Stock Review: National Hydro Power Company (NHPC)

At a time when thermal power companies continue to grapple with unavailability of fuel, staterun hydro power generation company National Hydro Power Company (NHPC) presents an opportunity for investors as it has no fuel risk and can produce cheap power.

The company has posted betterthan-expected earnings performance for two consecutive quarters and its stock is available at a discount of 25% to its initial public offer price. Concern over the company's execution ability is the key reason for the underperformance of its stock. Most of the company's projects have missed the guided timelines and cost overruns for these projects are huge. At a price of . 25 per share, NHPC is trading at a price-tobook value of 1.2x. Being a hydro power company, it can generate power at a much lower cost. It can produce per unit of power at a cost of less than . 2 compared with more than . 3 cost incurred by its thermal peers.

Though the company sells power at a regulated return-on-equity of 15.5%, its current return on equity is below 10% as it has a large amount of capital blocked in construction of upcoming projects, many of which have missed commissioning deadlines. Hydro projects generally have a gestation period of nearly eight years compared with five years for thermal power projects, and hence capital is blocked for a longer period.
NHPC has lined up capacity addition of 500-720 MW this year. In the past one year, its capacity has increased by 120MW to 5,295 MW. Power generation has risen 10% to 6,284 units. This has contributed to a growth of 14% in net sales. However,total revenue increased 40% to . 1,430 crore, which includes . 280 crore non-recurring income from previous period. Its operating margin decreased due to higher depreciation and maintenance cost, while net profit increased 46% to . 780 crore.

Though the company performed well in the past two quarters, over a period of about three years its performance has been disappointing. The company's generation capacity has remained almost flat in the past three years, except for 120 MW that was added last year. It expects to add at least 500 MW in the current fiscal. A timely commissioning of the guided capacity would be critical for restoring investor's confidence. If it succeeds, it will be a catalyst for the stock.