NTPC’s OFS also a sign of impending turnaround
Although media reports say Life Insurance Corporation (LIC) put in a large cheque of R3,000 crore for shares of NTPC at the auction on Thursday, the final subscription number of 1.7 times suggests that, even otherwise, there was enough appetite for the paper. Indeed, the offer for sale (OFS), for 78.32 crore shares, appears to have generated widespread interest with several foreign institutional investors (FII) having put in large bids of between $50 and $100 million each. While it helps that the markets globally are awash with liquidity and that FIIs are currently bullish on India—net buying so far this year has crossed $6 billion on the back of $24.5 billion in 2012—the government deserves credit for having chosen the OFS route to sell the shares and also for pricing the issue reasonably at a floor of R145 per share. Indeed, the OFS route—introduced by the capital markets regulator to help companies achieve a minimum float of 25%—seems to be working well with a host of companies now having raised equity this way. The process is transparent, quick—completed within market hours in a single day—and allows for efficient price discovery. Moreover, retail investors too should find the auction process simple enough to participate in.
The timing for the NTPC issue couldn’t have been better; while it’s true NTPC is a large and liquid stock, it has underperformed the markets for close to two years and it’s only now that analysts have turned more optimistic on the future of the power producer. The underperformance was mainly on account of a falling plant availability factor (down 300 basis points between FY10-12) and falling plant load factor (down 580 basis points in the same period). This trend should reverse with discoms expected to be financially better off now that state governments have started hiking electricity tariffs—in 2012, for instance, 17 states upped tariffs by anywhere between 2% and 38%. While it’s true that the hikes may not, in all cases, bridge the revenue gap of the discoms, and that many of them would still remain in financial dire straits, it would nonetheless ease the strain on their cash flows. Moreover, the financial restructuring package will help clean up their balance sheets. The package, of course, is voluntary but several states, including Rajasthan Haryana and Uttar Pradesh, have initiated talks with bankers to recast the outstanding debt. Moreover,