Power play

GUEST COLUMN/ TORCH-LIGHT

There was no dearth of takers for the recent public issue of National Thermal Power Corp (NTPC). The power generating company entered the market on October 7, 2004, with a book-built public issue of 86.58 crore equity shares of Rs 10 each which comprised a fresh issue and an offer for sale by the government.

The price band for the issue was Rs 52-62 (the price was subsequently settled at the higher end of the band).

The shares of NTPC were listed at the BSE and the NSE, and simultaneously in the F&O segment. In fact, a section of market players feels that the simultaneous listing in the F&O segment led to a scenario where the non-institutional high net-worth investors sold in the cash market on listing.

This helped them liquidate their leveraged position and facilitated cash inflows. Then, perhaps, long positions were opened in the F&O market to facilitate further leveraging. The price pattern post-listing is reflective of the same with the stock gradually gathering strength.

The same thing happened at the time of the listing of Tata Consultancy Services (TCS) which, too, made a simultaneous debut on the cash and F&O segments of the capital market.

After the initial hiccups, this premier infotech stock rebounded handsomely. Will NTPC show a similar pattern? Perhaps, but let us first move on to see where it stands in the power pecking order.

NTPC is the largest power generating company in India and ranks among the top 10 world-wide. The issue proceeds are proposed to be used in six projects aimed at expanding its generating capacity.

Given the huge demand-supply gap that exists in the Indian power sector, the expansion is justified and if the government sticks to its 10th five-year plan target, the power capacity addition would be 41,110 mw of which NTPC is expected to contribute over 9,370 mw.

NTPC's financials pass muster, though it must be noted that the company has been a beneficiary of a one-time settlement scheme (securitisation of receivables) initiated in April 2002 whereby the RBI has issued 8.5 per cent tax-free bonds worth Rs 16,410 crore till date.

Not only has this glossed over the risk of NTPC's exposure to the financially unstable SEBs (state electricity boards), but has also had a positive impact on its financials.

Firstly, the tax-free interest earned on these bonds has boosted NTPC's other income to such a level that it has actually converted to profit what would otherwise have been an operational-level loss. Furthermore, receivables, which were hitherto looming large, have dipped vertically. This largesse by the RBI will stand NTPC in good stead till 2016, and RBI's benevolent shadow offsets much of the risk NTPC faces on account of possible SEB defaults.

It is also worth noting that with the new tariff regulations kicking in, the post-tax RoE (return on equity) has been reduced to 14 per cent from 16 per cent which could impact NTPC's cash flows. This can, however, be offset through increased sales and cost-cutting measures like the proposed focus on hydro-based plants.

At the prevalent price of around Rs 74, the P/E multiple stands at 14 plus, which suggests the pricing captures the present fundamentals. However, factors like the huge market-cap that the company now enjoys post-listing, the anticipation of the continued high level of FII interest and the fact that the much-touted 'India growth' story can materialise only through rapid progress in core sectors like power, make NTPC a fair long-term bet.

Simply put, those backing it will have to do so with an understanding that it is a growth story rather than a value play.

The scenario is quite the contrary with Power Trading Corp (PTC) which is promoted by NTPC. In spite of being far from a growth stock, PTC has had a fair upward run from its issue price. This was because investors, institutional ones, backed it as a value play.

But at the current market price of around Rs 52, it doesn't seem to be the value pick it was at lower levels.

PTC is promoted by NTPC, Powergrid Corporation of India (Power Grid), National Hydroelectric Power Corp (NHPC) and Power Finance Corp (PFC). It created a niche for itself by becoming the first company to successfully trade in power in this country.

PTC sources power from surplus power generating entities and supplies the same in areas where there is a supply shortfall. It has hitherto managed its financial relationship with SEBs satisfactorily.

Furthermore, the cost-plus formula it works on has hitherto protected it from any significant market price discovery risks. PTC is also positioned to explore the opportunities arising from the export of power from the neighbouring nations of Nepal, Bhutan and Bangladesh.

There is the issue of a potential conflict of interest with NTPC which has set up a 100 per cent subsidiary to do power trading. Not being in a capital intensive segment with serious entry barriers, PTC's real test will come when an inevitable competitor emerges.

Those who invested in PTC's IPO now need to take a call whether, having exhausted most of the value, this stock can be backed as a growth play. Those who are looking for a growth play are likely to place their bets on NTPC.

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com. Disclosure: He has an outstanding interest in NTPC and TCS.)