NHPC reported poor earnings in a seasonally weak quarter, as the absence of generation growth on an expanded capacity base, coupled with provisions for employee- related wage revision, dampened earnings performance. We are positive on the stock given rich dividend yield and growth prospects from 1,130 MW of power capacities to be commissioned over the next two years. Resolution of Subansiri still remains a stumbling block. Maintain ADD rating with target price of `32/share. Poor generation on expanded capacity, non-recurring expenses distort earnings NHPC reported weak earnings in a seasonally less significant quarter with net income of `1.7 bn compared to our estimates of `3.3 bn. Lower earnings were on account of the absence of generation growth (3,281 MU) despite commercialisation of 80 MW at Teesta Low Dam IV. Management highlighted (i) earnings impact of `50 crore due to lower energy charges, (ii) `70 crore on account of capacity charges, and (iii) impact of `45 crore on account of finalisation of tariff orders. Further employee cost included expenses of `200 crore on account of pay revision for central sector employees, though the same has a corresponding recognition of revenues under rate regulated income, owing to the cost-plus nature of the business. NHPC ended full year 2017 with 17% y-o-y growth in net income at `27 bn due to commercialisation of assets over the past two years. 1,130 MW to commission over the next two years; Subansiri deadlock remains NHPC has a portfolio of 3 GW that is currently under execution, of which, the 2 GW Subansiri project has been stalled since December 2011. NHPC currently awaits the judgment of the National Green Tribunal, to resume construction work on the project.
Of the balance 1.1 GW—Kishanganga (330 MW) will likely commission during the current fiscal, delay in project commissioning is attributable to unrest in the Jammu and Kashmir. Parbati II (800 MW) is seeing steady progress in project execution and the project will likely commission by 2019.
We note that the high capital cost will lead to increased tariffs for projects, making them less competitive than other sources of power generation—Subansiri will likely commission with a tariff close to `4.7/kwh, while the tariff for Kishanganga despite the sub-ordinated debt is `4.3/kwh.
Maintain ADD with a target price of `32/share We continue to remain positive on NHPC owing to (i) rich dividend yield with a dividend of `1.7/share besides a buy- back of 7.3% of equity that was concluded in 2017, (ii) growth from commissioning of 1,130 MW of power capacities that will likely commission over the next two years, and (iii) potential resolution of the long-standing embargo on construction of the large Subansiri project. We have marginally revised earnings for the company by 3% for 2018/2019, though we maintain our target price of `32/share.