Renewable energy unit's valuations may rub off on NTPC stock

Energy conglomerate looking for strategic investors; plans to list subsidiary

The power sector may present interesting medium-term to long-term investment opportunities. Economic recovery is linked to higher power usage, which should mean 10-12 per cent higher consumption this fiscal year (2021-22, or FY22).

Supply-chain issues, high coal and gas prices affected thermal margins. However, with coal prices declining and coal inventory picking up, the situation has eased somewhat. Given the low base of last fiscal year, there is a favourable base-effect.

The government’s initiative to bundle renewables with thermal power could benefit generators, such as NTPC. The expansion of the solar manufacturing production-linked scheme to Rs 24,000 crore may lead to fresh investments.

One major concern is that dues from distribution companies have started mounting again, leading to bloated receivables and higher working capital needs. Renewables comprise around 10 per cent of the current generation mix in India and around 2 per cent of the mix for NTPC. 

It’s worth taking a look at NTPC Renewable Energy (NREL) – the wholly-owned subsidiary of NTPC. The public sector unit is planning roadshows next year to find a strategic investor and then to spin off in an initial public offering.

NREL has 2.09 gigawatt (Gw) of renewable energy capacity, including solar, wind, and hydro energy. It’s generation in April-November was 4,089.64 million units.

It has 3.85 Gw of capacity in various stages of construction. It targets 35 Gw of capacity by 2027 and 60 Gw capacity by 2032. This will require massive capital expenditure. In 2022-23, it hopes to generate 10 billion green units. By 2032, if it achieves its targets, around 45 per cent of NTPC Group’s capacity will be renewables.

Apart from funding for this expansion, NTPC has a target of Rs 15,000 crore in asset monetisation. It’s planning to take two other subsidiaries, NTPC Vidyut Vyapar Nigam and North Eastern Electric Power Corporation public. It will also exit a joint venture with SAIL – the NTPC-SAIL Power Company.

What sort of valuations can a pure-play renewables generator expect?

Apart from wind and solar, NREL is also looking at green hydrogen.  Demand isn’t going to be an issue in macro terms. Over the next decade, assuming normal gross domestic product growth, power generation may rise from 1.4 trillion units (2020-21) to 2.5 trillion units (2029-30) by NTPC’s estimates.

Indian renewables capacity is likely to rise from around 94 Gw to 435 Gw.

In terms of valuations, one of India’s largest renewables companies is Adani Green Energy (AGEL) with a current portfolio of around 14 Gw and plans to push this to 45 Gw by 2029-30.

AGEL has registered earnings before interest, tax, depreciation, and amortisation (Ebitda) margins of 70 per cent and may push this to around 76 per cent in FY22, with estimated Ebitda of Rs 4,700 crore from a top line of Rs 6,220 crore. That’s obviously well above anything thermal generators can expect – NTPC has an Ebitda margin of 31-32 per cent.

AGEL is highly valued at a threefold-digit price-to-earnings (P/E) ratio. It has a very high debt-to-equity ratio of 10-plus. However, renewables companies do seem to sustain high P/Es. Many global pure-play renewables businesses are traded at P/Es of 50-plus.

NTPC has a single-digit P/E, while Tata Power (with a mix of thermal and renewables) has a P/E of 35-37. The NREL spin-off could come at a high valuation, which is at many multiples that of the parent. Is this likely to be factored into NTPC’s own valuations?