MOSL: Morning India (26/December/17)-1. NHPC; 2. ONGC; 3. Mahindra Financial Services

​MOrning India (26/December/17): 1. NHPC; 2. ONGC; 3. Mahindra Financial Services

Today’s top research idea

NHPC – Come on in, the water’s fine; Valuations attractive at 1x BV and 6% dividend yield; initiate with Buy

• NHPC is one of the largest hydro power producers in India. It has an installed capacity of ~6.6GW with attributable equity share of 5.9GW. We expect ~6%/11%/20% CAGR growth in share in capacity/regulated equity/core (ex-other income) PAT, respectively, over FY17-20E driven by commissioning of projects, saving in O&M costs and approval of capital cost of five projects.
  
• RoE will improve by 240bps to ~12% by FY20E. The regulatory risk is low, growth potential is high and there is need to encourage hydro to handle volatility in solar energy to manage grid.
  
• Valuation is attractive at ~1x P/BV and dividend yield of ~6%. We expect the stock to get re-rated as RoE improves.
  
• We value the stock at INR37/share based on DCF and initiate the coverage with a Buy rating.
  

Piping hot news

Cummins in talks to acquire Kirloskar Oil Engines in $500 million deal

• The Cummins Group, one of the world’s largest manufacturers of engines and power generation products, is in talks to acquire a controlling stake in Kirloskar Oil Engines Ltd in a deal valued at over $500 million through one of its Indian subsidiaries, two people aware of talks between the companies said. Mint reported on 5 December that the Kirloskar group was in talks to exit its diesel generator set business.