Power sector stocks rallied sharply in the run-up to the elections. Hope that a reform-oriented BJP-led government will introduce measures to tackle problems faced by the sector fuelled the rally. The stock of state-owned hydropower producer NHPC, too, has gained 34 per cent so far this year.
Slow capacity addition
Projects with a total capacity of 5,115 MW are yet to take off as they await statutory clearances. While the new government’s thrust on quick project clearances could kick-start these projects, the risk of execution delays still remains.
More importantly, with a major part of NHPC’s planned capacities to be commissioned only after September 2016, revenue growth is likely to be muted over the next two years. Besides, there is a risk of delays in commissioning of projects, as has happened in the past. While the stock is not in the expensive range, investors can consider exiting given the absence of near-term growth drivers. At ₹25, the stock discounts its estimated 2014-15 book value by about 0.96 times, slightly below its five-year average valuation of 1.1 times.
NHPC’s current operational capacity is 6,507 megawatts (MW), which accounts for about 14 per cent of India’s total hydro power generation.
It sells power at tariffs set by the Central Electricity Regulatory Commission, which allows cost-recovery and an assured return on equity of 15.5 per cent on completed projects. Expansion of power generation capacity, therefore, holds the key to revenue growth for the company.
As on date, projects with aggregate capacity of 3,290 MW are under construction. About 95 per cent of this capacity is expected to be commissioned between late 2016 and mid-2018. This includes larger projects, such as the 2,000-MW Subansiri Lower project in Assam and Arunachal Pradesh and the 800-MW Parbati-II project in Himachal Pradesh.
Implementation delays
NHPC continues to face delays in the completion of its projects. For instance, the Subansiri Lower Project (2,000 MW), which was originally expected to be commissioned by December 2012, has faced interruptions due to local agitations since December 2011.
The project is now likely to be completed after June 2018, with consequent cost over-runs. Also, the 160-MW Teesta Low Dam-IV project in West Bengal has been proceeding at a slow pace since March 2013 due to work being stopped by one of the contractors.
The project deadline has now been extended by nine months to the second quarter of 2015-16.
After a 10 per cent rise in 2010-11, NHPC’s power production grew at a negligible rate in the following years. In 2013-14, it generated 18,386 million units of power – down about 3 per cent on a year-on-year basis – due to lower production from existing projects. This was despite 654 million units of additional power generated from new plants.
The 280-MW Dhauliganga plant, for instance, became non-functional following the floods in Uttarakhand in June 2013. It restarted operations only in May 2014. During 2013-14, NHPC commissioned new capacity of 807 MW, which includes the Uri-II project in Jammu & Kashmir and the Parbati-III project in Himachal Pradesh. But the third phase of the Parbati project is linked to the second one.
Accordingly, the full capacity of the third phase will be realised only once the second phase, which has been delayed, gets operationalised.
In 2013-14, NHPC posted a 53 per cent decline in net profit to ₹1,219 crore. This was largely due to the charging of borrowing and other costs on the much-delayed Subansiri Lower and Teesta Low Dam-IV projects to the profit and loss account.
Why Sell
No near-term capacity addition
Poor project completion record
Run-up in stock price
Did you know
The 800-MW Parbati II project, originally to be commissioned by September 2009, is now likely to come up by 2018