We have utterly failed to make the politicians understand the true value of stock market.  

Mr. Gyanendra Lal Pradhan is one of the leading hydropower entrepreneurs and a noted share market investor of the country. Under his able leadership, Chilime hydropower project has become one of the blue-chip companies and has made a huge contribution to the nation building process. Inspired by Warren Buffet and the Reliance Group, Mr. Pradhan has been pushing for the growth of the hydropower as well as real sector companies in such a way that both the promoters as well as ordinary share investors stand to benefit the most. ShareSansar.com talked to Mr. Pradhan to provide priceless insight into share trading for our viewers. Check it out!

How do you view the outcome of the Constituent Assembly election? Do you think it is going to lead the country to political stability and rapid economic growth?

The stock market should not be valued on the basis of politics of the country. The market stakeholders should make the politicians understand the value and importance of the share market—how significant is the market for the overall economic growth of the country; how the market is transforming thousand of small investors into entrepreneurs. We have utterly failed to make the politicians understand the true value of stock market.

Insofar as the changed political context is concerned, the growth of the market in the coming days will still depend how much can we convince the upcoming government about the importance of the growth of the market as well as what and how we trade in the stock market than expecting the upcoming government to promote the market. Nonetheless, political stability will have a positive impact on market capitalization, and we can see that happening now.

Here I would like to add one more thing that a good thing for the market is that it is getting mature – as demonstrated by correction in the market immediately after hitting a series of circuit breakers after the Constituent Assembly election. This shows that the investors themselves have become more mature. Over the years, investors have burnt their fingers and learnt their lesson. Hence the market will continue to rise but would not witness a meteoric surge in days to come.

Apart from making the state realize the importance of the stock market for the economy, what else needs to be done immediately for the promotion of the market?

Bringing in the real sector, as proposed by many stakeholders, could be one of the steps. However, I don’t think that most of the real sector companies are willing to join.  Even if they are willing to enter the stock market the government should first enforce strict regulation so that the investors do not have to suffer as in the case of Jyoti Spinning Mills while the promoters can walk free and continue to make profit while the ordinary investors who invest in their shares suffer the loss. The regulator must ensure that the listed real sector companies are operating transparently and they can be held accountable.  Anyway, the scopes of the real sector companies are limited as they have limited market –unlike the hydropower, which has endless possibilities in the country.

Insofar as the three leading sectors are concerned, banking insurance and hydropower will remain strong in the market for a long time because there are not only duly regulated by concerned regulating authorities  but also the promoters of the companies listed under these groups hardly have a scope to manipulate their balance sheet or to become non-transparent.  

Now moving on to more specific issues related to the hydropower sector; how do you see the growth of the sector in Nepal? Don’t you think that the long period of political instability has affected the growth as evident from the ongoing power crisis?

Well, I view it differently. Despite all odds, the hydropower sector has come a long way. Currently, the private sector is constructing almost 400 MW projects, which could not be imagined in the past. The sector is likely to get FDI worth US 5 million dollars, which is quite impressive. The country has never seen FDI of that volume in the past. The state itself is developing projects with installed capacity of almost 800 MW, including the mammoth Tamakoshi project, which our state never did in the past. Hence the hydropower sector is picking up in the country, though we could have still have performed better.

Talking about the load shedding – how much energy do we need to generate to end it? Around 600 MW; we have enough resources inside the country for that.

What do we need to do now to expedite the growth of the hydropower sector?

To further speed up the growth of the sector, the government should come up with a law that makes it mandatory for the hydropower companies -- as well as banking and insurance companies -- to join the stock market. Today it is optional for them. Let me explain this with an example of the Khimti hydropower project. The Norwegian government invested Rs 175 crore in the project and is taking away Rs 250 crore a year as profit from the project each year! This is wrong. The government should make sure the local residents get the shares of hydropower companies. Khimti should float 30 percent shares to the public.

Another thing the government needs to immediately act is channelizing the remittance, which comes to the tune of Rs 500 arba a year. If even 5 percent of remittance can be directly channelized into the hydropower sector through the stock market, not only the stock market, it will ensure sustainable growth of the hydropower and the entire economy. This is possible if the government only assures that they take guarantee of their investment. Today, not even 2 percent of the total remittance goes into capital formation.  If we can channelize even 5 percent of remittance into the stock market in a year, it will ensure Rs 25 arba capital formation every year.

We have been hearing for decades about the tremendous potential of water resources. But we have been able to harness not even 800 MW of electricity, and the country is facing load shedding for many years now.  On the other hand, most of the existing projects as well as those in the pipeline are RoR type. But what we need is more of reservoir based projects to end the power crisis, especially during the dry spells. But such projects are extremely expensive. How should we go about it?

This problem requires collective initiative. Nobody, not even the state, can solve this problem singlehandedly. The government’s annual budget comes to the tune of Rs 500 arba. How many hydropower projects can the government build? A very few. Therefore, the public, private sectors, PPP model as well as FDI have their own importance. The overarching objective should be to expedite the growth of hydropower sector at the earliest. Even though we believe that we have 83,000 MW potential in the country, the actual possibility is even higher—up to 2 lakh MW. But what is the use of the potential if we cannot harness it?

We should also know which agency is best fitted for what kind of projects.  The government should not be involved in small hydropower projects.  The private sector should be allowed to develop them. Look what happened with Chameliya and Kulekhani projects. The cost of the project undertaken by the state kept on surging. The private sector could have completed the project in half of that cost.  On the other hand, the private sector cannot afford to build huge projects such as Tamakoshi. The government has to build such projects. If a project very big such as the Karnali-Chisapani project, even the government cannot afford to construct it. We need FDI for that.

Hence, we need to have a collective approach, and most importantly, we need to make it mandatory for all the hydropower companies to be listed in the stock market.

Besides the role of the state to encourage all the hydropower projects to join the share market, what can these companies themselves do for promotion of the market in such a way that entails a win-win situation for every side?

They should follow the policy of the Reliance Group of India. If you are talented and have a plan then why invest even 51 percent of your capital in a project. The notion of holding 51 percent share in a company is wrong. You need to invest your idea and let the people invest their capital. Look at India, where has Reliance made 51 percent investment in any company?  You invest just 5 to 10 percent in any company, and let others earn. You live in a house that costs a billion dollar and let others become rich, too. I am trying to follow that model in Chilime. I am the largest shareholder in the project, and I hold 25 percent share. I still want the major shareholders to let the people earn more. This will help expand the project.

The problem with most of the hydropower projects is that they have distributed the profit in form of cash. That is the problem with many of them, including Butwal Power Company. It distributes cash to the shareholders. This is absolutely wrong policy. How can you expand a company when you start distributing cash dividend? You should never distribute cash; you should always distribute rights issue and bonus shares so that the project expands and the share market also benefits. What did Chilime did? It gave 30 percent bonus share. If the price does not come down then it means the investors have got 30 percent returns.  And Rs 106 crore profit generated from the project will go on to expand the project.  When the equity base increases it will eventually lead to heightened profit. Yes, its EPS will go down Rs 15 in four years time, down from Rs 80 to 90 at its peak, but after four years its new project will again start to add profits. BPC failed to follow this model. Tamakoshi is following Chilime’s model, which guarantees that the project will never suffer loss.  

What else should the state do to promote the promotion of hydropower project?

More and more hydropower projects will enter the stock market in days to come. The state needs to ensure that new hydropower projects, too, can generate profit from the initial years like Chilime did due to early IPO and front-loaded PPA.   

As you also noted, more and more hydropower companies are joining the stock market. There was a huge response in the market when the hydropower companies floated their IPOs. But most investors tend to sell such shares shortly after they are listed as they have to wait for years for returns. What do you have to say about it?

There are two types of investors when it comes to the shares of hydropower companies. One of them is like me who takes long-term position, on the basis of the balance sheet of the listed company. I believe in Warren Buffet’s approach. I can’t earn huge profit by taking a short-term position. For a long-term investment, you have many benefits: you can see the company’s balance sheet, you know the background of the promoters and the future projections of the company. Let’s take Chilime’s case for example. The 271 MW project guarantees 38 percent shares and Rs 200 crore profit from the fourth year onward. Rs 106 crore cash dividend is confirmed. Why should I take a short-term position in a hydropower company like Chilime?  Hence, there is no problem for Chilime for the next three years. If something goes terribly wrong for the project in the next three years, I can always dispose my shares.

As far as the investors who take short-term position, they can always take profit from the market capitalization. But you need to keep yourself updated with the market on a daily basis if you want to take short-term position, which I can’t. I have other priorities, too.  Most importantly, if you look at any investors who have earned a lot of money from the stock market anywhere in the world, they have always been long-term investors.

Share trading started in Nepal decades ago. Still many ordinary people and even government officials believe that share market is more like gambling, and they prefer to stay out of the process. How important is investor education in our context?

I don’t think any government official will again make such reckless remark now.  And I can also see that a lot of people have already understood the benefits and the significance of the stock market.  Why? The stock market went into a correction mode after hitting three circuit breakers in a day immediately after the results of the Constituent Assembly election started to pour in. The market could have continued to rise given the possibility of political stability and economic growth in the country after the election. But it did go on correction mode. This speaks volumes about maturity of the market as well as the investors. Now the investors won’t lose their houses and other properties in the share market.

Nevertheless, I would also suggest our investors that it is really important to book your profit in the share market. Be in share market or the real estate, a lot of investors still prefer to take calculated risk instead of booking profit.  You need to book your profit at some point. That is key to the success in this market. What I usually do is that if I invest Rs 100 then I will book 25 percent profit once it fetches Rs 200. This will give me Rs 50 profit in average. I will again book another 25 percent profit if it reaches Rs 400. Now my liability is zero. Now I’ll gamble by waiting for the peak. Hence it is important to book your profit –even if it’s a blue-chip company.

What are the things an investor needs to know before investing on the shares of a hydropower company?

If you want to take a short-term position then you don’t need to know much about the company’s backgrounds, and you can simply go and buy of the IPO floated by any hydropower company and make profit from the margin of market capitalization. I recommend short-term position for new hydropower companies and long-term position for the companies that are doing well for years.

To make a long-term investment it is crucial to check the background of the promoter’s group and the dividend they have offered in the past. Then you have to confirm their balance sheets.  If these things are taken into account, then you can make a long-term investment in the project.

Another promising aspect of the hydropower company is that there is a third party verification in the sector, which a very few investors seem to realize. Apparently, there is no regulator for the hydropower companies unlike the insurance group, which is regulated by the Insurance Board, and central bank that regulates the BFIs. However, the money generated from a hydropower company after it comes into operation gets channeled to Nepal Electricity Authority and then directly goes to the banks –unlike the real sector companies.  Real sector companies of the past such as Harisiddhi brick and tile factory was making a good profit. But why did their shares crashed in the market? Because there was no agency to regulate the real sector. But hydropower companies always have third party verification.

What are the companies that you are eyeing, and why?

Considering the fact that the market is rising, the political scenario is positive and the banks are slashing their interest rates, it is wise to base the investment on bonus shares. Hence, the first company I’ll go for is Chilime. Then looking at the insurance sector, many insurance companies have growth plan to meet the Rs 50 crore target. They will meet it by issuing bonus shares. Nepal Life Insurance Company Limited has a very strong growth plan. Another good aspect of NLIC is that it does not have a huge tradable volume in the market, which is good. For instance, BPC earned merely Rs 3 crore in the last three months while Chilime earned Rs 33 crore. However, the difference between the share prices of the two companies is not ten times. This stops the market from surging dramatically.  

I will be interested in the shares of the banking sector when the government makes it compulsory for them to have a paid-up capital of Rs 5 arba. Even in the past the reason the price of shares of banking sector companies increased mainly due to the bonus shares.  Cash dividend cannot support the growth of the share market. Can anyone invest in the market to get 3 to 5 percent returns when your cost of fund will be more than 10 percent? No. It will be better to deposit the money in banks than to invest in the share market for cash dividend.  Hence, I am in a wait-and-watch mood. If I were to buy any bank shares now then I would go for cheap ones. Buying shares of the banks, which are yet to meet the market capitalization can also be a wise move.    

What about the microfinance sector? How do view them as a share investor?

If the microfinance sector companies are regulated properly then I have no problems with such shares. But the cooperatives should not be allowed to enter the stock market. They are not regulated. If cooperatives enter the share market, they will destroy the market and themselves. Microfinance companies are fine, but they cannot play significant role in the promotion of the market because of their limited size.

Any word of advice to both big and small investors?

First of all the investor should carefully think about the money they have and what kind of returns they want. If you are a small amount to invest, say Rs 10,000, you should not think about long-term investment.  You have to take short-term positions. Then you have to be updated with the day-to-day trading at the stock market, especially the news of mergers.  But you may not even have to look at the balance sheets if you take a short-term position.

But if you want to take a long-term position then it is crucial to check the balance sheet and the growth plan of the company.

Where do you see the stock market six months down the line?

Most of the investors are short-term players who have taken loan from banks to invest in the share market. The bigger players are yet to enter the market. Hence, the stock market will continue to rise for a long period, though with corrections. But it will be foolish to think that the market could rise to such a degree that it could breach 1500 points. The listed companies, including the banks, are not in such a position to propel the market to that height. Moreover, the central bank has enforced a regulation that bars the banks from enforcing spread rate of more than 5 percent. It will only decrease their profit.