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Within one day, the NHPC IPO has been oversubscribed 3 times ... when you look at the individual categories (Qualified-Institutional, Non-Institutional and Retail), you can see that entire volume is coming from the Qualified Institutional category. While the other 2 categories are only 15% and 50% subscribed, the qualified institutional category is oversubscribed by 6 times.
1) The Book Value myth:
Almost everyone I spoke to is talking about how low the Price-to-Book value of NHPC is. The book value of this company is roughly INR 18,000cr as of Mar 2009. This gives a P/B range of 2x to 2.4x for the price band. And everyone...fund managers, analysts, television talkers alike...is concentrating on this P/B and comparing it to peers - JP Hydro,NTPC, Tata Power etc. And therein lies the catch - NHPC's existing 3650MW (excluding subsidiary NHDC) yields the company an average power tariff of Rs. 1.62 per unit. The unconsolidated company's net worth as of Mar 2009 is INR 18,000cr. The PAT of the unconsolidated company is Rs.1,130 cr. This gives a Return on Net Worth of 6.7%....pathetic.
Let me give an analogy - your friend owns a house, which he got by inheritance. Today, the house is worth Rs. 4cr on the market (thats what everyone is telling you). But your friend's late great-grandfather had signed a rent agreement at Rs. 1lac per month till year 2030. So, would you pay your friend 4cr to buy this house today??
The catch is in the low price NHPC has been forced to sell power at by the power regulator for the last two decades. And this is why the Price-to-Book argument falls flat.
2) Leverage and the grey market:
Almost every institution gets a leverage of 20x...to subscribe for 50cr worth of shares, you need to put in 2.5cr. At an interest rate of 12% for 15 days, the break-even (inclusing interest cost) works out to Rs. 39.30. And the stock is already trading in the grey market at Rs.46. So everyone is playing the game...get allotment and look to sell immediately.
And herein lies the second catch - the grey market is a very thin market and is only an indicator of price, not volume. If the stock tanks after listing, the ones who were not able to get rid of the shares in the "grey-market" will get burnt....which is what happened in the Reliance Power IPO in Jan 2008.
Funny how we can forget so quickly...playing fastest-finger-first with our bruised fingers from a year ago!
