Street disappointed by NHPC offer price, finds it unattractive

Written by Ankit Doshi | Mumbai | Updated: Nov 1 2013, 16:19pm hrs
NHPCSeveral projects are facing hurdles and there may be a vacuum in earnings over FY16 and FY17.
The buyback offer announced by the National Hydroelectric Power Corp (NHPC) may well be at a slight premium to the current market price, but shareholders are disappointed that the tag of R19.25, which is 28% lower than the book value, does not give them an opportunity to exit.

As per Bloomberg data, the book value of NHPC stands at R24.694 a share. The NHPC stock closed at R18.15 on Thursday.

Investment bankers and analysts are of the view that the buyback programme is badly priced and is meant to benefit only the government and not the shareholders. The pricing may have been intentionally kept low to force small investors from not participating and tender their shares in the buyback programme and free up the reserved category for the promoters the government in this case they say.

With NHPC being the first buyback programme of the governments disinvestment plan, the investor community was keenly watching the approach. However, the company has raised eyebrows by keeping the price lower than book value and far lower than the IPO price, said Jagannadham Thunuguntla, chief strategist, SMC Global.

NHPC has over 10.48 lakh individual shareholders holding up to R1 lakh share capital and around 5,350 individual shareholders holding in excess of R1 lakh as of quarter ended September 2013, exchange data show.

In addition, the hydel-power major has a little over 5,400 NRI shareholders, over 100 FIIs, a few asset management companies, insurance companies and financial institutions and banks. LIC is one of the biggest shareholders in NHPC with a holding of 1.93% of the total share capital.

While the objective of the share buyback is to boost undervalued stock and improve investor sentiment, this is perceived as a sign of lack of future prospects. The government has damaged investor psyche and confidence, said an investment banker, requesting anonymity.

While a buyback at market price may not provide immediate upside for small investors, it has potential upsides in the longer run, by improving return ratios to smaller shareholder base. For instance, the equity share capital declines, thus giving a boost to earnings-per-share (EPS).

Analysts argued that even if the buyback is rightly priced and fairly neutral from markets perspective, there are concerns with respect to completion of projects that would eventually impact earnings and cash flow into the company.

Several projects are facing hurdles and there may be a vacuum in earnings over FY16 and FY17, and the company is unlikely to recoup the money used for buyback in the next 1-2 years under the current operating circumstances, they said.

ICICI Securities downgraded the stock price in its recent research note, citing delayed returns vis-a-vis the huge capex in FY13 and FY14. A good amount of capital works in progress (CWIP) rests on projects like Subanshri lower and Parbati II. The company has already invested R10,078 crore as of FY13 on projects and they are expected to give returns from FY17-18... We only ascribe an equity multiple of 0.5x on the CWIP, which is the most concerning variable for NHPC in the medium to long term. Hence, we downgrade the target price, stated Chirag Shah, AVP, research, ICICI Securities.

According to a company presentation, NHPC had added 132 MW of capacity so far this fiscal and plans to add another further 805 MW capacity by spending nearly R5,000 crore on capex.