Nava Bharat Ventures -Earnings decline due to lower merchant rates:: Alchemy

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Earnings decline due to lower merchant rates
Nava Bharat Ventures’ second quarter operating profit declined 30% YoY to
`934mn, in line with our estimates. While the sales volume increased 15%YoY,
external sales realisation declined 28% YoY and fuel cost increased 14%YoY.

Hence, PAT declined 30% YoY.
PAT declined 30% YoY, mainly due to decline in merchant rates
Power sales volume increased 15% YoY to 410MUs. However, a 28% YoY decline in
realisation of external power sales and a 14% increase in the fuel to `1.37/unit led to a
~20% YoY decline in earnings from the power business. This, coupled with loss in the
ferro alloy business, led to a 30% YoY decline in PAT, to `847mn.



Merchant rates to remain weak in 2HFY11
For 3QFY11, expected external sales realisation is `4/unit and hence, the merchant sales
realisation, excluding Gridco sales, would be `4.15/unit (~30% YoY decline). For
4QFY11, the management has indicated external sales rates will be above `4.2/unit.
The company is exploring options to tie up the off-take of 2x150MW units through case-
1 bids. This is a change from the company’s earlier strategy to sell the power generated
from the units in the merchant market.

Nava Bharat Singapore enters into an SPA with Kobe Green
Kobe Green is a Japanese company, which has the development rights to set up a
129MW hydro-power plant in Laos, at a cost of US$200mn, funded at a debt-equity of
70:30. The equity contribution from Nava Bharat will be 60% of total equity (with an
additional 20% if the Government of Laos declines).

Key takeaways from management con-call
 Boiler light-up of a 64MW unit is expected in the next two months, but
management is still confident of commissioning the unit in 4QFY11. (Generally, it
takes seven to nine months for a unit to be commissioned after boiler light-up).
 The Indonesian mine has obtained forest clearance. The production of coal will still
take time due to pending issues with its local partner.

Valuation
We have revised our merchant rates for FY11E and FY12E to `4.71/unit and `4.6/unit,
respectively, which results in a 2% reduction in our TP. We have used the DCF method
to value the power business. Our SoTP-based target price (refer to exhibit 4) of
`389/share implies 10% upside from the current level. Maintain Accumulate.