slower conversion of its CWIP and surplus cash (about 50% of
total assets and earnings no/ low returns) into core assets, we expect
limited upside for the stock. But we see NHPC as a good defensive
bet. We thus maintain our NEUTRAL rating on the stock.

1Q12 results marginally better than estimates
NHPC’s recurring PAT at Rs5.98 bn was robust (up 16% YoY and 3%
ahead of our estimates). This was mainly led by (1) finalisation of tariff
orders for nine out of its 12 projects (approved tariffs are higher than the
provisional tariff used to book revenues) and (2) higher incentives led by
better plant availability /PAF (overall PAF for 1Q12 at 91.9%) resulting in
higher availability incentives and 10.5% YoY increase in generation
resulting in higher incentives from secondary energy (part of increase in
generation was led by the commissioning of its 120MW Sewa-II project).

Adjustments required to arrive at recurring PAT
For a like-to-like comparison, NHPC’s 1Q12 results need to be adjusted
for (1) prior period income of Rs79.9 mn, (2) Rs2,753 mn of sales relating
to the prior period, (3) Rs689 mn profit earned on the transfer of the
Subansiri Middle project to JSPL, (4) the provision of Rs2bn made
towards water cess payable for J&K projects (expense provided but sales
not booked yet on conservative basis, but most likely would be allowed
as pass-through in tariff) and (5) Rs890 mn interest earned on Rs20 bn
of arrears to be recovered (based on difference between final tariff order
and provisional tariff) from SEBs. All the above figures are pre-tax.
Grossing up of RoE at corporate tax rate a potential upside
NHPC has grossed up RoE during 1Q12 at MAT rate. However, there is
potential foe the company to gross up RoE at corporate tax rate for FY12,
depending on the capacity commissioned during FY12. As per NHPC,
the decision to gross up RoE at MAT/corporate tax rate for FY12 as a
whole would be taken in 4Q12. If RoE in FY12 is grossed up at corporate
tax rate, it would provide about 10% upside to our FY12 earnings.
Higher share of equity investments is also positive
NHPC has about Rs71 bn of surplus cash on its balance sheet currently
that represents ~15% of its total assets. We expect the share of cash to
increase to ~30% in a few years. Currently, this cash is mostly invested in
fixed / company deposits that earn 6–7% post-tax returns. NHPC plans to
increase the equity investment for some of its pipeline projects over the
regulated norm of 30% of the project cost. As per the CERC regulation,
such excess equity investment over 30% entitles the developer to earn
the weighted average cost of debt for the company (8–9% for NHPC).
Though this would marginally increase RoE/earnings for NHPC, we
believe it is a positive, given it provides the company to earn slightly
higher yields on its surplus cash.