BNP Paribas recommends 'Reduce' rating on NHPC
BNP Paribas initiates coverage on NHPC with a 'Reduce' rating and a target price of Rs 29. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1 GW.
By ET Bureau |
NHPC
RESEARCH: BNP PARIBAS
RATING: REDUCE
CMP: RS 33.45
BNP Paribas initiates coverage on NHPC with a 'Reduce' rating and a target price of Rs 29. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1 GW. Hydropower projects have long gestation periods taking several years to plan and build. With potential opposition from environmentalists and people displaced by the project, they also face significant execution risks. Seven of NHPC's 11 projects under implementation have been delayed by a year or more owing to natural calamities, and opposition from environmentalists and locals. NHPC assumes a higher risk in building hydropower plants but the Central Electric Regulatory Commission (CERC)'s tariff regulations do not compensate it for the extra risk. We estimate every 10% shortfall in generation will lead to an 11.3% reduction in our FY10 EPS estimates. Presently, 32% of its equity is stuck in capital work in progress, which earns no returns - due to the long gestation of projects and execution delays, 8% in 8.5% tax-free bonds and 6% of equity is deployed in cash. The target price is based on 1.4x our FY11 BV/share estimate, a discount to NTPC's FY11 P/BV of 2.5x. The valuation discount is warranted for the significantly lower ROE of 8.3% vs NTPC's ROE of 14.6%.
RESEARCH: BNP PARIBAS
RATING: REDUCE
CMP: RS 33.45
BNP Paribas initiates coverage on NHPC with a 'Reduce' rating and a target price of Rs 29. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1 GW. Hydropower projects have long gestation periods taking several years to plan and build. With potential opposition from environmentalists and people displaced by the project, they also face significant execution risks. Seven of NHPC's 11 projects under implementation have been delayed by a year or more owing to natural calamities, and opposition from environmentalists and locals. NHPC assumes a higher risk in building hydropower plants but the Central Electric Regulatory Commission (CERC)'s tariff regulations do not compensate it for the extra risk. We estimate every 10% shortfall in generation will lead to an 11.3% reduction in our FY10 EPS estimates. Presently, 32% of its equity is stuck in capital work in progress, which earns no returns - due to the long gestation of projects and execution delays, 8% in 8.5% tax-free bonds and 6% of equity is deployed in cash. The target price is based on 1.4x our FY11 BV/share estimate, a discount to NTPC's FY11 P/BV of 2.5x. The valuation discount is warranted for the significantly lower ROE of 8.3% vs NTPC's ROE of 14.6%.
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