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NHPC Will Buy Back Shares at Rs. 19.25

NHPC – the hydropower PSU – will buy back shares in a tender offer, at Rs. 19.25 per share. Their IPO was in August 2009 at Rs. 36, a price I noted as way too high for comfort. Since then, the share fell to Rs. 18 in 2012, and then went back to Rs. 29, a gain of over 50% between Oct 2012 and Jan 2013.

After that was another great fall, plonking the stock down to the Rs. 18.7. The earnings have doubled to about Rs. 2 per share, so this is a P/E of less than 10.

The company will spend Rs. 2367 crores on the buyback.

NHPC Stock Chart

 

Why are they doing this? The company could instead have paid dividends. A tender offer will be proportionate – everyone who submits shares will get at least some of them bought back, in proportion to all the shares offered. If 200 shares are to be bought and 1000 shares are offered, they will buy back 1/5th of what each person offered.

Read: Demystifying Share Buybacks 

Many people don’t bother and will leave the shares in their accounts. This gives the rest of the submitters a slight edge. With the stock price so close to the tender price, many might not be incentivised to offer, so what’s the deal?

The Government Wants the Cash and Will Cut Holding

They have a lot of cash on their books. Their biggest owner is the government, which holds 86% of the shares. This has to be brought down to 75%, but the government can’t easily sell their shares in the market (just the news it will take the stock down big .) The recent institutional placements of shares (ONGC, NTPC etc.) have resulted in deep mistrust of the government since those stocks haven’t performed well since.

Therefore, one way to get to the cash that NHPC holds is to do a tender offer. If the government submits all its shares, it will see a buy back of at least 8.6% shareholding (as the buyback is 10% of total capital).

This will not help in bringing government shareholding down to 75%. Since the price is so low, we can assume that no one else will tender their shares. (LIC holds 2% and they are unlikely to tender)

If no one else subscribes, then the government gets to sell 10%, which will bring their stake down from 86 out of 100 shares, to 76 out of 90 shares, which is still 84%.They’ll still need to figure out how to sell the rest to other people so that their holding comes down.

Unfair?

Some might say this is unfair – the IPO four years ago was at 36, and the buy back is at about half that? But this is how markets are. No one forced you to buy, and no one should bail you out if you took that risk.

And by the way, no one’s forcing you to sell either; The EPS will go up about 10% (lesser shares to distribute profits) and the P/E will be around 9. This stock has a huge government influence which is a negative.

If the government has to sell to make the 75% limit, the shares are likely to see more damage, though temporary. But honestly, this isn’t such a bad company, so it might be worth a dekho at a reasonable price. I’ll leave the valuation to better people, but you have to note that nearly all government companies are cheap, so this has to be judged as a relative bet.

  • Balaji M says:

    Fantastic analysis. I now have some better knowledge and insight. I am also holding shares of this company in a loss. It is frustrating whenever a company doesn’t even hit its IPO price [Jet Airways, another company that I hold which is not even close]
    I am just hoping that a better evaluation system exists and retail investor doesn’t get cheated on his money.
    Though I fundamentally agree to your statement that no one forced you to buy.

  • px says:

    Most people including me bought a lot of govt psus holdings which we are stuck with.
    Yes there is risk in eq but no one expected a fire sale of assets to the detriment of the PEOPLE OF INDIA whom the PRESIDENT OF INDIA represents.
    The most shameless scam is the new LIC scam wherein LIC is forced to bail out the govt by purchasing its disinvestment proceeds. Well this will give big negative returns to policy holders for the next decade. Been to the Indian hotels agm and seen how the lic babu gave hazri at the board meeting… Sir just to record that i am present is what the official went on the podium to inform, and Ratan Tata got up and got up and assured him that his presence is noted. This is the sad state of psu institutional shareholders activism.
    NO govt has devalued the nations psu shareholding the way this govt has.. Stocks like Shipping corp FPO @140 is at 36 ? show sorry state of affairs.
    Joke is the SEBI wants to protect small investors in IPOs etc with a 1 yr capital security! When the govt has debased the psu cos what face has it got?
    It is a sorry state of affairs and i guess history has repeated itself as i remember that UTI and UTI64 were also saddled with high cost psu disinvestment during the previous congress regimes, one of the main reasons for its failure other being reliance.. remember the parekh committee recommending UTI to sell psu and buy tech, again another scam that lead to the K10 and HFCL etc abundance in the UTI portfolio to bail out influential parties.
    People including a certain K C the son of the great PC have to be investigated , because insider info on govt policy may have helped them make a killing in the mkts.
    Especially look at stocks like COAL INDIA and ONGC .
    I mean how the hell will the govt expect small investors to invest in PSUs where they have faced a 25 to 80%? loss on their holdings? Chidambaram said psus and mfs are safe investments ! and the best fund houses have tax saving funds which have made 50% losses to small investors who rushed in at peaks !
    No wonder Retail is out of the Mkt and IPO FPO Etc mkts are DEAD !

  • HS says:

    Buybacks are better than dividends because of the impact of DDT.
    If the company declares a dividend of INR 2,375 crores, they will have to pay a further 400 crores as Dividend Distribution Tax. If they do a buyback, there is no tax implication on the company and it will be tax free for long term investors as well. Thats a saving of 400 crores (or just under 2% of current market cap)