A strong visibility in earnings and significant cash on its books make Neyveli Lignite a growth-cum-value stock.
Within power generation, which is considered to be a relatively defensive sector on the back of steady earnings as well as humungous growth opportunities, Neyveli Lignite Corporation (NLC) is a safe investment. The company is expanding its capacities aggressively, which are backed by robust cash flows, loads of cash in hand and large mining reserves.
NLC is a public sector lignite-based power generation company and currently operates three power generation plants with total capacity of 2,490 mw. All these plants are well backed by three lignite mines, which have estimated total reserves (including proven, indicated and inferred) of 38,929 million tonne.
According to estimates, the company's reserves are enough for the three power plants to operate at optimum capacity for the next 18-20 years. Over a period of time, the company has become a prominent player with expertise in lignite-based power plants. Today, the company has the largest reserves of lignite in the country insulating it from any risk associated with the availability of fuel.
In terms of efficiency as well, the company scores well. Its existing three plants are currently operating at a plant load factor (PLF) of about 70-89 per cent. Lignite, which is also known as 'brown coal', is considered to be a cheaper fuel source for generating power. This is also a reason that the company is one of the lowest cost producers of the thermal power in the country; it sells power at about Rs 1.20 per unit. Besides the benefit of low cost, Lignite is preferred on account of scarce supply of coal in the domestic market and higher international coal prices.
Well planned expansions
Leveraging its capabilities, the company is aggressively increasing its power generation capacities. The company plans to add 2,000 mw of power during the Eleventh Five Year Plan (2007-12) and further another 10,250 mw of power capacity during the Twelfth Five Year Plan (2012-17). To back these projects, the company will also increase its mining capacity by 8.7 MTPA (million tonne per annum) in Eleventh Five Year Plan and by another 32 MTPA Twelfth Five Year Plan.
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Among the bigger projects is a 1,000 MW coal-based plant based in Tuticorin (Tamil Nadu), which is being developed in joint venture with the Tamil Nadu Electricity Board. NLC will hold 89 per cent of the equity and the rest will be held by the latter. The company has established coal linkages and acquired land for the said project. NLC is expecting an equity contribution of Rs 1,311 crore for this project, which will be funded through internal accruals, and is expected to be completed by August 2012.
| REPLACEMENT COST | |
| Rs crore | |
| Capacity (MW) FY09 | 2,615 |
| A) Cost @ Rs 4.5 cr/mw | 11,768 |
| B) Net cash | 3,455 |
| Approx replacement value (A+B) | 15,223 |
| Market capitalisation | 8,766 |
| M-cap/total value (%) | 58.00 |
The company generated about Rs 1,500 crore of cash profits during FY08. After adjusting for the dividend (Rs 431.68 crore) paid out to shareholders, the company is still left with about Rs 1,000 crore per year. Along with the strong internal cash accruals and a cash equivalent (adjusted with total loan) of about Rs 2,785 crore as on March 2008, the company is well placed to fund its projects. A strong balance-sheet, needless to say, also helps in raising debt with ease. Among other major projects, many of them are at the early stages and will take a long time before they start functioning. This will also mean the revenue flow will only start after 4-5 years from now.
| LOADS OF CASH | |
| Rs crore | |
| Cash & Bank balances | 5,420 |
| Investments | 826 |
| A) Total cash equivalents | 6,246 |
| B) Total loan | 2,791 |
| C) Net cash (A-B) * | 3,455 |
| Market capitalisation | 8,766 |
| Cash as %age of mkt cap | 39.4 |
| Cash per share (Rs) | 20.6 |
| * Estimates as on Sept 30, 2008 | |
Meanwhile in the near-term, the growth will come from its ongoing 750 mw power projects. These projects will be completed in a phased manner by the end of March 2010. This should provide a marginal volume growth of 5-6 per cent in FY09 and about 15-18 per cent in FY10. Thereafter, volume growth will come from the commissioning of the Tuticorin project (first phase of 500 mw capacity expected to start by December 2011).
The volume growth is marginal in the near-term, the company’s long-term prospects are better given the strong balance sheet, regular cash flows and a pipeline of new projects (see Project Pipeline. For the said projects, totaling 1,750 mw of capacity, the company has estimated a debt funding requirement of Rs 4,640 crore, for which it has already tied up for a rupee loan of Rs 2,500 crore and a 50 million euro-based funding through the ECB route.
| PROJECT PIPELINE | |||||
| MW | No of units | Total MW | Estimated Cost (Rs crore) | Approx date of commissioning | |
| Projects at advanced stage of completion | |||||
| TPS11 | 250 | 1 | 250 | 2,375 | Nov–2009 |
| TPS11 | 250 | 1 | 250 | 2,375 | Mar–2010 |
| Barsingsar Thermal | 125 | 1 | 125 | 940 | Dec–2008 |
| Barsingsar Thermal | 125 | 1 | 125 | 940 | June–2009 |
| Coal-based plant (Tuticorin) *** | 500 | 2 | 1,000 | 4,910 | Aug–2012 |
| Advance Action Projects (already sanctioned by Government) | |||||
| Jayamkondam * | 800 | 2 | 1,600 | 9,800 | NA |
| TPP at Neyveli * | 500 | 2 | 1,000 | NA | NA |
| Coal-based plant (Orisa) ^ | 500 | 4 | 2,000 | 8,000 | NA |
| Gujarat Power # | 1,000 | 1 | 1,000 | 5,640 | NA |
| Barsingsar Thermal $ | 250 | 1 | 250 | 1,690 | NA |
| TPS111 * | 500 | 2 | 1,000 | NA | NA |
| Total | 8,600 | ||||
| * At intial stage seeking initial approvals; $ Various reports are under progress ^ Acquiring land and mining for coal in JV; # Feasibility, environment at final stage *** Equity stake 89%, coal mines and land acquired | |||||
Investment rationale
The robust growth plans apart, the stock is a clear ‘value buy’ providing a reasonably decent dividend yield of four per cent. The company has been paying dividends since the past ten years, which has gradually risen from 5 per cent to 20 per cent. Even in terms of replacement cost, assuming total operational capacity of 2,615 (as on March 2009) and value of Rs 4.5 crore per mw (conservative cost, factoring large mining reserves), the company’s value works out to Rs 11,768 crore.
Besides, the company is also holding cash equivalents (see Loads of cash) of Rs 3,455 crore (net of total debt), which is about Rs 20.29 per share as against the current market price of Rs 52.25. Including the net cash equivalent, the replacement value works out to about Rs 15,223 crore, thus, valuing the company at just 58 per cent of its estimated replacement value.
Thirdly, on the basis of price-to-book value, the stock is again reasonably priced at less than one time its book value of Rs 53.88 per share as on FY08. To sum up, the stock appears to be a ‘value buy’ using any of the three different valuation methods. These valuations look good for a company, which is expected to grow consistently at a healthy pace for the next three years, at least. Even if the volume growth remains low for some time, the company will continue to generate strong cash as result of regulated returns (14 per cent) on equity.