The sharp divergence in BHEL and NTPC's stock performance over the past six months suggests the market is concerned about future thermal capacity addition but remains comfortable with BHEL's prospects from thermal equipment and smaller businesses, Kotak Institutional Equities said.
BHEL has outperformed NTPC by 80 percentage points since the start of the West Asia conflict. Kotak said NTPC's underperformance may be underpinned by "weak near-term earnings growth expectation based on weak thermal capacity addition in recent months" and "nebulous medium-term growth prospects of NTPC's thermal business" amid the steep increase in renewable generation and storage capacity.
"We fully agree with the uncertain terminal value of thermal generation and equipment assets," the brokerage said.
Kotak's reverse valuation of NTPC implies it will add a cumulative 42 GW of incremental thermal capacity. This compares with the CEA's projection of 86 GW of cumulative thermal capacity addition over FY2027-36, part of which could come from the private sector.
For BHEL, however, the market appears "exuberant regarding BHEL's future prospects". Even after ascribing 25% of its value to non-thermal businesses, Kotak's reverse valuation suggests BHEL needs to deliver 150-300 GW of BTG and a better cash generation profile "in perpetuity".