Sell NTPC stock; share price fully captures PSU's growth aspirations: Kotak

Kotak Institutional Equities has suggested a 'Sell' rating on NTPC Ltd, saying its prevailing valuations reasonably capture the growth aspirations, leaving little room for execution slip-ups. The domestic brokerage said NTPC’s prevailing market price disregards the risks of lower-than-expected returns from renewable assets. NTPC shares are up 27 per cent in 2024 so far and 80 per cent in the past one year.

On the renewable front, the PSU plans to increase its renewable capacity to 20 GW by FY2026, and 60 GW by FY2032, from 3.6 GW currently and another 9.2 GW under construction. The state-run firm plans to roll out tenders for 15 GW of thermal capacity over next two years, in addition to the current 9.6 GW of under-construction thermal capacity, which is expected to be commissioned by FY2030. NTPC is also looking to add 26 GW out of the overall target of 80 GW for the country. 

Kotak said the NTPC management refrained from taking specific questions on the renewable business, as it would like to address the same separately as it prepares for the IPO of the renewable business over the next few months. Kotak highlighted that NTPC had earlier given a guidance for capitalisation of Rs 80,000 crore for 10 GW of conventional capacities and Rs 85,000-90,000 crore for 16 GW of renewable capacities. It also plans to spend another Rs 30,000 crore for installing FGD plants for 60 GW of capacities.

"We assign a multiple of 1.5 times for the regulated return business, and 1.2 times for the renewable business, yielding a revised FV of Rs 290 from Rs 275. The revision in FV is on account of roll-forward to September 2026E as well as increase in under-construction capacity for thermal as well as renewable power plants. Addition of coal capacities to be tendered (15 GW) would add another Rs 15 per share to our FV while inclusion of future renewable capacity targets (50 GW) would add another Rs 15 per share," it said.

NTPC has forayed into nuclear power, having signed a JV agreement with Nuclear Power Corporation of India. The project of 2.8 GW had an estimated capex cost of Rs 42,000 crore on the basis of FY2017 cost, that would have likely increased to Rs 47,600 crore today. 

The NTPC management highlighted that it currently takes 8-10 years to build a nuclear power plant, and the current power plant in Rajasthan will likely break ground over the next few months. At current capital cost, tariffs for nuclear power plants would be Rs7/kwh with a fuel cost of Re 1/kwh, Kotak noted. 

"Valuations at 2x P/BV and 16.4x P/E reasonably capture the growth aspirations, leaving little room for execution slip-ups," Kotak said.