The stock of NHPC, the country’s largest hydro power producer, declined in the run up to the government’s offer for sale of 11.4 per cent stake in the company in April. Recouping the loss, the stock has since gained strongly.

But it is still attractively valued. At ₹24, it trades at 0.8 times its estimated book value for 2016-17. This is at the lower-end of its five-year historical valuation band of 0.6-1.2 times. With the company’s prospects also looking good, investors can buy the stock.

NHPC sells power at tariffs set by the Central Electricity Regulatory Commission (CERC). These tariffs enable the company to fully recover costs and earn an assured return on equity (ROE) on its completed projects. Expansion of power generation capacity, therefore, holds the key to the company’s revenue growth.

NHPC is set to commission additional generation capacity in the current financial year and again in 2018-19. Also, since the tariffs set by CERC provide an assured return, it gives revenue visibility.

Adding capacity

NHPC currently operates power generation capacity of 6,587 MW, which accounts for about 15 per cent of the country’s hydro power capacity.

After commissioning minimal additional generation capacity during 2015-16 (80 MW was added only in March 2016), the company plans to commission 410 MW in the current financial year.

This comprises the remaining 80 MW of the Teesta Low Dam-IV Project in West Bengal and the 330 MW Kishanganga Project in Jammu & Kashmir. Benefit of the 80 MW generation capacity added towards the end of 2015-16 too should flow in the current financial year. The next capacity addition will come about in 2018-19 with the commissioning of the 800 MW Parbati II Project in Himachal Pradesh.

This should add to NHPC’s power production and revenue. Take for instance 2015-16, when helped by the 7.4 per cent increase in power generation, the company reported 5 per cent revenue and 8 per cent profit growth during the year.

Likewise, boosted by the 20 per cent growth in power generation in 2014-15, the company posted 11 per cent revenue growth.

No demand shortfall

NHPC sells its power to state power distribution utilities (discoms) at tariffs fixed by CERC. The tariffs allow recovery of costs, including operation and maintenance expenses, depreciation and finance cost plus an ROE of 15.5-16.5 per cent (depending on the type of plant).

The power sales happen under long-term power purchase agreements entered into with the state discoms. This brings in assured customers for the company and shields it from the buyer uncertainty of the merchant power market.

Also, unlike many large thermal power producers, NHPC has been relatively immune to the cut down in power purchases by the financially strained state discoms.

This is because, according to the merit order dispatch regulations under the Electricity Act, discoms have to give preference to a cheaper source of electricity.

So, when discoms decide to reduce their intake, they have to first cut down on the more expensive power purchases (thermal, in many cases).

Financial performance

For the year ended March 2016, while NHPC grew its revenue 5 per cent (year-on-year) to ₹8,628 crore, higher expenses dented its operating profit (down 1 per cent to ₹5,205 crore).

Helped by lower interest expense though, the company’s net profit grew 8 per cent to ₹2,688 crore. NHPC’s improved debtor position in 2015-16 too provides comfort.

The amount owed to the company by the debtor state discoms came down to ₹1,956 crore as of March 2016 from ₹3,352 crore, a year ago.

Problems remain

While the company’s earlier stranded Teesta Low Dam- IV Project is close to full commissioning, the Subansiri Lower Project (2,000 MW) in Assam and Arunachal Pradesh remains a pain point.

The project, which was originally expected to be commissioned by December 2012, has faced interruptions due to anti-dam agitations since December 2011.

The petition at the National Green Tribunal, against the environmental clearance granted to the project, is set for hearing in August.

Assuming the order is in the company’s favour and construction is resumed quickly, commissioning of the project will still take four years. NHPC’s future projects however, should gain from faster statutory clearances under the current government, the benefit of which will flow in the long run. NHPC currently has 8,000 MW of projects at various stages of clearances.

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