NHPC's Valuation May Take A Hit On Ongoing Execution Delays
Delay in commissioning of Parbati II and Subansiri Lower projects puts regulated equity at risk, Kotak said.
NHPC Ltd.'s forward price-to-earnings ratios for fiscal 2025 and fiscal 2026 suggest strong earnings growth, making the stock appear cheaper than its current valuation. However, continued execution delays in NHPC's two key hydro projects—Parbati II and Subansiri (Lower)—are impeding potential higher earnings growth and lower valuations.
Current Valuations
According to Bloomberg, NHPC's forward price-to-earnings ratios for FY25 and FY26 are projected at 20.77 and 18.23, respectively. This is lower than the current price-to-earnings ratio of 25.56.
In theory, lower forward valuations indicate high consensus estimates for future growth, based on the assumption that Parbati II and Subansiri (Lower) will be commissioned within the next two years.
However, Kotak Institutional Equities highlights that despite commencing construction at Subansiri (Lower), several execution delays have occurred. Additionally, commissioning timelines for hydro projects beyond Subansiri and Parbati II have been revised, prompting Kotak to lower its earnings estimates for NHPC Ltd. by 17% for FY25 and 7% for FY26.
These revised estimates imply higher forward P/E multiples, suggesting the stock might not be as cheap as current metrics indicate.
Delayed Projects
NHPC Ltd. currently has projects aggregating 18.6 gigawatts under various stages of implementation, including 10.4 gigawatts of projects under construction.
The commissioning of Parbati II, an 800-megawatt hydro project, has been delayed to Q4 FY25, while Subansiri Lower, a 2,000-megawatt project, has been pushed to FY27 from FY26.
The original commission timelines for Parbati II and Subansiri Lower were 2009-10 and 2009-11, respectively.
Higher Expenditure
Projects under construction have a total cost of Rs 1.02 lakh crore. This includes Rs 21,247.5 crore for the Subansiri project, Rs 12,160 crore for the Parbati II project and Rs 31,876.4 crore for NHPC's Dibang project.
The incurred costs for all these three major projects are at 98%, 92% and 7%, respectively.
Furthermore, NHPC has capex plans of around Rs 11,700 crore in FY25, in comparison with the Rs 8,600 crore capex spent in FY24.
Regulated Equity Growth at Risk
According to Kotak Institutional Securities, NHPC currently has a regulated equity of Rs 12,900 crore on a standalone basis. This is likely to grow to Rs 22,900 crore upon the commissioning of Parbati II and Subansiri Lower.
Regulated equity refers to the portion of a company's capital base that is considered relevant for determining the allowed rate of return by a regulatory body. This concept typically applies to industries like utilities that are overseen by government agencies.
Potential Impact
The delay in commissioning of Parbati II and Subansiri Lower projects puts the regulated equity at risk, Kotak said. This could have several negative impacts:
The delay in commissioning of Parbati II and Subansiri Lower projects could have several negative impacts:
NHPC's equity growth slowdown impedes regulatory assessment for infrastructure investment and company growth.
NHPC's idle hydropower plants risk revenue loss, potentially lowering profits and impacting return on equity ratios.
Delays may raise doubts about NHPC's financial reliability, triggering credit rating downgrades and increasing future borrowing costs.
Delays in projects can cause cost overruns, affecting cash flow. NHPC may require extra funding, straining its financial resources.
