Power Finance Corporation Offer for Sale (PFC OFS) – July 2015

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

What seemed to be an easy task for the Finance Minister Arun Jaitley at the start of the current financial year is getting more and more difficult now and if the government is not able to get the land bill passed and the GST introduced with effect from its much anticipated date of April 1, 2016, the task will become next to impossible to achieve. I am talking about the government’s target of raising Rs. 41,000 crore through disinvestment of minority stakes in Central Public Sector Enterprises (CPSEs) and Rs. 28,500 crore by selling its controlling stakes.

Investors were carrying high hopes that one way or the other, the Modi government will be able to do something to get the land bill passed and the GST bill introduced in the Monsoon session of parliament. But, with the first four consecutive days of the current session getting washed out, it doesn’t seem that the Modi government wants to use its muscle power to overcome the current logjam created by the opposition.

But, the government is still trying to do whatever little it could to bridge the gap of where it stands right now and where it wants to reach. This time the idea is to sell its 5% stake in Power Finance Corporation (PFC) and the method of selling this stake will be the same which was used to sell the 5% stake in REC i.e. Offer for Sale (OFS) on the stock exchanges.

Power Finance Corporation (PFC) is also one of its Navratnas, like Rural Electrification Corporation (REC) and both the companies are in the similar lines of businesses i.e. power financing business.

The government will be selling its 5% stake in the company i.e. 6,60,02,035 shares at Rs. 254 a share as the floor price. With 5% discount for the retail investors, the government will be able to raise a minimum of Rs. 1,660 crore from this share sale. Currently, the government holds about 72.8% stake in the company, which will come down to 67.8% post this OFS.

Before we check out the factors affecting our decision to invest in this OFS, let us first check the basic details of this offer.

Shares on Sale – The government has decided to reduce its 72.8% stake in PFC to 67.8%, thus cutting its holding in the company by 5%. A total of 6,60,02,035 shares will be sold by the government in this offer for sale, out of which 20% shares i.e. 1,32,00,407 shares will be reserved for the retail investors investing up to Rs. 2 lakh.

Offer Price – Yesterday, when the markets got closed for trading, the share price of PFC closed at Rs. 259.55 on both the stock exchanges i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The government has set Rs. 254 as the floor price for this OFS, a discount of 2.14% to its closing market price.

5% Discount for the Retail Investors – The government has once again decided to offer a discount of 5% to the retail investors. This discount will be offered on the price at which the retail investors successfully bid in the OFS or the cut-off price set by the government, whichever is higher.

Brokerage – Unlike IPOs, stock brokers levy brokerage charges on these OFS transactions. These charges are normally higher than the rate of brokerage investors pay on their routine transactions. So, if the allotment price is fixed at say Rs. 255, the retail investors will get it at Rs. 242.25 a share plus applicable brokerage charges and statutory taxes thereon. So, the retail investors should consider these charges in their overall cost of acquisition.

Cut-Off Option Introduced – This would be the biggest highlight of this OFS. Long demanded by the retail investors, SEBI recently made it mandatory for the companies to provide the option to place their bids at the “CUT-OFF” price.

As observed during the OFS of Rural Electrification Corporation (REC), OFS process is still very complicated for the retail investors. They just cannot keep changing their bid prices in order to increase their chances of successfully getting these shares allotted. They still require either proper guidance or the option to bid at the cut-off price. So, this time around, their demand has been fulfilled. Now, they will not be required to change their bids as the indicative price goes up or down. But, it would be interesting to observe how the shares would get allotted among the successful retail bidders.

Only a Single Day OFS – As always happen in an OFS, PFC OFS will remain open for a single day only and that too, during the trading hours of the stock exchanges i.e. between 9:15 a.m. and 3:30 p.m. You’ll get to know the status of your bids by Monday evening itself and if successful, you’ll get the shares allotted by the designated stock exchange on T+1 basis.

As the bidding gets started on the stock exchanges at 9:15 a.m. on July 27, you can check the LIVE bidding status here on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE).

How does an OFS process work? – Offer for Sale Process

If you are investing in an OFS for the first time and want to know more about the process, here is the link to check the details about it. If you have any query regarding the process, please share it here, I’ll try to respond to it as soon as possible.

How to invest?

You need to contact your broker to know how it is facilitating the bidding process. I think most of the broking firms must be providing the investment facility through their online platforms. If you don’t have access to the online platform, you should contact the customer care department of your broker and get your bid placed through telephonic confirmation.

Should you invest in this OFS?

This is what I had to say during the REC OFS – “Power sector is one of the key drivers for a country’s rapid economic growth and poverty alleviation. Approximately 30% of India’s population do not have access to this basic amenity called electricity. For the past many many years, India’s power sector has been paralyzed with one issue or the other.

Poor financial condition of the state electricity boards (SEBs), unreasonable poll promises made by our politicians during elections, coal shortages due to scams/litigations or high import prices, poorly drafted laws of land acquisition, policy paralysis, shortage of funds or equipments for new capacities are some of the reasons due to which India’s power sector has shown an extremely poor growth.

However, the government is committed to provide electricity to all households over the next few years. Keeping that in mind, the government has recently taken many initiatives, including transparent & competitive auctions of coal mines, implementing gas price pooling policy, encouraging Coal India to meet its production targets etc. It makes me feel that the government is doing an excellent job at the ground level and it should start reflecting in growth numbers very soon.

With the government moving in the right direction, an efficient minister heading the power ministry and the interest rates heading downwards, I think India’s power sector should do extremely well in the next 3-5 years. The need of the hour is not to mix politics with economics. Unnecessarily giving subsidies to people who can comfortably afford power makes no sense to me. I think the state governments should focus on making their electricity boards (SEBs) and power generation & distribution companies more efficient rather than subsidizing our electricity bills.”

What I mentioned in my REC OFS review, I stick to it and feel there is a huge potential in India’s power sector. However, there are a couple of macroeconomic concerns. Firstly, China is slowing down considerably and secondly, India’s corporate profitability is also not showing any sign of a turnaround with some key reforms pending due to parliamentary hiccups.

Though I feel the Indian economy and stock markets would do extremely good from a medium to long-term perspective, stock prices would be very volatile in the next couple of months. If the markets go down further from here, I think PFC stock would also fall equally sharply.

Assuming the government to fix its allotment price for the retail investors at Rs. 241.30 per share, the stock is available at approximately 5X its estimated earnings per share (EPS) and 1X its estimated book value (BV) for the current financial year. The company has also managed to generate return on equity (RoE) of 21%. I think this offer for sale is attractively available at Rs. 254 a share and a 5% discount to this price makes it more attractive.