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Business News/ Market / Mark-to-market/  NTPC divestment likely to be another LIC play

Just like the divestment of Hindustan Copper Ltd, the government’s share sale in NTPC Ltd is likely to be bailed out by state-run financial institutions led by the Life Insurance Corp. of India.

The government is targeting to raise around 13,000 crore by selling 9.5% of its stake in the electricity producer, according to news reports. That translates into 170 per share, a 6.5% premium to Friday’s closing price.

Sure, the announcement to sell NTPC shares was handily accompanied by the news that the cabinet has allowed the re-allocation of three coalfields taken away from the company. Logically, that should boost the valuation of the company, but it is not easy to develop coal mines in this country, as can be seen from Coal India Ltd’s example. Any gains from the utility being able to source captive coal will take some time.

Fundamentally, there is nothing much to cheer about. NTPC’s pace of power generation has slipped in recent times because of lower availability of coal and gas required to fire its factories. For instance, in the September quarter, its output gains were almost entirely driven by capacity additions. Capacity utilization levels, or the plant load factor, fell to 74.9% in the three months ended 30 September from 78.3% a year ago.

Falling capacity utilization also means the company’s earnings are affected because the company gets incentives for operational efficiency. That is one reason for falling return on equity and why the company is trading at 13.4 times one-year estimated earnings compared with a historical average of 17 times.

But, lower valuations might not be enough because investors have been scalded by power sector stocks. Take NTPC’s example. In February 2010, the government sold another chunk of shares at 201 apiece. Now, the stock is trading at a 21% discount to that price compared with a 14% gain for the benchmark Sensex.

So, a huge discount might be needed to persuade private investors to cough up money. While Hindustan Copper might not be a strictly comparable case, note that even a hefty discount there was not enough to attract private investors. If the government sticks to its 13,000 crore target, then there could be a repeat of the Oil and Natural Gas Corp. Ltd (ONGC) disinvestment fiasco seen in March, when the issue flopped simply because the pricing was too high.

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Updated: 25 Nov 2012, 11:39 PM IST
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