BSE Power index has seen a rally of around 86 per cent over the last one year, driven by rising power demand, government’s thrust on renewable energy and enhanced capex spending in the power sector. One of the major contributors to the rally has been the stock of PSU hydro generator NHPC.
Since our ‘Accumulate’ rating in bl.portfolio dated February 5, 2023, the stock of NHPC has gone up by around 130 per cent. Previously, the rationale for such rating was attractive valuation, high dividend yield, assured return model and strong balance sheet.
There has been a sharp run-up in the stock, with valuation expanding from one-year forward P/E (Bloomberg consensus estimates) of around 10 times to 23 times since then. While the balance sheet and business model still remain strong, investors can book profits in the stock as the investment thesis has already played out due to spike in stock price and valuation.
Conferred with Miniratna status, NHPC is India’s largest hydro power generator with around 15 per cent share of the country’s installed hydro-electric capacity. The PSU has an installed capacity of around 7,097 MW, of which 98 per cent is hydro-based. It earns majority of its revenue by selling power to State distribution utilities (mainly in northern and north-eastern India) through long-term PPA (power purchase agreement) while the rest is through power trading, contracts, project management and consultancy segments.
The tariff that the company earns on its PPAs is cost-plus nature based on CERC regulations. Here, subject to normative plant availability factor (PAF) of each plant, NHPC earns fixed ROE (of 15.5 per cent) over and above recovery of expenses such as operations and maintenance and interest on loans.
The company also earns incentives based on its plants reporting PAF more than the normative levels (85 per cent) and deviation charges where the power station of the company contributes towards maintaining grid stability.
A hydro-electric power plant, once commissioned, incurs lower generation-based expenses and has a higher life compared to other sources. However, setting up a hydro plant is a lot more time-consuming process and involves higher fixed cost (capex) on a per MW basis compared to other power generation sources.
Intermittency issues of solar and wind can lead to sudden power generation shortfalls or excesses, which can affect grid stability, resulting in outages. Here, hydro power comes into the picture due to its ability to ramp up/ramp down quickly. Hence, combining hydro power with solar and wind can enable clean energy transition with grid stability.
NHPC’s overall plant availability factor during H1FY24 was lower at around 92 per cent against 99 per cent in H1FY23 due to lower water availability and outage of some of power systems like Parbati-III, Kishanganga and Chamera-II. During H1FY24, the company saw 9 per cent lower generation YoY at about 16,797 million units mainly on account of lower water availability and intense rain and flood in some parts of Himachal Pradesh in August ‘23 which has impacted the generation in the region.
The company earned an operating revenue of around ₹5,688 crore in H1FY24 i.e. 7.5 per cent lower compared to H1FY23 on account of lower generation. Further, its EBITDA decreased by around 11 per cent to ₹3,262 crore and thereby margins decreased from 60 per cent to 57 per cent. This might be on account of 43 per cent increase in generation expenses mainly due to applicability of water cess in Uttarakhand, Sikkim and Madhya Pradesh.
Despite being a capex-driven company, NHPC has a pretty strong debt profile with D/E of around 0.8 times and interest coverage ratio of more than 10 times.
Outlook and valuation
The company has incurred a capex of around ₹4,095 crore during H1FY24. The management has revised the budgeted capex at around ₹9,006 crore for FY24 (from ₹10,857 crore earlier planned) which is around 29 per cent higher than the capex incurred in FY23 at around ₹6,961 crore. Further, NHPC plans to ramp up its capex in FY2024-25 at around ₹11,761 crore.
The company currently has an under-construction capacity of around 10,449 MW. As it looks to ride the renewable energy wave and the thrust on increasing solar and wind energy installed capacities, the under-construction capacities also include 3,135 MW of solar-based.
NHPC trades at nearly 23 times its one-year forward earnings, which is about 158 per cent higher than its historical five-year average P/E owing to the surge in the stock price over the last one year. This has further led to its dividend yield decreasing from around 4 per cent to 1.8 per cent since our last call. Considering the steep rise in price as well as valuations, investors can lock into some gains on the stock.