Kotak Sees Red for NTPC: Time to Sell?

Kotak Institutional Equities has recently suggested that investors should consider selling their NTPC Ltd shares. Their reasoning? They believe that the stock’s current valuation has already fully reflected the company’s growth ambitions, which means there isn’t much room left for any potential slip-ups in execution.

This advice comes at a time when NTPC’s shares have been performing quite well, climbing 27% in 2024 alone and an impressive 80% over the past year. However, Kotak points out that the current price might overlook some risks associated with the expected returns from renewable energy projects.

Speaking of renewables, NTPC is setting ambitious targets for itself. The company aims to boost its renewable energy capacity to 20 GW by the fiscal year 2026, and a whopping 60 GW by FY2032. Right now, NTPC has 3.6 GW of renewable energy and 9.2 GW more currently under construction.

In addition to this, NTPC is planning to issue tenders for building 15 GW of thermal capacity over the next two years, alongside another 9.6 GW already in progress. They are on a mission to contribute 26 GW to India’s overall target of 80 GW in renewable energy.

Interestingly, when asked by analysts about its renewable energy business, NTPC management chose to stay vague. They want to keep their cards close to their chest as they prepare for an IPO of their renewable segment in the coming months.

Kotak also mentions that NTPC has laid out capital spending plans: ₹80,000 crore for 10 GW of conventional energy and ₹85,000-90,000 crore for 16 GW of renewables. Additionally, they plan to invest another ₹30,000 crore to install Flue Gas Desulfurization (FGD) plants to clean emissions from their power plants.

According to Kotak’s analysis, they assign a valuation multiple of 1.5 times for traditional power operations and 1.2 times for renewable ones, leading to a revised fair value of ₹290 per share, up from the previous ₹275. This increase accounts for the roll forward to September 2026 and the added capacity from both thermal and renewable sources.

NTPC has also ventured into nuclear power, having signed a joint venture agreement with the Nuclear Power Corporation of India. They’re looking at a substantial project with 2.8 GW of capacity, which is estimated to cost around ₹42,000 crore, though that figure has likely risen to about ₹47,600 crore today.

It’s worth noting that building a nuclear power plant is a lengthy process, typically taking between 8 to 10 years. NTPC’s current nuclear project in Rajasthan is expected to kick off soon, but with capital costs driving tariffs to around ₹7/kWh, it adds another layer of complexity for investors.

Kotak concludes by stating that the current valuation metrics—2x Price-to-Book Value and 16.4x Price-to-Earnings—seem to adequately reflect NTPC’s growth potential, warning that there’s little margin for error when it comes to execution.