NHPC stock falls 16% from peak but Kotak Institutional sees another 32% drop – here’s why

Domestic brokerage firm Kotak Institutional Equities, in a recent report, reiterated its bearish stance on NHPC following the company's mixed performance in the quarter ending June. The brokerage maintained its 'sell' rating on NHPC, setting a target price of ₹68, which suggests a potential downside of 31% from the stock's recent closing price of ₹98.80. 

The stock has already been in a downtrend in recent weeks, currently trading at a 16% discount from its recent peak of ₹118. 

One-off provision reversal aids net profit

According to the brokerage, NHPC reported standalone revenue of ₹24 billion (a 6% decline year-on-year and a 46% increase quarter-on-quarter), EBITDA of ₹12.8 billion (down 8% year-on-year but up 73% quarter-on-quarter), and a PAT of ₹10.2 billion (a 3% drop year-on-year but a 47% rise quarter-on-quarter). These figures were largely in line with Kotak's estimates.

Earnings for the quarter were positively impacted by a ₹993 million write-back of provisions, stemming from a previously allocated ₹2.2 billion on the DPR of the Bursar project. This amount is now expected to be reimbursed to NHPC by the government.

Additionally, the quarter's earnings were aided by rate-regulated income of ₹584 million in 1QFY25, compared to ₹219 million in 1QFY24. In 1QFY25, NHPC earned incentives of ₹116 million, a 1% increase year-on-year, due to a shift in the recognition of availability-based incentives to year-end.

Kotak also noted that NHPC's receivables stood at ₹46 billion as of June 2024, reflecting a 31% year-on-year decrease and a 17% quarter-on-quarter increase. Receivables greater than 45 days amounted to ₹5.1 billion.

Project pipeline

NHPC has projects totaling 19 GW in various stages of implementation, including 10.6 GW under construction. The commissioning of Parbati II (800 MW) is anticipated by 4QFY25, while Subansiri Lower (2000 MW) is expected by FY2027.

NHPC aims to commission three units of Subansiri Lower by March 2025, with the remaining five units by May 2026. The projects under construction have a total cost of ₹1 trillion, including Parbati II at ₹122 billion, Subansiri at ₹212 billion, and Dibang at ₹319 billion, with incurred costs (until June 2024) at 96%, 101%, and 8%, respectively.

Kotak noted that NHPC has capex plans of ₹117 billion for FY2025E, compared to a capex of ₹86 billion in FY2024, with ₹19.6 billion spent in 1QFY25.

Execution delays

Kotak highlighted that NHPC's current valuations, trading at 18X P/E and 2.3X P/B (FY2026E), are based on the assumption of perfect execution, with the expectation that both Parbati II and Subansiri Lower will be commissioned within the next two years.

However, Kotak emphasised that despite construction commencing at Subansiri Lower, there have been several execution delays. Additionally, timelines for hydro projects beyond Subansiri and Parbati II have been revised, and investment in pump storage projects is only in the nascent stage.

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