NHPC is a low-risk investment and could be a long-term bet

Mahindra Holidays and Resorts India’s recent initial public offering (IPO), subscribed 10 times, could renew interest in the so-far moribund primary equity market.

In fact, several fresh IPOs seem to be on the anvil, most prominently those of public sector undertakings (PSU) like National Hydro-Electric Power Corporation (NHPC) and Oil India. The NHPC IPO, which is expected to hit the market in August or September, is especially awaited.

So could these present an investment opportunity for retail investors in the coming months? Financial advisors say there are no blanket solutions. And investors should bear a few things in mind.

“If you’re looking at building an equity portfolio to meet your financial goals and if you’re considering the direct equity option, then IPOs could be one vehicle to enter equities directly. But this means that you have the skills to understand and time to track your equity portfolio,” says certified financial advisor, Gaurav Mashruwala.

Also, not all IPOs are worth it. Atul Karve, partner Blue-Chip Investments, feels the returns may not suffice in the short term. “Suppose you put in a Rs 30,000 application for 100 shares and are only allotted shares worth Rs 5,000. Now even if that appreciates by 40 per cent, the actual gain on Rs 30,000 will be much lower,” he says.

In the long term too, he feels it may be possible to get a stock at close-to-its IPO price since typically, a company will take three years to deploy and make returns from its IPO funds. “There have been enough instances in recent times where post-IPO costs have been below the IPO price,” adds Mashruwala.

Others are more optimistic. Remember, some of the PSU IPOs over the last five years have given good returns. Take NTPC, which priced its share at Rs 62 in its IPO in October 2004. On June 29, 2009, the NTPC stock closed at Rs 196.95 on the Bombay Stock Exchange.

So what about NHPC? Says Hitul Gutka, research analyst, power sector, India Infoline: “NHPC, if priced correctly, should be a good investment opportunity for a long-term investor, especially over a three-to-five-year time horizon.” He is not bullish on generation companies on the whole because he feels these stocks are already over-priced and have factored in the returns from the forthcoming generation capacity additions.

But NHPC’s case may be different, he feels. For one, it’s the country’s largest hydro-power generator. Then, it plans to add around 4,600MW capacity to take its total installed capacity to around 9,700MW by 2012, and it has already signed long-term power purchase agreements with customers for the same.

“This kind of business is safe and works like an annuity. We believe this low-risk business could be a good long-term bet,” says Gutka.

There’s one thing though. Since PSU IPOs usually have a huge equity base, their growth will be relatively slower than that of private sector companies. So investors should be willing to wait for a longer time to get decent returns, cautions Gutka. “However, PSU stocks would form a good defensive bet for investors in such volatile times,” he says.