NTPC's Green Arm Set to Hit the D-Street: Can the IPO Impress Investors?

NTPC IPO: National Thermal Power Corporation recently announced that its green arm is all set to enter the primary market. NGEL (NTPC Green Energy Ltd.) is planning to raise nearly Rs 10,000 crores via its initial public offering, making it the second largest PSU IPO only after LIC.

For NTPC, the timing for the IPO couldn't have been better. With the buzzing domestic primary market attracting robust premiums to India's bold green target of achieving 50 per cent non-fossil installed capacity by 2030, NGEL's entry might just come at a perfect time.

NGEL is the third-largest company in terms of signed energy contracts (15 GW of capacity), only after Adani Green (27 GW) and Renew Power (16 GW). While most of the company's portfolio focuses on utility-scale projects, NGEL currently operates only 3.2 GW of this total capacity, earning Rs 17 billion in profits (EBITDA), as per a report by ICICI Securities.

“We estimate revenue of Rs 117 billion (Rs 11,700 crore), EBITDA of Rs 95-100 billion (Rs 9,500-10,000 crore) for its portfolio. EV to EBITDA remains the best valuation metric to analyse NGEL’s RE portfolio. Retain BUY and TP of Rs 495 on NTPC,” the brokerage house said.

Use of Proceeds

The renewable energy company will be allocating a large part of the proceeds (Rs 7,500 crore) towards repaying part or all of its subsidiary's existing loans. A quarter of the portion will be set aside for general corporate purposes. As of July 31, 2024, NGEL has a debt of Rs 16,200 crores on a consolidated basis.

It is also worth noting that the renewable energy sector is inherently quite capital-intensive. This eventually results in high levels of debt for companies in this sector. As per the brokerage firm, the key risks for the company include delays in the execution of thermal and renewable energy projects, as well as increases in execution costs.

Future Outlook

India is witnessing a surge in power demand since the post-COVID period. The brokerage company expects a rise in both base and peak demand by nearly 6 per cent over the next few years. As this growth continues, there might be a need to expand the country's thermal capacity to meet medium-term needs until storage solutions become more affordable.

"NTPC has demonstrated its ability to execute RE (renewable energies) capacities in a timely manner and has set a target of 60GW by 2032. As of March this year, it has locked-in capacity of 20GW, operational capacity of 3.5GW, and under construction capacity of another 5GW, upcoming capacities would start contributing significantly to profitability in coming years," the brokerage firm said.

The brokerage recommended a 'BUY' on NTPC stock, keeping the target price at Rs 495, valuing NTPC's thermal business at 18 times its estimated earnings per share (EPS) of Rs 438 for FY26 and its renewable energy business at 12 times its estimated enterprise value (EV) to EBITDA for FY26.