MOSL: NHPC (Buy) - 4QFY18: Shutdowns, weather impact FY18 performance; Earnings growth to accelerate

NHPC 4QFY18: Shutdowns, weather impact FY18 performance; Earnings growth to accelerate, RoE to improve; dividend yield attractive

(NHPC IN, Mkt Cap USD26.3b, CMP INR26, TP INR36, 38% Upside, Buy)

• NHPC’s standalone (S/A) 4QFY18 PAT grew ~12% YoY to INR1.9b (our estimate: INR1.7b), boosted by late payment surcharge income of INR1.5b, but partly offset by 32% YoY decline in incentive income to INR1b. Generation declined 35% YoY to 2.16BU due to hydrology.
• For FY18, S/A PAT was down ~1% YoY to INR27.5b. Higher dividend income from subsidiaries was offset by revenue reversal at Parbati-III Unit-IV and shutdown at TLDP. O&M under-recovery reduced by ~INR1b on lower employee and other expenses. S/A regulated equity increased 0.6% YoY to INR109b. Generation declined 1% YoY to 22.9BU in FY18.
• Consolidated PAT declined 17% to INR25b due to lower other income (less liquid surplus and lower later payment surcharge) and ~40% decline in PAT at NHDC subsidiary (~51% stake) due to lower generation.

Earnings growth to accelerate, RoE to improve; dividend yield attractive

• Kishanganga 330MW was commissioned in May 2018. This will boost S/A regulated equity by ~16% to INR130b in FY19. Work on Parbati-II is progressing at slow pace due to geological issues, but the project is expected to be commissioned by FY21. Commissioning of Parbati-II will boost regulated equity by ~20% and also drive earnings recovery from Parbati-III Unit-IV (river flow is linked). Subansiri remains stuck, awaiting final environment approval.
• We have increased capex from INR22b-25b to ~INR26b over FY19-21, as NHPC plans to undertake new projects. We have also cut DPS from INR1.8-2 to INR1.6-1.9 over FY19-21 due to higher capex and equity funding at Subansiri until the project is cleared by authorities.