Home >Markets >Mark To Market >NHPC stock’s low valuations ignore the benefits of new project additions

In an era of green-energy investing, hydropower producer NHPC Ltd should have been the darling of investors. But the stock continues to languish, trading at a discount to its book value.

A subdued June quarter financial performance didn’t help. Revenue grew just 4% and profit dropped as the company provided one-time rebate to power distribution companies (discoms). Generation dropped 5% on plant shutdowns and low availability of water. Trade receivables rose during the quarter.

Even so, the company maintained its capacity addition timelines, providing growth visibility. The 800 megawatt (MW) Parbati II power project is expected to be commissioned in the next fiscal. After this, it plans to add the 2,000MW Subansiri Lower power project in FY24-FY25. Upon completion, NHPC’s regulated equity base is projected to rise by 71% from the current levels.

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Similar to NTPC Ltd, NHPC is also assured of minimum returns on the regulated equity and sharp expansion can add significantly to its earnings.

Still, investors are circumspect. This is partly explained by the skepticism about project commissioning schedules. Both Parbati II and Subansiri Lower were initially expected to be commissioned in FY18.

“While work restarting at Lower Subansiri is a positive, progress on the same needs to be watched," Motilal Oswal Financial Services Ltd said in a note.

Delays meant that project costs too have risen sharply. A significant amount of the company’s funds got stuck in capital work in progress. With the company stepping up execution of these projects and looking to bid for upcoming solar projects, capital expenditure is set to rise in the near term. Some fear this can weigh on near-term return ratios, till the time under construction projects are commissioned.

“Capex run-rate, on the other hand, is expected to increase as the company is investing/exploring new projects, which is expected to reduce FCF (free cash flow) and drag RoEs (return on equity) in the near term," add analysts at Motilal Oswal.

Valuations at 0.6 times FY22 price to book value and 7.5 times price to earnings multiple reflect these concerns. That said, both the projects have power purchasing agreements. Work on the Parbati II project is progressing well and NHPC is planning to generate power under trial basis.

While this takes the project (Parbati II) closer to commissioning, a large operating capacity base and low stock valuations provide good dividend yield.

“We remain positive on NHPC owing to its rich dividend yield, with a dividend of 1.5/share (8% yield), growth from commissioning of 800MW of Parbati II and resolution of longstanding embargo on construction of the large Subansiri project," analysts at Kotak Institutional Equities said in a note.

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