NHPC - Lower tariff realisation mars performance… :: ICICI Securities

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Lower tariff realisation mars performance… • Generation increased 17.5% YoY in Q3FY15 to 318.3 crore units due to incremental capacity of 807 MW added YoY. Tariff realisation, however, declined 14.1% YoY to | 4.1 (I-direct estimate - | 4.8) • Consequently, revenues increased only 3.9% YoY to | 1,177.0 crore, below our estimate of | 1,383.9 crore for the quarter • During the quarter, NHPC included a sum of ~| 139 crore as provisions related to administrative and borrowing cost related to its under construction Subanshri and TLDP IV projects. This resulted in a 30.7% YoY decline in PAT to | 179.8 crore • However, after adjusting for these expenses, PAT came in at | 286.0 crore, up 10.3% YoY and in line with our estimate of | 283.9 crore for the quarter. In Q3FY15, incentives came in at | 12 crore vs. | 22 crore YoY. PAF in 9MFY14 was at 81.4% vs. 84.0% YoY Environmental hurdles, cost overruns impact growth India’s robust hydropower potential of 148.7 GW has been impacted by various issues related to environmental clearances, long construction period, project cost overrun, etc. leading to capacity addition of only 40.2 GW till date. With an installed capacity of 6.5 GW (including 1.5 GW through JV), NHPC contributes ~16% of India’s total hydro capacity and 14% of total hydro generation (18.5 BUs in FY14). The company operates under the purview of the CERC regulated model (RoE - 16%) with assured offtake pacts with SEBs. However, NHPC’s historical growth has been hit by sectoral woes leading to delayed project execution and cost overruns. Accordingly, the PSU has been suffering from very low RoEs as a significant chunk of its asset has been blocked in CWIP (CWIP as percentage of networth at 55% for FY14) for projects under construction. However, with the formation of a stable NDA government at the Centre, we believe project clearances and execution will take off at a rapid pace, which will address the sectoral concern. Capacity addition of 807 MW in H2FY14 to reap benefit in FY15E NHPC’s standalone installed capacity has grown at 6.9% CAGR over FY02-14 taking the overall capacity to 4,987 MW. NHPC added 807 MW of capacity in H2FY14, which was during the lean period. Thus, earnings remained subdued in FY14 as fixed cost went up. However, FY15E is expected to see better PAF and PLF with the commissioning of the entire 5 GW capacity as even floods impacted the 280 MW Dhauliganga plant that was fully operational in H1FY15. As expected, NHPC reported robust generation growth surpassing our expectation during H1FY15. Accordingly, we expect generation and PAT to grow 16.7% and 69.6% YoY, respectively, in FY15E. While the management remains positive on starting unit-1 of TLDP IV in FY16 and beginning construction at Subanshri soon, we maintain our estimate that FY15-16 would see a lull in terms of capacity addition. Target price revised downward; still maintain BUY While the incremental YoY capacity would generate higher units in FY15E and FY16E leading to better PLF and PAF as reflected in 9MFY15, the incorporation of expenses related to Subanshri is likely to slightly dent earning in FY15, which we have incorporated in our valuation. Furthermore, the delay over the execution of Subanshri projects and ~| 7,057 CWIP on the same will act as an overhang on the stock price till clarity persists. Factoring in the same, we now lower our FY16E target P/BV multiple to 0.9x (1.0x earlier) and derive a target price of | 24 (earlier | 26). We maintain our BUY rating.

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