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.