Better execution needed to justify valuation for NTPC Green Energy

NTPC Green Energy (NGEL) has gained over 30 per cent since an IPO was launched at Rs 108 a few days ago. The surge after listing suggests the market thinks NGEL was undervalued in the IPO. NGEL saw revenue growth at 47 per cent annually over financial year 2022-24 with an operating profit margin at 87-90 per cent in previous three years, as operating profit rose from Rs 795 crore in financial year 2022 (FY22) to Rs 1,747 crore in FY24.

 

Between FY22-FY24, net profit rose by 90 per cent annually to Rs 345 crore (FY22 net profit was Rs 95 crore). But the net profit in FY24 was less than FY23 because the FY23 tax rate was negative (minus 17 per cent) while it was positive in FY24 (29 per cent). The operating profit for the first half of FY2025 (H1FY25) was at Rs 933 crore.

 

A large chunk of the IPO raise of Rs 10,000 crore via a fresh issue was to clear Rs 7,500 crore worth of debt. The rest of the funds can be availed for general purposes including capex. The parentage translates into access to lower cost of capital and gives NGEL a competitive edge. 

 

 

The company has 4,294 MW of operational solar and wind capacity supported by 25 years of power purchase agreements (PPAs). NGEL aims to add 16GW of renewable energy (RE) in the next three years and achieve 60GW capacity by 2032. The company plans to commission 3GW in FY25, 5GW in FY26, and 8GW in FY27, and it could leverage strategic MoUs with Rajasthan (25GW) and Maharashtra (10GW).

 

NGEL is also developing a green hydrogen hub in Andhra Pradesh. It is trying to finalise partnerships for electrolyzer production. In battery storage, it plans to install grid-scale facilities to support solar and wind power, while participating in standalone grid-scale storage tenders for grid balancing. The ties to NTPC, which holds 90 per cent stake, enables access to low-cost debt at 7 per cent. The IPO has unlocked value for the parent. Even with a holding company discount, the implied valuation is over Rs 100 per NGEL share for NTPC. 

 

The valuations are rich at around 70 times of the trailing enterprise value to operating profit on FY24 numbers. Investors should bear in mind that there are limited returns on extant and under-construction capacity, since that is the nature of the business.

 

An acceleration is required in commissioning with only 0.7 GW commissioned in the past 18 months versus 15-16 GW of targeted additions over FY25-27 and the current equity raise would only support 14 GW of capacity addition at an assumed cost of Rs 5 crore per MW for solar and Rs 7 crore/MW for wind. Hence, the company will have to raise more funds to support its expansion plans. 

 

NTPC Green earned an operating profit of Rs 1,750 crore on a gross block of Rs 20,000 crore in FY24, implying a cash return of 9 per cent. The earnings profile remained unchanged in H1FY25, with an operating profit of Rs 933 crore (up 2 per cent Y-o-Y) on a gross block of Rs 21,800 crore.

 

NGEL must significantly accelerate execution to add 15-16 GW over FY25-27, including signing of PPAs and transmission connectivity. Most of the 14 GW contracted or awarded are solar, and 4.5GW is still not backed up by PPAs.

 

If we project forward to FY28, NGEL’s current portfolio of ongoing projects with 17GW will contribute fully to earnings, with around 55 per cent annual growth in operating profit over FY2024-28.

 

Valuations are at premium to peers. The valuations could be justified in that timeframe.