In today’s Finshots, we take a look at the upcoming NTPC Green Energy IPO.

The Story

In the 1970s, as India was charting its course towards industrialisation, the country needed power. Lots of it. There was but one option — burn coal. It was simple. Dig it up, burn it, and giant turbines would spin to make electricity. It was the age when coal was king. And the smokestacks of power plants became symbols of progress. That’s when in 1975, the National Thermal Power Corporation or NTPC, became one of the government’s cherished possessions.

NTPC built massive coal-fired power plants, controlling everything from mining coal to generating and delivering electricity.

But as the decades passed, the world began to change. Smog blocked the stars, rivers turned black, and what once seemed like progress began to feel like a problem. Calls for cleaner energy grew louder, and soon coal began to lose its lustre.

NTPC saw the writing on the wall. The world was moving away from coal, and India pledged to do the same.

So, NTPC pivoted.

It embraced renewable energy by creating NTPC Renewable Energy in 2020 and also set itself an ambitious goal of generating 60 GW of renewable energy by 2032. But the transition wasn’t easy. There were new technologies, new players, and a different kind of energy to harness. It came from the sun and the wind! And unlike coal, you couldn’t just dig up a pile of sunshine or order a tanker full of wind, no? But NTPC rolled up its sleeves and began building solar farms and wind turbines across the country.

And thus, NTPC Green Energy was born in 2022 as a subsidiary of NTPC. And by 2023, NTPC also transferred its stake in NTPC Renewable Energy to NTPC Green Energy.

The company’s launch couldn’t have come at a better time. By then, India had established itself as a global leader in renewable energy sector with a target of 500 GW by 2030. It had made strong commitments under the Paris Agreement to reduce its carbon footprint, and public and private investments were pouring into the green energy sector. All those things helped NTPC Green and other renewables companies expand fast. And today, it’s India’s largest renewable energy public sector enterprise, with 3,071 MW of operational solar capacity.

The company’s solar business contributes to over 90% of its total revenues amounting to ₹1,840 crores in FY24, while the wind business’ share is about 4% of total revenues.

And now it’s set to launch its initial public offering (IPO) offer worth ₹10,000 crores!

But why go public just two years after its inception, you ask?

For starters, it’s about regulatory compliance. Indian regulations require public sector companies to have a certain portion of their shares held by the public. And this IPO helps NTPC Green meet that requirement.

Next, an IPO could unlock value for the company, especially since NTPC’s renewable energy business is set to outgrow its other core businesses. With 60 GW planned by 2032, it is clear that NTPC Green Energy is morphing into NTPC’s flagship business, and even poised to surpass its coal counterpart.

And finally, debt repayment. See, NTPC Green’s rapid expansion has been funded through loans, and 75% of the IPO proceeds, that is ₹7,500 crores, will go toward reducing its debt. That’s important because in the capital-heavy world of renewable energy, cutting debt is crucial because it frees up cash flow, slashes interest costs, and gives NTPC Green Energy the ability to reinvest aggressively in future projects.

So, now that you know why NTPC Green is gearing up for an IPO, you’re probably curious about what’s fuelling its ambitions.

Well, it’s all about turning big ideas into reality. You see, harnessing solar and wind energy isn’t as straightforward as flipping a switch. Just like carmakers in the early 1900s needed roads, railways and logistics to deliver their vehicles to customers, NTPC Green needed the right partners to power its renewable vision. And that’s where state-owned electricity distributors, or DISCOMs, come into play. They’re the ones who help NTPC Green get its green energy to the masses.

But there is one big hurdle. DISCOMs are notorious for delayed payments and red tape. To navigate this tricky terrain, NTPC Green relies on Power Purchase Agreements (PPAs). These long-term contracts essentially say, “We’ll supply you with electricity for 25 years, but you’ve got to pay us a fixed price.”

However, securing PPAs is just the beginning. To keep the lights on, literally and figuratively, NTPC Green had to invest heavily in infrastructure. We’re talking solar panels, wind turbines and storage solutions like batteries and smart grids, all to ensure that the power promised in these agreements keeps flowing without a hitch.

And they’ve done it. A quick glance at their balance sheet will tell you that the company’s property, plant and equipment have jumped to ₹17,300 crores today — a solid 17% rise compared to FY23. That’s a massive leap in infrastructure capacity and it certainly bodes well for power generators who rely on these assets to keep up with demand.

Another impressive aspect is NTPC Green’s low cost of capital. This is a critical factor in the energy sector, where big projects demand big money. Access to cheaper debt means NTPC Green can expand without being weighed down by high interest payments. And with the strong credit backing of its parent company, NTPC, it can borrow at better rates. This financial advantage eases its debt burden, allowing NTPC Green to fund more projects and scale up its operations.

In fact, its debt-to-equity ratio reflects its financial discipline. At 1.9x, it’s among the lowest in the industry. In simple terms, this means that NTPC Green is relying more on its own funds (equity) than on borrowed money to fuel its growth. With 3,171 MW of solar and wind capacity already installed, it’s steadily working towards its ambitious target of 60 GW by 2032 — a big part of India’s renewable energy aspirations.

Besides, its Draft Red Herring Prospectus (DRHP) highlights that the company is a frontrunner in developing 2.7 GW of Round-the-Clock (RTC) renewable energy projects in India. These RTC projects are designed to provide uninterrupted power around the clock by combining sources like solar, wind and battery storage.

But it’s not all sunshine and rainbows for NTPC Green.

The company faces significant concentration risks, as a staggering 87% of its revenue in FY24 came from just five customers. If even one of these clients delays payments or reduces demand, it could severely impact cash flow. For instance, in FY24, one of the DISCOMs that accounted for over 45% of revenues delayed payments for four months straight, throwing a wrench in the financial machinery.

Geographical concentration adds another layer of risk. Over 60% of NTPC Green’s projects are situated in Rajasthan, making the company vulnerable to regional challenges.

Coupled with this is the hefty capital expenditure (capex) required to expand its renewable energy infrastructure. Effectively managing these costs will be crucial for NTPC Green’s long-term success.

The competition is heating up too. Rivals like Adani Green and Tata Power Renewable Energy are some of the formidable players with substantial portfolios. For example, Adani Green is currently developing the world’s largest renewable energy project in Khavda, with an investment of about ₹30,000 crores. While NTPC Green enjoys government support and strong financial backing, these competitors boast advantages such as faster project execution and diversified revenue streams. And that can influence how much market share NTPC Green could capture while bidding for new projects.

Another pressing concern is the issue of receivables or the money NTPC Green’s customers owe it. As we told you earlier, DISCOMs are notorious for payment delays, which can tighten cash flows. As of June, NTPC Green had a 99-day receivables cycle, meaning it takes nearly three months to get paid for the energy it provides. This is a sharp increase from the 68-day cycle in 2022, underscoring growing financial pressure.

Lastly, rising finance costs are a challenge as NTPC Green takes on more debt to fund its expansion, while depreciation costs also climb with the addition of new assets. These factors could further eat into its profits until the new capacity starts generating revenue, making it a tightrope walk for the company as it navigates its ambitious growth trajectory.

And if you’re wondering why we haven’t looked into the incomes and revenues yet, that’s because, in the renewable energy space, past financials often take a back seat. This is a relatively new and fast-evolving sector that requires a gestation period before the real growth kicks in. What truly matters are the future projects and the long-term potential that lie ahead.

So, where does all of this leave us?

Well, NTPC Green’s IPO is a significant opportunity, but we’ll still need to wait for the issue price to truly assess the company’s earnings potential and market valuation.

Interestingly, there’s a buzz in the investment circles with whispers of, “Just grab a single share of NTPC.”

If you’re wondering why, it’s all about strategy. Owning even one share of NTPC gives you preferential access to NTPC Green’s IPO. And with this offering set to be one of the largest in India’s renewable energy space, and the second largest PSU IPO after LIC in fact; getting in early could give savvy investors a serious edge.

We’ll let you know what we end up telling our friends who’ve been encouraging us to snag that one NTPC share.

For now, it’s the perfect time to sit back and watch the market, which is buzzing with high valuations, and a red hot IPO landscape!

Until then…

Don't forget to share this story on WhatsApp, LinkedIn and X.

📢 Ready for even more simplified updates? Dive into Finshots TV, our YouTube channel, where we break down the latest in business and finance into easy-to-understand videos — just like our newsletter, but with visuals!

Don’t miss out. Click here to hit that subscribe button and join the Finshots community today!

🚨ATTENTION FINSHOTS FAMILY!

We are organising an EXCLUSIVE webinar on one of the most important financial topics — LIFE INSURANCE.

Who is it for?

• People in their 20s and 30s planning for life insurance
• Those curious about the differences between Endowment Plans, ULIPs and Term Insurance
• Anyone wondering if it’s too late to get Term Life Insurance
• Getting married or having kids soon? Find out how you can protect your loved ones!

LIMITED SLOTS AVAILABLE! Click here to Register Now.