NHPC IPO at Top End of Rs 36…It’s a tradeoff of your Greed and that of the Government !

The NHPC IPO : Market Hype and Seduction

The Market is in Love with the Power Sector

Even at Top end of Rs 36 of NHPC’s IPO Pricing Range,  the current grey market premium of Rs 8-Rs 10 is indicating listing gains….The Issue opened this morning and has crossed 3 times oversubscription till afternoon…so clearly the market seems to be screaming at you to apply in the IPO…so should you ? and if you do,then how should you apply?…we’ll discuss this later 

But First a few observations on the NHPC IPO ….let’s do it my favourite ‘P’ way

Pedigree

• NHPC was incorporated as National Hydro Electric Power Corporation Private Ltd in November 1975,with the ‘Private’ name being dropped in September 1976..It became a Public Company in  April 1986…it was just last year in March 2008 the name was changed to it’s abbreviation NHPC
• It’s a hydroelectric power generating company owned 100% by the Government of India
• The Mini Ratna Category-1 Status granted by the Goverment in April 2008 has an important precondition that NHPC will not require any equity funding from the Government of India

• It currently operates 13 power stations (incl two through it’s subsidiary NHDC for 1520 MW) with an installed aggregate capacity of 5175 MW (downgraded to 5134.2 by the CEA) in eight North and North Eastern States
• in FY 09,it generated 18951 Million units of Electricity and sold 16933 Million Units at an average Selling Price of Rs 2.03 per unit…Rs 3436 crs or 84.81% of the consolidated total income came from sale to SEBs and their successor entities..The operational efficiency was good with an average capacity index of 93.61%
• NHPC is currently developing eleven additional projects for an aggregate of 4622 MW at a cost of Rs 14014 crs
• It is also awaiting government sanction for an additional five projects with an anticipated capacity of 4565 MW
• A Major Risk Factor is the quantum of Contingent Liabilities not Provided for and therefore not acknowledged as Debt…Rs 8372 crs in respect of Capital Works,Land Compensation ,Tax and Other Disputes
• The CERC’s Tariff Policy till FY 2009 prescribed that the Equity Component of any Project Cost should not exceed 30%…so NHPC has a total debt of Rs 14931 crs as on March 31,2009 and of the new projects cost of Rs 14014 crs,the debt component is 70% at Rs 9810 crs and the balance will be Equity of 30% of Rs 4204 crs…Government has contributed equity of Rs 2060 crs and so part of the the IPO Proceeds will contribute the balance of Rs 2144 crs…As of June 30,2009 Rs 6699 crs has been deployed

Public Issue 

• Now  the IPO Issue  Size is 1,67,73,74,015 equity shares of FV Rs 10 of which 55,91,24,672 shares are an offer for sale by the Government of India and the balance of 1,11,82,49,343 shares is a fresh issue by NHPC
• The Book Building range is Rs 30-Rs 36
• At top end pricing of Rs 36 this would mean that the issue size is Rs 6038.55 crs with Rs 4025.70 crs accruing to NHPC while the Offer for Sale would fetch the Government Rs 2012.85 crs  
• Of Rs 4025.70 crs that NHPC is raising, only Rs 2144 crs will serve to fund  seven identified projects…Ignoring Issue Expenses for now this would leave Rs 1881.7 crs for general corporate purposes !…that’s a mind boggling 46.7% of the Fresh Issue Proceeds being raised by NHPC !…IDBI is the monitoring Agency for use of Funds
• The Equity will move up from Rs 11182.49 crs to Rs 12300.45 crs with the government diluting it’s stake from 100% to 86.36%  

Pricing 

• At Top end of Rs 36,NHPC’s IPO has a downside risk of Rs 10 and an upside of Rs 10…current grey market premium is Rs 8-Rs 10 indicating listing gains
• The Government’s getting Greedy…What’s the difference between those private sharks that priced their IPOs at obscene premiums and this Public Shark…why should the Government crib at private IPOs making hay in good times ,when it’s charting the same path !? It actually was to price it much lower,but times are good..so make merry is the current motto…Retail Investors’ Safety be damned !
• The NHPC IPO is priced in a book building range of Rs 30-Rs 36…at twice post issue Book Value and at 30 Earnings Multiples at the top end of Rs 36
• To me the Fair Price is Rs 25…..that’s 1.5 times the pre issue Book Value of Rs 16.45…and that’s why I say the Down side is Rs 10…An Earnings Multiple Valuation of 15-20 times would be in the range of Rs 18-Rs 24
• And since most experts on the media stock channels,seem to be focusing on Book Values peer comparisons to justify the price of Rs 36,let’s actually follow through this analysis…but a little later

Pre and Post Issue Networth  

• The Capital Structure reveals the Equity pre issue Equity at Rs 11182.49 crs and net reserves of Rs 7210.03 crs (March 31,009)…This gives a pre issue networth of Rs 18392.52 crs and a Book Value of Rs 16.45…Q1 FY 09 results would have contributed a few Hundred crs to the networth and got the Book Value upto around Rs 16.75
• Assuming IPO Price of Rs 36,post issue the Equity moves to Rs 12300.45 crs and the reserves will move from Rs 7210.03 crs to Rs 10119.81 crs,the increase being the Share Premium of Rs 26 received and which aggregates to Rs 2907.45 crs…so the new book value post issue will be Rs 18.23 based on a Networth of Rs 22418 crs..it would be near Rs 18.50 if you consider around an additional Rs 300 crs for Q1 FY 09 PAT

Profits and the Funding of Fixed Assets & Investments

• NHPC has earned a consolidated PAT of Rs 1244 crs in FY 09 and a dividend of Rs 325 crs has been appropriated for the Government…that’s one fourth of profits…but was there any need to do so,considering the EPS barely crosses Rs 1 ! ? and the ROI is below 4% on Capital Employed of over Rs 33000 crs? and that the company is suffering negative cash flows in recent fiscals ?
• Net Fixed Assets at March 31,2009 are Rs 34135 crs and Investments are Rs 1791 crs,aggregating Rs 35926 crs…This is funded by a Networth of Rs 18393 crs,Loans of Rs 14931 crs ( incl of Rs 3188 crs of Fx Loans) and Rs 2602 crs by stretching the working capital
• Net Fixed Assets will cross Rs 40000 crs as the additional Rs 7315 crs becomes deployed from the Project Costs of Rs 14014 crs

 Peer Valuation…NTPC

• Peer Valuation shows NTPC,quoted at Rs 216,computing to three time book value of Rs 69 and 20 Times earnings…while NHPC at Rs 36 is twice Post issue Book Value of Rs 18.50 and 30 times Earnings ( assuming an EPS of Rs 1.2 for FY 10)  
• So the general hype is that NHPC too should quote at atleast 2.5 times Book Value…that would give an indicated listing price of Rs 45…and that’s supported by the grey market premium in the range of Rs 8-Rs 10…this would give a 25% absolute return inside a month on listing…assuming 5 times oversubscription in the Retail category,the return gets diluted to 5%…still attractive 
• The Down side is 1.5 times Book value …that’s closer to Rs 25…that’s my Fair Value

Price Projections

• I’m giving you a book value angle to think about as to where the share price of NHPC would tend to move a few years down the line
• The Book Value post issue will be Rs 18.50…your Cost is Rs 36….Assuming 2.5 times Book (based on NTPC’s being over 3),the share should list at Rs 46
• Let’s assume the Book Value moves to Rs 25 and then to Rs 36 in the years to come,by way of retained profits and even future equity issues at a premium
• Then assuming the same Multiple of 2.5,the Share Price should move too to Rs 62 and Rs 90….now that looks exciting,considering the cost of Rs 36
• But how much time will it take for the Book Value to move to Rs 25 first and then to Rs 36 ?
• Post Issue Networth is Rs 22418 crs of which Reserves are Rs 10120 crs (March 31,2009 Position + IPO Share Premium)…Now for a Book Value of Rs 25,the reserves have to climb to Rs 18450 crs…that’s a jump of Rs 8330 crs
• Now the PAT is @ Rs 1250 crs on 5175 MW on long term power purchase contracts with SEBs,with little flexibility on pricing because of CERC Tariff Regulations
• The new Projects of 4622 MW come on stream from August 2010 to December 2012…so we can expect the PAT to cross Rs 2000 crs earliest in FY 13 and probably only by FY 14…Even here the EPS of just over Rs 1 will double to Rs 2…a 20 Multiple will even then compute a Share Price of Rs 40 ! ( based on NTPC’s current 20 Multiple)
• So for the next three to four years the reserves would receive merely the retained Rs 1000 crs or thereabouts every year,assuming NHPC maintains it’s dividend distribution policy…so to bring the Book Value to Rs 25,which would need an aggregate Rs 8330 crs accretion, will take many years !….so let’s not even talk about doubling book value to Rs 36!
• This argument should give you some conviction to sell of NHPC,or atleast a part of your allotment,on listing at Price levels over Rs 42…because to reach Rs 62 it needs a Book Value of Rs 25 and/or a Book Multiple expansion higher than 2.5…the former seems less possible for some years yet,unless NHPC again launches a New Issue at a High premium inside a few years again !…while a Book Multiple Expansion is very much possible in a Bullish Market,driven more by Momentum and Liquidity and Exuberance rather than on Valuations    

And that is why I say the Government is Greedy !…NHPC,at Rs 36 per share, is collecting Rs 4025.70 crs of which a high 46.7% or Rs 1881.60 crs is for General Corporate Purposes !

So I see this NHPC IPO at Rs 36 as a tradeoff between your greed and that of the Government !….and a strong case of Differing Perception v/s Reality  

The overwhelming response NHPC’s IPO has received today on opening is due to the fact that QIBs and DIs see NHPC as Quality Paper from a Quality Pedigree and are willing to pay Rs 36 for this

I only wish it had come at a Quality Price ! For me Rs 36 is not !

But as Listing gains appear to be indicated I won’t grudge you making an Application at Rs 36 !