>NHPC LTD (BNP PARIBAS)

Hydro Ain’t Electrifying

■ Hydropower – a risky business
We Initiate coverage on NHPC Ltd with a REDUCE rating and TP of INR29.00. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1GW (12% of India’s hydropower generation capacity). Hydro power projects have long gestation periods taking several years to plan and build. With potential opposition from environmentalists and people displaced by the project, they also face significant execution risks. Seven of NHPC’s 11 projects under implementation have been delayed by a year or more owing to natural calamities, opposition from environmentalists and locals.

■ Low returns for high risks
NHPC assumes a higher risk in building hydropower plants but the Central Electric Regulatory Commission’s (CERC) tariff regulations do not compensate it for the extra risk. Unlike the National Power Thermal Corp (NTPC), NHPC has lower levers to boost its ROE above 15.5%.
New regulated tariffs for the period FY10-14 are negative for NHPC as its profits could be hit if it can’t generate the stipulated amount of electricity owing to water shortages. We estimate every 10% shortfall in generation will lead to an 11.3% reduction in our FY10 EPS estimates.

■ High CWIP and low leverage depress ROEs
The long gestation period and high execution risks mean investor returns in NHPC are low. ROE in FY09 was only 9.1% due to low leverage and a low asset-turnover ratio. Presently 32% of its equity is stuck in capital work in progress, which earns no returns – due to the long gestation of
projects and execution delays, 8% in 8.5% tax-free bonds and 6% of equity is deployed in cash. We expect the same in FY12, when only 49% of the equity will earn returns.

■ Unattractive valuations: Initiate with TP of INR29.00/share
Our TP of INR29.00 is based on 1.4x our FY11 BV/share estimate, a discount to NTPC’s FY11 P/BV of 2.5x. We believe the valuation discount is warranted for the significantly lower ROE of 8.3% vs NTPC’s ROE of 14.6%. We expect upside if more NHPC projects are allowed to sell Carbon Emission Rights under the Clean Development Mechanism.

To see full report: NHPC LTD

>INDRAPRASTHA GAS LTD. (CD EQUIRESEARCH)

Company Brief
Indraprastha Gas Ltd., incorporated as a JV between GAIL, BPCL and the Delhi government, is the sole supplier of CNG to transport sector, PNG to domestic & commercial sectors & R‐LNG to industrial sector, in the National Capital Region (NCR) of Delhi.

Highlights
■ The company has a very sound business model due to its utility nature i.e fuel for the vehicles and piped natural gas for domestic and industrial consumers and hence is relatively immune from any economic downturn.

■ IGL is consolidating its presence in the NCR of Delhi by investing Rs 1,600 crore to expand its retail outlets and PNG network in and around the metropolis in the next three years.

■ IGL is looking for opportunities in the surrounding regions and has geared itself for competitive bidding being for setting up of City Gas Distribution Projects in various cities.

■ IGL has tied up for its future gas requirements by signing Gas Sale Agreements with GAIL & BPCL and the supply pact with RIL from KG D6 block, and hence will not have gas sourcing
issues over the medium term.

■ In view of forthcoming Commonwealth Games in 2010, a large number of high capacity buses and Radio Taxis running on CNG are expected to be added to the public transport fleet in the Capital, which would immensely benefit IGL.

■ IGL is a debt free company with surplus cash and investments of about Rs 250 crore and all the expansions have been undertaken with internal accruals.

■ At the current price of Rs 161, the stock trades at a P/E multiple of 11.1x FY10E earnings and 9.6x FY11E earnings. We recommend a “BUY” on the stock with a price target of Rs 205, assuming a P/E multiple of 12x FY11E earnings, an upside of 27% from the current levels, over a period of 12 months.

To see full report: INDRAPRASTHA GAS LTD

>HIGH NOON (SHAREKHAN)

SUPPORT @ 5050

The Nifty opened in green with positive global cues but has given up all its gains. It is finding resistance at 5150; however, it has got good support at 5050 level. The Nifty has given a breakout from a triangular pattern, so the upper end of the triangle also remains a crucial support in the short run. The momentum has started to reverse on the upside which will also support the Nifty to move higher.

On the hourly charts, the KST momentum indicator has a given a positive crossover and is trading above the zero line. The Nifty is trading above the 20-HMA and 40-HMA, ie 5039 and 5022 respectively, which are supports in the short run. The market breadth is positive with 764
advances and 456 declines.

Of the 30 stocks of the Sensex ITC (down 3.11%) and HUL (down 2.30 %) are the top losers while NTPC (up 2.50%) and BHEL (up 1.43%) are the top gainers.

To see full report: HIGH NOON

>J KUMAR INFRAPROJECTS (ANAND RATHI)

High-growth urban infra play; Reiterate buy

■ 49% earnings CAGR over FY09-12. Given steady order inflows and a proven execution record, we raise FY10 and FY11 earnings estimates by 25% and 21%, respectively. We estimate a 49%
CAGR in J Kumar’s earnings over FY09-12.

■ Healthy order book. J Kumar’s Rs14.5bn order book (3.7x FY09 and 3.1x TTM revenues) is a healthy mix of varied projects – transport engineering, skywalks, irrigation, civil construction and piling. It has an average execution period of two years.

■ Superior operating margins. J Kumar’s operating margin (15%) is better than the sector average (10%) given its strengths: geographical concentration, owned machinery and manpower and a strategy of not bidding for sub-contract work. For FY10-12, we estimate it would maintain margins at current levels.

■ Macro growth opportunities… scale up in execution is key. Increase in outlay on infrastructure development would increase order flows to construction companies. J Kumar, with a threedecade long track record in Maharashtra, is in a good position to capitalise on the potential for infrastructure investment.

■ Valuation. We value J Kumar at 7.5x FY11e earnings, a 50% discount to the average of large cap construction companies and a 25% discount to mid cap companies. At the current price of
Rs172, the stock trades at 5.0x FY11e earnings.

To see full report: J KUMAR INFRAPROJECTS