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Lower rates, high fixed costs, and sugar segment losses dent earnings
Navabharat Ventures’ (NVL) Q3FY11 PAT, at INR 493 mn (our expectation
INR 800 mn), dipped 62% Y-o-Y, due to lower–than-expected merchant
realisations at INR 3.24/INR (our expectation INR 3.8/kWh). Operations at the
ferro alloy unit were subdued with the ferro chrome facility being practically shut
down, while part of the manganese facility was also not operational due to sub
optimal prices. However, fixed costs for these units were still borne, resulting in
lower earnings. The sugar segment also posted losses as prolonged rains have
delayed the crushing season. Ferro alloy and sugar segments are expected to post
better performance in 4QFY11, though impact on overall earnings may be
marginal. The 64 MW Orissa unit has been installed and awaiting environmental
clearance for commercialisation, which is expected by March-April 2011.
Lower cash due to debt repayment and lower drawdown on capex loans
The company’s cash on books dropped to INR 5.5 bn (from INR 6.9 bn in FY10) in
tune with debt repayment, currently at INR 1.6 bn (from INR 2.5 bn in FY10),
leading to lower interest expense and treasury income. NVL has drawn only
INR 550 mn of debt against INR 1.6 bn sanctioned for the Orissa expansion due to
surplus cash position and to save interest during construction. We expect this
debt to be drawn post commercialisation of the unit in FY12.
Restating earnings to factor in high risks, costs and lower revenues
We have revised down our merchant price assumptions to INR 4 / kWh for FY12
and also factored in rising coal prices, lower PLF (due to pressure on coal
availability), and lack of recovery in ferro alloys prices to dent NVL’s earnings.
Hence, we have revised down our earnings for FY11E and FY12E by 30% and
40%, respectively. We are introducing FY13 estimates, which are expected to be
first full year of Zambian coal mining operations.
Outlook and valuations: Inexpensive valuations; maintain ‘BUY’
Commercialisation of 64 MW at Orissa and commencement of mining in Zambian
coal mines (by Oct-Nov 2011) will aid earnings post H2FY12. The next phase of
earnings growth will be driven by commissioning of 150 MW power capacities in
FY14. Given NVL’s strong balance sheet and potential for growth from assets
across coal, power, and ferro alloys (due to uptick in steel cycle) we find the stock
attractive from a long-term perspective. We maintain ‘BUY’ with revised SOTP
target price of INR 394 (based on diluted equity).
Cutting estimates on higher risk from fuel security, rising costs, expansion
delays
• Merchant rates
NVL realised merchant rates of INR 3.35/kWh in Q3FY11 (adjusted for sales to
GRIDCO at INR 2.9/kWh). Management has contracted merchant sales at ~INR
3.4/kWh in Jan 2011, INR 3.75/kWh in Feb 2011, and INR 4.23/kWh in March 2011.
We expect FY12E average realisation to be ~INR 4/kWh (in line with our assumption
for the power universe).
• Fuel security
The company currently has a fuel mix of 70% linkage coal with 30% e-auction coal
and washery rejects for its existing power plants. For its forthcoming projects the
mix will be 70% washery rejects with 30% e-auction and linkage coal. Since it is not
economically viable to transport washed coal over longer distances and it also
requires tweaking of boiler technology to use large quantum of washed coal,
management is confident of securing coal supplies since its upcoming projects (both
Orissa and Paloncha) are near existing washeries. However, given the imminent coal
shortage in the country we believe e-auction will not only be more expensive but
also a limited resource, while linkage coal for new plants may not come at all given,
Coal India projections. Thus, we have factored in lower PLF of 75% for both new
projects in Orissa and Paloncha with consequent impact on earnings and valuations.
• Ferro alloys
While average realisations for manganese alloys is around INR 55,000 /tone, that of
ferro chrome is INR 63,000/tonne. The ferro chrome operations reach break-even at
a price of INR 65,000/tonne, thus requiring shutdown of these plants, though
certain fixed costs still need to be accrued. Management expects better pricing and
demand from manganese alloys going forward. However, given the sticky nature of
prices so far we have cut ferro alloy earnings estimates to INR 70-72 mn per annum
in FY12 and FY13 against INR 250-300 mn earlier.
• Excluding 150 MW power project and Indonesian coal mine from valuations
With environmental clearance awaited for 150 MW in Andra Pradesh which is based
on imported coal, we have excluded the same from our valuations. We are also not
factoring in any value from the Indonesian coal mine asset as the company has gone
for judicial arbitration.
Management call highlights
• Orissa and Andhra Pradesh (AP) power capex
The Orissa-based 64 MW project, which was delayed due to lack of environmental
clearance, is due to be commissioned in Q1FY12. In AP the first 150 MW unit at
Paloncha is under construction with financial clearances and equipment tied up. NVL
is actively participating in long-term Case I tenders to tie up its part of its existing
and upcoming capacities.
• Zambian mines and power plant
The restructuring of the mine has been completed with all past dues cleared. NVL
intends to commence operations from H2FY12 with 0.5 mt production ramping up to
1 mt p.a. by FY13E. Negotiations for signing PPA for the 300 MW power plant and
tendering for equipment are in progress; financial closure and equipment ordering is
expected by H1FY12. Total equity in Zambia (mines +power plant) is expected to be
USD 130 mn, of which USD 25 mn has been deployed. We have not yet factored the
power plant in our earnings estimates and valuations, pending its financial closure.
• Indonesian mines shelved
Given the long delay in environmental clearance for the Indonesian mining assets,
NVL has decided to back out of this agreement. The equity deployed so far is USD 4
mn which has a lien on Singaporean assets owned by mining partners. The matter is
currently subjudice to recover the equity invested.
• Dilution on forced conversion
NVL has used its forced conversion right to convert its pending FCCBs (lying with the
liquidator of Lehman Brothers) at a conversion price of INR 121.82/sh. The
conversion will result in a diluted equity of ~90 mn shares.
Company Description
NVL has historically been a ferro alloy and sugar manufacturing company with
captive power generation capacities to fulfill requirement of these businesses.
However, the company has, over the past two years, shifted focus to power and coal
mining while toning down its ferro alloy business. In FY10, bulk of the INR 5,128 mn
PBIT in FY10 came from power sales (~25 MW captive sales and ~200 MW merchant
sales).
Investment Theme
Power & Coal capex:
• NVL’s power capacities will almost double to 450 MW by FY14 with addition of 64
MW in Orissa by Q4FY11 and 150 MW in Andhra Pradesh (AP) by FY14. The
company has one coal mine in Zambia with cumulative reserves of 120 mt. NVL is
targeting production of 1 mtpa this location by FY13 with PBT margins of USD
10/tonne. In Zambia the company NVL has acquired 65% stake in a coal mine with
access to 60 mt reserves of high grade coal (GCV 6,500 kcal/kg) for sale in the open
market and additional 60 mt thermal coal (GCV 4,500 kcal/kg) which is to be used
for fueling a 300 MW power plant (to be set up and operated by NVL). The company
expects to produce 0.5 mn tonnes of high grade coal in FY12 and 1 mn tpa in FY13.
The power plant is expected to achieve financial closure by mid FY12 and to be
commissioned by FY15.
Ferro alloy capacity a hedge against falling merchant prices:
• Exposure to the ferro alloy price cycle has resulted in high volatility in NVL’s PAT
historically (FY05-09). However, with the company raking in almost all future profits
from the power segment, PBT is expected to be relatively stable (FY11-13). Falling
merchant rates will be partly compensated by steady coal earnings and rising other
income from a strong cash position. In FY14, new power capacities of 150 MW will
further boost earnings.
Key Risks
Correction in merchant prices and scarcity of coal
Since the company maximum exposure is to merchant power prices (i.e., short term
power sales contracts of 3-6 months) any sharp correction in them will immediately
impact profitability. We have assumed merchant rates falling to INR 4 / kWh FY12
onwards for our projections. Prices below these levels will be a risk to our earnings
estimates. However, we expect NVL to participate in case-I bidding soon for incremental
capacities to tie up a sizable portion through assured bid prices and reduce its exposure
to market prices by FY13. The coal situation in India is worsening due to Coal India’s
production target reducing progressively, casting a shadow of doubt on availability of
linkage coal for additional capacities. NVL’s upcoming capacities have ~30% of their coal
requirement through linkage while balance is contracted with existing washeries for
washery rejects. Hence the risk lies in 30% of its incremental coal requirement.
Delay in power and coal mine capacity addition
A chunk of NVL’s capacity is coming up by FY14, which adds INR 40/share to our
SOTP. Its 64 MW Orissa plant is expected by FY12, valued at INR 37/share. Any
delay in the commissioning of these plants will delay cash flows and hence impact
earnings and valuations. The company expects to post 1 mt coal sales in FY13
(Zambia) at USD 10 / tonne PBT margin. We have factored 0.5 mt sales in FY12
from Zambia, growing to 1 mt by FY14. Any delay in this project and/or short fall in
volumes and margin pose a risk to our estimates and valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lower rates, high fixed costs, and sugar segment losses dent earnings
Navabharat Ventures’ (NVL) Q3FY11 PAT, at INR 493 mn (our expectation
INR 800 mn), dipped 62% Y-o-Y, due to lower–than-expected merchant
realisations at INR 3.24/INR (our expectation INR 3.8/kWh). Operations at the
ferro alloy unit were subdued with the ferro chrome facility being practically shut
down, while part of the manganese facility was also not operational due to sub
optimal prices. However, fixed costs for these units were still borne, resulting in
lower earnings. The sugar segment also posted losses as prolonged rains have
delayed the crushing season. Ferro alloy and sugar segments are expected to post
better performance in 4QFY11, though impact on overall earnings may be
marginal. The 64 MW Orissa unit has been installed and awaiting environmental
clearance for commercialisation, which is expected by March-April 2011.
Lower cash due to debt repayment and lower drawdown on capex loans
The company’s cash on books dropped to INR 5.5 bn (from INR 6.9 bn in FY10) in
tune with debt repayment, currently at INR 1.6 bn (from INR 2.5 bn in FY10),
leading to lower interest expense and treasury income. NVL has drawn only
INR 550 mn of debt against INR 1.6 bn sanctioned for the Orissa expansion due to
surplus cash position and to save interest during construction. We expect this
debt to be drawn post commercialisation of the unit in FY12.
Restating earnings to factor in high risks, costs and lower revenues
We have revised down our merchant price assumptions to INR 4 / kWh for FY12
and also factored in rising coal prices, lower PLF (due to pressure on coal
availability), and lack of recovery in ferro alloys prices to dent NVL’s earnings.
Hence, we have revised down our earnings for FY11E and FY12E by 30% and
40%, respectively. We are introducing FY13 estimates, which are expected to be
first full year of Zambian coal mining operations.
Outlook and valuations: Inexpensive valuations; maintain ‘BUY’
Commercialisation of 64 MW at Orissa and commencement of mining in Zambian
coal mines (by Oct-Nov 2011) will aid earnings post H2FY12. The next phase of
earnings growth will be driven by commissioning of 150 MW power capacities in
FY14. Given NVL’s strong balance sheet and potential for growth from assets
across coal, power, and ferro alloys (due to uptick in steel cycle) we find the stock
attractive from a long-term perspective. We maintain ‘BUY’ with revised SOTP
target price of INR 394 (based on diluted equity).
Cutting estimates on higher risk from fuel security, rising costs, expansion
delays
• Merchant rates
NVL realised merchant rates of INR 3.35/kWh in Q3FY11 (adjusted for sales to
GRIDCO at INR 2.9/kWh). Management has contracted merchant sales at ~INR
3.4/kWh in Jan 2011, INR 3.75/kWh in Feb 2011, and INR 4.23/kWh in March 2011.
We expect FY12E average realisation to be ~INR 4/kWh (in line with our assumption
for the power universe).
• Fuel security
The company currently has a fuel mix of 70% linkage coal with 30% e-auction coal
and washery rejects for its existing power plants. For its forthcoming projects the
mix will be 70% washery rejects with 30% e-auction and linkage coal. Since it is not
economically viable to transport washed coal over longer distances and it also
requires tweaking of boiler technology to use large quantum of washed coal,
management is confident of securing coal supplies since its upcoming projects (both
Orissa and Paloncha) are near existing washeries. However, given the imminent coal
shortage in the country we believe e-auction will not only be more expensive but
also a limited resource, while linkage coal for new plants may not come at all given,
Coal India projections. Thus, we have factored in lower PLF of 75% for both new
projects in Orissa and Paloncha with consequent impact on earnings and valuations.
• Ferro alloys
While average realisations for manganese alloys is around INR 55,000 /tone, that of
ferro chrome is INR 63,000/tonne. The ferro chrome operations reach break-even at
a price of INR 65,000/tonne, thus requiring shutdown of these plants, though
certain fixed costs still need to be accrued. Management expects better pricing and
demand from manganese alloys going forward. However, given the sticky nature of
prices so far we have cut ferro alloy earnings estimates to INR 70-72 mn per annum
in FY12 and FY13 against INR 250-300 mn earlier.
• Excluding 150 MW power project and Indonesian coal mine from valuations
With environmental clearance awaited for 150 MW in Andra Pradesh which is based
on imported coal, we have excluded the same from our valuations. We are also not
factoring in any value from the Indonesian coal mine asset as the company has gone
for judicial arbitration.
Management call highlights
• Orissa and Andhra Pradesh (AP) power capex
The Orissa-based 64 MW project, which was delayed due to lack of environmental
clearance, is due to be commissioned in Q1FY12. In AP the first 150 MW unit at
Paloncha is under construction with financial clearances and equipment tied up. NVL
is actively participating in long-term Case I tenders to tie up its part of its existing
and upcoming capacities.
• Zambian mines and power plant
The restructuring of the mine has been completed with all past dues cleared. NVL
intends to commence operations from H2FY12 with 0.5 mt production ramping up to
1 mt p.a. by FY13E. Negotiations for signing PPA for the 300 MW power plant and
tendering for equipment are in progress; financial closure and equipment ordering is
expected by H1FY12. Total equity in Zambia (mines +power plant) is expected to be
USD 130 mn, of which USD 25 mn has been deployed. We have not yet factored the
power plant in our earnings estimates and valuations, pending its financial closure.
• Indonesian mines shelved
Given the long delay in environmental clearance for the Indonesian mining assets,
NVL has decided to back out of this agreement. The equity deployed so far is USD 4
mn which has a lien on Singaporean assets owned by mining partners. The matter is
currently subjudice to recover the equity invested.
• Dilution on forced conversion
NVL has used its forced conversion right to convert its pending FCCBs (lying with the
liquidator of Lehman Brothers) at a conversion price of INR 121.82/sh. The
conversion will result in a diluted equity of ~90 mn shares.
Company Description
NVL has historically been a ferro alloy and sugar manufacturing company with
captive power generation capacities to fulfill requirement of these businesses.
However, the company has, over the past two years, shifted focus to power and coal
mining while toning down its ferro alloy business. In FY10, bulk of the INR 5,128 mn
PBIT in FY10 came from power sales (~25 MW captive sales and ~200 MW merchant
sales).
Investment Theme
Power & Coal capex:
• NVL’s power capacities will almost double to 450 MW by FY14 with addition of 64
MW in Orissa by Q4FY11 and 150 MW in Andhra Pradesh (AP) by FY14. The
company has one coal mine in Zambia with cumulative reserves of 120 mt. NVL is
targeting production of 1 mtpa this location by FY13 with PBT margins of USD
10/tonne. In Zambia the company NVL has acquired 65% stake in a coal mine with
access to 60 mt reserves of high grade coal (GCV 6,500 kcal/kg) for sale in the open
market and additional 60 mt thermal coal (GCV 4,500 kcal/kg) which is to be used
for fueling a 300 MW power plant (to be set up and operated by NVL). The company
expects to produce 0.5 mn tonnes of high grade coal in FY12 and 1 mn tpa in FY13.
The power plant is expected to achieve financial closure by mid FY12 and to be
commissioned by FY15.
Ferro alloy capacity a hedge against falling merchant prices:
• Exposure to the ferro alloy price cycle has resulted in high volatility in NVL’s PAT
historically (FY05-09). However, with the company raking in almost all future profits
from the power segment, PBT is expected to be relatively stable (FY11-13). Falling
merchant rates will be partly compensated by steady coal earnings and rising other
income from a strong cash position. In FY14, new power capacities of 150 MW will
further boost earnings.
Key Risks
Correction in merchant prices and scarcity of coal
Since the company maximum exposure is to merchant power prices (i.e., short term
power sales contracts of 3-6 months) any sharp correction in them will immediately
impact profitability. We have assumed merchant rates falling to INR 4 / kWh FY12
onwards for our projections. Prices below these levels will be a risk to our earnings
estimates. However, we expect NVL to participate in case-I bidding soon for incremental
capacities to tie up a sizable portion through assured bid prices and reduce its exposure
to market prices by FY13. The coal situation in India is worsening due to Coal India’s
production target reducing progressively, casting a shadow of doubt on availability of
linkage coal for additional capacities. NVL’s upcoming capacities have ~30% of their coal
requirement through linkage while balance is contracted with existing washeries for
washery rejects. Hence the risk lies in 30% of its incremental coal requirement.
Delay in power and coal mine capacity addition
A chunk of NVL’s capacity is coming up by FY14, which adds INR 40/share to our
SOTP. Its 64 MW Orissa plant is expected by FY12, valued at INR 37/share. Any
delay in the commissioning of these plants will delay cash flows and hence impact
earnings and valuations. The company expects to post 1 mt coal sales in FY13
(Zambia) at USD 10 / tonne PBT margin. We have factored 0.5 mt sales in FY12
from Zambia, growing to 1 mt by FY14. Any delay in this project and/or short fall in
volumes and margin pose a risk to our estimates and valuations.
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