Monday, August 10, 2009


I am unable to understand the logic of the pricing of NHPC. It is planning to raise close to $1bn from the markets soon. 30x PE, 2x P/B for a govt run 6% ROE company is crazy - one might be better off in 2018 putting money in RPower at Jan 2008 valuations rather than putting money in NHPC at Aug 09 valuations.

I had first looked at this company in May 2007 - the last time it filed its DRHP in anticipation of an IPO. At that time, I thought this company would be a great short if it ever got listed, and I continue to believe so. Shorting this and going long NTPC (govt owned thermal power company) will likely make a lot of money if held over a long period of time.

The company's ROI is close to 5%, and it appears to have always been below 5%. The company survives on generous equity infusions by the government each year. What it means is that over the long run, the company will repeatedly dilute its equity holders to fund future mega-projects. The government of India has really sent taxpayer's money down the drain with this company.

Now the bulls might argue that the company has always been on a capex spree as it was developing new projects, so its important to ex Capital work in progress (CWIP) from the asset base to calculate ROI, as the CWIP doesn't generate earnings. But we can argue the same for NTPC. Like for like ROI for NHPC is substantially lower.

Developing a hydro project takes more time than thermal, so NTPC's capacity growth should be higher than NHPC. So not only will NTPC grow faster, but because of its higher ROI, it will need to dilute lesser to fund its growth. If the market gives NHPC a nice pop on the opening day so that its P/B discount to NTPC narrows, it might be a great time to put on the trade.

What I am not sure is of the funding cost of this trade. And whether one can really put on this trade considering the only way to short in India is through futures.


Sudhanshoo said...

If past 2 years are anything to go by, IPO markets seldom function on logic :P If RPower can price its issue at "infinity" multiple, NHPC's bankers, even though bullish (or foolish?), are still sane to price it at the mentioned levels.

Also, the taxpayer's money goes down the drain no matter what business the government is in.

Having said that, I think your recommended trade can make more money in a falling market when people will stick to NTPC.

Gaurav said...

Yes I agree. Besides, the cost of rolling forward this trade month after month might be very high.

Penny Stock Info said...

I have always avoided IPO'S. Their simply to expensive their over priced on purpose.