Shares of NHPC Ltd were little changed over the last one year, even as the company resumed work on the long-stalled 2,000 megawatts (MW) Subansiri Lower hydroelectric project. Alongside, it took over the 500MW Teesta VI hydropower plant and is aiming to add 800MW Parbati II power project in FY22.

Together, the Subansiri Lower and Parbati II projects can expand the regulated equity base by 68%, show NHPC’s calculations. Regulated equity assures minimum return.

Profits after the start of the Subansiri Lower project can rise by as much as 965 crore, estimates NHPC. That will be a notable jump for a company which earned a profit of 2,630 crore in FY19.

Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

Still, investors are not impressed. Even more surprising is the lacklustre reaction to the December quarter results. Profit after tax more than doubled as the company benefited from better water availability and electricity generation.

The subdued reaction can be explained by NHPC’s poor execution record. Construction at the Subansiri Lower project was stalled for almost eight years. Similarly, Parbati II has seen a significant cost overrun. The delay and cost overruns can significantly increase tariffs. “Project execution risk means investors are not ascribing much to the potential benefits from capacity additions for now," says an analyst, requesting anonymity.

Further, some analysts worry that rising capital expenditure (capex) will suppress return ratios in the near term. Capex in FY20 is projected to double to 4,640 crore, and rise to 5,300 crore in FY21.

Besides, the fear is that rising capex can impact NHPC’s cash flows. The company is estimated to generate a return on equity of 10% in FY20. “Capex run-rate is expected to increase on account of investment in new projects. However, their commissioning remains 4-5 years away, implying potential drag on near-term free cash flows/return on equity," said analysts at Motilal Oswal Financial Services Ltd in a note.

The NHPC stock is trading at a discount to its book value and at eight times FY20 earnings estimate. For valuations to catch up with the market average, the company has to deliver on execution.

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