Why The NTPC Green Listing Premium Makes Sense According To This Bernstein Analyst

Shares of NTPC Green Energy Ltd., the renewable energy arm of state-owned NTPC Ltd., debuted on the Indian bourses at a premium of 3.33% over the issue price of Rs 108 per share. The scrip then surged to hit the upper circuit.

While the listing has sparked investor interest, there might be doubts about whether the company’s IPO valuation now exceeds its inherent value.

But while the valuation might seem stretched, several factors justify the pricing, said Nikhil Nigania, director at Bernstein. NTPC, being a public sector 'Maharatna' company has numerous borrowing advantages. The government is also pushing for 500 GW of renewable energy capacity by 2030, which makes IPOs such as this, all the more desirable, according to Nigania.

Though Bernstein does not cover NTPC Green directly, it has set a target price of Rs 440 for NTPC Ltd. and maintained an 'outperform' rating. Nigania did express concerns about NTPC Green listing as a separate entity, highlighting that synergies with its government-backed parent could be diluted.

According to Nigania, the premium can largely be attributed to several advantages that NTPC Green Energy enjoys, especially when viewed through the lens of its parent company, NTPC. NTPC's status as a government-owned sovereign entity gives NTPC Green Energy access to more favourable borrowing terms, compared to private sector peers, he said.

“They can borrow at 7.5-8%, while private sector players are paying 9.5%,” he explained, highlighting that 80% of the renewable business is debt-funded, which gives NTPC Green Energy an edge over private peers while bidding over the same tenders.

The company benefits from a tripartite agreement between NTPC and the Reserve Bank of India for receivables, further strengthening its financial position, Nigania said. 

While he noted some reservations about the renewable arm listing separately from the parent company, Nigania remains optimistic about the overall potential of NTPC's renewable business. “The renewable business has great potential, and NTPC Green can grow to become one of the biggest players in India’s renewable space,” he said.

Another reason behind the IPO's premium lies in the broader power sector’s dynamics. Nigania pointed to the recent surge in power demand, which has been growing at a compounded annual growth rate of 8-9% over the past three years, compared to the 5% growth of the previous decade. This robust demand has spurred a rally in power sector stocks, including NTPC.

However, he noted that in the last quarter, from July to November, power demand had plateaued, primarily due to higher-than-expected rainfall during the monsoon, which caused a temporary dip in demand. But Nigania remains confident that this is a temporary setback. "It’s only a matter of time before demand picks up again."

Despite the strong growth potential, Nigania also pointed out some risks that could affect investor sentiment, particularly around power demand. A cooler-than-expected winter or weak economic activity could dampen consumption, which in turn would impact power demand. However, the long-term outlook remains strong, thanks to government incentives and ambitious targets in the renewable energy sector.

Investor interest in NTPC Green Energy has also been bolstered by the government's push to reach 500 GW of renewable energy capacity by 2030. Nigania pointed to the growing interest in renewable energy IPOs, citing companies like Waaree Renewable Technologies Ltd. and Premier Energies Ltd., which have seen strong subscription rates due to this government push and the lack of major players in the space.