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Sunday, July 04, 2010

NHPC a long term buy!!

NHPC National Hydro Power Corporation
CMP: 31.90
Market Cap: 39239Cr
Reserves: 6798Cr
Networth (March 2009):17980.62Cr
Debt: 12,234Cr
Sales TTM: 4331.98Cr
Gross Profit TTM: 3892.41Cr
ROCE (March 2009): 6.13%
Debt Equity Ratio (March 2009): 0.68
Avg. Cash Flow From Operations (2007-2009): 2236.88Cr
Current Installed Capacity: 5175MW (March 2010)
Company Website: http://www.nhpcindia.com/

NHPC as we all are well aware is the largest Hydro power generator in India. NHPC operates 13 hydro power stations with a total aggregate capacity of 5175 MW (year ending March 2010).

Power generation is a regulated industry with limited scope of returns (fixed around 15-16% return on Equity). NHPC by all terms looks like an expensive proposition with limited return potential.

Let us compare numbers of NHPC with Tata Power the largest Private sector power utility in India.



As one can see Net profit of NHPC is 2090Cr while Tata Power its 947.65Cr
1. Networth to Equity for Tata Power: 39.03 and NHPC: 1.60
- Since a power project has fixed returns on Equity and Equity=Networth.
- Tata Power Rs 100 NW = Rs 16 profit, EPS = 16 *39.03 =  624.48
- NHPC Rs 100NW =Rs 16 profit, EPS=16*1.60 = 25.6
Networth/Equity ratio is high for Tata Power hence the EPS growth for every additional rupee of earning gets multiplied by 39 times while for NHPC EPS earning gets multiplied by 1.60 times.

2. Tata Power Avg Cash flow from Operations  for 3 years is: 737.18Cr while NHPC it is 2236.88Cr
So NHPC has 3 times more cash flowing in from operations than Tata Power for the past 3 years. Additional Cash flow from Operations from NHPC over Tata Power (2236.88 - 737.18)*3 = 4499.1Cr additional cash flows from NHPC in last 3 years.

3. If we look at the market cap, Net Profit for past Twelve Trailing Months (TTM) and the Current Installed capacity we can see that NHPC is available at a discount (almost 50% based on Installed capacity and Net profits)

- 11 projects having aggregate installed capacity of 4622 MW are under active construction. With the commissioning of these projects, NHPC would become a 9500 MW company likely by 2013
- NHPC is actively pursuing clearances from Government of India for several hydro projects having aggregate capacity of 9631 MW. Out of these, seven projects with aggregate capacity of 5965 MW are planned to be implemented by NHPC on its own
- Hydro power is a renewable economic, non polluting and environmentally benign source of energy. Hydro power stations have inherent ability for instantaneous starting, stopping, load variations etc. and help in improving reliability of power system. Hydro stations are the best choice for meeting the peak demand. The generation cost is not only inflation free but reduces with time. Hydroelectric projects have long useful life extending over 50 years and help in conserving scarce fossil fuels.

Tata Power has current Hydro power capacity of 447MW and the rest are Thermal power plants which have the potential of increase in fuel costs. NHPC is only Hydro power and all future capacity expansions are going to be in Hydro power only. Hydro power as stated above .. generation cost reduces with time!!
Development of New Hydro Power plants in the private sector is low due to unprofitable tariff structure
(so there is a possible hydro power plant tariff improvement which will benefit NHPC)
With the eminent Oil crisis in the horizon energy prices are bound to escalate while NHPC's generating costs are going to reduce which should make NHPC more profitable.
With the oil deregulation the next step would be power (energy) deregulation (no wonder NHPC shoots up with OIL price deregulation)
 
Conclusion: Right now the investment community is not looking at the generating capacity and fuel costs while making an investment in power companies. Investors are looking at growth in EPS ..Tata Power by virtue of a Networth/Equity ratio of 39 will see the EPS rise much faster for every additional rupee of additional earnings...
NHPC on the other hand with 60% higher generating capacity and 3 times more Operating Cash flows is being discounted because its Networth/Equity ratio is poor: 1.60. Even in 2013 Total Power Generating capacity of NHPC will be higher than that of Tata Power.. and since its 100% hydro power fuel costs are capped. 
At present NHPC Networth 17,980Cr is twice that of Tata Power which gives it more equity to take larger projects and hence cash flows from operations will continue to be higher for NHPC.
NHPC Networth /Equity will also rise steadily . but we cannot really expect to surpass Tata Power's Networth/Equity.
If we look at NHPC with the right set of eyes we can see the deep discount in NHPC and the rising energy prices will be favourable for NHPC. Invest for long term 5+ years and expect NHPC to at least triple from these levels irrespective of where the market is heading.

19 comments:

Wahreindia said...

Hi,
Thanks. I am also holding NHPC for the long term. I will be thankful to you if u can provide me some information on major IT companies like Wipro, TCS and HCLtech.

Suyash

What'sUp Prahalad said...

Suyash:

Personally I cannot analyse companies such as Wipro, TCS and HCL Tech..
1. very high valuations..
2. no infrastructure.. only brand value..
3. Always changing Landscape.. new technologies.. Cloud computing

Too many variables.. to much risk..
NHPC also looks very expensive.. just that the guaranteed 15-16% return on equity and it is already a market leader makes the investment cut..

electricity pricing includes cost of interest payment on debt!! what more can you ask..

=happy investing

Vikas Kumar said...

Hi,

Just read your comments about the prospects of NHPC. The management of this company is also trying to impress upon, that the company will do well in future but there are certain negatives with the NHPC model, which I feel need some clarifications.

Would like to highlight some of them as follows :-

1) The Hydel power projects are very difficult to implement, as it requires lot of clearances, land aquisitions and displacement of masses - Not an easy task by any chance.

So the ability of the organisation to grow at a fast pace is that much limited/restricted.

2) The imprtant factor for bidding for new projects is Cash reserves and not just the networth, as one cannot and should not expect a company to liquidate its assests to implement new projects.

Therefore Tata Power scores high on that parameter.

3) When you compare the two companies i.e. Tata Power and NHPC you will find the net profit of Tata power is high despite low installed capacities as compared to NHPC. It means very high operating profits, which is key to any company's growth.

4) NHPC despite having a formidable track record (i.e. no. of years of operation) much more than that of Tata Power, still has less Cash Reserves which basically means improper utilisation of cash generated or that the hydel power projects are much more capital intensive.

Which brings me to another interesting point, that then why is the debt to equity ratio so small. Is there a lack of confidence of management in terms of returns generated on capital employed ?

Seems true, as ROCE is low ....

That means they are scared of raising money from market as they cannot generate good returns.

And if that is the case, than how will I get good returns as an investor. Isn't it scarry.. ???

Therefore, I feel one will be better off by investing in debt market instruments than by investing in NHPC equity, atleast.

It Violates the basic principle of investing i.e. compounding.

Awaiting comments....

- Regards,

(Vikas Kumar)

What'sUp Prahalad said...

Vikas:

1. Govt needs all the power it can get .. and everyone from Reliance power to tata's to jindal everyone is looking for supply linkages.. cause fuel coal/gas is in short supply..

2. hydel projects are difficult to implement.. That would be a moat for NHPC everyone who is looking for a major hydro electric power station is looking for experienced souls .. and NHPC is standing tall..It is difficult but NHPC has implemented it and will get a major chunk of all future projects.. call it "killing competition"

3. Debt to Equity of NHPC is small because most likely the govt has issued bonus equity before public issue using up all the free reserves making the equity bloat and the IPO price affordable for the masses.. increasing equity (fudging the debt/equity ratio) also eating into the reserves.. (making NHPC look like a company with poor reserve levels ..)

4. All power projects are guaranteed by the govt to generate a fixed amount of return on equity.. tata power could have better returns because of: Merchant power capacity and because of transmission and distribution business in metro's

Right now NHPC is supplying a chunk of electricity to the local stategovt (where the Hydro electric power station are built) at cost also I dont think they are allowed to set up merchant power plants unlike private sector..

In the future when resources will be scarce.. we can expect energy prices to rise and with fixed fuel costs (Zero fuel costs) the hydro electric power plants will do much better .. have better margins..

as mentioned Tatapower EPS growth is going to be high for some time.. but my concerns are Peak oil!!..

=happy investing
whatsup-indianstockideas.blogspot.com

Sushil Upadhyay said...

Hi Prahlad,

How do you compare NHPC with Jaiaprakash Hydro...I remember JP Hydro also was languishing for long time around 30s and then it kept going up and i guess reached atleast 80 level.

Thanx Sushil

Anonymous said...

Thanks for the helpful insights. Based on the Q3 Results, is there any change in the fundamental analysis.

Is NHPC a screaming buy at 22-23 levels or is there potential for further downside?

Thanks.

What'sUp Prahalad said...

Anonymous:

NHPC is a screaming buy as it is a Zero fuel cost system.. and as such power projects are given fixed guaranteed returns.. 16% (I think)

Also NHPC generates a lot of free cash.. which can be used for new projects..

only thing to remember is that NHPC is a long term play 10-15 years.. what you can do is buy in bulk and sell half at 30-35 levels.. reducing your cost close to 10 or less.. then hold for long term and enjoy the tax free returns..

PN: these are my personal views please do your own deep dive before investing

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

NHPC @20 levels - whats your take - continue to accumulate?

What'sUp Prahalad said...

Anonymous:

NHPC Twelve trailing months EPS is 2.24 @ 20 NHPC is seling at less than 10 PE..

Electricity is a very basic necessity.. and we can expect the company to continue to do well ..

Its the best large cap stock.. to buy at these moment.. add to the fact that you are guaranteed a higher dividend.. than last time.. NHPC has always increased dividends each and every year consistently..

buy I would say..

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

Thanks. Are you still buying NHPC - 18's !!

Hard to believe that it is trading at 50% of its IPO value and its continuing to trend down.

What'sUp Prahalad said...

Anonymous:

Yes I would buy.. Please note this is a long term recommendation.. as it will take time to first accumulate the stock from the weak hands.

Hold for long term

=happy investing
whatsup-indianstockideas.blogspot.com

Pawan said...

Hi Prahalad,
Why is the ROCE so low? Any insights?
Regards,
Pawan

What'sUp Prahalad said...

Pawan ji:

ROCE is low (I think) because the Govt wanted to issue shares at affordable rates to the public..

So they issued bonus to themselves.. and brought down the book value to manageable level to come with a IPO price of around 35/= per share ..

So the ROCE is low because of huge equity.. with time as the new projects get comissioned we should see the ROCE improve..
Govt as such guarantees minimum return of 16% (I think) on capital.. so there is very little risk.. add to the fact that every year NHPC has increased dividends.. so hold on or buy more at these price levels is my suggestion..

=happy investing
whatsup-indianstockideas.blogspot.com

Pawan said...

@Prahalad,

Thanks for the prompt reply. A few questions/doubts:

1. I do not follow your answer on ROCE. To be on the same page, by ROCE I mean Return on Capital Employed. Hope you don't mean ROCE as Return on Common Equity?

2. I am not sure the guaranteed return on capital means anything in real world. What happens if NHPC isn't efficient in its working? Would the govt. still give 16% over and above its capital invested?
AFAIR, Noida Toll Bridge Company also has such guarantee but never got such returns. Stock is languishing as a result.

3. See this link: http://articles.economictimes.indiatimes.com/2012-06-15/news/32254636_1_nhpc-national-hydroelectric-power-corporation-capacity-addition
Why would NHPC want to go into Thermal, Solar and all that? The same link says: 'NHPC added only 1,150 mw, as against the original target of 5,322 mw, in the 11th Five-Year Plan that ended in March'.
Now that is not confidence inspiring in any way, is it?

Your insights please.
Regards

What'sUp Prahalad said...

Pawan ji:

even tata power has poor return on capital.. is it because of high depreciation?.. or maybe an industry wide thing? (I am not so sure..)

moving into solar,thermal is not a good idea..
my investment idea is based on nhpc as a play for hydro power.. and hydro power having Zero Fuel cost
(Actually fuel cost is not Zero and hydro power plants do pay a water bill to the state ..)

Cost of hydro power is really cheap (less than a rupee per unit around 60paisa I think)

yes project implementation is a problem.. cause every state realizes the value of an energy source and want 100% of the states hydropower income/profits

there are a number of issues which need to be clarified but then this is a long term thing.. and once started its cost of operations are pretty low..

price increases are done based on increased expense.. and hence ROCE is low.. to ask for higher per unit generation price...

Yes.. ROCE is low but I see it with Tata Power, Jaiprakash and Reliance Power.. and could be an industry wide phenomenon ..

Projects though delayed will have to be implemented as energy crunch will be here even in the future

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

NHPC @ 17.50 - is it time to invest everything in NHPC?

What'sUp Prahalad said...

anonymous ji:
the only stock in which you can invest everything (according to me) is Jayant Agro organics.. I expect it to be a 5-10 bagger over next 5yrs

=happy investing

whatsup-indianstockideas.blogspot.com

Anonymous said...

Thanks - investing everything in Jayant requires a very strong heart given the debt level and liquidity of the stock. I did invest in Jayant based on your analysis (thanks) and am sitting on a 30 %return, and will continue to do so for the next 10 years.

I can envision NHPC becoming a 5-10 bagger in the next 10 years as well. Even if not, I am happy to take a 4% tax-free dividend and double my investment in 5 years. The risk-rewark is extremely in favor of NHPC.

Anonymous said...

Hi - any change in view with NHPC. Went down to 15.50 and hovering at ~18 right now.