Can a hydropower revival package solve NHPC’s problems?


Shares of hydropower producer NHPC Ltd, which had been languishing below their initial public offering (IPO) price, gained 5.7% on Friday after Business Standard reported that the government is considering a package to revive the hydropower sector.

With the latest gains, the stock is up 38% over the past one year, although it’s still below its IPO price. At around 12 times the current fiscal year earnings estimates and a little more than its book value (1.2 times), it is not expensive.

Relative to the share price, the company pays good dividend. A note from Elara Securities (India) Pvt. Ltd says the dividend yield for past fiscal works out to 5.9%, the second highest in the power sector (after SJVN Ltd).

What’s more, like NTPC Ltd and Power Grid Corp. of India Ltd, NHPC has a good capacity addition pipeline.

It plans to add 3,130 megawatts (MW) over the next couple of years.

As these projects get commissioned and regulated equity (generates fixed returns) expands, NHPC’s earnings should see structural improvement.

Of course, one niggling concern is a cost overrun and the resultant rise in tariffs. But if the government’s proposal to provide interest rate subvention gets approved, then it can lower finance and generation costs, addressing the problem of tariff escalation to some extent.

So do these factors make NHPC a good investment?

Not really.

As an analyst with a domestic broking firm points out, the problem with NHPC is delays in project execution. The proposed package can do little about it as problems are project specific. For instance, construction at the 2,000MW Subansiri project has stalled since 2011 and the estimated cost of this project almost tripled. Till March, NHPC invested about Rs9,139 crore on this project. According to ICICI Securities Ltd, this investment alone (in Subansiri) adds to almost half of NHPC’s capital work in progress, the commissioning (date) of which remains uncertain.

The other two projects which the company is planning to commission in the current and next fiscal years have also seen cost overruns and execution delays.

As a consequence, a significant chunk of NHPC’s assets or funds are blocked. This is resulting in low return on equity, compared with NTPC and Power Grid.

According to ICICI Securities, the management is trying to resolve these issues. Even then, huge cost overruns at some projects mean that cost of electricity generation will rise. These high tariffs, in turn, can make it unpalatable for customers, Emkay Global Financial Services Ltd warns.

So, while the news that the government is looking to address the problems of the hydropower sector is welcome, the issue with NHPC is more company specific.

Unless NHPC demonstrates execution capabilities and the return on equity improves, the stock can find little long-term support. “Though the firm is a generous dividend payer, at the same time, multiple re-rating (for the stock) has limited scope owing to untimely commissioning of capacity,” ICICI Securities said in a 5 June note.

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