BHEL, NTPC shares: 2 reasons for stark divergence in PSU stock performance

Kotak Institutional Equities in a fresh note said the sharp divergence in stock performance of Bharat Heavy Electrical Ltd (BHEL) and NTPC Ltd over the past six months suggests that the market is concerned about future thermal capacity addition but comfortable with BHEL’s future prospects from thermal equipment and other smaller businesses. 

BHEL has jumped 63 per cent in the past six months compared with a 13 per cent drop in NTPC during the same period, data compiled from Bloomberg suggests.   

Kotak said it fully agree with the uncertain terminal value of thermal generation and equipment assets. It said NTPC's current market price implies 40 GW of incremental thermal capacity addition in perpetuity. On the other hand, BHEL's current market cap is much higher than the likely thermal equipment undiscounted profit pool of Rs 50,000 crore to Rs 1 lakh crore. 

"The current market cap of BHEL implies significantly larger thermal capacity addition in perpetuity, which appears rather optimistic versus the government’s estimates," Kotak said.

Kotak said the bulk of the underperformance of NTPC may be underpinned by weak near-term earnings growth expectation based on weak thermal capacity addition in recent months. Besides, it cited nebulous medium-term growth prospects of NTPC’s thermal business based on the steep increase in renewable generation capacity and continued aggressive rollout of renewable generation and storage capacity.

NTPC

Kotak said the recent correction in NTPC Green may not be material for the recent underperformance of NTPC, given the low contribution of the former in its target price. 

"Our reverse valuation exercise of NTPC implies that it will add a cumulative 42 GW of incremental thermal capacity. The CEA projects a cumulative 86 GW of thermal capacity addition over FY2027-36. A part of this capacity addition may come from the private sector; ADANI has a roughly 4 GW/year of capacity addition target over FY2027-32," Kotak noted.

BHEL Kotak said its reverse valuation exercise of BHEL, even after ascribing 25 per cent of its value to non-thermal businesses, suggests that it needs to deliver 150-300 GW of BTG and a better cash generation profile in perpetuity. 

The current market capitalisation of BHEL implies 150 GW of life-time capacity execution at a 10 per cent PAT margin, with the ask increasing further to 200 GW at a 7.5 per cent PAT margin. 

"This calculation does not reflect any time value for revenues/profits, which can increase the ask further. We note that BHEL made Rs 7,100 crore of FCF over FY2007-26 versus an adjusted PAT of Rs 38,300 crore," Kotak said.