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Neyveli Lignite: Big plans but timing an issue

Source : BUSINESS_STANDARD
Last Updated: Wed, Jul 04, 2012 19:11 hrs

While thermal power producers are grappling with fuel availability and pricing issues, Neyveli Lignite Corporation (NLC), which currently has only lignite-fired plants, does not face these. In that sense, it is relatively better placed, with reasonable growth visibility. Hence, its follow-on public offer should attract a healthy response.

Its diversification into thermal power might take time to yield the desired results. Many in the process of setting up new capacities are already witnessing delays. Some projects are also facing the threat of becoming unviable if fuel issues are not solved. While this raises questions over NLC's long-term growth visibility, analysts say these are already factored into the stock, which trades at a reasonable 10 times 2012-13 estimated earnings. Hence, patient investors need not wait for the FPO, and can accumulate the stock from the secondary market.

Better placed than peers
Like NTPC, even Neyveli works under a regulated business model (no merchant power exposure), which provides guaranteed returns and fuel costs are a pass-through. Fuel is the biggest concern for most power producers at the current juncture but not for Neyveli, as the company is fully integrated, with 100 per cent fuel security. Its lignite-based capacity of 2,740 Mw is completely fuelled by its four operational captive mines having capacity of 30.6 million tonnes.

IMPROVING PROFIT GROWTH
In Rs crore FY12 FY13E FY14E
Net sales 4,867 5,269 5,980
% change y-o-y 23.2 8.3 13.5
Operating profit 1,815 1,989 2,297
% change y-o-y 41.1 9.6 15.5
Net profit 1,333 1,444 1,641
% change y-o-y 2.7 8.3 13.6
E: Estimates Source: Company, Bloomberg

The company also has relatively lesser issues in terms of receivables and the probability of backdowns by state electricity boards (SEBs) is also low. This, since all the power produced is bought by the Tamil Nadu Electricity Board and lignite-based power is relatively cheaper.

The company's low gearing (less than 0.5 times net debt to equity in FY12), high promoter shareholding at 93.56 per cent (scope for further dilution, if required), steady cash flows from operations and navratna status add to the positives, and will help it in funding for projects. Having navratna status means the company's board could take up any project in the country up to Rs 1,000 crore or acquire assets abroad up to Rs 3,000 crore without seeking government approval.

Big plans
As noted, all power stations of Neyveli are currently lignite-based. India has huge deposits of lignite, estimated at almost 40 billion tonnes, and 80 per cent of that is in Tamil Nadu. Of this 80 per cent, four-fifths is deep-seated, 300 metres below the surface. Technology to exploit it is not easily available even elsewhere. In other words, while there is huge opportunity in lignite-based power, there are challenges as well.

To diversify its revenue streams, it has big plans to get into thermal power and renewable energy (50 Mw wind farms and a 10 Mw solar farm in Tamil Nadu). Recently, it announced a foray into coal-based capacity, with 1,980 Mw in Uttar Pradesh (expected to be commissioned by 2016). In the long term, it has plans to set up such projects in Tamil Nadu, Jharkhand, Odisha and Madhya Pradesh. On the whole, NLC is targeting to achieve a capacity of 10,000 Mw by FY17, involving a capital outlay of Rs 40,200 crore, including the 500 Mw Neyveli TPS-2 expansion and 1,000 Mw Tuticorin expansion in FY13.

For maintaining fuel security, the company is also increasing its lignite mining capacity from the current 30 million tonnes to 45 mt by FY17. However, fuel linkages for coal plants are yet to be tied up, part of which NLC plans to achieve by acquiring coal assets in Indonesia and South Africa, through joint ventures.

On the flip side, it has seen sluggish capacity additions and delays in the past (almost no capacity additions in recent years). Also, since many of its projects are at an early stage of development, timely land acquisition and getting environmental clearance are also crucial and need to be monitored. In simpler words, there is an element of execution risk.

Valuations
The stock touched a 52-week high of Rs 105.3 on February 16 but corrected by 20 per cent. At the current price of Rs 84.40, it trades at a lower valuation as compared to NTPC's 14 times and NHPC's 11 times. Analysts feel the stock is fairly priced, given the size and risks involved. Given its business plans, investors with a one to three-year perspective could buy the stock from the secondary market instead of waiting for the FPO.


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