NTPC vs PowerGrid: Which power stock is better investment for long term?

The Indian government is targeting to double power generation capacities to 900 GW by 2030, which will require significant investments in power generation and transmission infrastructure. The focus will be more on renewable/clean energy. The entire value chain is likely to benefit from the upcoming investments in the power sector.

Experts believe that the outlook for the power sector appears promising as the global transition to cleaner and sustainable energy sources gains momentum. Increased investments in renewable energy, grid modernisation, and energy storage technologies are expected to drive growth and reduce environmental impact in the coming years.

Amid this backdrop, let's analyse between power stocks NTPC and PowerGrid Corporation, which have better growth opportunities for the long term.

Stock Price Trend

In the last one year, both NTPC and PowerGrid gave double-digit returns, outperforming the benchmark massively. While NTPC rose higher, up almost 41 percent in this period; PowerGrid jumped over 17 percent. In comparison, benchmark BSE Power declined around 11 percent in the last 1 year.

Similarly, in 2023 YTD, both NTPC and PowerGrid surpassed the benchmark again. NTPC rallied over 43 percent whereas PowerGrid gained over 26 percent. Meanwhile, benchmark index BSE Power added 6 percent in this time.

NTPC has given positive returns in 7 of the 9 months so far in this current calendar year, falling only in 2 - April (down 1.7 percent) and January (down 0.38 percent). Meanwhile, the stock has gained 8.5 percent in September so far, extending gains for the fifth straight month.

Meanwhile, PowerGrid has also given positive returns in 7 of the 9 months of the current calendar year, declining only in August (down 8 percent) and May (down 1.4 percent). The stock has risen the most in September so far, up 10.22 percent.

NTPC hit its 52-week high of ₹245.90 earlier this week, on September 20, 2023. Currently trading at ₹239, it has soared 54 percent from its 52-week low of ₹155, hit on September 28, 2022.

On the other hand, PowerGrid also hit its 52-week high of ₹205.90 earlier this week on September 20, 2023. Currently trading at s 201.80, it has also rallied over 44 percent from its 52-week low of ₹139.76, hit on September 26, 2022.

Meanwhile, in the long term, 3 years, NTPC has emerged as the winner, giving multibagger returns of 148 percent while PowerGrid also more than doubled its investor wealth, surging 104 percent.

Earnings

In the June quarter, NTPC missed Street estimates to post a 9.4 percent rise in its standalone net profit at ₹4,066 crore as compared to ₹3,717 crore clocked in the year-ago period. Its total revenue from operations, however, fell 2.3 percent to ₹39,122 crore in Q1FY24 versus ₹40,026 crore reported in the corresponding quarter of the previous fiscal year. Meanwhile, EBITDA came in at ₹11,369.1 crore, up 16.7 percent YoY, and the EBITDA margin rose by 470 bps YoY to 29 percent.

"The comparative figures for the quarter ended 30 June 2022 are restated on account of the merger of two wholly-owned subsidiaries in the previous year for which accounting has been done," NTPC stated in the regulatory filing.

Power Grid, on the other hand, posted a 5.9 percent fall in its standalone net profit to ₹3,542.7 crore in Q1FY24, compared to ₹3,766 crore in the corresponding period last year. The state-owned power major's revenue from operations during Q1 stood at ₹10,436 crore, registering a marginal decline of 0.1 percent, against ₹10,446 crore in the year-ago period. EBITDA, meanwhile, rose 3.4 percent YoY during the June quarter to ₹9,099.4 crore versus ₹8,802 crore in the same period last year. The EBITDA margin came in at 87.2 percent, compared to 84.3 percent in the year-ago period.

Which stock has better long-term opportunities?

Suman Bannerjee, CIO, Hedonova, likes NTPC over PowerGrid.

“According to me, NTPC seems like a more promising long-term investment choice. It has a track record of stronger performance and a higher growth in net profit compared to PowerGrid. Notably, the company's management has set ambitious targets, aiming to achieve a total installed power generation capacity of 130 GW by 2032, with a substantial portion, 60 GW, coming from renewable sources. Furthermore, their goal of securing a 25% market share in ancillary services and storage by 2032 reflects a strategic vision for diversification and adaptability in the evolving energy landscape. This could be a plus point for the long term,” said Bannerjee.

Vinit Bolinjkar, Head of Research, Ventura Securities, also prefers NTPC between the two.

“Though both NTPC and Power Grid Corp (PGCIL) are marquee power sector PSUs, they represent different sub-segments. NTPC is a power generation company, while Power Grid is in power transmission and distribution (T&D). We prefer NTPC over PGCIL due to its ongoing diversification in renewable energy and green hydrogen, which significantly enhances its business potential and could also re-rate its valuation,” said Bolinjkar.

The Indian government is targeting to double the power generation capacities to 900 GW by 2030, which will require significant investments in power generation and transmission infrastructure. The focus will be more on renewable/clean energy. In line with this development, NTPC has been expanding its capacities in both thermal and renewable segments. The share of renewable power in its total generation capacity has increased from 1.7 percent (1 GW) in FY19 to 4.6 percent (3.3 GW) in FY23. The company is targeting a 50% percent(60 GW) share of renewable capacity by 2032, he said.

In addition, NTPC, which is setting up a more than ₹1 lakh crore green hydrogen hub in coastal Andhra Pradesh, will install 13.4 GW of solar power and 6.6 GW of pumped storage project (PSP). The area earmarked for the project is spread over 1,200 acres, and it will have both an industrial (solar module and wind turbine manufacturing hub for captive use) and green hydrogen production setup, added Bolinjkar.

Meanwhile, Gaurang Shah, Senior Vice President at Geojit Financial Services, believes both power companies have strong long-term growth opportunities.

“We remain structurally positive on power generation, power transmission, and power equipment companies. There are a lot of huge capacities that are lined up by the government in terms of power generation, which will enable power generation companies in terms of earnings visibility. Transmission companies in terms of earnings improvement and power equipment companies in terms of the order book. We have positive coverage on NTPC and Powergrid from a long-term point of view and we expect the companies to deliver best better numbers as we go forward,” said Shah.

Brokerage house Jefferies also has ‘buy’ calls on both NTPC and PowerGrid and has raised their target prices but it sees more upside potential in NTPC than PowerGrid. The brokerage has a target price of ₹300 ( ₹255 earlier) for NTPC, indicating a potential upside of over 25 percent, whereas, for PowerGrid, it has a target of ₹212 ( ₹206 earlier), which implies just a 5 percent possible upside.

The brokerage believes that FY23-26E should see NTPC’s consolidated non-fossil portfolio rise 4.9x to 20 GW. Its estimates factor in 14 GW solar/wind RE by FY26E, vs NTPC’s target of 20 GW. Monetisation plans with stake sale/IPO over two-three years up as more assets come on the ground is an additional trigger ahead. As the renewable energy portfolio becomes more sizeable, it believes the stock will continue to re-rate. Its revised PT of Rs300 (vs Rs255) values the company at 1.7x PB Sept'25E (vs 1.5x FY25E) as visibility on asset commissioning is improving.

Jefferies noted that PowerGrid’s valuation depends on the capex growth prospects for the company. It de-rated consistently for five years during FY17-21, as capex growth slowed down although capitalisation and earnings pricked up. The re-rating in the past three years was driven by the rise in the bid pipeline, which points to capex ahead moving higher, said the brokerage. It believes visibility on a healthy transmission bid pipeline remains, as RE capacity addition is taking off. Against this backdrop, the stock should trade at 2.2x, at the higher end of its PB trading range, added the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.