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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.

  • Anonymous says:

    >Again i am glad you are not doing things fundametnal way, bravo

    Ohh, 2200 cr profit, buddy they are going to sell there 45% power on merchant power basis, geez this company has 0% Raw material cost.

    Is it expensive, hell yes!!! but plz do some study yaar did u study your market downturn study this way too.

    Plus point for this company free cash flow generating, zero raw material cost, dividend paying company. In any funding issue comes PSU bank will rush to help it out.

    negative point, long and troublesome project implementions, upfront cost very high, lots of power plants are in J&k and northeast state. Very high equity not much left for shareholder.PSU company so won't get the PE multiples.

    On very long term basis ( 5-10 years )this one will be a decent (not great ) wealth creator

  • Anonymous says:


    Forgot to add

    The company has 40% net profit margin plus edita margin of close to 80-90%

    Common stuff for hydro companies.

    Plus if everything goes according to plan ( Very very slim just like a hair chance ) this one could be a diamond.

    All existing plants have PLF of over 92-94% best in india as per CERC

    Cause most of plants are at excellent location performance wise.

  • Deepak Shenoy says:

    >Interesting points. But price to quality is pathetic – simply put they've not got enough earnings or earnings growth despite being able to capitalize a good portion of expenses. For a company with flat earnings growth you don't pay a 30 P/E. At least with NTPC there is reasonable earnings growth. JP Hydro is another expensive stock.

    As I mentioned I'm not doing any deep analysis on the book (I don't believe most of the target dates will be reached, nor do I firmly believe their depreciation schedules or accounting) 40% margins mean nothing if you can't grow EPS. Zero input costs is a fallacy – they have geopolitical risk on supply, they have pretty hefty operational costs, they are hugely interest rate linked.

    At this price, it would be a ridiculous buy. But things have been known to get even more ridiculous.

  • Anonymous says:

    >As i said in my first post is expensive for a PSU stock.

    They have Capital imployed in WIP projects. So no EPS growth….

    They also do some job outside of india not purely hydel company….as they are going for thermal projects too. plus EPC sort of job work for hydel projects in nepal and bhutan.

    I would rather trust PSU for decent accounting norm….i would not trust any private companies accounts.

    What my own thinking is to apply for the IPO then flip it ( Reliance Power :)) hehe) then if it cracks later in the range of 10-20 if at any time then buy it by bucketful…..then keep finger crossed.

    My only issue with u is u condemn fundamentals while just seeing EPS and PE……..but not look at if there is any WIP projects involoved……..what the project finalization period…….what's the ratio between regulated and merchant unit sales…..and other miscellenous thousands of stuff. Like could this become a Good Widow Stock.

    Plus i just came to know one of there facility forgot the name which was supposed to be operational by 2010 is pused back to 2012 or thereabouts.

  • Anonymous says:


    Again forgot to add insurance companies and maybe ULIP guys would buy it by heapful( i read somewhere that ULIP could go for 5 year lock in period ), myabe some foregin pension funds might also buy it then average it down.

    So the supply will be filled up

  • Deepak Shenoy says:

    >PSU accounting: You could have your opinion, of course, but I've seen them rigged as much as any 🙂

    Btw, capital accounting ensures that whatever they spend right now is not expensed until the project is operational (i.e. you can "capitalize" expenses; in this phase it's also easy to move some expenses into the capitalization to make the profits look good. Even after the project is operational the expenses are allocated on a depreciation basis.

    As I said on a momentum or trading basis different concepts apply, so you can totally ignore fundamentals 😉

    WIP projects: Remember it doesn't matter – I considered EPS with operational projects now (EPS is considering capitalized WIP expenses – they would be very stupid not to do that) and after the projects are operational (with the additional 3300 MW). Their revenue is capped through PPAs, so they don't have much flexibility to increase EPS by much more (or margins!)

    There are a lot of fundamentals you can look at – I'm not doing that for this IPO, just focussing on EPS and potential P/E and profit growth based on simple math. Why don't you analyse the rest and post it in your blog? Send me a link and if I like it I'll post it here.

    For a trading basis, let the market figure out the price. I personally have no wish to get into a company that is so ridiculously overpriced for a long term purchase.

  • Dalal Street Analyst says:

    >In a way of speaking, you are right about the valuation. But we look at NHPC from a 3 to 5 year perspective when the company will be easily shelling out ~30% dividend while the stock would have appreciated too. Same holds good for Powergrid when it went to IPO and was beaten down in the crash.

    They are all proven businesses with profit and dividend track record of over 5 years unlike the Loot Masters – Reliance Power and Adani.

    Ones folio must have high dividend yield stocks too. I have friends who have inherited REALLY plum portfolios where their dividend yield runs in 7 figures 🙂

  • Deepak Shenoy says:

    >DSA: I doubt this co can shell out "30%" dividend – that means Rs. 9 per share at a price of Rs. 30, which is not possible because they earn Rs. 1 a year and as I've mentioned, if they do REALLY well, they will earn Rs. 2 a year in five years.
    At 30% of face value, that's 30 paise per year, which is 1% of the market value. A 1% dividend yield is horrendous.

    I also own a number of dividend yield stocks – we get as much dividend per year from Hero Honda as my father paid for the shares 🙂 But NHPC is not such a company.

  • Dalal Stret Analyst says:

    >Dividend in India is always is on face Value i.e Rs10 in case of NHPC and @ 30% is Rs 3.

    The Growth of the company will accelerate as it is in the core sector and don't forget the article you posted on Matt Taibi on how Goldman will engineer the next big scam of Carbon Credits. NHPC will benefit.

    OK, even if Rs 2 dividend after 5 years is not bad. Compared to all others, this is a good bet.

    Our style is choose the company with dividend as well as stock appreciation. Whoever chose HLL 20 years ago, they were riding the growth and benefiting from rich dividends but in the past 10 years, stock hasn't gone anywhere, but those who bought 20 years ago seem to be happy with liberal dividends.

  • Deepak Shenoy says:

    >DSA: That's a joke, right? They will pay Rs. 3 dividend? I can't see them earning more than a total of Rs. 2 per share, even after five years 🙂

    NHPC is a simple power manufacturer. Power companies are commodities – they never get High P/Es in the long run, and are cash flow positive which is why their div yield should be high. But this company gets a VERY high P/E, so there is no chance of getting a good dividend yield; even when fully owned by the govt,. they paid only 25% of their profits as dividend – Using the same benchmark they will pay 50 paise per share in five years – that's a 1.5% dividend yield. Not very interesting. (And you can get four-five percent yields right now, in other companies)

    Goldman – well, I think their good times will soon come to an end. They are likely to be told "no" to trading in carbon credits, and I think they are on the wane.

    HLL – I own the stock for 20 years, and it is not a dividend stock, in comparison with Ranbaxy and Hero Honda. Or most PSU banks.