Challenges amid opportunities

Last Updated: Wed, Sep 21, 2011 06:37 hrs

Neyveli Lignite Corporation's recent announcement on its expansion plans in the power sector suggests the trend of flat revenues and profits, thanks to almost no expansion in capacities in the recent years, will be passe. The lignite-based power producer is diversifying into coal-based power and has lined up huge expansion plans, worth over Rs 40,000 crore. However, as experienced by other power producers, delays cannot be ruled out on account of execution hurdles.

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Thus, the stock's up move from its 52-week low of Rs 78.5 last month will depend on the execution of the planned capacities. The company is better placed than its peers, due to low-gearing and the scope of diluting promoter holding (which is high at 93.56 per cent), as far as the funding of the projects is concerned. Conservative investors with a horizon of more than three years can consider the stock.

The company has been producing power from its captive lignite mines for more than 50 years. By FY12, it would add 750 Mw, which will support growth. The company is diversifying into coal-based power, thanks to the cap on producing lignite with the current technology and available reserves. Most of the lignite deposits are deep-seated and there is no technology for underground mining. The company, though, is exploring various options for tapping these in joint venture with the Gas Authority of India.

In Rs crore FY11 FY12E FY13E
Sales 3,949 5,569 5,721
% chg -4.2 41 2.7
Operating profit 1,286 1,950 1,929
% chg -0.6 51.6 -1.1
Net Profit 1,298 1,132 1,202
% chg 4.1 -12.8 6.2
EPS (Rs) 7.7 6.7 7.2
% chg 4.1 -12.4 6.2
P/E (x) 11.3 13.0 12.1
E: Estimates Source: Company, Analysts Reports

The company has lined up capacity additions of 7,500 Mw coal-based projects across Tamil Nadu (4,000 Mw), Rajasthan (250 Mw) and Uttar Pradesh (2,000 Mw) by FY17, involving an investment outlay of Rs 40,200 crore. The capex includes the replacement of its 45-year old 600 Mw plant with a 1,000 Mw plant in Tuticorin. The aim is to achieve a capacity of 10,000 Mw by FY17 However, most of the projects are in the early stages of development, and a lot hinges on factors like timely land acquisition, getting environment clearance and so on.

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Among these, fuel security is going to be the biggest risk in attainting the target additions. The existing players are already facing problems in sourcing fuel and the company is a new entrant in the segment. In a bid to secure fuel, it plans to use both domestic and imported coal (linkages or mine acquisition in Indonesia, South Africa). In case of domestic coal, it is vying for three (with combined reserves of 800 million tonnes) of the five coal blocks that earlier belonged to NTPC. NTPC's allocation was cancelled by the government on account of delays in the mine development.

The company received Navratna status in April, which enables it to spend up to Rs 1,000 crore without seeking the government's approval and gives it improved flexibility. More, its debt (gross) equity ratio is very low at just 0.4 times as on March-on a net basis, the company has zero debt and a net worth of Rs 11,174 crore. Analysts expect this to improve in the next two years, despite the expansion plans, thanks to the steady cash flow from the operations (cash profit of over Rs 1,500 crore).

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This is in contrast to most private power producers, which are highly leveraged. Some of them are gasping for funds, as banks are reluctant to lend, thanks to the challenges faced by the sector and the already high leverage.

The stock has gained 11 per cent from its 52-week low a month ago to Rs 87.60, wherein the dividend yield is a healthy 2.6 per cent. The valuation of 12 and 1.1 times FY13 estimated earnings and the book value, respectively, look reasonable, considering its current capacity and the risks involved (fuel security-the biggest one) in achieving the capacity addition targets. Analysts expect an upside over a longer time-frame, as the company is achieving its planned targets. Its follow-on public offer, which is planned within one year, should also act a positive trigger in terms of providing further funds for growth.

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