NHPC fails to power on debut; what should investors do now?

Just when the initial public offering (IPO) fever seemed to be heating up comes the dampener. NHPC, the power company from the government’s stable, listed today on the stock exchange amid much fanfare but came a cropper — it traded well near the issue price of Rs 36 all day long. This, after private sector power company Adani Power, which listed recently, met with the same cold treatment from the market. While analysts blame high valuations in case of both NHPC and Adani Power, lead manager Enam Securities says it’s time to stop the flipping game and look at long-term buying. NHPC: What’s the view? Most analysts blamed pricing for the lukewarm debut. Sanju Verma of Universal Proactive Group, who had for long been maintaining the issue was highly priced, said she would stay awayfrom both NHPC and Adani Power — but if asked to make a choice, she would go for the latter. “NHPC did not really have too much going for it,” Verma said, adding, “If you are talking about the short term, FY10 EPS growth will barely be 9%, yes, FY11 will be a whopping 75% plus but that is off a very low base.” “Why should NHPC trade at a market cap to NAV of something like market cap or mega close to 9 times when NTPC is trading at 5 times?” she asked. Verma added that she would rather buy Power Grid and Tata Power than the two recently-listed power companies. Enam says Enam Securities Chairman Vallabh Bhanshali, the lead book manager for both NHPC and Adani Power, said he was intrigued but not disturbed by the market’s response to the listing. “People should not get swayed by whatever may happen in the short to medium term,” Bhanshali said. “We have seen the performance of companies like REC and some other companies where investors may have taken a short-term view and regretted. These are great companies, very difficult to duplicate and the business is all about the barrier that you have around it.” Bhanshali added that NHPC was an under-leveraged company and that its return on equity (RoE) would increase as it leverages its cash flow to build projects. When asked to comment on NHPC’s pricing, Bhanshali said, “The IPO market has just about opened and therefore issuers, bankers, investors all are struggling on how to price the IPO and it will settle down as we have more examples.” He added that even though Adani Power and NHPC — “companies with good management and sector” — saw a listless debut, it was too short a period to take a call on whether the pricing was improper. What should investors do now? NHPC may now continue to remain in a range of about Rs 36-39, Investment Analyst SP Tulsian said. “My advice to both high-net-worth individuals and retail investors should be to exit the stock.” “When we wrote our IPO research note to clients, we did a discounted cash flow (DCF) valuation of about Rs 37.20 and told our clients to avoid NHPC just because there wasn’t anything in it for them to buy at this price,” Satish Betadpur, CFA, Global Research Director at Independent International Investment Research PLC, said. Betadpur added that investors could have bought NHPC had the stock listed at Rs 30 levels — the lower end of the price band. “One thing that comes out of this listing is: pricing is very important. Even though we like the sector but being the highest priced entity within the sector, the stock doesn’t deserve it,” he said. “At this point, we will tell our investors to hold off, get back into it closer to Rs 30 because it is a good stock for the long run. It’s just over priced at this point.”