Recommendation from Power Generation/Distribution Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.
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NHPC LIMITED: TURNING POWER INTO PROFIT 

HERE IS WHY
✓  Largest organisation for hydropower development
✓  Government focus on clean energy to benefit the company
✓  Strong fundamentals and expansion plans 

India’s power sector is undergoing significant changes driven by sustained economic growth and the government’s focus on ‘power for all’. India has launched the Mission Innovation Clean Tech Exchange to expedite advancements in clean energy. 

The Central Electricity Authority (CEA) estimates India’s power requirement to grow to 817 GW by 2030, and the government plans to establish a renewable energy capacity of 500 GW by 2030. Taking all this into account, our low price scrip for this issue is NHPC Limited, which is the largest organisation of its kind for hydropower development in India, encompassing all activities from conceptualisation to commissioning of hydro projects. The company has also diversified into solar and wind power. 

NHPC’s main business area is the construction and operation of hydroelectric power projects. It is making a big push to expand its power generation capacity by 2.5 times, reaching a target of 16,285 MW by 2032. This ambitious plan involves ongoing projects, potential ventures in Gujarat, and international collaborations in Nepal. The Indian government’s focus on clean energy bodes well for NHPC. The company is well-positioned to capitalise on the government’s 1,000 MW solar power expansion plan while hydropower remains the core strength for the company.

Hydropower offers clean and reliable energy, and continued government support for such projects would be beneficial. The company is also taking steps to address peak power demand and grid stability by signing agreements for pumped storage hydropower projects with a total capacity exceeding 7,350 MW. In Q3FY24, on a consolidated basis, the company reported net sales at ₹2,055.50 crore, a QoQ decrease of 29.88 per cent and a YoY decrease of 20.41 per cent. Due to flash floods in river Teesta on October 4, 2023, there were certain losses to the assets and consequential generation loss in Teesta-V, Teesta Low Dam–III and Teesta Low Dam– IV power stations that led to a fall in the revenues. 

The total expenditure of the company stood at ₹1,334.58 crore as compared to ₹877.49 crore in the same quarter of the previous year and sequentially decreased by 58.98 per cent. The net profit of the company stood at ₹536 crore, which decreased by 58.10 per cent as compared to ₹1,279.19 crore in the same quarter of the previous year and sequentially fell by 66.82 per cent. On the valuation front, NHPC’s shares appear expensive. Its current PE ratio of 24.4 times sits significantly above the three-year median of 10.4 times. Similarly, the price-to-book value (PBV) ratio of 2.34 times is higher than the industry average of 2.19 times. 

However, this higher valuation might be justified by NHPC’s solid fundamentals and the potential for a bright future. The company boasts a healthy three-year average return on equity (ROE) of 10.6 per cent and a return on capital employed (ROCE) of 7.91 per cent. Going ahead, the company’s diversification into different sources of power generation will help it to mitigate business risks and diversify its revenue stream. Therefore, despite the high valuation metrics, NHPC could still be a potential investment opportunity due to its strong fundamentals, expansion plans, and the government’s focus on clean energy, particularly hydropower. Considering all these factors, we recommend BUY.

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