The currently open NHPC public issue of around Rs 6,000 crore (at the upper price band) has already created ripples in the equity market as it was oversubscribed 3.5 times on Friday, August 7. However, most of the oversubscription has come in the qualified institutional investors? category and the retail investors can still participate as the issue is open till August 12.
But the question is, what view should the investors take? Clearly, history shows that initial public offers by most of the public sector undertakings have provided returns. So this could be one factor.
However, operationally, NHPC is India?s largest hydroelectric power generating company with a capacity of 5,175 mw and has till date executed 13 hydroelectric power projects in the country. Its completion of Chamera-II and Dhauliganga-I power stations and the Indira Sagar and Omkareshwar projects ahead of schedule creates positive sentiments regarding its execution abilities, a key parameter for hydro power stations.
Also other factors like cost competitiveness and the ability to manage collections, that impact profitability seem to be in order. The company has achieved 100% bill collection over the past six years. IAlso, the company?s average selling price of power was Rs 2.03 per unit during FY2009, which is amongst considered very competitive. .The company is currently in the process of developing 11 additional hydroelectric projects with a capacity of 4,622 mw at a total cost of Rs 23,010 crore, which are under various stages of completion. India has a huge potential for hydroelectric power generation and the government intends to develop its share of generation in India, which is currently just 25%. Hence, the business outlook is sound. NHPC?s projects are mostly located in north and north eastern regions, which have perennial rivers with continuous water supply and huge power deficit, and this is a positive factor reckon analysts at Angel Broking.
NHPC has set a price band of Rs 30-36 a share for its initial public offer (IPO) of 1.68 crore shares. Currently, the company is issuing fresh equity of 10% while the government is disinvesting 5%. The IPO will comprise 13.6% fully-diluted post-issue paid-up capital of the company.
About the valuations, the company has had an extremely low return on earnings (RoE) ratio of around 6.55% and this compares unfavourably with peers who have a much higher number. Analysts attribute this to continuous capital expansion. On the price to book value basis, however, even on the upper price band, the price to book value ratio works out to 1.7 times and peers have better numbers. So overall, the pricing does seem fair, if not extremely attractive.
The investment option, therefore, is best suited for those who believe in the PSU-IPO story and that the company will eventually catch up with its overall returns numbers and cause capital appreciation.