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NHPC IPO Review By Capital Market

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Forum: Initial Public Offers (IPO's)
Posted By: Capital Market
Posted On: 8/11/2009 11:00:27 AM
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Last Update: 4/16/2011 12:22:04 AM
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Posted on 8/11/2009 11:00:27 AM

NHPC IPO Review By Capital Market
NHPC is the largest hydroelectric power generating company in the country. It has 13 operating hydro electric power (HEP) plants with an installed capacity of 5,175 MW including two power stations of total 1,520-MW capacity set up through its joint venture subsidiary Narmada Hydroelectric Development Corporation (NHDC). Current total generating capacity is 5,134.2 MW, taking into account the downgrade of the capacity ratings of Loktak and Tanakpur power stations by the Central Electricity Authority. All the existing power projects of the company (excluding the JV subsidiary) are located in the northern and north-eastern states such as Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Manipur and Sikkim. The two HEP stations are in Madhya Pradesh.

NHPC is constructing 11 additional hydroelectric projects, which are expected to increase the installed capacity by 4,622 MW. These plants, barring Teesta Low Dam IV, are mostly in the north and northeastern states and scheduled to be commissioned between December 2009 and March 2013. The Teesta Low Dam IV project is coming up in the Darjeeling district of West Bengal. NHPC is awaiting government sanction to build another five projects with an anticipated capacity of 4,565 MW on its own and another 2,166-MW capacity projects through certain JV projects. In addition, the company is surveying and investigating proposals for nine additional projects totaling 7,255 MW of anticipated capacity.

Apart from development and operation of HEP projects, NHPC also develops, designs, and delivers HEP station to clients. The company has executed two HEP projects, i.e. Kurichhu HEP in Bhutan and Devighat HEP in Nepal, on contract. Further, it also provides technical, management advisory and consultancy services to domestic and international clients. So far it has completed 76 consulting assignments and had 17 consulting assignments on hand end May 2009. NHPC also acts as an agency for implementing rural road development and rural electrification programs in India on request from the government of India. It earns fixed agency fee as determined mutually.

The current public offer has two components: Disinvestment from the Union government‘s existing holding 55,91,24,672 equity shares of Rs 10 each (4.5% of post- issue equity) and fresh issue of 1,11,82,49,343 equity shares of Rs 10 each (9.1% of post- issue equity). While NHPC will not get any amount from offer for sale (which will go to the government), the proceeds from fresh issue will be used to part finance the construction and development of Subansiri Lower in Arunachal Pradesh, Uri II in J&K, Chamera III in Himachal Pradesh, Parbati III in Himachal Pradesh, Nimoo Bazgo and Chutak in J&K, and Teesta Low Dam IV (in West Bengal) power projects as well as for general corporate purposes.

Strengths

Operational efficiency track record of the existing power plants is strong.

Proven execution capability in designing, executing, completing HEPs.

Improvement in customers' bill realization over the last six years following the recommendation of Ahluwalia Committee and one-time settlement of past dues.

The Nimoo Bazgo (45 MW) and Chutak (44 MW) HEPs in J&K were registered by the executive board of Clean Development Mechanism (CDM). These two projects are scheduled to commission in August 2010 and February 2011, respectively, and will generate carbon credit. Also pursuing CDM registration for other projects.

Weaknesses

HEPs are typically associated with longer execution period as well as high execution risks: geological, hydrological as well as environmental. Rehabilitation and resettlement issues are obstacles and often result in delays in the completion of projects. Moreover, there is little return on equity investments made during project execution.

Supplies 12% of the energy generated free to the respective state or its utilities or the electricity board as per the MoUs signed with the respective state governments following the power purchase agreements.

Among others, the tariff includes annual fixed charge (AFC) consisting of primary energy charge and capacity charges. However, under the new tariff policy effective from 1 April 2009, the capacity index has been replaced with the normative annual plant availability factor (NAPAF). Capacity charge for a power generating station will constitute 50% of the AFC and will be calculated using a formula that takes into account the NAPAF and the actual plant availability factor achieved. Earlier, if the capacity was available, the capacity charges could be recovered. Now, capacity has to actually operate at or above NAPAF. So if there were insufficient water, which prevents the plant from operating at or above NAPAF, the capacity charge would be adversely affected, even though the unit might have available capacity. Also, earlier capacity charge was equal to AFC less the primary energy charge. Now, 50% of AFC will depend on capacity charge. So this has introduced volatility in AFC, capacity charge and revenue, especially when water availability is poor.

Valuation

Consolidated sales of NHPC rose 19% to Rs 3493.71 crore and net profit by a modest 3% to Rs 1244.15 crore in FY 2009. On post-IPO equity of Rs 12300.74 crore, the EPS for FY 2009 works out to Rs 1 and the PE is 30-36 times at the offer price band of Rs 30-Rs 36. In comparison, thermal power major NTPC quotes at a PE of 22 times its FY 2009 consolidated EPS. The per MW valuation works out to Rs 3.76 crore (on the lower price band) to Rs 4.52 crore (on the upper price band) compared with Rs 3.58 crore per MW of NTPC.

Hydropower is typically characterized by high fixed costs and low operating costs. Against this background, the per-MW valuation of NHPC is ahead of thermal or other power plants. While the seasonality in thermal power is low, it is very high for hydropower projects.

 
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