Stock Review: NHPC

In a scenario where thermal power companies are suffering from uncertainties over high fuel costs, hydropower firms appear better placed. Largest in the lot, NHPC seems well placed to outperform on bourses, particularly since the steep fall in recent months discounts almost all its existing problems such as project delays and cost overruns. The company's plans to add more than 25% capacity in FY12 will give it further impetus.
Being a hydro player, NHPC is protected from the demand-supply risk of fuels such as coal or gas. The biggest concern in the hydropower business is the risk involved in execution of projects. However, once operational, these projects have the lowest risks such as fuel availability.

Also, the life of hydropower plants is 35 years, more than that of thermal plants, which have life of around 25 years, thus its annual depreciation charge is less. Also, the fuel cost for a hydropower is almost zero. Both these factors make it one of the lowest-cost producers of power in the country. Due to these factors, hydel companies enjoy higher operating margins. Operating margin for NHPC is as high as 62%.

These prove to be key positive factors for NHPC at a time when state electricity boards (SEBs) are in a bad financial health. SEBs are the largest buyers of power in the country and have a consolidated loss of more than . 50,000 crore, which is not allowing them to buy power at higher tariffs even in times of deficit. This has compelled other power generators, especially thermal power firms to operate at lower capacity utilisation or what is known as 'plant load factor' in industry parlance. The offtake risk is also lower for hydropower as they can handle the fluctuating demand during peak hours. NHPC is planning to add a 1,400-MW capacity in FY12, which is more than 25% of its existing capacity. Even after assuming some delays on this front, the current valuation of price-to-book value 1.2 leaves little room for the scrip to fall. On the other hand, completion of any hydro-power project would improve cashflows and profits. The projects aiming to commission in another three months are Chamera III and Teesta Low Dam III with an aggregate capacity of 363 MW. While low valuations make the scrip attractive, timely completion of these projects could be a positive trigger.