NHPC shares succumb to margin calls

The stock has tanked almost 23% to Rs 19.45 extending its over 10% Friday's fall on back of heavy volumes on BSE.

Shares of state-owned NHPC Ltd plunged as much as 25.9 per cent on Monday on speculation that financiers sold the stock after traders failed to bring in additional margin money following the scrip’s decline on Friday. But the stock recouped part of its losses to end at Rs 19.60, down 18.9 per cent over the previous close. The market is abuzz with various versions on the reason for the 27 per cent decline in the stock since Thursday’s closing price.

One is that an informal deal between a group of operators and an institutional investor to offload their stake at a higher price had fallen through, sparking the selling. This triggered stop-losses forcing financiers to dump the stock. Another version is that Ahmedabad-based and Kolkata-based operators could not meet margin calls.  

Analysts said the absence of visible fundamental developments, too, could have contributed to the stock’s fall. The company has seen some de-rating recently because of lower revenue visibility in the coming two-to-three years, delay in projects, large dues from state utilities and lower return on equity (RoE) having its implications on the valuations.

Valuations were higher earlier. Currently — after correction — at Rs 19.8, the stock is trading 0.85 times its book value and 10 times its earnings in FY12, which is considered to be reasonable, given about nine per cent RoE and lower earnings visibility.

For instance, the estimates suggest that earnings growth during the financial year 2012 and 2015 is expected to be 3.2 per cent annually.

Since its initial public offering in 2009, the company's capacity has moved from 5,175 megawatt (Mw) to about 5,500 Mw currently. It has a large pipeline of projects, but due to the nature of projects (hydro-based power), they take five-seven years for commissioning.

"The management guided for capacity addition of 952 Mw in FY13 and 420 Mw in FY14. However, it guided for zero capacity addition over FY15-17 as execution issues pertaining to two key projects that are stranded midway (Parbati-II-800 Mw and Subansiri Lower-2,000 Mw) are yet to be resolved," said Bhavin Vithlani, who tracks the company at Axis Capital in a note.

The company's power projects are run on fixed RoE of about 15.5-16.5 per cent. Despite lower capacity addition in the last few years, the company could manage to grow because some of the earlier capital expenditure (capex) started to generate returns. By FY12, capex worth Rs 19,400 crore, which is 60 per cent of market capitalisation, was under progress.

So, a large part of the capital is stuck in the ongoing projects, which is why the growth has been slow and overall RoE has been lower. Importantly, even if the existing projects keep on making cash, growth will be determined by the timely commissioning of ongoing projects. That apart, the worry also stems from long dues as some of the state utilities to whom NHPC has supplied the power have delayed or defaulted on payments. In fact, due to the gravity of the situation, the management earlier indicated it had curtailed the power supply to states that defaulted on payments. Meanwhile, this led to worries in the mind of investors despite the company saying it was hopeful of recovering these dues.