Accumulate NHPC - CMP: Rs.21, TP: Rs.23 - Prabhudas Lilladher

Healthy capacity addition in next two years: Capacities aggregating to 1372MWs are in advance stages of completion which we are expecting to come up in FY13-15. For other projects also we have taken a 2 -3 years delay despite them all being 60-70% plus complete in terms of earth work. We expect NHPC to add 330MWs in FY13-14E and 491MWs in FY14-15E, which we feel is conservative compared to management and street expectations. Post that we are further expecting NHPC to add close to 690MWs taking the operating capacity to 5547MWs by FY16. Over and above this, NHPC has 3775MWs already operational.

Regulated Equity and thus ROE's should start inching upwards now: Suppressed investments in CWIP will start yielding better returns as 822MWs is expected to commission in the next 12-15 months. Thus, the ROEs (excluding tax effect) of the company will start reflecting a change upwards. ROE improvement of 1% will also aid the overall returns. We expect the regulated equity to move up at a CAGR of 10% over next five years which will result into a 35% growth in the Book Value over the same period. New ventures in Solar, wind and thermal may aid the ROE growth in long term. Also a higher tariff for peak hours will give additional push to the ROEs.

Valuation: Positive movement in ROE's, better placed than thermal power in terms of input related risks and steady capacity addition make NHPC a strong candidate for re-rating from current levels of sub 1x to 1.2x. Thus, the stock can give a potential return of 10-15% in the near term. If valued at book value we expect a 20% return over next 1 year. We value NHPC using a combination of NPV (explicit period) and LTSSG (perpetual period) and arrive at a SOTP of Rs23.

Source : Equity Bulls

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