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NHPC (NHPC)
Utilities
Stable operating performance. NHPC’s reported profit of Rs10 bn was substantially
ahead of our estimate of Rs6.7 bn, primarily on account of accrual of water cess charge
of Rs4.6 bn allowed as a pass-through expense by CERC. Operational performance
remained stable with generation of 7 BU, though delay in commissioning of capacities
remains an area of concern. We continue to maintain our positive stance on NHPC due
to reasonable valuations, absence of fuel risk and low cost of generation that insulate it
from a constrained purchase budget of SEBs. Maintain ADD and PT of Rs29/share.
Prior-period adjustments and other income drive outperformance
NHPC reported revenues of Rs18.3 bn (48% yoy), operating profit of Rs13 bn (28% yoy) and
adjusted net income of Rs10 bn (45% yoy) against our estimates of Rs12.7 bn, Rs9.5 bn and Rs6.7
bn, respectively. Accrual of previously paid water cess yielded Rs4.6 bn of additional earnings. Net
income was further boosted by Rs1.2 bn of interest from beneficiary states on account of
finalization of tariff orders. Reported net income of Rs9.7 bn was dented by prior-period
adjustment of Rs352 mn. Operational performance remained robust with gross generation of 7.1
BU against our estimate of 7 BU. We discuss the key details of the results in a subsequent section.
Hydro-based generation company; safer bet in times of fuel uncertainty
NHPC remains our preferred pick in the power sector, given (1) continued uncertainty over fuel
availability, (2) constrained purchase budgets of distribution utilities now resorting to increased
load-shedding, and (3) reasonable valuations for NHPC (1X P/B) with growth opportunities from
capacities likely to commission over the next 12 months. Being a hydro-based generator, NHPC is
one of the lowest cost producers of power in India and would invariably rank high in the merit
order of dispatch.
Reiterate ADD with a revised target price of Rs29/share
We maintain our ADD rating on NHPC with a revised target price of Rs29 (previously Rs30) as we
adjust for marginal commissioning delays. Attractive valuations of 1X FY2013E book and 11X on
FY2013E EPS along with inherent security in the business model (as highlighted above) make
NHPC one of our preferred picks in the sector. Our valuation includes (1) Rs18/share for
operational as well as under-construction power projects and (2) Rs11/share for cash and cash
equivalents. We have revised our EPS estimate to Rs2.1/share (previously Rs1.8/share) in FY2012E
to account for extra revenue booking in 1HFY12.
Key highlights of 2QFY12 results
Revenues. Reported revenues of Rs18.3 bn includes Rs4.6 bn recognised on account of
favourable order by CERC allowing NHPC to bill its beneficiaries for the water cess paid to
the J&K Government. We seek clarity from the management regarding the tax rate at
which the tariffs were grossed up.
Operations. NHPC’s gross generation in 2QFY12 was 7,102 MU (-1% yoy) implying an
average realization of Rs1.92/kwh (adjusted for additional water cess) and average O&M
of 46p/kwh (adjusted for water cess provisioning of Rs2.1 bn).
Other income. Other income included interest income of Rs1.2 bn against deferred
revenues.
Tax rate. Effective tax rate for 2QFY12 was 24%.
Stalemate on capacity addition could be a dampener
The management is fairly confident of adding 515 MW in the next six months, including 44
MW at Chutak, 240 MW at Uri II and 231 MW at Chamera III. Further, the management has
indicated that 45 MW at Nimmo Bazgo, one unit of Parbati III of 130 MW and one unit of
Teesta Low Dam III of 33 MW could be commissioned by end-FY2012E on a best-effort basis,
thus aggregating to potential capacity addition of 723 MW in FY2012E.
We, however, remain skeptical and accordingly factor a more conservative capacity addition
of 515 MW in FY2012E. We do note that NHPC has added just 120 MW (Sewa II) in the past
four years though also highlight that the inherent nature of hydro projects makes them
vulnerable to delays and cost over-runs. In our view, incremental commissioning of
capacities over the next few months could be a strong catalyst for the stock as it would
restore investor faith in NHPC’s delivery credentials, which have admittedly taken a hit due
to this long draught in capacity additions.
We note that NHPC has incurred a capex of Rs9.4 bn in 1HFY12, just 30% of our full-year
capex estimate of Rs31 bn, though highlight that the first half is in general a weak
construction period and was further exacerbated by the earthquake in Sikkim.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NHPC (NHPC)
Utilities
Stable operating performance. NHPC’s reported profit of Rs10 bn was substantially
ahead of our estimate of Rs6.7 bn, primarily on account of accrual of water cess charge
of Rs4.6 bn allowed as a pass-through expense by CERC. Operational performance
remained stable with generation of 7 BU, though delay in commissioning of capacities
remains an area of concern. We continue to maintain our positive stance on NHPC due
to reasonable valuations, absence of fuel risk and low cost of generation that insulate it
from a constrained purchase budget of SEBs. Maintain ADD and PT of Rs29/share.
Prior-period adjustments and other income drive outperformance
NHPC reported revenues of Rs18.3 bn (48% yoy), operating profit of Rs13 bn (28% yoy) and
adjusted net income of Rs10 bn (45% yoy) against our estimates of Rs12.7 bn, Rs9.5 bn and Rs6.7
bn, respectively. Accrual of previously paid water cess yielded Rs4.6 bn of additional earnings. Net
income was further boosted by Rs1.2 bn of interest from beneficiary states on account of
finalization of tariff orders. Reported net income of Rs9.7 bn was dented by prior-period
adjustment of Rs352 mn. Operational performance remained robust with gross generation of 7.1
BU against our estimate of 7 BU. We discuss the key details of the results in a subsequent section.
Hydro-based generation company; safer bet in times of fuel uncertainty
NHPC remains our preferred pick in the power sector, given (1) continued uncertainty over fuel
availability, (2) constrained purchase budgets of distribution utilities now resorting to increased
load-shedding, and (3) reasonable valuations for NHPC (1X P/B) with growth opportunities from
capacities likely to commission over the next 12 months. Being a hydro-based generator, NHPC is
one of the lowest cost producers of power in India and would invariably rank high in the merit
order of dispatch.
Reiterate ADD with a revised target price of Rs29/share
We maintain our ADD rating on NHPC with a revised target price of Rs29 (previously Rs30) as we
adjust for marginal commissioning delays. Attractive valuations of 1X FY2013E book and 11X on
FY2013E EPS along with inherent security in the business model (as highlighted above) make
NHPC one of our preferred picks in the sector. Our valuation includes (1) Rs18/share for
operational as well as under-construction power projects and (2) Rs11/share for cash and cash
equivalents. We have revised our EPS estimate to Rs2.1/share (previously Rs1.8/share) in FY2012E
to account for extra revenue booking in 1HFY12.
Key highlights of 2QFY12 results
Revenues. Reported revenues of Rs18.3 bn includes Rs4.6 bn recognised on account of
favourable order by CERC allowing NHPC to bill its beneficiaries for the water cess paid to
the J&K Government. We seek clarity from the management regarding the tax rate at
which the tariffs were grossed up.
Operations. NHPC’s gross generation in 2QFY12 was 7,102 MU (-1% yoy) implying an
average realization of Rs1.92/kwh (adjusted for additional water cess) and average O&M
of 46p/kwh (adjusted for water cess provisioning of Rs2.1 bn).
Other income. Other income included interest income of Rs1.2 bn against deferred
revenues.
Tax rate. Effective tax rate for 2QFY12 was 24%.
Stalemate on capacity addition could be a dampener
The management is fairly confident of adding 515 MW in the next six months, including 44
MW at Chutak, 240 MW at Uri II and 231 MW at Chamera III. Further, the management has
indicated that 45 MW at Nimmo Bazgo, one unit of Parbati III of 130 MW and one unit of
Teesta Low Dam III of 33 MW could be commissioned by end-FY2012E on a best-effort basis,
thus aggregating to potential capacity addition of 723 MW in FY2012E.
We, however, remain skeptical and accordingly factor a more conservative capacity addition
of 515 MW in FY2012E. We do note that NHPC has added just 120 MW (Sewa II) in the past
four years though also highlight that the inherent nature of hydro projects makes them
vulnerable to delays and cost over-runs. In our view, incremental commissioning of
capacities over the next few months could be a strong catalyst for the stock as it would
restore investor faith in NHPC’s delivery credentials, which have admittedly taken a hit due
to this long draught in capacity additions.
We note that NHPC has incurred a capex of Rs9.4 bn in 1HFY12, just 30% of our full-year
capex estimate of Rs31 bn, though highlight that the first half is in general a weak
construction period and was further exacerbated by the earthquake in Sikkim.
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