NHPC: Tariff finalization boosts earnings; project delay still a concern: Quant

 NHPC (NHPC IN) reported an adjusted PAT of Rs23.7 bn in FY12 vs Rs21.4 bn y-y. Reported PAT of Rs27.7 bn in FY12 was higher on the back of tariff finalization of the projects.
 In FY12, tariff on a number of power projects was finalized, thereby leading to an increase in sales. Prior period sales stood at Rs4.7 bn. Overall sales of Rs58.7 bn also included water cess of Rs6.9 bn. Other income of Rs8.5 bn was higher by ~20% y-y, due to higher interest earnings from deposits and interest from beneficiaries on delayed finalization of tariff.
 While earnings improved, we maintain our negative view on the stock, given the delay in project commissioning and also due to inherent risks faced by the hydro sector. While NHPC has guided for 1,212 MW of commissioning in FY13, our estimate stands at ~650 MW for FY13 while the rest would slip to FY14.
 We increase our FY13 EPS estimate by ~16.1% to Rs2.0 and introduce our FY14 EPS estimate of Rs2.2. We lower our PT to Rs19.9 from Rs20.6 based on a DCF method. Although there is an increase in FY13E EPS, our delayed commissioning expectation of projects implies lower price target. We reiterate our REDUCE rating on the stock.

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Standalone PAT up on tariff finalization and Other income: The company posted an adjusted PAT of Rs5.8 bn in 4Q FY12 vs Rs5.2 bn y-y. For the full year, adjusted PAT stood at Rs23.7 bn vs Rs21.7 bn. As tariff on a number of projects was finalized in 4Q, reported PAT stood higher at Rs27.7 bn. Incentive for the year was up ~10% to Rs3.9 bn. This was mainly on account of a better Monsoon, leading to higher water availability for the power projects. Due to this, subsidiary NHDC (Not Listed) also posted a PAT of Rs6.5 bn for FY12 vs Rs3.0 bn in FY11.
Management’s plans to add 1.2 GW in FY13; looks aggressive: While the company did not commission any unit during FY12 due to delays following adverse weather conditions and local agitations, it plans to commission 1,212 MW during FY13. The commissioning timeline of a number of projects have been delayed by a few months. We estimate the company will commission ~650 MW in FY13, while the rest would slip to FY14.
Inherent risks for hydro project commissioning remain: While ~1.2 GW is in advanced stages of commissioning, the company has sizeable plans for capacity addition. While the projects lined up for under construction, under implementation and survey is high, we believe there is significant risk on all hydro units with respect to difficult terrain, state government intervention and local agitations. This in turn leads to huge cost project escalation which takes few years for actual tariff finalization.
Valuation: We increase our FY13 EPS estimate by ~16.1% to Rs2.0 and introduce our FY14 EPS estimate of Rs2.2. We lower our PT to Rs19.9 from Rs20.6 based on a DCF method. We reiterate our REDUCE rating on the stock.
Risks: Faster project implementation, SEB restructuring and returns on under-construction projects are key upside risks to our call and estimates.