Q1FY24 Review: NHPC: PAT miss + execution delays = overhang on stock

16 Aug 2023 , 11:56 AM

NHPC’s standalone/ consolidated PAT was flat YoY, owing to higher effective tax rate. In Q1, operations were subdued due to lower water availability at power stations. Parbati – II and Subansiri Lower (SL) may witness delay in commissioning, as heavy rains stall construction work. For this, analysts of IIFL Capital Services cut their FY24/ FY25 earnings forecast by 4%/14%. At 13x FY25 P/E, valuations are not cheap and are at a premium to other regulated entities. Analysts of IIFL Capital Services await a better entry point for a meaningful upside. 

Muted performance: 

NHPC’s Q1FY24 standalone/ consolidated PAT was flat YoY as higher treasury, lower depreciation and finance cost were set off by higher taxes. Generation was down 3% YoY because of lower availability of water at power stations; resulting in lower PAF (94% vs 99% YoY). The company has changed policy for accruing PAF incentives (accruing incentives after recovery of capacity charges vs based on quarterly assessments earlier) leading to nil PAF incentives vs Rs1.7bn YoY. 

Further delay in capacity adds:

During the post-earnings conference call, NHPC stated: 1) Parbati-II has faced challenges due to heavy rains in July’23. Consequently, the target for commercialising 2 units may exceed the deadline and commission in Q1FY25. 2) SL construction will resume in Oct’23, post monsoon; the aim is to commercialise 2 units (800MW) in Q4FY24 and the balance through Q1FY26. 3) The targeted capex for FY24 is Rs57bn (Group level: Rs109bn). 4) Overall debtor position has improved with only Rs3.4bn being due for more than 45 days. 5) Any adverse surprises in the CERC tariff regulations FY25-29, should not be expected. 6) RE projects that are under implementation stand at 1.2GW and should get commercialised through FY26. 

Cut earnings estimates by 4-14%: 

Analysts of IIFL Capital Services forecast NHPC’s PAT to be flat through FY23-25 due to delays in project execution, for which, they cut their FY24/FY25 earnings estimates by 4%/14%. Valuations are not cheap vs other regulated entities (13x FY25 P/E, 1.3x FY25 P/B). Further, there is less visibility on capacity additions post FY26, as projects are in nascent stages. At CMP, the stock is well-above its stressed valuations and may not offer an asymmetric payoff. It may find fundamental support at CMP, provided there is surprise in dividend payout (55% in base case). The risk of OFS is not priced in. Await a better entry point for a meaningful upside.