Like all other sectors, power stocks, too, have been in the limelight on the bourses. A key reason for their run up on the stock markets was the initiation of the power reforms in the country. The passage of the Electricity Act, 2003 was one of the key triggers for the stocks in the sector. In the Act, the government has planned that it would pay back the dues of SEBs to the generating companies, one of them being Neyveli Lignite, in the form of securitised assets. In this article, let us have a brief overview of Neyveli Lignite.
Neyveli Lignite Corporation (NLC), a PSU situated at Neyveli in Tamil Nadu, is engaged in the business of lignite mining and power generation. It is one of the largest power generating companies in the country with a capacity of over 2,000 MW. NLC has an installed capacity to produce 18 MTPA of lignite. It primarily caters to State Electricity Boards (SEBs), with Tamil Nadu Electricity Board being a major consumer.
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The company has a good financial track record, despite having a 94% government holding. Over the last decade, the operating margins for the company has improved from about 12% to almost 40%, while its return on capital employed (ROCE) has improved from lower single digits to about 17%. For 1HFY04, the company registered a bottomline growth of 55% on the back of a strong 15% growth in topline. Almost 2/3rd of the revenues was contributed by the power segment, the balance coming from the lignite-mining segment. However, the bottomline contribution tilts in favour of the lignite segment, as this segment’s contribution stood at 53% during 1HFY04.
The company is currently on an expansion mode. Post the completion of its expansion programmes, the company’s mining capacity will stand expanded to 24 MTPA of lignite, while its generation capacity will increase to almost 2,500 MW. It must also be noted that by the end of the Tenth Plan (2002-07), NLC is targeting lignite mining capacity of 36.5 MTPA and power generation capacity of 4,000 MW. Moreover, the passage of the Securitisation Act augurs well for NLC, as it solves a major problem faced by power generating companies i.e. recovery of dues from SEBs. Also, the beginning of reforms in the power sector with the passage of the Electricity Act, 2003 should spell good times for the company going forward. It must also be noted that NLC is on the government’s list as a probable divestment candidate.
Going forward, with a projected demand of more than 100,000 MW additional power generation capacity by the year 2012 to bridge the gap between demand and supply, and the power reforms already initiated, there lies significant opportunities for the company. However, huge power dues from SEBs continue to be a cause for concern, though some headway has been made to recover the dues by converting them into bonds.
At the current price of Rs 67, the stock trades at P/E multiple of 10x, annualised 1HFY04 earnings. The company has experience in servicing of power plants, which is a secured business and going forward it will help the company to boost its revenues. The company’s huge capacity expansion plans will, however, take time to contribute to the topline.
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