Published on 11/01/2018 3:30:15 PM | Source: Motilal Oswal Securities Ltd
Buy NHPC Ltd For Target Rs.37.00 - Motilal Oswal
NHPC is India’s largest hydro power generator, with a 15% share. The company has an installed capacity of 6.6GW, with attributable equity share (AES) of 5.9GW (5.1GW at parent and 51% share in 1.52GW NHDC). NHPC has 3.1GW projects under construction, which are expected to raise AES in capacity by 53%. Regulated equity in its projects and operating efficiencies are the key drivers of earnings.
Come on in, the water’s fine
Valuations attractive at 1x BV and 6% dividend yield; initiate with Buy
Regulated equity to increase 35%, despite Subhanshiri project being on hold
NHPC is targeting commercialization of the 330MW Kishanganga project from January 2018 and the 800MW Parbati-II project from December 2018. These two projects will increase AES in capacity by 19% and attributing regulated equity (ARE) by 35%. The 2,000MW Subhanshiri project remains on hold for now.
Under-recoveries to decline on natural attrition and approval of five tariff orders
O&M under recoveries have peaked, in our view. Wage bill growth will be muted due to high natural attrition, while existing manpower can manage new projects. We expect approval of capex for the five projects over the next few years, which can boost recurring PAT by ~INR1.5b. Higher dividend payout is boosting RoE; room for even higher payout/buyback Capital allocation has improved with a payout of INR113b in four years. Debtor days have come down after the implementation of the UDAY scheme for DISCOMs. Net worth (NW) in non-core business has dropped from 51% to 36%, and RoE has improved from 8.7% to 9.9% over FY13-17. Another 32% of NW can be paid out, which is not deployed in core business.
Earnings are at inflection after five years of stagnation
We expect core PAT CAGR of ~20% over FY17-20, driven by (a) commercialization of assets, leading to ~11% CAGR in regulated equity, (b) lower O&M underrecoveries and (c) approval of pending tariff petitions. Consolidated PAT CAGR of 8% over FY17-20E is diluted by lower other income. RoE will improve by 240bp to 12.4% and re-rate the stock.
Valuations attractive at 1x BV and 6% dividend yield; initiating with Buy
* NHPC has low regulatory risk with high growth potential due to the large untapped water energy potential in India. We expect many regulatory tailwinds, as the government will need to invigorate investment in hydro power to handle volatility in solar energy in order to manage grid. Earnings growth visibility is strong for a few years as two projects are in advance stage of commissioning. Until a new wave to investment cycle strikes, NHPC will be high-dividend-yield stock. Valuations are attractive at P/BV of 1x FY19E and dividend yield of ~6%. We expect the stock to get re-rated as RoE improves. We value the stock at INR37/share based on DCF and initiate the coverage with a Buy rating.
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