NTPC Green Energy, a subsidiary of NTPC Limited, is set to launch its IPO soon, aiming to raise around ₹10,000 crore. This will be one of the biggest IPOs in recent times from a public sector company, the last being LIC’s ₹21,000 crore IPO in May 2022. But before making any investment, it’s important to understand the risks involved. Let’s break down the key risk factors outlined in their Draft Red Herring Prospectus (DRHP).
Heavy Reliance on a Few Customers: What Happens If They Back Out?
One of the biggest risk factors for NTPC Green Energy is its high dependence on a small number of customers. In fact, over 87% of its revenues come from just five offtakers (buyers of energy), with the largest buyer contributing nearly 50% of the total revenue in FY24. If even one of these major customers were to back out or face financial trouble, it could seriously harm the company’s earnings.
For the next financial year, FY25, the company expects to continue relying on the top nine offtakers. So, while NTPC Green Energy has strong revenue streams, the loss of even one big client could be a significant setback for the business.
No Long-Term Supply Contracts with Key Equipment Providers: A Major Concern?
NTPC Green Energy depends heavily on third-party suppliers for important materials, components, and equipment required for its projects. However, the company currently does not have any long-term supply contracts with key suppliers, which poses a risk to the steady availability and pricing of critical equipment.
While NTPC Green Energy plans to enter into long-term agreements for major items like solar modules, wind turbines, and battery storage systems, as of now, any disruption in supply could affect project timelines and profitability.
Geographic Concentration: Is Rajasthan a Safe Bet for NTPC Green Energy?
Most of NTPC Green Energy’s renewable energy projects are based in Rajasthan, a state prone to seasonal changes and natural disasters. This geographic concentration means that any major political, social, or economic issues in the state could directly impact the company’s operations.
Moreover, while Rajasthan is currently favorable for renewable energy due to its climate and policies, over-reliance on a single region poses a business risk. Diversifying to other states could help mitigate this risk, but as of now, the company remains heavily focused on Rajasthan.
Challenges with Power Purchase Agreements (PPAs): A Double-Edged Sword?
NTPC Green Energy’s revenues are largely derived from fixed-tariff power purchase agreements (PPAs) for renewable energy. While these agreements offer stable income, they also expose the company to several risks. For instance, any changes in tariff regulations could affect profitability. In FY24, around 96% of the company’s revenue came from the sale of renewable energy, making efficient cost management under these agreements critical for success.
Additionally, any regulatory changes that affect the structuring of these PPAs or sudden shifts in market tariffs could disrupt the company’s financial health.
Stiff Competition: Can NTPC Green Energy Stay Ahead?
The renewable energy market in India is highly competitive, and NTPC Green Energy faces strong competition from both domestic and international players. Competitors include developers and operators of solar, wind, and other renewable energy projects.
If NTPC Green Energy is unable to keep up with market trends or adapt to changes in the renewable energy sector, it could lose out to competitors who are quicker to innovate. This makes staying ahead in technology, efficiency, and cost management all the more important for NTPC Green Energy.
Supply Chain Risks: How Equipment Import Restrictions Could Drive Up Costs
Another risk factor is related to the company’s procurement operations, especially for solar projects. NTPC Green Energy could face issues if suppliers fail to meet their warranty obligations or if there are restrictions on the import of critical equipment like solar modules and wind turbines.
With India pushing for more locally manufactured solar equipment, any restrictions on imports could lead to higher costs and supply chain disruptions. This would increase the overall cost of projects and might reduce profitability.
Rising Debt Levels: Is NTPC Green Energy Overleveraged?
As of June 30, 2024, NTPC Green Energy had outstanding borrowings of ₹15,277 crore. This significant level of debt is a potential risk, especially if the company faces challenges in repaying or complying with the terms of its financing agreements. Failure to manage this debt effectively could impact its ability to grow and take on new projects.
Diversification into Green Hydrogen and Other Areas: A Risky But Necessary Move?
NTPC Green Energy plans to expand beyond traditional renewable energy projects by entering new areas like green hydrogen, green chemicals, and energy storage systems. While these emerging sectors have significant growth potential, they also come with high costs and risks.
Developing and commercializing green hydrogen and other new technologies will require substantial investment and time. Whether NTPC Green Energy can successfully navigate these uncharted territories remains to be seen.
In conclusion, while NTPC Green Energy offers exciting investment potential due to its renewable energy focus, it also comes with its share of risks. From customer concentration to supply chain issues and increasing competition, potential investors should weigh these factors carefully before making a decision.
