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Buy NHPC Ltd For Target Rs.27 - HDFC Securities

Our Take:

NHPC is the largest hydropower company in the country and a Mini-Ratna Category-I PSU. Company is involved across the entire chain of hydro power project development – from concept to commissioning. It has a wide presence across 11 states contributing to 15% of installed hydro-electric capacity in India on a consolidated basis. The company has 24 operational projects with an installed capacity of 7071 MW (includes subsidiary NHDC of 1520 MW; 51:49 NHPC : GoMP) as of FY20. During FY20 it achieved highest annual generation of 26,121 Million Units (MUs) exceeding the generation target of 26,000 MUs. Favourable hydrology of rivers on which most of its projects are located, has helped the company maintain a healthy track record of power generation. The company plays an important role in implementing the GoI’s planned capacity addition in the hydel power sector.

Counter party risk has become structural in nature where, defaulters have increased by 25.5% (Top Five debtors) over FY19-20 period. However, presence of a Letter of Credit as per the terms of PPA and benefits associated with the availability of tripartite mechanism between the GoI, state governments and the Reserve Bank of India (RBI) for recovery of dues from state discoms is a breather. Moreover, cost plus tariff mechanism, timely implementation of policy measures by the Ministry of Power, GoI for hydro power sector would enable to improve the tariff competitiveness, especially for the projects under implementation, which are stricken with significant cost overrun.

Kick start of various projects like Subansiri (250 MW*8) & Parbati II (200 MW*4) and their expected near time completion, signing of various MoUs & PPAs, talks with various state governments to start stalled projects have further raised its prospects. As once these get completed NHPC’s generation will rise considerably. Moreover, ROEs remaining largely in line with 2019-24 norms provide a boost to investor sentiments.

Its subsidiary NHDC has shown consistent performance reflected in its PAF which kept rising for the past three years from 90.6% during FY18 to 93.9% in FY19 and 94.3% in FY20. Also diversification in various other forms of power (solar & Wind) should help mitigate the segmental concentration risk associated.

Valuations and Recommendations:

NHPC wants to incur Rs 5255cr of CAPEX during FY21 and expects it to increase further by 45% in FY22 to Rs 7618cr. Timely completion of Subansiri project should be beneficial for the company. However, agitation caused by locals in the past and any other possible hindrances remains critical for the completion to fructify. Government’s Atmanirbhar scheme on PFC/REC loan package is under discussion stage and the management expects these institutions to release Rs 1800cr soon, which would be largely channelized for the J&K’s outstanding. Various other governmental schemes to augment the hydro power as a sector also augurs well. Attractive valuations, gearing at 0.7x, healthy liquidity, regulated model, improved return ratios, past track record etc. are a few triggers for the company. Also with its large dividend payout (NHPC follows the GoI mandated dividend policy, higher of 5% of net worth or 30% of PAT), the yield on the stock is attractive at 6.5%. NHPC is the only ‘completely green’ PSU generating company as well as the largest in the country.

We expect NHPC Rev/EBITDA/PAT to grow at a CAGR of 5%/5%/6% between FY20 to FY22. We assign a P/BV multiple of 0.72x FY22E BVPS and 7.25xFY22E EPS for base case fair value resulting in price of Rs.24.35, and 0.8x FY22E BVPS and 8.0xFY22E EPS for bull case fair value resulting in price of Rs.27.1 over the next two quarters. We feel that investors can enter the stock on dips at Rs.21.85 (0.65x FY22E BVPS and 6.5xFY22E EPS) and add more on dips to Rs 19.35 (0.57x FY22E BVPS and 5.75xFY22E EPS).

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