E-PaperKotak Institutional warns NTPC and Power Grid valuations appear super expensive – here’s why
Power stocks on Dalal Street have seen significant growth due to capacity expansions, rising demand, and order inflows. However, Kotak Institutional warns of incorrect valuation methods for NTPC and Power Grid stocks.
Power-related stocks have gained favor on Dalal Street in recent years due to several positive triggers, including capacity expansions, rising power demand, increased order inflows, and government emphasis on the sector. These factors have attracted investors to power stocks, resulting in significant multibagger returns over a short period of time.
Notable performers in this sector include NTPC and Power Grid Corporation, which have delivered returns of up to 110% in a year.
However, domestic brokerage firm Kotak Institutional Equities has cautioned that investors may be using incorrect valuation methodologies when assessing stocks like NTPC and Power Grid Corporation.
"We do not agree with the way investors are valuing NTPC and Power Grid stocks, even as we agree with the view of new capacity creation in the power sector. One fundamental difference is that NTPC and Power Grid -their earnings growth depends on the growth in the stock of assets, unlike ‘flow’ stocks, where earnings growth depends on growth in revenues and profitability," said Kotak.
The brokerage highlighted other critical issues, including the questionable terminal value of NTPC’s thermal assets and the gradual shift in their business models towards competitive low-RoE ventures compared to their current assured high-RoE businesses.
It anticipates fairly muted earnings growth for NTPC and Power Grid, as their earnings are tied to the expansion of their regulated equity base, which depends on the addition of new assets. The brokerage expects that their asset bases will grow slowly over the next few years, considering the recent trends in gross block, new asset capitalisation, and regulated equity base from the past few years and projected for FY2024–26.
Valuations appear super expensive
According to the brokerage, the fair values of NTPC and Power Grid are significantly lower than their current market prices. Although NTPC is valued at 16X FY2025E EPS and Power Grid at 18X FY2025E EPS, which might seem relatively inexpensive compared to the broader market or other capital goods and electricity stocks, these multiples are not low when considering the slow earnings growth and the limited terminal value of NTPC's current asset base, particularly its thermal assets.
In fact, the brokerage highlighted that the valuations are quite steep when viewed in terms of P/B ratios, with NTPC trading at 2X FY2025E BV and Power Grid at 3.2X FY2025E BV.
Moreover, when using the adjusted P/B methodology—removing cash and investments from the market cap and using regulated equity instead of reported equity—the valuations appear even more inflated, it pointed out.
The brokerage noted that the end-FY2024 regulated equity for NTPC and Power Grid stood at ₹89/share and ₹83/share, respectively. Using reverse valuation exercises, the brokerage determined that NTPC’s stock price is effectively discounting around 50–70 GW of new thermal capacity compared to its end-of-year 2024 thermal capacity of 59 GW.
Similarly, Power Grid stock price is discounting an additional asset base of ₹2.6 trillion versus its end-FY2024 gross block of ₹2.8 trillion. These implied assumptions are considered quite unrealistic by the brokerage.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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