NTPC sale powers up India divestment ambitions

India kicks off one of the largest ever government divestment deals with a $2.2 billion sale of shares in the country’s largest power producer.

The Indian government took a big step towards fulfilling its ambitious divestment target for the current financial year on Tuesday when it launched a 10% offer-for-sale (OFS) in National Thermal Power Corporation (NTPC).

The divestment, which could raise Rp138.5 billion ($2.2 billion) follows a similar offering last year, when the government raised $730 million after selling a 5% stake at Rp122 per share and reduced its holding to 70%. This time around, the government is looking for a much bigger deal at a higher price.

At the end of the first day, the institutional portion of the 825 million share sale was already oversubscribed, putting the transaction on course to become India’s third-largest government divestment behind 2015’s $3.6 billion secondary sell-down in Coal India and the latter’s $3.5 billion initial public offering in 2010.

The government is currently five months in to its 2017/18 fiscal year starting April 1 and has raised $1.5 billion from eight separate stake sales including National Aluminium Company (Nalco), Housing and Urban Development Corporation (Hudco) and Oil India.

But it is clear that it is the NTPC sale, which is more than 50% larger than the value of its other divestments combined, is the key to New Delhi reaching its $11.2 billion divestment target.

Investors’ reception to NTPC will crucially set the tone for other prospective power sector divestments, including a 10% stake in each of NHPC and Power Finance Corp.

The government also choose to lead with NTPC because it is financially sound and could therefore ease the way for tougher divestment cases in the second half of the fiscal year. These include the partial sale of troubled flag carrier Air India, which is sitting on over $8 billion of debt and is only surviving because of a nine-year government bailout approved in 2012.

Other divestment plans include the sale of a 15% stake in NLC, 10% in Steel Corporation of India, 5% in Rural Electrification Corp and another 3% in Indian Oil Corp.

Split structure

Similar to other billion-dollar divestment, the NTPC OFC has been split into two-part parts, with the government offering a 5% stake through the base offer plus a further 5% through an overallotment option. One quarter of the shares have been reserved for mutual funds and insurance companies and another 20% for retail investors.

The Reg S/144A deal has been pitched at a floor price of Rp168 per share, representing a 3.1% discount to the stock’s Rp173.3 Monday close. On Tuesday, the stock dipped 2.83%.

Early bidding suggests orders are mostly coming in at the floor price, but sources said the figures are not a true reflection of demand given that the bulk of orders typically come in at the final hours of the bookbuild.

Equity analysts are generally upbeat about NTPC’s prospects. This is based on the company’s solid first-quarter results including a 12% year-on-year improvement in reported earnings and 4.3% increase in net sales.

Reliance Securities, which gives NTPC a buy rating and a target price of Rp192, said the company’s capacity addition track record, assured return on equity, robust balance-sheet and strong operational cash-flows will continue to support its share price in the long run.

Over the next two years, NTPC plans to add 8.8 gigawatts of commercial production capacity, or 17% of its existing capacity of 51.7 gigawatts, solidifying its position as India’s largest power producer. Most of the planned capacity addition has low off-take risks because they are backed by long-term power purchase agreements with suppliers and consumers.

This may support NTPC’s slightly richer valuation compared to smaller power producers. NTPC currently trades at nine times forward Ev/Ebitda, compared to 8.8 times for privately held Adani Power and 8.4 times for state-backed National Hydroelectric Power Corporation (NHPC).

Joint placing agents of the NTPC OFS are CitiJefferiesAxis Capital and Yes Securities. 

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