Shares of NHPC Ltd gained 3% after the company reported better than expected performance for the September quarter. Power generation increased 5% from a year ago.

As the tariffs for some projects were finalized, realizations expanded 6.6%, says ICICI Securities Ltd. This helped revenue and profit grow 12% and 73%, respectively. True, revenue and profit have been pushed up by adjustments and a one-time income. But even adjusting for them, growth is better than analysts’ estimates.

Encouragingly, the company’s plants operated at higher levels. Plant availability and utilization levels improved in the range of 5-6 percentage points from a year ago. The core return on equity (RoE) increased 1.7 percentage points to 8.4%, Religare Capital Markets Ltd’s calculations show. RoE is the percentage of profit generated on shareholders’ equity.

Even though the strong performance led to some earnings upgrades, the stock continues to trade at a substantial discount (26%) to current year estimated book value. It is down 10% in the last one year.

Weighing on the outlook are two factors. One is the lack of growth opportunities in the near term. NHPC did not add any capacity in the first half of the current fiscal. Large capacity additions are expected to be added only from 2017. According to analysts, the management expects to add 130 megawatts (MW) in the second half of the current fiscal. But going by its track record, many doubt if the projects will begin operations on time. “While NHPC is unlikely to commission any project in FY16, it is likely to add 490MW in FY17 (TLDP-IV 160MW and Kishanganga 330MW)," Religare said in a note.

The second point is the amount of capital tied up in projects under execution. Though the RoE improved last quarter, NHPC’s returns are weighed down by high capital work in progress (CWIP) and receivables. According to ICICI Securities Ltd, as of the last fiscal, more than half or 51.9% of NHPC’s net worth is blocked in CWIP, which contributes very little to the return ratios. Receivables increased 9% from year ago.

With the commissioning of large projects expected to gather pace only in 2017, the ratio is unlikely to fall substantially in the near term. “As a large part of capital is stuck in CWIP and receivable, the contribution to earnings remains limited," Motilal Oswal Securities Ltd said in a note. “Given that project commissioning is delayed, CWIP would persist, as also cash accretion."

While some projects will eventually get capitalized in the coming years, the future of one large project (Subansiri) remains uncertain. A committee was formed to evaluate the consequences of the project. A favourable outcome can help alleviate investor concerns.

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