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NHPC - CAG report - tardy execution, cost overruns... - ICICIdirect
Posted On : 2012-09-10 20:15:24( TIMEZONE : IST )
The Comptroller and Auditor General of India (CAG) presented its report on PSU hydro utilities namely NHPC, THDC (unlisted), SJVN (unrated) and NEEPCO (unlisted) .The report highlights the tardy execution of projects and cost overruns by all the above-mentioned PSUs.
NHPC - Capacity addition tardy along with cost overruns
In the Eleventh Five Year Plan, the capacity addition of NHPC was 1150 MW (against the revised target of 5322 MW). In the Twelfth Five Year Plan, the report states that the company would be able to add 1702 MW (against the target of 4502 MW). On an average, the report points out that the company's projects have been delayed by 45 months. The cost escalation of projects is anywhere between 11% and 69%.
Long time taken for environment clearance; delay in Parbati and Subansiri
The report points out that NHPC unduly took a long time in obtaining clearances and completion for Environment Impact Assessment and Environment Management Plan against the benchmark defined by Ministry of Power. In one of the projects (Parbati 2 - 800 MW); against the suggestion of Geological Survey of India not to use tunnel boring machine methodology, NHPC used it leading to the project getting stuck with subsequent re-tendering of the contract yet to done. The report pointed out that NHPC relaxed pre-qualification criteria in five out of 16 contracts pertaining to Parbati 2 & Subansiri Lower. The report also highlighted NHPC's claims settlement mechanism is not prompt as claims worth Rs.2546 crore are pending, which affects cash flows of contractors.
Our stance
From the CAG report and interaction with the management, we infer that commissioning of Subansiri Lower (2000 MW) and Parbati 2 (800 MW) looks difficult in the Twelfth Five Year Plan. Total capital invested by NHPC in these projects is Rs.9610 crore (50% of CWIP). We maintain our BUY rating as timely execution of 1372 MW in FY13-14 would lead to earnings growth. The stock is trading at an inexpensive valuation of 0.8x FY13 P/BV (dividend yield of 4%). However, investors will have to be patient enough to earn meaningful returns on the stock.
