In a recent report, Kotak Institutional Equities has reiterated its bearish stance on NHPC, reflecting concerns about the company's performance and future prospects. The brokerage firm has maintained a 'sell' rating on NHPC, setting a target price of ₹68, which suggests a potential downside of 31% from the stock's recent closing price of ₹98.80. This cautious outlook comes amidst a backdrop of NHPC's recent financial performance and project execution challenges.

Stock Performance and Valuation

NHPC's stock has experienced a downtrend in recent weeks, currently trading at a 16% discount from its recent peak of ₹118. This decline reflects broader concerns about the company's financial health and operational execution.

Quarterly Financial Performance

For the quarter ending June, NHPC reported a standalone revenue of ₹24 billion, marking a 6% decline year-on-year but a 46% increase quarter-on-quarter. The company’s EBITDA stood at ₹12.8 billion, which is an 8% decrease year-on-year but a 73% increase quarter-on-quarter. The PAT (Profit After Tax) was ₹10.2 billion, showing a 3% drop year-on-year but a 47% rise quarter-on-quarter.

One of the significant positive impacts on NHPC’s earnings was a write-back of provisions amounting to ₹993 million, which is expected to be reimbursed by the government. This write-back was related to a previously allocated provision of ₹2.2 billion on the DPR of the Bursar project. Additionally, the quarter's earnings were bolstered by rate-regulated income of ₹584 million, compared to ₹219 million in the previous year. NHPC also earned ₹116 million in incentives, reflecting a 1% year-on-year increase.

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Receivables and Financial Health

As of June 2024, NHPC's receivables amounted to ₹46 billion, showing a 31% year-on-year decrease but a 17% quarter-on-quarter increase. The company's receivables greater than 45 days stood at ₹5.1 billion.

Project Pipeline and Execution

NHPC has an extensive project pipeline totaling 19 GW, with 10.6 GW currently under construction. Key projects include Parbati II (800 MW), expected to be commissioned by 4QFY25, and Subansiri Lower (2000 MW), slated for FY2027. NHPC aims to commission three units of Subansiri Lower by March 2025 and the remaining five units by May 2026. The total cost for these projects is substantial, with ₹1 trillion allocated, including ₹122 billion for Parbati II, ₹212 billion for Subansiri, and ₹319 billion for Dibang. The incurred costs for these projects until June 2024 were 96%, 101%, and 8%, respectively.

Capex Plans and Execution Delays

Kotak Institutional Equities notes that NHPC has ambitious capex plans of ₹117 billion for FY2025E, up from ₹86 billion in FY2024, with ₹19.6 billion spent in 1QFY25. However, NHPC's current valuations, trading at 18X P/E and 2.3X P/B (FY2026E), are predicated on the assumption of flawless execution. The report highlights several execution delays, particularly with the Subansiri Lower project, and revised timelines for hydro projects beyond Subansiri and Parbati II. The company's investment in pump storage projects is still in the nascent stage, adding to the uncertainties.

Conclusion

Despite some positive financial indicators, Kotak Institutional Equities' bearish outlook on NHPC is driven by concerns over project execution delays and market conditions. Investors should remain cautious, given the potential risks associated with NHPC's current and future performance.

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