Investment risks and rewards - An analysis of NTPC Green Energy Limited

The Indian renewable energy sector is among the fastest-growing sectors, courtesy the favourable policies of the government. In such a scenario, an IPO coming from a key player in renewable energy would be considered a major investment opportunity by investors.

And this is exactly the case with the upcoming IPO of NTPC Green Energy Limited (NGEL). Being a subsidiary of the state-owned power giant NTPC Limited, NGEL has access to infrastructure, expertise, and financial resources to support its renewable energy operations.

Like any investment, investing in NGEL IPO also carries risks that must be weighed. Read on to have a better understanding of the risks and rewards associated with investing in NGEL.

History of NGEL

NGEL was incorporated in 2022 as a fully owned subsidiary of NTPC Limited, with the purpose of consolidating NTPC's presence and assets across the renewable energy domain. The company develops, owns, and operates utility-scale solar, wind, small hydro, and other renewable energy projects across India. As of March 2023, NGEL had an installed renewable energy generation capacity of 3,570 MW, comprising 2,198 MW of solar capacity and 1,372 MW of wind energy assets.

The company sells electricity generated from its projects under long-term power purchase agreements (PPAs) to state electricity distribution companies. It also sells renewable energy certificates (RECs) to entities that are mandated to fulfil renewable purchase obligations under India's electricity regulatory framework. For fiscal 2023, NGEL reported a total income of ₹11,960 million and profit after tax of ₹1,790 million.

Investment reward factors

NGEL operates in India's renewable energy sector, which has strong long-term growth potential, backed by favourable government policies and climate change considerations. India aims to achieve 500 GW of renewable energy capacity by 2030. This is expected to open up large investment opportunities for companies like NGEL.

• As a subsidiary of NTPC Limited, a Maharatna public sector company, NGEL enjoys significant operational and financial support. NTPC is India's largest power producer with an established track record of developing large-scale power projects. Its parental support provides comfort regarding NGEL's capabilities.

• With a renewable energy portfolio of over 3.5 GW and plans to expand further, NGEL has substantial operating scale and capacity. This large size provides access to economies of scale and enhances competitiveness.

• NGEL has demonstrated consistent revenue growth in recent years as more renewable energy assets begin commercial operations. Its total income grew from ₹3,790 million in fiscal 2021 to ₹11,960 million in fiscal 2023. As its project pipeline expands further, NGEL's revenues can be expected to grow.

• Given its ownership by NTPC Limited, NGEL has access to cost-effective debt financing from domestic banks and financial institutions. This enables maintaining a lower cost of capital.

• NGEL has articulated a clear dividend policy, which balances rewarding shareholders versus retaining capital for growth. Over the long run, the company is well placed to provide regular dividend payouts from its windfall gains.

Being the renewable energy subsidiary of a leading power sector public sector company, NGEL may get premium market valuations similar to its peers in the sector. This could provide an opportunity for value appreciation.

Risk factors

• NGEL's performance is linked to the growth trajectory of the Indian economy and power sector. An economic slowdown could dampen electricity demand growth and the viability of signing new PPAs for renewable energy projects.

• The renewable energy sector in India is subject to policies, regulations, and programmes instituted by central and state governments. Any adverse changes in regulations or policies relating to tariffs, taxation, subsidies, renewable purchase obligations, or other aspects could negatively impact NGEL's operations and profitability.

• Presently , NGEL relies on its parent company for key managerial personnel, operational and technical support, and other shared services. Any discontinuation of such support due to corporate restructuring, changes in business strategy, or other reasons could adversely affect NGEL's operations.

• NGEL undertakes development and engineering activities before setting up renewable energy projects. Delays in securing right of way, obtaining permits, procurement of equipment, or completion of transmission infrastructure could increase project costs and affect NGEL's returns.

• The renewable energy business is capital intensive, forcing NGEL to raise debt from banks and other sources. High leverage on the balance sheet increases financial risk and vulnerability to interest rate volatility. As of March 2023, NGEL had total borrowings of ₹74,710 million.

• NGEL imports some capital equipment for its renewable energy projects, exposing it to foreign exchange fluctuation risks that could affect project costs.

• NGEL must comply with various environmental laws and regulations pertaining to land acquisition, permits, disposal of waste, greenhouse gas emissions, etc. Any changes in regulations or standards could force additional investments, raising project costs and affecting profitability.

• Availability of water is essential for NGEL's solar power projects to periodically clean the photovoltaic panels. Any disruptions in water supply due to droughts, competing demand from other sectors, or other reasons could lower power generation.

• Advances or disruptions in renewable energy technologies such as battery storage, floating solar, or hydrogen electrolysers could impact NGEL's competitiveness and market position over the long run.

• NGEL is involved in certain direct tax, indirect tax, and other legal proceedings that, if determined unfavourably, could impose financial costs and penalties that adversely impact profitability. Non-compliance with any applicable regulations could also lead to fines or business disruptions.

Balancing risks and rewards: Should you invest?

Given the bearish trend of the market currently, deciding whether to invest in NGEL IPO is not going to be easy. However, what will help is understanding and analysing the key risks and rewards outlined above. While the current market conditions may seem unfavourable, NGEL's promising pipeline and first-mover advantage in some indications could make it an attractive long-term investment if you have a higher risk appetite.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.