3 points about NHPC IPO- should you apply ?

NHPC is coming out with an IPO of 15% of its share capital (167 crores) at a price band of Rs 30 to 36. One third of issue proceeds will go to the government (about 2000 core) and rest to the company (4000 core). ICRA has rated the issue as “average”, 3 marks out of 5.

You either have to play this for listing gains or for a long term horizon(at least 4 yrs).While the issue looks expensive but may have some listing gains for a couple of days due to trading interest– market conditions permitting. This issue is more expensive than recently concluded Adani power(coal based power generation)

#1 Company’s Business
NHPC has 13 hydroelectric power stations operational (making power from water) with total installed capacity of 5,175MW. The company is engaged in the construction of 11 projects with installed capacity of 4,622 megawatts. Thus if all goes well the company will have about 10,000 MW capacity by 2012. Seven projects have been identified to receive the benefits from this IPO.

While during the project planning itself the company gets into contracts with its customers these contracts are called Power purchase agreements (“PPA”).In the current year the company sold power at price of Rs 2.03 per unit and the company & its subsidiary generated about 17,000 MU in total..Being a PSU, i dont think they
can raise prices easily.


#2 Valuation
Market Cap basis
1. Market cap = 40,225 crore (upper band) to 33,546 (lower band)
Mcap/ mw (2009) = 7.77 to 6.48.
Mcap/ mw (2012) = 4.0 to 3.35 – if all goes as planned.
2. PE based on 2009 EPS = 36.7 to 30.61

I dont have enough info to do a "Sum of parts" valuation.However if the company is able to generate 17,000 mu from 5175 mw @ Rs 2. We can do guesstimation on the sales once 10,000 mw is achieved.

Peer group valuation
The only other major player in exactly the same space is JP Hydro which is trading at about 30 PE but they seem to operating a project of 300 MW.NTPC is at about 22 to 23 and Tata power about 30 PE( as on 01-aug-09). All these players have mcap/mw of about 3 or less. Having said that,the operating margins may be slightly better for NHPC and it is insulated from fluctuation in coal prices.

#3 Risks
1. The gestation period in hydro power projects is much longer since there is need to acquire land , get clearances and then construct the plant etc. Thus its may be more risky compared to coal based plants.

2. Unavailability of water and lack of rainfall may impact the output.

So whats the simple idea? - Should you apply ?
If you are risk averse investor avoid the issue at this price.Although the barrier to entry are high,the business is capital intensive and company may need to dilute equity periodically. If you want to play the trading bounce and have guts - go for it, but do exit once you get the bounce.