NTPC is developing expansion plans in the renewable energy industry

NTPC’s renewable capacity currently stands at 3,500 MW, with plans to increase it to 20,000 MW by FY27 (delayed by one year) and further to 60,000 MW by FY32. This means RE will account for almost 46% of the total capacity target of 130,000 MW by 2032. Sure, the excitement about a potential stock exchange listing of a subsidiary is justified. However, there is a risk that NTPC will suffer from a discount from the holding company if the green energy subsidiary is listed separately. This is because potential investors will directly purchase a green energy company, which will be the main factor in increasing production capacity in the future.

In FY24, NTPC’s standalone profit before tax declined by almost 6%. ₹22,710 crore and remained unchanged in the fourth quarter. The latest results are not exciting, and the company’s shares fell more than 1% on Monday. This is due to the conventional way of operating energy companies in the country, which leaves no room for any surprises after the results are announced. Profits are determined using a fixed return on equity (RoE) of 15.5% (plus some incentives based on plant load factor etc.) on regulated equity and then based on profit after tax, a backtest is carried out to come to a sale price per unit of power. So simple analysis such as fuel cost as a percentage of sales etc. doesn’t really matter.

The puzzle of regulated capital

Here it is important to understand the concept of regulated capital. This is the capital component of an energy project, which is set in advance at 30% of the total capital employed, with the remainder coming from debt. Therefore, profits only improve when new capacity is added, which does not often happen due to the long duration of projects. The difference in profitability is due to under- or over-recovery of fixed costs.

In FY24, NTPC’s standalone and consolidated regulated equity increased by 13% and 11% year-on-year to ₹87,700 crores and ₹1.04 trillion respectively. In an ideal scenario, profit after tax (PAT) should track the growth of regulated equity capital. However, the relationship may not be exact because the dates of commissioning vary. The full impact of regulated capital added in FY24 is likely to translate into earnings a year later.

NTPC’s standalone and consolidated capacity is 59,000 MW and 76,000 MW respectively. The capitalization of incremental thermal capacity will amount to 2,200 MW and 1,500 MW in years 25 and 26, respectively, which represents less than 4% per year of the existing autonomous capacity. We can therefore exclude a significant increase in unit profit in years 26 and 27, assuming that the full effect of increasing production capacity will occur in the following year.

Against this backdrop, the sharp appreciation of stocks over the past year suggests that investors are sufficiently seeing a clearer picture. Additionally, investors should be prepared for risks such as lower than expected returns from renewable energy businesses.