Major Project Report - JK - Final

7/31/2019 Major Project Report - JK - Final

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Issue & Performance Analysis of a Power Sector Company IPO – NHPC Ltd.

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1. EXECUTIVE SUMMARY

An Initial Public Offering (IPO) is the sale of a company’s stock to the public for the

first time. The primary impetus for an IPO is generally either to raise capital or to offer an exit

strategy to some of the firms existing owners, but a number of other motivations and

considerations also influence a firm’s decision to go public.

In addition to provide an immediate capital influx and mechanism through which

existing owners can cash in on their investment, there are other advantages of going public.

Since the expectation is that a liquid aftermarket will develop following the offering, firms

conducting an IPO can expect to be in a position to raise additional capital relatively easily and

on favorable terms following the initial offering. The increased liquidity also makes it possible

for public companies to offer stock-based incentives and compensation, which can help them

attract and retain top employees and improve employee productivity.

Trading on an exchange also makes mergers and acquisitions easier since stock can

be issued as part of the deal. Due to increased visibility, companies going public may also

experience an increase in prestige, which can improve their credibility with suppliers and

customers, resulting in better credit terms and more pricing leverage. Even the increased

scrutiny of public companies is not all bad since it usually allows the company to issue debt at

lower rates. The history of IPO mechanism can be traced back to period of CCI regime i.e.

Controller of Capital Issues. Prior to nineties all the public issues have to take the permission

of C.C.I. The latter determines all other aspects of the issue. The office of C.C.I. was abolished

.In 1993 after the formation of SEBI during 1992. SEBI was honored to regulate all aspects of

Capital market, including primary market and IPO’s. IPO market has undergone a change with




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an introduction of fixed price regime and has further advanced with implementation of Book

Building process as a result of Malegam Committee which was set up in1995.

NHPC, a “Mini Ratna” category I public sector utility is the flagship hydroelectric

generation company promoted by the Government of India. The company is the largest HEP

developer in India. NHPC was incorporated in 1975. The company has 11 operational plants

having a total capacity of 3,620 MW. NHPC owns 51% stake in Narmada Hydroelectric

Development Corporation (NHDC), which has two operational plants with a total capacity of

1,520 MW. The projects are more skewed towards the northern and northeastern part of India

as the region offers significant untapped hydropower potential. NHPC has 17 different projects

with a total capacity of ~14,000 MW are under various stages of consideration for which the

construction activity is still to take off.

NHPC, being a public sector company, has the majority of its shareholding vested

with the President of India. The company came up with its IPO in Aug’09, at Rs.36 per share

with the face value of the stock being Rs.10 and premium at Rs.26 per share, after which the

equity capital of the company increased from Rs.11,182.49cr to Rs.12,300.74cr. The Issue

comprised a Fresh Issue by company and an Offer for Sale by the Selling Shareholder.

The object of the Offer for Sale was to carry out the disinvestment of 55,91,24,672

Equity Shares of Rs. 10 each by the Selling Shareholder. Company would not receive any

proceeds of the Offer for Sale by the Selling Shareholder.

This paper is a sincere effort to analyze the issue activities and the performance of

the IPO when it listed in the exchanges.




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2. ABOUT THE PROJECT

2.0 TITLE OF THE PROJECT:

The present paper has been titled as “ Issue & Performance Analysis of a Power Sector

Company IPO – NHPC Ltd. ” .

2.1 OBJECTIVES:

The objectives of the project are as below:

1. To study the regulatory framework governing IPOs in India.

2. To study the activities involved in the process of Initial Public Offering (IPO) in India

by focusing on the offer by a power sector company, i.e. NHPC Ltd.

3. To analyze the offer by the company in terms of its objectives, financial health,

industry position, pricing etc.

4. To conduct a Fundamental Analysis of the Company.

5. To study the subscription patterns and to analyze the rationale behind the same.

6. To conduct the Performance Analysis through comparison with the performance of

another power sector company IPO (Coal India Limited) that resulted into better

returns.

7. To analyze the factors influencing price performance of IPOs & to arrive at some

factors which depend upon the success/failure of an IPO.




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2.2 SIGNIFICANCE OF THE STUDY:

Initial Public Offering (IPO) is always lucrative investment for mainly short-term

investors. But now the situation has changed, investors have to be very selective and thorough

homework is required in taking exposure for the short-term. For an investor it has always been

a task to judge a company in terms of investment. There are companies, which demonstrate

weak past but promising future plans. So the selection of IPO always needs a proper analysis.

The approach for retail investors for investing in IPOs should be no different from

making any other investments. Key factors to look out for would be the company’s track record,

quality of management and end use of funds. The next big question is the price. The book

building mechanism allows for market-driven price-discovery process. Retail investors should

be guided by the build-up of the book. Sometimes immediate market conditions affect the

sentiment and the subscription in an IPO.

This paper is a sincere effort to analyze the issue activities and the performance of

the IPO when it hit the market.

2.3 FOCUS OF THE STUDY:

The study focuses on the following aspects:

• Regulatory framework governing IPOs in India – SEBI Guidelines.• Activities involved in the process of Initial Public Offering (IPO) in India by focusing on

the offer by a power sector company, i.e. NHPC Ltd.

• Analysis of the offer by the company in terms of its objectives, financial health,

industry position, pricing etc.




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• Fundamental Analysis of the Company.

• Subscription patterns and analysis of the rationale behind the same.

• Performance analysis through comparison with the performance of another power

sector company IPO that resulted into better returns.

• Analysis of the factors influencing price performance of IPOs

2.4 RESEARCH METHODOLOGY:

The research methodology adopted has been explained below under sub-clauses 2.4.1 to

2.4.5.

2.4.1 RESEARCH DESIGN:

The present work is a descriptive study and the Research Design for a descriptive study

must focus on the following:

• Formulating the objective of the study – Refer under clause 2.1 above.

• Designing the methods of data collection – Refer under clause 2.4.4 below.

• Selecting the Sample – Refer clause 2.4.3 below.

• Processing & analyzing the data – Refer clause 2.4.5 below.

• Reporting the findings – Refer final chapter of the report.

2.4.2 UNIVERSE & SURVEY POPULATION:

In the present study, the Indian Capital Market and its constituents act as the

universe.




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2.4.3 SAMPLE:

The listed power sector companies (either in NSE or in BSE) constitute the sub set of

the universe. A power sector company has been selected from the sub set for the purpose of

the study/analysis.

2.4.4 COLLECTION OF DATA:

The report has been compiled on the basis of secondary data sources. Mainly, data

has been collected from the information available on the internet validated from various

recognized websites like Securities & Exchange Board of India (SEBI), Bombay Stock

Exchange (BSE), National Stock Exchange (NSE), NHPC Limited, Money Control Website

etc. Some financial calculations in the study has been done using the information available in

the book “Investment Analysis & Portfolio Management” by Sh. Prasanna Chandra.

2.4.5 ANALYSIS PATTERN:

The analysis has been done based upon comparison with the peers and also based

upon the best practices in the field. Also, the book “Investment Analysis & Portfolio

Management” by Sh. Prasanna Chandra has been a major guide.

2.5 LIMITATIONS OF THE STUDY:

Though there are a number of different methods for the evaluation and selection of

IPO’s, only a few have been considered for the present study. Also, there may be subjective

variations in the results in some of the methods. The study confines to only a particular IPO

and cannot in every case be generalized.




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2.6 ORGANISATION OF THE STUDY:

The organization of the study is as follows:

Chapter-1: Executive Summary

Chapter-2: About the Project

Chapter-3: Regulatory Framework for IPO’s

Chapter-4: IPO Offering by NHPC Limited

Chapter-5: Fundamental Analysis

Chapter-6: Post-Offer Scenario

Chapter-7: Performance Analysis

Chapter-8: Conclusion

Bibliography

Annexures.

2.7 REFERENCES:

Please refer “Bibliography” provided at the end of this report.




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3. REGULATORY FRAMEWORK OF IPO’s

This chapter presents the regulatory framework governing the issuance of IPOs

through Public offer, Book building and Online route. The market design for primary market has

been provided in the provisions of: (a) the SEBI Act, 1992 which establishes SEBI to protect

investors and develop and regulate securities market; (b) the Companies Act, 1956, which sets

out the code of conduct for the corporate sector in relation to issue, allotment and transfer of

securities, and disclosures to be made in public issues; (c) the Securities Contracts

(Regulation) Act, 1956, which provides for regulation of transactions in securities through

control over stock exchanges; and (d) the Depositories Act, 1996 which provides for electronic

maintenance and transfer of ownership of de-mat securities.

In this chapter, the market design for IPOs as provided by SEBI has been analyzed.

An elaborate system built under the Capital Issues (Control) Act, 1947, established firm control

of the Central government over IPOs and other capital Issues in the post independence era

since1947 until the abolition of the Act, in 1992. This abolition paved the way for free access to

the capital markets and for free pricing of IPOs and other capital issues. SEBI has become the

focal point for regulating issues of capital by the corporate sector. It has been entrusted with

the responsibility to look after the interest of investors in this regard by providing them with

adequate and full disclosures in the offer documents and by regulating the various

intermediaries connected with the issue of capital. In this context, SEBI issued guidelines in

June, 1992 known as Disclosure and Investor Protection Guidelines, which govern the issue of

capital to public. SEBI has been issuing clarifications to these guidelines from time to time

aiming at streamlining the public issue process. In order to provide a comprehensive coverage

of the DIP guidelines, SEBI has issued a compendium series in January, 2000, known as SEBI




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(DIP) Guidelines, 2000. These guidelines apply to all public issues, offers for sale and right

issues of listed and unlisted companies.

3.1 Eligibility Norms for Companies Issuing IPO’s:

SEBI has introduced entry norms for the IPO market. According to the guidelines

issued by SEBI, a company intending to make an IPO should satisfy some eligibility conditions.

It has to file a draft prospectus with SEBI, through an eligible merchant banker, at least 21

days prior to the filing of prospectus with the Registrar of Companies. A company cannot make

a public issue unless it has made an application for listing of the securities with stock

exchange(s). The company must also have entered into an agreement with the depository for

dematerialization of its securities.

An unlisted company can make initial public issue, on fixed price basis or on book

building basis, provided it has a pre-issue net worth of not less than Rs.1 crore in 3 out of the 5

preceding years and has minimum net worth in immediately preceding 2 years. Also, the

company should have Net Tangible Assets of at least Rs.3 crore in each of the proceeding 3

years of which not more than 50% is held in monetary assets; and in case the company has

changed its name within last one year, at least 50% of the revenue for the preceding 1 year is

earned by the Company from the activity suggested by the new name. The Company should

also have a track record of distributable profits in terms of section 205 of the Companies Act,

1956, for at least 3 years out of the preceding 5 years2. Earlier SEBI norms permitted a new

company to come out with an IPO if it has a dividend payment track record for 3 years ,out of

the ‘actual payment of dividend’ to ‘ability to pay dividend’ in terms of Section 205 , out of

immediately preceding 5 years. In order to encourage IPOs, SEBI relaxed this requirement

Companies Act, 1956. That is why; the company making IPO must have distributable profits for




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at least three out of immediately preceding five years. Further, the issue size should not

exceed five times of its pre-issue net worth. A company is eligible to make a public issue on

fixed price basis or on book building basis, if the issue size does not exceed five times its pre-

issue net worth.

If the company does not meet the above criteria, i.e., not having track record or it

wishes to raise more than 5 times the pre-issue net worth, then the issue will have to be

compulsorily made through book building route. In such a case, 60% of the issue size will have

to be allotted to the ‘Qualified Institutional Investors’. If the company wishes to issue only 10%

of post issue capital to public, then it can be made only through book building with allocation of

60% of the issue to QIBs. Also, one of the following two conditions must be satisfied i.e. firstly,

the minimum post-issue face value capital of the company shall be Rs. 10 crore; or secondly,

there shall be compulsory market making for a minimum depth of 300 shares along with

maximum bid-ask spread of 10%.

A listed company can make public issue if the issue size does not exceed 5 times its

previous net worth as per audited balance sheet of the last financial year. Private sector banks,

public sector banks and Infrastructure companies are exempt from the requirement of eligibility

norms if their project has been appraised by a public FI or IDFC or IL&FS or a bank which was

earlier a public FI and not less than 5% of the project cost is financed by any of the institutions,

jointly or severally, by way of loan and/ or subscription to equity.

Companies in the information technology sectors requested SEBI that in view of the

factors like high valuation enjoyed by these companies coupled with low capital requirements,

importance of employee stock options (as employees are the main asset for these companies)

and attractiveness of ADR route for listing on overseas stock exchange with capital dilution as

low as 10 per cent, they may be granted relaxation from requirement to offer to the public at




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least 25 per cent of the securities issued for the purpose of listing. In view of the fact that

accumulation of excess capital by these companies would result in unproductive utilization and

crowd out the other industries in need of capital, SEBI decided to allow these companies to list

their shares by making a public offer of 10 per cent of the post issue capital instead of 25 per

cent, subject to requirements of issue of minimum number of securities and a specified

minimum issue size.

A concern had arisen about the misuse of high valuation of IT industry by some

unscrupulous promoters who may charge unreasonably high premiums from the investors. It

was, therefore, thought necessary to stop the access to public funds by such promoters so that

the interest of genuine promoters is protected. Thus, in continuation of efforts to ensure that

the offer document contains adequate disclosures to enable the investors to make an informed

investment decision, additional disclosure requirements were stipulated for companies which

changed their names in the recent past to give an impression of being into information

technology. Eligibility norms were modified to provide that a company in the IT sector going for

IPO/offer for sale shall have track record of distributable profits as per Section 205 of the

Companies Act in three out of five years in the IT business/from out of IT activities. This clause

has been deleted now. It can also access the market through the alternative route of appraisal

and financing by a bank or financial institution.

Thus, existing eligibility norms of the issuers have been reviewed inter-alia with an

objective to strengthen the existing norms, to facilitate entry of mid-cap, small-cap new

entrepreneurs to the primary market without exposing the public to undue risk, to maintain

quality of issuer companies and also to keep fly by night issuers at bay.




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3.2 Pricing of IPO’s:

Pricing the instrument is the most critical element of an issue. Since the abolition of

CCI, the onus of pricing the issue has fallen on merchant bankers. Companies are now

allowed to freely price their issues. The idea behind free pricing was that if companies

overpriced their issues, the market would penalize them by not subscribing and by under

pricing; the companies would have to forego the potential premium.

In the CCI regime, when all the issues coming with a public issue had to price their

issue based on the CCI formula, was a case of anti-market practice, where all companies

whether fundamentally sound or not had to price their issues very conservatively. As a result of

this, all the issues coming into the market were easily oversubscribed leaving a few

developments. The merchant banker’s role during this period was limited.

With the abolition of CCI in June 1992, the restriction was removed and companies

were allowed to price their equity at a premium subject to certain conditions. This free pricing

regime had its own quota of boons and banes. The sound companies with good fundamentals

were able to tap funds from the capital market at a premium. On the other hand, companies

with dubious credentials issued capital with rosy projections and fleeced the uninformed

investors. The merchant banking community too moved into the numbers game and became

less concerned about the quality of issues. This resulted in the overpricing of many issues

which often gave negative initial returns to the investors ( ICFAI , 1999).

3.2.1 SEBI Guidelines about Pricing:

A company eligible to make a public issue may freely price its equity shares. An

eligible infrastructure company and public or private sector bank can also freely price their

equity shares, as specified by SEBI and RBI respectively from time to time.




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3.2.2 Differential Pricing:

Offer documents filed with the Board and actual price can be determined at a later

stage. Any company making a public issue of equity shares may issue such securities to

applicants in the firm allotment category at a price different from the price at which the net offer

to the public is made provided that the price at which the security is being offered to the

applicants in firm allotment category is higher than the price at which securities are offered to

public.

3.2.3 Price Band:

Issuer company can mention a price band of 20% (cap in the price band should not

be more than 20% of the floor price) in the date before filing of the offer document with ROCs.

If the Board of Directors have been authorized to determine the offer price within a specified

price band, such price shall be determined by a resolution to be passed by the Board of

Directors. In case of listed company, the lead merchant banker should give a 48 hours notice

of such meeting to the Designated Stock Exchange. Also, in case of public issue or rights issue

by listed issuer company, issue price or price band may not be disclosed in the draft

prospectus filed with the Board. The final offer document shall contain only one price and one

set of financial projections, if applicable.

3.2.4 Freedom to Determine the Denomination of Shares to Public:

Keeping in view the changes in the capital market emanating from free pricing of

shares and free access to market for funds by the issuers, the SEBI with the objective of

broadening the investors’ base, dispensed with the requirement of standard denomination of

Rs.10 and Rs.100 (in terms of government circulars) and gave freedom to companies with




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dematerialized shares, to issue shares at any denomination but not below Re.1/- or decimal of

a rupee to be determined by them. Now, an eligible company shall be free to make public issue

of equity shares in any denomination determined by it in accordance with sub-section (4) of

section 13 of the Companies Act, 1956 and in compliance with the norms as specified by SEBI

from time to time. The companies proposing to issue shares in any denomination shall comply

with the following:

i. The shares shall not be issued in the denomination of decimal of a rupee;

ii. At any given time there shall be only one denomination for the shares of the company;

iii. The company shall adhere to the disclosure and accounting norms specified by SEBI

from time to time

This measure would give freedom to companies to price their IPOs below Rs.10 and

would thus be an extension of free pricing. This will also harmonize the existing separate

disclosure and entry point norms for par and premium issues.

3.3 Promoter’s Contribution & Lock-in Requirements:

3.3.1 Promoter’s Contribution:

In a public issue by a company, the promoters shall contribute not less than 20% of

the post issue capital. Promoters shall bring in the full amount of the promoters contribution

including premium at least one day prior to the issue opening date which shall be kept in an

escrow account with a Scheduled Commercial Bank and the said contribution/amount shall be

released to the company along with the public issue proceeds. But where the promoters’

contribution has been brought prior to the public issue and has already been deployed by the

company, the company shall give the cash flow statement in the offer document disclosing the

use of such funds received as promoters’ contribution. Further where the promoters’ minimum






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3.3.3 Lock-in of Pre Issue Share Capital of an Unlisted Company:

The entire pre-issue share capital, other than that locked-in as promoters’

contribution, shall be locked-in for a period of one year from the date of commencement of

commercial production or the date of allotment in the public issue, whichever is later. The

above Clause shall not be applicable to the pre-issue share capital held by venture capital

funds and foreign venture capital investors registered with the Board. However, the same shall

be locked-in as per the provisions of the SEBI (Venture Capital Funds) Regulations, 2000 and

any amendment thereto held for a period of at least one year at the time of filing draft offer

document with the Board and being offered to the public through offer for sale."

3.4 Pre-Issue Obligations:

The lead merchant banker plays an important role in the pre-issue obligations of the

company. He exercises due diligence and satisfies himself about all aspects of offering and

adequacy of disclosures in the offer document. Each company issuing securities has to enter

into a Memorandum of Understanding with the lead merchant banker, which specifies their

mutual rights, liabilities and obligations relating to the issue.

In case a public issue is managed by more than one merchant banker, the rights,

obligations and responsibilities of each merchant banker shall be demarcated . In case of

under-subscription of an issue, the lead merchant banker responsible for underwriting

arrangements has to invoke underwriting obligations and ensure that the underwriters pay the

amount of devolvement. The lead manager shall ensure that the issuer company has entered

into agreements with all the depositories for dematerialization of securities. He shall also

ensure that an option is given to the investors to receive allotment of securities in

dematerialized form through any of the depositories. All the other formalities related to post-




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issue obligations like allotment, refund and dispatch of certificates are also taken care by the

lead merchant banker. From May 2007 onwards SEBI has mandatory the grading of IPOs by

any SEBI authorized credit rating agency. This has to be mentioned in the company’s

prospectus.

3.5 Other Issue Requirements:

Rule 19(2) (b) of SC (R) Rules, 1957

In case of a public issue by an unlisted company, the net offer to public shall be at

least 10% or 25% as the case may be, of the post-issue capital and in case of listed

companies it is 10% or 25% of the issue size. An eligible infrastructure company, inviting

subscription from public may not be required to offer at least10% or 25% of its securities to

public for subscription as required under rule 19(2)(b) of SC(R) Rules, 1957.

Previously, in case of public issues of equity shares by unlisted companies in any of

the eligible sectors at least 10% of the securities issued by such company might be offered to

the public subject to the following: -

i. Minimum twenty lakhs securities are offered to the public (excluding reservation, firm

allotment and promoter's contribution); and

ii. The size of the offer to the public i.e. the offer price multiplied by the number of securities

offered to the public at point (i) above is minimum Rs.50 crore.

iii. The issuer company is free to make reservations and/or firm allotments to various

categories of persons mentioned hereafter for the remaining of the issue size subject to

other relevant provisions of these guidelines.

But now the issuer company is free to make reservations and/or firm allotments to

various categories of persons mentioned hereafter for the remaining of the issue size subject




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to other relevant provisions of these guidelines. In a public issue (not being a composite issue)

by a listed company, the reservation on competitive basis can be made for the shareholders

who, on the record date ( date fixed for the purpose of determining the eligible shareholders) ,

are holding shares worth up to Rs. 50,000/- determined on the basis of closing price as on the

previous day.

An unlisted company may make an application to the Board for relaxation from

applicability of clause (b) to sub-rule (2) of Rule 19 of the Securities Contracts (Regulation)

Rules, 1957 for listing of its shares without making an initial public offer if it satisfies the

conditions mentioned in the guidelines.

3.6 Green-Shoe Option:

An issuer company making a public offer of equity shares can avail of the Green

Shoe Option (GSO) for stabilizing the post listing price of its shares. A company desirous of

availing this option, shall in the resolution of the general meeting authorizing the public issue

seek authorization also the possibility of allotment of further shares to the ‘stabilizing

agent’(SA) at the end of the stabilization period in terms of clause 8A.15. The prime

responsibility of SA is to stabilize post listing price of the shares. The SA should enter into an

agreement with the promoters, the details of which would be disclosed in Red Herring

Prospectus, and the final prospectus.

In case of an initial public offer by a unlisted company and by a listed company also,

the promoters and pre-issue shareholders holding more than 5% shares, may lend the shares

subject to the provisions.




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3.7 Guidelines for Book-Building:

Book building is a price discovery mechanism used by the corporate issuing

securities. The mechanism also helps the small investors to subscribe to securities at a price,

which is arrived at by a transparent process. The importance of this mechanism was

recognized by the SEBI and book building guidelines were introduced in 1995. However, while

book building became an accepted practice in the market for private placement of debt

securities, it remained absent in the public issue market despite the regulatory framework

being in place for a long time but now it has become the most popular method for the IPOs. An

issuer company proposing to issue capital through book building has two options, viz., 75%

book building route and 100% book building route. The 75% book building route is available to

all body corporate that are otherwise eligible to make an issue to the public. In case this route

is followed, the issue size shall not be less than Rs. 100 crore and underwriting shall be

mandatory to the extent of the net offer to the public. The prospectus should indicate the price

band within which the securities are being offered for subscription. The balance 25% of the

issue will be issued at the price determined through book building only to retail individual

investors who have either not participated or have not received any allocation, in the book built

portion. The issue price for the book built portion and the fixed price portion shall be the same.

If 100% book building route is adopted, the size of issue has to be at least Rs. 25 crore and the

issue has to be fully underwritten. The book built portion shall be allotted in de-mat form only.

Book building shall be for the portion other than the promoters’ contribution. Not more than

60% of the book built portion can be allocated to institutional investor, not less than 15% onproportional basis to non-institutional investors applying for more than 1,000 shares and the

remaining 25% to small investors on pro-rata basis.




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SEBI had issued guidelines in October 1997 for book building, which were applicable

for 100% of the issue size and for issues above Rs.100 crore. The guidelines were revised

subsequently to reduce the limit to issues of Rs.25 crore to encourage the use of this facility.

However, no issuer used this facility. SEBI modified the framework for book building

further in October 1999 and Aug 2003 to make it more attractive. Under the modified

guidelines an issuer has been given the option to book build either 90 per cent of the net offer

to the public or 75 per cent of the net offer to the public. The balance issue is offered to the

public at the fixed price determined through book building exercise.

The book building mechanism is designed keeping in view the international practices

and procedures for book building. The modified framework does not replace the existing

guidelines. The issuer company shall enter into an agreement with one or more of the Stock

Exchange(s) which have the requisite system of on-line offer of securities. The Lead Merchant

Banker shall act as the Lead Book Runner and he would have to follow the specified code of

ethics. The red herring prospectus shall disclose either the floor price of the securities offered

through it or a price band along with the range within which the price can move, if any.

The issuer would have option to issue securities using book building facility under the

existing framework or the modified set up broadly as given below:

i. The present requirement of graphic display of demand at bidding terminals to syndicate

members as well as the investors has been made optional.

ii. The 15% reservation for individual investors bidding for up to 10 marketable lots may be

merged with the 10% fixed price offer.

iii. Allotments for the book built portions shall be made in demat form only.

iv. The issuer may be allowed to disclose either the issue size or the number of securities

to be offered to the public






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4. IPO OFFERING BY NHPC LIMITED

4.0 BUSINESS OF THE COMPANY (As on 31.03.2009):

NHPC is a hydroelectric power generating company dedicated to the planning,

development and implementation of an integrated and efficient network of hydroelectric

projects in India. NHPC executes all aspects of the development of hydroelectric projects, from

concept to commissioning. As on 31.03.2009, NHPC has developed and constructed 13

hydroelectric power stations and our current total installed capacity is 5,175 MW. Current total

generating capacity is 5,134.2 MW, which takes into account a downgrade of the capacity

ratings of the Loktak and Tanakpur power stations by the CEA. This total installed capacity and

total generating capacity includes two power stations with a combined capacity of 1,520 MW,

constructed and operated through our Subsidiary, NHDC. The power stations and hydroelectric

projects are located predominantly in the North and North East of India, in the states of Jammu

& Kashmir, Himachal Pradesh, Uttarakhand, Arunachal Pradesh, Assam, Manipur, Sikkim and

West Bengal. NHPC including its Subsidiary generated 16,582.72 MUs and 2,368.45 MUs of

electricity, respectively, in Fiscal 2009. In Fiscal 2009, the Company and Subsidiary sold

14,587.88 MUs and 2,345.01 MUs of electricity, respectively.

NHPC is presently engaged in the construction of 11 additional hydroelectric projects,

which are expected to increase the total installed capacity by 4,622 MW. Also, sanction for a

further five projects with an anticipated capacity of 4,565 MW are awaited. In addition, NHPC is

awaiting government sanction for certain joint venture projects with an anticipated capacity of

2,166 MW. Survey and investigation works are being carried out to prepare project proposal

reports for nine additional projects, totaling 7,255 MW of anticipated capacity.




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NHPC has experience in the design, development, construction and operation of

hydroelectric projects. They can execute and manage all aspects of projects, from front-end

engineering design to commissioning and operation and maintenance of the project. They

have also been engaged as a project developer for certain projects, where the scope of work is

to design, develop and deliver a hydroelectric power station to a client on an agency basis.

They also provide contract-based technical, management advisory and consultancy services to

domestic and international clients.

Based on NHPC’s restated consolidated financial statements, in Fiscals 2007, 2008

and 2009, they generated total income of Rs. 2,579.95 crore, Rs. 3,321.63 crore and Rs.

4,051.52 crore, respectively, and net profit of Rs. 1,049.10 crore, Rs. 1,207.04 crore and Rs.

1,244.15 crore, respectively. In Fiscal 2009, the average selling price of electricity was Rs.

2.03 per unit. In Fiscal 2009, derived Rs. 3,436.22 crore or 84.81% of restated consolidated

total income from the sale of energy to SEBs and their successor entities, pursuant to long

term power purchase agreements.

NHPC’s operational efficiency has been reflected through high average capacity

indices for our power stations. The average capacity indices for Fiscals 2007, 2008 and 2009

were 94.11%, 96.13% and 93.61% respectively. These indices are higher than the cumulative

capacity index levels, which is required under CERC regulations and the higher efficiency

parameters, which pursuant to the tariff policy in place for Fiscal 2005-Fiscal 2009 entitled to

certain incentive payments.

Also, NHPC has obtained BS OHSAS 18001:2007, ISO 9001:2000, ISO 14001:2004

and PAS 99: 2006 certifications from the BSI Management Systems, all of which are valid until

July 25, 2011. In recognition of performance and consistent achievement of targets as

negotiated under the MoUs that enter into with the GoI on an annual basis, the GoI has rated




24

NHPC’s performance as “Excellent” from Fiscal 1995 through to Fiscal 2006, “Very Good” in

Fiscal 2007 and “Excellent” in Fiscal 2008. Also, in recognition of our performance, NHPC has

been designated as a Mini-Ratna Category-I public sector undertaking in April 2008. As a Mini-

Ratna Category-I entity, NHPC will have greater autonomy to undertake new projects without

GoI approval, subject to an investment ceiling of Rs. 500 crore set by the GoI.

The President of India, and its nominees, currently hold 100% of the issued and paid-

up Equity Share capital of the Company. After the Issue, the President of India will continue to

hold 86.36% of the post-Issue paid-up Equity Share capital of our Company. Under the Articles

of Association, the GoI has the power to appoint all of the Directors.

4.1 THE ISSUE:

4.1.1 Objects of the Issue:

The Issue comprises a Fresh Issue by the Company and an Offer for Sale by the

Selling Shareholder.

4.1.1.1 The Offer for Sale

The object of the Offer for Sale is to carry out the disinvestment of 55,91,24,672

Equity Shares of Rs. 10 each by the Selling Shareholder. The Company will not receive any

proceeds of the Offer for Sale by the Selling Shareholder.

4.1.1.2 The Objects of the Fresh Issue

The objects of the Fresh Issue are to:

(a) utilise the proceeds of the Fresh Issue, after deducting the proportionate

underwriting and issue management fees, selling commissions and other expenses




25

associated with the Fresh Issue (the ‘‘ Net Proceeds of the Fresh Issue ’’) to part

finance the construction and development costs of certain of projects, namely,

Subansiri Lower, Uri – II, Chamera - III, Parbati – III, Nimoo Bazgo, Chutak, and

Teesta Low Dam - IV (“ Identified Projects ”);

(b) utilise the remaining portion of the Net Proceeds of the Fresh Issue for general

corporate purposes; and

c) create a public trading market for our Equity Shares by listing them on Stock

Exchanges, as the listing of our Equity Shares will enhance the visibility and brand

name and enable to avail of future growth opportunities.

Issue 1,67,73,74,015 Equity Shares

Which Comprises:

Fresh Issue 1,11,82,49,333 Equity Shares

Offer for Sale 55,91,24,672 Equity Shares

Of Which:

Employee Reservation Portion 4,19,34,350 Equity Shares

Net Issue 1,63,54,39,665 Equity Shares

Of Which:

Qualified Institutional Buyer’s Portion At least 98,12,63,799 Equity Shares (allocation

on proportionate basis), of which 5% of the QIB

Portion or 4,90,63,190 Equity Shares (assuming

the QIB Portion is 60% of the Net Issue) shall be

available for allocation on a proportionate basis

to Mutual Funds only (Mutual Funds Portion) and

93,22,00,609 Equity Shares shall be available for

allocation to all QIBs, including Mutual Funds

Non-Institutional Portion Up to 16,35,43,966 Equity Shares (allocation on




26

proportionate basis)

Retail Portion: Up to 49,06,31,900 Equity Shares (allocation on

proportionate basis)

Equity Shares Outstanding Prior to the

Issue

11,18,24,93,430 Equity Shares

Equity Shares Outstanding Post the

Issue

12,30,07,42,773 Equity Shares

Eligible Employees may also apply for Equity Shares under the Net Issue and such

Bids shall not be treated as multiple Bids. The unsubscribed portion, if any, from the Equity

Shares in the Employee Reservation Portion will be treated as part of the Net Issue and may

be added to any category at the sole discretion of our Company and the Selling Shareholder in

consultation with the BRLMs. Under subscription, if any, in any portion, except in the QIB

portion, would be met with a spill-over from the other portions at the sole discretion of our

Company and the Selling Shareholder, in consultation with the BRLMs. If at least 60% of the

Net Issue cannot be allocated to QIBs, then the entire application money will be refunded.

Other Details:

Issue Open Date: 07th Aug 2009

Issue Close Date: 12th Aug 2009

Price Band: Rs 30-36 per Share

Face Value: Rs 10 per Share

(Bid Lot 175 Equity Shares)

Issue Size: 1,67,73,74,015 Eq Shares

Pre Issue Equity Capital: Rs 11,182.49 Cr




27

Post Issue Equity Capital: Rs 12,300.74 Cr

Fresh Issue: 1,11,82,49,343 Eq Shares

Offer For Sale: 55, 91, 24,672 Eq Shares

Shareholding Pattern (%):

Pre Issue (%) Post Issue (%)

Promoter & Group 100.00 86.36

Public ---- 13.64

Issue Structure:

Qib: 98, 12, 63,799 Eq Shares

Non-institutional: 16, 35,43,966 Eq Shares

Retail: 49, 06,31,900 Eq Shares

Employee Reservation: 4,19,34,350 Eq Shares

Other Specifics:

Lead Manager: Enam Securities Pvt Ltd

Registrar: Karvy Computershare Pvt Ltd




28

5. FUNDAMENTAL ANALYSIS

5.0 Fundamental Analysis Definition:

Fundamental analysis is a stock valuation method that uses financial and economic

analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company's financial

reports, and non-financial information such as estimates of the growth of demand for products

sold by the company, industry comparisons, and economy-wide changes, changes in

government policies etc.

5.1 General Strategy:

To a fundamentalist, the market price of a stock tends to move towards it's “real

value” or “intrinsic value”. If the “intrinsic/real value” of a stock is above the current market

price, the investor would purchase the stock because he knows that the stock price would rise

and move towards its “intrinsic or real value”.

If the intrinsic value of a stock was below the market price, the investor would sell the

stock because he knows that the stock price is going to fall and come closer to its intrinsic

value.

All this seems simple. Now the next obvious question is how do you find out what the

intrinsic value of a company is? Once you know this, you will be able to compare this price to

the market price of the company and decide whether you want to buy it (or sell it if you already

own that stock).




29

To start finding out the intrinsic value, the fundamentalist analyzer makes an

examination of the current and future overall health of the economy as a whole.

After you analyzed the overall economy, you have to analyze firm you are interested in. You

should analyze factors that give the firm a competitive advantage in it’s sector such as

management experience, history of performance, growth potential, low cost producer, brand

name etc. Find out as much as possible about the company and their products.

Do they have any “core competency” or “fundamental strength” that puts them ahead

of all the other competing firms?

What advantage do they have over their competing firms?

Do they have a strong market presence and market share?

Or do they constantly have to employ a large part of their profits and resources in

marketing and finding new customers and fighting for market share?

After you understand the company & what they do, how they relate to the market andtheir customers, you will be in a much better position to decide whether the price of the

company’s stock is going to go up or down.

Having understood the basics of fundamental analysis, let us go into the first stage of

the fundamental analysis of NHPC Limited, which covers the Economic & Industry analysis.

5.2 Economic & Industry Analysis:

The Power sector is on the path of growth led by private and public counterparts. In

order to revamp the power sector, numbers of initiatives have been taken in the recent past,

both in terms of policy pronouncement and programmes ranging from bringing about efficiency




30

in generation segment through introduction of super critical technology to penetration of

commercial energy in the rural areas and consolidation of electricity distribution system. The

sector has posted decent set of results as a whole despite of current economic scenario.

Higher utilisation would also help reduce the depreciation cost for the companies. While it

might not be visible fully, but fall in interest rate would also help the bottom line of the

companies. Power sector is highly capital intensive and hence, is highly leveraged. The

electricity generation target for the year 2008-09 has been fixed at 744.344 BU comprising of

631.270 BU thermal; 118.450 BU hydro; 19.000 BU nuclear; and 5.624 BU import from

Bhutan. Outlook for the sector looks reasonable with decline in fuel prices and its availability.

This would further be aided by fall in interest cost, led by falling interest rate. Therefore, in the

light of rising demand for power and huge capacity expansion, the scope for the growth of the

sector is vast and is expected to materialize soon. Therefore, looking at the current scenario

and future growth potential it can be expected that Power Sector will be able to outperform the

markets in the medium to long term (i.e., 3-5 year) thereby providing excellent investment

opportunities in the sector.

5.3 Hydropower Potential in India:

According to the Hydro Power Policy 2008, India has enormous potential for

hydroelectric generation, assessed by CEA to be about 84,000 MW at 60% load factor, which

translates to 148,700 MW in terms of installed capacity. In addition to the above, 6,782 MW of

installed capacity has been assessed from small, mini and micro hydroelectric schemes (i.e.,

schemes of capacity up to 25 MW). Further according to the India Investment Centre, 56

potential pumped storage sites, with an aggregate installed capacity of 94,000 MW, have also

been identified.




31

Despite the benefits of hydroelectric projects, hydropower’s share of the Indian

market for power has steadily declined. At the end of First Five Year Plan (1951-56),

hydropower constituted 37% of the total installed capacity in the power sector, and rose to

more than 45% by 1963. Until the late 1970s, hydropower continued to represent more than

40% of India’s power supply, which is considered to be the ideal hydro-thermal generation mix

for meeting demand in an efficient manner. However, in the 1980s, hydropower’s share began

declining sharply and in Fiscal 2009 hydropower constituted only about 25% of the overall

installed capacity of the country.

To meet the energy requirements of 1,038 billion units and a peak load of 152,746

MW with a 5% spinning reserve, a total capacity addition of about 82,500 MW is required

during the 11th Plan, according to the Hydro power policy, 2008, of which 12,716.70 MW have

already been commissioned as on March 31, 2009 with hydropower contributing 26.67% of the

commissioned units. However, a capacity addition of 78,700.4 MW comprising 36,874.0 MW

(46.85%) in central sector, 26,783.4 MW (34.03%) in the state sector and 15,043.0 MW

(19.11%) in the private sector has been proposed during the 11 th Plan. Out of this, a capacity

of 15,627 MW is proposed to be added from hydropower projects comprising 8,654 MW

(55.38%) in central sector, 3,482 MW (22.28%) in state sector and 3,491 MW (22.34%) in the

private sector.

The proposed hydropower capacity addition during the 11th plan is 15,627 MW. Out

of this, 3,392 MW capacities has already been commissioned and 12,235 MW is under

construction as on May 31, 2009. The CEA estimated the hydropower potential of the country

at about 150,000 MW in its reassessment carried out from 1978 - 87. The hydropower installed

capacity at the end of the Tenth Five Year Plan was 34,653.77 MW.




32

It is expected that by the end of the 14th Five Year Plan, the entire feasible

hydropower potential in India would be tapped.

5.4 COMPANY PROFILE:

NHPC Limited , a PSU Mini-Ratna, is one of the largest hydroelectric power

generators in the country, accounting for 14% of the country's hydro capacity. NHPC is

involved in planning, development and implementation of an integrated and efficient network of

hydroelectric projects in India. It carries out all activities related to the development of

hydroelectric projects, from front-end engineering design to commissioning and operation and

maintenance of the project. Moreover, the Mini-Ratna status will have greater autonomy to

undertake new projects without Govt of India approval, subject to an investment ceiling of

Rs.500cr set by the Govt. With 13 hydroelectric power stations having a total installed capacity

of 5,175 megawatt (MW), it currently generates about 5,134.2MW marginally lower as CEA

downgraded capacity ratings of Loktak and Tanakpur power stations. On a standalone basis, it

generates about 3655MW and about 1520MW through JV's, (two power stations, constructed

and operated through NHPC's subsidiary, Narmada Hydroelectric Development Corporation

(NHDC)).The company's power stations and hydroelectric projects are located predominantly

in the north and north east of India, in the states of Jammu & Kashmir, Himachal Pradesh,

Uttarakhand, Arunachal Pradesh, Assam, Manipur, Sikkim and West Bengal.

NHPC is presently engaged in the construction of 11 additional hydroelectric projects,

which are expected to increase the company's total installed capacity by 4,622MW.

Furthermore, it is awaiting the government's sanction for five more projects with a total

anticipated capacity of 4,565MW in addition to certain joint venture projects with a total

anticipated capacity of 2,166MW. Besides, the company is conducting surveys and

investigation works for nine additional projects, totaling 7,255 MW of anticipated capacity.




33

NHPC's core business is the generation and sale of hydropower. It also provides

contract-based services including technical, management advisory and consultancy services

as well as project execution on contract basis.

Being a central PSU, NHPC operates under the purview of CERC. All the operational

plants have entered into long-term off-take arrangements under the regulatory mechanism,

which lends significant long-term visibility. As the projects are skewed towards the north and

north eastern region, it exposes the company to the relatively weak state utilities of this region.

Profitability for the company is expected to improve with new projects starting to kick

in from FY12E onwards. With ample projects awaiting clearances the pipeline of projects under

construction is also expected to remain robust for the next five years.

5.4.1 Regulatory overview

Regulatory framework plays a very important role in the operations of NHPC. All

operational plants within NHPC’s portfolio have tied up for long-term PPAs under the CERC

tariff policy. The plants are guaranteed a fixed return of 15.5% on the regulated capex under

the tariff policy.

Annual Fixed Charges 2009-14 2004-09 Impact

Return on Equity (%) 15.5 14 Positive

Interest on Loans As per Actual As per Actual No Impact

Depreciation 5.28 2.57 + AAD Negative

Interest on Working Capital Normative Parameters Normative Parameters Negative

O&M Expenses

New Plants

Commissioned after 2009

2% of Project Cost 1.5% of Project Cost Positive




34

Plants Commissioned

before 2009

Normative O&M Expenses

escalated @ 5.72%

O&M Expenses

escalated @ 5.17%

Positive

Impact of Changes in the Tariff Policy (2009-14)

5.4.2 Investment Positives:

5.4.2.1 Impressive track record in implementing hydroelectric projects:

The company has managed the development and implementation of 13 hydroelectric projects,

including two through their Subsidiary, NHDC and has also completed projects that are located

in the geo-technically sensitive Himalayan terrain and in inhospitable areas that are often

difficult to access. Their proven execution capability is a key advantage for securing projects

and the relevant experience and expertise in project implementation provide the company with

significant competitive advantages.

5.4.2.2 Additional capacity expansion through JV’s and MoU’s on cards:

NHPC plans to double its capacity and is in a process of adding 4.6GW of fresh

capacity through 11 projects. In addition, the company is also awaiting government sanction for

certain joint venture projects with an anticipated capacity of 2,166 MW. Survey and

investigation works are also being carried out to prepare project proposal reports for nine

additional projects, totaling 7,255 MW of anticipated capacity.

5.4.2.3 Strong Operational Performance:

Majority of the NHPC’s plants are located in the water rich north and north east region

which allows it to generate electricity even during the non peak period. NHPC’s average

capacity index for FY07-09 was 94.11%, 96.13% and 93.61% respectively well above the

benchmark required under the CERC regulation of 90% availability.




35

5.4.2.4 Diversifying into Thermal Projects:

Apart from its main business of setting up and managing hydel projects, the company

is now looking at more thermal projects. As a part of this diversification, the company, through

its subsidiary, has signed up with the Madhya Pradesh Government for a 1,320 MW thermal

station located near its existing hydel plants and close to coal mines in the mineral-rich state.

5.4.3 Investment Concerns:

5.4.3.1 Unexpected Complexities and Delays:

There are a number of uncertainties inherent in the development and construction of

any hydroelectric project due to issues such as availability of funds, delay or failure to obtain

necessary environmental and other governmental clearances, including those relating to

financing of our projects. In addition, the costs, timing and complexities of project development

and construction can increase because of the remote location of many of our hydroelectric

project sites.

5.4.3.2 Opposition from Local Communities and Other Parties:

The construction and operation of hydroelectric projects has faced opposition from local

communities where these projects are located and from special interest groups. Significant

opposition by local communities, special interest groups and other parties to the construction of

the projects may adversely affect our reputation and financial condition.

5.4.3.3 Long Gestation Period and Substantial Capital Outlay:

Due to the nature of the business company’s projects typically require a long

gestation period and substantial capital outlays before completion or before positive cash flows

can be generated. The time and costs required in completing a project may escalate due to

many factors. In addition, failure to complete a project development, or failure to complete a




36

project according to its original specifications or schedule, may give rise to potential liabilities

thus impacting the overall performance.

5.4.4 Business Outlook, Valuation & Recommendation:

With its current installed capacity aggregating to 5,175MW and plans to nearly double

its capacity by FY16 along with various JV's in place augurs well for robust growth

opportunities for NHPC. However, its projects carry inherited risks of environmental and

government clearance delays also require a long gestation period for completion of projects.

However, the operating cost of its projects is significantly lower than that of the conventional

thermal power stations. Considering the demand-supply scenario, the power space stands

clear for strong growth momentum going ahead. NHPC is placed in an admirable position in

capitalizing the situation with its strong operational efficiency and various MoU's/JV's in place.

Hence, with long term growth prospects in view, it makes sense to subscribe to the issue of

NHPC Ltd.

5.5 FINANCIAL ANALYSIS:

The financial data has been annexed as below:

i) Balance Sheet of the company (Mar 2006 to March 2009) – Annexure-I

ii) Profit & Loss Account (Mar 2006 to March 2009) – Annexure-II

iii) Capital Structure (2006 to 2009) – Annexure-III

iv) Ratios – (March 2006 to March 2009) – Annexure-IV

The two principal methods of equity evaluation are the dividend discount method and the

earnings multiplier method.






38

To answer these questions, investment analysis starts with a historical analysis of

earnings (and dividends), growth, risk & valuation multiples and use this as a foundation for

developing the forecasts required for estimating the intrinsic value.

5.5.2.1 Earnings & Dividend Level:

To assess the earnings and dividend level, investment analysts look at matrics like

the Return on Equity (RoE), the Book Value (BV) per share, the Earnings per Share (EPS),

the Dividend payout ratio and the dividend per share.

Return on Equity (RoE):

(i) Return on Equity (RoE) = Equity Earnings / Equity

(ii) The RoE can be decomposed into three factors:

RoE = (Profit after Tax / Sales) x (Sales / Assets) x (Assets / Equity)

Net Profit Margin Asset Turnover Equity Multiplier

(iii) Investment Analysts use one more formulation of the RoE wherein it is analysed in

terms of five factors:

RoE = (PBIT / Sales)x(Sales / Assets)x(PBT / PBIT) x (PAT / PBT) x (Assets / Equity)

= PBIT Efficiency x Asset Turnover x Interest Burden x Tax Burden x Leverage

The relevant calculations are enclosed as Annexure – V. The results are tabulated below.

(i)

Year 2006 2007 2008 2009

ROE (%) 7.27 8.25 8.98 9.69




39

(ii)

Net Profit Margin 46.02 49.11 39.06 39.83Asset Turnover 0.07 0.08 0.09 0.09

Equity Multiplier 2.3 2.15 2.44 2.7

(iii)

PBIT Efficiency (%) 67.41 77.09 58.99 68.54

Asset Turnover 0.07 0.08 0.09 0.09

Interest Burden 0.75 0.80 0.71 0.72

Tax Burden 0.91 0.80 0.94 0.80

Leverage 2.30 2.15 2.44 2.70

Book Value per Share:

BV = (Paid-up Equity Capital + Reserves & Surplus) / No. of Outstanding Equity Shares

= Rs. 16.08 per share as on 31.03.2009 (Annexure – V).

Earnings per Share:

EPS = Equity Earnings / No. of Outstanding Shares

=

Year 2006 2007 2008 2009

EPS 0.72 0.82 0.89 0.96




40

Growth Performance (Annexure – V):

Compound Annual Growth Rate (CAGR) of Sales = (Sales for 2009 / Sales for 2006) 1/3 – 1

= 19.01%

CAGR of EPS = (EPS for 2009 / EPS for 2006) 1/3 – 1 = 10.06%

CAGR of Dividend per Share (DPS) = (DPS for 2009 / DPS for 2006) 1/3 – 1 = 11.36%

Risk Exposure:

Risk is a multi-faceted phenomenon. The following measures are quite useful in getting a

handle over risk:

i) Beta (Not calculated here)

ii) Volatility of RoE

Volatility of RoE (Annexure – V):

The Volatility of RoE = Range of RoE over n years / Average RoE over n years = 0.28 .

5.5.2.2 Favorable & Unfavorable Factors:

Favorable Factors Unfavorable Factors

Earnings Level High BV per Share Low BV per Share

Growth Rate High RoE Low RoE

High CAGR in Sales & EPS Low CAGR in Sales & EPS

High Sustainable Growth Rate Low Sustainable Growth Rate

Risk Exposure Low Volatility of RoE High Volatility of RoE

Low Beta High Beta




41

5.6 CONCLUSION:

At the high end of the issue price, i.e. at Rs. 36/-, a return of 12% approx. can only be

expected, which is very low compared to the prevailing interest rate & inflation conditions. Also,the Return on Equity (RoE) is very poor in the range of less than 10%. However, the growth

rates of the company in terms of CAGR (Sales, EPS & DPS) are high in the range of 10-20%.

The EPS values are also low. However, low volatility in RoE is a favorable factor. In a nutshell,

the calculations show a mixed performance of the company – a mix of good & bad parameters.

However, considering the importance of the parameters considered, then we have to say that

bad parameters dominate the good parameters which do not make the company a right choiceto invest.




42

6.0 POST OFFER SCENARIO

6.0 Subscription Details:

NHPC IPO received very good response from both the retail and the institutional

investors. Overall NHPC IPO got subscribed by around 24 times. Retail segment has also

received tremendous response from the investors; this segment got oversubscribed by 4 times.

NHPC (IPO Subscription day by day)

No. of times issue is subscribed (BSE + NSE)

As on Date QIBs Non Institutional

Retail (RIIs)

Employees Total

Day 1 – 07 ‐Aug‐2009 6.0057 0.0062 0.0952 0.0002 3.54

Day 2 – 10 ‐Aug‐2009 6.1474 0.1521 0.4929 0.0689 3.76

Day 3 – 11 ‐Aug‐2009 9.4851 2.4331 1.2507 0.2229 6.16

Day 4 – 12 ‐Aug‐2009 29.1608 56.7074 3.8730 0.5697 23.74

IPO Grading:

Pursuant to the SEBI Guidelines, this Issue has been graded by ICRA Limited and

has been assigned a grade of 3/5 indicating average fundamentals. The IPO Grading is

assigned on a five point scale from 1 to 5, with IPO Grade 5/5 indicating strong fundamentals

and IPO Grade 1/5 indicating poor fundamentals.

Issue Price:

The Issue Price of Rs. 36 has been determined by the Company and the Selling

Shareholder in consultation with the BRLMs (Book Running Lead Managers) and on the basis




43

of assessment of market demand for the Equity Shares through the Book Building Process.

The BRLMs believed that the Issue Price of Rs. 36 is justified in view of the above qualitative

and quantitative parameters.

6.1 Listing Details:

NHPC’s shares failed to enthuse retail investors when opened for trading on

01.09.2009, damping the prospects of forthcoming public issues. The stock opened at Rs 39; 8

per cent above the offer price of Rs 36. It ended the day at Rs 36.75 on the Bombay Stock

Exchange. Analysts said the response was tepid because these issues were priced on the

higher side. The pricing didn’t leave much for investors on the listing day. The other reasoning

was that NHPC is a long-term bet and considering its core businesses, it will be difficult for the

stock to witness any big spike in the near term. The selling pressure in the NHPC stock also

came from HNIs who had subscribed to the IPO using margin funding from stock brokers.

Margin funding allows investors to leverage their subscription. The interest rate for NHPC was

around 12 per cent per annum. According to brokers, the costing for HNIs who used margin

funding came to around Rs 42 per share and they could make profit only above this level.

While the IPO was subscribed 23 times, the portion reserved for HNIs was subscribed over 55

times.




44

7.0 PERFORMANCE ANALYSIS

7.0 Introduction:

In Chapter – 6, we have seen the calculation of some basic parameters which may

govern the performance of an IPO. However, there are no benchmark values for the calculated

parameters for comparison, and without any comparison, the calculations do not have any

relevance. So, to give meaningfulness to the calculated values, I have compared the values

with that of another company operating in the same broad sector, i.e. power sector, which also

came up with an IPO later and gave huge returns to investors. The selected company is Coal

India Limited (CIL).

7.1 Introduction to CIL:

Coal India Limited (CIL) - a Schedule 'A' 'Navratna' Public Sector Undertaking under

Ministry of Coal, Government of India, has its Headquarters in Kolkata, West Bengal. We

produce non-coking coal and coking coal of various grades for diverse applications.

As of March 31, 2010, we operated 471 mines in 21 major coalfields across eight

states in India, including 163 open cast mines, 273 underground mines and 35 mixed mines

(includes both open cast and underground mines). We also operated 17 coal beneficiation

facilities with an aggregate designed feedstock capacity of 39.40 million tons per annum. We

intend to develop an additional 20 coal beneficiation facilities with an aggregate additional

proposed feedstock capacity of 111.10 million tons per annum. Besides this, we provided 85

hospitals and 424 dispensaries.

The Indian Institute of Coal Management (IICM) operates under CIL and imparts multi

disciplinary management development programs executives.




45

Coal India's major consumers are the power and steel sectors. Others include

cement, fertiliser, brick kilns etc.

7.2 Coal India IPO:

Objects of the Issue:

The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the

Selling Shareholder and to achieve the benefits of listing the Equity Shares on the Stock

Exchanges.

Issue Detail:

»» Issue Open : Oct 18, 2010 - Oct 21, 2010

»» Issue Type : 100% Book Built Issue IPO

»» Issue Size : 631,636,440 Equity Shares of Rs. 10

»» Issue Size : Rs. 15,199.44 Crore

»» Face Value : Rs. 10 Per Equity Share

»» Issue Price : Rs. 225 - Rs. 245 Per Equity Share

»» Market Lot : 25 Shares

»» Minimum Order Quantity : 25 Shares

»» Listing At : BSE, NSE

Coal India Ltd IPO Grading / Rating:

CRISIL has assigned an IPO Grade 5 to Coal Indid Ltd IPO. This means as per CRISIL

company has 'Strong fundamentals'. CRISIL assigns IPO grading on a scale of 5 to 1, with

Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.




46

7.3 Financial Data & Calculations:

The financial data has been annexed as below:

i) Balance Sheet of the company (Mar 2006 to March 2009) – Annexure-VI

ii) Profit & Loss Account (Mar 2006 to March 2009) – Annexure-VII

iii) Ratios – (March 2006 to March 2009) – Annexure-VIII

iv) Calculation – Annexure -IX

7.4 Subscription Details:

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time

QualifiedInstitutional

Buyers

(QIBs)

Non

Institutional

Investors

RetailIndividual

Investors

(RIIs)

Employee

Reservation

s

Total

Shares Offered /

Reserved284,236,398

85,270,919

198,965,479

63,163,644

631,636,440

Day 1 - Oct 18,

20100.6300 0.1800 0.1000 0.0000 0.3400

Day 2 - Oct 19,

20103.3900 0.5400 0.3500 0.0100 1.7100

Day 3 - Oct 20,

201024.7000 2.8900 1.1000 0.0400 11.8500

Day 4 - Oct 21,

201024.7000 25.4000 2.3100 0.1000 15.2800




47

7.5 Listing Details:

BSE

Issue Price: Rs. 245.00

Open: Rs. 287.75

Low: Rs. 287.45

High: Rs. 344.75

Volume: 192,839,607

NSE

Rs. 245.00

Rs. 291.00

Rs. 291.00

Rs. 344.90

479,716,245

7.6 Comparison of NHPC IPO with Coal India IPO:

Sl.

No.

Parameter Compared NHPC LTD. COAL INDIA

LTD.

Remarks

1. Expected Rate of Return

at Issue Price (Rs. 36 for

NHPC & Rs. 245 for CIL)

12.255% 15.4% High Expected Returns

in CIL than NHPC –

Favourable to CIL

2. BV per Share 16.08 27.01 High BV per Share in

CIL – Favourable to

CIL

3. RoE 9.69% 59.84% Very High RoE in CIL –

Most Favourable to CIL

4. CAGR (Sales) 19.01% 10.4% High CAGR in Sales in

NHPC – Favourable to

NHPC

5. CAGR (EPS) 10.06% 10.22% No significant diff.

between NHPC & CIL.




48

6. CAGR (DPS) 11.36% 13.8% High CAGR (DPS) in

CIL – Favourable to

CIL.

7. Volatility of RoE 0.28 0.31 Low Volatility of RoE

favourable to NHPC,

but cannot be

compared with CIL as

the RoE values are

much higher in CIL

8. Grading / Rating ‘3’ by CRISIL ‘5’ by CRISIL Favorable to CIL

9. Discount to Retail

Investors

0% 5% Favorable to CIL

investors

10. Issue Volume 1,677,374,015 631,636,440 NHPC Volumes are

approx. 2.5 times that

of CIL.

7.7 Return Analysis:

(Ref: Price Performance of IPOs in Indian Stock Market by Rohini Inder Chopra, School Of Management And Social

Sciences Thapar University, Patiala ).

To test whether a stock has been priced at its intrinsic worth or not and to determine

the magnitude and degree of the deviations of market price of the stock from its offer price,

returns have been computed. If the returns are positive, the indication is that of under pricing

while negative returns imply overpricing. It is not possible to compare these returns across the




49

board, because the market behavior is different in different phases during the period. So, this

return need to be adjusted using the returns on the Index for the corresponding period.

The initial return on IPOs has been computed as the difference between the closing

price on the first day of trading and the offer price, divided by the offer price.

R_Ret. = {(P1 – Po) / Po} * 100 --------------------- (i)

Where R_Ret. = subscriber’s initial return

P1 = closing price on the first day of trading

Po = Offer price

The return measured by Equation (i) would be valid in a perfect market, where there

is no time gap between the application closing date and the first day of trading, no opportunity

cost of money deposited with the application (or demand for shares does not exceed the

supply of shares and hence no rationing takes place), and no other costs associated with

lodging an application. If the first condition is not fulfilled, returns should be adjusted for

changes in market conditions during this period. In most cases the gap between the application

closing date and the first day of trading would be very small and is likely to have a negligible

effect. But, in India this gap is quite long. During this period, a major change could occur in

market conditions and the observed premium (discount) measured by equation (i) could be

caused by a change in market conditions rather than initial mispricing. Therefore, the raw

return estimated by equation (1) has been adjusted for market return.

MAER = {[(P1 – P0) / P0] – [(M1 -M0) / M0]} * 100------------------ (ii)

Where MAER = Market adjusted excess return

M1 = Closing value of Market Index on the first trading day

Mo = Closing value of Market Index on the offer closing date.




50

NHPC CIL

P1 36.7 342.35

P0 36 245

M1 (Sensex) 15551.19 (on 01.09.2009) 20893.57 (on 04.11.2010)

M0 (Sensex) 15020.16 (on 12.08.2009) 20260.58 (on 21.10.2009)

MAER -1.591% (Overpricing) 36.61% (Underpricing)

Issue-Size and Price Performance :

Issue size is the offer size of a company i.e. the total no. of shares a company is

selling in their IPOs. According to SEBI guidelines the issue size that is being offered should

be disclosed in Red- Herring Prospectus. Table below shows the correlation between under

pricing with the Issue size. All the average raw returns and mean MAER given by IPOs basis

on Issue sizes are positive. From the Table, it is clearly shows that the optimum issue size for

an IPO is between 120 and 180 (lakh shares). With an increase in the issue size, there is a

gradual increase in raw returns. So from an investor point of view this is the optimum size to

invest in.

Initial Listing Returns of IPOs by Issue Size:

Sample Size Issue SIze Raw Returns MAER

(N) (Lakh Shares) (%) (%)

244 All 23.31 21.49

108 <=60 26.37 25.04

60 60 to 120 27.73 4.17

23 120 to 180 168.98 162.19

11 180 to 240 114.98 94.95




51

Issue SIze MAER

(Lakh Shares) (%)

NHPC 16,773.74 -1.591

CIL 6,316.36 36.61

Subscription level and Price Performance:

Subscription level of IPOs depicts the total demand of the issue generated in market

by investors’ viz. retail investors, NIIs and QIBs. Subscription level is being calculated by

dividing total demand (of the issue) by total offer size. The benchmark value of subscription

level is 1. If the subscription level value is less than 1 then the issue is undersubscribed and if

it is more than 1, it is over-subscribed. From the table below, it is crystal clear that with an

increase in subscription level there is a subsequent increase in raw returns. This shows the

clear correlation between the two indicating that the issues which are more subscribed are

bound to give significant positive raw returns indicating under pricing.

Sample Size Subscription Level (S) Raw Returns MAER

(N) (No. of Times) (%) (%)

229 All 26.47 24.27

158 <=30 36.67 32.66

44 30 to 60 132.12 124.29

19 60 to 90 304.94 302.73

8 >=90 1288.27 1326.44

Subscription Level (S) MAER

(No. of Times) (%)

NHPC 23.74 -1.591CIL 15.28 36.61




52

7.8 Findings of Return Analysis:

The negative value of raw return indicated by NHPC IPO clearly points out that the

issue is overpriced. The attempt to correlate initial returns to the size of the issue succeeded

only to an extent. As such, the bigger size issue may be a factor for the low initial returns by

the investors. However, no correlation could be established between the subscription level and

raw returns since the comparison of the subscription level and MAER of the companies

showed opposite results.




8.0 CONCLUSION

The negative value of raw return indicated by NHPC IPO clearly points out that the

issue is overpriced. This statement is very well supported by the calculations as per Gordon

Dividend Discount model wherein the expected return comes out to be 12% only at the high

end of the issue price, i.e. at Rs. 36/-, which was very low compared to the prevailing interest

rate & inflation conditions. Also, the Return on Equity (RoE) was very poor in the range of less

than 10%. However, the growth rates of the company in terms of CAGR (Sales, EPS & DPS)

are high in the range of 10-20%. The EPS values are also low. However, low volatility in RoE

was a favorable factor. The attempt to correlate initial returns to the size of the issue

succeeded only to an extent. As such, the bigger size issue may be a factor for the low initial

returns by the investors. However, no correlation could be established between the

subscription level and raw returns since the comparison of the subscription level and MAER of

the companies showed opposite results. In a nutshell, the factors such as Overpricing, Low

Expected Rate of Return, Low Return on Equity and Bigger Issue Size dominated the high

growth rates in terms of CAGR in Sales, EPS & DPS. As a result, the IPO brought

lower/negative initial returns to the investors. However, long term positioning in the stock may

bring significant returns because of the high CAGR rates, which is not analysed in the report.

Documents

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