Kotak Institutional Equities maintained 'Sell' rating on NTPC Ltd with a revised fair value of Rs 300 per share from Rs 290 apiece earlier, even as its subsidiary filed IPO papers with SEBI for a Rs 10,000-crore issue. The initial reading of the NTPC Green Energy prospectus suggests that earnings for the green business are sub-par, the brokerage said adding that access to cash flows from NTPC, as a separately listed entity, will be constrained and NTPC Green Energy will have to fend for itself through an incremental equity raise following the IPO.
The parent NTPC on its own will have investment allocation just for the coal business, and, accordingly, higher free cash flows for lower growth opportunities. "Investors looking for a green and growing portfolio will directly have access to NTPC Green; this may accordingly warrant a lower valuation for NTPC," Kotak said.
The proposed equity raise of Rs 10,000 crore by NTPC Green Energy will likely suffice for the equity contribution for 11.7 GW of the incremental capacity addition, Kotak said.
"We currently ascribe a value of Rs 32,900 crore (Rs 33 per share) for 15 GW of renewable capacity in our SoTP for NTPC; and maintain our SELL rating with a revised FV of Rs 300/share (from Rs 290/share)," it said.
Kotak said NTPC Green Energy had a net worth of Rs 6,200 crore, as of March 2023, supported by the larger balance sheet of NTPC. The proposed raise will help fund the equity component (20 per cent) of Rs 12,700 crore for a balance capex of Rs 63,500 crore (for 11.7 GW of contracted and awarded projects).
NTPC Green Energy reported an Ebitda of Rs 1740 crore on a gross block of Rs 19,900 crore, implying a cash return on gross capital invested (CRoGCI) of 9.6 per cent that appears low, despite an average tariff of Rs 3.44 per kwh in FY2024.
"We note that in comparison, Tata Power and Renew Power had a CRoGCI of 10.8 per cent each, while Adani Green had a CRoGCI of 14.7 per cent in FY2024. We highlight that our comparison may miss stabilisation of assets and part capitalisation of under- construction assets. Leverage at Rs 12,700 crore was 64 per cent of the gross block, but the same seems under-leveraged when one takes into consideration the additional CWIP of Rs 7100 crore, as of March 2024," Kotak said.