NHPC – a better option than a fixed deposit

NHPC â a better option than a fixed deposit

Let me make it clear at the outset that I am invested in NHPC (and SJVN too), so my views are bound to be biased. In my view NHPC is not for people who wants to buy only those stocks that beat stock market returns (though that not ruled out completely at current price). It is only for those, who want to earn decent returns (more than fixed deposit on post-tax basis) and are more concerned with protecting the downside than aiming for upside.

**Rationale for investment: **I have invested in NHPC treating it as a bond which provides tax free return of 4% pa (post tax yield of around 5.5%, with growth possibilities and possibility of capital gain when the current pessimism ends). It also falls under the theme âHeads I win and tail I do not lose muchâ. Father of value investing Benjamin Graham has classified investment securities into the following types

Class I â Securities of the fixed value type (High grade bond) , Class II (A) Senior securities of the variable type â well protected issues with profit possibilities (a high grade convertible bond or preferred stock) Class II (B) - Senior securities of the variable type â Inadequately protected issues (a lower grade bond or preferred stock) Class III â Common-stock type â A common stock (I know a table would have been better but unfortunately not able to paste picture)

In my view NHPC is a class II security â a high grade convertible bond as its profits are well protected (by law NHPC is guaranteed ROE of 15.5% on post-tax basis, provided it meets certain operational parameters) and it provides dividend yield of around 4% (post tax yield at 30% tax rate is 5.7%)

_Reasons to buy : _


1). NHPC is guaranteed by law a ROE of 15.5% on a post-tax basis and all the cost incurred by it on construction of hydro power plants and generation of electricity is fully recoverable (provided it meets some operational parameters) as part of the tariff.

2). In the last twelve years, it has never reported a decline in operating profit and net profit. The worst year was 2010 when itâs operating profit and net profit was flat.

3). NHPCâs new hydro plants have been exempt from a newly introduced tariff-based competitive bidding regime up to December 2015, in view of complexities and construction risks involved.

4). Even though companies operation of building Hydro power plants are highly capital intensive, it was able meet almost 80% of its capex needs over 2003-11 from the operating cash flow.

5). Its current net debt to equity is less than 0.4x, so it will be able to fund its large capex without diluting equity in the near future.

6). The companyâs operating and net profit margins have remained above 67 per cent and 35 per cent, respectively, in the past 10 years.

7). Current earnings yield (inverse of PE) is around 9% and dividend yield 4%, with growth prospects. Moreover this yield is on depressed earnings as large amount of capital is tied up Capital Work In Progress (CWIP, around 60% of shareholders funds).

8). Current valuation factors in a very pessimistic scenario (see valuation section)

Reasons not to buy:

1). Current policy paralysis in power sector. __

2). Even on four year trailing basis, Return on Capital Employed (RoCE) for 2010 and 2011 is merely 9-10%__

_3). _Financial conditions of its main customer viz SEB is currently very poor. Even after some restructuring it improves, it will for sure deteriorate again under political interference and pricing electricity at a lower price. __

4). Project cost overrun more than 40% in many cases. (many of which are due to uncertain geology condition and a large part of it have got approved in the past as per management)

5). There is a risk that what happened in telecoms with BSNL and MTNL happens with PSU companies under Hydro and PSUs may not be able to compete with the onslaught of private sector.

6). Since 2003, ROE for most times is around 6-7%. Only in 2010 & 11 it touched around 9%. (But this is because of high CWIP)

7). CWIP on average is more than 60% of shareholders fund for the last three years (Company does not earn any return on CWIP)

8). Installed capacity is flat over the last four years.

9). Contingent liabilities for disputed sales tax: 2,500 cr.

10). About 20% of the current projects are in the state of J&K. Exposed to tail risk of terrorist attack and attack from Pakistan.

_Valuation _


1). Market is assuming that its ROE (Return on Equity) will stay at 7% for ever which is highly unlikely. (This is using justified price to book value method, Formula ROE-G/(R-G), where ROE is return on equity, G = Growth and R = discount rate, G= 3% pa and R= of 8%).

2). When the earnings stability is as certain as bond with a growth prospect, it cannot be valued below book value. Currently it is trading approximately 20% below book value.

3). At current price, dividend discount model implies that dividend will grow at 4% p.a in future (taking R= 8% and DPS of INR 0.7).

When to sell

1). Ultra long term holding â So sell only when you want to reduce your allocation to debt. Else keep it in place of a bond.

2). Company business model changes from current model of assured equity and cost plus model. (though competitive bidding will kick in from 2016, it will be long before the it derives substantial portion of its income from competitive bidding tariff)

3). Valuation above 2.5x book value._ _(Because that will imply that its sustainable ROE will be more than 14%)

Note: I have also posted this on another website. My aim is to get some views of senior members (preferably contrary views) to my investment approach. I hope Donald is fine if the same stuff is being posted on multiple websites.



Have a look at Sree Sakthi Paper. I feel it offers better dividend yield and growth prospects.

The main issue with NHPC is of execution. It’s project invariable gets delayed by years due to agitation against hydro projects by locals, due to L1 criteria cheapest contractor turns out to be an incompetent,loss making contractor like HCC n Patel n Parbati 2 contractor, sarkar I culture of its employees who sitting in filed postings are getting hefty bribes n least bothered abt projects getting delayed, lousy power ministers like Shinde who are duffers n corrupt .

Had it been in pvt sector or atleast good contractor like JP The projects wud hv been completed.

Any updates on commissioning of projects ?

the issue with NHPC is capital work in progress

where they don’t earn any return till the time the project is executed which takes typically 5 to 8 years for hydro power project

the story would unfold ones the CWIP comes down

But agreed the stock is cheap

Almost 45 to 50% of capital is tied in CWIP

Excel and Vivek,Apologies for late reply

Agreed on all the negatives and it is trading at where it is trading because of that. But think of NHPC as alternative to your debt allocation and not as allocation to equity portfolio. Tell me which other business provides you earnings predictability close to electricity generation (except when we have such a severe drought that there is no water at all). Even assuming zero growth, its book value will keep compounding at 9-10% pa. You get dividend yield of close to 3%. Even atslightestPB re-rating return should be better than FD

Ayush: I agree Sree sakti paper also provides high div yield, but can it be considered class II security within thedefinitionof Benjamin graham, I don’t think so. In case of NHPC, natural calamity is the major threat which can dent the earning stability, but for sree sakti paper, decline in final goods price, increase in raw material price, substitutes or market competition and many more can dent its profits sustainability. Even after 10 years, for sure NHPC will still be in business but can be say the same with certainty about Sree sakti papers.

For certain stocks like NHPC and SJVN we need to analyse them differently and these are stocks which can provide lot of downside protection while the upside is not capped.

Go through this link for Warren Buffetthoughtson Utility business.http://valueandopportunity.com/2012/12/27/utility-companies-the-warren-buffet-perspective/

It took years for NHPC to move from 18 to 29 and not even a week to get back to 29. Company has come out and said there is no change in the fundamentals and nothing in budget that affect its growth prospects negatively.

So if this is true, who is selling and why? Things like these is what makes Indian equity market unattractive and scary for retail investors.

Sorry, I meant get back to 18 in above post. Really need a edit feature in this forum.

Earlier bottom was at 17.30. It would be interesting to see if that bottom is held and a higher bottom is formed. After such a sharp fall, there could be some range bound consolidation before a next move. In fact that should be healthy for next uptrend to resume.

In the past such steep falls haveoccurredwhere promoters pledged shares were sold or company was facing some workingcapitalconstraints, headwinds in business, regulatory concerns or outright fraud on the part of management. I do not foresee any such reason in case of NHPC. NHPC business is quite simple one and leverage is also very less than what regulatory rules allow. Over the last six months NHPC has added around 250 MW [4% increase in installed capacity] and another 1,000 MW is expected to be added in FY14. After that no new projects are expected till FY17-18. Given the back end nature of capacity addition its quite possible that price remainsuppressedover extended period of time.

But as I mention earlier, for certain stocks like NHPC and SJVN we need to analyse them differently and these are stocks which can provide lot of downside protection while the upside is not capped.I have bought it as perpetual debt and I still feels it is a better option in place of fixed deposit if bought at right price. Added some more at INR 18.5. Will add more if stock corrects another 20-30% from here.


Read somewhere that this correction is due to rumors on disinvestment at steep discount - Rs 16-17 or something like that.

If it can fall from 29 to 18, I think downside protection was not there at least at 29 when we discussed it earlier.

Dividend yield of around 8% might offer some protection if at all…



fixed deposit broken

Request you to refrain from making these wisecracks as they do not provide any value and acts as a deterrent for people to express their opinions.

It is literally impossible to predict the downfall/upmove correctly and that’s the beauty of the markets…you believe your analysis and understanding is correct and support the idea after doing your groundwork.



Please go through the link

fixed deposit broken

I completely concur with Rajarshi. Many other sites like Moneycontrol are there for such comments. In addition these kind of comments trigger unnecessary noise on the board. Please refrain from it.

Co rep by RST Sai, CMD; R S Mina, Director Finance; Babu, ED and Shivakumar, ED.Key takeaways of the conference call by Capital Mkt;

The company has commissioned 3 projects i.e. Puri, Parvatui and Nimo Bazco with an aggregate capacity of 805 MW during H1FY15. Current capacity as end of Sep 2014 stood at Rs 6507 MW including 1520 MW of capacity in the books of MP based subsidiary company.Construction activity of Subansiri Lower Project and Teesta Lower Dam Project IV Projects continue to be interrupted and the company has provided for Rs 350 crore in Q2FY15. But for this the bottom-line of the company would have been higher to that extent.

Expected 20% more power generation than last year in NHPC. Even on like to like basis the generation will be higher by 8%. The MP subsidiary company is expected to generate about 1000 mln units more than design energy. The generation of two Uttarakand projects which was affect last year has performed well in H1FY15 with good water availability.

UI/Deviation Charges for H1FY15 stood at Rs 104 crore compared to Rs 36.7 crore in the corresponding previous period. UI Charges for Q2FY15 was Rs 59 crore and for Q1FY15 is about RS 45 crore. Incentives excluding UI Charges in Q2FY15 was Rs 109 crore and for Q1FY15 is Rs 114 crore.

Coal block â IFFCO leads SPV that was executing a power projects with a linked coal block. The company was talking with IFFCO for acquisition of their controlling stake in the SPV but with SC verdict the coal block was cancelled and that plan has dropped.

Renewable â DPR is getting prepared for 86 MW wind project in Kerala. The land is provided by Kerala Government. The company has signed MoU to set up a 50 MW solar project, in which the company will hold 75% stake and balance by UP government. Cost of solar project is Rs 400 crore.

Breakup of overall receivables: J&K accounts lions share at Rs 1600 crore and of which about Rs 600 crore is received on Oct 30, 2014. Receivables from UP stands at Rs 284 crore, Punjab were Rs 244 crore, HP was Rs 133 crore and Delhi is Rs 133 crore.Regulated equity as on date stood at Rs 9800 crore.

Capital work in progress as end of Sep 2014 is about Rs 16000 crore of which Subansiri Lower accounts for about Rs 6900 crore, Parvati 2 is about Rs 4700 crore, KishanGanga is Rs 3600 crore and that of Teesta Lower IV is 1551 crore.Adjusted PAT for half year ended Sep 2014 is Rs 1576 crore and for Q2FY15 will be Rs 822 crore.Capex planned for FY2014-15 is Rs 3300 crore and of which the company has spent about Rs 1100 crore in H1FY15.

Contractor of TLDP IV project is requesting for a financial adjustment over and above the contract value. The company will be providing a loan of Rs 80 crore on contractor’s bank guarantee. Balance work in this project is Rs 80 crore. The project will be completed by Mar 2016.Under earlier tariff regulation, whatever the company is generating extra has to be compensation in the subsequent 4thday. And this condition as removed in new regulation and this benefits hydel power plants.

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Read Business Line recommendation of this scrip today. Request your thoughts on its current valuation.

Nhpc has sunk very large capital@10billon Rs in lower subansiri project in Arunachal construction has stalled for last many years because of local agitation And siesmic concerns The current govt seems to be reviving the project In a few years this project can dramatically improve the fortunes of nhpc. H K Gupta

NHPC/SJVN seem to be two stocks where dividend yield is better than post tax return on FD as has been pointed out earlier. I think the way to value the company is assign a price to book multiple where the capital wip is subtracted from net-worth and ROE is computed. Usually in hydro power plants maintenance capex is significantly less than depreciation and this adjustment may also may have to be made in earnings. Adjusting for this, the ROE can be even close to 18-20% on operational assets. After arriving at the value based on this P/B (1.5-1.8X) on operational equity assign a multiple to CWIP which I think should be 0.5-0.7 depending on the uncertainties associated with the projects and how close they are to commissioning. Both stocks seem to be valued on almost zero growth basis at CMP.

With both companies in a mood to return cash through buybacks/dividends thanks to GOI they seems to make sense as placeholders until better value is found elsewhere in this market.

You may want to have a look at NLC as well