Government Plans NTPC Disinvestment

According to media reports, the Government of India has shortlisted around 6 banks for its stake sale of around 9.5% stake in NTPC. The government currently holds around 84.5% stake in NTPC and post–divestment, its stake would come down to 75%. At the current market price of Rs 158 per share and with around 78.33 crore equity shares, the stake sale would raise around Rs 12500-13000 crore. Even though the dates for the sale are not yet finalised, the reports suggest that it is likely to be at the end of this month.

This stake sale is a part of the government's disinvestment programme, which will further help them to curb the fiscal deficit. Earlier, the government had divested Hindustan Copper and NMDC, which helped it to raise an aggregate of around Rs 7000 crore. Over the next couple of months, it plans to sell stake in other PSUs like Steel Authority of India (SAIL), NALCO, Bharat Heavy Electricals.

The question arises as to whether one should go ahead and subscribe to the NTPC stake sale offer or skip the same?

NTPC is the largest power generating company in India in terms of both total installed capacity and generated output, engaged in the business of generation and sale of bulk power. However, it is facing serious headwinds in the current environment. The company is planning to import around 7 million tonnes of coal, which would result into total import of 16.4 million tonnes in the current fiscal for its 16 power stations across the country. Importing coal would prove costlier for the company, impacting its margins. It would be difficult for them to pass on these costs to the distribution companies, as they too are facing issues.

In the past, the company has postponed its capacity expansion, which would curb its business growth. Due to gas shortage, it had stopped the expansions of its gas-based plant with a capacity of 8000 MW. This will further hit its long-term growth strategy of adding 2500 MW of capacity every year in the five year plan (2012-2017). Over the last five years, the company has added only 53,922 MW of power generation capacity, which is 69% of the targeted original capacity (78,700 MW) and 87% of the revised target of 62,000 MW.

We still believe that there is a good chance that NTPC may miss the target capacity of 1,28,000 MW by 2032. To read more about this, refer to our Mindshare article NTPC To Go Slow On Capacity Additions, Returns Look Weak.

Even in the past, NTPC’s stock has underperformed the broader market. In CY2012, it gave negative returns of 2.5% against the Sensex, which moved higher by 26%. Further, the company had come out with a follow-on public offer (FPO) in Feb 2010 at Rs 201 per share, which was at a 5% discount for retail investors. At the current market price of Rs 158 per share, this scrip has clearly disappointed investors, as it is yielding negative returns of 21% in almost three years.

Overall, we believe that investors can give this issue a miss, given the company's current headwinds and its gloomy outlook. We are sceptical about the company's growth target, which will impact its financials going ahead.