Sunday, October 27, 2013

On Buy-Back and Bite-Back

You might have seen following announcement from NHPC...

NHPC Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 24, 2013, has unanimously approved the buyback of upto 10% of fully paid up Equity Shares of Rs. 10 each at Rs. 19.25 per share payable in cash for an aggregate amount of Rs. 23,67,89,29,832/- (Rupees Two Thousand Three Hundred Sixty Seven Crore Eighty Nine Lacs Twenty Nine Thousand Eight Hundred Thirty Two Only) through tender offer.

I try to briefly give my thought process on this buy-back as follows:

To give you a small background, Government of India holds 86% equity in NHPC. They did an IPO at Rs 36 per share in Aug-2009 and the stock has been downhill ever since. CMP is at Rs 18.40. With investors having consistently lost money here and buy-back price fixed at Rs 19.25, it is highly unlikely that any ordinary shareholder would tender in this buy-back. Only Government of India would tender at this price.

In-principle, Buy back is usually resorted to owing to one or more of following reasons:
 (A) Increase the underlying share value
(B) Support share price during periods of temporary weakness
(C) Return surplus cash to the shareholders

Why is it unfair to ordinary shareholders of NHPC?

1)     In case of NHPC, it’s clear that (A) and (B) are not the underlying reasons. 
2) As regards (C), since the price is unattractive to ordinary post-IPO shareholders, cash return will happen only to “promoters” and not to “all shareholders” as is the underlying objective of buy-back.
3)     Point to note is that same “promoter” already pocketed the premium of Rs 26 per share at the time of IPO in Aug-2009, so now promoter does not mind a lower buy-back price since whatever the buy-back price it anyway stands to gain. But it is the ordinary shareholders that lose as they entered at the time of IPO or post that. The stock has never crossed its IPO price in the last 4 years.
4)     On the contrary, say the buy-back price had been fixed at Rs 30, it would have given a fair chance to all shareholders to tender. But then, it would not have served promoter’s objective of grabbing the cash and still not lowering it’s stake much in the company (assuming 14% of the public shareholders do not tender, promoter’s stake will go down only by 1.5% after all this). I don’t think even LIC that holds 1.84% will tender.
5)    Sometime in future say after 2 years, Government will still have to resort to an FPO or secondary placement if it intends to bring down its holding to 75% level. It is anybody’s guess that such an FPO, as and when that comes, will be at even worse pricing, else who would come forth to invest seeing the spectacular capital markets track record of the company. Oops, I forgot LIC and its charity work…

Why is it unfair to NHPC the company?

1)    Under obligations of buy-back, it cannot issue fresh equity for the next 1 year and lower equity+reserve would also make debt raising more arduous. Can a company in power projects sector be confident that it will not have to raise capital as per its business plan or is the decision just being forced upon them because Government wants to take the cash out to meet its fiscal deficit targets?
2)    Cash of Rs 2,367 crore that is being stripped of NHPC balance sheet could have been used by the company to expand its business or may be enter into some related projects/business. It is not a FMCG or IT type of company where we can say they do not have any real use for cash.
3)   Buy-back price is fundamentally an indicator of intrinsic value that the company gives to the markets and all stakeholders. As things stand, in case of NHPC, it appears the company itself does not consider that it’s worth is more than Rs 19.25 per share. So the question is why should the market give it a better price multiple anytime soon. At the most, market will adjust the price for marginally higher EPS that it will have post-buyback due to reduction in number of outstanding shares.
4)  In other words, company’s stock will be fundamentally de-rated after this buy back is completed. Look at so many of the PSU stocks that are quoting far below their IPO/FPO prices.

Why is it unfair to other PSUs?

Is anybody concerned as to what signal such actions give to other companies belonging to the same promoter and about the fate of ordinary shareholders in those PSUs. Oh, you said they are already quoting dirt cheap, as if they’re going to shut down. So nothing much can happen to those - they have already come a long way from “nav ratna” to “no ratna”. What I meant was some of these companies are cash rich, debt free, free cash flow generators like Coal India, Engineers India, NMDC etc, at least they can be a given a fair chance to command a premium that market would otherwise assign to any respectable owner group.

But that seems like asking for too much at present juncture.

Disclosure: I don’t hold any shares in NHPC, neither held anytime in the past nor holding at present. Reading this, you’d get an idea that I don’t plan to have it in future either.

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