NHPC Limited. Background. Objects Of The Issue. Valuation. Aug 07, 2009

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1 Aug 07, 2009 Issue Details Face Value INR. 10 Price Issue Size Issue Amount Minimum Lot INR 30-INR36 per share 1.68 bn equity shares INR50.32bn - INR60.39bn 175 shares Minimum Amount INR INR Issue Opens August 07, 2009 Issue Closes August 12, 2009 Other Details Lead Managers Registrars Listing Financial Highlights ENAM Securities Pvt. Ltd,Kotak Mahindra Capital company Ltd, SBI Capital Markets Ltd. Karvy Computershare Pvt Ltd. BSE & NSE (INR mn) Particulars FY07 FY08 FY09 Total Income % Growth Operating profit % To income Net Profit % To income Diluted EPS (Rs) NHPC Limited Public issue of 1.68 bn shares with a face value of INR10 at a price band of INR30- INR 36, aggregating to INR50.32bn - INR60.39bn. The issue comprises an offer for sale of 0.56bn shares and fresh issue of 1.1bn shares. Background NHPC is a hydroelectric power generating company, which is dedicated to the planning, development, and implementation of an integrated and efficient network of hydroelectric projects in India. NHPC is involved in all aspects of hydroelectric projects - from conceptualizing to commissioning. Objects Of The Issue To part finance the construction and development costs of projects such as Subansiri Lower, Uri II, Chamera - III, Parbati III, Nimoo Bazgo, Chutak, and Teesta Low Dam IV. General corporate purposes Valuation We value NHPC on a P/BV basis relative to peers like JP Hydro in the hydel space and NTPC and Tata Power, CESC and KSK Energy. While there are no comparable peers, we believe hydel companies should be accorded discounting lower than its thermal peers owing to the higher risks of execution and long gestation periods. We believe NHPC s nearest comparable peer is NTPC owing to a common lineage and large scale. Bulk of NHPC s projects are being commissioned in FY11 and FY13. We have estimated the addition to gross block, funding and debt repayment as per norms for FY12 when the first tranche of projects will be eligible for full RoE. We have also considered that the projects will be commissioned as scheduled. The upper price band of INR36 discounts NHPC s FY12E book value by 1.62x and the lower price band discounts FY12E book value by 1.38x. The upper P/BV is at a 31% discount to NTPC while the lower P/BV is at a 41% discount to NTPC. We believe that the higher price band does not adequately factor in the risks. Thus, we recommend SUBSCRIBE at the lower price band of INR30. Analyst Radhika Podar research@acm.co.in Tel: (022)

2 Industry Overview In FY09, demand for electricity exceeded supply by 11%, compared with 9.90% in FY08. India s peak demand deficit during FY09 was 12% or 13,124MW; it is anticipated to be 152,746MW by 2012 with total energy requirements of 969 billion units. Hydropower Potential in India According to the Hydro Power Policy 2008, India has enormous potential for hydroelectric generation; about 84,000MW at 60% load factor, which translates into 148,700MW in terms of installed capacity, according to CEA. Moreover, 6,782MW of installed capacity has been assessed from small, mini, and micro hydroelectric schemes. The estimated hydropower potential and probable installed capacities of major Indian river systems are given below: Basin/River Potential at 60% Load Factor Probable Installed Capacity (MW) Indus Ganga Central Indian Rivers West-Flowing Rivers East-Flowing Rivers Brahmaputra Total As of May 31, 2009, the total installed capacity in the country was 149,392MW and hydropower (including pumped storage schemes in the country) accounts for 36,878MW. Share of Hydropower in Total Power Generation in India, as of May 31, 2009 Type of Station Installed Capacity (MW) Percentage Share Hydropower Thermal Nuclear R.E.S Total This capacity does not include small hydropower capacity of 1,168MW from hydropower plants with an installed generating capacity up to 25MW. These smallscale hydropower generators were classified as Renewable Energy Sources (RES) (along with wind energy and biomass energy) in FY09. A capacity addition of 78,700.4MW has been proposed in the eleventh five year plan. Of this, capacity addition of 15,627MW is proposed from hydropower - 3,392MW has already been commissioned and 12,235MW is under construction, as of May 31, (MW) Hydropower Thermal Nuclear Total Central sector State Sector Private sector All India NHPC plans to add around 1492MW, around 9.5% of the total proposed capacity addition.

3 Company NHPC was incorporated under the Companies Act in 1975 as a private limited company. It became a public limited company from, 1986, and its name changed to NHPC Limited. NHPC is a hydroelectric power generating company, which is dedicated to the planning, development and implementation of an integrated and efficient network of hydroelectric projects in India. The company executes all aspects of the development of hydroelectric projects - from conceptualizing to commissioning. It has developed and constructed 13 hydroelectric power stations and its current total installed capacity is 5,175MW. NHPC s current total generating capacity is 5,134.2MW, which takes into account a downgrade of capacity ratings of the Loktak and Tanakpur power stations by the CEA. NHPC s power stations and hydroelectric projects are located predominantly in the North and North East India, in Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Arunachal Pradesh, Assam, Manipur, Sikkim, and West Bengal. The company and its subsidiary, NHDC, generated 16, MU and 2, MU of electricity in FY09; they sold 14, MU and 2, MU, respectively. NHPC s average selling price was INR2.03 per unit and the average capacity indices for FY07, FY08 and FY09 were 94.11%, 96.13% and 93.61%, respectively. Joint Ventures NHPC selectively forms alliances with state governments to undertake development of projects. Pursuant to a MoU with the government of Madhya Pradesh, NHPC incorporated NHDC on August 1, 2000 to take advantage of the hydroelectric potential of the Narmada river basin. In September 2007, it signed a MoU with the government of Manipur to establish a JV to develop the Loktak Downstream hydroelectric project. In June 2007, the company entered into a MoA with the Arunachal Pradesh government to implement the Dibang project on an own-and-operate basis. Further, on October 10, 2008, it signed a MoU with the JKSPDC, the government of Jammu & Kashmir and PTC, to implement the Pakal Dul and other hydroelectric projects in the Chenab river basin with an anticipated aggregate installed capacity of ~2,100MW. In recognition of NHPC s performance, it was designated a Mini-Ratna Category-I public sector undertaking in April The company now has greater autonomy to undertake new projects without GoI s approval, subject to an investment ceiling of INR5 billion. The President of India and its nominees currently hold 100% of NHPC s issued and paid-up equity share capital. After the issue, the President of India will hold 86.36%of the post-issue paid-up equity share capital.

4 Exiting projects of the company Power station State Installed capacity in MW Year of Commissioning Revenue generatd in FY09 (InCrs) Baira Siul Himachal Pradesh Chamera I Himachal Pradesh Chamera II Himachal Pradesh Sub Total Salal Jammu & Kashmir / Uri I Jammu & Kashmir Dulhasti Jammu & Kashmir Sub Total Tanakpur Uttarakhand 120* Dhauliganga I Uttarakhand Sub Total Rangit Sikkim Teesta V Sikkim Sub Total Loktak Manipur 105** Sub Total Indira Sagar* Madhya Pradesh Omkareshwar* Madhya Pradesh Sub Total Total 5175 *Projects with NHDC *de-rated to 94.2MW **de-rated to 90MW Revenue Recognition NHPC s major source of revenue is through long-term power purchase agreements with SEBs. The company also provides contract-based management advisory and consultancy services to domestic and international clients in Bhutan and Nepal. The company has also been issued bonds by SEBs and other clients on which it earns 8.5% interest annually. The bonds issued to NHPC by SEBs are due for maturity and hence the income from these bonds will decline in the future. The operations and tariff of the company is regulated by the CERC, which recently unveiled its new tariff policy for the period FY The new policy is beneficial to power companies due to an increase in return on equity to be earned by the companies from post-tax 14% to 15.5% on pre-tax basis. Further, in the new policy also depreciation rate has also been increased from 3.6% to 5.28% which will prove to be beneficial to the company in improving its cash flows. However, Advance Against Depreciation (AAD) has been withdrawn and as a result of which, any repayments in excess of depreciation will not be allowed to be recovered through higher depreciation. The company has bulk of its projects lined up towards the end of FY11 and FY13 and full impact of which will be reflected in FY12 and some projects in FY14. The company is also planning to expand its contract based advisory services going forward. Key strengths Established track record in implementing hydroelectric projects Long Long-term power purchase agreements with customers. Strong in-house design and engineering team Competent and committed workforce Strong operating performance

5 Key concerns Hydroelectric projects face considerable opposition from the affected communities, leading to significant delays in execution of a project. NHPC has been facing opposition from such parties with litigations against the company and its subsidiary; NHPC may continue to face such opposition in future projects that it may take up. NHPC s projects are dependent on rainfall, which determines the amount of energy that can be generated by its plants. Rainfall in the current year has been dismal. Continued slack rainfall will impact the power generation and revenues. Lack of rainfall will lower availability and recovery of fixed costs, impacting profitability. The company had negative cash flows in recent fiscal years, as its expenditure on fixed assets exceeded its dividend income. Such negative cash flows may recur in future fiscal years. We have also considered debt repayments as per norms. NHPC s projects require long gestation periods and substantial capital outlay before it realizes benefits or returns on investments. The long gestation periods tend to suppress the company s return on equity with capital work-in-progress not earning any returns. NHPC s long-term agreements with state electricity entities expose it to certain risks, as it does not have the flexibility to modify such contracts. In the event of any significant change in operating circumstances requiring a change in tariff, the company will have to approach the regulator for a revision in tariff. The delay in getting approval for the same will impact performance. NHPC has no history of constructing or operating thermal power projects; so, it is difficult to estimate the future performance of its new business ventures The company s plans Expansion of installed capacity through JVs and MoUs Promotion and development of consulting and advisory services Continued expansion of international activities Focus on environmental and corporate social responsibility Investment in technology to modernize operations and improve operating performance. New projects NHPC is involved in various other projects as well. Some are awaiting clearances from MoEF and some are awaiting approval from the Supreme Court. Projects that are awaiting clearances comprise a total capacity of 6,731MW. NHPC is surveying and investigating some projects in Uttarakhand and Arunachal Pradesh with a total capacity of 7,255MW. The company plans to increase its capacity to 20,000MW by 2020.

6 Capacity (MW) State Installed capacity in MW Type Normative PAF (%) Baira Siul Himachal Pradesh 180 Pondage Chamera I Himachal Pradesh 540 Pondage Chamera II Himachal Pradesh 300 Pondage Salal Jammu & Kashmir 690 ROR Uri I Jammu & Kashmir 480 ROR Dulhasti Jammu & Kashmir 390 Pondage Tanakpur Uttarakhand 94 ROR Dhauliganga I Uttarakhand 280 Pondage Rangit Sikkim 60 Pondage Teesta V Sikkim 510 Pondage Loktak Manipur 90 Storage Indira Sagar* Madhya Pradesh 1,000 Storage 85 1,000 Omkareshwar* Madhya Pradesh 520 Pondage Sewa II Jammu & Kashmir NA NA 120 Chamera III Himachal Pradesh NA NA 231 Nimoo Bazgo Jammu & Kashmir NA NA 45 Parbati III Himachal Pradesh NA NA 520 Teesta Low Dam III West Bengal NA NA 132 Uri II Jammu & Kashmir NA NA 240 Chutak Jammu & Kashmir NA NA 44 Teesta Low Dam IV Subansiri Lower West Bengal NA NA 160 Assam/Ar unachal Pradesh FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 NA NA 2,000 Parbati II Himachal Pradesh NA NA 800 Kishanganga Jammu & Kashmir NA NA 330 Total 5,134 5,134 5,254 6,466 6,626 9,426 9,426 9,426 9,426 9,756 & CERC New Projects Capex (INR cr) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Sewa II Jammu & Kashmir Chamera III Himachal Pradesh 1, Nimoo Bazgo Jammu & Kashmir Parbati III Himachal Pradesh 2, Teesta Low Dam III West Bengal Uri II Jammu & Kashmir 1, Chutak Jammu & Kashmir Teesta Low Dam IV West Bengal 1, Subansiri Lower Assam/Arunachal Pradesh 6, Parbati II Himachal Pradesh 3, Kishanganga Jammu & Kashmir 3, Total Debt inflow 466 5, , ,549 Debt repayment 740 1,529 1,914 1,928 2,507 2,507 2,507 2,512 Net debt chg (274) 3,676 (1,171) 5,215 (2,507) (2,507) (2,507) 37 Debt repayment calculated as per CERC norms

7 Peer comparison Price/BV (x) BV Per share FY10E FY11E FY12E FY10E FY11E FY12E INR INR NTPC LIMITED RELIANCE POWER LIMITED TATA POWER CO LTD CESC LIMITED NA NA *NTPC, Reliance Power, Tata Power and CESC are consensus estimates Discount to NTPC at lower Price 41.31% Discount to NTPC at higher Price 31.30% Source: Bloomberg, ACMIIL Research Profit and loss statement INR Mn FY05 FY06 FY07 FY08 FY09 Net Sales/income from operations Net Sales Contracts and Consultancy Income Interest on Power Bonds and Long term Advances Total Income TOTAL EXPENDITURE OPERATING PROFIT Other Income EBIDTA Depreciation Interest and Finance charges PBT Provision for Taxation Current year tax and Fringe benefit tax Deferred Tax Deferred tax recoverable adjustment Net TAX PAT before minority interest & extraordinary items Extraordinary income Profit before minority interest Minority interest Net Profit

8 Balance sheet INR Mn Particulars FY05 FY06 FY07 FY08 FY09 Sources of funds Share Capital 94, , , , , Share Capital Deposit 1, GOI Fund adjustable to Equity 3, , Reserve and Surplus 41, , , , , Total Networth 141, , , , , Secured loans 55, , , , , Unsecured loans 36, , , , , Minority Interest 10, , , , , Deferred Tax Liability Advance against Depreciation 9, , , , , Capital Grant/Proportionate Contribution by Govt. of Madhya Pradesh towards Fixed Assets 8, , , , , Total Capital Employed 268, , , , , Application of funds Gross Block 141, , , , , Less: Depreciation 23, , , , , Net Block 118, , , , , Capital Work In Progress 97, , , , , Construction Stores and Advances 9, , , , , Investments 25, , , , , Net current liabilities 9, , , , , Miscellaneous Expenditure(to the extent not written off or adjusted) (0.10) Total Assets 260, , , , , Cash flow statement INR Mn FY05 FY06 FY07 FY08 FY09 Net Cash Flow From Operating Activities Net Cash Flow/(Used)from Investing Activities Net Cash Flow/(Used) From Financing Activities Net Increase/(Decrease) In Cash And Cash Equivalents Cash & Cash Equivalents at the beginning of the year Cash & Cash Equivalents at the close of the year

9 Ratios Profitability ratios FY05 FY06 FY07 FY08 FY09 Operating Profit Margin (%) PAT Margin (%) ROCE % RONW % Per Share Ratios Diluted EPS (INR) BVPerShare (INR) P/E (X) at lower band P/E (X) at upper band P/BV (X) at lowe band P/BV (X) at upper band Turnover Ratios Debtors Turnover Fixed Asset Turnover Capital Structure Ratios Debt/equity Current Ratio Quick Ratio

10 Annexure Hydropower is a renewable energy; it is more economical and less damaging to the environment as well as less polluting than most other forms of energy. In a hydroelectric power station, energy is harnessed from water by running it from a height, and in the process, a hydro-turbine is driven, which rotates an alternator to produce electricity. Water Water Reservoir Hydro Turbine Alternator Step -up Transformer Electricity in Grid Water reservoir: Hydropower plants utilize a water reservoir, which provides energy (i.e., moving water) to rotate the hydro turbine. Hydropower turbines: The water flow drives the turbines, making its rotors rotate at high speed. Alternators: Alternators are coupled to the turbines and they rotate with the rotors. The alternators convert the energy generated by the rotation of the turbines rotors into electricity. Various types of hydroelectric developments: Run-of-the-river (RoR) schemes: Electricity is generated from the water flow of a river or other moving water sources. This type of project doesn t involve a reservoir to store water inflow from the catchment area. Storage schemes: The reservoir comprises seasonal water surplus for generating electricity during seasons of lower flows when demand exceeds inflow. Tidal plant schemes: Power is generated via daily differences in tidal levels. The tidal range, or amplitude, is given by the difference between the high tide level and the subsequent low tide level. The tidal range is not constant even at one site, but it fluctuates to a smaller or larger extent around a local mean value, depending on the geographical position. Pumped storage schemes: Water used to generate power during peak demand periods is pumped back into the reservoir during lean demand periods. A pumped storage plant operates on the principle that the same machines are used for generation of power during peak hours when power is given to the network and for pumping back water into the reservoir during off peak hours, utilising power from the system. The provision is based on economics of operation and the availability of enough spare capacity in the grid to operate the machines as pumps in the low load period. 10

11 Notes: Institutional Sales: Ravindra Nath, Tel: Kirti Bagri, Tel: Himanshu Varia, Tel: HNI Sales: Pranav Jain, Tel: Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report. 11