Initiate with ‘buy’ on NHPC; DCF-based TP of Rs 34

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December 23, 2020 8:33 AM

NHPC, the largest hydroelectric power generation company in India, has 7GW operational capacity split 98%/2% in favour of hydro/renewables, making it the largest ‘completely green’ power generating company in India.

NHPC claimed that the Rs 5,748-crore project of “national importance” was being held up and it cannot process the fresh tender in the wake of a status quo order operating against it.

NHPC, the largest hydroelectric power generation company in India, has 7GW operational capacity split 98%/2% in favour of hydro/renewables, making it the largest ‘completely green’ power generating company in India. Its regulated business model and capacity addition outlook (5 under-construction projects) provides earnings certainty, while ever improving operational performance resulting in higher incentives will provide the extra fillip to earnings. As a result, PAT is estimated to increase by 51% over FY20-FY24E (11% CAGR). Green credentials and hydro’s must-run status backed by stricter RPO compliance requirements provide further comfort. We initiate coverage on the stock with ‘BUY’ rating and DCF based target price of Rs 34.

Earnings CAGR of 11% over FY20-24E led by capacity addition: Increase in standalone capacity from 5,551MW to 8,351MW in FY24E takes regulated equity from Rs 129bn at FY20-end to Rs 221bn in FY24E, at CAGR of 14.5%. Further earnings boost is expected from revision of TLDP-IV’s tariff order and Parbati-III reverting to original design energy post Parbati-II’s commissioning (cumulative >Rs 2bn p.a. addition to PAT). Considering commissioning of Parbati-II (800MW) in FY23 and Subansiri Lower (2GW) in FY24 (construction in full swing), NHPC’s expected earnings CAGR for the period FY20-24E clocks 10.9% to reach Rs 45.5bn (vs Rs 30bn in FY20). Core RoE is expected to increase to 18% by FY24E from 17% currently.

High regulatory certainty; no expectation of RoE revision: NHPC’s earnings and revenue is set according to CERC tariff guidelines, which has maintained the existing RoE structure for 2019-2024. For NHPC, blended average RoE is ~16% (although core RoE is higher due to incentives earned). Although the next tariff guideline revision of CERC is in 2024-29, we do not expect any change to the existing RoE structure due to hydro projects’ long gestation period and their strategic importance for the nation, as well as grid stability and peaking requirements.

‘Completely green’ and must run status to result in 100% offtake: As per the draft Electricity Act (Amendment), 2020, hydro generation will now be considered renewable. Also, scope of RPO has been expanded to include hydro with stricter compliance, assuring 100% offtake. With 98%/2% of its installed capacity based on hydro/renewables, NHPC is the only ‘completely green’ PSU generating firm as well as the largest in the country. It also spends significantly on CSR activities.

High dividend yield and attractive valuations, NHPC follows the GoI mandated dividend policy (higher of 5% of net worth or 30% of PAT), which translates to >Rs1.5/sh. At CMP of Rs22/share, the stock is trading at 6.2 P/E and 0.6 P/B of FY23E basis. Its dividend yield is >7%. We value the stock on DCF basis and initiate with a BUY rating at a target price of Rs34.

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