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Investment arguments
Fully integrated power player, captive mines eliminates fuel risk: Neyveli
Lignite Corporation (NLC) is a fully integrated power generation player with a
current capacity of 2,740 MW. NLC is the largest owner of lignite mining
capacity in India of 30.6 mn MTPA and lignite reserves of 735 mn MT
(produces ~ 80% of the total lignite production in India). Its own mines
cater to 100% of the fuel requirement, thus, insulating the company from
price increases in the raw material. Secondly, the lignite mines are located
near the power plants thus providing cost advantage to the company.
Further, lignite mines’ proximity to power generation plants and raw
material supply based on transfer pricing (fixed by CERC) result in
favourable EBITDA margins for the company.
Power generation capacity to grow 5-fold while lignite mining capacity
to more than double by FY2017: NLC plans to increase its current power
generation capacity to 4,290 MW (1.5times) by FY2013 and to 13,790 MW
(5-fold) by the end of the 12th Five Year Plan. The lignite capacity of the
company is planned to be more than doubled to 64.9 mn MTPA by FY2017.
The total investment in the projects is expected to be more than Rs.56,700
crore. The company is diversifying across fuels and geographies which
would help mitigate the risk of heavy rainfall (that hampered the profitability
in Q3 FY2011) by FY2017 when ½ of the total capacity is expected to be
based on fuel other than lignite and ~ 60% would be based in states other
than Tamil Nadu.
Protected ROE mechanism: NLC being a state-owned entity, its tariffs are
regulated by the Central Electricity Regulatory Commission (CERC) norms.
Power generation by the company is based on the (Return on Equity) ROE
concept under which all costs are a pass-through and the power plant makes
a fixed post-tax ROE of 15.5% (pre-tax 23.8%) with the plant being financed
by a debt: equity ratio of 70:30.
Strong Balance Sheet: NLC has a strong balance sheet with cash balance as
on September 2010 of Rs.4,462 crore (against an expected net sales of
Rs.3,685 crore for FY2011E). In addition, the company has unquoted
investments of Rs 62 crore (Book Value) in tax free SLR Power Bonds issued
by the State Governments. Further, despite State Electricity Boards being the
company’s clients, sundry debtors on NLC’s books (FY2010) is Rs.455.4
crore i.e. 11% of net sales. As against this, the company has a debt of
Rs.4,350 crore of which Rs 840 cr is foreign currency loans (guaranteed by
the Government) and balance is from Indian banks, REC and Neyveli Bonds.
Risk to View
• Any disruption in lignite mining activities due to heavy monsoons in the
state of Tamil Nadu may hamper the operations of power plants;
• Neyveli Lignite may face delays in the implementation of power
generation projects leading to escalation in costs on account of land
acquisition and environmental clearance issues.
Valuation
At the current price of Rs.111, the stock has declined by 38% from its 52-
week high of Rs181 and 59% from the high it achieved on 4th January 2008
(Rs.274). The stock currently trades at a PE of 10.5x FY2013E EPS of Rs.10.6
which is below its average of 1-year forward PE of 12.2 over the last 5 years.
On P/BV basis, the stock trades at 1.4x FY2013E which corresponds to 5-
year average of 1-year forward P/BV. Moreover, the true potential value of its
lignite mining (with a total capacity of 30.6 mn tons and total reserves
estimated to be around 735 mn tonnes) is not reflected in the valuations. We
expect Neyveli Lignite with its major expansion plans – across fuels and
geographies - and captive mines which would last for more than 2 decades
to grow its bottom line consistently over the years in future.
At the current price of Rs.111, we recommend a BUY on the stock with a
target price of Rs.148 (1.8xFY2013E BV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment arguments
Fully integrated power player, captive mines eliminates fuel risk: Neyveli
Lignite Corporation (NLC) is a fully integrated power generation player with a
current capacity of 2,740 MW. NLC is the largest owner of lignite mining
capacity in India of 30.6 mn MTPA and lignite reserves of 735 mn MT
(produces ~ 80% of the total lignite production in India). Its own mines
cater to 100% of the fuel requirement, thus, insulating the company from
price increases in the raw material. Secondly, the lignite mines are located
near the power plants thus providing cost advantage to the company.
Further, lignite mines’ proximity to power generation plants and raw
material supply based on transfer pricing (fixed by CERC) result in
favourable EBITDA margins for the company.
Power generation capacity to grow 5-fold while lignite mining capacity
to more than double by FY2017: NLC plans to increase its current power
generation capacity to 4,290 MW (1.5times) by FY2013 and to 13,790 MW
(5-fold) by the end of the 12th Five Year Plan. The lignite capacity of the
company is planned to be more than doubled to 64.9 mn MTPA by FY2017.
The total investment in the projects is expected to be more than Rs.56,700
crore. The company is diversifying across fuels and geographies which
would help mitigate the risk of heavy rainfall (that hampered the profitability
in Q3 FY2011) by FY2017 when ½ of the total capacity is expected to be
based on fuel other than lignite and ~ 60% would be based in states other
than Tamil Nadu.
Protected ROE mechanism: NLC being a state-owned entity, its tariffs are
regulated by the Central Electricity Regulatory Commission (CERC) norms.
Power generation by the company is based on the (Return on Equity) ROE
concept under which all costs are a pass-through and the power plant makes
a fixed post-tax ROE of 15.5% (pre-tax 23.8%) with the plant being financed
by a debt: equity ratio of 70:30.
Strong Balance Sheet: NLC has a strong balance sheet with cash balance as
on September 2010 of Rs.4,462 crore (against an expected net sales of
Rs.3,685 crore for FY2011E). In addition, the company has unquoted
investments of Rs 62 crore (Book Value) in tax free SLR Power Bonds issued
by the State Governments. Further, despite State Electricity Boards being the
company’s clients, sundry debtors on NLC’s books (FY2010) is Rs.455.4
crore i.e. 11% of net sales. As against this, the company has a debt of
Rs.4,350 crore of which Rs 840 cr is foreign currency loans (guaranteed by
the Government) and balance is from Indian banks, REC and Neyveli Bonds.
Risk to View
• Any disruption in lignite mining activities due to heavy monsoons in the
state of Tamil Nadu may hamper the operations of power plants;
• Neyveli Lignite may face delays in the implementation of power
generation projects leading to escalation in costs on account of land
acquisition and environmental clearance issues.
Valuation
At the current price of Rs.111, the stock has declined by 38% from its 52-
week high of Rs181 and 59% from the high it achieved on 4th January 2008
(Rs.274). The stock currently trades at a PE of 10.5x FY2013E EPS of Rs.10.6
which is below its average of 1-year forward PE of 12.2 over the last 5 years.
On P/BV basis, the stock trades at 1.4x FY2013E which corresponds to 5-
year average of 1-year forward P/BV. Moreover, the true potential value of its
lignite mining (with a total capacity of 30.6 mn tons and total reserves
estimated to be around 735 mn tonnes) is not reflected in the valuations. We
expect Neyveli Lignite with its major expansion plans – across fuels and
geographies - and captive mines which would last for more than 2 decades
to grow its bottom line consistently over the years in future.
At the current price of Rs.111, we recommend a BUY on the stock with a
target price of Rs.148 (1.8xFY2013E BV).
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