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

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

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.

JPMorgan view on India Power sector: NTPC, Essar Power:, GVK, JSW Energy, Adani Power, Tata Power

• A resource held ‘captive’: Only 26 of the 215 coal blocks allocated since
1993 had started production as of Jun-2010. Despite delays, so far only
eight blocks have been de-allocated. Captive coal blocks allocated so far
amount to 45BMT of resources, quite similar to 52.5BMT proven
geological reserves with CIL. However, captive mines produced 44.5MMT
in FY10, ~8.4% of total production of 530MMT. ~60% of captive coal
resource has been allocated to power sector.
• What is causing delays? We analyzed the status of captive coal blocks held
by IPPs to evaluate the fuel risk for the associated power project. We
conclude that the majority of coal blocks analyzed were delayed due to
pending forest clearance and land acquisition.
• A key risk to valuations; major IPPs with exposure include:-
• NTPC: Allocated blocks have ~5.9BMT of reserves. Earliest block
allocated in Oct-2004 (Pakri Barwadih), unlikely to commence production
before FY12, in our view. Stage-II forest clearance and MDO appointment
pending for this block. Captive coal mines can potentially support 15GW of
target capacity of 70GW by FY17.
• Essar Power: All 3 blocks allocated fall in ‘no-go’ forest area classification
of Min. of Environment & Forest (MoEF). Over 55% of capex on dependent
Mahan-I (2x600MW, CoD est. 3QCY11) has been incurred. Underconstruction
Tori-I (2x600MW, CoD est.4QCY12) also faces fuel risk.
• GVK: Tokisud mine expected to start production by Dec-11, ahead of CoD
of unit-1 of Goindwal Sahib (2x270MW) in 3QCY12. Stage-II forest
clearance and land acquisition are still pending.
• JSW Energy: 2x800MW West Bengal project (contributes 17% to SOP, or
Rs21/share) is dependent on 3 coal blocks being developed by the state
minerals development company. Coal blocks are unexplored, as yet.
Assurance of commencing coal production by Dec-2013 is at risk.
• Adani Power: Still seeking alternative block in return for Lohara allocation
which was rejected due to proximity to tiger reserve. Alternative block
allocation a upside for Tiroda-I (1980MW)- ~Rs26/share or 17% of SOTP.
• Tata Power: Production of Tubed block to commence by FY13 and
Mandakini by mid-2014. As per ministry of coal stage-I forest clearance is
pending for both. Tata Power is basing 2.4GW of pipeline on these blocks
(we have factored value for 1GW in SOP, ~Rs146/share or 10% of SOP).