BHEL vs NTPC: KIE explains the sharp divergence between 2 power stocks

According to ACE Equity data, BHEL stock has added 63 per cent in the last six months and significantly outperformed NTPC, which has lost 13 per cent.

Thermal power stocks like BHEL and NTPC have diverged sharply in the last six months as Street signals concern about the future thermal capacity addition, but remains comfortable about the future prospects from thermal equipment. 

 

According to ACE Equity data, BHEL has added 63 per cent during this period and significantly outperformed NTPC, which has lost 13 per cent.  

Source: Bloomberg, KIE

 

Domestic brokerage Kotak Institutional Equities (KIE) said that while it fully agrees with the "uncertain terminal value of thermal generation and equipment assets", it also believes that the current market cap of BHEL signals significantly larger thermal capacity addition in perpetuity. This, it said, appears rather optimistic.

 

 

KIE's reverse valuation exercise for NTPC implies that it will add a cumulative 42 GW of incremental thermal capacity. The CEA projects a cumulative 86 GW of thermal capacity addition over FY2027-36, with the private sector also expected to participate. Adani group alone had a target to add roughly 4 GW/year of capacity over FY2027-32.

 

Meanwhile, a similar exercise for BHEL, even after ascribing 25 per cent of its value to non-thermal businesses, suggests that it needs to deliver 150-300 GW of BTG (boiler, turbine and generator) and a better cash generation profile in perpetuity. 

 

"The current market capitalization of BHEL implies 150 GW of life-time capacity execution at a 10 per cent PAT margin, with the ask increasing further to 200 GW at a 7.5 per cent PAT margin," said KIE.

  

The brokerage thinks that India may add only about 100 GW of new thermal power capacity in the future because solar power combined with battery storage is becoming a strong competitor. That limits how much business there will be for companies that manufacture thermal power equipment.

 

Even at elevated realisations, KIE said that aggregate undiscounted profit pool of thermal equipment manufacturing will be around ₹50,000 crore to ₹1 trillion. Meanwhile, BHEL's market cap is ₹1.48 trillion. Therefore, KIE said that the current market cap of BHEL implies significantly larger thermal capacity addition in perpetuity, which appears rather optimistic versus the government’s estimates. 

 

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