05 January 2012 NHPC NHPC. Uri I and Salal project update: J&K state government has formed a. Capacity addition highlights: The NHPC management has

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1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 NHPC 05 January 2012 Power Event Update Rating: HOLD Current Price: Rs 19 Target Price: Rs 24 Stock Data 52-week high/low 29 / 18 O/S shares (mn) 12,301 Mkt Cap Rs (bn) 234 Avg Daily Vol (mn) 5.2 Bloomberg Code Reuters Code Shareholding (%) NHPC IN NHPC.BO Sep-11 Promoters 86.4 FIIs 1.7 DIIs 3.2 Public 8.8 Overhang of Uri-I and Salal projects priced in J&K state government on the basis of a cabinet order passed in June-1975 is looking at owning NHPC s Uri 1 (480MW) and Salal projects (690MW). NHPC citing clauses in MoU has ruled out any scope to transfer any projects. We present below the impact analysis in a worse-case scenario. Uri I and Salal project update: J&K state government has formed a Cabinet State Committee (CSC), which is expected to recommend transfer of Uri I (480 MW) and Salal (690 MW) from NHPC or claim compensation. We understand from our interactions with NHPC Management and MoP officials that such a transfer is unlikely. In FY11, we note that the Uri 1 and Salal projects constituted 34% of total units sold and contributed 16% to sales revenue and 14% to RPAT. In the worst case scenario, if we assume transfer of these two projects and adjust future earnings accordingly, our target price would be Rs 15. At CMP, most of the overhang on the stock on this account looks priced in. We do not factor in any transfer of projects or any other liability but remain cautious. Withdrawal of CSC s demand for project transfer and/or capacity addition would be key triggers for stock to outperform. Capacity addition highlights: The NHPC management has maintained capacity addition estimates as communicated during the 2QFY12 Analyst Meet. We have revised capacity addition estimates downward to factor in delay of 1-4 months. We expect NHPC (Standalone) to add capacity of 275 MW in FY12, 937 MW in FY13, 660 MW in FY14 and 2300 MW in FY15. Accordingly, NHPC would benefit from incremental units sold of -0.3% (vs. earlier estimate of 1%) in FY12E, 10% (vs. 16%) in FY13E and 12% (vs. 4%) in FY14E Regulated equity base to expand: Regulated equity is expected at ~Rs 85bn by FY13 and at ~Rs 97bn by FY14, representing CAGR of 11% (FY11-FY14). Valuations and Recommendation: At CMP, NHPC trades at a PB(x) of 0.8x FY13E/FY14E. We maintain HOLD rating with a revised price target of Rs 24 (-14%). NHPC Sensex Sachin Mehta sachinmehta@ifinltd.in Y/E Mar (Rs. mn) FY10 FY11 FY12E FY13E Net Sales 34,024 40,466 42,741 49,173 EBITDA 25,158 28,455 31,498 36,571 PAT (post prior period items) 12,740 15,103 19,579 21,338 EPS (Rs) EPS (growth) 6% 19% 30% 9% Book Value/(Rs.) PER (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) IFIN Research 1

2 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Exhibit 1: NHPC (Standalone) Capacity Addition Estimates Plant Name State Plant type FY10 FY11 FY12E FY13E FY14E FY15E Sewa II J&K ROR 120 Total for FY11E 120 Uri - II (Unit 1 to 4) J&K Pondage Chamera III (Unit 1 to 3) HP Pondage Parbati III HP ROR Teesta Low Dam III WB Pondage 132 Nimoo Bazgo J&K ROR - 45 Chutak J&K ROR - 44 Total for FY12E 275 Parbati II HP ROR 800 Teesta Low Dam IV WB ROR 160 Total for FY13E 937 Subansiri (Lower) (Unit 1 2) Ar.P ROR 500 Total for FY14E 660 Subansiri (Lower) (Unit 3 to 8) Ar.P ROR 1500 Total for FY15E Opening Balance 3,655 3,655 3,955 4,230 5,167 5,827 Additions ,300 Grand Total 3,655 3,955 4,230 5,167 5,827 8,127 Source: CEA; IFIN Research Exhibit 2: Snapshot of Uri 1 and Salal projects Units Sold (MU) Share in total units sold Share in Sales Revenue Share in RPAT (Standalone) Uri 1 Salal FY09 2,668 2,646 36% 23% 24% FY10 2,379 2,661 34% 1 16% FY11 2,675 2,842 34% 16% 14% FY12E 2,313 2,759 31% 14% 12% Exhibit 3: Comparison of core RoE vs normative RoE 12% 10% 10% 10% 10% 8% 6% 4% 8% 6% 6% 6% 6% 6% 6% 6% 6% 8% 8% 2% Core RoE Nomative RoE IFIN Research 2

3 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 PB(x) Valuation & View We revise our estimates for sales and PAT. We decrease our Sales and PAT estimate by 6% and 3% respectively for FY13 to factor in delay in the projects envisaged. We maintain our HOLD rating and have revised our target price of Rs 24 to factor in the above changes, the increase in project cost for some projects, and increase in WACC from 10.6% to 10.9%. Exhibit 4: Changes in estimates At CMP, NHPC trades at a P/B(x) of 0.8x FY13E/ FY14E. Old FY12E New % Change Old New FY13E % Change Net Sales 42,751 42,741 0% 52,121 49,173-6% APAT 18,682 19,579 5% 21,890 21,338-3% Source: IFIN Research. We value the core business using discounted cash flow methodology to equity holders with WACC of 10.9%, cost of equity of 12.1% and terminal growth rate of 4% up to FY 2025E. We arrive at the present value (PV) of Rs. 24 per share. At the target price of Rs 24, it would trade at a P/B(x) of 1.1x FY13E and 1.0x FY14E.. Exhibit 5: DCF Assumptions WACC DCF Value Risk free rate 8.0% Perpetual Growth 4.0% Beta 0.8 PV of forecast period i.e. FY25E (Rs bn) 101 Risk Premium 5.0% PV of terminal value (Rs bn) 313 Cost of Equity 12.1% Firm Value (Rs bn) 414 Cost of Debt (post Tax) 9.0% Less: Net Debt (Rs bn) -117 Debt : Equity 0.6 Equity Value (Rs bn) 297 WACC 10.9% Per share (Rs.) 24 Exhibit 6: Valuation Band Year Forward PB (x) PB (x) Peak PB (x) Average PB (x) Trough PB (x) IFIN Research 3

4 Financials - Standalone Income Statement (Rs Million) Balance Sheet (Rs Million) Y/E March FY10 FY11 FY12E FY13E Y/E March FY10 FY11 FY12E FY13E Net Sales 34,024 40,466 42,741 49,173 Share Capital 123, , , ,007 Sales Growth (%) 2 19% 6% 15% Reserves 109, , , ,747 Operating cost 4,698 6,801 6,838 7,376 Net Worth 232, , , ,754 Personnel cost 5,298 6,996 6,838 7,868 Debt 138, , , ,018 Power & Fuel Total Current Liabilities 59,943 73,307 83,572 93,469 EBITDA 25,158 28,455 31,498 36,571 Total Equity & Liabilities 431, , , ,242 EBITDA (%) 74% 70% 74% 74% Net Block 163, , , ,433 Depreciation 10,333 9,167 8,094 10,420 CWP 140, , , ,041 Other Income 5,601 7,069 7,789 7,203 Investments 43,941 53,995 50,215 46,700 Tax 3,116 7,118 6,097 6,223 Current Assets Tax Rate (%) 20% 32% 24% 23% Debtors 11,402 19,086 14,532 14,893 Adjusted PAT 12,740 15,103 19,579 21,338 Cash & Bank Balance 50,974 28,641 35,042 29,435 Prior Period Items (8,165) (6,564) (4,637) (3,400) Loans & Advances 12,957 13,654 14,159 21,108 Net Income 20,905 21,666 24,217 24,738 Other Current Assets 7,885 7,228 11,584 16,631 PAT Growth (%) 13% 19% 30% 9% Total Assets 431, , , ,242 Ratios Cash Flow Statement (Rs million) Y/E March FY10 FY11 FY12E FY13E Y/E March FY10 FY11 FY12E FY13E EPS (Rs) Consolidated PAT 12,740 15,103 19,579 21,338 CEPS (Rs) Depreciation 10,333 8,387 9,316 12,926 BV (Rs.) DPS Change in deferred taxes/provisions Cash Flow from Operation 2,470 (86) 2,272-25,543 23,403 31,167 34,264 Payout % Inc/(Dec) in WC (1,008) 5,725 7,687 (2,460) Debt/Equity (x) Operating Cash Flow 24,535 29,128 38,854 31,804 Leverage (x) Capex (34,764) (46,700) (59,190) (20,749) Valuation (x) Free Cash Flow (10,229) (17,571) (20,336) 11,055 P/E Equity Raised 39, EV/EBITDA Debt Raised/Repaid 16,342 7,010 28,107 (11,781) Price/Book Value Investment (16,005) (10,055) 3,780 3,515 Profitability Ratio (%) Dividend Paid (7,889) (8,578) (9,158) (9,881) RoE Misc (9,886) (6,860) (4,007) (1,485) RoCE Net Cash Flow 31,975 (22,333) 6,400 (5,607) Turnover Ratios Opening Cash Bal. 19,000 50,974 28,641 35,042 Debtors (Days) Add: Net Cash 31,975 (22,333) 6,400 (5,607) Fixed Asset Turnover (x) Closing Cash Bal. 50,974 28,641 35,042 29,435 IFIN Research 4

5 Disclaimer: I-Fin Disclaimer: All information/opinion contained/expressed herein above by I-Fin has been based upon information available to the public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Neither I-Fin nor any of its employees shall be in any way responsible for the contents. Opinions expressed are subject to change without notice. This document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. This document is for the information of the addressees only and is not to be taken in substitution for the exercise of judgment by the addressees. All information contained herein above must be construed solely as statements of opinion of I-Fin at a particular point of time based on the information as mentioned above and I-Fin shall not be liable for any losses incurred by users from any use of this publication or its contents. Analyst declaration: I, Sachin Mehta, hereby certify that the views expressed in this report are purely my views taken in an unbiased manner out of information available to the public and believing it to be reliable. No part of my compensation is or was or in future will be linked to specific view/s or recommendation(s) expressed by me in this research report. All the views expressed herewith are my personal views on all the aspects covered in this report. I-Fin Investment Rating: The ratings below have been prescribed on a potential returns basis with a timeline of up to 12 months. At times, the same may fall out of the price range due to market price movements and/or volatility in the short term. The same shall be reviewed from time to time by I-Fin. The addressee(s) decision to buy or sell a security should be based upon his/her personal investment objectives and should be made only after evaluating the stocks expected performance and associated risks. Key ratings: Rating LARGE CAP Market Cap >= Rs 100 bn MID CAP Market Cap < Rs 100 bn BUY (B) > 15% > 25% Hold (H) 5-15% 10-25% SELL (S) < 5% < 8% Not Rated (NR) Not initiated coverage on the stock IFIN: IFCI Financial Services Limited Corporate Office: 'Continental Chambers', III Floor 142, Mahatma Gandhi Road Nungambakkam Chennai Tel: Fax: Mumbai Office: 2B (1), Gr. Floor, Filmcentre 68, Tardeo Road Mumbai Central I Mumbai Tel: sales@ifinltd.in Website: IFIN reports are also available on the Bloomberg [IFCI <GO>] IFIN Research 5