MANI
In this article, I’ll try to evaluate for myself whether buying NHPC shares at ₹100 and holding them for the long term will be a sound decision. The focus is on NHPC’s business fundamentals, future prospects, and current price valuation. I’m writing this article to evaluate for myself, what I should do with NHPC shares. In Year 2024 (about 8 months), the share price has already gone up from ₹66 levels to ₹98 (up by 49%). Considering this run-up already, I thought to check whether it make sense to buy it at these price levels or not.
NHPC is India’s largest hydropower company in India. It also has a growing presence in renewable energy. At ₹100 per share, investors may wonder if the stock offers good value for a long-term hold. We will analyze NHPC’s financial performance, growth prospects, and risks.
The aim is to provide a clear answer based on the company’s recent (FY 2023-24) annual report.
- Business Fundamentals: The analysis will consider revenue trends, profit margins, key financial ratios, and future growth potential.
- Price Valuation: We will also assess whether the current stock price fairly reflects NHPC’s intrinsic value.
By examining these two aspects, this article will help me decide if adding NHPC shares can be added to my portfolio at the current price levels of ₹100.
1. NHPC’s Business
NHPC Limited is a leading player in India’s hydropower sector. It operates 25 power stations with a total installed capacity of 7,144.2 MW. The said capacity included both hydro and renewable energy. Out of the total 7,144.2 MW capacity, 6,971.2 MW (97.5%) comes from hydro and only 173 MW (2.5%) from renewable energy.
The company generates most of its revenue from the sale of hydroelectric power. It is a key player in the segment of hydroelectric power generation.
NHPC is expanding its portfolio to include more renewable energy sources. It is developing significant projects like:
- 2,880 MW Dibang Multipurpose Project: It is a very big hydroelectric power project being developed on the Dibang River in Arunachal Pradesh. It is set to be one of the largest hydropower projects in the country. The project aims to generate significant amounts of renewable energy. It will reduce dependence on fossil fuels. This is an ongoing project expected to get completed by Year 2032.
- 2,000 MW Subansiri Lower Project: It also a is a big hydroelectric power plant being developed on the Subansiri River in Arunachal Pradesh. It is one of the largest hydropower projects in the country. The project aims to generate significant amounts of renewable energy, reduce dependence on fossil fuels. However, its construction has faced delays and controversies due to environmental concerns and opposition from local communities. NHPC expected to complete this project by December’2024.
- 800 MW Parbati-II Project: It is also a hydroelectric power plant being developed on the Parbati River in Himachal Pradesh. It also includes the Parbati-III Project. The project aims to generate renewable energy. NHPC expected to complete this project by May’2026.
If these three project go through completion, it will add substantial capacity in the coming years, boosting revenue potential.
NHPC is also diversifying into solar and wind energy. The company recently signed multiple agreements, including a 3000 MW solar power project under the MNRE-REIA scheme. It has also partnered with Andhra Pradesh Power Generation Corporation for pumped hydro storage projects.
2. Financial Performance Analysis
NHPC’s revenue has shown steady growth over the past five years, with total income reaching ₹10,024.99 crore in FY 2023-24. The primary source of revenue is the sale of energy, contributing ₹7,957.43 crore. While other operating income, including power trading and consultancy, added ₹447.49 crore. The income looks stable despite fluctuations in energy sales. The cash flow management looks fairly positive.
Profitability is also nearly stable. Profit After Tax (PAT) at ₹3,743.94 crore in FY 2023-24. It is slightly down from ₹3,833.79 crore the previous year. This slight decline is due to increased operational costs and one-off expenses. However, the company maintained healthy profit margins, with a net profit margin is about 42%.
Key financial ratios show NHPC’s fairly strong financial health (considering its nature of business). The Return on Equity (ROE) stands at 9.36%/ The Debt-to-Equity (D/E) ratio is 0.84, reflecting moderate leverage and a balanced capital structure.
In the last five years, the EPS has grown from ₹2.87 to ₹3.61 at a rate of 4.69% per annum. Considering the nature of its business, this EPS growth in decent.
NHPC’s financial performance is not excellent (if we’ll compare it other blue-chip companies), but considering that it is a PSU operating in the “Utility” space, it looks like a good company.
As per press release dated 30-Aug-2024, NHPC is now a Navratna PSU company.
3. Growth Prospects and Strategic Initiatives
NHPC’s growth prospects are strong. It is driven by ongoing projects like the 2,880 MW Dibang Multipurpose Project, the largest hydroelectric project in India. It will significantly enhance the overall operating capacity of NHPC. Other key projects, such as the 2,000 MW Subansiri Lower and 800 MW Parbati-II, are nearing completion.
These projects will substantially increase the revenue of NHPC from energy sales in the future.
Government policies supporting renewable energy provide a favorable environment for NHPC. Incentives, like tax benefits and subsidies, boost the company’s expansion into solar and wind power. This aligns with India’s goal to achieve 500 GW of renewable capacity by 2030. These government incentives offers NHPC a strategic advantage.
NHPC has also made strategic moves to expand its renewable portfolio. It has signed several MOUs, including one with Andhra Pradesh Power Generation Corporation. The MOU is for pumped hydro storage power project. There is another project with Gujarat Power Corporation for a ₹4,000 crore investment in a 750 MW project.
NHPC has Partnered with ONGC for developing pumped hydro storage and other renewable projects further diversify its energy mix.
These initiatives indicate NHPC’s commitment to long-term growth. I think it is good well to leverage government support and strategic alliances. This diversified approach will further enhance its revenue stability. I think, in terms of business fundamentals, NHPC is a decent option for long-term investors.
4. Price Valuation Analysis
At ₹100, NHPC’s current share price reflects a significant run-up from ₹40 in March 2023. The Price-to-Earnings (P/E) ratio has surged to 27.6, up from 10.35 in March 2023. This sharp increase suggests the market is pricing in higher future growth expectations. Compared to the utility sector’s average P/E of around 15-20, NHPC appears overvalued.
The Price-to-Book (P/B) ratio of 2.55 is also above its historical average of around 1.04. This is another indicator that the stock is trading at a premium relative to its book value.
The EV/EBITDA ratio has risen to 18.98, compared to 10.46 a year ago. It again suggest that the market expects robust earnings growth or has become more optimistic about NHPC’s future cash flows.
Despite these high multiples, NHPC’s estimated intrinsic value, based on its assets, cash flow, and growth potential, may not fully justify the current price. The intrinsic value, considering the fundamentals, seems closer to ₹50 per share (as per my Stock Engine). This is significantly lower than the market price, indicating the stock may be overvalued at ₹100.
Thus, while NHPC has growth prospects, the current price exceeds the intrinsic value estimates. It is suggesting a caution for those investors who are considering adding NHPC to their portfolio at these price levels.
Conclusion
Deciding whether to buy more NHPC shares at ₹100 depends on your investment horizon and risk tolerance. NHPC shows strong growth potential through its ongoing projects and expansion into renewable energy. However, the current market price seems to overestimate these future gains.
The recent surge in share price, driven by favorable government policies and market optimism, suggests that much of the anticipated growth may already be priced in.
Investors focused on long-term stability and a steady income stream, NHPC’s is an ideal stock. NHPC’s consistent dividends and government backing provide a level of security.
The company’s strategic moves in renewable energy could pay off over time. Yet, for those looking for immediate gains or undervalued opportunities, the current premium may be a deterrent.
As a conservative investor with a long-term outlook, NHPC could be a reasonable hold or modest buy for me. But it is also true that at these price levels, higher returns will not be feasible.
For me, NHPC’s will become a great buy at ₹75 levels.
Have a happy investing.
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