Why is NHPC Ltd falling/rising?

Robust Short-Term Performance and Sector Tailwinds

NHPC Ltd has demonstrated impressive short-term gains, with a one-week return of 6.74%, markedly higher than the Sensex’s 0.85% over the same period. The stock has also outpaced the benchmark over the past month and year-to-date, registering returns of 8.22% and 5.63% respectively, compared to the Sensex’s modest 0.73% and 0.64%. This outperformance is further underscored by the stock’s four consecutive days of gains, accumulating an 8.97% rise in that span.

The power generation and distribution sector, to which NHPC belongs, has also experienced a healthy uptick, gaining 2.61% on the day. This sectoral strength has likely buoyed investor sentiment towards NHPC, contributing to its intraday high of ₹83.86, a 5.21% increase from previous levels.

Technical Strength and Liquidity Support

From a technical standpoint, NHPC is trading above all major moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages. This positioning often signals sustained buying momentum and can attract further interest from traders and institutional investors. Although delivery volumes have declined by 20.9% compared to the five-day average, the stock remains sufficiently liquid, supporting trade sizes of approximately ₹1.73 crore based on recent average traded values.

Institutional Confidence Amidst Fundamental Concerns

One of the key positive drivers for NHPC’s recent price appreciation is its high institutional holding, currently at 21.73%. Institutional investors, equipped with superior analytical resources, have increased their stake by 0.65% over the previous quarter, signalling confidence in the company’s prospects despite some fundamental headwinds.

However, it is important to note that NHPC faces challenges on the fundamental front. The company’s ability to service debt remains constrained, with a high Debt to EBITDA ratio of 5.14 times. Additionally, its long-term growth has been modest, with net sales and operating profit growing at annual rates of just 2.30% and 2.93% respectively over the past five years. Profitability metrics such as Return on Equity averaging 9.11% and a low ROCE of 6.50% in the latest half-year period further highlight limited efficiency in generating shareholder returns.

Moreover, the company’s valuation appears expensive relative to its capital employed, with an enterprise value to capital employed ratio of 1.5. The PEG ratio of 3.6 also suggests that the stock’s price growth may be outpacing its earnings growth, which could temper enthusiasm among value-focused investors.

Balancing Momentum with Caution

Despite these fundamental concerns, NHPC’s stock continues to attract buying interest, driven by sectoral momentum, technical strength, and institutional backing. The stock’s five-year and three-year returns of 261.99% and 109.31% respectively far exceed the Sensex’s gains over the same periods, reflecting its strong historical performance. Yet, the relatively flat one-year return of 1.42% compared to the Sensex’s 7.28% indicates some recent moderation in growth.

Investors should weigh the current momentum and sector tailwinds against the company’s subdued growth prospects and high leverage. The recent price rise is supported by positive market sentiment and technical factors, but the underlying fundamentals suggest a cautious approach may be warranted for longer-term holdings.

Conclusion

In summary, NHPC Ltd’s share price rise on 02-Jan is primarily driven by strong sector performance, sustained technical momentum, and increased institutional interest. While the company’s fundamentals reveal challenges such as high debt levels and modest growth, these factors have not deterred investors in the short term. The stock’s ability to outperform the Sensex and its sector over recent weeks underscores its appeal as a momentum-driven investment, though caution remains advisable given its valuation and profitability metrics.

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