NTPC Green Energy IPO analysis

NTPC Green Energy IPO (initial public offering) will open for subscription on November 19, 2024, and close on November 22, 2024. Below is a breakdown of the renewable power producer's strengths, weaknesses and growth prospects to help investors make an informed decision.

NTPC Green Energy IPO in a nutshell

• Quality : During FY23-24, the company reported a two-year average ROE and ROCE of 4.9 and 4.5 per cent, respectively.
  
• Growth : Between FY23 and FY24, NTPC Green Energy's revenue and net profit grew by 1,056 and 101 per cent per annum, respectively.
  
• Valuation : The stock is valued at a P/E and a P/B ratio of 290.5 and 5 times, respectively.
  
• Overview: NTPC Green Energy Limited, a subsidiary of NTPC Limited , stands to benefit from the government's push towards renewable energy, with targets like achieving 50 per cent non-fossil fuel capacity by 2030 and net zero emissions by 2070. With renewable energy making up 45 per cent of India's installed capacity as of September 2024, NTPC Green Energy stands to play a significant role in this transformation. Its growth is expected to be further fueled by increasing advancements in solar and wind technologies, rising demand for clean energy and favourable government policies. However, factors like the company's mounting debts and a highly capital-intensive industry remain a cause for concern.

About NTPC Green Energy

NTPC Green Energy, a wholly-owned subsidiary of NTPC, is a prominent player in India's renewable energy sector. Incorporated in April 2022, it is the largest renewable energy PSU in terms of operating capacity and power generation (as of September 30, 2024).

The company operates 3,320 MW of solar and wind projects spanning 17 solar and two wind installations across six states. During the fiscal year 2024, renewable energy sales accounted for over 95 per cent of NTPC Green's revenue. Beyond solar and wind, the company is also advancing initiatives in green hydrogen, green chemicals and battery storage technologies with key projects, including a green hydrogen hub in Pudimadaka.

Strengths of NTPC Green

• Strong backing and expertise: NTPC Green is a wholly-owned subsidiary of NTPC Limited, which contributed nearly 17 per cent of India's total installed capacity and 24 per cent of total power generation as of September 30, 2024. The company can leverage its parent company's scale to negotiate and reduce the cost of its EPC (engineering, procurement and construction) and price of equipment and materials for its solar and wind projects from both domestic and foreign OEMs (original energy manufacturers) and suppliers.
  
• Stable revenue: NTPC Green has established itself as the go-to partner for PSUs pursuing renewable energy goals through long-term power purchase agreements (PPAs). These agreements generally last 25 years, ensuring stable revenue for NTPC Green. Further, with all nine off-takers being government entities, NTPC Green Energy benefits from low credit risk.
  
• Positive growth prospects: With a well-diversified portfolio of 16,896 MW, including 3,320 MW of operating capacity, 13,576 MW of contracted projects and an additional 9,175 MW in the pipeline, NTPC Green Energy demonstrates a robust growth trajectory. Its ability to secure future development opportunities through MOUs and joint ventures with PSUs and private companies also ensures sustained expansion.

Weaknesses of NTPC Green

• High trade receivables and debt: Though NTPC Green's financials are relatively stable, it has high trade receivables, resulting in negative free cash flows. This is attributed to the fact that the company's clientele comprises government discoms. Further, NTPC Green reported a debt of Rs 18,045 crore (as of September 2024), significantly affecting its bottom line.

Risk report

Company and business

• Were the earnings before tax of NTPC Green more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 454 crore in the 12 months ending June 2024.
  
• Will NTPC Green be able to scale up its business?
  Yes. Government initiatives for renewable energy and growing power demand will enable the company to scale its business.
  
• Does the company have recognisable brands with client stickiness?
  Yes. NTPC Green has a recognisable brand with the backing of NTPC, its parent company and the government. It also entered into long-term agreements with other government discoms regarding power purchases, with each agreement lasting an average of 25 years.
  
• Does the company have a credible moat?
  Yes, it operates in an industry with substantial regulatory barriers and land capital requirements.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. Post the IPO, its parent company, NTPC, will hold around 89 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at NTPC Green?
  No. The company was incorporated in April 2022.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is NTPC Green free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average ROE of over 15 per cent and a ROCE of over 18 per cent?
  No. The company has yet to have a three-year history since it was incorporated in April 2022. Also, its two-year average ROE and ROCE were 4.9 and 4.5 per cent, respectively, and as of FY24, it reported an ROE and ROCE of 6.2 and 7.1 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. NTPC Green has reported positive cash flows since its inception in April 2022.
  
• Is the company's net debt-to-equity ratio less than one?
  No. The company's debt-to-equity ratio stood at 2.2 in FY24.
  
• Is NTPC Green free from reliance on huge working capital for day-to-day affairs?
  No. The company's working capital requirements are high, with its trade receivables higher than 130 days in FY24.
  
• Can the company run its business without relying on external funding in the next three years?
  No. As the company continues to grow, it will require external funding for its capex. This is also visible in its cash flow statement, as its free cash flow remains negative.
  
• Is NTPC Green free from meaningful contingent liabilities?
  Yes. As of September 2024, the company has no material contingent liabilities.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. NTPC Green offers an operating earnings yield of 1 per cent on its enterprise value.
  
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  No. It is valued at a P/E multiple of 290.5 times compared to the median of 208.9 times of its listed peers.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of over 5 times compared to the average of 22.3 times of its listed peers.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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