MOSL: NHPC (Buy)-Core PAT up 19%-one-offs impacted reported PAT-Lower under-recoveries and capital cost approval to boost earnings

NHPC: Core PAT up 19%; one-offs impacted reported PAT; Lower under-recoveries and capital cost approval to boost earnings

(NHPC IN, Mkt Cap USD3.6b, CMP INR25, TP INR33, 30% Upside, Buy)

Earnings impacted by shutdowns and reversals

NHPC's consolidated PAT declined ~17% YoY to INR25b in FY18. It was impacted by: (a) INR3.8b (pre-tax) impact of shutdown at TLDP III & IV plant and prior-period's revenue reversal at Parbati-III U-IV plant; (b) lower other income due to lower treasury and lower late-payment surcharge income; and (c) lower generation at subsidiary NHDC. Highlights from the FY18 annual report:

• Stripping out the other income, prior-period items, one-offs and shutdown impact, the standalone (S/A) generation PAT grew by a healthy 19% YoY (Exhibit 1) even as regulated equity remained unchanged.
• The improvement in underlying earnings is estimated to be driven by lower O&M under-recovery and other savings. Core (i.e. generation business) RoE on regulated equity increased ~200bp YoY to ~15%.
• We calculate O&M under-recovery reduced on lower cost (Exhibit 2) and with a normative annual increase in O&M allowance. Cost declined on retirement of employees (by 658 to 7,351), offsetting the wage hike, and by controlling repairs and other administrative costs.
• Standalone (S/A) debtor days continue to improve, down to 67 days in FY18 from 75 days in FY17, and with a peak of 141 days in FY13, releasing INR5.8b. But INR5.4b payment to a contractor under arbitration offset this benefit.