Indian Merchant’s Chamber had a seminar on Investor Protection- Myth or Reality and I was invited to be a speaker on the same topic from an investor’s perspective. Certain issues were raised by me affecting investors and possible suggestions for them.

Independent Directors - People who act or are nominated as independent directors on boards of companies and have a conflict of interest must not call themselves independent directors. In one of the most recent case of conflict of interest was in a company going public Hindustan Media Ventures Limited. Here the Managing Partner Shardul Shroff of the firm M/s Amarchand Magaldas the renowned legal firm is also the legal counsel for the IPO. This certainly is a conflict of interest and needs to be looked into.

Consent Orders by SEBI- Consent order by itself is a very laudable event and it eliminates endless paperwork. The principle behind consent should be threefold. In the first instance any ill-gotten gain or benefit should be recouped, recovered or got back. Secondly there should be a punishment for having done a wrong or committed a crime and finally in the third instance there should be a deterrent so that others would look at this case as an example and would be hesitant in committing a similar crime. It is seen that in these consent orders the magnitude of ill-gotten gain is not being recovered and therefore it pays to do crime. This policy of consent orders needs to be relooked in context of the fines and recovery of ill-gotten gains. There should also be steeper fines for repeated offences by the same person/entity.

Preferential allotments to promoters/persons by way of warrants- Warrants are issued for preferential allotment to promoters and other parties on payment of 25% of the price at which they would be converted. Earlier this amount used to be 10%. This instrument is being used as a tool to speculation as the warrants are not exercised if the price of conversion is not substantially lower than the market price and thereby offers immediate appreciation to the allotted persons. Readers would be aware that if you bought stock futures and rolled it every month for 18 months you would pay much more than 25% because the average cost of carry is significantly higher.

My simple suggestion is that in case preferential allotment is to be made it should be by way of partly paid shares with an option to pay the balance 75% within 18 months at the option of the person allotted the shares. In case the money is not paid then the shares may be forfeited.    

Complaints to SEBI – There are cases where an investor feels that due to a particular action by a company the takeover code has been triggered and XYZ Company needs to make an open offer. SEBI does not act by way of accepting or rejecting the contention.  Until and unless SEBI replies the investor cannot go to the Tribunal or SAT in the matter or proceed any further. We all know that justice delayed is justice denied. I believe that SEBI should reply in say a reasonable time of 45 to 60 days whether the code is applicable or not so that the complainant may take further action.

Takeover Code - In the first quarter of this year there was a takeover and open offer case involving Great Offshore. Readers would recall that the erstwhile promoter of Great Offshore Vijay Sheth had pledged his shares to the promoters of Bharti Shipyard and was unable to pay the mark to market difference of the same and it by default resulted in a sale of shares to Bharti and a resultant open offer as the stake was more than 15%. Bharti made the mandatory open offer and then ABG Shipyard stepped in with a counter offer to acquire shares on the basis of the fact that he was holding a stake in the company acquired from the market. This counter offer could only be made because the shares acquired became part of the offer and that holding plus the open offer quantity would be higher or equal to the quantity that Bharti would hold post the open offer.

Within days of the open offer opening, ABG Shipyard sold its shares in the open market and made money in the bargain. The action seems improper as the open offer could only be made if he held the shares and since this formed part of the process and that property or asset was no longer with him it should have made the open offer from ABG null and void. SEBI has since the case accepted that there are loop holes which need to be plugged, but it needs to be done as quickly as possible.
These were some of the suggestions made by me at the above seminar held in Mumbai recently. Readers comments and suggestions are welcome on the above and any other points that they may have.

In the current IPO season the first issue to receive overwhelming support was NHPC. The issue was oversubscribed an overall 23.74 times. The individual break up was as follows

Overall  23.74 times total applications received 12, 84,390. 

For purposes of this calculation certain assumptions have been used. Rate of interest is taken as 10%, period of loan as 13 days and margin is assumed as 5% which looking at the response was reduced to 3% subsequently. The HNI category was for 16, 35, 43,966 shares. At the price which has been fixed for the issue at Rs 36, the total amount to be raised in the HNI category was Rs 588.76 crs. The amount actually raised with the issue being oversubscribed 56.56 times was Rs 33,300 crs.  

Taking our assumptions it means HNI’s as a group paid 5% margin of Rs 1665 crs and borrowed Rs 31,635 crs to invest in the issue. They paid a sum of Rs 112.67 crs as interest to acquire shares with a market value of Rs 588.76 crs or Rs 6.89 per share.

A retail applicant applying for maximum shares would invest Rs 94500 for an application of Rs 2625 shares and would be allotted 678 shares as per the figures based on subscription. Assuming this quantity of allotment, a HNI would have to make an application for 38347 shares investing Rs 13, 80,492. The allotment to both would be a similar 678 shares. The margin payable on this amount would be Rs 69,025 and the loan amount would be Rs13, 11,467. The total interest that would be paid by the applicant is Rs 4671 or Rs 6.89 per share. The leveraging done by the HNI investor is 19 times.

In March 2008 we all will remember that one of the reasons why markets fell was because of the leveraging position in the F&O segment. The average margins in NIFTY is about 20% which means a leveraging of about 5 times and in stock futures was around 33% which means leveraging of 3 times. If 3 and 5 times could become dangerous at that time what would 20 times do to the market. I am not considering the fact that margins were than reduced to 3 % which meant a leveraging of almost 33 times.

What this kind of leveraging does is that a) it increases the cost to the investor and b) creates additional selling pressure on the stock when it lists. In the case of NHPC with an interest cost of about Rs 7, the benchmark for the share listing becoming successful or not is not the issue price of Rs 36, but the HNI investor cost of Rs 43. Before the issue opened for subscription one heard of a premium of Rs 12-14, which reduced to Rs 10, then to Rs 7 and currently indications are of between Rs 4-5. What listing day has in store one is not sure? Probable listing date is 31st August or 1st September. 

The share opened at Rs 15.05, made a high of Rs 133.70, a low of Rs 115.60 and closed at Rs 119.30, marginally below the issue price. The volume traded was 1,73,91,025 shares and a high 15.46% of traded volume or 26,89,365 shares were marked for delivery.

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.

The Global co-ordinator and book running lead manager to the issue is DSP Merrill Lynch Limited. The book running lead managers are Enam Securities Private Limited, IDFC-SSKI Limited, J M Financial Consultants Limited, Kotak Mahindra Capital Company Limited, Morgan Stanley India Company Limited, ICICI Securities Limited and SBI Capital Markets Limited. The issue has been graded by ICRA as IPO grade 3 indicating average fundamentals. ICRA in its letter dated 2nd July 2009 addressed to the company and forming part of the RHP has mentioned “The rationale for assigning the above grading will be sent to you in due course”.

Objects of the issue

The objects of the issue are to part finance the construction and development of Mundra Phase IV power project of 1980 MW and funding equity contribution in the subsidiary Adani Power Maharashtra Limited to part finance the construction and development cost of power project for 1980 MW at Tiroda, Maharashtra.

The Adani Group currently has four thermal power projects under various stages of development: Mundra Phase I and II Power Project will have four sub-critical generation units of 330 MW each, with a combined capacity of 1,320 MW. The company expects to commission the first 330 MW unit of Mundra Phase I and II Power Project by July 2009, and that the power project will be fully commissioned by February 2010. Mundra Phase III Power Project will have two super-critical generation units of 660 MW each, with a combined capacity of 1,320 MW. The company believes and currently expect that the first 660 MW unit of Mundra Phase III Power Project will be commissioned by January 2011, and that the power project will be fully commissioned by June 2011. Mundra Phase IV Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The group currently expect that the first 660 MW unit of Mundra Phase IV Power Project will be commissioned by August 2011, and that the power project will be fully commissioned by April 2012. Tiroda Power Project will have three super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The company currently expects that the first 660 MW unit of Tiroda Power Project will be commissioned by July 2011, and that the power project will be fully commissioned by April 2012. Adani Power’s 77.38% Owned subsidiary, Adani Power Maharashtra Limited (“APML”), is developing the Tiroda Power Project in Maharashtra.

Adani Power is also planning to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 MW, but no fund raising for this project is currently planned or to be implemented.

Concerns

There are issues concerning the profitability of Adani Power based on imported Indonesian coal. Coal will be sourced from Adani Enterprises Ltd at a price of US $ 36 per tonne (CIF Mundra). This price appears to be low and may not be sustainable going forward. There have been in the recent past many instances of the Indonesian government asking a lot of coal companies to renegotiate under – priced coal contracts. This could be a substantial risk to Adani Power’s coal supply. Further production ramp up of the Bunyu mines also looks an extremely challenging task given the difficult terrain and poor existing infrastructure.

Adani Power entire capacity is based on Chinese equipment. There are quite a few concerns which have been raised about the quality and life of Chinese equipment. Two concerns do however remain: – namely PLF’s obtained by Chinese equipment and second the issue of IPR issues.

Grey Market

We all remember Reliance Power which came out with a mega issue in January 2008 and raised Rs 11560 crs from the capital market at a price of Rs 450. The market cap at issue price was approximately Rs one lac crs and this was for projects which covered approximately 20,000 MW. The retail investors were offered an incentive and were given a discount of Rs 20 per share. The response was over whelming and what happened thereafter was history. In the grey market, where at one time the share premium was trading higher than the issue price, crashed and it is rumoured that commitments were not honoured. The pressure on the share was so much that it crashed and the management to please shareholders announced a bonus issue for only non-promoter shares in the ratio of 3 shares for every 5 shares held. Inspite of the bonus whereby the cost of shareholders reduced from Rs 450 to Rs 281.25, the share made a low of Rs 82 ex bonus. As of yesterday the share price closed at Rs 174.55 on the BSE and the current market cap is Rs 41836.14 crs.

Another fact that we must all remember is that grey market premiums have a nasty habit of simply, suddenly disappearing. This phenomenon is unexplainable but time and again it has happened.

If you like Adani Power buy NTPC

Coming to Adani Power the market cap at issue price would be Rs 19620.36 crs at the lower price band and Rs 21800 crs at the higher price band. The debt for 6600 MW is approximately Rs 20000 crs. If we were to add the two and divide by 6600 MW the approx cost per MW comes to 6 crs at the lower band and 6.33 crs at the higher end.

Let us compare the same with India’s largest producer of power today, NTPC. Their current capacity in generation or operation is 30,644 MW with an additional capacity of 3300 MW or half of Adani Power’s 6600 MW capacity to be set up in next three years to be commissioned by NTPC by March 2010. This would take NTPC to 33944 MW. Besides the above they have projects under implementation of another approx 12500 MW which would certainly be ready in the next three years. Yet another way of saying this would be that double the proposed capacity of Adani would be added in the next three years taking NTPC to approximately 46500 MW. The market price of NTPC as of yesterday on the BSE was Rs 217.30 and the market cap at Rs 179,173.84 crs. The company has earned an EPS of Rs 9.95 for the year ended March 2009 and Rs 2.66 for the quarter ended June 2009. The average PLF (plant load factor) achieved by NTPC is 91.14 %. NTPC with a market cap of 1.79 lac crs and a generating capacity in operation of 30644 MW is available at a cost of 5.84 crs per MW and additionally an EPS of Rs 9.95 for March 2009. If the same were to be based on the year end capacity of March 2010 the cost per MW reduces to 5.28 crs and if we are to talk about the three year hence capacity of approximately 46500, the cost per MW would be 3.85 crs. The company is in operation with revenues close to Rs 42000 crs for the year ended March 2009 and net profit after tax of Rs 8200 crs for the same period.

Conclusion

Looking at all of the above it appears apt to believe that better opportunities exist in the market currently in the form of NTPC and even Reliance power. In the medium term history has shown that IPO prices soften after listing and opportunities for fresh investment are always available.

The call to invest or not to invest is always with the investor. If you believe you have the conviction and determination to sell at 9.56 am on listing day irrespective of the price you may apply. Please also remember that almost everybody who is applying wants to be out of this counter within a few minutes of listing. One must also remember Reliance Power and vanishing grey market premiums.

SEBI Disclaimer:- I do not intend to subscribe to the above share issue.

The company is offering five different option plans with varying terms of maturity ranging from 36 months to 60 months. The rate of interest varies from 10.75% to 11.5%. STFC is a company in the financing of used or pre-owned vehicles. It also finances new vehicles provided the vehicle owner is an existing customer of the company. STFC has as of date over six lac customers and has as part of its assets under management over nine lac vehicles.

The company’s issue of NCD’s have been rated ‘CARE AA+’ by CARE and rated ‘AA (ind)’ by Fitch. STFC has been borrowing through fixed deposits for a very long time. This instrument now offers security to the traditional fixed deposit and has attractive interest rates and various time options. It may also be noted that there is no deduction of TDS (tax deducted at source) for resident debenture holders. Coming to the financials of STFC which is a registered NBFC with RBI and has a track record of over 30 years, they are impressive on all counts. The company recorded a total income of Rs 3731.13 crs and a net profit of Rs 612.40 crs for the year ended March 2009. The AUM or (assets under management) were at an impressive Rs 23281.11 crs as on 31st March 2009. The NIM (net interest margin) was at 6.99% while the Capital adequacy ratio at a healthy 16.35%. The net NPA’s (non performing assets) were at 0.83%.

If one were to look at the growth it is even more impressive. The AUM has grown at a CAGR (compounded annual growth rate) of 68% over the period 2005-2009. Over the same period Revenues have grown at a CAGR of 81.26% from Rs 345.69 crs to Rs 3731.13crs, while profit after tax has grown at a CAGR of 87.7% from Rs 49.32 crs to Rs 612.40 crs. The company has introduced a new initiative in the form of truck Bazaars to provide a suitable platform for counseling and buying and selling of commercial vehicles on a single platform and thus create a vibrant ‘used vehicle market’ . The other initiative from the Company is embarking on tapping local markets through developing partnerships with private financiers, who dominate the unorganized regional pre-owned commercial vehicle financing market.

The issue is open for three weeks and we normally see that people invest only at the last moment. The issue being a fixed income instrument has an added sweetener where interest would be given on application money provided allotment is made at the rate of 8% and at the rate of 2.5% if the application amount is refunded. Senior citizens would be entitled to an additional rate of interest of 0.25% in option one and two.

Very clearly STFC has come a long way and is poised to go further. Investors looking at fixed income with security should invest in this instrument. There is a choice of as many as five options to suit the individual needs.