NTPC: Powerful flotation

The NTPC valuation argument goes for a toss

As expected, the NTPC stock has generated a huge response, effectively silencing all criticism. You can't argue with demand, even though some of it could be riding on momentum.

A few analysts had pointed out earlier that, at the high end of the price band at Rs 62, the stock was being offered at 12.2 times FY04 earnings, higher than Tata Power's valuation. (Reliance Energy's multiple is, of course, much higher, but that's because the market values the distribution business more highly, thanks to its lower capex.)

But the rally in the market has put paid to the valuation argument as well, because, with the Tata Power stock moving up around 18 per cent in the last month, it now quotes at a price-earnings multiple of about 14.6. No wonder the NTPC offer is attractive, even though earnings growth is not likely to kick in immediately.

The coincidence is that China Power International Development Ltd, China's fifth largest power generator, also raised $320.6 million in an IPO this week.

While Hong Kong retail investors bid for 300 times the stock available and institutional investors bid for 15 times their quota, the offer was pruned down from the $500 million size originally slated, while Temasek also made a commitment to buy a large chunk of the offer.

China Power's current generating capacity is less than one-sixth of NTPC's, and it was priced at 12.7 times 2004 (calendar year) earnings estimates. In contrast, NTPC's FY05 PE is 11.9.

The NTPC offer is also at a substantial discount to its Chinese peer Huaneng Power International, which trades at around 14 times its estimated calendar 2004 earnings. Moreover, demand for quality Indian paper is perhaps more than that for Chinese IPOs, of which there has of late been quite a spate.

More power to small investors

A Sebi committee has suggested that retail investors should get a larger share of book-built issues - precisely 35 per cent of the issue instead of the current cap of 25 per cent.

In the process, the allocation for high net worth individuals would fall to 15 per cent, but the quota for qualified institutional buyers would remain unchanged at 50 per cent. The committee has also suggested that the investment limit for retail investors be increased to Rs 1,00,000 from Rs 50,000.

The committee's view has probably been prompted by the oversubscription of the retail portion in recent IPOs. Needless to say, the good market sentiment has helped bring retail investors to the primary market. Earlier, in the Bharti issue, for instance, retail investors had stayed away because of the bearish trend in the market.

Nonetheless, raising the limit for retail investors isn't risky as the unsubscribed portion, if any, can be allotted to HNIs or QIBs. In fact, it would be fair to give HNIs the first right to the unsubscribed retail portion, as it's proposed that their share should come down.

That would ensure that half the issue goes to non-institutional investors. Moreover, since the retail investor will be coughing up the money with his application, there is no risk, even if the application limit is raised to Rs 1,00,000.

In the US market, however, the distribution is skewed in favour of institutions with the regulators wanting to encourage smaller investors to opt for the mutual fund route. But SEBI has always talked of building an a preference for equity among retail investors, at the same time encouraging mutual funds.

Higher oil prices don't seem to bother equities

According to the IMF, every $5 per barrel increase in oil prices shaves off 0.4 per cent from the global economic growth. The spot price of Brent crude has risen by $18.3 a barrel this year, which using IMF's measure will deduct 1.46 per cent from global economic growth. Equity markets world-wide, however, don't seem to see higher oil prices as a threat.

Key Asian markets have risen between 6 and 14 per cent this year, adding to the huge gains made in the 2003 rally. The Indian markets, based on the movement of the broad-based S&P CNX 500 is currently at the same level as end-December 2003.

This phenomenon is not restricted to just the Asian markets. The S&P 500 index in the US has risen around two per cent this year, despite the 61 per cent jump in crude prices. UK's FTSE 100 has also gained around five per cent this year.

One reason given for the resilience in the equity markets is that the current price of oil, although high, is far from their peaks in real terms. Also, use of oil resources is said to be more efficient now, and the impact of higher prices is less compared to earlier periods.

But while that may be true for the developed world, surely the industrialisation of countries like India and China will mean more, not less, dependence of these countries on oil? Analysts point out that the proportion of oil in world GDP has come down over the years. The nonchalance demonstrated by the world equity markets, however, suggest that oil prices no longer matter.

With contributions by Shobhana Subramanian and Mobis Philipose