Power Finance Corporation Limited which had launched its FPO in a price band of Rs 193-203 was fully subscribed. The issue was open from Tuesday the 10^th of May and closed on Thursday the 12^th of May for QIB’s and on Friday the 13^th of May for all other non-QIB bidders. The issue was subscribed a total of 4.34 times. The issue consisted of a fresh issue of 17.21 cr shares and an offer for sale by the Government of 5.738 cr shares making a total issue size of 22.92 cr shares. There was an employee quota of 2.75 lakh shares as well

The details of the subscription level in various categories are given below: –

Looking at the response to the issue it appears very logical to expect the issue to be priced at the top end of the price band at Rs 203. The share has closed in the cash market at the BSE at Rs 215.85. The share price may fall from these levels considering the difference in the issue price and the market price, but the margin of safety is simply huge to expect any negative performance in this stock. Secondly there is a discount of 5% which would amount to Rs 10.15 per share assuming the top end of the price band is fixed at the issue price.

The retail subscription is more than the HNI portion and the only reason that HNI subscription was relatively poor was the fact that fresh positions in PFC were not allowed in the futures segment, making it difficult for HNI’s to hedge their position.

It is difficult to understand the phycology of HNI investors where in an IPO they take huge leveraged positions and are unable to sell their position in the premium market and most of the time losing money when the share lists on the bourses. A recent example was Muthoot Finance where the HNI portion was subscribed 60 times and the cost of leverage for a HNI investor was in the region of Rs 30. The share did not even touch the figure of Rs 200 which would have meant a gain of Rs 25. The share closed on Friday around Rs 165.

All in all the subscription for PFC FPO has been good and has set the divestment for 2011-12 in motion. Well begun is half done and let us hope that in future issues the government continues being considerate and liberal in the pricing of the issues.

Retail investors must grab opportunity

Power Finance Corporation Limited is tapping the capital markets with its FPO (follow on public offer) where the QIB portion has closed for subscription being subscribed 6.92 times. The issue closes for non QIB’s on Friday the 13^th of May.

Business

PFC is a leading financial institution in India focused on the power sector. The company is also involved in various Government of India programs for the power sector and is the nodal agency for the UMPP (ultra mega power projects) in India. The company as part of its business provides a comprehensive range of financial products and related advisory and other services from project conceptualization to the post-commissioning stage for clients in the power sector, including for generation (conventional and renewable), transmission and distribution projects as well as for related project finance, short term loans, buyers line of credit and debt refinancing schemes, as well as non-fund based assistance including default payment guarantees and letters of comfort. PFC also provides various fee-based technical advisory and consultancy services for power sector projects.

Investment Proposition for retail investors

The price band fixed is Rs 193-203 with a discount of 5% on allotment for retail investors. For simplicity sake let us assume that the price would be fixed at the upper band of Rs 203, and a discount of Rs 10 would be offered to retail investors. The closing price of the stock on Thursday the 12^th of May in the cash market was Rs 215.85 implying a safety factor of Rs 12.85 or 6.33%. What this means is that even if the cash market were to fall by Rs 13 on allotment and subsequent listing of the shares, the investor would be covered as his cost is only Rs 203 and on top that there is the retail discount as well.

PFC trades in the futures segment as well and the closing price on 12^th May is Rs 205.30. An important point to be noted here is that fresh positions in the stock have been banned as the open interest limit has been breached. This means that the extra safe HNI’s who apply for the issue after hedging themselves are unable to take fresh positions. This is also good for the investor as the gap between the future price which is trading at a discount to the cash market will converge going forward.

I believe this is a great opportunity for retail investors and they should subscribe to the above issue.

SEBI Disclaimer: – I intend to subscribe to the above issue.