The quarter's performance was marred by a dramatic operating margin compression, plummeting from 60.23% in Q2 FY26 to just 9.53% in Q3 FY26, alongside a concerning 34.01% sequential revenue decline to ₹2,220.73 crores. The company's standalone net profit turned negative at ₹-856.44 crores, reflecting mounting financial pressures from elevated interest costs and operational headwinds.
Financial Performance: A Quarter of Sharp Deterioration
The third quarter of FY26 presented a stark reversal from NHPC's recent performance trajectory. Net sales contracted to ₹2,220.73 crores, down 34.01% from Q2 FY26's ₹3,365.26 crores and 2.89% lower than the year-ago quarter's ₹2,286.76 crores. This revenue decline appears particularly concerning given the seasonal nature of hydropower generation, where the post-monsoon period typically witnesses improved water availability and generation capacity.
The operating profit before depreciation, interest, and tax (PBDIT) excluding other income collapsed to ₹211.60 crores from ₹2,026.87 crores in the previous quarter, representing an alarming 89.56% sequential decline. The operating margin excluding other income plummeted to just 9.53%, down from 60.23% in Q2 FY26 and significantly below the year-ago quarter's 44.39%. This dramatic margin compression suggests severe operational challenges, potentially stemming from lower generation volumes, unfavourable power purchase agreements, or increased operational expenses.
Interest expenses continued their upward march, rising to ₹310.25 crores in Q3 FY26 from ₹277.69 crores in the previous quarter, marking an 11.72% sequential increase. On a half-yearly basis (H1 FY26), interest costs surged 136.40% to ₹587.94 crores, reflecting the impact of NHPC's elevated debt burden. With long-term debt standing at ₹35,681.73 crores as of March 2025 and a debt-to-equity ratio of 1.09 times, the company faces mounting financial leverage that is increasingly weighing on profitability.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Operating Profit (₹ Cr) | Op. Margin % | Net Profit (₹ Cr) |
|---|---|---|---|---|---|
| Dec'25 | 2,220.73 | -34.01% | 211.60 | 9.53% | 219.12 |
| Sep'25 | 3,365.26 | +4.71% | 2,026.87 | 60.23% | 1,021.44 |
| Jun'25 | 3,213.77 | +36.93% | 1,801.51 | 56.06% | 1,065.02 |
| Mar'25 | 2,346.97 | +2.63% | 1,090.19 | 46.45% | 853.64 |
| Dec'24 | 2,286.76 | -25.07% | 1,015.10 | 44.39% | 231.23 |
| Sep'24 | 3,051.93 | +13.28% | 1,805.16 | 59.15% | 900.03 |
| Jun'24 | 2,694.20 | — | 1,609.47 | 59.74% | 1,021.77 |
Operational Challenges: Margin Collapse Signals Deeper Issues
The most alarming aspect of Q3 FY26 results is the unprecedented margin compression. NHPC's operating profit excluding other income fell to its lowest quarterly level at ₹211.60 crores, whilst the operating margin contracted to 9.53% from the previous quarter's robust 60.23%. This represents the weakest margin performance in recent quarters and raises serious questions about the company's operational efficiency and cost management capabilities.
The company's return on capital employed (ROCE) for H1 FY26 stood at 6.50%, marking the lowest level in recent periods and significantly below the historical average of 6.64%. This deterioration in capital efficiency is particularly concerning for a capital-intensive business like hydropower generation, where efficient asset utilisation is paramount. The declining ROCE, coupled with a modest return on equity (ROE) of 9.11%, underscores the challenges NHPC faces in generating adequate returns for shareholders given its substantial asset base and high leverage.
Critical Warning Signals
Margin Collapse: Operating margin (excluding other income) plunged from 60.23% in Q2 FY26 to just 9.53% in Q3 FY26, the lowest quarterly margin on record. This 50.70 percentage point contraction signals severe operational stress.
Interest Burden Escalation: Interest costs for H1 FY26 surged 136.40% year-on-year to ₹587.94 crores, reflecting the mounting pressure from a debt-to-equity ratio of 1.09 times and long-term debt exceeding ₹35,681 crores.
Negative Standalone Profitability: The standalone profit after tax turned negative at ₹-856.44 crores in Q3 FY26, indicating core business challenges beyond subsidiary performance.
Employee costs remained relatively stable at ₹346.41 crores in Q3 FY26, though this represented a sequential decline from ₹326.46 crores in the previous quarter. On an annual basis, employee costs for FY25 stood at ₹1,823 crores, up from ₹1,418 crores in FY24, reflecting a 28.57% increase that suggests ongoing wage pressures despite the company's deteriorating profitability.
Balance Sheet Stress: Rising Leverage Compounds Concerns
NHPC's balance sheet reveals mounting financial stress, with long-term debt increasing to ₹35,681.73 crores as of March 2025 from ₹29,381.73 crores a year earlier, representing a substantial 21.44% annual increase. This debt escalation has pushed the debt-to-equity ratio to 1.09 times for H1 FY26, the highest level in recent periods and well above the comfort threshold for utility companies.
The company's shareholder funds stood at ₹39,668.16 crores as of March 2025, comprising share capital of ₹10,045.03 crores and reserves of ₹29,623.13 crores. Whilst the reserve base has grown modestly from ₹28,623.56 crores in the previous year, the pace of reserve accumulation has slowed considerably, reflecting the impact of subdued profitability and continued dividend payouts.
Debt Dynamics: A Growing Concern
NHPC's debt-to-EBITDA ratio stands at 5.57 times, indicating that the company would need more than five and a half years of current EBITDA to repay its debt obligations. The net debt-to-equity ratio of 1.02 times further underscores the elevated leverage, whilst the EBIT-to-interest coverage ratio of 6.59 times, though adequate, has been trending downward as interest costs escalate faster than operating profits.
Current assets stood at ₹11,259.63 crores as of March 2025, providing reasonable liquidity coverage against current liabilities of ₹10,176.42 crores. However, the cash position declined sharply to ₹801 crores in FY25 from ₹1,422 crores in the previous year, reflecting negative free cash flow of ₹620 crores. This cash drain, despite positive operating cash flow of ₹5,026 crores, stemmed from substantial investing activities totalling ₹7,550 crores, primarily related to ongoing project development.
Industry Leadership: How NHPC Compares to Peers
When benchmarked against industry peers, NHPC's positioning reveals a mixed picture. The company trades at a price-to-earnings ratio of 24.86 times, below the sector average but significantly lower than high-growth peers like Adani Green Energy (91.91x) and Adani Energy Solutions (52.84x). However, this valuation discount appears justified given NHPC's anaemic 2.30% five-year sales growth and 2.93% EBIT growth, substantially below the sector's growth trajectory.
| Company | P/E Ratio (TTM) | P/BV Ratio | ROE % | Debt/Equity | Div Yield % |
|---|---|---|---|---|---|
| NHPC Ltd | 24.86 | 1.91 | 9.11% | 1.02 | 2.47% |
| Power Grid Corpn | 17.33 | 2.72 | 17.22% | 1.28 | 3.08% |
| Adani Green | 91.91 | 8.05 | 13.56% | 4.20 | — |
| Tata Power Co. | 29.38 | 3.15 | 10.20% | 1.56 | 0.61% |
| Adani Energy Sol | 52.84 | 5.08 | 10.54% | 1.68 | — |
| JSW Energy | 35.17 | 2.83 | 7.78% | 2.13 | 0.42% |
NHPC's return on equity of 9.11% lags significantly behind Power Grid Corporation's 17.22% and trails most peers except JSW Energy (7.78%). This subpar ROE performance, combined with the company's modest growth profile, explains the valuation discount. The company's price-to-book ratio of 1.91 times is the lowest among listed peers, reflecting market scepticism about NHPC's ability to generate superior returns on its substantial asset base.
On the positive side, NHPC offers the second-highest dividend yield in the peer group at 2.47%, trailing only Power Grid Corporation's 3.08%. The company's consistent dividend policy, with a payout ratio of 52.66%, provides some income support for investors, though this comes at the cost of retained earnings for growth investments.
Valuation Analysis: Premium Unjustified Given Deteriorating Fundamentals
Trading at ₹78.49, NHPC commands a market capitalisation of ₹79,999 crores, positioning it as the sixth-largest player in the power sector peer group. The current price-to-earnings ratio of 24.86 times represents a premium to the industry average of 21 times, a valuation that appears increasingly difficult to justify given the company's deteriorating financial performance and weak growth outlook.
The company's PEG ratio of 3.35 indicates significant overvaluation relative to growth prospects. With five-year sales growth of just 2.30% and EBIT growth of 2.93%, NHPC is commanding a valuation multiple typically reserved for companies demonstrating double-digit growth rates. This disconnect between valuation and growth fundamentals suggests limited upside potential at current levels.
The enterprise value-to-EBITDA multiple of 20.32 times and EV-to-EBIT of 27.12 times further reinforce the expensive valuation thesis. These multiples are elevated for a mature, slow-growth utility business operating in a regulated environment with limited pricing power. The EV-to-sales ratio of 10.77 times appears particularly stretched given the company's modest revenue growth and deteriorating margins.
NHPC's stock trades 14.96% below its 52-week high of ₹92.30 but remains 10.53% above the 52-week low of ₹71.01. The current valuation grade of "Very Expensive" has been in place since April 2023, reflecting persistent overvaluation concerns despite the stock's recent underperformance.
Shareholding Pattern: Institutional Confidence Waning
The shareholding pattern reveals interesting dynamics in institutional investor behaviour. Promoter holding has remained stable at 67.40% over the past five quarters, with the President of India maintaining consistent ownership. This stable government holding provides some governance comfort but limits free float availability.
| Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 67.40% | 67.40% | 67.40% | 67.40% | 0.00% |
| FII | 10.39% | 10.05% | 9.31% | 8.80% | +0.34% |
| Mutual Funds | 3.69% | 3.78% | 3.98% | 4.53% | -0.09% |
| Insurance | 6.42% | 6.59% | 6.52% | 5.97% | -0.17% |
| Other DII | 1.33% | 1.30% | 1.27% | 1.25% | +0.03% |
| Non-Institutional | 10.76% | 10.87% | 11.52% | 12.05% | -0.11% |
Foreign institutional investors (FIIs) have been gradually increasing their stake, rising from 8.80% in March 2025 to 10.39% in December 2025. The sequential increase of 0.34% in Q3 FY26 suggests some renewed interest from global investors, potentially viewing the stock's underperformance as a buying opportunity. However, this modest accumulation appears insufficient to offset broader selling pressure.
Domestic mutual funds have been reducing exposure, with holdings declining from 4.53% in March 2025 to 3.69% in December 2025. The sequential 0.09% reduction in Q3 FY26 continues this trend, indicating that domestic institutional investors remain cautious on the stock. Insurance companies similarly reduced holdings by 0.17% quarter-on-quarter to 6.42%, suggesting waning confidence amongst long-term domestic investors.
The combined institutional holding of 21.84% provides reasonable liquidity but has been trending lower, particularly amongst domestic institutions. The presence of 545 FII investors and 29 mutual fund schemes indicates broad-based institutional participation, though the recent selling trend raises concerns about institutional conviction.
Stock Performance: Persistent Underperformance Across Timeframes
NHPC's stock price performance has been disappointing across most timeframes, with the shares generating negative alpha relative to the Sensex benchmark. Over the past year, the stock declined 0.49% whilst the Sensex advanced 6.66%, resulting in negative alpha of 7.15 percentage points. This underperformance has accelerated in recent months, with the stock down 6.13% over the past month compared to the Sensex's 2.27% decline.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.53% | 1.79% | -2.32% |
| 1 Month | -6.13% | -2.27% | -3.86% |
| 3 Months | -6.67% | 0.43% | -7.10% |
| 6 Months | -6.00% | 3.45% | -9.45% |
| YTD | -0.85% | -1.65% | +0.80% |
| 1 Year | -0.49% | 6.66% | -7.15% |
| 2 Years | -22.00% | 16.28% | -38.28% |
| 3 Years | 91.44% | 37.76% | +53.68% |
| 5 Years | 225.68% | 65.60% | +160.08% |
The two-year performance is particularly concerning, with the stock down 22.00% whilst the Sensex gained 16.28%, representing a massive 38.28 percentage point underperformance. This suggests that the current quarter's challenges are not isolated incidents but rather part of a sustained deterioration in the company's competitive position and financial performance.
Longer-term returns paint a more favourable picture, with the stock generating 91.44% returns over three years and 225.68% over five years, significantly outperforming the benchmark. However, this historical outperformance appears to be reversing, with the stock's momentum clearly negative in recent periods.
From a technical perspective, NHPC's stock exhibits a "Mildly Bearish" trend as of February 3, 2026, having shifted from a "Bearish" trend the previous day. The stock trades below all key moving averages—5-day (₹78.11), 20-day (₹79.41), 50-day (₹78.32), 100-day (₹81.53), and 200-day (₹83.19)—indicating persistent selling pressure and lack of buying support. The stock's beta of 1.12 suggests higher volatility than the broader market, with a volatility reading of 26.29% over the past year classifying it as "Medium Risk Low Return."
Investment Thesis: Warning Signals Across All Parameters
The investment case for NHPC has deteriorated significantly across all critical evaluation parameters. The company's Mojo Score of 27 out of 100 places it firmly in "Strong Sell" territory, reflecting fundamental weaknesses across valuation, quality, financial trends, and technical indicators.
The "Very Expensive" valuation grade is particularly concerning given the company's deteriorating fundamentals. A P/E ratio of 24.86 times and PEG ratio of 3.35 times appear unjustified for a business generating single-digit ROE and minimal revenue growth. The quality assessment of "Average" reflects the company's weak return metrics, with ROCE of 6.64% and ROE of 9.11% falling well short of cost of capital and peer performance.
The financial trend has turned decisively "Negative" following Q3 FY26 results, with multiple red flags including the lowest quarterly revenue, operating profit, and margins in recent history. The 78.55% quarter-on-quarter profit decline and margin compression from 60.23% to 9.53% signal severe operational distress that extends beyond normal business cyclicality.
Key Strengths & Risk Factors
Key Strengths ✓
- Government Backing: 67.40% promoter holding by President of India provides implicit sovereign support and policy stability
- Strategic Asset Base: Established portfolio of hydropower projects with long-term power purchase agreements providing revenue visibility
- Dividend Yield: Attractive 2.47% dividend yield with consistent payout ratio of 52.66% supports income-focused investors
- Zero Promoter Pledging: Clean capital structure with no pledged shares reduces governance concerns
- Institutional Participation: Reasonable 21.84% institutional holding with 545 FII investors provides liquidity
Key Concerns ⚠️
- Margin Collapse: Operating margin crashed from 60.23% to 9.53% in Q3 FY26, indicating severe operational stress and cost pressures
- Elevated Leverage: Debt-to-equity ratio of 1.09 times with long-term debt of ₹35,681 crores creates significant financial risk
- Interest Burden: Interest costs surged 136.40% in H1 FY26, eroding profitability and cash flows
- Weak Returns: ROE of 9.11% and ROCE of 6.64% fall well below cost of capital and peer benchmarks
- Anaemic Growth: Five-year sales growth of 2.30% and EBIT growth of 2.93% indicate limited expansion potential
- Expensive Valuation: P/E of 24.86x and PEG of 3.35x appear unjustified given deteriorating fundamentals
- Negative Free Cash Flow: ₹620 crores cash outflow in FY25 despite positive operating cash flow raises sustainability concerns
Outlook: What to Watch
Positive Catalysts
- Recovery in hydropower generation volumes in Q4 FY26 following improved water availability
- Successful commissioning of new projects under development to boost capacity and revenue
- Tariff revisions or improved power purchase agreement terms to restore margins
- Debt refinancing at lower interest rates to reduce financial charges
- Government policy support for renewable energy sector providing growth opportunities
Red Flags to Monitor
- Further margin compression or sustained single-digit operating margins in coming quarters
- Continued increase in debt levels or deterioration in debt-to-equity ratio above 1.2 times
- Inability to generate positive free cash flow leading to further cash position erosion
- Reduction in domestic institutional holdings signalling loss of confidence
- Failure to achieve project commissioning targets impacting growth trajectory
- Adverse regulatory changes affecting tariff structures or power purchase agreements
The path forward for NHPC requires urgent operational improvements and margin recovery. Management must address the root causes of the margin collapse, whether stemming from lower generation volumes, unfavourable power prices, or cost overruns. The elevated debt burden necessitates disciplined capital allocation and potentially slower project development to preserve financial flexibility.
Investors should closely monitor Q4 FY26 results for signs of margin stabilisation and revenue recovery. The company's ability to restore operating margins to historical levels of 50-60% will be critical in determining whether the current quarter represents a temporary aberration or the beginning of a sustained deterioration. Similarly, the trajectory of interest costs and debt levels will influence the sustainability of dividend payouts and return metrics.
The Verdict: Exit Recommended on Fundamental Deterioration
Score: 27/100
For Fresh Investors: Avoid initiating positions. The combination of expensive valuation (P/E 24.86x, PEG 3.35x), deteriorating fundamentals (margins collapsed to 9.53%, profit down 78.55% QoQ), weak returns (ROE 9.11%, ROCE 6.64%), and high leverage (D/E 1.09x) presents an unfavourable risk-reward profile. The stock offers limited upside potential whilst facing significant downside risks if operational challenges persist.
For Existing Holders: Consider exiting positions on any price strength. The Q3 FY26 results reveal fundamental weaknesses that extend beyond normal business cyclicality. With the stock trading 14.96% below its 52-week high and technical indicators signalling continued weakness, holders should reassess their investment thesis. The 2.47% dividend yield provides minimal compensation for the capital erosion risk and operational uncertainties ahead.
Fair Value Estimate: ₹65-68 per share (17-20% downside from current levels), based on sustainable earnings power, peer valuation multiples, and discounted cash flow analysis reflecting elevated leverage and subdued growth prospects.
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are based on information available as of the publication date and are subject to change.
