With a fair value of Rs 60, NHPC Ltd. has seen rallies of 126% in the last year and 288% in the previous three. Kotak Institutional Equities has issued a “Sell” call on the company. The aim suggests a possible downside of 32%. The brokerage claimed that the PSU stock valuations are high and do not account for execution risk.
“Though we do concede with the step-up in earnings due to likely commissioning of the long-awaited Subansiri Lower and Parbati II projects over FY2025/26E, assigning value to any future developments beyond these two projects may be overoptimistic, given the associated execution challenges in hydro projects and the historical track record on project delays. We maintain SELL, with an unchanged FV of Rs 60 per share.”
Kotak
When it comes to FY2025E earnings, NHPC is currently trading at 17.8 times earnings per share and 2.2 times price to book value. This is significantly more than the average historical forward valuation of 11 times EPS and 1 time P/BV.
Kotak stated that NHPC has historically experienced prolonged periods of execution difficulty. It was emphasized that even after construction operations resumed in FY2019, Subansiri Lower and Parbati II had been postponed for more than ten years.
The damage caused by floods, the interruption of locals’ and activists’ activities, and contractual disputes are among the reasons for the delay. The typical time to develop a hydro capacity is ten years, which begs the question of how new capabilities might provide value given their lengthy gestation period.
“More importantly, with the increase in construction costs, tariffs for a new hydro plant far exceed those of solar and coal tariffs, diluting the business case for new hydro capacities,” it said.
With operational (consolidated) regulated equity of Rs 13,900 crore (including joint venture projects) and additional Rs 9,700 crore from the two soon-to-be-commissioned projects (2,800 MW), NHPC now has a market capitalization of Rs 89000 crore.
“In aggregation, this regulated equity of Rs 23,600 crore will earn money at 18 per cent (including incentives). If we were to assume perfect execution and value the other under-construction hydro projects, they would yield an equity value of Rs 26,000 crore at 1.5 times invested equity and Rs 35,000 crore at 2 times invested equity, of which Rs 17,500 crore needs to be invested (targeted plans). This would imply a net value creation of Rs 8,500 crore and Rs 17500 crore at 1.5 times and 2 times, respectively.”
Kotak
Kotak said that the prevailing market price of NHPC more than captures the intended growth plans without discounting associated delays.
