Can NTPC Green's IPO electrify your portfolio?

As one of India's largest renewable energy public sector enterprises, NTPC Green boasts a robust portfolio of operational and pipeline renewable energy projects. It aims to use the proceeds to strengthen its financial position and accelerate its green energy initiatives. Investors seeking exposure to the burgeoning renewable energy sector may find NTPC Green's IPO attractive. However, it is important to consider factors such as the company's financial performance, future growth prospects, and market conditions before making investment decisions.

Financials look green

The company has experienced impressive growth over the past three years, with revenues soaring at a compounded annual growth rate (CAGR) of 46.8%. Its profitability metrics, including both operating and net profit, have also seen consistent upward trends.

The company's low net debt-to-equity ratio, significantly below its peers, combined with a strong credit rating, allows it to access capital at competitive interest rates, strengthening its financial flexibility and supporting its growth initiatives. “The cost of debt is relatively much cheaper even with our competitors," said Gurdeep Singh, chairman & managing director of NTPC in a recent press meet in Mumbai.

This financial strength has been instrumental in driving substantial investments in renewable energy, as evidenced by a 78% surge in capital expenditure to ₹8,882.7 crore in FY22.

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However, the company's valuation at the upper price band is demanding, with an EV/EBITDA multiple of around 53 times (post-issue) and a price-to-earnings ratio exceeding 200x as of FY24. 

“Valuations for NTPC Green appear to factor in FY27 cash flows, given that its 19 GW capacity is expected to be fully operational by then. However, the market has yet to fully price in the potential growth from the hydrogen sector. With management’s focus on integrating solar with advanced storage solutions, NTPC Green is poised to meet energy demands during peak hours, setting it apart in the renewable energy space," said Sunny Agrawal, head of fundamental equity research at SBICaps Securities.

A report by Reliance Securities emphasizes the company's prudent business approach and strategic growth initiatives. “NTPC Green has deep domain expertise of the management team focusing on new energy solutions like green hydrogen, green chemicals and storage with prudent growth and contributing towards fulfilling India’s net zero goals," it said.

Concentration risk

While NTPC Green boasts a strong renewable energy portfolio, a significant portion (62% in H1FY25) of its operational projects are concentrated in Rajasthan, a state renowned for its renewable energy potential. Rajasthan and Gujarat, with 29.6 GW and 27.5 GW of installed renewable capacity (as of September), respectively, dominate India's renewable energy landscape. Other key states include Tamil Nadu, Karnataka, Maharashtra, Andhra Pradesh, and Madhya Pradesh. 

While this concentration has fueled the company's growth, it also exposes it to potential risks. Any unforeseen events, such as natural disasters, policy changes, or geopolitical tensions in these regions, could have a ripple effect on the company’s operations and financial performance.

Besides, its exposure to China for critical components like solar module cells and wind turbine parts makes it vulnerable to supply chain disruptions and geopolitical risks. However, India's growing domestic manufacturing capabilities, particularly in the solar sector, offer a glimmer of hope. Singh from NTPC highlighted that India has made substantial strides in solar manufacturing, with around 50 GW of module production capacity already in place. "However, the focus is now on expanding domestic capacity for solar cells." 

He expressed confidence that India's efforts would soon reduce the reliance on imports for these upstream components, adding, "I think we have really developed a lot of capacity in the country as of today so that it should not be a bigger issue going forward."

Analysts, too, are optimistic about India’s potential to reduce this dependency in the coming years.

 "A significant shift in India’s solar industry as domestic giants like Reliance, Adani, and Waaree ramp up large-scale solar panel manufacturing," Agrawal said. “With the government imposing import duties on cheaper Chinese panels, India’s dependence on imports is set to decline over the next three to five years. This will make Indian solar components more competitive and drive a shift in procurement strategies, supporting the growth of a self-reliant renewable energy sector," he explains further.

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NTPC Green’s push for self-reliance aligns with India’s broader strategy to reduce dependency on foreign suppliers, Shivani Nyati, head of Wealth at Swastika Investmart, said. “The company is aligning with government initiatives like the production linked incentive (PLI) scheme to encourage domestic manufacturing of solar modules and wind turbine components. Collaborations with Indian manufacturers and partnerships with global players for localized production facilities are likely part of their strategy to mitigate supply chain risks and reduce dependency on imports. This move aligns with India’s broader push for self-reliance in the renewable energy sector."

Meanwhile, India’s renewable energy sector is seeing impressive growth, with installed capacity increasing more than two fold in less than a decade. However, thermal power still dominates the energy landscape, accounting for nearly 54% of the total installed capacity as of September 2024. So, even if the shift towards green energy is gaining momentum, thermal power remains a significant part of the mix. This stark contrast highlights the ongoing challenge of balancing India's energy needs with its climate goals.

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Competitive landscape

NTPC Green Energy participated in 17.3 GW of bid capacity (quoted capacity) between FY22 and FY24, securing 7.9 GW of projects. While the company achieved a higher win ratio of 54% in FY22, this figure declined to 39% in FY24, indicating a challenging bidding environment. 

Industry analysts believe that this decline in NTPC Green’s bid success ratio is largely due to several factors, including intensified competition, aggressive pricing strategies by rivals, and the evolving policy landscape in the renewable energy space. 

"The decline in NTPC Green Energy's bid success ratio could be attributed to increased competition, aggressive pricing by peers, or evolving policy frameworks in the renewable energy sector. To regain momentum, the company may focus on leveraging its scale and expertise to optimize project costs, enhance operational efficiencies, and adopt innovative financing models," Nyati explained.

The company participated in 46% of the auctioned megawatt, which may point to more participation in Solar Energy Corp of India tenders versus state tenders and also their own execution ramp-up capability on an annual basis, highlighted in a recent report by Jefferies.

Green future ahead

The company is well-positioned to capitalize on India's growing emphasis on clean energy. With a significant focus on renewable energy sources, the company is set to benefit from the substantial increase in installed capacity projected between FY24 and FY29. Renewable energy is expected to dominate the growth, with a projected increase of 187 GW, far surpassing the increase in coal capacity of 27 GW. Looking ahead, renewable is projected to comprise 50% of the total installed capacity by FY29.

NTPC Green benefits from the strong backing of its parent company, NTPC Ltd, a power behemoth with over 60 GW of thermal capacity. Combined with NTPC Green's own substantial operational capacity of approximately 4 GW and a contracted capacity of 12 GW, the company is well-positioned to capitalize on India's growing renewable energy market. 

“What gives them an edge is their strategic partnerships, including a joint venture with Indian Oil Corp. Ltd (IOCL) to provide captive power for IOCL’s refineries. Additionally, their joint venture with ONGC positions them as a frontrunner for acquiring renewable portfolios," said Abhishek Kumar, executive director at Avener Capital. 

“NTPC Green is also making strides in solar and wind projects, and their pilot projects in storage technology have equipped them with the capability to expand in this space. Clearly, they are well-positioned to grow in the renewable energy sector," he added.

Meanwhile, India holds its position as the world’s fourth-largest renewable power capacity, trailing only China and Brazil among emerging economies, excluding hydropower plants. The country has made significant strides in harnessing various renewable energy sources, including solar, wind, and biomass.

“The government's National Electricity Plan aims to reach a total capacity of 900 GW by 2032, up from the current 400 GW, with 80% of the 500 GW increase expected to come from renewable energy. This creates significant potential for both power generation and transmission," Kumar added. “To support this growth, substantial investment is needed in transmission infrastructure, especially in regions like Rajasthan and Gujarat, where most renewable capacity will be located." 

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