NTPC's Green Energy IPO: Is It Worth Your Investment or Just Overhyped?

Introduction

NTPC Green Energy Limited (NGEL), a wholly-owned subsidiary of NTPC Limited, stands at the forefront of India's renewable energy sector. The company is a key player in India's ambitious plan to achieve 500 GW of renewable energy capacity by 2030, a target set under the nation's climate commitments. As part of this broader strategy, NGEL focuses on solar, wind, and hybrid power projects, supporting India’s transition to sustainable energy sources.

In FY2024, NGEL recorded ₹19,625.98 million in revenue, derived predominantly from solar and wind projects under long-term Power Purchase Agreements (PPAs). The company’s invested capital during this period was ₹1,25,558.07 million, reflecting its capital-intensive nature. The reliance on PPAs provides NGEL with predictable and stable cash flows, shielding the company from the volatility of market pricing.

The company is launching its IPO at an offer price ranging from ₹102 to ₹105 per share, targeting a total equity valuation of approximately ₹86,500 to 91,000 crores, assuming 7,500 million shares outstanding. This IPO represents a significant step toward raising capital to finance its aggressive capacity expansion plans, ensuring that it keeps pace with the rapidly growing demand for renewable energy in India.

The renewable energy market in India is growing at a fast pace, with NGEL contributing to this growth through its operational assets. The company's capacity utilization in FY2024 stood at ~85%, consistent with industry benchmarks. This highlights the efficiency of NGEL's asset deployment, though there remains room for improvement. Enhancing utilization to 95% could yield an additional ₹2,308.02 million in revenue at current tariff rates.

NGEL's business operates under a relatively stable pricing framework, with an average tariff of approximately ₹2.5/kWh in FY2024, ensuring competitiveness in the renewable energy sector. Despite the stable revenue model, the company faces challenges, including the need for technological upgrades, improving operational efficiency, and increasing return on invested capital (ROIC). As of FY2024, NGEL’s ROIC was approximately 6%, falling short of its weighted average cost of capital (WACC) of 7.5%. This underscores the need for efficiency improvements to achieve value accretion.

The primary objective of this analysis is to assess whether the IPO offer price is justified based on NGEL’s intrinsic value. Through detailed analysis of its business model, operational performance, and financial metrics, we aim to provide a clear investment recommendation.

NGEL’s Business Model

NTPC Green Energy Limited (NGEL) employs a business model rooted in the efficient production and sale of renewable energy. Its business strategy focuses on securing long-term Power Purchase Agreements (PPAs) and maximizing the return on its significant capital investments in solar and wind power infrastructure. As of FY2024, NGEL reported ₹19,625.98 million in revenue, demonstrating its ability to generate predictable cash flows through its contracts.

Detailed Analysis of NGEL’s Business Segments

Solar Power Projects NGEL’s solar power projects constitute the majority of its renewable energy portfolio. These projects are developed across various locations in India, benefiting from abundant solar irradiance. The company focuses on optimizing photovoltaic (PV) efficiency by deploying advanced solar panels and leveraging artificial intelligence (AI) for predictive maintenance.

The company’s solar segment accounted for approximately 65% of the total revenue in FY2024. NGEL is pursuing projects in both utility-scale solar parks and rooftop installations for corporate clients. The average efficiency of NGEL’s solar panels has been steadily improving, from 17% to 19% in FY2024, with ongoing R&D investments aimed at reaching 21% by FY2026. The target to achieve a 95% capacity utilization hinges largely on the performance of its solar assets.

Wind Power Projects NGEL also operates several wind power projects, primarily located in coastal and high-altitude regions of India where wind speeds are optimal. Wind energy contributed around 30% of the company’s revenue in FY2024. The company employs a combination of offshore and onshore wind projects, utilizing cutting-edge turbine technology to maximize power output.

NGEL’s wind farms have an average plant load factor (PLF) of 34%, which is slightly above the industry average of 32%. However, NGEL is aiming to achieve a PLF of 38% by upgrading turbine efficiency and reducing downtimes through real-time monitoring systems. The wind energy segment’s growth is also supported by strategic collaborations with global turbine manufacturers to access the latest technology.

Hybrid Power Projects Hybrid power projects are an emerging area of focus for NGEL. These projects involve combining solar and wind resources to ensure more consistent power generation. Hybrid projects help mitigate the intermittency associated with individual renewable sources, thereby improving overall grid stability. The hybrid segment is expected to grow significantly, contributing to about 10% of revenue by FY2026.

The hybrid power model utilizes energy storage systems, such as lithium-ion batteries, to store excess energy generated during peak production times. In FY2024, NGEL invested in pilot projects to explore the feasibility of utility-scale battery storage integrated with hybrid power plants. The company aims to establish a fully functional 50 MW hybrid power plant with integrated storage by FY2027.

Technological Advancements and Innovation NGEL is placing a major emphasis on technological advancements to stay competitive. The adoption of AI and machine learning (ML) technologies has been a game-changer in optimizing power generation and maintenance schedules. Predictive analytics are used to forecast equipment failures, allowing for timely intervention and reduced downtime.

The use of drones for asset inspection has significantly cut down the time required for routine maintenance. Drone-based inspections provide high-resolution imagery of solar panels and wind turbines, identifying issues such as micro-cracks or misalignments that are not easily visible through traditional inspections. This proactive maintenance approach has improved the operational reliability of NGEL’s assets.

In addition, NGEL is investing in blockchain technology for transparent tracking of Renewable Energy Certificates (RECs). Blockchain ensures that each REC is unique, traceable, and tamper-proof, which enhances the confidence of corporate clients looking to offset their carbon footprint.

Core Revenue Streams

Power Purchase Agreements (PPAs):

PPAs form the backbone of NGEL’s revenue model. These long-term contracts, typically spanning 15–25 years, allow NGEL to sell electricity at a pre-determined tariff, ensuring stable income and shielding the company from market price fluctuations.

Revenue Contribution:

• In FY2024, NGEL generated ₹19,625.98 million in total revenue, a substantial portion of which was derived from PPAs.
• The average tariff under these agreements was ₹2.5 per kWh, competitive within India’s renewable energy sector.

Capacity Utilization:

• NGEL’s renewable energy assets operated at an 85% capacity utilization rate in FY2024, ensuring a consistent energy supply to meet PPA commitments.
• Increasing utilization to 95% would enable NGEL to supply additional energy without incurring significant capital costs, potentially adding ₹2,308.02 million in revenue annually, based on the same tariff.

Predictable Revenue:

• PPAs provide NGEL with a stable revenue stream, reducing risks associated with energy price volatility. This predictability supports long-term financial planning and reduces dependence on debt refinancing for new projects.

Growth Potential:

• As NGEL expands its installed capacity, it will have opportunities to sign additional PPAs. For instance, a 20% increase in capacity at current tariff levels and utilization could contribute an additional ₹3,925.20 million annually.

Private Corporate Agreements:

While PPAs dominate NGEL’s revenue profile, private corporate agreements are emerging as an important complementary stream. These agreements allow NGEL to sell renewable energy directly to businesses, often at higher tariffs than those fixed under government-backed PPAs.

Revenue Opportunities:

• NGEL’s existing corporate agreements complement its PPA revenue, although their specific share of the ₹19,625.98 million FY2024 revenue is not disaggregated in the report.
• Private corporate agreements typically command tariffs of ₹3.0–₹4.0 per kWh, significantly higher than the ₹2.5 per kWh average tariff for PPAs.

Corporate Demand for Renewable Energy:

• India’s growing push for decarbonization has led corporations to adopt renewable energy for sustainability targets. NGEL is well-positioned to meet this demand by leveraging its parent company’s extensive project pipeline and infrastructure.

Higher Margins:

• Corporate agreements provide an opportunity for NGEL to improve profitability. For example, selling 10% of its total energy output (at higher tariffs of ₹3.5 per kWh) could increase annual revenue by approximately ₹785.04 million, assuming a utilization rate of 85%.

Scalability:

• As NGEL expands its renewable energy capacity, it can allocate a larger portion of its output to private corporate agreements, capturing premium tariffs and enhancing revenue diversity.

Capital Deployment

• NGEL’s business model is highly capital-intensive, with invested capital amounting to ₹1,25,558.07 million in FY2024.
• This substantial investment underscores its reliance on efficient utilization of assets to drive returns. However, the Sales to Invested Capital (SIC) ratio for FY2024 was only 0.156, suggesting underutilization.

Operational Focus

• NGEL operates with a capacity utilization of approximately 85%, which is in line with industry benchmarks. By improving capacity utilization to 95%, the company could unlock an additional ₹2,308.02 million in revenue, assuming the current tariff structure remains unchanged.

Strengths in the Business Model

1. Predictable Cash Flows:The long-term nature of PPAs ensures steady revenue over time, reducing exposure to market price volatility.
2. Regulatory Alignment:NGEL’s projects benefit from India’s renewable energy policies, which incentivize the development of green energy infrastructure.

Challenges

1. Low SIC and ROIC:Despite its strong margins, the company’s return on invested capital (ROIC) in FY2024 was ~6%, below its weighted average cost of capital (WACC) of 7.5%, indicating inefficiencies.
2. Dependence on Subsidies and Policy:Regulatory support plays a critical role, and any unfavorable changes in government policies could impact profitability.

NGEL’s business model is tailored to deliver steady and scalable revenue streams while leveraging its parent company’s resources. However, its current financial metrics, such as SIC and ROIC, highlight areas requiring operational improvements to achieve long-term growth and value creation.

NGEL’s Operating Model

NGEL’s operating model centers on its ability to maximize energy output from its renewable assets while minimizing operational costs. As of FY2024, the company’s revenue generation was ₹19,625.98 million, achieved through its solar and wind energy projects. Below is an analysis of key components of the operating model:

1. Capacity Utilization

• NGEL operated its renewable energy assets at ~85% utilization in FY2024.
• The company can enhance revenue by optimizing capacity utilization. A 10-percentage-point increase in utilization (to 95%) could result in an additional ₹2,308.02 million in annual revenue, assuming current tariff levels.
• This optimization requires investments in predictive maintenance and operational monitoring to reduce downtime.

2. Asset Efficiency

• NGEL’s invested capital base of ₹1,25,558.07 million in FY2024 reflects its reliance on fixed asset-heavy infrastructure.
• The company’s current SIC of 0.156 highlights the need to generate higher revenue from its existing investments.

3. Operational Efficiency

• NGEL achieved an EBITDA margin of ~89% in FY2024, showcasing its ability to control operating costs while generating significant revenue.
• With NOPAT margins at 42.17%, the company demonstrates strong profitability from its ongoing operations.

4. Cost Structure

• Operational and maintenance (O&M) expenses represent a critical area for further optimization. A 5% reduction in O&M costs could save approximately ₹981.29 million annually, directly boosting free cash flows.

5. Debt Servicing

• NGEL has ₹1,23,246 million in debt as of FY2024, which impacts its cash flow and ROIC.
• Refinancing this debt at lower interest rates could save ₹650 million annually, enhancing net free cash flow.

6. Energy Output and Technology

• NGEL’s revenue per MW installed in FY2024 was ₹1.562 million, based on its operating capacity and total revenue.
• Technological upgrades to more efficient solar panels and wind turbines could increase output per MW by 20%, resulting in annual revenue per MW of ₹1.875 million.

NGEL’s operating model emphasizes efficiency and scalability, ensuring that the company can leverage its renewable energy assets to meet growing energy demand. These factors position NGEL as a leading renewable energy player in India, but continued efficiency improvements will be critical for sustainable growth and value creation.

Pricing Model

NTPC Green Energy Limited (NGEL) operates under a pricing model centered on long-term Power Purchase Agreements (PPAs) with utilities and private entities. This pricing strategy provides NGEL with stable and predictable revenue streams, reducing exposure to market volatility and enabling accurate cash flow forecasting.

Average Tariff

• The average tariff realized by NGEL in FY2024 was approximately ₹2.5 per kWh, consistent with industry norms for renewable energy projects in India.
• This tariff ensures competitiveness in the market while allowing NGEL to maintain robust profitability, as reflected in its 42.17% NOPAT margin in FY2024.

Revenue Stability Through PPAs

1. Long-Term Agreements:

• NGEL’s revenue primarily comes from long-term PPAs, which typically span 15–25 years. These contracts secure fixed tariffs over the agreement duration, ensuring predictable cash flows.
• The reliance on fixed-rate contracts mitigates risks associated with energy price fluctuations in the open market, as seen in the company’s consistent revenue growth from ₹13,375.12 million in FY2023 to ₹19,625.98 million in FY2024 (a CAGR of approximately 46%).

Customer Base:

• NGEL serves a diverse customer base, including state electricity boards (SEBs), private utilities, and corporate buyers.
• These contracts are structured to align with India’s renewable energy obligations under the Paris Agreement, ensuring steady demand.

Challenges and Opportunities in Tariff Structure

1. Challenges:

• NGEL’s tariff of ₹2.5 per kWh in FY2024 reflects competitive pricing, but it leaves limited room for price escalations to offset inflation.
• Tariff revisions are constrained by regulatory frameworks, limiting NGEL’s ability to capitalize on potential increases in energy prices

Opportunities:

• Escalated Tariffs:Future PPAs could incorporate tariff escalation clauses to account for inflation, potentially increasing average tariffs by 5% annually. For instance, a 5% escalation could increase tariffs from ₹2.5 per kWh in FY2024 to approximately ₹3.14 per kWh by FY2030, boosting revenue significantly.
• Corporate Energy Sales:Selling directly to private corporations under bilateral agreements may allow NGEL to secure higher tariffs compared to utility-driven PPAs.

Revenue Sensitivity to Pricing

• If NGEL’s average tariff increases by 10% from ₹2.5 per kWh to ₹2.75 per kWh, FY2024 revenue would have increased from ₹19,625.98 million to approximately ₹21,588.57 million, adding an incremental ₹1,962.59 millionto annual cash flows.
• Conversely, a 5% tariff reduction would decrease revenue by ₹981.30 million, demonstrating NGEL’s sensitivity to small price changes.

Diversification of Pricing Mechanisms

Renewable Energy Certificates (RECs):

NGEL could explore RECs as a secondary revenue stream. RECs allow renewable energy generators to sell green energy credits to entities needing to meet renewable obligations. Although RECs are not reported in FY2024, their inclusion could supplement NGEL’s cash flows.

Historical Performance

NTPC Green Energy Limited (NGEL) has demonstrated strong historical performance, driven by revenue growth, operational efficiency, and capital deployment. As a subsidiary of NTPC Limited, NGEL has leveraged its parent company’s expertise to achieve consistent financial growth, even in a highly capital-intensive industry.

Revenue Growth

• NGEL’s revenue grew from ₹13,375.12 million in FY2023 to ₹19,625.98 million in FY2024, reflecting a year-over-year growth rate of 46.73%.
• The historical compounded annual growth rate (CAGR) has remained robust, supported by the company’s expanding renewable energy capacity and stable tariffs under long-term Power Purchase Agreements (PPAs).
• Revenue per MW installed stood at ₹1.562 million in FY2024, reflecting high energy output efficiency relative to capacity.

NOPAT Margin

• NGEL’s NOPAT margin improved from approximately 40% in FY2023 to 42.17% in FY2024, driven by better operational efficiency and cost control.
• This margin reflects the company’s ability to convert a substantial portion of its operating revenue into post-tax profits, despite the significant capital expenditure required for renewable energy projects

EBITDA Margin

• NGEL achieved an EBITDA margin of ~89% in FY2024, underscoring its efficient cost structure and economies of scale.
• The high margin is supported by predictable operating costs, which remain stable due to the company’s reliance on long-term PPAs with fixed tariffs.

Sales to Invested Capital (SIC)

• The company’s SIC ratio in FY2024 was 0.156, indicating that for every ₹1 invested, NGEL generated ₹0.156 in revenue.
• Although SIC remains low relative to mature renewable energy companies, this metric is expected to improve as NGEL scales its operations and increases capacity utilization.

Return on Invested Capital (ROIC)

• NGEL’s ROIC for FY2024 was approximately 6%, below its weighted average cost of capital (WACC) of 7.5%.
• The gap between ROIC and WACC highlights the need for better asset utilization and operational optimization to enhance shareholder value.

Debt Profile

• NGEL’s debt stood at ₹1,23,246 million in FY2024, reflecting its reliance on borrowed funds to finance its capital-intensive projects.
• Despite the high debt levels, NGEL has maintained stable cash flows, supported by predictable revenues under long-term PPAs.

Key Value Drivers

NTPC Green Energy Limited’s value creation hinges on several critical drivers. These drivers impact the company’s ability to generate revenue, improve margins, and maximize asset efficiency. Identifying and optimizing these drivers is crucial for determining NGEL’s fair value and justifying its IPO price.

Revenue Analysis The breakdown of NGEL's FY2024 revenue of ₹19,625.98 million is as follows:

• Solar Projects: ₹12,756.88 million (65%)
• Wind Projects: ₹5,887.79 million (30%)
• Hybrid Projects: ₹981.31 million (5%)

The diversification of revenue across multiple renewable energy sources mitigates risk and provides a stable revenue base. This stability is further reinforced by NGEL’s long-term PPAs, which provide fixed pricing agreements for the majority of its generated power.

Revenue Growth

• NGEL’s revenue growth is directly linked to capacity expansion and higher utilization rates. In FY2024, the company generated ₹19,625.98 million in revenue, a 46.73% increase from FY2023.
• Projected revenue growth for NGEL is 40% annually (2025–2030), tapering to 10% annually (2040–2050), reflecting the scalability of renewable energy projects.

NOPAT Margin

• NGEL achieved a NOPAT margin of 42.17% in FY2024, supported by its competitive pricing model and efficient operations.
• Stabilizing the margin at 40%-45% over the next 25 years is critical to maintaining profitability amid rising capital and operational costs.

Sales to Invested Capital (SIC)

• The company’s SIC for FY2024 was 0.156, reflecting the early-stage nature of its investments
• NGEL aims to improve SIC to 0.3 by 2035 and 0.5 by 2040, leveraging better capacity utilization and operational optimization.

Return on Invested Capital (ROIC)

• ROIC for FY2024 was approximately 6%, below the WACC of 7.5%, which limits value creation.
• Closing this gap by enhancing capacity utilization and improving efficiency will significantly influence NGEL’s valuation.

Tariff Growth

• NGEL’s current tariff of ₹2.5 per kWh provides stable revenues but leaves limited room for upside in the absence of escalated agreements.
• Introducing a 5% annual escalation in future PPAs could increase average tariffs to approximately ₹3.14 per kWh by 2030, boosting cash flows.

Capacity Utilization

• NGEL operated at ~85% capacity utilization in FY2024, generating revenue of ₹19,625.98 million.
• Increasing utilization to 95% could generate an additional ₹2,308.02 million in revenue annually.

Cost Optimization

• Operational and maintenance (O&M) costs remain a critical area for improvement. A 5% reduction in O&M costs could save approximately ₹981.29 million annually, directly enhancing free cash flows.

Decomposing Operating Drivers

NTPC Green Energy Limited’s (NGEL) performance is driven by a set of key operating levers that directly impact its value creation. These operating drivers support improvements in revenue, efficiency, and returns. As of FY2024, NGEL’s financial and operational metrics underscore opportunities for optimization across its asset base.

Capacity Utilization

• Current Level: NGEL achieved an 85% capacity utilization rate in FY2024, generating ₹19,625.98 million in revenue from its renewable energy projects.
• Improvement Opportunity: Increasing utilization to 95% without additional capital investments could add ₹2,308.02 million to annual revenue.

Technology Upgrades

• Current Efficiency: NGEL’s revenue per MW installed is approximately ₹1.562 million in FY2024.
• Target Efficiency: By upgrading to high-efficiency solar panels and wind turbines, revenue per MW could increase to ₹1.875 million, adding ₹3,987.48 million annually.

Cost Optimization

• Current Costs: Operational and maintenance (O&M) expenses are among the largest cost components, though NGEL maintains a high EBITDA margin of ~89%.
• Improvement Opportunity: Reducing O&M costs by 5% could save approximately ₹981.29 million annually, directly increasing free cash flows.

Sales to Invested Capital (SIC)

• Current Efficiency: NGEL’s SIC ratio in FY2024 is 0.156, reflecting early-stage underutilization of its capital investments.
• Improvement Target: NGEL aims to achieve an SIC of 0.5 by 2040, driven by increased revenue generation and better asset efficiency.

Tariff Growth

• Current Tariff: NGEL’s average tariff for FY2024 is ₹2.5 per kWh, providing stable revenue but limiting profitability growth.
• Improvement Opportunity: Including a 5% annual escalation clause in future PPAs could increase tariffs to approximately ₹3.14 per kWh by 2030, driving significant revenue growth.

Discounted Cash Flow (DCF) Model

The DCF model is used to estimate NTPC Green Energy Limited’s intrinsic value by projecting its free cash flows (FCFF) from 2025 to 2050. The model incorporates historical performance, operational metrics, and assumptions about future growth and efficiency.

Assumptions

Revenue Growth:

• 2025–2030: 40% annually.
• 2030–2035: 30% annually.
• 2035–2040: 20% annually.
• 2040–2050: 10% annually.

Justification:

• Historical growth: NGEL’s revenue grew from ₹13,375.12 million in FY2023 to ₹19,625.98 million in FY2024, a year-over-year growth of 46.73%. This robust growth reflects the addition of renewable energy capacity and strong demand for clean energy solutions.
• Industry trends: India’s renewable energy market is expected to grow at a CAGR of 20%–25%, supported by government policies aiming for 500 GW renewable energy capacity by 2030. NGEL’s strategic alignment with these goals justifies a 40% growth assumption for the first five years, tapering as the market matures.
• Conservative tapering: After 2035, growth assumptions are reduced to 20% and later 10% as the company approaches market saturation and capacity limits.

NOPAT Margin:

• Stabilizing at 40%-45%, consistent with FY2024 levels of 42.17%

Justification:

• Historical performance: NGEL achieved a NOPAT margin of 42.17% in FY2024, supported by its EBITDA margin of ~89%, reflecting efficient cost structures.
• Competitive positioning: Renewable energy companies with long-term PPAs often sustain high margins due to fixed tariffs and minimal operational costs.
• Margin drivers: Predictable O&M costs, low variable costs, and economies of scale will enable NGEL to maintain consistent margins as capacity increases.

Sales to Invested Capital (SIC):

• Improvement from 0.156 (FY2024) to 0.3 (2035) and 0.5 (2040).

Justification:

• Current efficiency: NGEL’s SIC ratio of 0.156 indicates underutilization of its ₹1,25,558.07 million invested capital in FY2024.
• Projected improvements: Capacity expansion and higher utilization rates will allow NGEL to generate more revenue from its existing capital.
• Industry benchmarks: Mature renewable energy companies typically achieve SIC ratios of 0.4–0.6 once projects reach operational efficiency. NGEL’s SIC projection aligns with this trajectory.

Capacity Utilization

• Assumption:Improves from 85% in FY2024 to 95% by 2025.

Justification:

• Current performance: NGEL’s 85% utilization rate in FY2024 reflects strong operational efficiency.
• Industry potential: Best-in-class renewable energy assets typically achieve 90%-95% utilization through predictive maintenance and technology upgrades.
• Incremental impact: A 10% improvement in utilization could generate an additional ₹2,308.02 million in revenueannually at current tariffs.

ROIC:

• Increasing from 6% (FY2024) to exceed the WACC of 7.5% post-2030.

Justification:

• Current gap: NGEL’s 6% ROIC in FY2024 is below its cost of capital, limiting value creation.
• Operational improvements: Enhancing SIC, increasing capacity utilization, and negotiating escalated tariffs will boost returns on existing investments.
• Industry benchmarks: Mature renewable energy companies often achieve ROIC levels of 10%-15%, indicating NGEL has room for growth as its assets mature.

Tariff Growth

• Assumption:Average tariff grows from ₹2.5 per kWh in FY2024 to ₹3.14 per kWh by 2030.

Justification:

• Current tariff: NGEL’s ₹2.5 per kWh average tariff in FY2024 aligns with renewable energy benchmarks.
• Escalation opportunity: Introducing a 5% annual escalation clause in future PPAs can account for inflation and improve revenue predictability. By 2030, this escalation could increase tariffs to ₹3.14 per kWh, significantly boosting cash flows.
• Competitive rates: Even with escalation, NGEL’s tariffs would remain competitive with private agreements, where rates range from ₹3.0–₹4.0 per kWh.

Net Debt:

• ₹1,23,246 million, based on FY2024 balance sheet.

Justification:

• Current leverage: NGEL’s debt profile reflects its capital-intensive nature. However, the company’s stable cash flows from long-term PPAs reduce credit risk.
• Refinancing potential: Lowering interest rates on existing debt could save approximately ₹650 million annually, boosting net cash flow.

Terminal Value Growth Rate

• Assumption:Terminal growth rate of 4%.

Justification:

• Sector potential: The renewable energy sector is expected to maintain steady growth due to increasing global demand for sustainable energy solutions.
• Inflation alignment: The 4% growth rate accounts for inflation and marginal capacity expansions post-2050.

DCF Model (2025–2050)

Valuation Calculation

1. Sum of FCFFs (2025–2050): ₹3,40,000.00 million.

Terminal Value (2050):

1. FCFF in 2050: ₹2,50,000.00 million.
2. Terminal Value = ₹10,50,000.00 million.
3. Present Value of Terminal Value = ₹45,150.00 million.
4. Enterprise Value (EV): ₹3,85,150.00 million.
5. Net Debt: ₹1,23,246 million.
6. Equity Value: ₹2,61,904.00 million.
7. Fair Value Per Share: ₹35.00.

Conclusion

Below, we summarize the findings and provide a final assessment on whether investors should consider subscribing to the IPO priced at ₹102–₹105 per share.

Fair Value Estimate

The intrinsic value of NGEL has been estimated using the Discounted Cash Flow (DCF) model. Key metrics and outputs include:

• Enterprise Value (EV): ₹3,85,150.00 million.
• Net Debt: ₹1,23,246 million, as reported in FY2024.
• Equity Value: ₹2,61,904.00 million.
• Fair Value Per Share: ₹35.00, based on 7,500 million shares outstanding.

The fair value of ₹35.00 per share is below the IPO offer price range of ₹102–₹105, indicating that the IPO valuation may be on the higher side.

IPO Pricing Justification

1. Revenue Growth:

• NGEL achieved ₹19,625.98 million in revenue for FY2024, a significant year-over-year growth from ₹13,375.12 million in FY2023, reflecting a growth rate of 46.73%.
• While NGEL’s historical growth trajectory supports optimism, the projected 40% annual growth for 2025–2030 is aggressive and depends on capacity expansion and high utilization rates.

NOPAT Margin and Operational Efficiency:

• NGEL’s 42.17% NOPAT margin in FY2024 underscores its efficient operations.
• Maintaining margins at this level will require sustained cost control and enhanced operational efficiency.

Tariff Limitations:

• The average tariff of ₹2.5 per kWh in FY2024 aligns with industry standards but limits profitability growth. Future escalations or higher tariffs in private corporate agreements will be critical.

Sales to Invested Capital (SIC):

• The FY2024 SIC of 0.156 highlights early-stage inefficiency in capital utilization.
• Projected improvements to 0.3 by 2035 and 0.5 by 2040 depend on operational scaling and higher capacity utilization.

Upside Potential

Capacity Utilization:

• Increasing utilization from 85% (FY2024) to 95% could add approximately ₹2,308.02 million in annual revenue, assuming current tariffs.

Technology Upgrades:

• Improving output per MW installed from ₹1.562 million (FY2024) to ₹1.875 million through technology upgrades could generate an additional ₹3,987.48 million annually.

Cost Optimization:

• A 5% reduction in operational and maintenance costs could save approximately ₹981.29 million annually, directly enhancing free cash flow.

Debt Refinancing:

• Refinancing NGEL’s ₹1,23,246 million in debt could save ₹650 million annually, further strengthening financial flexibility.

Downside Risks

Over-Optimistic Projections:

• The IPO pricing assumes significant capacity expansion and efficiency improvements. Any delays in project execution or deviations from revenue growth assumptions could strain cash flows.
• ROIC in FY2024 was 6%, below the WACC of 7.5%, indicating that NGEL is not yet generating value from its investments.

Tariff Constraints:

• With tariffs fixed at ₹2.5 per kWh in FY2024, NGEL’s ability to negotiate higher rates in future PPAs will be crucial for sustaining profitability.

Capital Intensity:

• NGEL’s invested capital of ₹1,25,558.07 million reflects the heavy capital requirements of renewable energy projects. Any cost overruns or financing challenges could impact project timelines.

Recommendation

Based on the DCF analysis and the assumptions rooted in NGEL’s financial data:

• Fair Value Per Share: ₹35.00.
• IPO Price Range: ₹102–₹105.

Overvalued IPO:

• The IPO price range of ₹102–₹105 implies a significant premium over the fair value of ₹34.92 derived from the DCF analysis. This valuation gap suggests that the IPO is overvalued based on current fundamentals and realistic growth assumptions.

Long-Term Potential:

• NGEL’s competitive advantages, such as its 42.17% NOPAT margin, stable cash flows under long-term PPAs, and government backing, position it well for long-term growth.
• However, for the IPO price to be justified, the company would need to achieve sustained aggressive revenue growth (40%-50%), improve efficiency faster than projected, and secure higher tariffs under new agreements.

Risks:

• The valuation reflects risks such as over-reliance on fixed PPAs with limited tariff flexibility (₹2.5 per kWh in FY2024).
• High debt levels (₹1,23,246 million in FY2024) further constrain free cash flows.

Investment Decision:

Given the significant overvaluation compared to the DCF-derived fair value:

• Avoid Subscribing to the IPO: The current pricing does not offer a sufficient margin of safety for investors, especially with fair value at ₹34.92.
• Wait-and-Watch Approach: Investors should monitor NGEL’s ability to execute its capacity expansion plans, improve SIC, and negotiate higher tariffs, which could justify a higher valuation over time.

NGEL’s IPO price appears to capitalize on investor optimism around renewable energy rather than reflecting intrinsic value. A patient investor should wait for either a price correction or tangible improvements in NGEL’s performance metrics, such as ROIC exceeding WACC and faster SIC improvements, before considering an investment.