Kotak Institutional warns NTPC and Power Grid valuations appear super expensive – here's why
NTPC and Power Grid Corporation, which have delivered returns of up to 110% in a year. However, domestic brokerage firm Kotak Institutional Equities has cautioned that investors may be using incorrect valuation methodologies when assessing stocks like NTPC and Power Grid Corporation.Also Read: Mint Explainer: Why the surging use of AI may challenge India’s power sector"We do not agree with the way investors are valuing NTPC and Power Grid stocks, even as we agree with the view of new capacity creation in the power sector.
One fundamental difference is that NTPC and Power Grid -their earnings growth depends on the growth in the stock of assets, unlike ‘flow’ stocks, where earnings growth depends on growth in revenues and profitability," said Kotak. The brokerage highlighted other critical issues, including the questionable terminal value of NTPC’s thermal assets and the gradual shift in their business models towards competitive low-RoE ventures compared to their current assured high-RoE businesses.Also Read: Torrent Power records 240% surge in 17 months, zooms 525% in 5 yearsIt anticipates fairly muted earnings growth for NTPC and Power Grid, as their earnings are tied to the expansion of their regulated equity base, which depends on the addition of new assets.
The brokerage expects that their asset bases will grow slowly over the next few years, considering the recent trends in gross block, new asset capitalisation, and regulated equity base from the past few years and projected for FY2024–26.Also Read: NTPC eyes $50 billion capex to transform into a complete energy companyAccording to the brokerage, the fair values of NTPC and Power Grid are significantly lower than their current market prices. Although NTPC is valued
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