NHPC - Stock to buy for long term

The way Coal India IPO has stirred the primary market in Indian stock markets, I got reminded of one more big PSU IPO, NHPC. Everyone seems to have forgotten this company but it should be a stock to buy now as part of your long term stock buying strategy.

NHPC was a PSU stock made lot of buzz in August 2009 when it had hit markets. Soon after listing, it started trading below its IPO price of Rs. 35 The stock trades at only Rs. 31.90 right now. It has paid a dividend of Rs. 0.55 which puts it's dividend yield at 1.7%, not bad.

I searched for any recent news on it and I got a recent recommendation on economictimes.com I am reproducing essential excerpts of it here for the benefit of readers.

With the improvement in its financial performance over the past five quarters, its price-earnings ratio has come down considerably to an attractive level of nearly 18 times. The company commissioned one of its projects recently, which would further add to the bottomline in the coming quarters.

NHPC is the largest hydel power generation company in the country having a capacity of 5,300 megawatt (mw), including a project of 120-mw capacity commissioned in July this year. Two of these projects totaling 1,520-mw of capacity are run through a 51:49 joint venture with NHDC. It has 10 projects with 4,500 mw of capacity under various stages of construction to be completed by the end of the financial year 2013. About 1,200 mw of this is expected to go on steam in the next four quarters. These projects would double the power generation capacity of the company. The increase in revenue and profit would be even higher since the new regulation provides higher returns on equity and higher efficiency parameters for new plants.

FINANCIALS: For the year ended March 2010, the company posted impressive numbers with consolidated sales growing by 49% and net profit by 84%. Profitability was aided by slight reduction in operating and interest cost. However, provision for depreciation nearly doubled with newer capacities coming on stream. However, in the June 2010 quarter, the performance has been subdued with a marginal decline in sales and 7% increase in net profit. But it must be noted that the hydel plants face significant amount of seasonality mostly depending on the rainfall. Hence, its performance should be looked over a longer period rather than on quarterly basis.

OUTLOOK: Even though the stock has failed to attract investors’ attention in the past one year, the medium term prospects of the company are good. In the longer run, the company is expected to behave like other global utility companies, offering steady cash flows and attractive dividends. The company looks comfortably placed to provide attractive returns and investors can consider to buy stocks of NHPC with a time frame of 2-3 years.

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Coal India IPO price band fixed - Should you buy it?

Coal India IPO is the largest IPO in world stock market history. It is opening for sbscription on October 18. The government today fixed the price band for its initial public offering at Rs 225-245.

Subscription to the Rs 15,000 crore IPO closes on October 21.

Coal India is the world’s largest coal company. It is one of India’s largest public sector enterprises and Coal India IPO will go on to create a company with a market cap of in excess of Rs 1.5 lakh crore.

Coal India has coal reserves which are the largest among all its peers in the world by many times. Its coal production has steadily grown and today it is the largest coal mining company in the world. The aggregate production last year was 431 million tonne which is slightly higher than the aggregate production of the second and third largest coal mining companies in the world.

Coal India is a financially profitable, debt free, large, financially sound company. It has always pursued a strategy aiming at physical volume growth and company is fairly well to take on any kind of competition with any company globally.

All global peers of Coal India have their valuations valued at 11 to 13 PE ratio. If the EPS stands at 16, the PE ratio comes to be little over 15 at Rs. 245. This is slightly above the comfort zone if compared to global peers. The 5% discount factor for retail investors would work though.

I was listening to Mr. Bhattacharya on TV show, most of the new realization in terms of growth for company are still 3 to 4 years away. No doubt company have tremendous assets and growth potential, investors should buy IPO of Coal India only for long term. There are good chances of stock market corrections in next 2 - 3 months and you might get Coal India at near issue price or maybe little below!

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BSE SENSEX & Small Cap Index - Valuations

BSE SENSEX has rose by 13.4% in past one quarter. BSE Mid cap index has increased by 13.1% during the same period and BSE Small cap index rose by 12.9%. Is the BSE Small cap index available at cheap? Has it not risen as much as it should have? How would small cap stocks perform in near future?

Ok. BSE Small cap has increased least among all three if we look at quarterly performance. Let’s change our time period. Let’s look at the current financial year i.e. FY 2011. Last two quarters. During this period, BSE SENSEX rose by 14% and BSE Mid cap rose by 19%. BSE Small cap has rose by 21% in past 6 months. Now the numbers have changed completely.

Let’s look at the price to earnings ratio which is widely accepted parameter when we compare the index. BSE Small cap index is trading at a price to earnings ratio of ~ 17.6 and BSE SENSEX is trading at 23.8 These ratios are definitely higher than historical ratios of 16 and this fact makes the value investors little uncomfortable, especially if you look at SENSEX earnings. Whatever we are seeing in markets right now is a rally on the back of money being poured in by FII’s. I think people are getting over optimistic on this rally. And big investors over excited about optimistic economic conditions.

Small investors need to be little cautious. This does not mean you should sell everything you have but keep some cash with you. Maybe 60 – 40 % (60 invested, 40 cash) would be a good idea at this point. This is my personal opinion. Feel free to write your opinion.

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