NTPC Green Energy: Intrinsic Value Estimation Using DCF Method – GETMONEYRICH

NTPC Green Energy, a subsidiary of NTPC Limited. Currently the company is in news because of its IPO. It is India’s largest renewable energy public sector enterprise (excluding hydro). NTPC Green is central to India’s energy transition strategy. But as investors, how do we evaluate if the IPO price is reasonable? We’ll use the Discounted Cash Flow (DCF) method to estimate the stock’s intrinsic value.

In this blog post, we’ll perform a detailed DCF analysis for NTPC Green to uncover its fair value. I’ve read the company IPO’s RHP. I’ve taken the number from its financial statements and (Management Discussion & Analysis) MD&A. Using these number, we’ll estimate the free cash flows and account for the risks. Eventually, we’ll arrive at an intrinsic value per share.

Topics:

1. About NTPC Green Energy

NTPC Green Energy is a key driver of renewable energy expansion within the NTPC Group. As of September 2024, it boasts:

• Operating Capacity: 3,320 MW (3,220 MW solar, 100 MW wind).
• Pipeline Projects: 13,576 MW contracted and awarded, plus 9,175 MW under development.
• Revenue Mix: Predominantly solar and wind energy sales (96% in FY2024).

Backed by long-term Power Purchase Agreements (PPAs) and government incentives, NTPC Green is well-positioned in the growing renewable energy market.

2. Discounted Cash Flow (DCF) Analysis: Overview

DCF analysis values a company by estimating its future free cash flows (FCFs). The cash flows are then discounted to their present values. The discounting is done using a suitable discount rate. using an appropriate discount rate. If you want to know how DCF analysis is done, check this link. You can also check this online DCF Calculator.

Here’s how we can approach the DCF analysis:

1. Project Future FCFs: Based on revenue growth, margins, and capital expenditures.
2. Determine Terminal Value: Capturing value beyond the explicit forecast period.
3. Discount FCFs to Present Value: Using the Weighted Average Cost of Capital (WACC).
4. Estimate Equity Value: Subtract debt and add cash.

3. Input Assumptions for DCF Calculations

3.1 Revenue Growth

Revenue growth for NTPC Green Energy is primarily driven by its pipeline of renewable energy projects.

As of FY2024, the company reported revenue from operations at Rs.19,626 million, supported by its operational capacity of 3,320 MW. The company’s pipeline includes 13,576 MW of contracted and awarded projects, along with an additional 9,175 MW under development, as highlighted in the MD&A.

These projects are expected to bolster revenue growth over the next decade with assumptions of a 15% CAGR. It aligns with the company’s aggressive expansion strategy in the renewable energy sector.

The long-term Power Purchase Agreements (PPAs) with government agencies and public utilities, averaging 25 years, provide revenue stability for its solar and wind projects.

• FY2024 revenue from operations: Rs.19,626 million.
• With pipeline projects of 13,576 MW, we assume a CAGR of 15% over the next 10 years.

3.2 Profitability Margins

NTPC Green Energy has demonstrated consistently high profitability margins. It currently reports an EBITDA margin of 89.39% in FY2024, as per its financial statements. This stability reflects the company’s strong operational efficiencies, driven by its long-term Power Purchase Agreements (PPAs). These PPAs provide predictable revenue streams.

Additionally, NTPC Green’s focus on deploying advanced technologies like robotic cleaning, drone thermography, and live performance monitoring for its renewable energy plants supports efficient operations and cost control, as outlined in the MD&A.

These factors justify maintaining an 88% EBITDA margin assumption for forecasting. It is in line with its historical performance.

• EBITDA margin in FY2024: 89.39% (historically stable).
• I will assume 88% for the forecast.

3.3 Capital Expenditures

NTPC Green Energy’s capital expenditures (capex) are a key driver of its growth.

In FY2024, the company reported significant investments in project development, with property, plant, equipment, and capital work-in-progress (CWIP) reaching Rs.2,66,035 million in the balance sheet. This heavy capex aligns with its pipeline of 13,576 MW contracted and awarded projects and additional 9,175 MW under development.

The MD&A emphasizes the importance of these investments to achieve the company’s long-term growth objectives.

Estimating capex at 60% of revenue for the forecast period is consistent with NTPC Green’s ongoing expansion plans. It is expected to taper to 30% as the pipeline projects near completion and operational capacity stabilizes.

• NTPC Green is investing heavily in new projects. Based on FY2024 figures, we estimate annual capex at 60% of revenue for the forecast period, tapering to 30% in later years.

3.4 Working Capital

NTPC Green Energy maintains stable working capital requirements. It is supported by efficient management of receivables, payables, and inventories.

As per the MD&A, the company has long-term PPAs with government agencies and public utilities, ensuring predictable cash inflows.

The financial statements reveal a consistent working capital structure. It’s current assets like trade receivables and cash being sufficient to cover short-term liabilities.

Given this stability and the nature of its contracts, assuming working capital requirements at 10% of “incremental revenue” (=Revenue of the current year – Revenue of the previous year) will be a safe assumption.

3.5 Weighted Average Cost of Capital (WACC)

Considering the nature of business of NTPC Green Energy, its capital structure is heavily reliant on debt. It has a debt-to-equity ratio of 1.98 as of FY2024, as reported in the financial statements.

The cost of debt is estimated at about 8%. It is consistent with prevailing interest rates on its borrowings.

The company’s MD&A highlights the capital-intensive nature of its business. Hence it requires substantial debt financing to support its pipeline of renewable energy projects.

For the cost of equity, a 12% rate is assumed. Factoring in India-specific risks and the sector’s growth potential, I think a 12% cost of equity is a fair assumption.

Combining these inputs, NTPC Green’s Weighted Average Cost of Capital (WACC) is estimated at approximately 10%.

[Note: WACC is a blended cost of funding and the risk-adjusted return expectations of equity investors. This is the number we’ll later use as the discount rate.]

• Debt-to-equity ratio: 1.98 (FY2024).
• Cost of debt: 8% (assumed based on existing rates).
• Cost of equity: 12% (adjusted for India-specific risks).
• WACC: ~10%.

3.6 Terminal Growth Rate

A terminal growth rate of 2.5% is a conservative estimate for NTPC Green Energy. I’ve assumed the India’s projected GDP growth while accounting for the maturing renewable energy sector.

The MD&A emphasizes the company’s significant pipeline of projects and long-term Power Purchase Agreements (PPAs), which provide stable revenue streams even as the sector evolves.

Given the increasing competition and potential market saturation in renewable energy, the chosen rate of 2.5% appropriately balances optimism about India’s clean energy transition with the practical challenges of sustaining high growth indefinitely.

This assumption also aligns with the sector’s gradual convergence to broader economic growth rates over the long term.

4. DCF Calculation: Step-by-Step

Step 1: Project Free Cash Flows (FCFs)

Using the above assumptions, I project revenues, expenses, capex, and working capital to calculate FCFs for 10 years:

Step 2: Calculate Terminal Value

Using the formula:

Terminal Value = Final Year FCF × (1 + Terminal Growth Rate) / (WACC − Terminal Growth Rate)

Terminal Value = 18,180M × (1 + 2.5%) / (10% − 2.5%) = Rs.1,91,123M.

Step 3: Discount to Present Value

We discount yearly FCFs and terminal value using WACC:

Step 4: Estimate Enterprise Value (EV)

Sum of discounted values: Rs.1,30,449 million.

Step 5: Adjust for Net Debt

• Net Debt (FY2024): Rs.123,246 million.
• Equity Value = EV − Net Debt = Rs.1,30,449 − Rs.1,23,246 = Rs.7,203 million

5. Key Findings from the Analysis

• Intrinsic Value per Share: The intrinsic value per share is calculated as the adjusted equity value divided by the number of outstanding shares. Based on the DCF analysis, the adjusted equity value is estimated at Rs.7,203 million. Dividing this by the number of outstanding shares (5,843.33 million) results in an intrinsic value per share of approximately Rs.1.23.
• Comparison with IPO Price: The IPO price of Rs.108 per share is significantly higher than the intrinsic value of Rs.1.23 per share derived from the DCF analysis. This disparity suggests that the IPO may be priced at a premium, potentially reflecting investor enthusiasm for renewable energy and NTPC Green’s strategic importance within India’s energy transition plans. However, it also raises concerns about valuation sustainability based solely on current fundamentals.

Conclusion

Assessing NTPC Green Energy’s IPO requires a balance between intrinsic value calculations and qualitative factors. The DCF analysis indicates a substantial gap between the intrinsic value of Rs.1.23 per share and the IPO price of Rs.108.

It suggest that the stock may be overvalued based on current financial metrics and growth assumptions.

However, a 360-degree perspective also highlights strengths that warrant consideration.

• NTPC Green Energy operates with a robust pipeline of renewable projects.
• They also benefit from long-term PPAs with government agencies, ensuring stable cash flows.
• The company’s strategic alignment with NTPC Limited, a ‘Maharatna’ PSU, provides additional credibility, operational expertise, and access to resources.
• Moreover, India’s regulatory push toward renewable energy and net-zero commitments enhances the sector’s growth prospects, which could justify the premium pricing in the long run.

There are a few downsides to this IPO as well:

• NTPC Green’s heavy reliance on debt financing (debt-to-equity ratio of 1.98) and the capital-intensive nature of its business present risks. From the above calculations, you can see how the debt factor has reduced the equity value of the company.
• Execution delays in pipeline projects, rising interest rates, and potential policy changes could impact profitability and cash flows.
• The intrinsic value also assumes stable operational efficiency and revenue growth, which may not fully account for market or operational disruptions.

While the DCF-derived intrinsic value suggests caution, NTPC Green Energy’s IPO offers exposure to a promising growth sector backed by strong fundamentals and strategic partnerships.

Investors with a long-term horizon may consider participating, acknowledging the premium valuation as a reflection of future growth potential.

What I’ll do? I’m personally very skeptical of investing in PSU. Why? Because of their valuations.

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Have a happy investing.