Maharatna PSU Energy Stocks BUY/SELL? NTPC, Power Grid Neither 'Growth' Or 'Value' Stocks; TP Below Rs 100

Maharatna PSU energy stocks, NTPC and Power Grid have given double-digit growth in 2024 so far. Where NTPC surged by 19.5% YTD, Power Grid has outperformed its counterpart with gains of 35% on BSE. Both are top power-generating companies and are trading between Rs 300-400. However, brokerage Kotak Institutional Equities in its latest report highlighted that neither NTPC nor Power Grid are 'growth' nor 'value' stocks. Kotak sees the fair value of both stocks to be below Rs 100 from the current levels.

On BSE, after the market hours of June 13, NTPC's share price is at Rs 369.95 apiece down by 0.4% with a market cap of Rs 3,58,728.16 crore. Power Grid stock is at Rs 321.40 apiece, lower by 1% with a market cap of Rs 2,98,921.41 crore.

Both stocks are near their 52-week highs.

However, Kotak does not agree with the way investors are valuing NTPC and PWGR stocks, even as the brokerage agrees with the view of new capacity creation in the power sector.

Kotak's note said, "One fundamental difference is that NTPC and PWGR are 'stock' stocks and their earnings growth depends on the growth in the stock of assets, unlike 'flow' stocks, where earnings growth depends on growth in revenues and profitability. We are keeping aside other relevant issues of (1) questionable terminal value of NTPC's thermal assets and (2) gradual shift in their business models to competitive low-RoE versus the current assured high-RoE businesses."

As per BSE data, currently, NTPC's return on equity is at 12.06% as of June 13, 2024, while Power Grid's RoE is at 17.81% much higher than NTPC. In general terms, RoE above 10% is stable.

Further, Kotak expects fairly muted earnings growth of NTPC and PWGR (see Exhibit 1), as (1) their earnings growth is linked to the growth in their regulated equity base, which will depend on the addition of new assets and (2) their asset base will grow slowly over the next few years.

In Kotak's view, the fair values of NTPC and PWGR are a lot lower than their current market prices. Their valuations (NTPC at 16X FY2025E EPS and PWGR at 18X FY2025E EPS) may look optically cheap relative to the market or other capital
goods stocks and electricity plays, but the multiples are not low in the context
of (1) low growth in earnings, as discussed above and (2) limited terminal value
in the case of NTPC for most of its current asset base (thermal).

Further, Kotak's note added the valuations are quite stiff in the context of (1) P/B (NTPC trades at 2X FY2025E
BV and PWGR at 3.2X FY2025E BV) and (2) adjusted P/B (removing cash and
investments from market cap. and using regulated equity instead of reported
equity), the most appropriate valuation methodology.

Kotak said, "We note that end-FY2024 regulated equity of NTPC and PWGR stood at Rs89/share and Rs83/share, respectively."

Finally, Kotak's note further said, "Our reverse valuation exercises for NTPC and PWGR show that (1) NPTC's stock price is discounting about 50-70 GW of new thermal capacity versus its end-FY2024 thermal capacity of 59 GW and (2) PWGR's stock price is discounting Rs2.6 tn of the additional asset base versus its endFY2024 gross block of Rs2.8 tn. The implied assumptions are quite unrealistic."

NTPC is India's largest power utility with a total installed capacity of 76,048 MW (including JVs). Established in 1975, NTPC is steering ahead to be India's largest integrated power company and targets to become a 130 GW firm by 2032.

Meanwhile, Power Grid is mainly engaged in the business of transmission of power through its EHVAC/HVDC transmission network. The company has diversified into the telecom business by leveraging its Pan India transmission network through the stringing of optical ground wire(OPGW).

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