NTPC Green Energy IPO: Here are the key risk factors highlighted in DRHP

NTPC Green Energy, a subsidiary of state-owned company NTPC Ltd., has submitted draft documents ₹Rs 10,000 crore initial public offering (IPO) on Wednesday.

Under the draft Red Herring Prospectus (DRHP), the company will only issue new shares and existing shareholders will not sell any shares.

Here are some of the risk factors the company highlighted in its DRHP:

Concentration of revenues from recipients

The Company derives a significant portion (over 87%) of its revenues from five of its largest customers in fiscal 2024, with its largest customer accounting for approximately 50% of its operating revenues in fiscal 2024. The loss of any of these customers or a deterioration in their financial condition could adversely affect the business.

NTPC Green Energy said it will continue to rely on nine top offtakers to generate a significant chunk of its revenues until the end of fiscal 2025.

Dependence on external suppliers

Business operations and profitability depend on the availability and cost of materials, components and equipment and on external suppliers who enable these requirements to be met.

The company currently has no long-term supply agreements with any material, component or equipment suppliers and typically sources requirements on a per-request basis. However, it may enter into long-term supply agreements for key capital expenditure components such as solar modules, wind turbine generators and battery storage systems.

Business in Rajasthan

The operating renewable energy projects are concentrated in Rajasthan. Any significant social, political, economic or seasonal disruption, natural disaster or civil unrest in Rajasthan may affect the operations.

PPA Risk

Power Purchase Agreements (PPAs) can expose a company to certain risks. In addition, operating revenues are subject to fixed tariffs and changes in tariff regulations and their structuring.

Currently, 96% of the company’s revenues come from the sale of renewable energy, and profitability is largely dependent on effective cost management under PPAs.

Competition

The company faces intense competition from both traditional and renewable energy companies, and failure to respond to market changes in the renewable energy industry could impact operations.

The main competitors are Indian and international developers and operators of solar, wind and other renewable energy projects.

Accounts Receivable

Inability to collect receivables from recipients of municipal services on time or in full.

Expenses

Internal purchasing operations for solar projects expose the company to certain risks. The company may incur unexpected expenses if suppliers of components in energy projects fail to fulfill their warranty obligations.

– increase in prices and availability of land, labor, equipment and materials

– inaccuracies in drawings and technical information

– delays in the delivery of equipment and materials to project sites

– unforeseen increases in the cost of equipment, materials and land

– delays due to local and seasonal weather conditions

Investment requirements

The renewable energy industry is capital intensive, which may require adequate capital to develop new projects and expand into new areas of activity such as green hydrogen, green chemicals and energy storage systems.

Climatic conditions

Generating electricity from solar and wind sources is highly dependent on suitable meteorological and climatic conditions. Unfavorable weather conditions can have a significant impact on operations.
In addition, the physical conditions surrounding wind turbine generators and solar farms can impact the operational performance of these assets.

Credit Risk and Performance Risk

NTPC Green Energy is subject to credit risk and supplier and contractor performance risk.

Import

Restrictions on the import of solar equipment and the import of wind turbine generators, as well as other factors, may affect the price or availability of solar equipment and increase the costs of doing business.

Diversification

As part of its business strategies, the company intends to further diversify its renewable energy project portfolio by entering new areas of renewable energy sources, including green hydrogen, green chemicals and energy storage systems.

The development and commercialization of new areas such as green hydrogen, green chemicals and energy storage systems are complex, time-consuming, expensive and involve a high degree of business risk.

Shares Issued to NTPC in Last 12 Months

During the preceding 12 months from the date of this DRHP, the company has issued ordinary shares at a price that does not reflect the issue price.

Debt

The Company has incurred significant debt, and any failure to meet debt repayment and other obligations contained in financial agreements could have an adverse effect on the Company’s operations.

As of June 30, 2024, the total outstanding loans (including current and long-term loans) stood at ₹15,277 crore.