Kotak Institutional Equities disagrees with 'bullish' valuation of power stocks NTPC, Power Grid
Kotak Institutional Equities has expressed disagreement with the investor bullishness in the electricity sector, particularly regarding NTPC and Power Grid stocks due to 'wrong valuation methodologies'.
Domestic brokerage firm believes that "wrong valuation methodologies" have been used to justify the narrative of investor "bullishness" in the , and mentions and as two stocks where such application is seen.“The market is super bullish on the electricity sector narrative, but overlooking that, these companies’ earnings are linked to , which will grow slowly; and valuations are super expensive,” Kotak said in its report.
Analysts at Kotak disagree with the way investors are valuing these two stocks even as they agreed with the view of new capacity creation in the power sector.
The fair values of and are a lot lower than their current market prices. According to the report, their valuations (NTPC at 16X FY2025E EPS and PWGR at 18X FY2025E EPS) look optically cheaper relative to the market or other capital goods stocks and electricity plays.
However, these multiples are not low in the context of low growth in earnings and limited terminal value in the case of NTPC for most of its current asset base (thermal).
“NTPC and PWGR are ‘stock’ stocks and their depends on the growth in the stock of assets, unlike ‘flow’ stocks, where earnings growth depends on growth in revenues and profitability,” said Sanjeev Prasad, analyst at Kotak Institutional Equities.
The domestic brokerage firm’s reverse valuation exercises for NTPC and Power Grid show that NTPC’s stock price is discounting about 50-70 GW of new thermal capacity versus its end of FY2024 thermal capacity of 59 GW while Power Grid’s stock price is discounting Rs 2.6 lakh crore of the additional asset base versus its end of FY2024 gross block of Rs 2.8 lakh crore.
The shares of NTPC were trading flat at Rs 368.75 while Power Grid was trading 1% lower at Rs 321.45 on BSE around 11:45 today.
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Source: Stocks-Markets-Economic Times
