Government Approves 9.5% Stake Sale In NTPC

In what could be a stepping stone towards meeting its disinvestment target, the government yesterday approved the sale of 9.5% of its stake in Maharatna firm NTPC at a price of Rs 155. Currently, the government owns an 84.50% stake in the company, which will come down to 75% after this divestment. It will also help in meeting SEBI’s mandatory requirement, which stipulates that the promoter holding in public companies come down to 75%. With a total of 78 crore shares on sale, the government expects to garner around Rs 12141 crore through this divestment. The price set by the government, though, is at a 5% discount to the current market price of NTPC's stock.

The government’s decision to sell a part of its stake in the company comes at a time when the power sector is facing a lot of headwinds mainly on the fuel supply front, coal prices, distribution and transmission losses, etc. But NTPC remains largely shielded from coal pricing issues due to its dominant position in the power sector. Assured domestic coal supply from Coal India for its power stations is an advantage that the company enjoys. One reason why the government has decided to go ahead with the divestment of NTPC is probably its good Sept 2012 quarter results. Its operating margin (27%) and the net profit margin (18.3%) are much better than its peers.

However, despite having put up a good operational performance, NTPC has not been able to do well on the bourses. The scrip has managed to go up by only 2% against a 20% rise of the Sensex in 2012 on a YTD basis. The power sector has not been in favour with the FIIs, which is also reflecting on the scrip's performance. FIIs have actually brought down their stake in the company from 4.02% in Mar 2012 to 3.95% as at the end of Sept 2012. This also indicates that FIIs not favouring this issue as well, making the task of the government a bit more difficult that it expects. Will retail participants be interested in the issue? Not likely, as they have already burned their fingers investing in the power sector in the past.

LIC already holds a 6.03% stake in the company. There is every likelihood that with other quarters not supporting the issue, the government will push LIC to help it meet its divestment target. It had done the same in Mar 2012 when, in order to raise Rs 12400 crore, it had divested its stake in ONGC through the auction route. The auction saw a tepid response from investors, following which LIC bid for the shares of ONGC at the last minute.

In fact, the government has now permitted LIC to invest up to 30% in a company as against the earlier cap of 10%. This is largely to equip LIC to buy more shares during the divestment process. The country's insurance regulator, Insurance Regulatory and Development Authority (IRDA), has opposed the government's move. This provides a hint that the government itself foresees a poor response to the NTPC divestment and that it expects the LIC to come to its rescue once again.

In our opinion, investors should avoid the NTPC issue as the company has already put some of its gas projects on hold. Also, the uncertainty of coal supply and high coal prices in the international market puts the power stocks at risk overall.