rs 35 rs 39 nhpc (nhpc) - icici...

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ICICIdirect | Equity Research

Analysts’ Name

Jitesh Bhanot [email protected]

Sales & EPS trend

2,000

3,000

4,000

5,000

FY09 FY10E FY11E FY12E

0.5

1.0

1.5

Sales - Rs cr(LHS) EPS - Rs(RHS) Stock Metrics

Bloomberg Code NHPC INReuters Code NHPC.BOFace value (Rs) 10Promoters Holding 86.4%Market Cap (Rs cr) 41,727.552 week H/L 42 / 29Sensex 17,350Average volumes 9,267,687 Comparative return metrics

Stock return(%) 3M 6M 12MNHPC 6.4 NA NAPower Grid 5.1 7.9 55.9Tata Power 1.6 28.7 86.7NTPC 6.8 13.4 28.3 Price Trend

25

30

35

40

45

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10

Pric

e (R

s)

Target Price Market Price

January 19, 2010 | Power

Initiating Coverage

NHPC (NHPC)

Sweetly placed to exploit opportunities… National Hydroelectric Power Corp (NHPC), a Mini Ratna Category I public sector undertaking, is the largest hydropower generator with an operational history of 28 years. NHPC has an operational capacity of 5,175 MW as of Nov 09, ~4,622 MW of capacity is under construction and another ~6,730 MW is awaiting clearances. NHPC has a track record of operating plants at some of the most difficult terrains in India and has substantial experience in design development and execution of hydroelectric plants. With the burgeoning need for power in the country and the generation capacity being skewed towards thermal power, NHPC has the opportunity to capitalise on the hydropower potential in India, which stands at ~149 GW. Of this only ~26% has been exploited so far. With the world moving towards greener technology and energy security being the prime focus, we believe NHPC is placed in a sweet spot. Thus, we are initiating coverage on NHPC with a BUY rating.

Expansion of profitability to follow commissioning of new capacity NHPC is staring at a humongous opportunity and has plans to increase the installed capacity to 20 GW by FY20. Several big ticket projects are awaiting clearances while several others are at the drawing board stage. NHPC has planned a capex of Rs 21,600 crore and Rs 30,000 crore in the Eleventh (07-12) and Twelfth (12-17) Five Year Plan, respectively. NHPC is also believed to recognise additional revenue of ~Rs 350 crore over H2FY10E due to the finalisation of tariff order for the Dulhasti plant and Teesta V.

Project recognitions from UNFCCC for carbon credits to lift the tempo Operating profitability will receive an incremental boost from carbon credits income. NHPC has already made a start with two small projects Nimoo Bazgo (45 MW) and Chutak (44 MW) receiving registration from the United Nation Framework Convention on Climate Changes (UNFCCC). We believe other upcoming projects are also likely to qualify for carbon credits.

Valuations At the CMP of Rs 35, the stock is trading at a P/BV of 1.9x FY10E and 1.8x FY11E, respectively. NHPC is witnessing strong EBITDA momentum and EBITDA is expected to more than double over the next three years by FY12E. We have valued NHPC based on our DCF based model deriving a fair value of Rs 39. Thus, we are initiating coverage on NHPC with a BUY rating.

Current Price Rs 35

Target Price Rs 39

Potential upside 11%

Time Frame 12-15 months

BUY

Exhibit 1: Key Financials (Rs Crore) FY08 FY09 FY10E FY11E FY12E

Net Sales 2,227.3 2,688.9 3,168.0 3,451.8 4,843.7EBITDA 1,890.7 1,917.1 2,787.7 2,716.7 3,907.0Net Profit 988.9 1,111.1 1,489.0 1,343.7 1,750.2EPS (Rs) 0.9 1.0 1.2 1.1 1.4EPS Growth (%) 7.1 12.4 22.1 -9.8 30.3EBITDA margin (%) 84.9 71.3 88.0 78.7 80.7PER (x) 39.5 35.1 28.8 31.9 24.5P/BV (x) 2.3 2.2 1.9 1.8 1.7Price/sales (x) 17.5 14.5 12.3 11.3 8.1Dividend Yield (%) 0.8 0.8 1.2 1.1 1.5RoCE (%) 5.6 4.9 5.7 4.6 6.4RoNW(%) 5.9 6.4 7.3 5.8 7.3 Source: Company, ICICIdirect.com Research

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Company background

NHPC, a Mini Ratna category I public sector utility, is the flagship hydroelectric generation company promoted by the Government of India. The company is the largest hydro electric plant (HEP) developer in India and was incorporated in 1975. NHPC has 11 operational plants with a total capacity of 3,620 MW. The company owns a 51% stake in Narmada Hydroelectric Development Corporation (NHDC), which has two operational plants with a total capacity of 1,520 MW. The upcoming projects are more skewed towards northern and north eastern India as the region offers significant untapped hydropower potential. NHPC has 17 different projects with a total capacity of ~14,000 MW under various stages of consideration for which construction activity is yet to take off. Exhibit 2: Operating Projects

Source: Company, ICICIdirect.com Research

Shareholding pattern (Q2FY10)

Shareholder % holdingPromoters 86.4Institutional investors 5.3Other investors 0.0General public 8.4 Promoter & Institutional holding trend (%)

100.

0%

100.

0%

100.

0%

86.4

%

0.0%

0.0%

0.0% 5.3%

0%

20%

40%

60%

80%

100%

Q3 Q4 Q1 Q2Promoter Holding Institutional Holding

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Being a central PSU, NHPC operates under the purview of CERC. All the operational plants have entered into long-term offtake arrangements under the regulatory mechanism, which lends significant long-term visibility. As the projects are skewed towards the north and north eastern region, it exposes the company to the relatively weak state utilities of this region. Profitability for the company is expected to improve with new projects starting to kick in from FY12E onwards. With ample projects awaiting clearances the pipeline of projects under construction is also expected to remain robust for the next five years.

Regulatory overview Regulatory framework plays a very important role in the operations of NHPC. All operational plants within NHPC’s portfolio have tied up for long-term PPAs under the CERC tariff policy. The plants are guaranteed a fixed return of 15.5% on the regulated capex under the tariff policy.

Exhibit 3: Impact of changes in the Tariff Policy (2009-14) Annual Fixed Charges 2009-14 2004-09 ImpactReturn on Equity (%) 15.5 14.0 PositiveInterest on Loans As per actual As per actual No impactDepreciation 5.28 2.57 + AAD NegativeInterest on Working Capital Normative parameters Normative parameters NegativeOperations & Maintenance Exp.New plants commissioned after 09 2% @ Project Cost 1.5% @ Project Cost PositiveOld plants commissioned after 09 Normative O&M expense escalated @ 5.72% O&M expense escalated @ 5.17% Positive Source: CERC, ICICIdirect.com Research

700045

700045

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Investment rationale

Huge opportunity for hydropower players in India According to CEA estimates, India has a hydropower potential of 148,700 MW. Of this, India has an installed capacity of ~36,900 MW till June 2009. According to the hydro policy, 2008, India is likely to explore the entire hydropower potential by 2027. This offers enormous opportunity to players operating in the hydel space. Hydropower plants have a significantly higher plant life compared to their thermal counterparts. Some hydropower plants are still operational even 100 years after their commissioning. Exhibit 4: Share of hydroelectric plants getting reduced in the overall installed capacity

14,4

60

18,3

08

19,1

94

21,6

58

26,2

69

26,7

67

29,5

07

30,9

42

32,3

26

34,6

54

35,9

09

36,9

17

50,2

80 70,6

14

111,

280 14

7,77

4

34.0

28.8 27.825.2 25.0 24.8 26.2 26.1 26.0 26.2 25.1 24.6 23.8 22.7

0.0

30,000.0

60,000.0

90,000.0

120,000.0

150,000.0

180,000.0

1985

1990

1992

1997

2002

2003

2004

2005

2006

2007

2008

2009

2012

2017

2022

*

2027

*

0.0

10.0

20.0

30.0

40.0

Hydro power capacity Hydro as (%) of total installed capacity - RHS Source: CEA, ICICIdirect.com Research

Power deficit continues to widen, North East remains unexplored The power deficit in India continues to widen. With the vision of the government of Power for all by 2012, we believe the focus on generation will get accentuated, going forward. The total installed hydropower capacity is approximately 36,878 MW. The mix of hydro-based generating capacity in India is skewed towards the more developed states in the north, west and southern regions of India.

Exhibit 5: India’s power deficit, north eastern region remains significantly unexplored

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

5

6

7

8

9

10

11

12

Deficit - RHS Demand MU - LHS Supply MU - LHS

North Easterregion, 1,198M

3%

Eastern region, 3,994MW, 10%

Southern region, 11,431MW, 30%

Northern region, 13,817MW, 37%

Western region, 7,650MW, 20%

Source: CEA, ICICIdirect.com Research

Significant hydropower potential still untapped in north eastern India

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Humungous expansion plans of 20 GW by FY20E

NHPC is India’s largest hydropower generation company. NHPC has humungous capacity addition plans and the company is targeting an installed capacity of 20,000 MW by FY20. Currently, NHPC has ~5,175 MW of installed capacity while ~4,620 MW is under development and another 6,730 MW is awaiting clearances. For plants under development, a significant part of the capex has already been incurred and we believe the company should be able to add 4,300 MW of additional capacity by FY13E. This provides significant visibility with respect to execution of projects.

Exhibit 6: Expansion plans

4,62

2

1,12

3

4,62

2

249

120

330

2,80

0

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

2010 2011 2012 2013 2014 2015 2016

MW

202020175,

175

6,73

03,

473

2017

Balance projects required for achieving FY20 targetProjects awaing clearancesProjects under developmentExisting projects


Largest hydropower player in India with 5.1 GW of installed capacity

At present, the company has 13 operational projects with an overall capacity under operation of 5,140 MW commanding ~14% of the overall hydropower generating capacity of India. The existing operations have strong cash generating assets. In FY09, the company generated an operating cash flow of ~ Rs 2,200 crore, which may be partly utilised in funding the expansion plans.

Exhibit 7: Projects under construction

Plant Type of PlantCapacity

(MW)NAPAF

(%)Total

CapacityDesign

Energy(MU) CoDNHPC Chamera Pondage 3x180 90 540 1,665 1994

Bairasul Pondage 3x60 85 180 779 1981Loktak Storage 3x30* 85 100 448 1983Chamera-II Pondage 3x100 90 300 1,500 2004Rangit Pondage 3x20 85 60 339 1999Dhauliganga Pondage 4x70 85 280 1,135 2005Teesta-V Pondage 3x170 85 510 2,573 2008Dulhasti Pondage 3x130 90 390 1,907 2007Salal ROR 6x115 60 690 3,082 1987/96Uri ROR 4x120 60 480 2,587 1997Tanakpur ROR 3x30* 55 90 452 1992Total - (a) 3620 16,467

NHDC (51% JV) Indira Sagar Storage 8x125 85 1000 1,979 2005Omkareshwar Pondage 8x65 90 520 1,166 2007Total - (b) 1520 3,145Total - (a+b) 5140 19,612

Source: RHP, ICICIdirect.com Research

NHPC is the largest hydropower player with 5.1 GW installed capacity and a track record of operating plants in the most difficult terrains in India

Aggressive long-term expansion plans for NHPC would lead to quadrupling of the installed capacity over the next 11 years

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Strong projects pipeline of projects under construction Another 11 projects have already been identified, which are expected to become part of NHPC’s overall portfolio by FY17. Having expertise in the hydropower segment and being a central public sector undertaking the company enjoys a significant advantage when compared to other private sector player with respect to scouting for new projects. For existing projects under construction a significant part of the capex has already been incurred. This provides significant visibility with respect to execution of the project.

Exhibit 8: Pipeline of projects under construction

Plant Type of PlantCapacity

(MW)Total

CapacityDesign

Energy(MU)Expected

CoDProject Cost

(Rs Cr) StateCapex incurred till

June 09 (Rs Cr)% incurredtill June 09

Uri II Pondage 240 240 1123.8 Mar-11 1,725.0 J&K 839.0 49Chamera III Pondage 3x77 231 1108.7 Mar-11 1,406.0 HP 868.0 62Teesta Low Dam IV Pondage 160 160 720.0 Mar-12 1,061.0 WB 517.1 49Nimoo Bazgo ROR 45 45 239.0 Mar-12 611.0 J&K 286.6 47Parbati III ROR 520 520 1963/972 Mar-11 2,305.0 HP 755.0 33Chutak hydroelectric ROR 44 44 212.9 Mar-12 621.0 J&K 262.1 42Subansiri lower ROR 2,000 2,000 7421.0 Mar-13 6,280.0 AP 3,171.0 50Sewa II ROR 120 120 533.5 Mar-10 665.0 J&KTeesta Low Dam III Pondage 132 132 594.4 Mar-11 768.0 WBParbati II ROR 800 800 3108.7 Mar-13 3,920.0 HPKishanganga Pondage 330 330 NA Mar-17 3,642.0 J&KTotal Capacity 1,382 4,622 15,062.0 23,004.0 6,698.9

Source: DRHP, ICICIdirect.com Research

Bonanza from finalisation of tariff order for Dulhasti & Teesta V plants

Approval for the final tariff order for the Dulhasti & Teesta plants have been finalised and will result in gains of Rs 350 crore in H2FY10E. Also, we believe NHPC will be able to recover the entire cost overruns by passing the additional cost to beneficiaries of the power plant. The Dulhasti plant is located in Jammu and Kashmir and has an installed capacity of 390 MW. The plant was originally scheduled for commissioning in March 2001 and finally started production in March 2007. The plant has suffered major setbacks on account of geological conditions and militant activities in the region. The Teesta plant is located in Sikkim with an installed capacity of 510 MW. The plant was completed in 2008 and started commercial production in March 2008. Also, another plant which is operating under the provisional tariff rates is Omkareshwar. The finalisation of tariff order for this project is expected to boost the operating profitability in the next year.

Partnering state governments to help them achieve expansion plans

NHPC has entered into several MoUs with several state governments for pursuing project development. On similar lines, the company has already executed the MoU with the state government of Madhya Pradesh and incorporated NHDC. Under NHDC, the company is also setting up a thermal capacity of 1,320 MW. NHPC has also entered into an MoU with the government of Manipur for execution of the Loktak project and entered into a memorandum of agreement (MoA) with the government of Arunachal Pradesh for execution of the 3,000 MW Dibang project.

Good mix of projects under construction and a good number of projects in the clearance stage depicts the pipeline under construction will remain strong

Additional revenue of Rs 350 crore expected from the determination of final tariff for Dulhasti & Teesta V.

The realisation per unit from Dulhasti is expected to climb from Rs 3.7 per unit to Rs 5.5 per unit in FY11E

The realisation per unit from Teesta V is expected to climb from Rs 1.7 per unit to Rs 2.0 per unit in FY11E

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Fillip from CERC regulations (2009-14) The new CERC regulation (2009-14) is expected to enhance the profitability of NHPC from FY11 onwards based on an assumption of normal monsoons. Owing to the subdued monsoon season in 2009, we do not expect the profitability to receive a significant boost in 2009-10. However, in subsequent years, NHPC is expected to be a key beneficiary of the incremental incentives flowing from the reforms expected in the power market. The new CERC policy also exposes the plants of NHPC that are older than 10 years to hydrology risk. However, we feel the majority of the capital expenditure of any plant has already been recovered in the first 10 years. Hence, the company will be able to deliver superior returns in future years.

Contingent positives may lead to growth in our bull case for FY12E EPS We expect the regulator to continue maintaining a favourable stance with a view to promoting investments in the hydro sector. In our base case we have not considered the impact of open access policy or the carbon credit income from the remaining upcoming projects. The open access policy, as being contemplated by the Ministry of Power, allows the generator to trade a part of the 15% allocation kept by the central government. In the impact analysis we have considered the entire 15% allocation will be available for the merchant route and expected a realisation of Rs 4 per unit. This will lead to an incremental EPS of Rs 0.32 per share. For considering the impact of carbon credits, we have considered a case where the entire 1,057 MW, which is expected to be commissioned by FY11E will receive UN registration for carbon credits by FY12E. This will lead to an incremental EPS of Rs 0.15 per share.

Exhibit 9: Impact analysis on FY12E EPS based on the expected opening up of regulations

0.32

0.15

1.89

1.43

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

FY12E EPS Selling 15% quotaunder Open access

Carbon credits Expected EPS

MW


FY10E is expected to remain subdued owing to aberration in rainfalls impacting the incentive income for NHPC. We expect the profitability to improve in the ensuing fiscal years

FY12E EPS in the bull case scenario is expected to increase to Rs 1.9 per share exploring the alternatives being contemplated by the Ministry of Power and NHPC

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Build up in CWIP and gross assets to translate into growth of profits

NHPC has been suffering from very low RoEs with a significant chunk of assets blocked in capital work in progress (CWIP). The company has incurred a significant part of the capex for projects under construction. The build up in CWIP will translate into operating assets from FY11E. Earnings under the regulated model are directly linked to the gross asset. The momentum in earnings is likely to follow the growth in operating assets. The gross asset base is expected to grow at a CAGR of 15% from FY10E to FY12E.

Exhibit 10: Growth of operating assets to follow after the CWIP momentum

10,34

3

10,87

6

12,75

6

12,94

4

20,64

0

21,42

8

21,42

8

22,09

3

28,29

7

7,781

9,557

9,623

12,25

6

7,396

10,42

3

11,32

6

14,66

1

12,45

7

0

5,000

10,000

15,000

20,000

25,000

30,000

2004

2005

2006

2007

2008

2009

2010

E

2011

E

2012

E

Rs C

rore

-45.0

-30.0

-15.0

0.0

15.0

30.0

45.0

60.0

75.0

Gross Assets - LHS (Rs Cr) CWIP - LHS (Rs Cr) CWIP Growth (%) - RHS

1034

3

1087

6

1275

6

1294

4

2064

0

2142

8

2142

8

2209

3

2829

7

7781

9557 9623

1225

6 7396

1042

3

1466

1

1245

7

1132

6

0

10,000

20,000

30,000

40,000

50,000

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

0.0

5.0

10.0

15.0

20.0

Gross Assets - LHS (Rs Cr) CWIP - LHS (Rs Cr) Total Assets Growth (%) - RHS Source: Company, ICICIdirect.com Research

CWIP growth has picked up in FY09. Double digit growth momentum is expected in FY10E and FY11E. Growth in the gross assets will follow the build up in CWIP

Total assets for the company are likely to exceed Rs 40,000 crore by FY12E

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Significant portion of capital expenditure already incurred NHPC has already incurred ~50% of the capex on 3,240 MW of capacity under construction. We believe the projects will not witness significant delays. The management expects the projects to come up according to the budgeted schedule. We believe there may be marginal delays of 6 to 12 months depending on project specific issues.

Exhibit 11: Growth of operating assets to follow after CWIP momentum

886

538

544

324

1,550

359

3,109

839

868

517

287

755

262

3,171

0% 20% 40% 60% 80% 100%

Uri II

Chamera III

Teesta Low Dam IV

Nimoo Bazgo

Parbati III

Chutak hydroelectric

Subansiri lower

Capex still to be incurred Capex incurred till June 09


Significant scope for leveraging a strong balance sheet Even after completion of capital expenditure on projects under construction of 4,622 MW, the balance sheet offers significant potential for further levering the balance sheet. Being a government related entity, it is relatively easier for NHPC to access credit facilities. Also, the company will be in a better position to manage subordinated debt at lower interest rates from the government for economically unviable projects.

Exhibit 12: Comfortable debt equity position at the end of projects under construction

3,22

0

2,80

0

2,80

0

2,80

0

1380

1200

1200

1200

0.60.7

0.8 0.9

0500

1,0001,5002,0002,5003,0003,500

FY10E FY11E FY12E FY13E

Rs C

rore

0.0

0.2

0.4

0.6

0.8

1.0

D/E(

x)

Debt Funding Equity Funding D/E


For projects under construction with an expected capacity of 3,240 MW the company has already incurred ~50% of the capital expenditure

Balance sheet strength provides adequate muscle to increase the pace of expansion in the future years

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Volatility in average realisation per unit to get accentuated The average realisation of each plant can be significantly volatile due to the nature of the business. The average realisation for all 13 plants over the past two years is illustrated in the Exhibit 13. With the commencement of new CERC norms the volatility in average realisation is expected to get further accentuated. The volatility in generation is one of the major reasons for instability in per unit realisation. Exhibit 13: Realisation per unit and generation at operational plants

Avg. Realisationper unit

1.71

1.06

1.22

2.33

1.74

3.68

1.52

1.14

1.12

2.65

1.84

1.97

1.31

2.27

2.69

1.87

0.85

1.39

3.58

3.89

1.63

0.80

1.67

2.38

3.02

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Chamera (540)

Bairasul (180)

Loktak (100)

Chamera-II (300)

Rangit (60)

Dhauliganga (280)

Teesta-V (510)

Dulhasti (390)

Salal (690)

Uri (480)

Tanakpur (90)

Indira Sagar (1000)

Omkareshwar (520)

Rs (per Kwh)

2009 2008

Units Generated

214.2

67.6

49.8

111.7

188.7

219.9

60.7

60.5

140.8

33.8

118.6

43.8

272.7

303.2

79.9

156.9

43.0

300.7

33.3

137.2

221.0

69.8

210.2

323.1

259.6

0 50 100

150

200

250

300

350

400

Chamera (540)

Bairasul (180)

Loktak (100)

Chamera-II (300)

Rangit (60)

Dhauliganga (280)

Teesta-V (510)

Dulhasti (390)

Salal (690)

Uri (480)

Tanakpur (90)

Indira Sagar (1000)

Omkareshwar (520)

Crore units (Kwh)2009 2008

Source: CEA, ICICIdirect.com Research

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Risks & concerns

Execution risk HEPs have a significantly higher gestation period and the construction involves several delays due to increased number of regulatory approvals and clearances. Development of hydropower project is also surrounded by several environmental issues. Due to consequent displacement and rehabilitations of persons, hydropower projects are also subject to several litigation issues. Any delays in these projects can possibly lead to cost overruns, thereby adversely impacting tariff competitiveness.

Policy risk The Electricity Act 2003 removes licensing requirements for thermal generators and provides for open access to transmission and distribution network. The open access reform will allow generators to sell their output directly to distribution companies and finally to the ultimate consumer. The financial implication of such a move on regulated plays will be long lasting. We believe that if NHPC is given permission to sell the power directly to the end consumer it will improve the profitability for the company significantly and may pose an upside risk to our valuation case. Also, certain plants that are operational under the provisional tariff order may not be in a position to recover the entire cost overruns on the particular project.

New CERC norms may pose operational challenges Hydrology risk is not a pass through under the new CERC regulations after the initial 10 years of operation. In a situation where rainfalls are insufficient the plants that are older than 10 years may be unable to recover the operational cost from that particular project putting further pressure on profitability ratios. This move is believed to give the private sector peers an advantage over NHPC.

Subdued return ratios The return ratios of the company over the past four years have not been encouraging. This was primarily led by a significant chunk of investment blocked in CWIP, which does not qualify for returns. We have excluded the equity invested in CWIP for calculation of adjusted return on networth, which depicts an improved picture for the past four years. However, with significant expansion plans over the next decade we feel the reported return ratios will continue to remain subdued. Exhibit 14: Return ratios and adjusted Return ratios

5.8

7.1

6.6 7.

3

4.8 5.

6

5.7 6.

3

0.01.02.03.04.05.06.07.08.0

FY06 FY07 FY08 FY09

Retu

rn (%

)

Adjusted RONW Reported RONW Source: Company, ICICIdirect.com Research

Construction of a hydro power plant is inflicted with higher risk compared to the thermal power plant. It involves higher number of challenges in the construction and operation of HEP

New CERC norms to result in increased volatility in the profitability of NHPC

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Financials

Robust growth in revenues on the back of capacity addition NHPC has been witnessing a growth of 20% in revenues over FY06-FY09. Revenues are expected at Rs 4,844 crore in FY12E. The rate of growth is expected to get accentuated further to 22% in FY09-FY12E period. The primary reason for the growth in revenues is the expansion in installed capacity by 10% over the next three years which is expected to reach 4,863 MW by FY12E. Exhibit 15: Standalone revenue and EBITDA expansion over the last four years

1,555 1,7062,227

2,6893,168 3,452

4,844

1,31

5

1,51

5

1,89

1

1,91

7

2,78

8

2,71

7

3,90

7

01,0002,0003,0004,0005,0006,000

FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Rs c

rore

Revenues EBITDA

Source: DRHP, ICICIdirect.com Research

Normalised EBITDA expanded due to one time recovery in FY10E

The regulator has finalised the tariff order for the Dulhasti and Teesta V projects due to which NHPC is expected to receive a one-time additional EBITDA of Rs 350 crore in H2FY10E. NHPC is expected to start receiving a recurring ~Rs 24 crore per quarter from Q4FY10E due to finalisation of tariff. On an annualised basis, NHPC will receive an additional ~Rs 96 crore from FY11E.

Exhibit 16: EBITDA to expand due to one time recovery of difference between provisional & final tariff

24

350

2414

2788

2,000.00

2,200.00

2,400.00

2,600.00

2,800.00

3,000.00

FY10E NormalisedEBITDA

Recurring EBITDA -Tariff readjustment

One time Gain - Diff.between final tariff &

prov. tariff

Total FY10 EBITDA

MW


Pace of revenue growth will accentuate over the coming four years to 22% compared to 20% in the past three years

Finalisation of tariff for Dulhasti and Teesta V would lead to an incremental EBITDA of Rs 374 crore

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EBITDA margin to get recouped after dip in FY09

NHPC has commissioned ~1,420 MW of installed hydropower capacity over the past three years. The company was recognising revenues under the provisional tariff orders, which did not allow NHPC to recover the entire impact of additional capital expenditure. Spike in FY10E is expected due to the recovery of the difference between the final and the provisional tariff retrospectively. We believe the margin expansion will continue post FY11E on a gradual manner.

Exhibit 17: Trends in EBITDA margin

84.688.8

84.9

71.3

88.0

78.7 80.7

6065707580859095


EBIT

DA

mar

gin

(%)


Boost in profitability

We expect the net profit to report a growth of 15% CAGR (FY09-FY12E), with the PAT margin at 36% for FY12E. With the one time gains coming from the clearances of tariff orders for two plants the bottomline & PAT margins are expected to receive a perk up in FY10E. We expect the margin in the ensuing year to consolidate at lower band.

Exhibit 18: Trends in net profit and PAT margin

757

925

989

1,11

1

1,48

9

1,34

4

1,75

0

48.754.2

44.441.3

47.0

38.9

35.5

400

600

800

1,0001,200

1,400

1,600

1,800

2,000


Rs C

rore

s

24

28

32

3640

44

48

52

56

(%)

PAT(LHS in Rs crore) PAT margins(RHS in %)


EBITDA margins for NHPC received a setback led by lesser average realisation from two plants, which is likely to change over the future years

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Adjusted Return ratios appears better than normal return ratios

The Adjusted return on invested capital (ROIC) excluding the capital work in progress on the asset front provides a much improved picture of NHPC. NHPC has much longer gestation period compared to normal thermal power plants which also leads to subdued set of return ratios. However at the same time one must also consider the average life of a hydro power plant is nearly double that of the thermal power plant. Exhibit 19: Return ratios

5.6 4.9 5.7 4.66.4

9.8 10.713.2 13.2 13.7

7.35.87.3

5.9 6.4

0

4

8

12

16

20

FY08 FY09 FY10E FY11E FY12E

(%)

ROCE RONW ROIC (Adjs. for CWIP)


Adjusted ROIC shows a much improved picture for NHPC

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Valuations

NHPC is a regulated hydropower play within the overall Indian utilities sector. The policies of the regulator will play a crucial role in determining the fair value. The reform process within the overall power sector is expected to continue. In spite of being the largest hydropower utility, NHPC is still at a nascent stage when we look at the entire hydropower potential that it can cater to over the coming years. We believe the company operates in a niche segment with tremendous growth opportunity. NHPC is valued at a significant discount to other utilities based on balance sheet strength. Asset based plays have started getting momentum on the exchanges. Based on the profitability ratio, NHPC is richly valued. However, we believe the profitability will catch up with the incremental capacities coming in and the favourable stance of the regulator. At the CMP of Rs 35, the stock is trading at a P/BV of 1.9x FY10E and 1.8x FY11E, respectively. We have assigned a fair value of Rs 39 based on our discounted cash flow model. In assigning the fair value, we have assumed a cost of equity of 12.3% with a terminal growth in cash flows of 5% for valuing the standalone entity. 51% subsidiary (NHDC) is given a price to book value multiple of 3.0x and at a Mcap to MW multiple of Rs 4 crore per MW. NHPC is witnessing strong EBITDA momentum and is expected to double over the next three years by FY12E. We also expect a favourable stance from the regulator to continue, which may lead to incremental benefits for NHPC. Thus, we are initiating coverage on NHPC with a BUY rating and a price target of Rs 39. Exhibit 20: Growth momentum in core earnings for a six year period higher than most peers

0

0.5

1

1.5

2

2.5

3

0.0%

5.0%

10.0

%

15.0

%

20.0

%

25.0

%

30.0

%

35.0

%

40.0

%

45.0

%

Core earnings - CAGR (FY06-12E)

Core

ear

ning

s / E

V

NTPC NHPC Power Grid* Neyveli Lignite


* CAGR for Power grid is taken for (FY06-09)

Niche utility operating in the hydropower space with significant visibility of their growth plans to result in expansion of multiples

Although the return ratios for the company are subdued the company will continue to witness strong momentum in core earnings

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Based on asset coverage, NHPC is looking cheap NHPC has one of the strongest balance sheets among regulated utilities. NHPC appears to be one of the cheapest regulated utilities involved in generation activity when we compare the gross operating assets and the enterprise value of NHPC. The only other utility trading at a lower valuation is PowerGrid, which is a transmission utility. Exhibit 21: Total asset coverage over Enterprise Value

0.30.50.81.01.31.51.82.02.32.5

Oct-0

8

Nov

-08

Dec-

08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov

-09

Dec-

09

Tota

l Ass

et /

EV

NHPC NTPC Power Grid Neyveli Lignite


Based on asset coverage, NHPC looks cheap

Based on the price to book value, NHPC is one of the cheapest generating utility available. Considering a longer life cycle of hydro power plants, NHPC looks cheap for investors with a longer term horizon. Aggressive expansion of capacities will lead to upside in the return ratios of NHPC.

Exhibit 22: Peer Valuation

CMP TP FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11ENHPC 35 39 39.6 35.2 28.8 29.2 20.1 20.6 2.4 1.9 1.8 4.9 5.7 4.6 6.4 7.3 5.8NTPC 229 245 23.0 21.8 17.4 19.8 16.0 12.8 3.1 3.0 2.8 13.3 13.3 12.7 14.9 14.6 14.3NEYVELI Lig. 173 139 34.3 25.7 34.3 28.1 22.1 13.9 3.1 2.8 2.6 4.6 6.0 7.5 9.1 11.4 12.6POWERGRID* 115 - 28.6 23.0 19.5 14.8 12.7 10.6 3.3 3.0 2.6 - 5.9 6.1 - 13.2 14.3TATA POWER* 1475 - 25.8 20.3 19.3 16.1 14.2 12.3 3.5 3.0 2.7 - 5.7 5.2 - 15.8 14.6

ROCE(%) RONW(%)P/E (x) EV/EBITDA (x) P/BV

Source: Company, Reuters, ICICIdirect.com Research

* Comparable valuation is computed from Reuters estimates

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Key financials

P&L Statement (Rs Crore) Key ratios (Profit & Loss Account) (%)

FY07 FY08 FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12ESales 2,475.7 2,923.1 3,733.8 3,752.2 5,105.0 Emp Exp(in Rs crore) 324.9 492.5 488.6 542.2 633.1 Growth (%) 0.3 0.2 0.3 0.0 0.4 Admin & General exp 205.0 326.5 347.6 363.4 434.8 Op. Expenditure 585.1 1,006.0 946.2 1,035.6 1,197.9 Average cost of debt 9.8 9.8 9.8 9.8 9.8EBITDA 1,890.7 1,917.1 2,787.7 2,716.7 3,907.0 Effective Tax rate 10.9 8.5 16.5 14.6 15.3Growth (%) 24.8 1.4 45.4 (2.5) 43.8 Profitability ratios (%)Other Income 143.0 317.9 376.8 455.0 340.0 EBITDA Margin 76.4 65.6 74.7 72.4 76.5Depreciation 469.9 515.5 874.5 950.2 1,197.2 PAT Margin 39.9 38.0 39.9 35.8 34.3EBIT 1,563.8 1,719.4 2,289.9 2,221.5 3,049.8 Adj. PAT Margin 35.9 30.4 32.8 27.3 29.6Interest 453.4 505.2 507.4 648.6 982.9 Per share data (Rs)PBT 1,110.4 1,214.3 1,782.5 1,572.8 2,066.9 Revenue per share 2.2 2.6 3.0 3.1 4.2Growth (%) 4.7 9.4 46.8 (11.8) 31.4 EV per share 43.3 45.2 45.6 47.4 49.2Tax 121.5 103.1 293.5 229.1 316.8 EV per unit sold 30.6 30.6 32.6 33.6 32.4Extraordinary Item - - - - - Book Value 15.3 16.0 18.5 19.2 20.0Rep. PAT before MI 988.9 1,111.1 1,489.0 1,343.7 1,750.2 Cash per share 1.6 1.7 1.8 2.4 2.9Minority interest (MI) - - - - - EPS 0.9 1.0 1.2 1.1 1.4Rep. PAT after MI 988.9 1,111.1 1,489.0 1,343.7 1,750.2 Cash EPS 1.3 1.5 1.9 1.9 2.4Adjustments* 100.1 222.5 263.7 318.5 238.0 DPS 0.3 0.3 0.5 0.4 0.6

Adj. Net Profit 888.8 888.6 1,225.3 1,025.2 1,512.2 Costs as % to sales except tax rate and average cost of debtGrowth (%) 1.2 0.0 37.9 -16.3 47.5* Post Tax other income is excluded

Balance Sheet (Rs crore) Key ratios (Balance sheet) (%)FY07 FY08 FY09 FY10E FY11E FY12E Return ratios FY08 FY09 FY10E FY11E FY12E

Equity Capital 11,182.5 11,182.5 12,272.8 12,272.8 12,272.8 RoNW 5.9 6.4 7.3 5.8 7.3Preference capital - - - - - ROCE 5.6 4.9 5.7 4.6 6.4Reserves & Surplus 5,933.5 6,691.7 10,450.0 11,258.8 12,269.6 ROIC (adj. for CWIP) 9.8 10.7 13.2 13.2 13.7Shareholder's Fund 17,116.0 17,874.1 22,722.7 23,531.6 24,542.4 Financial health ratioMinority Interest - - - - - Operating CF (Rs Cr) 1,923 1,990 996 2,780 3,240 Secured Loans 7,003.5 8,212.4 8,212.4 8,212.4 8,212.4 FCF (Rs Cr) (652) (1,969) (3,504) (1,470) (760) Unsecured Loans 2,952.8 4,021.7 5,771.7 8,746.7 11,546.7 Cap. Emp. (Rs Cr) 27,072 30,106 36,704 40,488 44,299 AAD - Unearned Rev. 1,303.3 1,329.5 1,329.5 1,329.5 1,329.5 Debt to equity (x) 0.6 0.7 0.6 0.7 0.8 Source of Funds 28,375.6 31,437.6 38,036.2 41,820.1 45,630.9 Debt to cap. emp. (x) 0.4 0.4 0.4 0.4 0.4 Gross Block 20,622.8 21,428.3 21,428.3 22,093.3 28,297.3 Interest Coverage (x) 3.4 3.4 4.5 3.4 3.1 Less: Acc. Depreciation 3,264.8 3,815.0 4,689.5 5,639.7 6,836.9 Debt to EBITDA (x) 5.3 6.4 5.0 6.2 5.1 Net Block 17,358.0 17,613.3 16,738.7 16,453.5 21,460.3 DuPont ratio analysisCapital WIP 6,172.2 9,325.8 11,825.8 15,410.8 13,206.8 PAT/PBT 0.9 0.9 0.8 0.9 0.8Net Fixed Assets 23,530.2 26,939.1 28,564.6 31,864.4 34,667.2 PBT/EBIT 0.8 0.9 0.9 0.9 0.8Intangible asset - - - - - EBIT/Net sales 0.6 0.5 0.6 0.5 0.6Investments 3,049.2 2,793.6 5,293.6 5,293.6 5,293.6 Net Sales/ Tot. Asset 0.1 0.1 0.1 0.1 0.1Inventory&Othr current 394.2 531.5 533.5 535.1 545.4 Total Asset/ NW 2.4 2.7 2.8 3.0 3.3Trade Receivables 331.1 294.7 344.7 360.5 466.4 Spread of RoIC over WACC (?????) (%) (%)Cash 1,841.3 1,900.0 2,184.3 2,961.0 3,618.6 RoICLoans & Advances 776.0 1,264.9 1,671.7 1,579.8 2,045.6 WACCTotal Current Asset 3,342.5 3,990.9 4,734.2 5,436.4 6,676.0 EVACurrent Liab. & Prov. 2,623.6 3,385.2 3,655.3 3,873.5 4,105.0 Net Current Asset 718.9 605.8 1,078.9 1,563.0 2,570.9 Misc Exp. & Adv for cap 1,077.3 1,099.2 1,099.2 1,099.2 1,099.2 Application of funds 28,375.6 31,437.6 36,036.2 39,820.1 43,630.9

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Contd...

Cash Flow Statement (Rs crore) Working Capital RatiosFY08 FY09E FY10E FY11E FY12E FY08 FY09E FY10E FY11E FY12E

Profit after Tax 1,135.8 1,212.3 1,802.5 1,572.8 2,066.9 Working cap./Sales 0.3 0.2 0.3 0.4 0.5Other Non Cash expenses 25.5 (2.0) - - - Inventory turnover 58.1 66.4 52.2 52.1 39.0Depreciation 444.4 517.5 874.5 950.2 1,197.2 Debtor turnover 48.8 36.8 33.7 35.1 33.3Diect Tax Paid 121.5 103.1 293.5 229.1 316.8 Creditor turnover 0.0 0.0 0.0 0.0 0.0Interest Income 143.0 317.9 121.9 - - Current Ratio 1.3 1.2 1.3 1.4 1.6CF before change in WC 1,341.2 1,306.8 2,261.6 2,293.9 2,947.4 Quick ratio 1.1 1.0 1.1 1.3 1.5Inc./(Dec.) in Current Liab. 706.1 761.5 270.1 218.2 231.6 Cash to abs. Liab. 0.7 0.6 0.6 0.8 0.9Inc./(Dec.) in Current Assets 414.5 589.7 459.0 (74.6) 582.0 CF from operations 1,632.8 1,478.6 2,072.8 2,586.6 2,597.0 Purchase of Fixed Assets (2,575.5) (3,959.1) (4,500.0) (4,250.0) (4,000.0) FCF Calculation (Rs crore)(Inc.)/Dec. in Investment 273.5 3,049.2 (2,500.0) - - EBITDACF from Investing (2,159.0) (592.0) (6,623.2) (3,795.0) (3,660.0) Less: TaxInc./(Dec.) in Debt 2,424.4 - 1,750.0 2,975.0 2,800.0 NOPLATInc./(Dec.) in Net worth (15.7) - 3,925.0 - - CapexCF from Financing 2,408.7 - 5,675.0 2,975.0 2,800.0 Change in working cap.Opening Cash balance 466.9 1,841.3 1,900.0 854.8 1,631.6 FCFClosing Cash balance 1,841.3 1,900.0 854.8 1,631.6 2,289.1

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Appendix

Understanding the new tariff mechanism

Annual tariff for a hydropower plant consists of the following items: - Annual fixed charges (AFC) for recovery of regulated return and

capital cost - Incentive based on the performance level during the year Under the earlier tariff policy (2004-09), the recovery of annual fixed charges was not impacted by low water availability. The hydro plant, which declares a high capacity index, was allowed to recover the AFC and the incentive irrespective of the generation. Under the new policy the recovery of annual fixed charges is further split into two equal parts i.e. capacity charges and energy charges. Capacity charges: The generator recovers the capacity charge based on the availability of plant rather than the actual generation. The recovery is delayed if the plant is unable to achieve the prescribed availability levels. The regulator has prescribed 85% or 90% availability based on different kinds of plants during the year. The regulator has also relaxed the prescribed availability for certain plants even further. Energy charges: The generator can recover the other half of the AFC based on the design energy of the plant. The design energy is the amount of electricity that can be generated using water flows, which is 90% probable. The design energy specified by CERC takes into account the individual project specific issues. The generator is penalised if it is unable to achieve the design energy and is entitled to incentives over the design energy.

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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head – Research [email protected] ICICIdirect.com Research Desk,

ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I, Jitesh Bhanot CA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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rs 35 rs 39 nhpc (nhpc) - icici...

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