BHEL, NTPC, Coal India shares: Large thermal capacity addition narrative lasted 12 months; what's next?

In its latest strategy note on thermal power, Kotak Institutional Equities said the thermal electricity narrative seems to have lasted barely 12 months, as electricity deficit has reverted to normal, coal demand growth has been muted at 2 per cent in the first nine months, hybrid tariffs are competitive versus solar tariffs and ordering for new coal-based electricity generation is quite tepid.

The broken narrative is visible, going by the sharp decline in the prices of relevant stocks such as Coal India Ltd, NTPC Ltd and Bharat Heavy Electricals Ltd (BHEL) in the past 5-6 months. This has offset the sharp rise in stock prices seen in H1 2024, Kotak said.

The domestic brokerage said BHEL shares had jumped 95 per cent at the peak in July 2024 from December 2023 levels, but are down 5 per cent YoY. The rise was led by hopes of large thermal electricity generation equipment (BTG) ordering, but has corrected subsequently. The company has seen an improvement in ordering in recent years but the BHEL stock is extremely expensive in the context of the total industry profit pool (around Rs 24,000 crore versus BHEL’s market capitalisation of
Rs 69,700 crore, Kotak said.

"BHEL’s market capitalisation implies 15-25 GW of annual thermal capacity ordering in perpetuity. We expect BHEL’s ordering to peak around 15 GW over the next two years and decline thereafter," it said

On NTPC, it noted that the stock surged 65 per cent at its peak in September 2024 from December 2023 levels, driven by narratives around large thermal electricity generation capacity addition and value unlocking in its renewables business.

"The current stock price implies rather unreasonable value for its renewable business subsidiary, even as the narrative around large thermal electricity capacity addition has fizzled out. Our reverse valuation exercise shows that NTPC’s stock price is implying 30-40 GW of new thermal capacity versus its current consolidated thermal capacity of 77 GW," Kotak said.

Even in the case of Coal India, the sharp rally in its stock price in first eight months of 2024 has petered out, as the narratives surrounding higher coal demand got reset in light of rising share of renewables in electricity generation, weak coal dispatches and muted thermal electricity generation capacity addition.

"Renewable electricity is quite competitive with thermal electricity based on current bids for hybrid renewable electricity projects. As such, Coal India's valuation of 7.3 times FY2026E EPS appears expensive, as it implies around 2.7 per cent growth in perpetuity, at 12 per cent cost of equity and 70 per cent FCF/PAT, in the context of thermal capacity likely peaking soon," it said.