What makes the babu-neta combination better than the CMDs of either company? NTPC might have intended to go for hydel power but that does not mean that it should takeover NHPC? In any case, how did the power minister arrive at the valuation of NHPC?

Consider a few facts. As on March 1999, the balance-sheet size of NHPC was Rs 10,446.1 crore and a capacity of 2,115mw with 2,340mw under implementation (the latest annual report of ministry of power provides no such information about NHPC). In 1998-99, sales was Rs 1194.42 crore and PAT was Rs 260.63 crore. As on March 1999, NTPC had an installed capacity of 17,735mw with 2,260mw under construction and 5,100mw under bidding stage.

PAT (provisional) was Rs 2,511.87 crore (Rs 2,153.50 crore). Since the final figures of 1998-99 are not available - compare 1998 figures. On an equity of Rs 3,393 crore and PAT of Rs 299.42 crore, dividend declared was Rs 16.5 crore (Source:Prowess). Considering the expansion plans of NHPC, there is no reason to believe that pay-out will improve materially. Since NHPC will be a subsidiary of NTPC, the returns will be measly and RoA will fall. If, however, NTPC and NHPC are merged, NTPC's RoA will improve marginally.

What is worse is that the amount that NTPC is asked to pay (Rs 2,500 crore and Rs 2,000 crore) is at least 60 to 65 per cent of the cash generated from operations. NTPC had negative free cash flow in 1997-98. Though the debt-equity ratio of NTPC is comfortable and raising debt for the immediate expansion projects will not be a problem it makes little sense to invest even internal accruals in a subsidiary to earn less returns than an FD. The power minister has also decided to hive off some of the power plants of NTPC into 51 per cent owned subsidiaries. This novel idea is hailed on the grounds that the money raised will not go to the Government but to NTPC.

The need for this, according to the minister is because private investment in the power needs to be promoted. Now, how does private sector investment in power is promoted if NTPC retains 51 per cent stake in the company? The 49 per cent stake, irrespective of the activity carried on by the investor, grants him the status of a financial investor only. How does it bring competition in the power sector? The minister has stated, "I want to bring competition in power sector." It is logical to believe that functional directors know better than the power minister and they have better options available than to transfer assets to subsidiaries. The options being divesting equity stake, internal accruals and debt. The ministry may help NTPC in recovery of dues which will also mean cash inflow.

In any case, will it be possible to find buyers for the units which serve the eastern region or states like UP and Bihar? If not, what is the point in hiving off other units? The record of NTPC in turning around plants is excellent and in fact, it should be taking over plants from SEBs to recover dues and not sell its existing plants. Incidentally, it will be nice to co-relate expansion plans of NTPC and at the same time sale of some of its existing plants to promote private sector participation. What will the 49 per cent stake holder bring to table except cash which in any case NTPC can generate without an assets sale.

The lower contribution of internal accruals for expansion plans will result in NTPC's expansion plans being delayed as the time lag between cash from asset sale and payment for NHPC will be substantial and this in turn will hurt power plant equipment manufacturers also. If the deal goes through, it will be a worse blunder than naphtha for power and other IPP policy blunders. If hydel generation needs to be enhanced, the better option is to grant NTPC management contracts to run NHPC plants rather then to buy them out.

Trent/Pantaloon
While on the one hand, Trent's "Westside" has posted disappointing results for the quarter ended September, Pantaloon Retail's "Pantaloons" has done reasonably well during the period. Turnover has remained more or less stagnant as compared to the immediately preceding quarter for both these companies. Trent recorded net sales of Rs 10.13 crore during the quarter as compared to Pantaloon's Rs 28.49 crore. However, Trent's expenditure during the quarter rose by over 28 per cent to Rs 9.5 crore while Pantaloon was able to keep operating costs stagnant at around Rs 26.28 crore. As a result, Pantaloon saw its operating margin rise from 6.86 per cent to 7.76 per cent while Trent's profitability declined from an impressive 25.68 per cent to 6.22 per cent.

The current quarter should be better for both the companies considering that October and November are known to be the best months for retailers hawking garments and personal accessories. More so for Pantaloon as its Mumbai and Calcutta stores are doing extremely well. The Mumbai store which opened for business in the last week of August is believed to have contributed over Rs 1 crore to Pantaloon's topline for the quarter ending September. Pantaloon's Calcutta store is also believed to be doing far better than its Bangalore, Chennai and Hyderabad stores owing to a good festive season demand in the city. Calcutta is one of the most buoyant markets during Dussehra, which falls in the current quarter.

Trent has no presence in Calcutta yet and is likely to consolidate its position further in Bangalore, Chennai, Hyderabad and Mumbai before it decides to expand. Pantaloon, on the other hand, has two more mega-stores on the anvil - one in Ahmedabad and the other in New Delhi. These will only help to boost its future earnings. Although its expansion plans have led to a recent equity dilution and the company has a much higher gearing than Trent, Pantaloon should generate a higher return on shareholder's funds for the current year. This is because a bulk of Trent's resources are deployed in investments yielding relatively lower returns than would otherwise have been possible.

Yet an investment in either of the two companies at the current market prices makes sense. Although Pantaloon has seen its market capitalisation rise 10-fold during the last one year and is currently quoted at around Rs 50 to Rs 55 per share, its growth potential more than justifies its discounting of 11 (based on the annualised EPS for the quarter ending September). Trent has seen its stock prices drop by half to around Rs 130 to Rs 135 in the last six months and at this price the stock is available at less than book value. As most of the company's assets are liquid and are appreciating, there is little reason for the bearish trend to continue.

Emcee (with contributions from Urmik Chhaya & Sarad Saraf)