Sell this PSU multibagger stock, 32% downside likely amid execution risks, says Kotak

NHPC Ltd, which rallied 280 per cent in the last three years and 126 per cent in the last one year, has received 'Sell' call from Kotak Institutional Equities, with a fair value of Rs 60. The target hints at a 32 per cent potential downside. The PSU stock valuations are rich and are disregarding execution risk, the brokerage said.

"Though we do concede with the step-up in earnings due to likely commissioning of the long-awaited Subansiri Lower and Parbati II projects over FY2025/26E, assigning value to any future developments beyond these two projects may be overoptimistic, given the associated execution challenges in hydro projects and the historical track record on project delays. We maintain SELL, with an unchanged FV of Rs 60 per share," Kotak said.

NHPC trades at 17.8 times earnings per share and 2.2 times price to book value on FY2025E earnings, which is meaningfully higher than the average historical forward valuations of 11 times EPS and 1 time P/BV.

Kotak said execution challenges have traditionally plagued NHPC for extended periods. It highlighted that Subansiri Lower and Parbati II have been under construction for over a decade and have been delayed, even after the resumption of construction activities in FY2019.

Reasons for the delay include damage from floods, disruption of work by locals/activists and contractual issues. Hydro capacities take 10 years on average to be completed, which also raises the question on value creation from new capacities owing to the long gestation period.

"More importantly, with the increase in construction costs, tariffs for a new hydro plant far exceed those of solar and coal tariffs, diluting the business case for new hydro capacities," it said.

NHPC currently has a market capitalisation of Rs 89000 crore against operational (consolidated) regulated equity of Rs 13,900 crore (including JV projects) and another Rs 9,700 crore from the two soon-to-be-commissioned projects (2,800 MW).

"In aggregation, this regulated equity of Rs 23,600 crore will earn money at 18 per cent (including incentives). If we were to assume perfect execution and value the other under-construction hydro projects, they would yield an equity value of Rs 26,000 crore at 1.5 times invested equity and Rs 35,000 crore at 2 times invested equity, of which Rs 17,500 crore needs to be invested (targeted plans). This would imply a net value creation of Rs 8,500 crore and Rs 17500 crore at 1.5 times and 2 times, respectively," Kotak aid.

Kotak said that the prevailing market price of NHPC more than captures the intended growth plans without discounting associated delays.