NTPC shares rally as Bernstein sees them performing well; What it means to investors

by | Nov 27, 2024 | 0 comments

NTPC Limited, one of India’s largest players in the power generation industry, has witnessed its stock edge up 3% after the international brokerage, Bernstein, issued an “outperform” call. Bernstein analysts have increased their target price for NTPC shares to Rs 440, stating that it is the thrust of robust power demand, evening shortages, and the company’s cost-of-debt advantage as the key drivers behind their optimistic outlook. Positive momenta at the company are not only from its core power-generation business but also strategic progress in its renewable energy business arm, NTPC Green Energy. But with NTPC shares having witnessed some correction in the market recently, are such gains sustainable? We shall talk to you about the factors driving NTPC’s stock surge, the performance of the company, its prospects in renewable energy, and how investors should interpret the market situation.

 

Performance of NTPC: What is driving this stock surge?

NTPC shares rose by 3% to Rs 377 in morning trade on November 25, marking the second successive increase day for NTPC. The surge followed a positive rating from Bernstein as the brokerage house upgraded its outlook on the company with a price target of Rs 440. Analysts at Bernstein said that the fair market price for the stock was Rs 377; an upsurge of about 20.5% from the current market levels.

The analysts identified the following as the key factors behind NTPC’s positive outlook:

Robust Demand for Power:

In India, power consumption has enhanced significantly with industrial growth, increased urbanization, and government-led initiatives for electrifying rural areas. As long as power consumption continues expanding within the country, NTPC is expected to benefit from this rising demand due to its prominent position as one of India’s large-scale power generation companies.

Evening Peaks Demand for power increases during evening hours, for which NTPC has developed all the necessary infrastructural frameworks. It helps the company to gain an upper hand in the Indian electricity market. The company must maintain its predominant position by controlling supply strategically during peak hours.

Cheap Debt Advantage:

One of the main advantages of NTPC has been its ability to raise funds at relatively low rates, allowing it to build a high-quality balance sheet while funding infrastructure and growth expansion. In the recent past, this advantage has been particularly helpful to fund projects being undertaken by the company, with a focus on renewable energy.

These factors point out that NTPC is well-positioned to gain from the growing energy demand coming from India. Besides, the company’s strides to further bolster its renewable energy portfolio have also contributed to this positive outlook.

NTPC Green Energy: A Green Future for the Company

The key part of NTPC’s growth story is its renewable energy arm, NTPC Green Energy, which made headlines with a recent IPO. The IPO was grossly subscribed. There was huge demand from not only retail investors but also institutional buyers. The retail portion was subscribed 3.44 times and the QIB portion subscribed 3.32 times. Such enthusiasm better reflects the increasing confidence of the market in NTPC’s green energy initiatives.

NTPC Green Energy’s Rs 10,000 crore IPO had net proceeds of Rs 7,500 crore. The IPO proceeds will be used to repay outstanding loans of NTPC Renewable Energy Ltd and other corporate purposes. This is indicative of NTPC taking concretely solid steps in strengthening its renewable energy infrastructure, which would be the key to future growth and realising its intent of a cleaner, greener energy mix.

Within its renewable energy arm focused on solar and wind power assets, the company is part of a larger effort by NTPC to diversify its energy portfolio. NTPC has announced targets to expand its renewable energy capacity manyfold, and the successful listing of NTPC Green Energy signals the company’s serious commitment towards this transition. As a ‘Maharatna’ PSU (Public Sector Undertaking), NTPC enjoys the strength and support for increasing its renewable energy businesses, hence its potential to possibly emerge as one of the top competitors in India’s greener energy scene.

 

What does this IPO and market response mean to NTPC shareholders?

For NTPC’s shareholders, the listing of NTPC Green Energy as an independent company introduces new dynamics. On the upbeat side, the market response to the IPO in such a positive way shows that investors have full confidence in NTPC’s renewable energy arm and may have a long-term impact on the parent company, NTPC.

On the other hand, market experts highlight that the separation of NTPC Green Energy may introduce a holding company discount to the existing shareholders of NTPC. A holding company discount is the difference in valuation between the parent company and the subsidiary’s standalone value in the market. This may give NTPC shares some short-term volatility, especially when the market digests the reality of the new listing.

However, in the long term, this focus on renewable energy by markets is likely to continue to fuel growth for NTPC, especially considering the ramping up of its renewable energy capacity. The demand for clean energy solutions, coupled with government incentives and a strong support system towards the renewable sector, puts NTPC Green Energy at the pinnacle of driving growth within the company.

 

Valuation and Market Performance of NTPC

The stock of NTPC is currently trading at 16x FY25 earnings and 10x EV/EBITDA. Valuation multiples are at par with global peers, which makes the current stock price quite comparable to that of similar companies from the power generation sector. This indicates that shares of NTPC are perhaps attractively valued, given its dominant share in the Indian power market as well as its increasing renewable energy portfolio.

However, investors should also consider the broader market environment, which has seen some correction in recent weeks. NTPC shares have fallen 12% over the past month, which reflects some concerns in the broader market. In such a scenario, stocks of large-cap companies like NTPC may face short-term volatility but their strong fundamentals and steady growth prospects often make them resilient over the long term.

Management of rising input costs, increased operational efficiency, and an increase in demand for both traditional and renewable sources of energy will be crucial to sustaining the stock price performance going ahead.

Key Risks and Challenges

While the outlook for NTPC remains positive, it is also important to consider the risks and challenges the company faces:

1. Policy and Regulatory Risks:

As a public sector company, NTPC is subject to government policies and regulations, which can change over time. These policy shifts could affect the company’s operations, especially in terms of pricing, tariffs, and subsidy reforms in the energy sector.

2. Execution Risks:

NTPC has aggressive plans to expand its renewables. However, there are execution risks associated with that. NTPC needs to ensure its renewable energy projects are executed and completed in time with minimal cost overruns. Delays in execution or extra costs related to execution can impact the bottom line of NTPC.

3. Competition:

The power sector in India is highly competitive, with both public and private players vying for market share. The increasing competition in the renewable energy space, particularly from private players, could pressure NTPC’s market share and profitability.

4. Macro-Economic Factors:

The slowdown of the economy, changes in the inflation rate, and fuel price fluctuations will always influence NTPC’s performance. Changes in interest rates or currency movements may also influence the cost of capital and profitability for the company.

5. Debt Levels:

Although NTPC’s balance sheet is healthy, most of its large-scale projects, especially in renewable sources, entail significant capital investment. The company would surely be under pressure concerning its debt levels to keep financial stability on track while executing large projects.

 

Conclusion: Is NTPC a Good Investment?

This recent spurt in stock prices, at least a little bit, reflects the market’s enthusiasm as Bernstein has issued an “outperform” recommendation that indicates positive sentiments on the prospects of growth. The target price is Rs 440 with an upside potential of 20.5 per cent from prevailing levels and strong backing from its renewable energy division, NTPC does seem poised for good growth in the future.

The company has the long-term fundamentals of a solid earnings base, cost-of-debt advantage, and an expanding green energy portfolio, which means that NTPC will have more chances to generate pretty good performance in the future, although the weak market performance over the last month was a serious concern for investors.

NTPC is an attractive prospect for a stable return for investors interested in the power and energy sector, especially since it continues to scale up its renewable energy initiatives while maintaining its dominant position in the conventional power generation market. As usual, however, all the risks and market conditions need to be carefully assessed before making investment decisions.

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