Why The NTPC Green Energy IPO Could Be A Turning Point For Green Energy Related IPOs

After a journey of over two years, the NTPC Green Energy IPO is finally here. It is interesting that despite the long anticipation and preparations behind this mega Initial Public Offering (IPO) of Rs 10,000 crores ($1.18 billion), the latest IPO still gives one a feeling of a rushed effort, thanks to the many exemptions and efforts for a faster launch from regulators and more.

Keep in mind that many of the usual ratios like PE ratio or Return on net worth or even Return on Equity do not always make sense in a sector growing as strongly as the renewable sector is, with firms doubling capacities and order books in a single year in many cases. But we believe we are heading into a stage where the winners or those who can sustain growth rates over 40% for the next 4-5 years will be separated soon.

Markets Finally Understanding The Sector Better?

In many ways, the NTPC Green IPO risks becoming a milestone for the euphoria around green energy firms and their stocks that we have seen in the past year. Be it the main board of the BSE and NSE, or the SME exchanges green energy firms, be it the manufacturers, developers or EPC, have enjoyed the kind of demand that promoters could only dream of as recently as 2022. That has meant investors placing these firms at prices, and consequently, valuations that would be the envy of the most well-run MNCs, monopolies, or other firms with a strong moat against future risks to the business. NTPC Green comes at the fag end of this euphoria, in many ways.

It might be a coincidence that just the week before NTPC Green made its public offer, Acme Solar Holdings, another established green energy developer, suffered the rare event of a green stock listing below its issued price. At the time of writing this, Acme Solar shares were trading at around Rs 255, about 12% below its issue price of Rs 289 which was at a PE (Price to earnings) ratio of over 30, rich, but not when compared to listed developers like Adani Green, which still trades at a PE of well over 250.

A market that has seemed unbothered about the distinction between a renewable energy developer, solar/wind manufacturer or an EPC finally seems to be getting the hang of it all. This was but natural, as more and more firms listed, and understanding about the sector improved. A firm like Waaree Renewable Technologies, with its strong credentials as an EPC, and bulging order book that virtually guarantees a strong performance in FY25 has struggled to regain the glory days of a stock price pushing Rs 3,000, as the markets have realized that the high margins till FY24 will not sustain in a larger, more competitive market today.

At a time when the overall market has corrected 10% from its all-time highs, some of the green energy stars are at levels a full 50% below (Waaree RTL), 40% (Sterling and Wilson Renewable Energy) and over 30% (Adani Green, KPI Green, Suzlon energy) from their 52-week highs. And mind you, if we go beyond the 52-week period, the fall will be even steeper in many cases.

Has NTPC Green Priced It Right?

NTPC Green’s probably IPO price of Rs 108, the upper end of the price band it has proposed makes for an interesting analysis. It is clear that the firm is going all out to milk positive sentiments towards green energy firms in general, its parentage, and its continued favourable policy environment. However, on probable earnings per share of around 75 paise for FY25, you have to wonder if the firm is leaving anything on the table at all for investors.  For comparison, the firm in its DRHP is quick to compare itself with Adani Green (PE of 270 odd) and ReNew Global ( PE of 47, at NASDAQ).

What the numbers don’t tell you is that both the firms being compared have operating assets of 10 GW or more, unlike the barely 3.3 GW of NTPC Green. Their return ratios are also much much better of course, as a cursory comparison will show. To that, one could add that both have a degree of captive supply chains when it comes to critical components like solar modules as well. Finally, comparison with almost any Adani group stock is almost infructous, considering their elevated valuations when compared to peer group firms for the past few years now.

NTPC Green was incorporated on April 7, 2022, for the reorganization of NTPC Limited’s renewable energy business. Renewable energy assets of NTPC Limited were transferred to the Company at book value, through a business transfer agreement dated July 8, 2022.
Further, NTPC Limited also transferred 100% of its equity shareholding held in NTPC Renewable Energy Limited (“ NREL ”) to it through a share purchase agreement dated July 8, 2022. The transfer of the RE assets and 100% equity shareholding in NREL, were completed on February 28, 2023. Through all these transactions, including the last one on September 7, 2024, NTPC was issued shares in NTPC Green at a price of Rs 10.

So why the high price?

Perhaps it is the fact that its largest supplier in H1, FY25, Sterling and Wilson Renewable Energy (with a share of 36%) enjoys a PE of over 40. Or the pipeline of 13,576 MW of projects that have been contracted and awarded besides the operating capacity of 3320 MW? Or the massive opportunity it sees in the open access market, expected to add over 15 GW on its own by 2029? Against that, one can see the reluctance it has exhibited in terms of getting into Hybrid projects for instance, or energy storage projects, which have accounted for almost 25% of utility-scale tenders this year.

Or a comparison closer to home, between parent firm NTPC Limited (PE of 17.6)  and say, Tata Power (PE of 37 plus). We believe there was a case for some moderation in the IPO pricing, based on these factors. More often than not, government-owned firms trying to live upto private sector valuations have slipped, unable to match the sheer flexibility and efficiency of their counterparts. What they do offer is a far higher level of predictability to investors, which has been duly rewarded by the market in many cases, including for parent NTPC over the past year.

Conclusion

Has NTPC Green priced it too high? Yes, we believe, but we would hasten to add that it remains a subjective judgment call, based on a broader analysis of the market in India and beyond. In the closed, protected and limited options we have in India for now, NTPC Green should still be an attractive long-term bet for anyone who believes India will hit close to, or even overtake its green energy targets by 2030 and beyond.

The biggest risks like inflation for renewable energy contracts remain manageable, with a high regulatory focus on keeping it low. But at this valuation, the firm simply leaves itself with little headroom for delays or other missteps, an integral part of running a business in a new sector. The size of this IPO and its subsequent performance risks overshadowing plans of a plethora of other firms in line, as not only will NTPC Green whet and possibly satiate investor appetite for a green energy developer in their portfolio, it could also drag down returns expectations significantly with its stock market performance. Many will welcome it as a return to a better understanding of risk, others will rue the fact that they did not list before NTPC Green did.

Investors need to realize that today, margins in the business have aligned perfectly to cover future risks. Thus, manufacturers are making the highest margins (20-30% IRR) due to the highest risk of policy changes or product obsolescence, developers make a more predictable 12-15% IRR in general, while EPC firms will eventually be more than happy with double-digit returns.