NHPC Limited is tapping the capital markets with a public issue and an offer for sale which began on Friday the 7th August and closes on Wednesday 12th August. The offer for sale is for 5% of the present holding of the government and the fresh issue is for double the amount. The total shares under offer are 167,73,74,015 of which the fresh issue is for 11,82,49,343 and the offer for sale is of 55,91,24,672 shares. The breakup within this quantity is 4,19,34,350 shares to eligible employees which forms 2.5% of the issue. Of the balance 60% or 98,12,63,277 shares to the QIB bidders, 16,35,43,966 shares to Non Institutional bidders and the balance of 49,06,31,900 shares to retail bidders. After the present issue and offer for sale, the holding of the government of India would reduce to 86.36% and the public shareholding including employees would be 13.64
India has a huge shortfall of power and our per capita consumption is extremely low in comparison to not only to the Western world but also to our neighbour like China. To feed this deficit and the increase in demand which would be fuelled as we improve our purchasing power, more and more players are entering the power sector to tap this demand potential. Hydel power projects are long gestation projects and take anything from 5 to seven years to construct and begin operation. In comparison thermal plants have a much shorter time span of construction of about 30 to 36 months. The cost over –runs are also substantially less in the case of thermal or gas plants compared to Hydel projects and even land issue and related problems are far fewer. These problems add to the total cost of Hydel projects.
After the successful completion of Adani Power issue which was oversubscribed 21.59 times, hype is being created about NHPC issue. Retail portion in Adani was subscribed 2.92 times and the total numbers of forms collected were about 5.75 lakhs. Assuming that of the above 5.50 lakh forms would be from retail, one can assume that the average ticket size of retail would be roughly Rs 50,000. This becomes an important number to gauge response from retail in NHPC. Retail portion in NHPC is roughly 1800 crs which means there have to be 3.6 lakh forms for one time subscription in retail. Assuming the same type of oversubscription of Adani at three times in NHPC we are talking of about 11 lakh forms while four times would mean 14.5 lakh forms.
Cost of HNI’s doing margin funding and applying for NHPC would cost 13.7 paisa per share per time. This assumes interest at 11.25% per annum for 13 days and a margin of 5%. Assuming three levels of over subscription of 40 times, 45 times and 50 times the cost per share would increase on interest by Rs 5.48, Rs 6.17 and Rs 6.85 respectively. The current grey market rate is about Rs 10. One thing to be noted is that these rates remain till the issue is on and then the rates simply stop appearing and trades stop happening once the issue closes.
Every time a power company goes public Reliance power comes to mind. That issue was very heavily oversubscribed. The HNI portion was oversubscribed 159.56 times and retail 13.57 times. The index at that time was close to its all time peak and was around 20000-21000. The hype which this issue generated was too good to be true. The promoter of the company added fuel to this euphoria by adding that one of the merchant bankers on stage had predicted that the listing price of this share would be 4 digits against an allotment price of Rs 450 – implying a gain of 122% in absolute terms and over 2100% annualised assuming investment for 21 days. This entire incident was relayed live on business television. Reality without saying was completely different, and people lost money on day one itself.
The company NHPC
NHPC is a company which was incorporated by the Government of India in 1975 at the same time as NTPC. The difference in the two companies is for all to see with NTPC generating power from 30644 MW and NHPC a mere 5175 MW. It may be mentioned here that NHPC operates 1520 MW of the above capacity through its subsidiary NHDC, which is a 50:50 JV with the state of Madhya Pradesh. What is surprising that inspite of being the nodal agency for hydel power, NHPC has a market share of just 14% of the present hydel capacity of the country. The potential of hydel power in this country is assessed to be roughly 148701 MW of which a mere 25% or 36,878 MW is installed and another 9% is planned. From the table appended below one can see the existing plants which NHPC is currently operating.
The company is present in 8 states and has 13 power stations under operation. 7 projects in 4 states with an installed capacity of 3240 MW are under implementation. The company has already deployed close to Rs 6700 crs in these projects against an approved expenditure of about Rs 14000 crs. From the table below some of the delays talked about earlier will be visible as in the case of Subansiri Lower is delayed from September 2010 to December 2012 and Uri II is delayed from November 2009 to February 2011.
Valuations
Valuation of a company is a key factor in pricing of a company. Some of the different basis used include price to earnings multiple, market cap to MW, return on equity or return on capital employed and also book value. The Adani Power issue was sold on the basis of the vision of the promoter, one unit running and balance close to commission and substantially ahead of Reliance Power, and the lower market cap to MW amongst others. In the case of NHPC the issue is being aggressively sold on the price to book value method. The book value of NHPC at lower end of price band is 1.82 and at higher end of price band is 2.19. If one were to compare with NTPC the same would be roughly at 3 times book value. If one were to change the matrix and look at EPS, the same for NHPC would be Rs 1.08 translating into a price multiple of 27.8 and 33.33. The valuation based on price earnings for NTPC based on first quarter results annualised basis would be 19.96 and based on March 2009 results would be 21.34 times.
Conclusion
There is certainly lot of activity and interest in the issue of NHPC. This is the sixth issue being brought for divestment by the power ministry. In the first four namely NTPC, Power Grid, PTC and PFC Investors made money. In the fifth issue REC, investors did not make money initially but are now making money. The current issue is very stiffly priced and it may be a long haul for those investors who are aware of the grey market premium of Rs 10 factor it into their expectations. I believe investors looking for listing gains may apply in the retail category, but must exit on listing. The size of issue is big and the inadequate monsoon has seen markets falling sharply over the last two days. Incidentally bad monsoon has a double whammy effect for NHPC as water/rain is a raw material for NHPC.
SEBI Disclaimer: I intend to subscribe for the issue for listing gains.
