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Neyveli: Extraordinary fillip - Views on News from Equitymaster

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Neyveli: Extraordinary fillip

Jan 12, 2005

Performance summary
South based power generation PSU, Neyveli Lignite, declared its December quarter numbers yesterday. On YoY basis, the company's topline declined by 5%, but bottomline growth was a significant 94%. This was largely because of a significant margin expansion, as well as higher other income kicker. On the whole, Neyveli's nine month ended December 2004 performance saw nearly 8% revenue and 4% net profit growth.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 5,758 5,470 -5.0% 18,228 19,624 7.7%
Expenditure 3,236 2,811 -13.1% 11,404 9,332 -18.2%
Operating profit (EBDITA) 2,522 2,659 5.4% 6,824 10,293 50.8%
EBDITA margin (%) 43.8% 48.6% 37.4% 52.4%
Other income 896 2,291 155.8% 5,290 4,194 -20.7%
Interest 224 172 -23.2% 546 510 -6.6%
Depreciation 1,077 1,293 20.1% 3,485 3,855 10.6%
Profit before Tax 2,116 3,485 64.7% 8,082 10,122 25.2%
Extraordinary income/(expense) 12 -112 - 95 -77 -
Tax 905 1,004 10.9% 1,335 2,901 117.3%
Profit after Tax/(Loss) 1,223 2,368 93.6% 6,842 7,144 4.4%
Net profit margin (%) 21.2% 43.3% 37.5% 36.4%
No. of Shares (m) 1677.7 1677.7 1677.7 1677.7
Diluted Earnings per share (Rs)* 2.9 5.6 5.4 5.7
Price to earnings ratio (x) 12.2
*(annualised),

What is the company's business?
Neyveli Lignite Corporation, a 94% subsidiary of the Government of India, has power generation capacity of 2,490 MW (3% of all Indian thermal generation capacity). The company is also into lignite production and has three lignite mines with production capacity of 24 MTA (Metric Tonne per Annum). The company has an estimated lignite reserve of 3,300 MT and has expertise in renovation of old thermal power stations and mining equipments.

What has driven performance in 9mFY05?
Power drives revenues: While revenue performance in 3QFY05 sagged owing to dips in both lignite mining and power generation businesses, the nine month performance was clearly saved by the 7% growth in power generation. The company has plans to increase the generation capacity of its existing power plants by around 1,500 MW (likely to be operational in three to four years' time). Another 250 MW power plant has recently been approved by the Central Government.

Segmental snapshot
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change % of 9mFY05
revenues
Lignite mining 3,752 3,465 -7.6% 11,692 11,955 2.2% 38.3%
PBIT margins (%) 34.4% 18.4% 31.7% 24.6%
Power generation 5,757 5,378 -6.6% 18,001 19,296 7.2% 61.7%
PBIT margins (%) 17.7% 42.4% 6.2% 28.4%
Others 3 1 -64.0% 25 2 -93.5% 0.0%
PBIT margins (%) -576.0% -1255.6% -365.0% -2975.0%
Total revenues 9,511 8,843 -7.0% 29,718 31,252 5.2% 100.0%
PBIT margins (%) 24.2% 32.9% 15.9% 26.8%

Revenues from lignite segment grew marginally during the nine months (2% YoY). The lignite demand is mainly driven by the power sector because it is relatively cheaper fuel for power generation as compared to naphtha and gas (at the same time, thermal generation has strict environmental restrictions). The lignite consumption is expected to grow by 41% during the 11th five-year plan (by FY12). The company is planning to increase production capacity of lignite by another 12 MTPA going forward (50% of the current capacity). Here again, the central government has recently approved 2.1 MTPA capacity recently.

OPM - YoY effect: The company's operating margins have become stronger in the current year. But this is because last year, Neyveli had made a contingency provision of Rs 461 m in 3QFY04 and Rs 721 m in 9mFY04 fearing reduction in power tariff (which was part of other expenditure last year). However, as the company has sought higher tariff in its petition to the CERC, such provision was not made in the current year. Also, incentives paid to electricity boards were higher last year. This was because it included one time incentive arrears to the tune of Rs 2,397 m in 9mFY04. Excluding both these issues, operating margins have actually dipped marginally from 54.5% in 9mFY04 to 52.4% in 9mFY05.

Cost break-up
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Raw material 759 846 11.4% 2,339 2,620 12.0%
Staff 1,049 1,175 12.0% 3,242 3,577 10.3%
Power dues securitisation incentives 324 259 -20.0% 3,045 777 -74.5%
Others 1,105 532 -51.8% 2,778 2,358 -15.1%
Total expenditure 3,236 2,811 -13.1% 11,404 9,332 -18.2%

Other income kicker: While the other income was up significantly in 3QFY05, the 9mFY05 numbers told a different story. This is again because of one-off events. While 3QFY05 figures include Rs 1,340 m of provision write back, the nine month picture was skewed owing to inclusion of arrears of interest income in 9mFY04 numbers (Rs 2,546 m) that the company received on the power bonds issued to it by the government. If we exclude everything extraordinary both at the expenses and the other income side, the company's profit before tax in 9mFY05 is up only 2%.

What to expect?
At the current price level of Rs 69, the stock trades at a P/E multiple 12 times annualised 9mFY05 earnings. With the restructuring of SEB (state electricity board) in Tamil Nadu and other three neighbouring states to which the company sells power, unlike the past, the recovery rate of dues has improved considerably. Also, the government has recently sanctioned a 2.1 MTPA lignite mine and a 250 MW power station for the company at a capex of Rs 13.7 bn. This will be a good growth kicker in the long term.

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