Although media reports say Life Insurance Corporation (LIC) put in a large cheque of R3,000 crore for shares of NTPC at the auction on Thursday, the final subscription number of 1.7 times suggests that, even otherwise, there was enough appetite for the paper. Indeed, the offer for sale (OFS), for 78.32 crore shares, appears to have generated widespread interest with several foreign institutional investors (FII) having put in large bids of between $50 and $100 million each. While it helps that the markets globally are awash with liquidity and that FIIs are currently bullish on Indianet buying so far this year has crossed $6 billion on the back of $24.5 billion in 2012the government deserves credit for having chosen the OFS route to sell the shares and also for pricing the issue reasonably at a floor of R145 per share. Indeed, the OFS routeintroduced by the capital markets regulator to help companies achieve a minimum float of 25%seems to be working well with a host of companies now having raised equity this way. The process is transparent, quickcompleted within market hours in a single dayand allows for efficient price discovery. Moreover, retail investors too should find the auction process simple enough to participate in.
The timing for the NTPC issue couldnt have been better; while its true NTPC is a large and liquid stock, it has underperformed the markets for close to two years and its only now that analysts have turned more optimistic on the future of the power producer. The underperformance was mainly on account of a falling plant availability factor (down 300 basis points between FY10-12) and falling plant load factor (down 580 basis points in the same period). This trend should reverse with discoms expected to be financially better off now that state governments have started hiking electricity tariffsin 2012, for instance, 17 states upped tariffs by anywhere between 2% and 38%. While its true that the hikes may not, in all cases, bridge the revenue gap of the discoms, and that many of them would still remain in financial dire straits, it would nonetheless ease the strain on their cash flows. Moreover, the financial restructuring package will help clean up their balance sheets. The package, of course, is voluntary but several states, including Rajasthan Haryana and Uttar Pradesh, have initiated talks with bankers to recast the outstanding debt. Moreover, analysts believe that NTPC would not be adversely impacted by the price pooling mechanism sought to be put in place for procuring coal. Given the average price for the issue of R146.43 per share, the government can take home R11,469.39 crore. This then would take the disinvestment tally to just short of R21,500 crore, not too far from the target for the fiscal of R30,000 crore. The government hopes to mop up another R5,000 crore through the sale of shares in MMTC, Nalco, RCF and SAIL, which means it could finally end with around R27,000 crore. Not a bad effort in a challenging environment.