NHPC Limited's (NSE:NHPC) Price Is Right But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may consider NHPC Limited (NSE:NHPC) as an attractive investment with its 26.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

While the market has experienced earnings growth lately, NHPC's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for NHPC

Want the full picture on analyst estimates for the company? Then our free report on NHPC will help you uncover what's on the horizon.

How Is NHPC's Growth Trending?

NHPC's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.8% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 20% each year, which is noticeably more attractive.

With this information, we can see why NHPC is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of NHPC's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for NHPC you should be aware of.

You might be able to find a better investment than NHPC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.