A Follow On Inning

For a prolonged period in the Nineties the powder train 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 fairly consistent 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. Some hangover of those glory days still seems to pull the retail investor (sample the now-thankfully-dear-departed 'MF IPO' mela) to this day though.

As it turned out, in this happy period, my college pocket money was hardly enough to afford any investible surplus. The result naturally was that my initial flirtations with stock-picking missed any skew from the confident swagger of tenderfoot success, nor adventure from lure of lucre. Learning the hard way (and armed with pearls from two notable masters: Messrs Buffet and Lynch) my confidence gradually crept up at least enough to venture my opinion on the table. And when for a few years in a row my portfolio reflected better returns on direct equity investments vs the Sensex (or those via the Fund route) the tendency to play to gallery won me to freely dispense stock advice!

Unfortunately, of late, my acquaintance grew with that familiar spoilsport: Time (or the lack of it). Consequently, most of my theories were tested vicariously - and though the results were not discouraging, the discipline to tend better to my portfolio was found wanting. It is in this backdrop (and to the 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, here's how the issue stacked 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 of a healthy topline growth with plans to ramp up capacity by ~10K MW (over a third), assuming execution on track and equipment delays/ risks in control (Also important given its somewhat sub-optimal debt-equity ratio, affording 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 was steady - a new 20 yr coal supply agreement with Coal India for 12 of its existing 15 units would get supplemented with captive coal mines and KG basic gas expected to kick in over next 2 years. Possible overseas mines acquisitions (hydro projects remain a concern) would provide increased flexibility. There was also strong partnership potential in 2000 MW nuclear power JV and ventures with BHEL and Bharat Forge to manage engineering and equipment needs
• Potential upside existed from sectoral deregulation, specifically unallocated power sale boosting returns or short term power trading (#2 player) and 3P modernization/ life extension practice

Yet, for the retail investor, the icing on the cake could only come from a price play. Indeed, it was key to whether the issue would draw more than institutional interest. The latter, some argued, would get committed any ways, 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 at the very least) it was critical for the floor to be suitably defined so as to set the right tone for the aam aadmi investor.

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 prurient interest) were in itself well served by a simplified version of this script (rob Peter to pay Paul etc) but the back-room shenanigans transcended the staid approach the Govt and its hired guns usually adopt in such situations. In fact, far from commonly held misgivings on price, PSU entities actually bid at the high end, much higher than the floor price or the market - and that when FII interest was almost nonexistent! Extending the line, we had 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 that had been 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 an unprecedented manner. At the same time, it must be pointed out that such insidious conveyances could be but a short term tactic. Over the course of what promises to be a long summer, Fin Min mandarins would do well to imbibe better appreciation of their much professed principles of policymaking like public sector ownership by the public! Not only is the capital requirement in the current Grand Sale of PSU family silver way too high to afford being limited to incestuous bargains, but there is real fiduciary merit in spreading the spoils over a larger investor base. To boot, there may well be electoral arithmetic benefit in promoting an aam aadmi (or middle class, at the very least) lilt in any future auctions (even if at the cost of a marginal discount).

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