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Lower merchant rates and high ferro alloy fixed costs impact earnings
Navbharat Ventures’ (NVL) Q2FY11 PAT, at INR 847 mn, dipped 29.5%, as
expected, due to lower merchant realisations at INR 4.5/INR (INR 6/kWh in
Q2FY10). Due to lack of transmission capacity, the company continued to operate
its captive power units in Orissa at optimal levels which led to higher operating
costs than silico manganese realizations. Losses would have been greater if the
plant had been shut down completely. With the power transmission facility now
operational, management is confident of profits in H2 in the ferro alloy business.
Robust cash balance boosted by sale to Essar Power; capex on track
The robust cash balance of INR ~7 bn was aided by sale of a power plant to Essar
Power (INR 800 mn) which is sufficient to fund future capex towards mining and
power till FY13. The company has guided for a capex of INR 11 bn between FY11
and FY13 including ~USD 110 mn in Zambia, ~USD 13 mn in Indonesia, and the
300 MW expansion in AP. The 64 MW expansion is on track and commercial
operation is expected in Q4FY11.
Eyeing 129 MW hydro project in Laos
NVL, in association with a Japanese firm, Kobe Green Power, is planning to
develop a 129 MW hydro power plant in Laos whose hydrology study indicates a
minimum PLF of ~50%. A detailed feasibility study will be undertaken post which
NVL will enter into a project concession agreement with the Laos government.
NVL is expected to hold 60-80% stake in the USD 200 mn project which will be
70 : 30 debt : equity funded.
Outlook and valuations: Growth story intact; maintain ‘BUY’
With our merchant price assumptions of INR 5 / kwh, we expect firm ferro alloy
prices, sale of dump from Zambian coal mines and higher cash balance leading to
uptick in other income to cushion any impact due to lower merchant power sales.
We expect NVL’s profitability to be stable (INR 4.3–5.0 bn) till FY13 after factoring
lower merchant realizations and higher tax outgo but offset by 64 MW power
capacity addition and Zambian coal sales in FY12. The next phase of earnings
growth will be driven by commissioning of 300 MW power capacities in FY14. Given
its relatively steady cash flows and strong balance sheet, we find the stock
attractive from a long term perspective. We maintain ‘BUY’ on the stock with a
SOTP target price of INR 520 (based on diluted equity).
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