Should You Invest in NTPC Green Energy Ltd? Finology’s Take

India's 3rd Largest IPO of 2024, NTPC Green Energy Ltd., has given over 33% returns within a month since its IPO!

While it is a market-darling stock, our analysts have identified some red flags in the company, which is why we did not recommend it in Finology 30. Learn more in this article.

What makes the Solar Energy Industry special?

India has 203.18 GW of renewable energy capacity as of October 2024, growing at ~11% CAGR over the last 5 years. The renewable energy electricity generation capacity now accounts for ~44.8% of India’s total 452.69 GW installed capacity. 

India aims to achieve the target of having 500 GW installed capacity of renewable energy by 2030 to reduce dependency on fossil fuels. If successful, this would result in ~17% CAGR in the coming 6 years for the country’s total renewable energy installed capacity.

Four states account for ~52%(105.57 GW) of the country's total installed renewable energy capacity, which is 203.18 GW.

 

 

Source: pib.gov.in

If renewable energy has a bright future, so do the companies in the renewable energy industry. And even more so for solar energy because–

• Solar energy accounts for 45% of India’s renewable energy basket
• India’s solar capacity installation is growing at over 20% p.a.

That was the whole narrative behind NTPC Green Energy Ltd, the newly listed subsidiary of India’s largest power generation company. 

Why do the markets love NTPC Green Energy?

NTPC Green Energy Ltd. is the umbrella company for the green energy business initiatives of India's largest power generation company, NTPC. It was incorporated on 7 April 2022 to achieve NTPC’s target of 60 GW by FY32. It is focused on renewable energy sources, generating revenue from solar, wind, and solar-wind hybrid project sales.

For a closer look at the company’s financials and overall performance, check out NTPC Green Energy on Ticker for detailed insights.

NTPC Business Structure (Pre-Merger)

Source: NGEL Annual Report FY24

The company generates energy using renewable sources. It derives revenue mostly from the solar power business, contributing 93.77% to its total renewable energy sales for FY24. Wind energy power generation is a small portion of the business, contributing ~2.40%. About 3.83% of the sales come from other operating income sources, such as government grants and consultancy services, project management, and supervision fee services.

Source: DRHP, Recipe Research Desk

As of 30 September 2024, the company has a total operating capacity of 3.32 GW of solar and wind power with presence across more than six states. Of these, the company has 62.2% of its total installed capacity in Rajasthan. Gujarat is the only state where the company has installed wind power capacity (~3%).

 

 

Source: DRHP, Recipe Research Desk

Talking about the markets, NTPC Green Energy’s ₹10,000 Cr. fund raise is India’s 3rd largest IPO of 2024. Owing to its bet on India’s solar growth story, investors are loving the stock, evident from its 33% returns in less than a month since the IPO!

What grabbed our attention?

What made us interested in this business was its future prospects– the company has 13.5 GW of renewable power plant capacity in the pipeline. This 13.5 GW of additional capacity includes Power Purchase Agreements (PPAs) signed with customers, capacity won and allotted in auctions, and where Letters of Award (“LoAs”) have been received. LOA is basically a confirmation by the client that the contractor has been selected.

The capacity pipeline is 4x that of the current operating capacity for the company. So, the scope of growth from here is huge.

Source: DRHP, Recipe Research Desk

Although the growth prospects look strong for the company, we chose not to include the stock as a part of Finology 30 for now. And our research revealed strong reasons for the same.

Red Flags we spotted in NTPC Green Energy Ltd.

While growth prospects seem good, there are multiple issues in the business:

1. Supply-side Risk: NTPC Green Energy Ltd.’s business and profitability is dependent on the availability and cost of its key raw materials– solar modules and wind turbine generators. The company relies on third-party suppliers to meet these requirements. However, we observed that the company does not have long-term supply contracts for any of its materials, components or equipment.

Moreover, the company has a concentrated supplier base with the top 10 suppliers providing 92.65% of the overall raw materials. ~60% of the total supplies come from the top 2 suppliers only. This increases the supply-side risk for the company as a failure to deliver supplies or cancellation of contracts by key suppliers may result in the company taking a huge hit on its sales and growth trajectory.

 

Suppliers	% of Raw Materials supplied
Supplier 1	36.00%
Supplier 2	23.73%
Supplier 3	12.23%
Supplier 4	7.05%
Supplier 5	6.64%
Supplier 6	1.90%
Supplier 7	1.80%
Supplier 8	1.35%
Supplier 9	1.17%
Supplier 10	0.78%

Source: DRHP- NTPC Green Energy Ltd. 

2. Low Pricing Power: The company has low pricing power for its business. As most of its customers in the PPAs are central government, state government or government-backed entities, the company is left with limited ability to negotiate or renegotiate the terms of contract.

Also, the company enters long-term contracts with its customers, with an average length of 25 years of PPAs. This creates a scope of missed opportunity for the company if their are any industry-wide tariff hikes. The company will not be able to renegotiate contracts and take advantage of the increased market tariffs. This would result in weaker profitability during tough economic times.

All of these, along with a concentrated supplier base, result in a weak pricing power.

3. Increasing Receivables: The company’s trade receivables have increased year over year. Its trade receivables days have increased from 19.51% of sales in 2022 to 35.91% of sales in 2024.

Payment delays by offtakers, who have long-term agreements with the company to purchase power (via PPAs), have been the main cause for the increase in trade receivables. Majority of trade receivables coming from past dues from offtakers (98.72% - 100%) shows that the customer base of the company does not have strong credit profile to pay off the bills in a timely manner.

For instance, in the past, the company suffered delays in payments from Discoms in Telangana for 4 consecutive months.

 

Particulars	Restated Consolidated Financial Information	Special Purpose Carved-out Combined Financial Statements
	31 March 2024	31 March 2023	31 March 2022
Trade Receivables (in Cr.)	~₹705	~₹325	~₹178
Trade Receivables as % of Sales	35.91%	22.45%	19.51%
Receivables Days	96.07	63.34	68.01
Offtakers as a % of Trade Receivables	98.72%	100%	100%

Source: DRHP- NTPC Green Energy Ltd.

As they are long-term contract customers, the problem of continuing payment receipt delays seems likely to be here for a while.

Since this is a new company in the markets without a long history of wealth accumulation, these red flags can be serious business threats for the company.

To give you a snapshot, we have used “Porter’s 5 Forces” framework to analyse this company.

Porter’s 5 Forces Analysis of NTPC Green Energy Ltd.

 

Source: Recipe Research Desk

Here’s a breakdown of how the company fared in the 5 aspects:

1. Low Threat of New Entrants: The power generation business requires huge initial capital investments for setting up plants. Therefore, power generation companies usually operate with a significant amount of debt (usually greater than 1.0x Debt/Equity) to fund their capex. This creates a strong barrier for new players to enter the industry. The threat of a new entrant is lower for NTPC Green Energy Ltd., which is a plus point.

2. Moderate Threat of Substitutes: For NTPC Green Energy’s business, there exists a threat from conventional sources of energy generation like coal, natural gas, etc., because of their widespread availability. Coal energy still accounts for ~60% of the primary energy supplies for the country in 2023. However, we still consider this as a moderate threat to the business because of the increasing support from the government for the adoption of renewable energy.

 

 

Source: Niti Ayog

3. Low Supplier Power: As discussed in the red flags, the company has a concentrated supplier base and has low pricing power over its suppliers for obtaining raw materials. This could hamper its production in the future.

4. Low Buyer Power: The majority of the company's customers are government enterprises. The company enters into long-term contracts with its customers and does not have strong power over its customers to negotiate favourable terms for its contracts. Plus, there is a constant delay in encashing receivables. This could be a big-time challenge for the company to figure out.  

5. High Competitive Rivalry: The competitive rivalry within the industry is intense. For every new project, the company has to win bids and tenders from central and state government agencies and state public utilities. Every existing player tries to compete for new orders, they often try to do projects at lower costs than their peers. This ultimately eats up profitability for the players.

Ultimately, the company did not fare well in 3 aspects out of Porter’s 5 Forces.

The Bottom Line

Companies like this can be a shot in the dark, considering the IPO hype. However, trusting such stocks for long-term wealth creation does not make much sense to us.

Growth is just one thing when analysing a company. High growth potential without a strong fundamental can often backfire. And that too, when there isn’t a history of pulling it off in the markets.
 
Our ideology has been to focus on strong business models with decent growth opportunities. So, we decided not to go ahead with NTPC Green Energy Ltd. in Finology 30.

However, there are very few stocks that made it to Finology 30. Check them out here.