NHPC – Steady, Cheap, Defensive Power Generator

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  • 16 July 2013
  • CMP: Rs 18.3
  • Large Cap – Mkt Cap 22,510 crores
  • Advice:  Buy

Here is a short note on NHPC Ltd. (National Hydro Power Corp).

JainMatrix Investments, NHPC report

Introduction 

  • NHPC is a listed PSU, a Mini-Ratna Category-I Enterprise. It is the major player in public sector hydro power in India.
  • It has 5,700MW of installed hydro power capacity, with projects of an additional 4,100MW coming on stream in the next 4 years.
  • FY13 consolidated revenues were 6400 crores and profits 2900 cr.
  • In terms of demand, there are few doubts. India is energy hungry, and NHPC produces low cost power that will always be in demand. The States are also now raising their electricity prices for consumers, so there is hope that India’s power sector will see better days going forward.
  • NHPC operates in difficult terrain, and its projects need multiple approvals and involve social disruptions. Thus capacity addition is a slow, difficult task. However once commissioned, projects produce low cost uninterrupted power for years. NHPC is also a trustworthy player in this sector.

Pricing and Valuation

  • NHPC has been a ‘steadily weakening’ stock over the last 4 years. The Share Price has been falling from the 2009 IPO price of 36 (peak 40) to today’s 18.3, a 16% per year fall over 4 years.
  • In terms of business performance however, the last 4 years have seen steady annual growth in the generation of electricity (3.2%) and in revenues and profits (both 16.5%).
  • Thus NHPC is today available at low valuations – with the P/E at 9.6 and P/B at 0.85, relatively cheap.
  • Debt/Equity is at 0.67, so the low gearing also provides comfort.
  • Also the dividend yield is 3.83%, which is attractive.
  • Free Cash Flow is also improving, moving into positive numbers in FY12 (the FY13 annual report is not yet available).

Near Term Factors

  • Seasonality: The firm produces most power in Q1 and Q2 of every year due to the summer and monsoon seasons. From a short term purchase point of view, this is a good time to buy, as next 2 quarter results should be very good with the record Indian monsoon (though some plants in Uttarkhand may not be working due to floods).
  • Stake Sale: Another event is the stake sale of NHPC which should happen in the next few weeks. The govt which owns 86.4% will divest 11.4% to reduce stake to SEBI ordered 75% levels.

Overall Opinion

  • In a nutshell, NHPC is a defensive, steady, long term PSU stock. Do not expect sharp out-performance. But the current share price is low, reducing down side risk. So this is a good time to buy NHPC.
  • If you decide to buy, watch the share over the next few days for the govt. stake sale, (it can fall in this period) and buy at current 18.3 or lower levels.

JainMatrix Knowledge Base

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