Can NTPC Green Energy IPO power NTPC?

NTPC Ltd’s subsidiary NTPC Green Energy seeks to raise ₹10,000 crore from its proposed public issue of fresh shares. Soon after the announcement, NTPC shares hit a lifetime high of ₹431.85 on Thursday.

Notably, the stock has already surged by 75% over the past year. Nearly 75% of NTPC Green’s public issue is earmarked for debt repayment. Even though the net debt will be ₹7,500 crore after the issue, it is likely to rise thanks to huge capacity expansion plans.

The company plans to have at least 15 GW capacity by FY27 with 85% of it being solar and the remaining wind. This is achievable given that the typical development timeline for the company’s solar and wind projects is about 12-18 months and 18-24 months, respectively. The expanded capacity would be almost five times its existing capacity of 3 GW mainly of solar. The planned capacity is based on power purchasing agreement (PPA) signed with customers and the letter of award received after auction wins.

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While the expansion plans indicate strong outlook, it could require huge capital expenditure. So far, it has a gross block of about ₹18,000 crore for 3 GW capacity translating into capex of ₹6 crore per MW. Even assuming cost reduction per MW to ₹5 crore, it would need capital of about ₹60,000 crore for the additional capacity of 12 GW to complete the expansion. As its capital work-in-progress is already ₹9,000 crore, the additional funding required could be ₹51,000 crore. It is difficult to ascertain what mix of debt and equity will be used for this.

NTPC, the parent company’s risk-averse regulated business model with a predefined return on equity (RoE) provides earnings growth visibility, which can be used for rapid expansion of NTPC Green’s renewable portfolio.

NTPC’s long-term goal is to achieve 60 GW of renewable capacity by FY32. Note that many companies have announced aggressive plans in renewable energy, which may or may not materialize. Therefore, the following analysis has been restricted only till FY27 for better peer valuation comparison. While EV/Megawatt is ideal for comparison with peers, there is lack of future debt estimates for NTPC Green and peers. EV is enterprise valuation. Thus, market capitalization (mcap) to capacity multiple of peer group has been used.

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Adani Green Energy Ltd’s PPA capacity of 26 GW is valued at ₹3.2 trillion mcap or ₹12 crore per MW. Note that JSW Energy’s capacity of 16 GW, though not strictly comparable to other green energy generators as it includes about 20% of thermal capacity, is valued at ₹1.3 trillion or ₹8 crore per MW.

Assuming a valuation of ₹7 crore per MW, NTPC Green can still get an EV of about ₹1 trillion. On the other hand, NTPC’s EV stands at ₹6.2 trillion. After excluding NTPC Green’s EV and NTPC’s net debt of ₹2.2 trillion, standalone NTPC's implied mcap valuation is ₹3 trillion. Furthermore, the value of its investments in other subsidiaries, associates and joint ventures for FY24 works out to about ₹0.5 trillion. This means NTPC’s net mcap or equity value stands at ₹2.5 trillion, which is about 2.5x of regulated equity base of ₹1 trillion for FY26.

This mcap-to-regulated equity multiple can be compared to the multiple of NTPC’s fixed RoE (15%) to the risk-free interest rate (6.8%) based on 10-year G-Sec yield, which works out to 2.2x. Thus, while NTPC’s 2.5x multiple looks on the higher side, this can be justified to an extent as the risk-free interest rate trajectory is likely to be downward in the near term.

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