Neyveli Vs Tata Power Vs Reliance Energy

With the power reforms gaining momentum, all major power companies are planning to take maximum benefit and add generation capacities. With the stringent anti theft regulations, even private distribution companies have plans to increase their distribution circles. In this article, let's have a look at the relative strengths and weaknesses of majors like Neyveli Lignite, Tata Power and Reliance Energy.

Neyveli Lignite Corporation (NLC), a 94% subsidiary of Tamil Nadu state government, has power generation capacity of 2,070 MW. Tata Power Company (TPC) on the other hand, is the largest private player in the power sector, with a generation capacity of 2,278 MW, which is 52% of the total power generation capacity of the private sector in the country. Out of Tata Power's total installed capacity, 79% lies in the Mumbai circle. Where as, Reliance Energy (REL) was formerly into distribution of power in the northern suburbs of Mumbai but since 1995-96 has entered into power generation and currently has a capacity of around 885 MW.

NLC is expanding its thermal power generation capacity by 210 MW, which is expected to commence operations by the end of FY04. The company's expansion plans include a Thermal Power Plant at Tuticorin with a capacity of 1,000 MW as a joint venture with Tamil Nadu Electricity Board (TNEB). Apart from Tamil Nadu, the company is in talks with various state governments to add another 3,500 MW.

TPC on the other hand, is planning to add another 1,500 MW generation capacity by FY09. As per the company's estimates, the expansion will raise the topline of the company by around 70% over next five years. The company's addition of 120 MW of generation capacity at Jojobera is expected to be operational by October 2005. The company also plans to increase its exposure to distribution circles and transmission networks going forward.

On the other hand, Reliance Energy has more aggressive plans. The company has planned a 9,000 MW generation capacity by 2012, almost 10 times its current capacity. Talking about green field projects, the management is waiting for the state government's nod to begin its 3,000 MW gas power project in Vidarbh region of Maharashtra. The company has already announced merger of Reliance Salgaocar Company Limited (RSPCL) and BSES Andhra Power Limited (BAPL) with REL. With this merger, the generation capacity of the company will increase to 1,150 MW.

As is apparent from the graph above, the stock prices of all the three power majors have gained substantially in last one year. Going forward, we believe Tata Power is likely to get hit in its operating margins due to the open excess provision. Conversely, Reliance Energy is expected to improve its operating margins by around 2% from the current levels. Though the long-term growth prospects of both the private power majors are good, but in the medium term, it seems that growth has been factored in the current valuations.

(Rs m)	Neyveli Lignite	Tata Power	Reliance Energy
Net Sales	12,470	21,466	12,713
PAT	5,619	2,704	1,771
Operating Margins (%)	35.2%	29.2%	19.9%
Net Profit Margins (%)	45.1%	12.6%	13.9%
P/E (x) *	11.3	13.0	20.0

On the other hand, Neyveli is expanding its lignite mining capacity, which will augur well with generation capacity increase. Consequently, we expect its operating margins to improve from the current levels. The company has received its outstanding dues worth Rs 26 bn from the state government in the form of tax-free power bonds, under power dues securitisation scheme, redeemable by 2008 . Till then, the company will get interest on the said bonds. The sorting of the outstanding dues issue is a big boost to the company's fundamentals. The table above clearly reflects Neyveli's strengths vis-a-vis REL and TPC.