Public sector hydropower enterprise NHPC Ltd will slip in its capacity addition targets for the fiscal year ended March 2012 due to problems in execution. While these may well be anticipated in large power projects, it’s a roadblock in its growth trajectory.

Graphics: Sandeep Bhatnagar / Mint

The chairman of NHPC recently stated that the company will complete only around 3,300MW of projects by the end of fives year to March 2012. Given its target of 5,300MW from 12 projects, this means a shortfall of about around 2,000MW. This will be completed by the next financial year.

It may be recalled that in August, NHPC’s initial public offering at Rs36 was oversubscribed nearly seven times. As the country’s largest hydropower generator, it garnered around Rs6,000 crore. The government’s holding now is down to 86% with its equity rising from Rs11,118 crore to Rs12,300 crore.

NHPC is a regulated power utility. Positive news early this year with the government revising the return on equity for projects from 14% to 15.5% had created greater investor interest in these companies. The overall depreciation rate was also reduced by 1.7% for these projects.

Analysts’ consensus is that in big hydoelectric projects, a six-month to one-year delay is acceptable, as the projects deliver high return on equity when commissioned. Yet, timely commissioning is a bonus. There is an incentive of 0.5% of the project equity for timely commissioning. NHPC stands to lose on this count.

Besides, although exact numbers are not known, the delay implies that money deployed into the delayed projects will be stuck as capital work-in-progress, which does not generate any return. Also, it is only when the power project goes on stream that the sale of power accrues as cash flow to the company.

During FY09, NHPC has posted operating revenue of around Rs2,900 crore. Its operating profit margin was around 72%. The net profit was around Rs1,075 crore, which translated into an earnings per share of around Re1. The share price at Rs31 is below the issue price of Rs36.

There is undoubtedly promise in the sector. Also, with an installed capacity of 5,175MW, NHPC has lined up 16 projects for the 12th five-year plan, aggregating to a capacity of 14,000MW.

But in the interim, the delays will impact valuations adversely.