NHPC: Cheap valuations, improving ops are key triggers

NHPC intends to use Rs 1,600 crore to buy back shares, which should not only enhance the confidence of investors but also lead to better valuations

At a time when the government is looking to sell a part of its stake in public sector units (PSUs) through the open offer and offer for sale routes to raise funds, NHPC, India’s largest hydro power company, is looking to buy back shares. NHPC’s move is aimed at using its surplus cash to prop up valuations, which, at current levels, are pretty attractive. While a buyback should help enhance value for shareholders, the business prospects are also improving, led by a rise in capacities.

Due to woes faced by the power sector, as well as its own issues, the share price has corrected from Rs 29 in February to  Rs 14.8 recently. Though it has inched up a bit, even at current levels of Rs 16.85, valuations are attractive, with price to book value of 0.67 and dividend yield of over five per cent based on the FY13 numbers. More, the company is commanding a market capitalisation of Rs 20,600 crore against the value of investments (Rs 1,447 crore), cash in the books (Rs 7,976 crore) and capital work in progress of Rs 19,961 crore, totalling Rs 29,385 crore. Even if one were to adjust for the debt of Rs 21,000 crore at end-March 2013, there is value, given its operational capacity of 5,800 Mw, worth Rs 40,500 crore on a replacement value basis.

The company intends to use Rs 1,600 crore to buy back shares, which should not only enhance the confidence of investors, but also lead to better valuations. Though the price at which the company will buy back the shares is yet to be announced, assuming the current market price, it would mean a 8.3 per cent positive impact on the earnings and book value of NHPC.

Delays in execution have been a big disappointment for the shareholders in the past. During its initial public offering (IPO) in 2009, the company was aiming to double its capacity to 10,000 Mw by the end of March. However, a large number of projects have got delayed and huge money is stuck in ongoing capital expenditure. Over the last four years, the capital work-in-progress has been piling, with very little of it getting converted into operating assets. This has led to lower return on capital and, consequently, lower valuations.

However, some of the concerns seem excessive and are likely to ease. NHPC has an operational capacity of 5,800 Mw. Except for FY13, sales and profits have been consistently rising since FY09 and annual cash flow from operating activities has been over Rs 2,000 crore. Despite delays in capacity additions, it has been making cash profits in the region of Rs 3,000-4,500 crore annually over the last four years. Thankfully, worries over the growth are now easing. "New capacity addition (additional 415 Mw), along with good monsoons, can help build earnings momentum. At 0.63 times FY14 estimated price to book value (on an eight-nine per cent return on equity), and 8.4 times price to earnings, it is inexpensive," said Abhishek Puri of Deutsche Bank in a note.

Growth for NHPC largely comes from capacity addition and better plant availability. Most of the company's upcoming capacity was piled up due to delays. But now, it is expected that in FY14, the company will commission 937 Mw of new capacity and another 164 Mw in FY15. This should help ease investor concern over earnings growth. "We expect NHPC to report FY13-15 earnings annual growth of 10 per cent led by new capacity commissioning," said Nalin Bhatt, who is tracking the company at Motilal Oswal Securities in a report.

Investors also have apprehensions about the 280 Mw Dhauliganga power project, which was damaged and submerged during the recent flood in Uttrakhand. On this count, analysts are estimating a total loss of about 800 million units of power in FY14, which is merely 4-4.5 per cent of total generation. However, the management has said this unit is insured, thus the insurance claim will take care of equipment and loss of profits.