NTPC Green Energy: Should you subscribe to the IPO?

A subsidiary of the bellwether genco NTPC, NTPC Green Energy (NGEL) is finally launching its much-awaited IPO. The company is raising ₹10,000 crore through a fresh issue and proposes to use ₹7,500 crore to repay/ prepay, in full or in part, debt availed by its subsidiaries. The remaining amount is tagged for general corporate purposes.

NGEL is an independent power producer (IPP) focused on renewable energy projects. The largest renewable energy PSU in terms of operating capacity as of September 2024, the company is also running pilot projects pertaining to green hydrogen and investing in energy storage capabilities and solutions amongst others. NGEL has been expanding at a robust pace, both through organic and inorganic routes. A strong credit rating of AAA (thanks to its parent) hugely aids the company in raising funds at competitive rates in a capital-heavy industry where debt is a significant part of financing.

At the upper end of the price band, the IPO is valued at 47.5 times EV (Enterprise Value) / Revenue (trailing twelve months ending September 2024) and around 259 times PE on a TTM basis, which is expensive. In terms of Price to Book too, it is highly valued at 11 times, on a pre-IPO basis. NGEL competes with Adani, Tata and JSW groups amongst others. Though incorporated only in April 2022, the strong parentage and execution track record of the management warrants a premium. But even accounting for it, the valuation demanded in the IPO remains high. For perspective, Adani Green Energy, a pure-play IPP player, trades at 28.7 times EV to Revenue TTM and 22 times Price to Book, while ACME Solar, an integrated player with in-house EPC capabilities, trades at 17.2 times and 7 times respectively.

The power sector and especially the renewable energy segment is enjoying huge tailwinds with favourable government policies and robust project off-takes. NGEL could be amongst the better companies to play this trend, but we recommend investors to wait and watch for now, given the high valuations.

Note that equity shares of 278 crore were allotted to NTPC in the last nine months at an issue price of ₹10 per share which will result in a gain of around ₹27,250 crore at the upper end of the issue price, on listing.

Business

NGEL, like its parent, is a pure-play IPP and does not engage in engineering, procurement and construction (EPC). However, NGEL takes the responsibility to procure major equipment and supplies. For O&M (operations and maintenance), it appoints third-party service providers. NGEL benefits from NTPC’s longstanding relationships with leading off-takers and suppliers.

NGEL has an operational capacity of around 3.3 GW (Solar – 3.2 GW and Wind – 0.1 GW) and projects awarded and contracted add up to 13.6 GW as of September 2024, with a target to reach 60 GW of non-fossil capacity by FY32.

Around 80 per cent of NGEL’s current portfolio along with the under-construction projects are geographically focused on Rajasthan and Gujarat – States with relatively-higher solar irradiation.

The company expects solar to be the frontrunner, together with energy storage systems, in this transition towards greener energies, eclipsing wind. Thus, the portfolio of assets of NGEL is expected to be in the ratio of 90:10 between solar and wind. While there is widespread traction in demand for firm and dispatchable renewable energy (FDRE), NGEL surprisingly has not significantly committed to such projects. The management believes that the current tariff levels bid at in this segment, do not account for redundancies and are not sustainable.

While typically off-takers are not the same as partners, NGEL has entered JVs and SPVs with off-takers themselves in some cases, which will help combat cost overruns during the execution of project, and to some extent unintentionally mirror cost-plus projects, ensuring a better shot at profitability.

And, with 99.9 per cent of the contracted off-takers being Central and State government agencies/ entities and PSU customers, there is minimal counterparty risk. However, in FY24 and H1 FY25, around 50 per cent of revenue was contributed by one off-taker. This along with concentration around State-backed off-takers gives rise to possible overhangs on converting receivables into cash. The implementation of LSP Rules, 2022, though, has bettered the working conditions.

On the green hydrogen front, NGEL is developing a green hydrogen hub in Andhra Pradesh and has partnered with two technology providers pertaining to electrolysers, which makes NGEL ready to participate in commercial-scale green hydrogen projects.

Operational metrics

Revenue and operating EBITDA improved to ₹1,963 crore and ₹1,746 crore in FY24 respectively on the back of around 35 per cent year-on-year growth, while PAT degrew 24.5 per cent owing to increase in finance and depreciation expenses. During FY22-24, Revenue/ operating EBITDA/ PAT grew at a CAGR of 47/ 48/ 91 per cent respectively. Revenue for H1 FY25 recorded a 7 per cent year-on-year growth to ₹1,082.3 crore solely on the back of a 9 per cent increase (on a consolidated and restated basis) in electricity generated during the same period. On average, sale of electricity contributed around 97 per cent of total revenue from operations.

NGEL’s capacity utilisation factor was around 25 per cent for solar and 28 per cent for wind in H1 FY25 against 25 per cent and 30 per cent respectively for H1 FY24. This is very comparable with its competitors.

Operating cashflow to EBITDA has also been around 100 per cent since FY24. EBITDA margins are high in this business, considering most of the expenses associated with executing the projects are capitalised and on account of lower operating costs in the case of renewable energy, as there are no fuel costs.

Net debt to equity is around 1.9 times as of September 2024, which is reasonable relative to the industry standards. This could go down with the proposed usage of a chunk of IPO funds directed towards repayment of outstanding borrowings.

The existing operational capacity and the 13.3-GW under-development projects are entirely backed by long-term power purchase agreements (PPAs), typically for 25 years, and supported by availability of land parcels and grid connectivity. This provides revenue and cash flow visibility for the short to medium term.