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Thursday, August 6, 2009

NHPC IPO Analysis And Research Report

NHPC Ltd, a central PSU mini ratna, is the largest hydroelectric generator in the country with 13 stations operating and an installed capacity of 5,175MW. It accounts for 14% of the country’s hydro capacity. NHPC’s plans to nearly double its standalone capacity will play an institutional role in developing hydro power in the country. NHPC’s operational performance has been amongst the best in the industry with its availability index always beating the benchmark.

NHPC IPO Analysis And Research ReportAdditional 4.6GW is expected to commission by FY16
NHPC plans to nearly double its standalone capacity to 9,797MW by FY16. It is in the process of adding 4,622MW of fresh capacity, through 11 projects. In addition, it is awaiting government sanction for five projects with an anticipated capacity of 4,565MW and 2,166MW through joint ventures. NHPC is also conducting surveys and investigation works for nine additional projects with an installed capacity of 7,255MW. With the commissioning of all these projects, NHPC’s installed capacity will stand at 23.8GW.

Strategically located assets
Majority of NHPC’s plants are located in the water rich north and north east region. Due to continuous water flow in these regions, NHPC’s plants operate at very high availability indices, thus beating the benchmark. This allows it to generate electricity even during non peak period and earn incentive income which in turn enhances its RoE. NHPC’s average capacity index for FY07-09 was 94.11%, 96.13% and 93.61% respectively, well above the benchmark required under the CERC regulations of 90% availability.

Earnings growth will remain robust
NHPC’s earnings growth are dependent upon capacity adds by the company. With 1,500MW to commission over the next three years, we expect its earnings to witness an 18% CAGR over FY09-12. We expect the company to turn free cash flow positive in FY12 when it will generate ~Rs26bn of operating cash flow.

5.2GW makes it the largest hydroelectric player in the country
NHPC, a mini ratna, is the largest hydroelectric power generator in the country accounting for 14% of the country’s hydro capacity. It executes all aspects of hydroelectric projects from concept to commissioning. With 13 hydroelectric power stations (including JV’s), it has the largest installed hydro capacity of 5,175MW; 3,655MW on standalone basis and 1,520MW through JV’s. However, its generation capacity stands marginally lower at 5,134MW as CEA downgraded capacity ratings of Loktak and Tanakpur power stations.

Additional 4.6GW is expected to commission by FY16
Inorder to grow and take advantage of the robustness in the power sector, NHPC has charted out a plan to nearly double its capacity by FY16. It is in the process of adding 4,622MW of fresh capacity, through 11 projects, which will increase its standalone capacity by 126%. This capacity is scheduled to commission in different phases through FY10-16.

In addition, it is awaiting government sanction for five projects with an anticipated capacity of 4,565MW and 2,166MW through joint ventures. NHPC is also conducting surveys and investigation works for nine additional projects with an installed capacity of 7,255MW. If all these capacities come up then NHPC will have an installed capacity of 23.8GW.

NHPC has a very handsome execution track record. It has in the past completed many of its projects either on schedule or ahead of schedule. Being a central PSU and a mini ratna we believe it will be able to maintain its excellent track record in meeting its targeted cap add.

NHPC IPO Analysis And Research Report
Visibility on capacity addition continues to remain strong with the company having already invested Rs79bn against a total investment of Rs230bn, thus implying an average 35% completion (based on total expenditure as a percentage of overall cost). Of the total expenditure, Rs91bn is towards capacity commissioning over FY10-12. NHPC’s overall average cost per MW also continues to remain very competitive at Rs50mn/MW (for 4,622MW).

Robust cash flows to part fund capex
Apart from a strong balance sheet which NHPC will leverage to fund the huge Rs230bn capex over FY10-16, strong operating cash flow will also play a crucial part in funding its equity contribution. The company funds its expansions through debt-equity of 70:30. Over FY10-12, it will require ~Rs30bn as equity contribution, which we believe will be met through robust operating cash flow generation. We expect the company to remain free cash flow negative until FY12, but its strong operational performance should add ~Rs18bn to its operating cash flow every year.

Earnings growth will remain robust
NHPC, just like NTPC, enters into long term power purchase agreements with various state electricity boards. In FY09 it derived 85% of its consolidated revenues from SEB’s and their successor entities. These billings are secured through letter of credit which is generally entered into between the Government of India, RBI and the reporting state governments. In the past the company had issues relating to receipt of bills from the customers, for which it was
compensated by tax free bonds issued by the states. However, the management claims that things have now changed materially and has not experienced any such defaults in the recent past. Incase of default it would either regulate the power supply to that entity or recover payments directly from the Government of India’s Central Plan assistance funds.

NHPC is scheduled to add ~1,500MW over the next three years at Sewa II, Parbati III, Chamera III, Nimoo Bazgo, Teesta Low Dam III, Chutak, Teesta Low Dam IV and Uri II. Out of these eight projects three (416MW) will be operational for only one month during the year of commissioning. Hence we factor in zero revenues from these units for the commissioning year. Despite this we arrive at 18% earnings CAGR over FY09-12E. We believe the company will generate ~Rs26bn of operating cash flow by FY12, the year when we see the company turning free cash flow positive.

All this coupled with a robust financial performance, with a core RoE of over 20%, places it better than many of its listed peers. We believe NHPC is in a sweet spot to capitalize on the growth opportunity in the power sector. We expect NHPC’s earnings to witness an 18% CAGR over FY09-12, recommend SUBSCRIBE.

Detailed research report on NHPC IPO

1 comment:

  1. Hi
    your research report on NHPC IPO is excellent, after reading it I am planning to apply through my ICICI Direct account.
    thanks
    khalid

    ReplyDelete

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