Where the government went wrong in the NTPC sale

Disclaimer – The article is not a recommendation for the purchase or sale of any stock

The NTPC sale was the first large scale disinvestment taken up by the government after it has come into power in May of last year. There was a tremendous euphoria build up for the issue with various news sources quoting numbers as high as Rs 240-260 as the sale price and also that the base rate might be Rs 230. This was also the first stock to be taken up in a French Auction and as such it was important that this be successful so as to make future sales by this process take off.

However as it turned out by the time the issue came up the Global markets were in a corrective mode and most Emerging market equity funds were facing strong outflows. As such the base rate had to be revised down to Rs 201 and with the overall sentiment being down and there being no real discount for retail and HNI investors the issue by all standards has been a flop despite being fully subscribed. I think the original script would have been for the issue to be oversubscribed by atleast 8-10 times. The news flow on a higher base price also led to lot of buying pre issue and also by retail and HNI investors in the F&O segment. As such when the final base rate was announced it took lot of investors by shock and they went to sell off their holdings which created further pressure on the stock price.

Prior to the issue there were also reports in the media that NTPC might be allowed to sell some part of its generation as Merchant power and that will boost its profitability. However nothing of this sort actually came out prior to the issue.

So where did the government go wrong, I believe that the first and foremost mistake was the nature of the stock chosen for disinvestment and the mode of French Auction being deployed for a large and liquid stock with a market capitalization of Rs 170000 Crores (USD 40 billion). I believe that a French Auction would have worked better for a more illiquid stock, with a lower market capitalization, strong execution track record and greater upside potential due to regulatory changes. All said and done NTPC has a pretty average execution track record with slippages in capacity addition a norm and also the fact that it has huge amount of dues outstanding from SEB’s and the commercial disputes regarding one of its plants under execution. This is not a comment on whether the company is a good or bad investment it is just to say that there was really nothing exciting for investors to play into by bidding at a price significantly higher than the current market price.

I believe a better candidate for disinvestment can be a company like maybe GAIL. It is a natural monopoly and has got a very strong track record. It has performed well despite having to share subsidy on Petroleum products and given the gas economy in the country it has a strong growth potential. The market capitalization of the company is around Rs 55000 crores. What the government essentially has to do is the following –

-Implement the Kirit Parikh report as far as GAIL is concerned and absolve it from all future subsidy sharing

-Allow GAIL to set up a large number of pipeline projects on a common carrier principle and restrict competition so as to avoid duplication of resources

-Allow GAIL to get into the front end in terms of domestic gas supply and setting up of gas stations at the retail and bulk level (I don’t know whether there is a restriction on this or not)

Just these few steps being implemented will boost the market capitalization of GAIL by atleast 40%-50% (my analysis, could be wrong). Subsequently the government can disinvest 10% of its stake by a French Auction. I am sure that the bidding will be aggressive as large global investors would like to play the gas story of India which is just emerging and the Government will be able to garner Rs 7000-8000 crores. Given the fact that the floating stock is limited, investors will be able to get a larger chunk of shares only through the auction route. The increase in the value of Governments holding in the company will be far larger than what the government would save by making GAIL share a part of the subsidy burden.

Also no base rate should be set as the relevance of a base rate is lost in the case of a listed stock in any case. The rate for Retail investors should be set at a 10% discount to the final sale rate and that for HNI’s at a 5% discount. This will create enough incentive for long term investors to participate in the issue.

I believe that the entire process of disinvestment that is not a strategic but a financial stake sale also requires a great deal of strategic thinking so as to yield the best returns for the government (and in turn for taxpayers like us)

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