At first blush, NHPC Ltd seems grossly undervalued. It is trading at 1.1 times the estimated book value for fiscal 2012 (FY12). For a company that has a minimum assured return on equity of 15.5%, that is underwhelming. Peers such as NTPC Ltd and even Jaiprakash Power Ventures Ltd are trading at higher valuations.
But then NHPC’s financial results don’t look exciting, too. In the fourth quarter, profit after tax—after adjusting for one-time items—fell 20.6% from a year ago. Reported net profit for the quarter grew by more than half from a year ago, but that was because the company changed some accounting policies and a change in tax rates.
Revenue also grew by more than half from a year ago, again because of accounting policy changes and inclusion of prior-period sales. For FY11, revenue actually fell by a per cent from a year ago. That said, the number of units generated grew 9.7% from a year ago.
Unlike many other power firms, NHPC will have customers for its power since it’s one of the lowest-cost producers. But will it be able to sustain this increase in units generated?
The primary reason why investors are disillusioned with the NHPC story is the delay in capacity addition. It has completed one-fifth of its targeted capacity increase of 5,300 megawatts (MW) during the five years leading to 2012. In FY11, it commissioned just 120MW. These woes have been well-documented even if they are outside the company’s control. Geological problems, law and order issues, and environmental risks have wrecked NHPC’s ambitions outlined in its new share sale prospectus in 2009.
Also, NHPC has some Rs 4,000 crore of cash lying on its books. Better execution of projects will naturally lead to better utilization of this cash, and prevent return ratios from getting depressed. The company has said it plans to add some 1,180MW in this fiscal. This is just part of the 4,502MW projects it has under construction. But given its track record and current valuation, even a 500MW addition will push up the stock.
We welcome your comments at email@example.com