NHPC IPO

NHPC IPO: Price Band, Grade and Date

The price band of NHPC IPO is between Rs. 30 and Rs. 36.

ICRA has rated the NHPC IPO 3 out 5.

NHPC IPO opens at August 7^th 2009 and will close on August 12^th 2009.

NHPC: Business Overview

NHPC is a hydroelectric power company which has got 13 power stations, and an installed capacity of 5,175 MW. NHPC is predominantly present in the North and North Eastern part of India, and has power stations in the following states:

• Jammu & Kashmir
• Himachal Pradesh
• Uttarakhand
• Arunachal Pradesh
• Assam
• Manipur
• Sikkim
• West Bengal

The real story behind the NHPC IPO is one about expansion and growth. NHPC is currently engaged in the construction of 11 hydroelectric projects, which will increase its capacity by 4,622 MW. Further, 8 projects with an anticipated capacity of 5,751 MW are awaiting sanctions from the CCEA. Survey and Investigation works are being carried out to prepare project proposal reports for nine additional projects for 7,255 MW.

Here is a schedule of commissioning of the projects:

Name	Capacity MW	Commissioning Date
Sewa II	120	June 2009
Teesta Low Dam	132	December 2009
Uri II	240	August 2010
Chamera III	231	August 2010
Teesta Low Dam IV	160	August 2010
Nimoo Bazgo	45	August 2010
Parbati III	520	November 2010
Parbati II	800	December 2010
Chutak	44	February 2011
Subansiri Lower	2,000	January 2012
Kishanganga	330	July 2014
Total	4,622

NHPC was designated as a Mini Ratna Category-I entity by the government in April 2008. The Government rated its performance “Excellent” from Fiscal 1994 to 2006 and “Very Good” in Fiscal 2007.

Fitch has rated the long term foreign currency debt of NHPC at BBB-, and domestic short term and long term borrowing at AAA with stable outlook and F1+ respectively.

NHPC derives its revenues from sales to State Electricity Boards (SEBs) and has long term power purchase agreements to sell its power to SEBs and their successor units.

NHPC: Financials

NHPC had revenues of Rs.2,957.33 crores in fiscal 2008 and 2,132.28 crores in the fiscal before that. The profit after tax for those two years was Rs.1,085.16 crores and Rs.945.97 crores. The EPS for 31^st March 2008 was Rs.0.97 and for 2007, was Rs.0.87.

At the higher band of Rs.36, the P/E multiple translates to 37.11 on 2008 earnings. Just for reference, the EPS of NTPC for fiscal 2009 was Rs. 9.81 and at current price of Rs.215, the P/E Multiple comes out at 21.9. (I couldn’t find fiscal 2009 numbers for NHPC).

At the upper band of Rs.36, this issue translates into Rs.6,000 crores. NHPC will issue 10% fresh equity and 5% disinvestment of the government stake. That means that government will pocket Rs.2,000 crores out of this and Rs.4,000 crores will remain with the company.

Economic Times reported that the lead managers proposed a price band between Rs. 25 to Rs.30, so the price that has been announced is 20% higher than what the lead managers advised.

NHPC: Risk Factors

NHPC is in the business of developing power projects. This is a business that has long gestation periods and needs a lot of capital investment before they can turn in a positive cash flow.

NHPC IPO is coming out to raise funds for the company to carry out expansion. The expansion plans of NHPC are ambitious and require a lot of capital. The estimate for this is Rs. 4,385 crore, and is expected to be raised through the IPO, internal accruals and debt. The scale of the expansion exposes it to risks related to raising funds.

NHPC has total borrowings of Rs.12,885.49 crores as of March 31^st 2008 and debt – servicing can become a risk for the company.

NHPC sells its power to State Electricity Boards. The financial condition of a lot of State Electricity Boards is not good, and this poses a risk of payment default. The positive here is that NHPC has the Government of India to fall back upon; in case the state defaults.

As you can see from the plethora of power IPOs like the Adani Power IPO and Indiabulls Power IPO; the power sector in India is attracting large corporate houses and competition is intensifying in the sector

NHPC sells its power on tariff rates decided by the CERC. IF the CERC changes the way it calculates tariff, it may negatively impact the cash flows of NHPC.

This is a rather peculiar risk in that NHPC derives most of its revenues from long term agreements of about 5 year or so. This means that there isn’t much flexibility during the period of the contract to NHPC to grow revenues. And it adds pressure on them to manage costs in order to remain profitable. It also reduces their chances of entering into new contracts, if the energy prices rise and restrict their ability to take advantage of the rising energy costs.

The big positive about NHPC IPO are that it is a power IPO of a company that is actually generating power and not just planning to generate power. The negative is that the pricing is not as low as it could have been.

Photo Credit: Vattenfall

This is just a summary of the NHPC IPO from its draft prospectus filed with SEBI. This is not a buy or sell recommendation on this IPO.

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