A Follow On Inning

For a prolonged period in the Nineties the powder keg of India's growth story provided a discernible fillip to equity values, including a booming primary market. To boot, some aggressive issue pricing meant even neophyte investors made a fair killing through a buy-IPO-sell-listing strategy. It was too good to last, and the market eventually turned a great leveler as it must. Despite this, some hangover of those glory days seems to pull the retail investor (sample the now-thankfully-dear-departed 'MF IPO' mela) even to this day.

As it turned out, my college wallet was hardly corpulent enough to afford any investible surplus in this happy period. The result was that my initial flirtations with stock-picking missed any skew or confident swagger from tenderfoot success. Yet, learning the hard way (and armed with pearls from two notable masters in Messrs Buffett and Lynch), my confidence gradually crept up enough to venture opinion on the table. And when for a few years my portfolio reflected better returns on direct equity investments vis-a-vis the Sensex (or via the Fund route), a tendency to play to the gallery won me to freely dispense stock advice!

Unfortunately, lately my acquaintance with that familiar spoilsport: Time (or more accurately, its paucity), grew by leaps and bounds. Consequently, most of my theories were tested vicariously — and though the results were not entirely discouraging, the discipline to tend consistently to my portfolio was found wanting. It is in this backdrop (and to accompanying bugle calls from a generally bullish market) that NTPC announced its mega FPO. Persisting with the axiom of my stock-picking being based on more mature considerations, this is how the issue appeared to stack up:

• NTPC easily stood out as the largest Indian power utility, with reasonable historical revenue/profit track record and operating efficiency in load/ availability factor terms
• The firm boasted a healthy topline growth with plans to ramp up capacity by ~10K MW (over a third), assuming timely execution and minimal equipment delays or risk (important also given a somewhat sub-optimal debt-equity ratio, with scope for putting more equity to use)
• Significantly it was an infrastructure major with very low liquidity pressure atypical of the long gestation in the sector; and a comfortable funding position (~INR 17.5K Cr in cash alone) that weighed on its ROE as much as providing opportunity for backward integration
• Raw material pipeline looked robust — a new 20 yr coal supply agreement with Coal India for 12 of existing 15 units, supplemented by captive coal mines and KG basin gas (in next 2 years). Possible overseas mining acquisitions would provide additional flexibility
  
• From a product mix perspective, hydro projects could be a concern but strong partnership potential in 2000 MW nuclear power JV and ventures with BHEL and Bharat Forge to manage engineering and equipment needs provided a cushion
• Potential upside also existed from sectoral deregulation, specifically unallocated power sale, short term trading (#2 player), and the 3P modernization/ life extension practice.

Yet, for the retail investor, the icing on the cake could only come from price. Indeed, it was key to whether the issue would draw more than institutional interest. The latter, some argued, would commit anyhow, a volume player being inelastic to entry point in view of the overall mood and potential. Given the value-unlocking protestations in UPA 2.0 policy (disinvestment being no more a dirty word), it was critical and expected for the floor to be suitably defined to set the right tone for the aam aadmi.

Unfortunately, by any reasonable yardstick, the pricing and the issue came up short, saved the blushes only through 'motivated' subscription from SBI, LIC and other PSU players. The drama in the FPO (and my own morbid interest) were served well by a simplified version of this script (rob Peter to pay Paul etc) but the back-room shenanigans transcended the discreet approach that the Govt and its hired guns usually adopt in such situations. In fact, despite commonly held misgivings on price, PSU entities actually bid at the high end, much in excess of the market or floor price (and that when FII interest was almost nonexistent)! Extending the line was a series of seemingly unorchestrated sound-bytes (Goebbelsian devices that would have done any crafty market manipulator proud — case in point: Reliance Power) hinting at bear cartels at work to drive price below its 'natural' 230 levels! And if any argument were left to be had, one merely had to look at the complete absence of commitment from NTPC employees. They knew!

In short, the promoter, the Govt of India, obviously needed the money — and as appears in retrospect, badly enough to brazenly flirt with the grey in a manner unprecedented. Be that as it may, it is obvious that such insidious conveyances could be a short term tactic at best. Over the course of what promises to be a long summer, FinMin mandarins would do well to truly imbibe their much-professed principles of policymaking (public sector = public ownership). Not only is the capital requirement in the current Grand PSU Sale way too high to afford being limited to incestuous bargains, but there is real fiduciary merit in spreading the family silver over a larger investor base. To boot, there may be electoral arithmetic benefit in promoting an aam aadmi (or middle class, at the very least) lilt in any future auctions (at the cost of a marginal discount).

For now though the NTPC FPO kissa does leave more questions than it did answers, such was the Government's conduct. And one thought the ignominy in a follow on was restricted to cricket.