Stock Review: NHPC

 

 

NHPC looks comfortably placed to provide attractive returns. Investors can consider exposure in the stock with a time frame of 2-3 years

 

   HYDEL power generation company NHPC was listed on bourses in August 2009. Since then, it has been trading below the offer price for most of the time. With the improvement in its financial performance over the past five quarters, its price-earnings ratio has come down considerably to an attractive level of nearly 18 times.

   The company commissioned one of its projects recently, which would further add to the bottomline in the coming quarters. The company looks comfortably placed to provide attractive returns and investors can consider exposure in the stock with a time frame of 2-3 years.

BUSINESS:

NHPC is the largest hydel power generation company in the country having a capacity of 5,300 megawatt (mw), including a project of 120-mw capacity commissioned in July this year. Two of these projects totaling 1,520-mw of capacity are run through a 51:49 joint venture with NHDC. It has 10 projects with 4,500 mw of capacity under various stages of construction to be completed by the end of the financial year 2013. About 1,200 mw of this is expected to go on steam in the next four quarters.

   These projects would double the power generation capacity of the company. The increase in revenue and profit would be even higher since the new regulation provides higher returns on equity and higher efficiency parameters for new plants. This is also reflected in the increase in average sale price of the power generated by the company from 1.50 in FY06 to nearly 2.50 in FY10. This translates to a annualised growth of more than 10% over the past four years.

   The long line-up of under-construction projects indicates a significant amount of cash investments in the company, about 13,000 crore of funds, has been blocked. As this amount is almost one-third of its total balance sheet size, it puts pressure on capital return ratios. While the hydel projects normally run smoothly after the commissioning, the project execution is a challenging task, and risk for delay and cost run are high.

FINANCIALS:

For the year ended March 2010, the company posted impressive numbers with consolidated sales growing by 49% and net profit by 84%. Profitability was aided by slight reduction in operating and interest cost. However, provision for depreciation nearly doubled with newer capacities coming on stream. However, in the June 2010 quarter, the performance has been subdued with a marginal decline in sales and 7% increase in net profit.

   But it must be noted that the hydel plants face significant amount of seasonality mostly depending on the rainfall. Hence, its performance should be looked over a longer period rather than on quarterly basis.

OUTLOOK:

Even though the stock has failed to attract investors' attention in the past one year, the medium term prospects of the company are good. In the longer run, the company is expected to behave like other global utility companies, offering steady cash flows and attractive dividends. While the near-term movement of the stock price may remain subdued, investors can consider the stock with a medium term outlook.