NTPC Green Energy IPO: Could It Lead to a Lower Valuation for Parent NTPC?

NTPC Green Energy Ltd. (NGEL), the renewable energy arm of NTPC Ltd., has moved a step closer to its stock market debut by filing the Draft Red Herring Prospectus (DRHP) for its initial public offering (IPO). With an expected equity raise of ₹ 10,000 crore, the IPO is set to play a crucial role in funding NTPC Green's ambitious plans to expand its renewable capacity. However, market analysts have raised concerns that the IPO could potentially lead to a lower valuation for NTPC, the parent company.

Key Highlights of the NTPC Green Energy IPO:

• Equity Raise of ₹10,000 Crore: The planned IPO will involve an equity raise of up to ₹10,000 crore. According to Kotak Institutional Equities, this sum will likely suffice to fund the equity contribution for 1.7 GW of incremental capacity addition in NTPC Green’s portfolio.
• Capacity Expansion Plans: NTPC Green Energy has already set ambitious targets for capacity expansion. With 2.9 GW of installed renewable energy capacity as of FY24, the company is on track to add an additional 10.9 GW over the next few years, with the goal of reaching 60 GW of renewable energy capacity by 2032.
• Financial Performance and Comparison with Industry Peers: NTPC Green reported an EBITDA of ₹1,740 crore in FY24, based on a capital investment of ₹19,900 crore. This translates to a cash return on gross capital invested (CRoGCI) of 9.6%, which, according to Kotak, is relatively low compared to its industry peers. For example, Tata Power and ReNew Power posted a CROGCI of 10.8%, while Adani Green achieved 14.7% in FY24.
• Net Worth and Balance Sheet Support: As of March 2023, NTPC Green’s net worth stood at ₹6,200 crore, supported by NTPC’s larger balance sheet. However, once the company is listed, NTPC Green will have to rely more on its own cash flows for future projects, limiting its access to the parent company’s financial backing.

Impact on NTPC Ltd.’s Valuation:

Despite the promising future of NTPC Green, analysts, particularly from Kotak Institutional Equities, have highlighted that the listing could result in a lower valuation for NTPC Ltd. Here’s why:

• Shift in Focus to Coal Investments: With NTPC Green’s IPO, the parent company NTPC is likely to allocate a significant portion of its investment resources to its coal-based operations. This shift in focus could result in higher free cash flows for NTPC’s coal business but at the cost of limited growth opportunities in the renewable energy sector, which is a key area of interest for long-term investors.
• Lower Cash Returns from NTPC Green: The 9.6% CRoGCI for NTPC Green's renewable energy projects is notably lower than the returns posted by competitors like Tata Power and Adani Green, raising concerns that the IPO may not generate the same level of returns for investors as other green energy firms. This sub-par performance has led Kotak to caution that NTPC’s valuation may take a hit post-IPO.
• Green Investors May Favor NTPC Green Directly: Investors looking to gain exposure to the green energy sector may now choose to invest directly in NTPC Green, rather than its parent NTPC, further diluting NTPC’s valuation. Kotak noted that access to NTPC Green’s standalone shares could reduce the attractiveness of NTPC Ltd. for green energy-focused portfolios.
• Revised Price Target for NTPC: As a result of these factors, Kotak Institutional Equities has maintained its ‘Sell’ rating on NTPC Ltd. and revised its price target to ₹300 per share, down from an earlier target of ₹290 per share. This revision represents a potential 30% downside from NTPC’s last closing price.

NTPC Green's Growth Potential:

Despite the concerns over NTPC Ltd.’s valuation, NTPC Green Energy holds immense growth potential, particularly in the renewable energy sector. The company has a robust pipeline of projects aimed at expanding its solar, wind, and hydroelectric capacities.

• Future Expansion Plans: NTPC Green has outlined plans to add 11.7 GW of new capacity over the next few years, with a total investment of ₹63,500 crore. This will include projects across various renewable energy sources, including solar parks, wind farms, and energy storage solutions.
• Target of 60 GW by 2032: NTPC Green’s long-term vision involves reaching a total installed capacity of 60 GW by 2032, which would make it one of the largest renewable energy companies in the world. This ambitious goal aligns with India’s commitment to achieving net-zero carbon emissions by 2070.
• Support from the Indian Government: The Indian government’s policies on renewable energy, particularly its focus on promoting solar energy and reducing carbon emissions, are expected to provide a favorable regulatory environment for NTPC Green’s expansion plans. This could result in increased investor interest in the IPO.

Key Risks for NTPC Green:

While NTPC Green’s growth potential is significant, there are also risks associated with its future performance:

• Execution Risks: Expanding renewable energy capacity requires substantial capital and operational efficiency. Any delays in project execution, cost overruns, or regulatory hurdles could impact NTPC Green’s ability to achieve its growth targets.
• Competition in the Renewable Energy Sector: The renewable energy sector in India is becoming increasingly competitive, with major players like Adani Green, Tata Power, and ReNew Power expanding their capacities. NTPC Green will need to continue innovating and optimizing its projects to maintain a competitive edge.
• Dependence on Tariffs: NTPC Green’s ability to generate revenue is largely dependent on tariffs set by regulators. Any adverse changes in tariff structures could affect the company’s profitability.

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The upcoming NTPC Green Energy IPO marks a major step for the company as it seeks to establish itself as a leader in India’s renewable energy sector. However, the IPO may result in a lower valuation for the parent company, NTPC Ltd., due to a shift in focus towards coal investments and relatively lower cash returns from NTPC Green's projects.

While NTPC Green holds immense promise with its long-term expansion plans, investors should weigh the risks and rewards before making investment decisions. The IPO is expected to attract substantial interest from green energy-focused investors, but NTPC Ltd.’s valuation could face pressure in the short to medium term.