NTPC issued bonus debentures for shareholders: Positive for Equity shareholder; Maintain buy rating on the stock with target price of Rs.190 :: IndiaNivesh

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NTPC has approved to issue bonus debenture (secured, non- convertible,
redeemable, taxable, fully paid debentures) for shareholders, on the occasion
of entering its 40th year of operations.
 These bonus debentures would be issued through a scheme of arrangement.
Bonus debentures of face value of Rs. 12.50 each would be issued against
each equity shares of Rs. 10 (face value) held by its members by utilizing its
free reserves.
 The proceed of issue of the debenture will be utilized for capital expenditure
in on-going project. Issue size for 8.24 bn equity share would be Rs. 103.06
bn
 Coupon rate of debenture would be based on Gsec rate (10 years benchmark)
plus 50 basis points.
 Over the years the company has accumulated free reserve (General reserve+
net surplus) of Rs. 724 bn and cash and bank balance was Rs. 153.11 bn as
March 31, 2014. Further the company has a comfortable debt equity ratio of
0.78x.
 The debenture would be redeemed in three installments(Rs. 2.50 at the end
of 8th year, Rs. 5 in 9th and 10th year each)
 If debenture is deployed /utilized for acquisition, construction or production,
then the interest of debenture would be capitalized till the time of assets is
available for production.
Our take
 Through this accounting treatment the free reserve of the NTPC is being
converted into debentures. The amount lying in free reserves truly belongs
to shareholders getting paid in the form of bonus debentures is a lucrative
option. Shareholders, who have now become the debenture holders too,
receive interest on debentures regularly. Shareholders have the option of
selling the debentures in the secondary market if they desire. This is positive
for the equity shareholder of NTPC as this exercise is creating the value for
them. shareholder are getting an assured return in form of debenture of
Rs. 12.5 (paid in three tranches in 8th, 9th and 10th years) and ~Rs. 1 in form of
interest per year from debenture.
 However book value of the company would be reduced by Rs 14.5 per share
(including dividend distribution tax), shareholders value would be
compensated by NPV of debenture of Rs. 12.5 share. Further, Interest on
debenture is a tax deductible expense, so company will get the tax benefit.
Further, there is no immediate cash outflow at the time of issue of bonus
debentures and this ensures availability of cash for next few years (life of
debentures) to meet funds requirement for NTPC expansion plan. Thus we
don’t find any material impact of our target price.
 At CMP of Rs. 142, stock is trading at attractive valuation of 1.10x FY16E BV.
We maintain buy rating on the stock with target price of Rs.190 (1.5xFY16E
BV).