NTPC shows govt the light; REC may be more attractive
12 Feb 2010, 0053 hrs IST, Deeptha Rajkumar, ET Bureau
MUMBAI: A volitile market and the tepid response to the recent NTPC follow-on issue may prompt the government to price the follow-on public offering
of Rural Electrification Corporation (REC) more attractively, say merchant bankers. Having drawn flak for the manner in which the NTPC issue was handled, the government is looking to avoid repeating the mistakes made in that offering.
“The floor price of the REC issue is likely to be at minimum 8-10% discount to the market price,” said a person familiar with the development. The issue is still under discussion, as investment bankers are grappling with a volatile market environment. The REC board is meeting next week to finalise the FPO floor price for the government’s approval. The offer, which aims to raise Rs 3,900 crore, is expected to open on February 19, 2010.
But a government official said that the issue could be pushed back by a few weeks, so that bankers have more time to market the issue well, especially to retail investors.
“It is difficult to price an issue in an volatile market,” said Brijesh Koshal, head of investment banking at Daiwa Securities SMBC. “At the same time, it is important for the government to ensure that the REC offering is a success. The pricing will have to be attractive enough to draw in the much needed retail participation,” he said.
The market downturn in the past couple of weeks has taken its toll on the REC stock as well. The share price of REC has declined more than 23% in three weeks from a 52-week high of Rs 274.50 to Rs 222.75 at close on Thursday. Investment bankers are of the view that any reluctance on the part of the government to offer the shares at a decent discount, will send a wrong signal to the market, especially to the retail investors.
Prithvi Haldea, Prime Database MD, is of the view that the government’s approach in the NTPC issue was faulty and has resulted in alienating retail investors, and making them suspicious of future PSU issuances also.
“Why would a retail investor subscribe to an FPO if the differential (between the issue price and the market price) is negligible and which he knows can evaporate in just one trading session? And here he has to block his money for nearly three weeks,” he asks.
As far as retail investors are concerned, an FPO can work only in a rising market, where the price differential grows by the day, feels Mr Haldea.
While there appears to be some form of a consensus for a more realistic pricing for the forthcoming PSU issuances, there is some speculation on whether the government should still take the French auction route for its next FPO.
“As of now, indications are that the REC issue will have to be done through the French auction route as it is too late to change the format. However, of the two — REC and NMDC — the latter will elicit a better response through this route given that it is a highly illiquid stock,” said a banker on condition of anonymity.
Zerodha (Trading Account)
RHP
