Q4FY23 Review: NHPC: Saved by the tax!

31 May 2023 , 11:23 AM

NHPC’s Q4FY23 was flat YoY, as the weak operational performance was offset by gains from tax arbitrage. NHPC expects to operate the entire capacity of Subansiri Lower (2GW) and Parbati-II (800MW) projects from FY25 (40% growth in capacity); OCF/Ebitda conversion in FY23 was 75% — one of the lowest — and should improve going ahead. Analysts of IIFL Capital Services 7% p.a. PAT growth forecast builds in calibrated commissioning of two large projects. After ~40% run-up, stock is well above distress valuations, and trades fairly.

Saved by the tax: 

NHPC’s Q4FY23 PAT was flat YoY as there was no effective capacity addition (7GW as of FY23). Operationally, it was a weak quarter. Generation was down 14% YoY, while PAF averaged at 68% vs 77% YoY. Overall incentives were also lower by 67%, on account of fewer secondary energy sales, UI income, etc. Regardless, PAT was flat as NHPC utilised MAT credit (charged full tax in tariff from SEBs while paid less in P&L). Consolidated PAT was up 41% YoY, on account of tax arbitrage and better performance of NHDC (up 51% YoY – owns 51%).

Upbeat commentary on capacity adds: 

During the post earnings conference call, NHPC stated: 1) Construction works on 2GW Subansiri Lower (SL) and Parbati –II (800MW) progressing well; 800MW of SL and all 4 units of Parbati-II are set to commission in Q4FY24. Balance 1.2GW capacity of SL will get commissioned in Q1FY25; this should substantially boost FY25 earnings, since overall capacity will increase by 40%. 2) 1GW CPSE solar projects would be commissioned in phases through FY25. 3) FY24 capex plan is Rs57bn (Rs85bn group level), which can be funded through internal generation and debt. 4) In FY23, overall debtor days are 231 vs 237 YoY, as SEBs have opted to pay on time. Various govt initiatives are leading to such benefits; overall receivables should normalise over next 12 months. 5) Payout should remain healthy (FY23: ~55%).

Fairly valued: 

Analysts of IIFL Capital Services model NHPC to add ~40% capacity in phases over FY25, and on unchanged regulatory framework see PAT registering 7% p.a. growth. Relative to other regulated entities, valuations are not cheap (4.7% yield/ 1.1x P/BV). And to that extent, in near term they see less scope for the multiples to expand. Await better entry point.