NTPC Green Energy shares trade at pricey valuation versus Adani Green, others; sell NTPC stock, says Kotak

NTPC has successfully divested 10 per cent ownership in its renewable subsidiary with the listing of NTPC Green and all eyes are now on the tall targets that NTPC Green has of taking its operational capacity of 3.3 GW to over 26 GW in the medium term. The renewable energy firm has an eventual target of 60 GW.

Kotak said NTPC Green’s valuations are rich and do not factor in three key challenges: Modest returns on extant and under-construction capacity, a sharp ramp-up in commissioning—0.7 GW commissioned in the past 18 months versus 15-16 GW of targeted addition over FY2025-27 and constrained funding, as the current equity raise (Rs 10,000 crore) would support 14 GW of capacity addition.

Kotak said it seeks clarity on the incremental project pipeline of 9 GW in terms of the tariff/PLF profile.

"NTPC Green trades at pricey valuations—EV/Ebitda of 16 times and 5 times P/B on FY2028, when the current portfolio of projects (17 GW) will fully contribute to earnings, reflecting the 55 per cent CAGR in Ebitda over FY2024-28. Valuations are at a premium to the peer set, Renew Power and Adani Green. On the other hand, NTPC (which continues to own 90 per cent of NTPC Green) trades at 1.8 times P/BV and 9.4X EV/Ebitda on FY2026E," Kotak said.

Kotak believes as a separately listed entity, NTPC Green will not be able to get the support of NTPC for the incremental equity requirements, as was the case till now. As a corollary, NTPC’s cash generation will be restricted to lower-growth coal opportunities.

"With a separate listing of NTPC Green, cash flows of NTPC Ltd would likely be restricted to investment in the coal business, while incremental investment opportunities happen to be in NTPC Green," Kotak said while maintaining a 'sell' on NTPC with a revised fair value of Rs 310.

Kotak said NTPC Green has added 0.7 GW in the past 18 months, taking the total capacity to 3.3 GW. It believes that NTPC Green would have to significantly ramp up the pace of execution as it looks to add 15-16 GW over FY2025-27, including ensuring the signing of PPAs and transmission connectivity.

"We note that bulk of the 14 GW contracted/awarded capacities are plain vanilla solar, and 4.5GW still have to sign PPAs. The distribution utilities, however, have a higher preference for FDRE/hybrid projects, where the supply curve is better aligned to the demand curve, in comparison with plain vanilla solar, which has a peak mid-day generation," it said.