NEPC investors may lose in sale deal

Sebi may look into equity valuation of wind energy business hive off.

Investors in the Khemkas-controlled NEPC India may get a raw deal when the company sells its wind energy business to Southern Windfarms Pvt Ltd at a low equity valuation of Rs 18 crore. This valuation is less than one-tenth of the market-cap commanded by the company on the bourses.

The total consideration for the sale (a decision on the sale was taken at a board meeting of the company on October 17) is Rs 153 crore, of which Rs 135 crore are to be given to the company's lenders and creditors. Of the remaining amount, "a value equivalent to or representing 12.5 per cent of fully paid equity shares of Rs 10 each of Southern Windfarms will be issued to a trust to be formed by the company".

After netting off debt from the total consideration of Rs 153 crore, the equity valuation works out to Rs 18 crore. Going by this, the company's 6.9 crore equity shares have been valued at less than Rs 3 a share even as the stock was trading at Rs 26.65 on the bourses on the day of the announcement.

Based on the average price in the past one month, the company commands a market-cap of Rs 289 crore.

Asked to explain the low valuation, Raj Kumar Khemka, vice-chairman of NEPC India, said, "The valuation was done by an independent valuer and we did not have any say in it." The valuation was done by NM Raiji & Co. Asked why the company decided to exit a lucrative wind energy business, Khemka said, "We needed a large amount of cash to settle our loans. And we worked this out in the best interest of all parties."

Securities and Exchange Board of India officials, when contacted by Business Standard, said they would look into the matter.

In 2001, the promoters of NEPC were barred from accessing the capital markets for a period of five years. The NEPC share, buoyed by a flow of "good news", rose from Rs 2 a year ago to a high of Rs 60 a month back.

But it has been hitting the lower end of the circuit every day over the past one month, providing little chance for investors to exit the counter. The stock closed at Rs 21.8 on Friday. At its peak price of Rs 60 a month ago, the stock commanded a valuation of Rs 414 crore.

In the quarter ended September 2005, the promoters brought their stakes down in the company from 19.42 per cent to 13.37 per cent. During the same period, Southern Windfarms acquired a 5.79 per cent stake in the company in step with the shareholding pattern reported to the Bombay Stock Exchange.

In the June quarter, the promoters had hiked their stakes 7.23 per cent, up from 12.19 per cent in the March quarter. In the September quarter, institutional investors held 6.46 per cent in the company while other public shareholders accounted for 80.17 per cent.

Sources close to the deal said Southern Windfarms was formed on February 23, 2005 with A Srinivasa Rao and DR Sampath Kumar as its directors. The two directors resigned recently to make way for CP Khandelwal and Anju Khandelwal.

It is learnt that a group of investors funding the acquisition include some leading industrialists and investments bankers. However, Khemka refused to name them saying, "We will reveal the names of the investors at an appropriate time."

In financial year 2005, NEPC recorded revenue of Rs 387 crore, of which Rs 296 crore came from the wind turbine generator (WTG) business. The company posted a net loss of Rs 79 crore. In the June quarter, the company earned revenue of Rs 80 crore and a net profit of Rs 2.2 crore.

The company has a market share of 7.8 per cent in the WTG business. With a market share of 43 per cent, recently listed wind energy company Suzlon Energy Ltd commands a market capitalisation of Rs 19,737 crore and an enterprise value of Rs 19,614 crore, which is 10 times over its sales. If one were to apply the valuation multiple (enterprise value/sales) enjoyed by Suzlon vis-à-vis NEPC India, the fair value of the latter's equity will stand at Rs 2825 crore.

Even going by the average market prices of the NEPC stock in the past one month, the enterprise value, which is the company's worth inclusive of its net debt, will have been Rs 424 crore.

According some analysts, NEPC India is seeing a turnaround just now with the wind energy business growing rapidly, which means the company has the potential for substantial re-rating in the stock markets.

The management has also been making bullish statements about the company's performance. Even in its annual statement for financial year 2005, the director's report said, "The company...has plans to increase its Ebitda levels to 10 per cent, which will be more than the industry average. We look forward to a far better performance in the coming year."