NTPC Green Energy Outlines Potential Risks in Upcoming IPO

NTPC Green Energy, a subsidiary of NTPC Ltd., which is owned by the government, has filed draft documents for a ₹10,000 crore initial public offering (IPO) as of Wednesday. This public offering will exclusively consist of new shares, and current shareholders are not expected to sell any of their stakes, as detailed in the Draft Red Herring Prospectus (DRHP).

The firm garners a substantial share of its revenue, over 87%, from its top five key customers in the fiscal year 2024. Notably, one major customer alone accounts for approximately 50% of its revenue during this period. The loss of any major customer or their financial instability could significantly affect NTPC Green Energy’s business performance.

It is reported that the company will continue relying heavily on the top nine customers for its revenue through the remaining fiscal year of 2025. The success of its operations and profitability depends on both the availability and cost of essential materials, components, and equipment sourced from third-party suppliers.

Currently, NTPC Green Energy does not maintain long-term supply contracts for materials and components but is considering entering agreements to secure critical items such as solar modules, wind turbines, and battery storage systems.

The company’s renewable energy projects are largely situated in Rajasthan, suggesting that significant social, economic, political disruptions or adverse weather conditions in the area could impact the business adversely.

Power Purchase Agreements (PPAs) might pose certain risks to their operations, as revenue remains contingent upon fixed tariffs, and any changes brought to these tariffs could affect income levels. Moreover, 96% of the company’s revenue is derived from renewable energy sales, making cost management under PPAs critical to profitability.

The business faces substantial competition from both conventional and renewable energy firms. The inability to remain competitive in the evolving renewable energy sector could negatively impact NTPC Green Energy. Their primary competition comes from both domestic and international operators in solar and wind energy sectors.

Delays or non-collection of receivables from utilities can hinder the business cash flow. Additionally, the company’s internal procurement operations for solar projects can pose risks, such as unforeseen costs if suppliers fail on warranty obligations.

Business development costs, land or equipment price hikes, and import restrictions could further skew operational budgets. Additionally, unexpected climatic conditions could impact the production of wind and solar energy.

As part of its strategic growth initiatives, NTPC Green Energy aims to diversify its energy projects to include green hydrogen, green chemicals, and energy storage solutions. However, the commercial development of these new energy sectors is complex and requires significant capital expenditure, which poses notable business risks.

Up to June 30, 2024, the company reported substantial borrowings totaling ₹15,277 crore. The potential inability to repay or meet covenant requirements could pose significant financial challenges.

This IPO is being introduced at a time when the Indian stock market sees burgeoning IPO activity, with nearly 60 main board companies launching public offerings this year alone. NTPC Green Energy’s renewable capacity includes 3,071 MW from solar and 100 MW from wind energy projects. The company aims to ramp up its renewable capacity to 60 GW by 2032, with 3.5 GW already installed and 28 GW under development.

The lead managers for this IPO are IDBI Capital Markets & Securities, HDFC Bank, IIFL Securities, and Nuvama Wealth Management.