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NHPC IPO: P/E of 36

I’ve had some mail requesting for comments on the NHPC IPO. First note: the IPO is already 3x oversubscribed, with only one day of the IPO through. Only 9% of the retail bit is subscribed, and this has 49 cr. shares for retail (about 1500 cr.) which is fairly large. Still, that’s only 1.5 lakh retail individuals (each is capped to a max of 1 lakh) and there are enough people who will apply using fictitious names, fake demat accounts etc. There is serious moral hazard here – In the Yes Bank IPO scam case, SEBI got active and banned Karvy, IndiaBulls and Anagram but each one of them got away on technicalities. The big person behind the scam, Roopalben Panchal, who applied for the Yes Bank IPO in 6,315 different names with the same address, has not been arrested, and is free today. An article says 90 cr. has been collected by selling shares – but 90cr. is nothing lost by the perpetrators, and nobody’s gone to jail, so this is no deal.

But that’s a different story, and the frauds will continue to milk the IPOs. Even if there was a jail sentence. Because the odds of getting caught are small – Ms. Panchal was an outlier; there are hundreds of others, unknown and known, that do this kind of fraud on nearly every IPO.

This also means you SHOULD apply to good IPOs. With ASBA, your money is not blocked for long and you continue to earn interest in your bank account. By applying you ensure that these fraudsters get even lesser allocation – the more legit people that participate, the less space there is for these scamsters. So they’ll be forced to raise the scale of their operation and hopefully, if our regulators aren’t sleeping or in a government-pressure-induced-coma they will get caught.

But is NHPC a good IPO? I won’t mull over much but the basics:

  • It’s a hydel power company, with a current capacity of 5000 MW.
  • NHPC, in it’s IPO, is selling 168 cr. shares between Rs. 30 to 36. The price has changed dramatically – an earlier prospectus talked about Rs. 20-24 per share, and even earlier, there were talks of 16 per share being the limit.
  • Out of this, 1/3rd of proceeds will go to the government, and the remaining to the company. At Rs. 36, this is about 2000 cr. to the govt, 4000 cr. to the company.
  • They have made 1244 cr. on a consolidates basis, on a current share capital of 1124 cr. shares. That’s an EPS of about Rs. 1.1 per share.
  • At a price of 36, that’s a P/E band of 27 to 32.

  • What are they using the money for? For 7 power plants, total capacity about 3300 MW, which will cost 14,000 cr. (equity+debt). The plants will all be ready only by 2011.
  • If their 5000 MW current capacity delivers Rs. 1124 cr – We can stretch and say the 8,300 MW will deliver about 2000 cr. of profit? Let’s say 2500 crores. At the expanded equity of about 1300 cr. shares, that’s about Rs. 2 EPS. If you expect that in 2012, it’s a 22% EPS growth CAGR. That’s still way below the current P/E.
  • In the last three years, EPS has grown at less than 10% a year compounded.

I wouldn’t buy this IPO on fundamentals. It is way overpriced. At 20-24 there might have been something in there, though it would only be a “fair” price – remember, you gotta buy at dirt-cheap valuations so you get some appreciation.

And given the sentiment even this one will go overboard in terms of subscription, and then list even higher. Irrational exuberance perhaps, but who am I to stand in the way of this juggernaut? And this stock is ripe for trading – will at this price end up as a component of the Nifty, will get F&O approval, and has the grand ability to give huge visual gains on the minimum tick size of 5 paise. So yeah, it’s worth trading.

Otherwise, it’s a dim IPO. The price-to-quality gets worse and worse with every bull market, it seems.

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