Result Update Rating matrix Rating : Hold Target : 32 Target Period : 12 months Potential Upside : 3% What s Changed? Target Changed from 28 to 32 EPS FY7E Unchanged EPS FY18E Unchanged Rating Unchanged Quarterly Performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Revenue 1309 1464 (11) 1286 2 EBITDA 624 816 (23) 602 4 EBITDA (%) 48 56-802.4 46.8 92.5 PAT 215 388 (45) 1446 (85) Key Financials Crore FY15 FY16E FY17E FY18E Net Sales 6802.3 7434.1 7592.1 7892.1 EBITDA 4183.2 4243.5 4779.1 4967.1 Net Profit 2092.0 2440.1 2528.0 2669.6 EPS ( ) 1.9 2.2 2.3 2.4 Valuation summary FY15 FY16E FY17E FY18E P/E 16.1 13.8 13.4 12.6 Target P/E 14.8 12.7 12.3 11.6 EV / EBITDA 11.5 11.6 10.8 10.3 P/BV 1.2 1.2 1.2 1.1 RoNW (%) 7.6 8.7 9.0 9.1 RoCE (%) 7.7 7.7 8.7 8.7 Stock data Particular Amount Market Capitalization ( Crore) 33765 crore Total Debt (FY16) ( Crore) 20142 crore Cash and Investments (FY16) ( Crore) 5422.1 crore EV ( Crore) 48485 crore 52 week H/L ( ) 31.8/17.9 Equity capital ( Crore) 11070 crore Face value 10 Price performance (%) 1M 3M 6M 12M NHPC (4.8) 7.9 6.8 (1.5) Powergrid (4.7) 5.7 (0.9) (6.4) NTPC (14.5) (8.1) (7.5) (13.4) Research Analyst Chirag Shah shah.chirag@icicisecurities.com In line performance February 9, 2017 NHPC (NHPC) 31 NHPC reported its Q3FY17 results, which were in line with our estimates barring PAT, which was optically below estimates on account of a higher effective tax rate. The company also announced a buyback of 81.13 crore shares at a maximum price of 32.25/share, which would lead to maximum outflow of 2616 crore Revenues came in at 1308 crore, down 10.6% YoY, a tad higher than I-direct estimate of 1287 crore. Generation is expected to be down 17% YoY to 337.2 crore units for Q3FY17 while the calculated tariff came in at 4.2/Kwhr Absolute EBITDA was at 684 crore in line with our estimate of 684.4 crore for Q3FY17. Employee expenses were below estimates at 308 crore vs. estimate of 335 crore. Even reported interest costs were below estimate at 269 crore vs. our estimate: 285 crore Reported PAT came in at 214 crore vs. estimate of 253 crore. The miss was on account of higher effective tax rate of 31% in Q3FY17 Generation declines 17% YoY but tariffs up During the quarter, gross generation of NHPC declined 17% YoY at 337 crore units. However, tariffs came in at 4.37/Kwhr on account of tariff approval of TLDP IV project. During 9MFY17, the company added 80 MW of capacity from the TLDP IV project (Unit 3&4). However, the tariff hike for a few projects like Chutak, Sewa, Chamera II, etc, is yet to be approved. The company also provided provision to the tune of 3 crore for projects like Bursar and Kotli Bhel. Plant availability factor for Q3FY17 was at 87%. During Q3FY17, the incentive income earned by NHPC was at 10.6 crore vs. 42 crore in Q3FY16. Large projects witness huge cost overruns, time delays Most upcoming projects like Subansiri (187% cost over run, 2000 MW), Parbati III (114% cost over run, 800 MW), Kishanganga (58% cost over run, 330 MW) faced massive delays owing to regulatory and environmental issues. Accordingly, the PSU has been suffering from very low RoEs as a significant chunk of its asset has been blocked in CWIP (CWIP as percentage of networth at 50% for FY16) for projects under construction. Current CWIP is to the tune of 18000 crore out of which almost ~50% is stuck in the Subansiri lower project ( 8700 crore) where NHPC is awaiting clearance from National Green Tribunal although the respective state governments have given the go-ahead. FY17-19E to see ~1200 MW of capacity addition Going ahead, we expect NHPC to add capacity to the tune of ~1200 MW till FY19E. In 9MFY17, the company added 80 MW of capacity while Q4FY17E will see addition of one unit of 200 MW of Parbati II. However, due to crisis in Kashmir, there has been time overrun for Kishanganga project that will not get commissioned in FY18E. Corporate action over; focus back on stuck projects; maintain HOLD NHPC has currently declared a generous dividend of 1.7/share and a buyback programme involving 2600 crore. This has resulted in the stock rallying smartly in Q3FY17. W believe, going ahead, clarity on stuck projects will come to the fore as projects have seen massive cost overruns and finders of PPA would be hard to come by in a scenario where SEBs are reluctant to sign costly PPAs. We value the stock at 1.2x FY18E book value and assign a target price of 32 per share. ICICI Securities Ltd Retail Equity Research
Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments Energy sales net 1,298.4 1,246.5 1,440.9 (9.9) 1,246.5 4.2 Revenues were in line with estimates Other Income 10.2 40.0 23.4 (56.3) 40.0 (74.4) Total Income 1,308.6 1,286.5 1,464.3 (10.6) 1,286.5 1.7 G&A 375.4 350.0 375.8 (0.1) 350.0 7.3 Emplyee expense 308.8 334.5 272.3 13.4 334.5 (7.7) Total expenses 684.1 684.5 648.1 5.6 684.5 (0.1) EBITDA 624.4 602.0 816.2 (23.5) 602.0 3.7 EBITDA was higher on account of lower employee expenses EBITDA Margin (%) 47.7 46.8 55.7-802.4155 46.8 92.50837 Depreciation 355.1 350.0 368.6 (3.7) 350.0 1.5 Interest 268.8 285.0 263.4 2.1 285.0 (5.7) Other Income 175.0 350.0 178.7 (2.1) 350.0 (50.0) Other income was lower than estimates PBT 494.4 1,334.9 216.9 127.9 1,434.5 (65.5) Extraordinary expenses 0.0 0.0 0.0 0.0 Extraordinary Income 0.0 0.0 0.0 0.0 Total Tax 94.8 63.4 106.3 (10.9) 63.4 49.5 PAT 214.7 253.6 388.0 (44.7) 1,446.2 (85.2) PAT was lower on account of lower other income and higher than expected taxes Key Metrics Generation 337.2 337.2 407.0 (17.1) 894.0 (62.3) Generation as per CEA witnessed decline to the tune of 17% YoY Sales 296.8 296.8 763.1 (61.1) 786.7 (62.3) Tariff rate ( /Kwh) 4.2 4.2 4.3 (3.0) 3.0 40.5 Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 7,466.0 7,592.1 1.7 7,766.0 7,892.1 1.6 EBITDA 4,699.6 4,779.1 1.7 4,887.6 4,967.1 1.6 EBITDA Margin (%) 62.9 62.9 0 bps 62.9 62.9 0 bps PAT 2,588.2 2,528.0 (2.3) 2,631.0 2,669.6 1.5 EPS ( ) 2.3 2.3 (2.2) 2.4 2.4 1.5 Assumptions Current Earlier Crore units FY15 FY16 FY17E FY18E FY17E FY18E Generation 2,145.5 2,367.0 2,472.0 2,582.0 2,472.0 2,582.0 Sales 1,888.0 2,083.0 2,175.4 2,272.2 2,175.4 2,272.0 Tariff rate ( /Kwh) 4.0 3.6 3.5 3.5 3.6 3.6 Comments ICICI Securities Ltd Retail Equity Research Page 2
Company Analysis Generation declines 17% YoY but tariffs up During the quarter, gross generation of NHPC declined 17% YoY at 337 crore units. However, tariffs came in at 4.37/Kwhr on account of tariff approval of TLDP IV project. During 9MFY17, the company added 80 MW of capacity from the TLDP IV project (Unit 3&4). However, the tariff hike for few projects like Chutak, Sewa, Chamera II, etc, is yet to be approved. The company also provided provision to the tune of 3 crore for projects like Bursar and Kotli Bhel. Plant availability factor (PAF) for Q3FY17 was at 87%. During Q3FY17, the incentive income earned by NHPC was at 10.6 crore vs. 42 crore in Q3FY16. Exhibit 1: Generation and revenue trend Exhibit 2: Quarterly generation trend (Crore) 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 7,434 7,592 7,892 6,802 5,868 5,304 1868 1892 1839 2146 2367 2472 2582 - FY12 FY13 FY14 FY15 FY16 FY17E FY18E Generation Revenue 1,000 900 800 700 600 500 400 300 200 100 - (Crore unit) Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Exhibit 3: Trend in other income and incentives crore Q2FY17 Q1FY17 FY16 FY15 FY14 FY13 FY12 Incentives 143 131 242 181 171 111 118 Secondary Charge 177 137 86 159 141 UI Charges 50 176 161 72 116 137 Total 181 595 479 329 386 396 NHPC to add ~1200 MW over FY17E-19E NHPC commissioned one unit of TLDP IV of 80 MW in 9MFY17. Going ahead, we expect the company to add capacity to the tune of 1170 MW till FY19E. The key project that will get commissioned in FY17 includes Kishanganga (330 MW) and TLDP IV (80 MW), another 200 MW in FY18E (Parbati II 1 unit) and the remaining 600 MW in FY19E. However, work on Subansiri is expected to start from October 2016. The full commissioning is expected only in FY21E-22E. We believe this would reduce CWIP as a percentage of networth to 44.2% by FY17E-18E. ICICI Securities Ltd Retail Equity Research Page 3
Exhibit 4: CWIP as percentage of networth likely to decline, going ahead Exhibit 5: Trend in RoEs expected to improve in FY16-18E ( crore) 30,000 28,000 26,000 24,000 22,000 20,000 70.8 29,451 51.9 50.0 51.9 27,841 28,139 28,076 27,641 27,641 49.0 45.7 FY13 FY14 FY15 FY16 FY17E FY18E Networth CWIP 80 70 60 50 40 30 20 10 0 (%) ( crore) 3,000 2,500 2,000 1,500 1,000 500 0 9.0 9.1 8.7 2,440 2,528 2,670 2,092 7.6 FY15 FY16 FY17E FY18E PAT RoE 10 9 9 8 8 7 7 (%) Large projects witness huge cost overruns and time delays Most of the upcoming projects like Subansiri (187% cost over run, 2000 MW), Parbati III (114% cost overrun, 800 MW), Kishanganga (58% cost overrun, 330 MW) have faced massive delays owing to regulatory and environmental issues. Accordingly, the PSU has been suffering from very low RoEs as a significant chunk of its asset has been blocked in CWIP (CWIP as percentage of networth at 50% for FY16) for projects under construction. However, the management has taken the initiative to resolves issues with various projects. However, at the same time, calculated tariff has shot up drastically. For instance, tariff for TLDP IV is 5/unit while that of Kishanganga works out to 4.2/unit. Exhibit 6: Capex committed on projects under construction Project Capacity (MW) Total capex Capex till 9MFY17 ( crore) Capex still required ( crore) Teesta Low IV 160 2193 2190 0 Subansiri lower 2000 18063 8700 9363 Parbati II 800 8398 5900 2498 Kishanganga 330 5751 4700 1051 Total 3290 34405 21490 12915 Exhibit 7: Status of projects under construction and their status Project Capacity (MW) State Code Expected CoD - Mgmt guidance Capex ( /Mw) Teesta Low IV 160 WB Achieved 14 Subansiri lower 2000 AP FY21-22 9 Parbati II 800 HP FY18-19 10 Kishanganga 330 J & K FY18E 17 Total 3290 ICICI Securities Ltd Retail Equity Research Page 4
Valuation and outlook NHPC has currently declared a generous dividend of 1.7 per share and a buyback programme involving 2600 crore. This has resulted in the stock rallying smartly in Q3FY17. W believe, going ahead, clarity on stuck projects will come to the fore as the projects have seen massive cost overruns while finders of PPA would be hard to come by in a scenario where SEBs are reluctant to sign costly PPAs. We value the stock at 1.2x FY18E book value and assign a target price of 32/share. Exhibit 8: Key catalyst to be conversion of CWIP into gross block for re-rating ( crore) 21000 19000 17000 15000 13000 11000 9000 7000 5000 3000 1000 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E 80 70 60 50 40 30 20 10 (%) CWIP CWIP as % of Networth ICICI Securities Ltd Retail Equity Research Page 5
Recommendation History vs. Consensus 50 60.0 45 40 35 55.0 50.0 ( ) 30 45.0 (%) 25 20 15 40.0 35.0 10 Jan-15 Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Sep-16 Nov-16 30.0 Feb-17 Source: Bloomberg, Company, ICICIdirect.com Research Series1 Idirect target Consensus Target Mean % Consensus with Hold Key events Date Event Aug-09 Successful launch of IPO raising 6048 crore at an issue price of 36 Mar-10 Reported ~2.4x YoY growth in topline from 307 crore to 750 crore due to adoption of the new CERC tariff policy and finalisation of tariff orders for the Dulhasti plant in Q3FY10 and Teesta V in Q4FY10. However, RoE continues to be subdued at ~7% as 12,600 crore got stuck in CWIP Dec-11 Construction at NHPC's 2000 MW Subanshri project was stalled due to local agitation related to its safety and downstream impact. Estimated annual energy generation from the project was 7,421 MUs Mar-12 NHPC ends the Eleventh Plan with a capacity addition of only 1,150 MW vs. the target of 5,322 MW as various issues like delays in environment clearances, local agitations, geological risks and pre-commissioning hiccups impacted its capacity addition plans Jun-13 The 280 MW Dhauliganga plant stopped operating post the Uttarakhand flood disaster Nov-13 The management says the delayed Subanshri project would now be fully commissioned by 2017 vs. the previous target of 2012. The project will also witness close to 100% cost overrun to 12,000 crore against the original target of 6285 crore Nov-13 Share buyback announced value of 2367.9 crore at a maximum price of 19.25/share totaling 123.1 crore shares. The company purchased 110.7 crore shares worth more than 2,130 crore from the government. The government's stake in the company was reduced to 85.96% from 86.36% Dec-13 CERC proposed a stringent tariff draft for 2014-19, which proposes higher availability of incentives for NHPC plants. The draft, if implemented, would have a negative impact on the company to the tune of 3-4% Feb-14 CERC issues final tariff order for 2014-19, in line with the draft proposal Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m)n Change (m) 1 Government of India 31-Dec-16 0.75 8,248.3 0.0 2 Life Insurance Corporation of India 31-Dec-16 0.09 942.1-23.6 3 Power Finance Corporation Ltd 31-Dec-16 0.02 260.5 0.0 4 Rural Electrification Corporation, Ltd. 31-Dec-16 0.02 260.5 0.0 5 HDFC Asset Management Co., Ltd. 31-Dec-16 0.01 91.9 0.0 6 The Vanguard Group, Inc. 31-Dec-16 0.01 75.7 0.4 7 Norges Bank Investment Management (NBIM) 31-Dec-15 0.00 21.2 6.5 8 Dimensional Fund Advisors, L.P. 30-Nov-16 0.00 16.4 0.0 9 ICICI Prudential Asset Management Co. Ltd. 31-Dec-16 0.00 15.2 0.0 10 Mellon Capital Management Corporation 31-Dec-16 0.00 12.0 0.0 Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoter 85.96 85.96 74.60 74.60 74.51 FII 2.26 2.59 3.31 3.61 3.71 DII 5.06 4.35 9.61 10.43 10.39 Others 6.72 7.82 12.48 11.36 11.39 Investor name Investor name Investor name Value Shares Investor name Value Shares State Street Global Advisors (France) S.A. 0.89 2.40 Life Insurance Corporation of India -9.18-23.57 Research Affiliates, LLC 0.30 0.80 Axiom International Investors LLC -0.60-1.61 Northern Trust Investments, Inc. 0.27 0.70 Invesco PowerShares Capital Management LLC -0.31-0.79 The Vanguard Group, Inc. 0.16 0.40 Taurus Asset Management Co. Ltd. -0.21-0.56 Russell Investments Limited -0.12-0.30 ICICI Securities Ltd Retail Equity Research Page 6
Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 6,802 7,434 7,592 7,892 Growth (%) 23 9 2 4 Gen. Admin. & other exp 1,468 2,072 1,670 1,736 Employee Expenses 1,149 1,116 1,139 1,184 Provisions 0 0 0 0 Exp. On project mgmt 0 0 0 0 Other expenses 2 3 4 5 Total Operating Expenditure 2,619 3,191 2,813 2,925 EBITDA 4,183 4,243 4,779 4,967 Growth (%) 68 1 13 4 Depreciation 1,426 1,452 1,518 1,578 Interest 827 1,067 1,267 1,367 Other Income 861 920 1,000 1,100 Exceptional items PBT 2,794 2,647 2,997 3,126 Total Tax 702 757 869 907 PAT 2,092 2,440 2,528 2,670 Growth (%) 41 17 4 6 EPS ( ) 1.9 2.2 2.3 2.4 Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit before Tax 2,794 2,647 2,997 3,126 Add: Depreciation 1,426 1,452 1,518 1,578 (Inc)/dec in Current Assets (1,373) (847) (131) (249) Inc/(dec) in CL and Provisions 542 416 87 165 Others 125 311 398 461 CF from operating activities 3,514 3,979 4,870 5,081 (Inc)/dec in Investments 0 0 0 0 (Inc)/dec in Fixed Assets (2,918) (2,492) (3,699) (2,699) Others 271 299 300 319 CF from investing activities (2,647) (2,193) (3,399) (2,380) Issue/(Buy back) of Equity 0 0 0 0 Inc/(dec) in loan funds 500 1,061 1,000 1,000 Dividend paid & dividend tax (907) (1,943) (2,590) (1,295) Inc/(dec) in Sec. premium 0 1 2 3 Others (827) (1,067) (1,267) (1,367) CF from financing activities (1,234) (1,948) (2,856) (1,660) Net Cash flow (367) (162) (1,386) 1,042 Opening Cash 5,304 4,937 4,776 3,423 Closing Cash 4,937 4,776 3,423 4,516 Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital 11,071 11,071 11,071 11,071 Reserve and Surplus 16,571 17,068 17,006 18,380 Total Shareholders funds 27,641 28,139 28,076 29,451 Total Debt 19,081 20,142 21,142 22,142 AAD 1,606 1,606 1,606 1,606 Deferred tax balance 767 767 767 767 Total Liabilities 49,094 50,653 51,591 53,965 Assets Gross Block 36,150 38,943 42,943 45,943 Less: Acc Depreciation 10,277 11,729 13,248 14,826 Net Block 25,873 27,214 29,695 31,117 Capital WIP 14,356 14,056 13,755 13,454 Total Fixed Assets 40,229 41,269 43,450 44,571 Investments 2,479 2,479 2,479 2,479 Inventory 72 72 72 72 Debtors 2,609 3,055 3,120 3,243 Loans and Advances 2,721 3,122 3,189 3,315 Other Current Assets 1,513 1,589 1,668 1,752 Cash 4,937 4,776 3,423 4,516 Total Current Assets 11,852 12,614 11,473 12,898 Current Liabities 3,681 4,097 4,184 4,349 Provisions 3,771 4,148 4,563 5,019 Total Current Liabilities 7,452 8,245 8,747 9,368 Net Current Assets 4,400 4,369 2,726 3,529 Others Assets 1,986 1,986 1,986 1,986 Application of Funds 49,094 50,103 50,641 52,565 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS 1.9 2.2 2.3 2.4 Cash EPS 3.2 3.5 3.7 3.8 BV 25.0 25.4 25.4 26.6 DPS 0.7 0.7 2.0 1.0 Cash Per Share 4.5 4.3 3.1 4.1 Operating Ratios (%) EBITDA Margin 61.5 57.1 63.0 63.0 PBT / Total Operating income 41.1 35.6 39.5 39.6 PAT Margin 30.8 32.8 33.3 33.8 Inventory days NA NA NA NA Debtor days 140.0 150.0 150.0 150.0 Return Ratios (%) RoE 7.6 8.7 9.0 9.1 RoCE 7.7 7.7 8.7 8.7 RoIC 8.7 8.5 9.3 9.5 Valuation Ratios (x) P/E 16.1 13.8 13.4 12.6 EV / EBITDA 11.5 11.6 10.8 10.3 EV / Net Sales 7.0 6.6 6.8 6.5 Market Cap / Sales 5.0 4.5 4.4 4.3 Price to Book Value 1.2 1.2 1.2 1.1 Solvency Ratios Debt/EBITDA 4.6 4.7 4.4 4.5 Debt / Equity 0.7 0.7 0.8 0.8 Current Ratio 1.6 1.5 1.3 1.4 Quick Ratio 0.7 0.6 0.4 0.5. ICICI Securities Ltd Retail Equity Research Page 7
ICICIdirect.com coverage universe (Utilities) Sector / Company CMP Target Rating M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E NHPC (NHPC) 31 29 Hold 33,766 2.2 2.2 2.4 13.9 13.9 12.7 11.6 10.4 9.9 7.7 8.4 8.4 8.7 8.5 8.5 NTPC (NTPC) 172 200 Buy 131,268 12.5 13.0 14.4 13.8 13.2 11.9 11.7 10.2 10.0 8.0 7.7 8.1 12.9 11.0 11.1 Power Grid (POWGRI) 204 204 Buy 106,724 11.5 14.0 16.0 17.7 14.6 12.8 10.9 10.1 9.3 8.7 8.7 8.7 14.1 14.9 14.9 PTC India (POWTRA) 88 76 Hold 2,605 6.8 9.1 7.0 13.0 9.7 12.5 6.8 7.0 9.0 13.5 12.7 10.0 9.6 8.9 6.6 CESC (CESC) 820 675 Hold 10,870 27.5 45.2 58.2 29.6 18.0 14.0 7.0 7.4 6.3 12.8 12.0 12.7 5.7 8.5 8.9 Tata Power (TATPOW) 75 - - 20,285 0.6 4.3 6.2 120.9 17.5 12.2 7.5 6.0 5.0 11.3 13.4 15.9 1.3 8.8 12.4 ICICI Securities Ltd Retail Equity Research Page 8
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9
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ICICI Securities has received an investment banking mandate from Government of India for disinvestment in Bharat Heavy Electricals Limited. This report is prepared based on publicly available information. ICICI Securities Ltd Retail Equity Research Page 10