Indian hydropower company NHPC launched a Rs60 billion ($1.25 billion) IPO on Friday. By the end of the first day of bookbuilding, the institutional tranche was six times covered.
The company is selling 1.67 billion shares at a price range of between Rs30 to Rs35 a share. The shares are broken up into three tranches: an institutional tranche, which consists of 981 million shares; a non-institutional portion, made up of 163 million shares; and a retail portion of 490 million shares. One source close to the deal said that it is already marketing at near the top of the range.
The Indian government holds NHPC's entire share capital at present. After the issue, it will hold 86.36% of the company.
State-owned NHPC is a power company that designs, builds and operates hydroelectric power plants in India. It currently has 13 power plants, located mostly in the north and northeast of the country, with a total capacity of 5,175MW. It is in the process of building another 11 hydroelectric plants that will increase its capacity by 4,622MW. Another five plants are awaiting government approval.
Incorporated in 1975, NHPC has had plenty of time to establish itself as India's leading hydropower company; its nearest rival is Jaiprakash Hydro, which has only 300MW of capacity. In fact, it is India's second largest power company, second only to NTPC, which generates 30,000MW from a diverse range of sources.
The company will use around two-thirds of the proceeds from the IPO to finance the construction of seven hydropower projects. All of these projects are expected to be completed by the end of 2012. The largest plant, and the last scheduled to be completed, is the Subansiri Lower plant, which will have an installed capacity of 2,000MW.
Analysts say NHPC has a strong track record of providing India with 14% of its hydro-electric power. Also, all of the electricity it generates is sold via long-term power purchase agreements with state electricity boards. Payment is therefore guaranteed by letters of credit from the central government and the Reserve Bank of India.
However, Indian research company Noble raises a number of questions relating to NHPC's close relationship with the government. The company has capital expenditure plans of $10.4 billion up to 2017, and $3 billion of this is required to be in the form of equity. Yet, one-third of the proceeds from this IPO will go directly to the government, leaving around $800 million for development. The question Noble raises is: "How exactly will NHPC's equity requirements be funded once the IPO proceeds... are exhausted?"
Since NHPC's nearest rival in the hydroelectric sector is so small, there are no direct comparables in the Indian universe, so when placing a value on the company, investors have looked to its price-to-book value. Assuming a cost of equity of 12%, Noble comes up with a discounted cash flow (DCF) value for NHPC of Rs25 per share, equivalent to 1.3 times 2010 financial year's price-to-book value. This puts the company at a 57% discount to its peers in the utility space.
When bookbuilding finishes for the NHPC IPO on Wednesday, it will be the second Indian IPO in the power sector to be completed in the last few days. Adani Power, a producer of coal power, last week priced its IPO at the top of its indicative range. Market observers said that the success of this deal has opened the door for Indian corporates to raise capital via IPOs. This is a natural progression as markets stabilise, suggesting a shift from qualified institutional placements to IPOs. More power companies are expected to list, followed by real estate companies.
The bookrunning lead managers are Enam Securities, Kotak Mahindra Capital Company and SBI Capital Markets.
