MOSL: NHPC (Buy)-Lower under-recoveries to boost earnings; Cutting dividend estimates on higher capex

NHPC: Lower under-recoveries to boost earnings; Cutting dividend estimates on higher capex; maintain Buy

(NHPC IN, Mkt Cap USD4.3b, CMP INR29, TP INR36, 24% Upside, Buy)

We met the management of NHPC. Our key takeaways:

 Lower O&M under-recovery, approval of capital cost to boost earnings

The under-recovery in O&M cost is more than INR5.5b. It would decline to less than INR2b when the O&M norms are reset in the next tariff regulations in FY20. The decline in under-recoveries will also be aided by reduction in number of employees (count has reduced from ~8,000 in FY17 to ~7,500 in FY18 and will decline to ~6,500). The revenue under-recovery of INR1.5b-2b per year on four projects due to over-run in capital cost, which is pending approval, is also likely to be recovered by FY20. Of the four projects, three are in the first review stage of CEA, while one is in the second review stage of PIB. The final stage is approval by CCEA.

 Kishanganga commissioning soon; Parbati-II to be delayed

One unit of Kishangana (330MW, 3x110MW) was recently synchronized and run at full load. The plant is likely to be commercialized soon. Parbati-II is delayed due to complex geological issues, and we expect commercialization in FY21. Subansiri’s next hearing is scheduled in mid-April and final decision of the NGT is likely in June/July 2018.

 New projects to drive higher-than-expected capex

Annual capex is likely to be INR25b-30b, higher than our estimate of INR10b-15b over FY20-22. The higher-than-expected capex is due to delay at Parbati-II and commencing of work at some new projects (Dibang, Teesta-IV and Tewang). Civil construction work on the new projects will be taken up in FY19.