Still Fishing for Hydropower Companies To Invest In? Read This Before Diving Into Any Conclusions

From trading below the book value to massive increment of price, the Hydropower sector has brought a lot of fuss in the market and it sure has raised a question to fundamental analysts who prefers to invest in sound companies.

To that respect, Sharesansar carried out research on the major fundamental ratios of all hydropower companies which might or might not justify the price increment. In this article we compared the fundamental ratios of the third quarter of this FY with the corresponding quarter of last year and price increment is based on comparison from Baisakh 02, 2078. 

Some of the major ratios which are used in this study are Profit Growth, Revenue Growth, Current Ratio, ROE, and EPS.  

(NOTE: Investors can use other ratios in this analysis to get a broader picture)

Out of 40 listed companies, 8 companies have yet to publish their third-quarter report.

This analysis is divided into three categories:

• Companies that have a positive net profit
• Companies that reported a net loss
• Companies that have not published their Q3 report yet.

First, let’s deal with the companies which have reported positive net profit.

From the above table, it is clear that RURU Jalavidhyut Company Limited’s (RURU) price increased the most and stood at Rs. 1085 /share. RURU is followed by Radhi Bidyut Company Limited (RADHI) whose price increased by 114.72%. However, this is not what we are looking for in this article. We are interested in if the price increment is justified by the fundamentals of respective companies.

Let us know about RURU Jalvaidhyut, shall we? RURU Jalavidhyut currently operates a 5 MW power plant that started its commercial operation from Chaitra-09, 2071. The project cost comes at Rs 74.94 crores.

Now let's dive into the financial part, in this quarter, RURU Jalavidhyut Company Limited (RURU) reported a 12.89% increment in net profit compared to the corresponding quarter which seems fair because the revenue grew by just 2.82%. However, if an investor takes a careful look at the quarterly report, he/she will see that the production has been directly affected due to the frequent problem in the transmission line (as per the management). This might impact the overall revenue in the coming quarters if not solved. The company has also not invested in any other projects till this quarter. The company has reported an ROE of 16.69% which is probably higher than its peers. In terms of solvency, the company seems to be in a fair position to pay off its liabilities.  If we look at the most used valuation ratio, the company seems to have been trading at a Price to Earnings (P/E) ratio of 48.69 times.

Investors might be anticipating dividends from the company in this FY since it has Rs. 12.27 crores worth of reserve which might be one of the factors for an increased price, however, if an investor decides to buy the stock at the current market price, the value he/she will gain is from the increased profit in the upcoming FY which the company can play a crucial role in effectively investing its untied cash. 

The second company we will access is Radhi Jalavidhyut Company Limited which operates a 4.4 MW power plant. It started its commercial operation on Jestha-31, 2071. The profit in this quarter grew by 9.06%, however, the revenue declined by 3.95%. This is mainly because the transmission line had a frequent technical fault (mentioned by the management). In terms, of solvency, the company seems to have the ability to pay off its liabilities without external sources. The company doesn’t have much long-term borrowings in its book. However, investors are requested to access the liabilities side a little deeper since the liabilities might be due in upcoming years.

The company has invested in 4 other projects; Universal Power Company Limited (UPCL) (11 MW), Dordi Khola Jalavidyut Company Limited (DKJBSL) (12 MW), and Rapti Hydro & General Construction Limited which is currently involved in the construction of Rukum Gadh Jalavidhyut Aayojana (5 MW) hydropower.

The company proposed a bonus share of 36.5% for FY 2076-77 on May-17, 2021 during which the price was Rs. 774/share. When the company created its quarterly report, which was on April-03, 2021, its shares were trading at Rs. 492/share. The price has increased more than 100% since then and currently trading at a Price to Earnings (P/E) of 60.40 times which yields earnings of 1.65%. If investors wish to buy the stock at the current level of price, investors need to find a concrete reason which makes them sure that there is value at the current market price. Since price is what you pay and value is what you get.

Now Let’s deal with companies with Net loss in Q3 of FY 2077-78.

One of the first thing investors will notice in this table is two things (excluding the obvious; Net Profit and EPS) are common in almost all the companies; first is that the company has a negative reserve and second is except for NHPC and SSHL, all companies are insolvent, meaning that the company might face difficulty in paying off its short-term liabilities. On top of that, the company has a huge debt burden in its books.

From the table above, Dibyashwari Hydropower Company Limited’s (DHPL) price increased by 100.79% and the price per share stands at Rs. 255. The company is developing a 4 MW hydropower plant in the Sabhakhola River located in Sankhuwasabha District. The project has already come into operation. From the report, investors can see that the company expects an increment in the project cost since the contractors have yet to submit the final bill and job completion report.

Finally, the companies above are the ones who have yet to publish their third-quarter report.

Khani Khola Hydropower Company Limited’s (KKHC) price has increased the most which is about 88.81%. Since there is no official website of the company, we could not access much information on KKHC.

Conclusion:

Having adequate knowledge of what the company does and how the company is doing in terms of profitability, helps investors make an informed decision.

From this article, if there is one thing investors can take with themselves is that just looking at two or three common ratios won’t tell investors much about the company.  There are many other ratios that help the investor make an informed decision and not worry much about what the stock will do 1 or 2 months down the line.

(Disclaimer: Investors are requested to not take these analyses as a buy/sell suggestion This is just an opinion piece of Sharesansar.)