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Emkay Global
NHPC (Buy)
Target: ₹34
CMP: ₹27.8
NHPC offers moderate earnings growth in the medium term (FY22-FY24E: 7 per cent CAGR, FY22-FY26: 10 per cent CAGR on the back of a 50 per cent increase in stand alone capacity over the next four years.
In the past few years, the company has increased its dividend payout, and the yield stands at nearly 6 per cent currently. With a strong balance sheet (D/E of 0.7x and ₹2,250 crore of cash on books), NHPC can increase its capex, especially on Solar assets. The company has emerged as the winner of a 1,000MW Solar project under CPSU Scheme II
While there has not been much capacity addition in the past few years, we expect 800MW/2,000MW addition in the next 2/4 years. In the medium term, we see an improvement in earnings growth and ROE on the basis of these capacity additions. We believe that the improvement in RoE trajectory will lead to an expansion in the valuation multiple as well.
We assume coverage on NHPC with a Buy rating and a TP (September 22) of ₹34, based on SoTP. We expect its RoE to touch 12/13 per cent by FY26 from 9.3 per cent in FY22 and 8 per cent in FY15.
Our target price implies about 0.9x September 23 BVPS. We believe that improving RoE profile is one of the most important factors for re-rating in Utilities.
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