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INDIA is endowed with economically exploitable and viable hydro potential assessed to be about

84,000 MW at 60% load factor (1,48,701 MW installed capacity). In addition, 6780 MW in terms of
installed capacity from Small, Mini, and Micro Hydel schemes have been assessed. Also, 56 sites for
pumped storage schemes with an aggregate installed capacity of 94,000 MW have been identified.
However, only 19.9% of the potential has been harnessed so far.

Despite the fact that Hydroelectric Projects are recognized as the most economic and preferred
source of electricity, share of hydropower in the total installed capacity in India has been declining
steadily since 1963. The hydro share has declined from 44 percent in 1970 to 24 % in 1999. The ideal
hydro-thermal mix should be in the ratio of 40:60 and present imbalance is largely responsible for
system instability.

In order to reverse the trend and given the renewed thrust on hydropower by the Government, NHPC
Ltd. has drawn up a massive capacity addition plan in hydro sector upto 2017.

The IPO Listing : A FAILURE ?

NHPC IPO was subscribed almost 24 times. It had an issue size of 167.73 crore shares. Qualified
institutional investors played the leading role by subscribing 29.16 times while the non-institutional
investors subscribed 26 times and the retails 3.87 times. The issue was priced between 2 times post
money book value, which was still at a discount to that of listed scrips in the power space. NHPC
raised Rs 6,039 crores through the equity issue, which constitutes 13.64% of the post issue paid-up
capital of the company. This money will be used for 7 power projects with an aggregate capacity of
3300 MW.

But the scrip doesn’t take off as it was being talked about. Market was hoping NHPC to be listed at
10% premium opening which didn’t happen. It found it difficult even to maintain the Rs. 36 level and
eventually fell below. Blame was eventually shifted to company management and the book builders
that they didn’t leave anything for the investors on the table.

If we view the current valuations of this company, it may seem to us on the higher side from an
investment perspective. The company is valued at 30 to 36 times of its reported earnings of FY09.
This is a high valuation when we have thermal power companies like NTPC trading at a P/E of 20 and
Tata Power at a P/E of 31. Besides that, the company has a lower RoCE of 4.5% as compared to
15% RoCE of NTPC. The management bargained hard due to the company being a PSU. If we take
into account the current year’s profit of Rs. 1244.15 crores with 1124 crore shares, the EPS turns out
to be Rs 1.10. If by 2012, their increased capacity of about 8300 MW, if everything goes according to
plan, happens to create a net profit of 2000 crores, the EPS comes out to be about Rs. 2.00 (on the
higher side) with 1240 crore shares. The cumulative annual growth rate (CAGR) comes out to be
22%, which is way below its current P/E. Futher if we take a close look at its EPS growth over the
years, it is less than 10% in recent years.

All the above factors, alongwith a sobre stock exchange at that day caused the lacklusture listing of
NHPC.

ANALYSIS :

Hydropower plants are characterised by high fixed costs and low operating costs. Though it may have
seasonal rain and water flow issues, but its operating costs are quiet lower than thermal plants. But
this advantage is countered by lower Return on equity, higher risk of delays and geographical risks.

As per XI Plan (2007 – 2012), NHPC is managing 13 hdro-electric power plants and its total installed
capacity is 5,175 MW. It, though, includes 1520 MW of its 51.1% subsidiary, Narmada Hydroelectric
Development Corporation (NHDC). Out of the total proceedings from the issue, Rs. 2,013 crore is
meant for the Gov. Of India. Till date, NHPC has debt of Rs. 7,658 crore from LIC, PFC and Gov. Of
India. Of the whole debt, Rs. 2,050 crore has been employed. For FY07, FY08, FY09, the company’s
net revenues are 2,579.95 crores, 3,321.63 crores and 4,051.52 crores and net profit is 1,049.10
crores, 1207.04 crores and 1244.15 crores.

NHPC is currently constructing 11 projects which will increase its installed capacity by 4,622 MW.
Sanctions are awaited and investigation works are being carried out for more than 14 projects
increasing the installed capacity further by 13,500 MW. Overall, if we take into account the XI Plan
and Beyond XI Plan, the capacities turn out to be around 20,000 MW.

As per company sources, it is likely to have 6700 MW by 2012 and 9800 MW by 2016. In addition,
NHPC is also undertaking non-hydro projects. NHDC has received mandate to install 1000 MW plant
from Madhya Pradesh.

NHPC sells its electricity through long term Power Purchase Agreements (PPAs). Whenever NHPC
makes investment decisions on new capacity or expansion of existing capacity, it has commitments
for the purchase of output. In Fiscal 2009, NHPC derived Rs. 3,436 cr or 84.8% of its consolidated
total income from the sale of energy to SEBs and their successor entities due to PPAs. The billings to
state entities are currently secured through letters of credit taking into cognisance three-way
agreements among the Gov. of India, the RBI and respective state governments. In addition, NHPC
can secure payment by recovering payments directly from Gov. of India Central Plan assistance funds
that are given to the concerned state governments.

The tariffs for all NHPC’s power stations are guided by CERC Regulations 2009. As per the
regulations, 70:30 is the favorable debt equity ratio for a project and any equity in excess of 30% is
treated as a notional loan and is eligible for a return equivalent to weighted average cost of debt.
While NHPC has some of its operational projects, which were funded with an equity component of up
to 50%, since these projects were funded under the old regulations, NHPC is eligible for a 15.5% RoE
on additional equity.

GOOD NEWS :

If we overall view this company, it has got vision for a long period, means it has expansion in its eyes.
If we consider it for a medium term, it has an additional expansion of around 4500 MW which takes
overall installed capacity to around 9000 MW. The revenues and profits will double-up and it will have
significant impact on the equity price too. Though, I doubt whether electricity rates will rise too, in a
significant manner. In FY09, the average selling price of electricity is Rs. 2.03 per unit. This company
has eyes set for 20,000 MW for distant future. So, that’s the comfort zone.

Further, this company has got excellent engineering skills. It is known for its project executions within
limited time-frame.

As a Mini-Ratna Category-I unit, the company is bound to have greater autonomy amouting to Rs 500
crores.Being a Mini-Ratna Category – I, this company has the backing of government and its financial
institutions, power being such a prioritised object.

This company has always got ready-to-go customers in the form of SEBs and has got added
protection in terms of payment delays.

BAD NEWS :

1. Valuation of equity is a big problem. A price tag around Rs. 30 will have been good.

2. Dividends may be a bit of problem due to continuous expansions.

3. Project delays in terms of bureaucratic, environmental and other delays.

4. CERC regulations may change, thereby reducing its profitability.

5. Being a PSU, it may be forced to share the subsidy burden.


I will suggest, if one has bought into this scrip to really hold it for a long period, say around 2016. I
hope this company will give returns over a long period because of high start-up costs and later quiet
low operational costs. Further, this company getting into consultancy, can have added benefit.