Emkay: Navabharat Ventures- Concerns loom large but relatively better placed

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Nava Bharat Ventures Ltd.

Concerns loom large but relatively better placed

ACCUMULATE

CMP: Rs 280                                       Target Price: Rs 328

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n     NBVL reported weak numbers mainly due to lower merchant realizations (Rs3.36/unit) vs our est. (Rs4.5/unit). Mgmt said- contracts have been signed at Rs3.8-4.3/unit in Q411/ Q112E- suggesting some pick up

n     Revenues (down 7% yoy) were inline but EBITDA margins (23.1%, down 3100bps yoy) and EBITDA took a hit. Ergo RPAT was lower at Rs493mn versus our estimate of Rs856mn.

n     Cut earnings by 5-20% - factoring in higher fuel cost, coal trading in Zambia from Q312E (Indonesia dropped from projections) and Rs4.3/unit merchant tariffs in FY12E

n     Implied long term merchant tariff of Rs3.3/unit, relatively lower. maintain accumulate on relatively cheaper valuations, natural hedge, fuel security with use of washery rejects

Performance hit due to lower merchant realizations and higher fuel cost

NBVL reported revenues of Rs2.5bn (down 7% yoy), in line. However, EBITDA margins

fell by 3,100bps to 23.1% (vs our estimate of 36.2%) mainly led by lower merchant

realizations (Rs3.36/unit vs our estimate of Rs4.50/unit) and higher fuel cost (higher eauction

coal) of Rs2.1/unit (up 11% yoy). Ergo RPAT was lower at Rs493mn (down 63%

yoy) versus our estimate of Rs856mn. However, the management has indicated that it

has signed contracts at Rs3.8/unit-R4.3/unit for next two quarters indicating some pick

up in merchant realizations.

Cut earnings on higher fuel cost and lower merchant price assumptions

Going forward, we have factored (1) higher fuel cost (+8%), (2) coal trading (lower

quantity) in Zambia from Q312E vs Q2FY12E earlier (Indonesia dropped from

projections) and (3) Rs4.3/unit (earlier Rs4.5/unit) merchant tariffs in FY12E.

Consequently, we cut our earnings by 20/14/5% in FY11E/12E/13E.

While overall concerns on merchant prices/payments/coal supplies loom

large but NBVL relatively better placed

We continue to remain concerned on (1) merchant prices (our estimate of sustainable

tariff – Rs2.7/unit) and do not rule out significant cut in our merchant tariff assumptions

of Rs4.3/unit -FY12E and Rs4/Unit-FY13E, (2) discoms’ financials and (3) coal supplies.

However, NBVL with (1) net cash of Rs4.5bn (debt for current plants already repaid), (2)

lower cost of generation (use of washery rejects) of Rs2.2/unit, (3) lower competition in

securing coal supplies due to predominant use of washery rejects and (4) natural hedge

coming in from ferro alloys business and expected coal trading in Zambia is better

placed to ride through the storm.

Maintain Accumulate on relative preference

We maintain accumulate on NBVL on (1) relatively lower implied merchant tariff of

Rs3.3/unit vs Rs3.6/unit for our universe and (2) its being better placed to see through

difficult period. We lower our target price to Rs328/Share (DCF Based).

Concall Highlights

¾ 64 MW unit is ready for commissioning but its pending for a sort of environmental

clearance. Management guided for commissioning in beginning Q1FY12E

¾ Issues in Indonesian mine is status quo. The management mentioned that there are

two options they are pursuing (1) either get hold of the mine through regulatory

clearances or (2) get the reimbursement of its investment of USD 5mn

¾ Current debt and cash on the books is Rs1.6bn and Rs6.1bn (Conso).

¾ Zambia - (1) new coal handling and processing plant should start by Sep 2011 and coal

trading to start by Oct 2011, (2) expected high grade coal trading of 0.3mn MT in

FY12E, 1mn MT in FY13E, (3) cash cost of production at USD45/MT of high grade coal

(6200Kcal) which includes 2.5MT of low grade coal as a by product, (4) Financial

Closure and PPA for the power plant likely by March 2011 and (5) NBVL’s Singapore

subs has extended shareholder loan of USD 26mn which either could be converted into

equity or repaid (65% equity stake - already acquired by not infusing any equity).

¾ Ferro alloys – (1) Ferro Maganese realizations and EBITDA stood at Rs55000/MT and

Rs10000/MT during the qtr and (2) no production at ferro chrome plant (current

realizations at Rs63000/MT and break even at Rs65000/MT) for which the fixed cost

stands at Rs120mn per annum.

¾ Fuel for operational plants (1) Orissa plants – 70% coal linkage, 10% e-auction and

20% washery rejects and (2) AP plants – 80% coal linkage, 10% e-auction and 10%

washery rejects. Fuel for 64MW and 150MW Paloncha is 70-80% washery rejects and

20-30% e-auction or linkage coal.

¾ Current e-auction coal prices (Rs1665/MT pit head) about 30% higher than coal

linkage.

¾ Plans to tie up part of the power (50-60%) in case I bids for its under construction

plants.