This PSU stock has a ‘Sell’ call from Kotak Equities: 32% downside likely amid execution risks

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Kotak Institutional Equities gave a ‘Sell’ call to NHPC Ltd which has rallied 280 per cent in the last three years and 126 per cent in the last one year. The brokerage firm put a target price of ₹60 on the stock which hints at a 32 per cent potential downside but it said that the PSU stock valuations are rich and are disregarding execution risk.

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“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 ₹60 per share,” Kotak Institutional Equities said.

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Kotak also noted that execution challenges have traditionally plagued NHPC for extended periods as there have been delays in Subansiri Lower and Parbati II which have been under construction for over a decade. Delay has been seen due to damage from floods, disruption of work by locals/activists and contractual issues.

“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,” Kotak said.

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“In aggregation, this regulated equity of ₹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 ₹26,000 crore at 1.5 times invested equity and ₹35,000 crore at 2 times invested equity, of which ₹17,500 crore needs to be invested (targeted plans). This would imply a net value creation of ₹8,500 crore and ₹17500 crore at 1.5 times and 2 times, respectively,” it added.

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