Stock Pick from Electric Utilities Sector

Here Is Why:

• SJVN is diversifying its product portfolio.
• Earning highest margin in the industry.
• Offering 4-5 per cent dividend yield.

Hydropower is a capital-intensive sector. Once the plant is set up, the cost of producing one unit of power becomes cheaper than any other source of power generation and operating profit margin maybe as high as 90 per cent. This time our pick is from the hydropower sector viz. SJVN primarily because it has a sound operating history and some near-term triggers which will give an impetus to its earnings’ growth. SJVN is an almost debt-free company at the net debt level. The company pays one of the highest dividend yields at around 4 to 5 per cent and as compared to its peers it’s available at quite an attractive valuation.

Satluj Jal Vidyut Nigam (SJVN) is a joint venture between the central government and the Government of Himachal Pradesh and falls under the ambit of the Ministry of Power. It has enjoyed a high operating margin of 97 per cent over the past four years and net margin of around 60 per cent in FY14, which is the highest among its peers and other segments of the power sector. SJVN is generating a very healthy net operating cash flow year-on-year amounting to Rs 1,280 crore in FY14. Therefore, the company has been able to implement new projects without depending too on much debt.

During the first half of FY15, 6,182.21 million units of power have been generated out of which Nathpa Jhakri Hydro Power Station (NJHPS) generated 5,300 million units as against 5,494.41 million units during the corresponding half year; Rampur Hydro Power Station (RHEP) generated 848.69 million units; and Khirvire Wind Power Project generated 33.52 million units. SJVN has reported excellent growth with more than 60 per cent in revenue as well as at the net profit level during H1 FY15, primarily because the normative plant availability factor for Nathpa Jhakri has been increased from 82 to 90 per cent.Sales for the half year includes an amount of Rs 571.25 crore on account of arrears for the period FY09-14 in respect of NJHPS’ CERC order dated June 20, 2014. As far as return on equity is concerned, SJVN had reported a RoE at around 13 per cent in FY14 and so there is still further scope in improving up to 16 per cent, including 0.50 per cent for efficiency incentive.

The company is implementing 10 other projects in Nepal, Bhutan, Arunachal Pradesh, Himachal Pradesh, Uttarakhand, Bihar and Maharashtra. SJVN is diversifying its product portfolio and is venturing into non-conventional and thermal power generation to set up a 1,320 MW thermal power plant in Buxar, Bihar along with setting up a 47.6 MW wind project in Maharashtra. As far as the Bhutan and Nepal hydro power projects are concerned, the company has already got approval from both the governments.

On the valuation front, SJVN is trading at a TTM PE ratio of 6.17 and on the basis of price to book it trades at 0.95x. SJVN is a relatively steady and safe bet on account of a proven track record in terms of operations and offers 4-5 per cent dividend yield. Hence, we recommend our readers to take an exposure in the stock with the expectation of 25 per cent return from its current market price in the next one year.