NHPC: Uncertainties priced, attractive even on extant earnings ::Kotak Securities

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NHPC (NHPC)
Utilities
Uncertainties priced, attractive even on extant earnings. NHPC has been at the
receiving end of news flows regarding (1) a potential buy-back of power projects by
Jammu & Kashmir and (2) stoppage of work at Subansiri Lower, a 2,000 MW project.
We note that the CMP sufficiently factors the risk of both these eventualities (to which
we would ascribe low probabilities), and the stock looks extremely attractive on extant
earnings, offering (1) dividend yield of >3%, (2) 0.8X P/B and (3) 9X on FY2013E.
Potential project buy-backs in J&K and protests at Subansiri weigh on stock performance
Recent reports about a potential buy-back of projects in Jammu & Kashmir and anti-dam protests
against the 2,000 MW Subansiri Lower project have weighed on the stock’s performance. In our
view, the potential negatives from these events have already been priced.
According to media reports, the Cabinet Subcommittee (CSC) of the Jammu & Kashmir (J&K)
Government has recommended the purchase of Uri I (480 MW) and Salal (690 MW) projects of
NHPC at a depreciated cost. We note that the net impact of the transfer of these projects would
be 0.9/share (~3% of our fair value estimate).
Media reports also indicate that construction work at the 2,000 MW Subansiri Lower project has
been halted due to anti-dam protests and agitations in Arunachal Pradesh. A 12-month delay in
commissioning of the Subansiri Lower project (currently assumed in FY2015), would impact our
fair value estimate by ~1%. We discuss the impact in detail in the subsequent section.
Safe bet in trying times, capacity addition, although delayed, could catalyze stock performance
NHPC remains our preferred pick in the sector given (1) continued uncertainty over fuel availability
for coal-based capacities, (2) constrained purchase budgets of distribution utilities now resorting to
increased load-shedding, and (3) reasonable valuations for NHPC (0.8X FY2013E net worth) with
growth opportunities from capacities likely to be commissioned over12-18 months. We note that
NHPC is likely to add 1,200 MW over the next 12-18 months (see Exhibit 4), implying an addition
of 23% over the extant base of 5.2 GW.
Maintain BUY with a target price of Rs29
We maintain our BUY rating on NHPC with a target price of Rs29. Attractive valuations of 0.8X
FY2013E book and 9X on FY2013E EPS along with inherent security in the business model and a
dividend yield of 3.4% (assuming a 30% pay-out ratio) makes NHPC one of our preferred picks in
the sector. Our valuation includes (1) Rs18/share for operational and under-construction power
projects and (2) Rs11/share for cash and cash equivalents.


Muted impact of potential buy-back of J&K projects, protests at Subansiri Lower
􀁠 As per media reports, the Cabinet Subcommittee (CSC) of the Jammu & Kashmir (J&K)
Government has recommended the purchase of Uri I (480 MW) and Salal (690 MW)
projects of NHPC at depreciated cost. The projects accounted for 22% of NHPC’s
operational capacity and ~14% of earnings (FY2011). We value Uri I at Rs1.7/share and
Salal at Rs0.9/share and, adjusting for a consideration equaling the depreciated cost
(~Rs17 bn for Uri I and Rs4.4 bn for Salal), the net impact on our fair value estimate will
be Rs0.9/share (see Exhibit 2). NHPC has an operational capacity of 1,680 MW and
another 659 MW under construction in Jammu & Kashmir.
􀁠 According to media reports, construction at the 2,000 MW Subansiri Lower project in
Arunachal Pradesh has been halted due to anti-dam protests and agitations in the state.
We assume full commissioning of Subansiri Lower in FY2015. A12-month delay in
commissioning would impact our fair value estimate by Rs0.25/share. A complete
scrapping of the project and a corresponding reimbursement of capex already incurred
(~Rs11 bn is the equity component) would impact our fair value estimate by ~3%.