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Neyveli Lignite: Fades a shade

Sep 8, 2004

Introduction to results
Performance summary: South based power generation PSU, Neyveli Lignite, declared better overall numbers for 1QFY05 as compared to the previous quarter (4QFY04). On YoY basis, the topline grew by 3% and bottomline was higher by 7%. Operating margins took a hit (down 450 basis points) because of incentives provided to SEBs (State Electricity Boards).

(Rs m) 1QFY04 1QFY05 Change
Net sales 6,372 6,564 3.0%
Other income 580 881 51.9%
Expenditure 2,949 3,074 4.2%
Operating profit (EBDITA) 3,424 3,490 1.9%
Operating profit margin (%) 53.7% 53.2%  
Interest 158 178 12.8%
Depreciation 1,172 1,237 5.5%
Profit before tax 2,674 2,956 10.6%
Tax 832 718 -13.7%
Profit after tax/(loss) 1,842 2,238 21.5%
Net profit margin (%) 28.9% 34.1%  
No. of shares (m) 1,677.7 1,677.7  
Diluted earnings per share (Rs)* 4.4 5.3  
P/E ratio (x)   10.3  
(* annualised)      

Background: Neyveli Lignite Corporation (NLC), a 94% subsidiary of the Tamil Nadu state government, 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 1QFY05?
Sales: Waiting for capacity expansion Revenues from lignite segment grew marginally during the quarter (1% 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 MTA going forward (50% of the current capacity).

Power division revenues witnessed a marginal growth on a YoY basis. However, since the power plants are running at optimal capacity, growth in revenues will be a function of capacity expansion. 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 year’s time). Another 250 MW power plant is under approval by the Central Government.

Operating margins: Incentive blues
Operating margins declined during the quarter YoY, as the company had to provide for incentives to the SEB, which are primarily interest received on the bonds in lieu of the power dues (power sector PSU cannot have more than 14% of return on the capital employed). However, on a like to like basis (excluding incentives), margins have been stagnant.

Other income boost net margins:
Margins at the net level improved marginally because of the higher other income during the quarter (higher income is due to the interest received on the bonds and a part of it is given back to the SEBs as incentives). The increase in interest outgo has to be viewed with respect to the capacity expansion.

What to expect?
At the current price of Rs 52, the stock trades at a price to earnings multiple of 11.7 times annualised 1QFY05 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. As far as capacity additions are concerned, one has to consider the fact that Neyveli Lignite is a PSU and therefore, the approval and implementation will be slower. However, if things go as per plan, the company is poised for good growth in the future.

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