NVBL concludes transaction with Essar Power & puts Dharmavaram Power Project (150MW) on hold :Emkay

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NVBL concludes transaction with Essar Power & puts Dharmavaram Power Project (150MW) on hold

Events:

Nava Bharat Ventures Ltd (NBVL) has transferred balance holding (24% stake) in Nava Bharat Power to Essar Power. The company has also deferred setting 150MW Dharmavaram Power Project for the want of environmental clearances.

Background of NBVL-Essar Power deal:

In July 2010, NBVL had entered into a binding agreement to sell 100 per cent stake in Nava Bharat Power to Essar Power. Navabharat Power is a 2,250 MW coal-fuelled power plant being set up in Dhenkanal district of Orissa, India. The $2 billion project is being implemented in two phases, with the first phase of 1,050 MW and phase two of 1,200 MW. The project also includes the allocation of the Rampia Coal block of 112 million metric tones and 4.7 million metric tones per annum coal linkage with Coal India. Essar Power had initially acquired 76 per cent equity with the balance 24 per cent being acquired upon completion of certain project milestones. As the milestones have been achieved the company has sold its balance 24% stake to Essar Power and has received Rs850mn for the 24% stake sale.

Impact & Valuation:

We had already factored in the timely completion of transaction and had not considered the 150MW power project in our numbers and hence there is no change in our earnings estimates of Rs44.7/share and Rs45/share for FY12E/13E respectively At CMP of Rs269/share the stock is trading at 0.8xFY13E book of Rs327/share with an average RoE of 15.8% for next five years.

We continue to relatively prefer NBVL on account of (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.

Maintain ‘Accumulate’ rating on the stock with a DCF based PT of Rs328/share.