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Approvals to expedite project works

NHPC has recently received approval for two projects – Jal Power Corporation (JPCL) Rangit stage-IV and Ratle. The company is likely to expedite the tendering process and start construction activities in the near term. NHPC received the approval from MoP for an investment of Rs9.4bn for acquisition and construction of balance work for 120MW Rangit stage-IV project. It also received the board approval for the formation of a JV for 850MW Ratle in J&K at an equity investment of Rs510mn (51% stake). Once construction activities start, we expect both the projects to commission in 5-7 years. All these developments are positive for NHPC and will help it boost growth and earnings in the long term. Maintain BUY.

* Rangit stage-IV investment receives MoP approval: After receiving approval from NCLT Hyderabad bench on NHPC’s Rs1.65bn resolution plan for 120MW Jal Power Corporation’s (JPCL) Rangit stage-IV project in Jan’20, MoP has approved the investment of Rs9.4bn by NHPC for acquisition and construction of balance work. Tendering process for construction of the balance work is expected to begin from Apr’21. Timeline for completion is 42 months. JPCL is now a wholly-owned subsidiary of NHPC.

* Board approves formation of JV for 850MW Ratle project: NHPC had signed MoU with J&K government for execution of five hydro projects totaling 4,134MW at an estimated investment of Rs350bn. NHPC’s board has approved the formation of a JV for the implementation of 850MW Ratle project on Chenab river in J&K. Board has also approved the investment of Rs510mn as equity by NHPC in the JV company, in which NHPC will have 51% stake while the balance 49% will be held by JKSPDCL.

* To research on development of green hydrogen: As per media reports (link), NHPC has collaborated with Banaras Hindu University’s Hydrogen Energy Centre to research on the development of green hydrogen and for piloting development of hydrogen energy, based on National Hydrogen Energy Mission announced in the Union Budget 2021.

* High dividend yield and attractive valuations: NHPC’s increase in standalone capacity from 5,551MW to 8,351MW in FY24E takes its regulated equity to Rs221bn in FY24E, at a CAGR of 14.5%, resulting in earnings CAGR of over 11%. At CMP of Rs24.5, the stock is trading at 7.2 P/E and 0.7 P/B on FY23E basis and at a dividend yield of 6.5% (interim dividend of Rs1.25/sh already announced). We maintain our BUY rating and target price of Rs34 on NHPC.

* NHPC vs Verbund AG (Austria): Verbund, Austria’s leading electricity company and one of the largest producers of hydropower in Europe, with majority (51%) shareholding of the Republic of Austria, has an operational capacity of 8.3GW with low growth, and is trading at 3.2x PB & 38x PE on CY20 basis, while NHPC with 7GW capacity (FY20; 10GW by FY24) is trading at 0.8x PB & 8.2x PE on FY20 basis. The companies are comparable as both are PSUs with similar hydro capacity profiles and similar RoE ranging at 10% (NHPC’s RoE to improve to 12% by FY24). Despite the similarities, their valuations are very divergent, evident in the fact that Verbund’s dividend yield is 1%. Hence, we believe, there is an opportunity in NHPC.

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