Kotak Institutional Equities has identified a sharp valuation gap between NTPC and Bharat Heavy Electricals Limited (BHEL) following a 64% rise in BHEL shares against a 12% decline in NTPC over the last six months. Analysts warn that BHEL’s current market valuation, driven by strong sentiment on power shortages, may be disconnected from realistic long-term profit pools, while NTPC’s pricing reflects a more cautious outlook on thermal power growth.
The Indian power sector is seeing a significant split in market sentiment, with state-run power generator NTPC and equipment manufacturer Bharat Heavy Electricals Limited (BHEL) trading on vastly different investment narratives. According to a recent analysis by Kotak Institutional Equities, BHEL shares have surged approximately 64% over the last six months, while NTPC shares have declined by 12% during the same period. This trend has created a valuation paradox that analysts suggest requires a closer look at the long-term fundamentals of both companies.
Analysts at Kotak highlight that BHEL’s current market capitalization of roughly ₹1.5 trillion appears high when compared to the company’s expected long-term financial reality. For this valuation to be justified by future earnings, the company would theoretically need to execute between 150 GW and 300 GW of thermal power capacity. However, financial estimates of the total profit pool from thermal equipment sales suggest a range between ₹50,000 crore and ₹1 trillion. The brokerage noted that the recent stock rally is largely driven by momentum and investor optimism regarding power shortages and data center demand, rather than current realized cash flows.
In contrast, the market has priced NTPC based on a more conservative expectation for future thermal power capacity. The stock's current valuation implies an incremental addition of 40 GW in perpetuity. This cautious pricing reflects concerns over the long-term viability of coal-fired thermal power as renewable energy and storage solutions become more competitive. Kotak Institutional Equities recently upgraded NTPC to an 'Add' rating with a target price of ₹355, signaling that the brokerage sees value in the generation giant's current position despite the sector headwinds.
The energy transition remains a critical factor for both companies. For BHEL, roughly 75% of its market value is linked to orders for coal-based power plants. If the broader power sector shifts its capital spending aggressively toward renewable energy and storage, the long-term pipeline for new coal equipment orders could shrink. This creates a risk where current high valuations for equipment manufacturers may face correction if future order inflows do not match the optimistic projections currently baked into the share price.
For investors, the key monitorable will be the actual pace of capacity additions and how the competitive landscape between traditional thermal power and green energy evolves. While NTPC is adjusting to a market where renewable tariffs are becoming more competitive, BHEL faces the challenge of sustaining margins and order execution in an environment where the long-term demand for coal-fired power equipment remains uncertain.