Upcoming Renewable Projects Will Diversify India's Energy Portfolio

Key Takeaways

• Progress on renewable and hydroelectric projects positions NHPC for future revenue growth through energy diversification and expanded portfolio.
  
• Strategic mergers aim to enhance operational efficiencies and potentially improve net margins.
  
• Operational setbacks, including plant shutdowns and project delays, threaten NHPC's revenue, profitability, and efforts to diversify through renewable energy projects.

Catalysts

Engages in the generation, sale, and trading of electricity through hydro, wind, and solar power stations in India.

• Significant progress and anticipated commissioning of the Subansiri Lower Project by May 2026, which is expected to contribute to revenue growth once operational.
  
• Upcoming completion of the Parbati-II HE project by February 2025, which should enhance revenue streams due to its 98% physical progress.
  
• Execution of several renewable energy projects, including solar and floating solar power projects in states like Kerala and Gujarat, expected to be commissioned by August 2025, positioning the company for future increases in revenue from diversification into solar energy.
  
• Ongoing and planned large-capacity hydroelectric projects such as Dibang and Teesta-VI, expected to be completed by 2032 and 2027 respectively, potentially boosting long-term revenue and expanding NHPC's energy portfolio.
  
• The merger of subsidiaries like Lanco Teesta Hydro Power Limited and Jal Power Corporation, expected to enhance operational efficiencies and potentially increase net margins upon completion.

NHPC Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NHPC's revenue will grow by 29.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.3% today to 28.7% in 3 years time.
• Analysts expect earnings to reach ₹70.0 billion (and earnings per share of ₹6.81) by about May 2029, up from ₹31.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹92.3 billion in earnings, and the most bearish expecting ₹53.5 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.9x on those 2029 earnings, down from 24.8x today. This future PE is lower than the current PE for the IN Renewable Energy industry at 31.5x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.0%, as per the Simply Wall St company report.

Risks

• The flash floods and subsequent landslide in the Teesta Basin have severely impacted the Teesta-V power station, leading to a complete shutdown. The plant is expected to resume operations only by December 2025, resulting in significant under-recovery and potential loss of revenue amounting to ₹450 crores annually beyond the 12-month insurance coverage period. This adversely affects the revenue and net margins.
  
• NHPC's plant availability factor has decreased significantly from 91.93% to 82.68% due to several operational challenges, including the complete shutdown of Teesta-V and issues at TLDP-III and Uri-I power stations. This decline in operational efficiency can negatively impact revenue and earnings.
  
• The company has experienced a notable drop in profit after tax by 23% during half-year financial year '25 compared to the previous year. This decline is linked to reduced power generation and increased finance costs, primarily influenced by higher interest from arbitration and court cases. Both factors could depress net margins.
  
• There are delays and cost overruns in several key projects, such as Parbati-II HE, with anticipated costs and completion dates being pushed further. These delays can increase financial burdens and result in higher levelized tariffs, impacting future revenue streams and profitability.
  
• The company faces challenges in signing power purchase agreements (PPAs) for renewable projects at higher tariffs, which could limit the growth and profitability of its renewable energy segment. This poses a risk to the company's ability to diversify and stabilize its long-term revenue sources.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹89.57 for NHPC based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹117.0, and the most bearish reporting a price target of just ₹72.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ₹244.1 billion, earnings will come to ₹70.0 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 15.0%.
• Given the current share price of ₹78.14, the analyst price target of ₹89.57 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.