Low Risk Bet

NHPC was supposed to tap the primary market last year but it could not due to bad market. Now that the market sentiment has improved, it has finally mustered some courage to come out with its IPO. This mini-Ratna Category-1 public sector undertaking (PSU) is a hydro-power generating company, which focuses on planning, development and implementation of integrated hydro-power projects in India. It has developed and constructed 13 hydro-power stations and has total installed capacity of 5175 MW. NHPC’s projects are located in the states of Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Arunachal Pradesh, Assam, Manipur, Sikkim and West Bengal. That apart, NHPC also provides project management and consultancy services to government agencies in India and foreign governments, but the revenue from the same is not substantial. It has as on May 31, 2009 completed 76 assignments, while it is currently working on 17 assignments.

The company is presently engaged in the construction of total 11 hydro-power projects with a combined capacity of 4622 MW. But, of these 11 projects, it has currently identified seven projects (refer table for details) with a combined capacity of 3240 MW and is tapping the capital market for the same. The total cost of these seven projects is Rs 14,013.96 crore and is being funded through a combination of debt, equity and internal accruals. Till now, NHPC has already deployed around Rs 6494.79 crore for the same.

As for the equity part, NHPC is coming out with an IPO of 167.73 crore equity shares in the price band of Rs 30-36. Of this, the fresh issue is of 111.83 crore shares, while 55.91 crore equity shares is the offer for sale by the Government of India (GOI). Through the issue, the company expects to raise Rs 5031.9 – 6038.28 crore, of which around Rs 1677.3-2012.76 crore would go to the GOI, while the balance proceeds of Rs 3354.9-4025.88 crore would be utilised to part-finance NHPC’s seven projects. All these seven projects are expected to be commissioned on or before December 2012.[PAGE BREAK]

The company derives almost all of its revenues from the sale of energy to SEBs through long-term power purchase agreements. As on FY09, NHPC’s topline increased 22 per cent to Rs 4051.52 crore (Rs 3321.63 crore), while the bottomline increased three per cent to Rs 1244.15 crore (Rs 1207.04 crore) during the same period.

On the valuation front, on an expanded capital of 1230.07 crore shares, 8415 MW capacity and price band of Rs 30-36, NHPC generates an Enterprise Value (EV) of Rs 56,352-63,733 crore, thereby resulting in EV/MW of Rs 6.69-7.57 crore. However, much bigger peer such as NTPC’s EV/MW comes around to Rs 5.91 crore, whose expanded capacity would stand at 33,944 MW by 2010. Thus, NHPC is trying to command a higher premium from investors. In fact, even comparable peer such as JP Hydro’s EV/MW comes to around Rs 6.90 crore. Thus, it clearly indicates that the NHPC price band is a bit steep, leaving very little on the table for the investors. Hence, we do not expect any major gains from NHPC on listing. However, being a strong PSU, one can still take exposure to the NHPC IPO as the risk is low.