(A govt.

of India enterprise)

POST IPO ANALYSIS

OF

NTPC
 A REASEARCH PROJECT REPORT
ON
POST IPO ANALYSIS OF NTPC
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 INTRODUCTION

A company can raise capital through issue of shares or debentures. The various types of issues

are:

Public Issue, Rights Issue, Bonus Issue, Private Placement and Bought Out Deal

There can be two kinds of public issues, namely:

 Initial Public Offer (IPO)

 Further Public Offer (FPO)

IPO

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is

when an unlisted company makes either a fresh issue of securities or an offer for sale of its

existing securities or both for the first time to the public. This paves way for listing and trading

of issuer’s securities. The sale of securities can be through book building or normal public issue.

An IPO is the first sale of a corporation's common shares to investors on a public stock

exchange. The main purpose of an IPO is to raise capital for the corporation. While IPO’s are

effective at raising capital, being listed on a stock exchange imposes heavy regulatory

compliance and reporting requirements.

An initial public offering occurs when a security is sold to the general public, with the

expectation that a liquid market will develop. Most companies start out by raising equity capital

from a small number of investors, with no liquid market existing if these investors wish to sell

their stock. If a company prospers and needs additional equity capital, at some point the firm

generally finds it desirable to "go public" by selling stock to a large number of diversified

investors. Once the stock is publicly traded, this enhanced liquidity allows the company to raise

capital on more favorable terms than if it had to compensate investors for the lack of liquidity

associated with a privately-held company.

In particular, there are certain ongoing costs associated with the need to supply information on a

regular basis to investors and regulators for publicly-traded firms. Furthermore, there are

substantial one-time costs associated with initial public offerings that can be categorized as direct

and indirect costs. The direct costs include the legal, auditing, and underwriting fees. The
indirect costs are the management time and effort devoted to conducting the offering, and the

dilution associated with selling shares at an offering price that is, on average, below the price

prevailing in the market shortly after the IPO. These direct and indirect costs affect the cost of

capital for firms going public.

The existence of the phenomenon of “under pricing” is a well-established fact for the common

stock initial public offerings (IPOs). Research concerning the primary capital market is found to

be unequivocal in its conclusion that initial public offerings are offered at a discount. It has been

found that an average firm goes public with an offer price that is lower than the price that

prevails in the immediate aftermarket. As a result, IPOs register significant excess returns on the

first day of trading. Under pricing is a phenomenon that is largely restricted to the opening

transaction. And hence, the under pricing is almost entirely “corrected” by the market at the

opening transaction.

FPO

Further Public Offers are issued by companies or corporate bodies whose shares are already

being traded in the capital market and they are issuing fresh shares either to fund the expansion

of their existing business or to invest into other business activities. PUT MORE INFORMATION

THIS IS NOT SUFFICIENT

Reasons for Going Public

  Raising funds to finance capital expenditure programs like expansion, diversification,

modernization, etc.

 Financing of increased working capital requirements

 Financing acquisitions like a manufacturing unit, brand acquisitions, tender offers for

shares of another firm, etc.

 Debt Refinancing

 Exit Route for Existing Investors

Advantages of Going Public

 Facilitates future funding by means of subsequent public offerings

 Enables valuation of company

 Provides liquidity to existing shares

 Increases the visibility and reputation of the company

 Commands better pricing than placement with few investors

 Enables the company to offer its shares as purchase consideration or as an exchange for

the shares of another company

Disadvantages of Going Public

 Dilution of Stake makes co vulnerable to future takeovers

 Involves substantial Expenses

  Need to make continuous disclosures

 Increased regulatory monitoring

 Listing fees and Documentations

 Cost of maintaining Investor relations

 Takes substantial amount of management time and efforts

EXPLAIN THIS IN DETAIL

PUT MORE INFORMATION THIS IS NOT SUFFICIENT

OBJECTIVE OF THE STUDY

 To have a study of book building process .

 To study on impact of ipo on existing shareholders.

 To understand various dimensions and problems in IPO process and to

suggest recommendations.

 To understand post IPO performance.

 To study on ipo norms.

 RESEARCH METHODOLOGY

Descriptive Research

A descriptive study tries to discover answers to the questions who, what, when, where, and,
sometimes, how. The researcher attempts to describe or define a subject, often by creating a
profile of a group of problems, people, or events.
Such studies may involve the collection of data and the creation of a distribution of the number
of times the researcher observes a single event or characteristic (the research variable), or they
may involve relating the interaction of two or more variables. Organizations that maintain
databases of their employees, customers, and suppliers already have significant data to conduct
descriptive studies using internal information. Yet many firms that have such data files do not
mine them regularly for the decision-making insight they might provide.

This descriptive study is popular in business research because of its versatility across
disciplines. In for-profit, not-for-profit and government organizations, descriptive investigations
have a broad appeal to the administrator and policy analyst for planning, monitoring, and
evaluating. In this context, how questions address issues such as quantity, cost, efficiency,
effectiveness, and adequacy.
Descriptive studies may or may not have the potential for drawing powerful inferences. A
descriptive study, however, does not explain why an event has occurred or why the variables
interact the way they do.
TYPE OF DATA

Data related to IPO has mainly collected from secondary sources, which was analyzed for the
study purpose. Although for data collection related to O&M, semi-structured Interviews cum
discussions were held with senior level officials of NTPC from Finance and Commercial
Departments and with industry guide. In house Magazines and other published reports of NTPC
were also used. In the beginning of every year the corporate centre (CC) issues guidelines and
norms for preparing the O&M budget, those guidelines and norms were also used to prepare this
project
 LITERATURE REVIEW
The literature review on IPOs can be divided in the following main heads-

a) Reason and timing of going public

Going public marks a watershed in the life cycle of the firm. While increased equity

can support the firm’s future plans of growth, the trade off for the firm is that of increased public

scrutiny.

 Brealy and Myers (2005) state that in the context of USA the firms may seek private

equity in their initial years and only later go for public issues.

 Pagano, Panetta and Zingales (1998) in their study of Italian firms, find that firms

going public are not seeking money for growth but are rebalancing their accounts after

high investment and growth.

 Lerner (1994) found that there are times (windows of opportunity) when the markets

could be extremely optimistic about a particular industry and it may be a good time for

the firms in that industry to go public.

The post IPO period sees a reduction in leverage as well as investment. They state that going

public is a conscious choice that some firms make while some others prefer to remain private.

Thus going public is not a natural element in the life cycle of a firm.

b) Valuation of IPOs

 Benveniste and Spindt (1989) find that under writers try to resolve the information

asymmetry problem between the firm and the investors by providing an incentive to the

investors to reveal their private information about the firm.

 Kim and Ritter (1999) in their study of 190 firms find that under writers forecast the

next years earnings numbers and multiply them with PE ratios of comparable firms in the

industry to get the approximate price of the IPO. However they also found that PE ratios

using historical earnings numbers do not give accurate results whereas when forecasted

earnings numbers are used then the valuation is much more accurate.

 Purnanandam and Swaminathan (2002) say that IPOs are priced 50% higher than

industry peers. Also they find that more the IPO is overpriced with respect to its peers,

worse is its long term performance.

c) Allocation mechanism

The allocation mechanisms are specified by the regulators in different

countries. Loughran, Ritter and Rydqvist (1994) find 3 main categories across countries-

Auctions, Fixed price offers and Book Building. Sherman (2005) finds that Book building is a

superior mechanism for selling IPOs rather than auctions.

d) Theories explaining under pricing

There have been a number of theories to explain under pricing. The most prominent ones are

discussed below-

(1) Baron’s model (1982) - Baron’s (1982) model is for the contracting mechanism when the

Investment Banker has better information than the issuer about the IPO market. Since the issuer

cannot monitor the Investment Banker, without cost, in order to incentivize the investment

banker, the issuer lets the investment banker under price the issue (optimal delegation). Baron

uses theterm “delegation contracting” to model the situation in which an issuer not only needs

the services of the Investment Banker for distribution of the IPO but also needs his advice for

setting the offer price.

(2) Information acquisition- Benveniste and Spindt’s (1989) model is for book building and

predicts that under pricing is necessary to acquire true information from the more informed

investors. Thus those issues which are offered on the higher side of a price band mentioned in the

book building will be more under priced than the others.

(3) Prospect theory- Loughran and Ritter (2003) found that during 1990-1998 firms which went

public had total earnings of $8 billion while they left $27 billion on the table even though they

paid $13 billion as fees to the under writers. This made Loughran and Ritter propound a prospect

theory for under pricing where they state that issuers of IPOs leave a lot of money on the table

because they see a prospect of higher trading price in the first few days of listing consequently

offsetting their loss of wealth in under pricing the IPOs and in fact resulting in net gains to their

wealth levels. More importantly they found that most IPOs leave little money on the table. The

minority of IPOs that leave a lot of money on the table result in net increases to the wealth of the

issuers due to higher under pricing.

(4) Signaling Hypothesis-The signaling hypothesis is based on the assumption that the firm

knows about its prospects better than the investors. Allen and Faulhaber (1989), find that in some

circumstances good firms want to “signal” to their investors about their good future prospects

and therefore under price their IPOs. This is consistent with Ibbotson (1975) conjecture that IPOs

are under priced so as to leave a good taste in the investors’ mouths so that future seasoned

equities can be priced higher.

(5) A protection from legal liability- Tinic postulated that firms under price their IPOs as a

form of insurance against legal liability. If litigation arises post the IPO, then it harms the

reputation of both the issuers as well as the investment bankers and in order to guard against this

possibility, firms under price their offerings. Hughes and Thakor (1992) provide a theoretical

link between litigation risk and IPO under pricing, but they do not attribute this to be the sole

cause of under pricing as under pricing is observed even in countries where the legal systems are

not strong. They also contend that in all places the risk of loss of reputation of the under writer

and institutional arrangements make the under writers under price the IPOs.
 EVOLUTION AND GROWTH OF INDIAN PRIMARY

MARKET

To keep pace with the globalization and liberalization process, the government of India was very

keen to bring the capital market in line with international practices through gradual deregulation

of the economy. It led to liberalization of capital market in the country with more expectations

from primary market to meet the growing needs for funds for investment in trade and industry.

Therefore, there was a vital need to strengthen the capital market which, it felt, could only be

achieved through structural modifications, introducing new mechanism and instruments, and by

taking steps for safeguarding the interest of the investors through more disclosures and

transparency.

Early Liberalization Phase: 1992-1995 (Fixed Pricing)

The initiation of the process of reform in India also would not have been possible without

changes in the regulatory framework. The New Economic policy (1991) led to a major change in

the regulatory framework of the capital market in India. The Capital Issues (Control) Act 1947

was repealed and the Office of the Controller of Capital Issues (CCI) was abolished. The
Securities and Exchange Board of India (SEBI), established in 1988 and armed with statutory

powers in 1992, came to be established as the regulatory body with the necessary authority and

powers to regulate and reform the capital market. SEBI came to be recognized as a regulatory

body for the capital market after the abolition of the CCI. The control on pricing of capital issue

has been abolished and easy access is provided to the capital market. Initial Public Issue caught

the attention of general public only after the success of Reliance, when millions of small

investors made huge returns which were unheard of till then. Dhirubhai Ambani was the first

promoter who raised huge amounts through the public issue route to finance large facilities.

The issue process was smoothened, procedures were simplified and free pricing was allowed,

although with certain restrictions, The Indian market had the concept of par value of equity

shares, and anything above par was considered premium. The only companies that were allowed

to come with premium issues were those, which had a three year profit-track record for the

preceding five years. New companies without this record could float premium issues if their

promoting companies had the same track record and they had to hold 50% of the post issue

capital. Any new company floated by first generation entrepreneurs could only issue equity at

par. There was no restriction about prices in a premium issue.

The offer was always at a fixed price, whether premium or par. The companies had to appoint

intermediaries like merchant bankers, registrars, bankers etc. Merchant bankers had the

responsibility of fixing the prices, in consultation with the company, carrying out with due
diligence, preparing the prospectus (offer documents) etc. The prospectus had to be submitted to

SEBI for getting scrutiny.

There could be firm or preferential allotments to mutual funds, non-resident Indians etc. but the

price in those cases could not be less than that in the public offer. The post-issue shareholding

by the promoters could not be less than 25% of the total paid up capital. Also, at least 25% of

the total post issue capital would have to be offered through the prospectus to the public.

The primary market came into its own in the eighties when a large number of companies came

out with public issues. An entire industry of merchant bankers, brokers, agents and publicity

managers were built around the primary issues market. The interest in new issues rose so high

that investors were willing to pay for application forms.

The trend continued in the early nineties as many large projects were launched after the economy

was liberalised. Many of these companies came out with public issues and the retail participation

increased dramatically. But many of the companies which raised money during this period just

disappeared without a trace.

Late Liberalisation Period: 1996-2005 (Book Building)

The late nineties and the first few years of the current decade did not see much activity in the

primary market even though we saw a huge bull run led by technology stocks at the turn of the

decade. The bad experiences of retail investors kept them away from the market and made it

difficult for companies to launch successful issues. The corporate sector was recovering from the

damage caused by large capacity expansions and new projects set up in the nineties.

The dormant primary issues market came alive after 2003 mostly because of the divestment

programme of the government. The issue of Maruti Udyog, through which the government sold

part of its stake in the company, rekindled retail investor interest in the primary market. The

issue was made at a very reasonable price and investors made very good returns immediately.

The year 2004 saw the primary market activity at its historic peak as some large private

companies also came out with issues. Further divestment by the government; including the

largest ever issue by an Indian company from ONGC, attracted more retail investors into the

market. The IPO market continues to buzz in the current year as well. Taking advantage of the

strength in the secondary market, many high profle companies are lining up to raise money from

the market. The year started with the issue from Jet Airways which attracted a lot of interest from

investors. As a result of tougher regulations, the quality of the issues has gone up substantially.
Most of the recent issues have been from well established and well known companies. Though

some of these issues were over priced, investors have made significant returns in most of the

issues. With a number of primary issues coming out, many who have never invested in stocks

before are considering applying for some of these issues. The more experienced investors are

doubtful about participating when the stock markets are at a peak. Many have had bad

experiences investing in new issues during the nineties. But the incredible returns made by

investors in some of the recent issues keep their interest alive.

2006 onwards scenario:

India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000 crore) in net

proceeds through 78 public issues, global research and consultancy firm Ernst & Young said in

its Global IPO report. Across the world, the companies raised $246 billion, up from $167 billion

in 2005, through a total of 1,729 IPOs, led by Chinese companies at the top with net proceeds of

$56.6 billion. However, the biggest number of IPOs came from the United States with 187

offerings, followed by Japan with 185 and China with 175 IPOs. According to the study, India's

increasing number of larger deals has been driven by the growth of Indian corporations and their

need for additional capital for potential acquisitions. In 2007 Indian IPOs continue to surge in

numbers. Continued strength is expected in the real estate and energy sector. "The rapid growth

in emerging market economies has resulted in a migration of capital from the developed

economies into the emerging markets," E&Y said.

The localisation trend in India is evidenced by several billion-dollar IPOs hosted by Indian

exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8 billion, followed by the

oil production and exploration company, Cairn Energy, which raised $1.3 billion with both

companies listing on domestic exchanges.

However, some Indian companies are also listing abroad, especially London, Singapore and

Luxembourg, primarily for higher valuations and visibility, the report noted.

The private equity rush into India is creating the potential for many IPO exits. In 2006, private

equity firms invested more than $7 billion in India. Top global private equity funds as well as

local funds, have been key drivers of Indian IPO markets.

 REGULATORY FRAMEWORK FOR IPOS

A) Eligibility Conditions For Companies Issuing Securities

The companies issuing securities offered through an offer document shall satisfy the following at

the time of filing the draft offer document with SEBI and also at the time of filing the final offer

document with the Registrar of Companies/ Designated Stock Exchange:

 Filing of offer document

No issuer company shall make any public issue of securities, unless a draft

Prospectus has been filed with the Board through a Merchant Banker, at least 30 days

prior to the filing of the Prospectus with the Registrar of Companies (ROC):

Provided that if the Board specifies changes or issues observations on the draft

Prospectus (without being under any obligation to do so), the issuer company or the

Lead Manager to the Issue shall carry out such changes in the draft Prospectus or

comply with the observation issued by the Board before filing the Prospectus with ROC.
  Companies barred not to issue security

No company shall make an issue of securities if the company has been prohibited

from accessing the capital market under any order or direction passed by the Board.

 Application for listing

No company shall make any public issue of securities unless it has made an

application for listing of those securities in the stock exchange

 Issue of securities in dematerialised form

No company shall make public or rights issue or an offer for sale of securities,

unless:

a. The company enters into an agreement with a depository for

dematerialisation of securities already issued or proposed to be issued to

the public or existing shareholders; and

b. The company gives an option to subscribers/ shareholders/ investors to

receive the security certificates or hold securities in dematerialised form

with a depository.

B) Eligibility Norms For IPO

An unlisted company may make an initial public offering (IPO) of equity shares only if :-
 The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3

full years (of 12 months each), of which not more than 50% is held in monetary assets.

 The company has a track record of distributable profits in terms of Section 205 of the

Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years.

 The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years

(of 12 months each).

 In case the company has changed its name within the last one year, atleast 50% of the

revenue for the preceding 1 full year is earned by the company from the activity

suggested by the new name.

 The aggregate of the proposed issue and all previous issues made in the same financial

year in terms of size (i.e., offer through offer document + firm allotment + promoters’

contribution through the offer document), does not exceed five (5) times its pre-issue

networth as per the audited balance sheet of the last financial year.
 PROCEDURE FOR IPOS

A)Fixed Pricing versus True Pricing( Book- Building)

The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the

merchant banker agree on an “issue price”. Then the investor has a choice of filling in an

application form at this price and subscribing to the issue. Extensive research has revealed that

the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the world,

suffer from `IPO underpricing'. In India, on average, the fixed-price seems to be around 50%

below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as compared to

what might have been the case. This average masks a steady stream of dubious IPOs who get an

issue price which is much higher than the price at first listing. Hence fixed price offerings are

weak in two directions:

 dubious issues get overpriced and

 good issues get under priced.

What is needed is a way to engage in serious price discovery in setting the price at the IPO. No

issuer knows the true price of his shares; no merchant banker knows the true price of the shares;
it is only the market that knows this price. In that case, a better and true price can be obtained

only if the system is designed in such a way that the market decides the price of an IPO.

Imagine a process where an issuer only releases a prospectus, announces the number of shares

that are up for sale, with no price indicated. People from all over India would bid to buy shares in

prices and quantities that they think fit. This would yield a price. Such a procedure should

innately obtain an issue price which is very close to the price at first listing -- the hallmark of a

healthy IPO market.

B)BOOK-BUILDING

A mechanism where, during period for which the IPO is open, bids are collected from investors

at various prices which are above or equal to the floor price (the minimum price). The final price

of the share is determined after the bid closing date, based on certain evaluation criteria.

The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the term `book-

building' in a rather complex language as "a process undertaken by which a demand for the

securities proposed to be issued by a body corporate is elicited and built-up and the price for

such securities is assessed for determination of the quantum of such securities to be issued by

means of a notice, circular, advertisement, document or information memoranda or offer

document.''

Book building process is a common practice used in most developed countries for marketing a
public offer of equity shares of a company. However, Book building acts as scientific as well as
flexible price discovery method through which a consensus price of IPOs may be determined by
the issuer company along with the Book Running Lead Manager (i.e. merchant banker) on the
basis of feedback received from individual investors as well as most informed investors (who are
institutional and corporate investors like, UTI, LICI, GICI, FIIs, and SFCI etc). The method
helps to make a correct evaluation of a company’s potential and the price of its shares. Book
building refers to the process of generating, capturing and recording investor demand for shares
during an IPO (or other securities during their issuance process) in order to support efficient
price discovery. Usually, the issuer appoints a major investment bank to act as a major securities
underwriter or book runner. The “book” is the off-market collation of investor demand by the
book runner and is confidential to the bookrunner, issuer and underwriter. Where shares are
acquired, or transferred via a bookbuild, the transfer occurs off-market and the transfer is not
gauranteed by an exchange’s clearing house. Where an underwriter has been appointed, the
underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.

Book building is a common practice in developed countries and has recently been making
inroads into emerging markets as well, including India. Bids may be submitted on-line, but the
book is maintained off-market by the bookrunner and bids are confidential to the bookrunner.
The price at which new shares are issued is determined after the book is closed at the discretion
of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to
clients of the bookrunner and, if any, lead manager, or co-manager(s). Generally, securities laws
require additional disclosure requirements to be met if the issue is to be offered to all investors.
Consequently, participation in a book build may be limited to certain classes of investors. If
retail clients are invited to bid, retail bidders are generally required to bid at the final price,
which is unknown at the time of the bid, due to the impracticability of collecting multiple price
point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner
retain discretion to give some bidders a greater allocation of their bids than other investors.
Typically, large institutional bidders receive preference over smaller retail bidders, by receiving
a greater allocation as a proportion of their initial bid. All bookbuilding is conducted ‘off-
market’ and most stock exchanges have rules that require that on-market trading be halted during
the bookbuilding process.

The key differences between acquiring shares via a bookbuild (conducted off-market) and
trading (conducted on-market) are: 1) bids into the book are confidential vs transparent bid and
ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the bookrunner
and any co-managers may bid); 3) the bookrunner and the issuer determine the price of the
shares to be issued and the allocations of shares between bidders in their absolute discretion; 4)
all shares are issued or transferred at the same price whereas on-market acquistions provide for a
multiple trading prices.

Process

During the fixed period of time for which the subscription is open, the book runner collects bids
from investors at various prices, between the floor price and the cap price. Bids can be revised by
the bidder before the book closes. The process aims at tapping both wholesale and retail
investors. The final issue price is not determined until the end of the process when the book has
closed. After the close of the book building period, the book runner evaluates the collected bids
on the basis of certain evaluation criteria and sets the final issue price.

If demand is high enough, the book can be oversubscribed. In these case the greenshoe option is
triggered.

Book building is essentially a process used by companies raising capital through public offerings
—both initial public offers (IPOs) or follow-on public offers (FPOs) to aid price and demand
discovery. It is a mechanism where, during the period for which the book for the offer is open,
the bids are collected from investors at various prices, which are within the price band specified
by the issuer. The process is directed towards both the institutional as well as the retail investors.
The issue price is determined after the bid closure based on the demand generated in the process.

C)Book Building Process in US

Unlike India, in international markets the most active investors are the mutual funds and other

institutional investors and the entire issue is made through book building process. In India, on the

other, a large number of retail investors participate actively in IPOs made by the company. In

US, book building is called soft underwriting moded by investment bankers which implies that

they sell the securities on a best efforts basis and they are not obliged to take up the unsold stock

of securities if there is no demand for such securities. Public issue through book building process

in US takes an average of 75 days to make a prospectus, file it with SEC, NYSE or NASDAQ,

talk to select investors, establish a price range, print the red herring prospectus and launch the

offering. Trading of securities begins on the 16th day and payment by investors and delivery of

shares are completed by the 20th day.

The Book-Building Process (Fig 1.1)

ISSUER

BOOK RUNNING
LEAD MANAGERS

UNDERWRITERS
MERCHANT BANKERS
MUTUAL FUNDS STOCK BROKERS

INVESTORS
MFs Financial Foreign Financial NRIs Corporations HNIs Retail Investors
Institutions Institutions

In simple terms, book-building is a mechanism by which the issue price is discovered on the

basis of bids received from syndicate members/brokers and not by the issuers/merchant bankers.
 COMPANY PROFILE

NTPC Limited

Type Public
Founded 1975
Headquarters Delhi, India
R S Sharma, Chairman & Managing
Key people
Director
Industry Electricity generation
Products Electricity
▲INR 416.37 billion (2008) or USD
Revenue
18.15 billion
▲INR 70.47 billion (2008) or USD 1.89
Net income
billion
Employees 24,698
Website http://www.ntpc.co.in
 OVERVIEW OF ORGANIZATION

India’s largest power company, NTPC was set up in 1975 to accelerate power development in
India. NTPC is emerging as a diversified power major with presence in the entire value chain of
the power generation business. Apart from power generation, which is the mainstay of the
company, NTPC has already ventured into consultancy, power trading, ash utilization and coal
mining. NTPC ranked 317th in the ‘2009, Forbes Global 2000’ ranking of world’s biggest
companies.

The total installed capacity of the company is 30, 144 MW (including JVs) with 15 coal based
and 7 gas based stations, located across the country. In addition under JVs, 3 stations are coal
based & another station uses naphtha/LNG as fuel. By 2017, the power generation portfolio is
expected to have a diversified fuel mix with coal based capacity of around 53000 MW, 10000
MW through gas, 9000 MW through Hydro generation, about 2000 MW from nuclear sources
and around 1000 MW from Renewable Energy Sources (RES). NTPC has adopted a multi-
pronged growth strategy which includes capacity addition through green field projects,
expansion of existing stations, joint ventures, subsidiaries and takeover of stations.
NTPC has been operating its plants at high efficiency levels. Although the company has 18.79%
of the total national capacity it contributes 28.60% of total power generation due to its focus on
high efficiency. NTPC Limited or National Thermal Power Corporation Ltd is the largest
thermal power generating company of India.
NTPC was founded in 1975 to give boost to power development in the country as a
wholly owned company of the Government of India. Presently, Government of India
holds 89.5% equity in the company and the balance 10.5% is held by FIIs, Domestic
Banks, Public and others. NTPC is engaged in engineering, construction and operation
of power generating plants. It also provides consultancy in the area of power plant
constructions and power generation to companies in India and abroad. NTPC was
among the first Public Sector Enterprises to enter into a Memorandum of Understanding
(MOU) with the Government in 1987-88. Since then, every year, NTPC has been placed
under the 'Excellent category' (the best category). In recognition of its excellent
 performance and tremendous potential NTPC has been given the status of "Navratna" by
the GOI.

VISION OF THE ORGANIZATION

"A world class integrated power major, powering India’s growth, with increasing global
presence”

MISSION OF THE ORGANIZATION

"Develop and provide reliable power, related products and services at competitive prices,
integrating multiple energy sources with innovative and eco – friendly technologies and
contribute to society"
CORE VALUE
 Business Ethics
 Customer Focus
 Organizational & professional Pride
 Mutual Respect and Trust
 Innovation and Speed
 Total Quality for Excellence

SUBSIDIARIES OF NTPC

NTPC Electric Supply Company Ltd (NESCL): NESCL is a wholly owned subsidiary of NTPC.
It was incorporated in August 2002 with the objective to acquire, establish & operate Electricity
Distribution Network in various circles/cities across India. The company provides consultancy in
the area of: Turnkey execution, Project monitoring, Quality Assurance and Inspection, and Third
Party quality inspection on the behalf of utility.
NTPC Vidyut Vyapar Nigam Ltd. (NVVN): It was formed to cater to and deal with the vast
potential of power trading in the country and optimum capacity utilization.

NTPC Hydro Limited (NHL): It was set up in December, 2002 to develop small and medium
sized Hydro Electric Power Projects of up to 250 MW capacities.
Pipavav Power Development Co. Ltd (PPDCL): A MOU was signed between NTPC, Gujarat
Power Corporation limited (GPCL) and Gujarat electricity board (GEB) in 2004 for development
of 1000MW thermal power project.

Particulars NTPC Electric NTPC Vidyut NTPC Hydro Kanti Bijlee Bhartiya Rail
Supply Vyapar Nigam Limited Utpadan Bijlee
Co. Limited Limited Nigam Limited Company
Limited

Extent of 100 100 100 67.66 74

NTPC
Holding (in %)

Table 1: List of subsidiaries

JOINT VENTURES OF NTPC:

NAME OF THE PROMOTER’S EQUITY AREA(S) OF OPERATION
JV COMPANY HOLDING AS ON
31.3.2009

Trading of power,
PTC India NTPC = 5.28% import/export of power and
Limited NHPC = 5.28% purchase of power from
PFC = 5.28% identified private power
Power Grid Corp = 5.28% Projects and selling it to identified
SEBs/others.

Utility NTPC = 50% To take up assignments of

Power tech Limited (UPL) Reliance Infrastructure ltd.=50% construction, erection and
 supervision in power sector
and other sectors in India and abroad.

NTPC-SAIL NTPC 50% To own and operate a

Power SAIL 50% capacity of 814 MW as
Company captive power plants for
Pvt. Ltd. SAIL’s steel manufacturing
facilities located at Durgapur,
Rourkela and Bhilai.

NTPC-Alstom NTPC 50% To take up Renovation &

Power Alstom Power Modernization assignments
Services Generation 50% of power plants both in India
Private Ltd. and abroad.

Ratnagiri Gas NTPC 28.33 % To take over and operate

and power gas based Dabhol Power
Pvt. Limited Project along with LNG terminal.

CORPORATE PLAN
Recognizing the importance of a long term Corporate Plan, NTPC initiated this process very
early in its evolutionary cycle.

The First Corporate Plan (1985 – 2000)

With a view to chart the growth path for NTPC, a 15-year Corporate Plan was prepared in 1983.
This plan covered the time period 1985-2000. The Corporate Plan effectively served as a guiding
document and NTPC achieved great success in project implementation, generation and financing
rapid growth as envisaged in the Corporate Plan till the late eighties. However, for a short while,
during the period 1989-92 .NTPC’s growth plans were affected adversely, mainly on account of
the poor financial health of SEBs resulting in non-recovery of full dues. The situation was
exacerbated by withdrawal of net budgetary support by the Government in year 1989. During
this period, there were significant policy changes that resulted in an increased focus on attracting
private sector participation in electricity generation.
Looking Ahead: Corporate Plan (1997 – 2012)
Consequent to the initiation of the economic reforms and the liberalization process by
Government of India in 1991, a new power policy was announced in October 1991. This policy
was designed to alter the investment pattern in the power sector in the country. Private sector
participation was actively encouraged in various sectors of the industry. New factors such as
potential competition from Independent Power Producers (IPPs), stringent environmental
regulations, greater uncertainties in fuel linkages, funds constraints, restructuring of SEBs and
the pace of reforms in the power sector necessitated a review of the corporate road map for
NTPC. Hence a revised Corporate Plan (“Looking Ahead”) for the period 1997-2012 was drawn
up. This document became the guiding document and directional plan for NTPC.
NTPC achieved progress on many parameters outlined in “Looking Ahead”. These included
continuous improvements in operating performance, shortening the duration for project
execution, initiatives on people related issues, increased customer focus, exploring lower cost
fuel options etc.

Corporate Plan 2012 – 2017

The execution of the strategy outlined in the Corporate Plan 1997-2012, “Looking Ahead”, was
predicated on assumptions pertaining to some key improvements/ enablers in the domestic
business environment over the period 1997 – 2012. Many of these enablers did not materialize
during the 9th plan. The above period also saw a significant change in the business environment.
This included setting up of independent regulatory agencies at the central and state levels, and
unbundling of state electricity boards in many states. Some of these changes had a direct impact
on NTPC.
Even though, the last Corporate Plan was prepared for a period of fifteen years, the plan had a
built in feature of mid course correction through periodic review and rolling. Accordingly, at the
end of first rolling period of five years, the plan has been reviewed with respect to original
targets and goals. Keeping in view the fast changing business environment, the Corporate Plan
2002 – 2017 has also been prepared in similar lines with a provision of review and rolling at the
end of five years.
In the meanwhile, with the objective of positioning NTPC as a world-class power utility, a
comprehensive organization transformation exercise named Project Disha has been launched.
 The change management program emerging from the study has also been suitably incorporated
in this Corporate Plan.

GROWTH:

 Installed capacity crosses 30,000 MW mark. (30,144 MW)

 1000 MW commissioned during the year.
 Commercial capacity addition of 2,000 MW, highest ever in last 14 years.
 Contributed 31.85% of the generation increase in the country
 Records highest ever generation of 206.9 billion units, an increase of 3.03% YOY.
 Contributed 28.60% of the total electricity generated in the country during 2008-09 with 8.79% share of
the total installed capacity of the nation.
 Commendable performance by NTPC coal based with 23,895 MW capacity comprising 79 units with
average fleet age of 18 years.
 All time high PLF of 100.03% in March, 2009.
 All time high Availability Factor of 92.47% in 2008-09 against 92.12% in 2007-08.
 Plant Load Factor (PLF) of 91.14% in 2008-09 (National PLF 77.19%).
Introduction of IPO in context of Indian market

The Indian primary market has come a long way particularly in the last decade after
deregulation of the Indian economy in 1991-92. Both the primary and secondary
markets have had their fair share of reforms, structural cum policy changes time to time.
The most commendable being the dismantling of the Controller of Capital Issues (CCI)
and introduction of the free pricing mechanism. This changed the whole facet of Initial
Public

Recent Trends

In the last quarter of FY 2007-08, several large equity offerings, including those from
reputable business houses, have struggled to hit their targets. India's stock markets
have been volatile, reacting to fears of a widening global credit crunch and fears of a
U.S. recession. Let's have a glance of IPOs in the Indian primary market during Jan-
March, 2008.

Table 1: IPOs during Jan-March 2008 in India

Fund raising by Indian companies has seen a sharp drop in the last quarter of financial
year 2007-08. This is evident from an analysis of data presented in the above table.

Largest IPOs of the world

 Industrial & Commercial Bank of China $21.6B in 2006
 NTT Mobile Communications $18.4B in 1998
 Visa Inc $17.9B in 2008
 AT&T Wireless $10.6B in 2000
 Rosneft $10.4B in 2006

 
NTPC is one of the largest power generating company in India. It has been granted the
“Navratna” status by the Govt. of India. With having around 18.6% of country’s installed
capacity, it generates about 28.6% of total power in India. Currently, it has generation
capacity of 30644 MW out of which 28350 MW is through its owned 112 units and 2294
MW through Joint ventures. In addition to generation business, it carries electricity
distribution and power trading business through its subsidiary, and also provide
consultancy to state and private sector power companies.
 
 
Objects of the Issue:
 
- Disinvestment by the Government of India.

- Through this FPO, NTPC is not raising any funds as it is not issuing any additional
shares, but only existing shares of promoters are being sold. So realised funds from the
sale will be added to government’s treasury and not the company.
 

Investment Rationale
 
- Fuel Supply: NTPC has 86% of its generation capacity on coal based and balance
14% on gas. It has long term CSA (Coal supply aggrement) for 12 out of 15 coal based
stations and the other 3 stations recieves coal pursuant to coal supply linkages
allocated by the ministry of coal. It also has long term GSA (Gas sharing aggreement)
for its gas based stations. Secured fuel supply and most of the fuel sources being
proximity to the stations, not only helps for efficient utilisation of Installed capacity (Plant
Load Factor) but also makes the cost of generation competitive. NTPC has a favorable
average PLF of 91.1% whereas overall national average stood at 77.2% in 2009.In
order to secure fuel supply, the company has diversified towards coal mining business.
The GoI has awarded eight coal mining blocks including two blocks in joint venture with
state owned Coal India Ltd.
 
- Huge capacity addition: NTPC has an ambitious plan to have 75000 MW generating
capacity by 2017. Currently it has 30644 MW of installed capacity, and 17930 MW of
capacity is under various stages of construction, which is expected to commission
before FY 2013. It has invited bids for approximately 15000 MW of capacity and about
20000 MW of capacity is under feasiblity studies. Usually a power plant takes around
37-46 months for execution, and assuming that the bidding process for 15000 MW
capacities will be complete by fiscal 2012, the total planned generation capacity of
75000 MW by fiscal 2017 looks realistic. The huge capacity addition will be the growth
driver and add to the revenues of the company.
 
 

 
- Demand supply mismatch: India has one of the lowest per capita electricity
consumption in the world (ie, 503 units) which is far behind when compared to
developed countries and some of the emerging countries (USA -13515 and China-
2040) and also world average of 2750 units in 2005-06. However it has increased to
704.2 units from 503 units in 2007-08. India with an average growth of around 8.5%
during past 5 years is among one of the fastest growing economies in the world.
Historically it has been characterised by energy shortages and which has increased
over the years. The increase in energy shortages is attributed mainly due to shortfall in
target capacity additions by around 50% over the years. With increase in demand and
the lack of required capacity addition in the past has made the situation worse and
increased the demand supply mismatch. NTPC is strongly positioned itself to gain from
the lopsided demand situation.

- Foray into Merchant Power Plant: Government’s has an ambitious plan to provide
power of atleast 1000 unit per person by fiscal 2012, to achieve this it has enacted
electricity act and taken various reform measures. One of the measure being allowing
developers to set up merchant power plants where by the developer can sell the power
at market rates. To capitalise this opportunity NTPC is also developing 4 units under
merchant power plant with 2120 MW capacity. However it plans to sell some part
through long term PPA.
 
 

 
 
NTPC being one of the giant in power generation sector has diversified in power related
sectors through various joint ventures. One of the key concerns for timely execution of
projects is delay in supply of equipments by vendors. It is planning to ramp up its
capacity in huge scale, thus it can address execution concerns. Other than this it has
ventured in power station maintainance services, EPC contracts business and
manufacture and repairs of high voltage transformers.
 
 
Risk Factors:

- Delay in execution of project: NTPC is ramping up its capacity and also plans to add in
large scale. (17930 MW under construction and planning to add more than 30000 MW
to have 75000 MW capacity by 2017.) Historically the projects has faced delays due to
issues ranging from availablity of land, environmental clearances, allotment of coal
fields, natural barriers, timely equipment supply by vendors. However it is trying to
address the issues through entering joint ventures for equipments supply, etc. but arise
of any such problem will not only delay the projects but also reduce the return on equity.

- Higher dependance on coal based project: Around 86% of plants are coal based.
Majority of the projects under implementation and projects called for bidding are also
coal based. Eventhough the company has CSA for fuel, any rise of problems relating to
supply, price, may impact the revenues.

- Indian government taking self measures to reduce carbon emission: NTPC has many
of the coal based stations which are of old technology, which emits carbon above the
prescribed limits. If Indian govt adopts carbon emission measures than it has to pay for
emiting carbon above the prescribed limits, this may impact the profitability.
 
 
Valuation & Recommendation:

Peer Comparison

We believe that NHPC, Neyveli Lignite and Tata Power are the best comparable
company as both the NHPC and Neyveli lignite are PSU’s and Tata power being the old
player in the Industry. We tried to compare the companies on the basis of PE and
Price/Book Value.
 
 
 
 
On the basis of Price earning, NTPC at the price of Rs. 201 is undervalued than its
peers. Even on the basis of P/BV, NTPC is undervalued comparable to the Neyveli
Lignite and Tata power and slightly costlier than NHPC.
 

Recommendation

At the offering price, it looks cheap as compared to it peers and has good potential for
upside. We recommend “Subscribe” to this follow on public offer.
 
 
 
 
Project going on all over India
Significant power projects spread all over India

NTPC IPO will have a diversified project portfolio in terms of geography, fuel mix and
technology.

Nine of the proposed thirteen projects are coal-fired or gas-based and two of those have
fuel security; the rest are yet to be finalized. In our view, for such huge capacity, fuel
linkage is of paramount importance (see status of projects on Long term PPAs for
8,560MW have been signed, constituting just 32% of the

aggregated generating capacity. Of these, Sasan project (based on domestically

procured coal) and Krishnapatnam project (based on imported coal) have been signed
at a tariff of Rs1.19kw/h and 2.33kw/h per unit respectively, the differential attributable
to the high cost of imported coal. A large number of PPAs are yet to be signed,
reflecting some ambiguity on profitability.

We believe equipment sourcing will be critical for NTPC IPO being able to commission
projects on schedule. Other key factors, apart from capital costs, are timely deliveries of
equipment and maintenance costs.

We believe the Group can draw synergies from the expertise of Reliance Energy in EPC
in executing projects of NTPC IPO.

Our concerns include lack of fuel linkages except for 2 projects, coal prices and gas and
equipment availability. Also in view of the gap between the aggregate project outlay of
Rs1, 12,129Cr and post-IPO net worth of 13,707Cr, we believe

NTPC IPO may have to opt for further equity dilution going forward, in order to maintain
a manageable debt-equity ratio going forward.

While the high promoter holding of around 90% post-listing is a positive, it may be
viewed negatively from the point of view of minority shareholders, since the latter will
enter the company @ Rs450 per share vis-à-vis promoters’ average cost of Rs16.92
per share.

Given the long gestation period of projects, which are likely to get commissioned from
FY10 onwards, we have considered non-earnings related valuation parameters. The
valuation of the IPO in terms of price/book (7.4x FY08E) appears expensive vis-à-vis
NTPC (2.8x) and Tata Power (4.5x).

The issue appears expensive, also on the basis of asset valuation (estimated valuation
of generating capacity) in FY13. It is only on the basis of FY17 estimates, that the issue
looks attractive.
However, we believe the aggression and track record of the promoter group in
shareholder wealth creation in all its businesses including telecommunications, power
distribution, financial services and entertainment is likely to have a positive rub-off effect
on this IPO as well.

Fuel used by various projects of NTPC IPO

 LIMITATIONS OF THE STUDY

1. The company’s internal matter can not be disclosed as we have to follow the corporate veil

norms.

2. Time limitation is one of the key factors as 8 weeks time is not appropriate & sufficient.

3. The data which was to be used for this project is all secondary Lack of experience.

4. All the information’s were not included as most of the information were confidential and was

not approachable.

5. Staff although were very helpful but were not able to give much of their time due to their

own job constraints.

REFERENCES

BOOKS

 Indian Financial System, IInd Edition , MY Khan

 Foundation Of Financial Markets & Institutions, IIIrd Edition, Frank J Fabozzi, Franco

Modigiani
WEBSITES

 www.moneycontrol.com

 www.capitalline.com

 www.nseindia.com

 www.sebi.gov.in

 www.capitalmarket.com

 www.wikipedia.com

 www.ntpc.co.in

 www.thehindubusinessline.com

 www.financialexpress.com

 www.myiris.com

 www.icraratings.com

MAGAZINES & NEWSPAPERS

 Business India

 Business Today

 Economic Times