Kotak wrote in its note that both NTPC and Power Grid are examples of the narrative nature of the Indian market and the use of wrong methodologies to justify the narratives.
“The market is super bullish on the electricity sector narrative, but overlooking that these companies’ earnings are linked to stock of assets which will grow slowly and that their valuations are super expensive,” Kotak wrote in its note.
At its current price, Power Grid is trading at an financial year 2026 price-to-earnings multiple of 17 times, compared to its five-year average price-to-earnings multiple of 12.9 times.
NTPC too, trades at a financial year 2026 price-to-earnings multiple of 14.6 times, which is higher than the five-year average of 12.8 times.
The brokerage said that the fundamental difference is that NTPC and Power Grid are stocks, whose earnings growth will depend on the growth in the stock of assets, unlike other stocks, where earnings growth demands on growth in revenue and profitability.
NTPC and Power Grid, according to Kotak, are also likely to see muted earnings growth due to the following three reasons:
- Earnings growth is linked to the growth in their regulated equity base
- Their asset base will grow slowly over the next few years
- New assets capitalisation cannot be very high compared to the total stock of assets
Kotak’s reverse valuation exercise for both NTPC and Power Grid shows that NTPC’s stock is discounting about 50-70 GW of new thermal capacity, compared to its end-financial year 2024 capacity of 59 GW. On the other hand, Power Grid’s stock price is discounting ₹2.6 lakh crore of the additional asset base, compared to the gross block of ₹2.8 lakh crore at the end of financial year 2024.
“The implied assumptions are quite unrealistic,” the brokerage wrote in its note.
Shares of NTPC are up 19% so far in 2024, while those of Power Grid are up 36% so far this year. Kotak has a “sell” recommendation on both NTPC and Power Grid.
