NHPC Limited is an Indian Hydropower generation company that was incorporated in the year 1975. The objective was to plan, promote and organise an integrated and efficient development of hydroelectric power in all aspects. Now, NHPC has expanded its objects to include other sources of energy like Solar, Geothermal, Tidal, Wind etc.
The company’s shares have 52 weeks price band of INR 29.1-15.1 and a total market capitalization of INR 223 billion which makes it a Large-Cap company. The shares have a P/E ratio of 6.8 and a dividend yield of 8.71%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ☆ ☆)
The company operates in the Energy sector where market dominance comes from scale, distribution, capacity and licensing. NHPC has become the largest company for hydropower development in India. The company has capabilities to undertake all the activities from conceptualization to commissioning in relation to setting up of hydro projects. It has also diversified in the field of Solar and Wind power.
NHPC presently has an installation base of 7071.2 MW from 24 power stations on ownership basis including projects taken up in Joint Venture. The company is presently also engaged in the construction of 5+ projects aggregating to a total installed capacity of 4924 MW which includes 2 hydroelectric projects namely 2000 MW Subansiri Lower HEP and 800 MW Parbati-II HEP being executed on ownership basis. This overall gives a good economic moat to the company as the nature of the business is asset-heavy. Therefore this category gets 3 stars in NHPC fundamental analysis.
2. Business Model and Management (★ ★ ★ ☆ ☆)
The business model of the company is such that heavy investments are required to generate revenue. Hence the management is looking forward to capacity expansion in the near future. In addition to the 4924 MW projects, there are 14 other Projects with an aggregate capacity of 8326 MW are under clearance stage which includes 9 Schemes of NHPC’s own and 5 in JV mode. Further, 2 projects with an aggregate capacity of 1079 MW are in S&I stage.
Mr Abhay Kumar Singh is the Chairman and Managing Director of the company. In his 35 years of professional life, he has played pivotal roles in the setup of many Hydroelectric projects like Tanakpur Project (120 MW), Dhauliganga Project (280 MW), Teesta low dam stage IV (160 MW), Parbati Stage II (800 MW), Parbati Stage III (520 MW) and Kishanganga HE Project (330 MW). Mr Ratish Kumar is the Director of Projects. He is in charge of all NHPC projects which are under construction and pre-construction stages. Overall the management has been stable and has shown interest in minority shareholders wealth. Therefore this category gets 3 stars in NHPC fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has grown at a rate of 4.99% CAGR over the 10 year period. The working capital has been positive, which means the current liabilities are less than the current assets. This also indicates that the nature of business is asset-heavy. The capital expenditure has declined over the years which shows moderate growth in the near future for the company. Therefore this category gets 4 stars in NHPC fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The gross margin has stabilized over the years which is due to increased capacity utilization and economies of scale. The Operating margin has also declined slightly. The EBT margin and therefore the net margin has fallen due to the increasing interest expense. The return on assets has also decreased as net income is reduced. This is because of the capital expenditure done by the company which requires additional interest-bearing debt. Therefore this category gets 3 stars in NHPC fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
The capital expenditure has declined which shows moderate growth prospects in future but also improves the free cash flows of the company. Therefore the free cash flow growth has gone positive over the years. The operating cash flow growth has been fluctuating over the years along with the free cash flow as a percentage of net income. This indicates a mediocre cash flow position. Therefore this category gets 3 stars in NHPC fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ☆ ☆)
The current ratio is 2.41 which is way above the minimum requirement of 1. This indicates that the current liabilities are lower than current assets and the company will not need to borrow money to pay their obligations. The debt to equity ratio has also been mostly stable over the years along with the financial leverage. The quick ratio has also deteriorated from 1.92 in FY 2015 to 0.8 in FY 2019. Overall the company’s financial position has not changed much over the years. Therefore this category gets 3 stars in NHPC fundamental analysis.
7. Efficiency Ratios (★ ★ ☆ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
The day’s inventory and inventory turnover ratio has almost remained constant over the years without showing any improvement. The payable days have gone down and receivable days have gone up which shows deteriorating business efficiency and need of additional working capital for the company. The cash conversion cycle has also deteriorated significantly in the last few years. Therefore this category gets 2 stars in NHPC fundamental analysis.
8. Valuation Ratios (★ ★ ☆ ☆ ☆)
The market has been pricing NHPC shares at almost constant multiples, this is because of the deteriorating profitability and lower growth prospects in the company. All three valuation ratios have not seen any significant movement since FY 2010. The sector is also opening up to the private players and hence the company’s share may not see any significant price appreciation. Therefore this category gets 2 stars in NHPC fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The leverage has almost been flat over the years and therefore there is no significant change in interest payments. The asset turnover has also been stable. The operating margin has seen some decline over the years and tax efficiency has improved. Overall this has led to a stable ROE over the years. Therefore this category gets 3 stars in NHPC fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The company has seen some delay in new projects amidst the lockdown. Works at Subansiri were impacted and suspended for 20 days but it has now resumed and is being carried out in the day shift.
- The company’s FY 2020 CAPEX stood at INR 41.6 billion and further expects the CAPEX at INR 53 billion for FY 2021.
- Some of the challenges ahead is the increasing competition, sector privatization and heavy asset requirements which can increase debt levels for the company.
NHPC has shown stable but weakening financial position and lower growth prospects. The stock may not give extraordinary returns but can provide portfolio diversification as it has good dividend yields. Therefore this category gets 4 stars in NHPC fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
NHPC SHARES (3.0/5)
Therefore it is a 3-star stock
★ ★ ★ ☆ ☆
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|Economic Moat||★ ★ ★ ☆ ☆|
|Business & Management||★ ★ ★ ☆ ☆|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ☆ ☆|
|Efficiency Ratios||★ ★ ☆ ☆ ☆|
|Valuation Ratios||★ ★ ☆ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ☆ ☆|
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3 star Investments ★ ★ ★ ☆ ☆
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)