Why NTPC Green IPO GMP is falling? Complete Analysis

Why NTPC Green IPO GMP is falling today? Complete Analysis

The NTPC Green IPO GMP has been falling in all the news lately. With business and industry showing so much promise, many want to know whether it is worth investing in the IPO or not. Let's break it down for you to give you a clear picture of things.

 

Business

NTPC Green Energy operates in the renewable energy space, which has a high growth prospect where the world will be moving towards efficient and sustainable energy solutions. The business model of the company and its industry positioning look good given the thrust on clean energy, along with government policies supporting the sector. This forms an excellent long-term growth foundation.

 

The Valuations

While the business prospects look attractive, equally important is the valuation of the IPO. How does it compare with its peers? Is it appropriately priced? For anyone interested in investing in a company that is likely to reap good returns, its pricing is the key factor. Having analyzed the numbers, a detailed explanation of whether the growth potential of the company in terms of pricing is justified has been given herein.

There has been a notable drop in the grey market premium (GMP) of NTPC Green Energy IPO in recent times due to the following considerations:

1. Concerns Relating To Valuation: It has been claimed by some analysts that the IPO has been offered to investors at a steep valuation. As an example, the FY24 EV/EBITDA is at 53.4x meaning that while ratios that are this steep will not hold even by FY27, then current levels have made investors wary. Some believe that the pricing does not allow for easy profit-taking
2. Declining GMP: When started, the GMP was close to Rs.25 but crumbled to just Rs.0.70 once the price band was out implying low investor participation. This means there is expected to be only a token increase over the issue price, thereby indicating little potential for quick returns.
3. OverAll Market Sentiments: The overall state of the stock market, including concerns about the high prices in the renewable energy industry and other more general economic concerns, may also have affected the mood.

Despite this, NTPC Green Energy is expected to do very well given its ambitious goals to increase its operating capacity and earnings over the coming years.

These factors encourage analysts to remain bullish on long-term investors given the underlying growth story of the company and the support from NTPC Ltd. contrary to the tight negative outlook expected from short-term market players, which, in turn, seem to influence trends in the GMP.

Read the full NTPC Green IPO

Understanding the Valuation Game in the NTPC’s Green Recently Moves

NTPC Green and ONGC Green lead the way in bidding for Ayana Renewable at $650 million or Rs.5400 Crore. Ayana Renewable currently has an operational capacity of 1.6 GW gigawatts whereas at present, 2.5GW is under development.

Now let us link this with NTPC Green’s plans on an IPO. NTPC Green is coming to the market with an $11 billion, or Rs.91,000 crore, valuation. As per their management, they have 3.3 GW of operational capacity with an additional 3 GW capacity under construction purported to be ready by FY25.

This is where the valuation matrix gets very engaging:

Acquisition Valuation: 

In other words, when NTPC Green intends to buy Ayana, it means NTPC Green is valuing the current capable capacity of Ayana at Rs.3400 crores per GW. 

IPO Valuation:  

On the other hand, when it comes to its IPO, NTPC Green is valuing its capacity at Rs.14,500 crores per GW. That is more than 4 plus times the valuation they are giving before Ayana for comparative capacity. 

And to make it even simpler never mind the others, but let’s take NTPC Green and its parent NTPC Limited. The huge discrepancy in those estimates prompts some questions: 

Why does NTPC Green have such an inflated self-assessment when courting investors, yet they are ready to offer much less per GW when buying a competitor?  

Is this difference in valuation an indication of over-enthusiastic pricing for the equities on the company owing to the IPO, or are there other reasons like growth and sentiment?    

This game of valuation illustrates the ability to price within the renewable energy business as well as the situational aspects surrounding value.  

An analysis of the company and the ability to analyze the capacity of the business will reveal that the valuation for the company may be a bit on the higher side. This high valuation is the probable reason behind the shares of the company trading poorly in the grey market. The GMP has come down to below 1%, and this reflects low enthusiasm among investors. 

Interestingly, in terms of IPO pricing and correlation with GMP, we see a peculiar trend. In as much as the company increased its IPO price band, GMP continued decreasing on a day-to-day basis. Now, one would consider the valuation already high, but at the same time, the steepest of price bands was hardly supporting any form of sentiment. Consequently, all this together has placed the IPO in a very negative light. 

Investors normally look for a balance between valuation and pricing. In this case, the mismatch in the grey market to IPO valuation, whereby high valuations are associated with a higher price band, seems to have created resistance in the market, which contributes to a gray market underperformance.

 

Conclusion

Based on the industry analysis, business prospects, and valuations, we hope you have a clearer idea now about the NTPC Green Energy IPO. Decisions to invest should always be based on research and alignment with your financial goals.

We hope that this breakdown helps you make an informed investment decision on NTPC Green Energy's IPO.  

Disclaimer: Not a buy or sell recommendation/advice. No investment or trading advice is given. This blog is purely for information and education purposes. Always discuss investment-related decisions with your eligible financial advisor before investing.