Power from Lignite
Neyveli Lignite is a 'Plain Jane' thermal power generator, cast in the Government mode, which sells the power that it generates to the electricity boards of the four Southern states, as also the union territory of Puducherry. Coming into being in 1956, it will rank as one of the oldest corporatised power generating units in the country, and owned directly by the central government (the President of India being the nominee holder of the Government stake). It makes power from mining lignite, an inferior grade of coal, and is the only such company in South Asia to do so.
The scene as it stands today is that it has a capacity to mine close to 31 million tonnes of lignite per year on a three shift basis, at the four mines that it owns, with 4.6 m tons having been added to the total capacity during FY10. Three of the mines, with a capacity of 28.5 million tonnes, are located at Neyveli, while the fourth mine with a capacity of 2.1 million tonnes is located at Barsingsar, in Rajasthan. The directors' report harps on the sudden overdrive by the management to get the company moving at some speed both on the mining front and the power generation segment. It has submitted plans to the central government to take on lease new mines in Tamil Nadu, Rajasthan, and Gujarat which will increase the mining capacity to 65 million tonnes per annum during the XII Five Year Plan. From the hazy details available, this expansion may well cost several thousand crores. The good news is that the present proven reserves of lignite amounting to 6.1 bn tonnes will keep the company going at full tilt through our lifetime at least. For those who do not have much of a clue about Five Year Plans, the country is currently in the throes of the XI Five Year Plan which ends in 2012. (It is interesting to see that Neyveli Lignite still bestows a lot of faith in the working of the moribund and ossified Planning Commission, or probably, it may have little choice in the matter.)
Expansion and diversification plans galore
In keeping with the increase contemplated in the production capacity of lignite, and with a planned lateral diversification into coal based generation, and wind and solar based energy, the company is planning big on the power generation front as well. Currently it has four units, 3 at Neyveli, and 1 at Barsingsar with a total installed capacity of 2,740 MW (mega watts). Combined they together generated power (gross) to the tune of 17,656 MU (million units) in FY10, which is the highest to date in the last decade, and marginally higher than the generation recorded in FY08. There is however no sane way one can link generation to capacity it appears, as the capacity is given in one set of units, while the production is given in another set of units. There is also a big differential between what it generates, gross, what it generates, net, (15,902 MU) and what it sells (14,828 MU). It effectively sells only 84% of what it generates on a gross generation basis. How this compares as an efficiency norm with other thermal units is not known. The company also generated in FY10, on a gross basis, 881 units of power for the consumption of one ton of lignite. This is lower than the production of 904 units of power in FY08. The peak efficiency norms for power generation relative to lignite consumption are not known.
From what the annual report has to disclose, the company will bring on stream additional capacity of 500 watts of generating capacity during the current year. The company also plans to take the total lignite based generating capacity to 7,740 MW by the end of Plan XII, after phasing out the ossified 40 year old 'Plant 1' at Neyveli, which has a capacity to generate 600 MW of power. Whether these new plants in the anvil will be wholly owned captive units of the parent, or spun off as joint sector projects has not been specified. The management appears to be indulging in a lot of star gazing too. Given that lignite mines are concentrated in only three states, and with a need to spread out, it is ruminating the possibility of setting up coal fired units too. Besides the 1,000 MW coal fired unit that it is setting up in the joint sector at Tuticorin, (through a subsidiary of the company, in which it has already invested Rs 4.2 bn as equity) it plans additional capacity installation of another 4,000 MW, either as captive units, or in the joint sector. That would amount to 5,000 MW of coal fired generating capacity. For this purpose, it is considering acquiring coal assets abroad. Other plans on a smaller scale include the minor diversifications that it contemplates, in the solar and wind power sector.
Such crystal gazing may have more to do with any planned issues of capital in the immediate future, than in any real talking points. Projects of this magnitude call for investments that run into tens of thousands of crores of rupees, and given the present capital base, and the existing shareholding base, it appears well nigh impossible-unless it is talking of plans over the next two decades or so. (To give an example, the new 1,000 MW plant to replace its Station 1 unit at Neyveli is expected to cost around Rs 56 bn.) The government's current stake in Neyveli is over 93% in the issued and paid up capital, with the balance being held by the hoi polloi. This stake will get depleted in any new issue of capital, though the percentage reduction is only a guess. Additional investments in manufacturing capacity have to be backed up by a neat combination of additional debt and equity (the Debt/Equity ratio), and the government will have to bring in its share of the equity, if new projects have to see the light of day. The government may well be constrained to chip in with its share of the equity given its other compulsions, unless they are willing to settle for a further dilution in their holding. It will be interesting to see how the company manages this imbroglio. Presently the Debt/Equitynorm for power projects is 70:30. Floating new power plants through subsidiaries would involve far less capital outlay, but any dividend returns from these equity investments will take forever in generating any yield. The point is also that the company presently simply does not generate sufficient cash from operations, to push through the mega plans that it keeps day dreaming about.
The cost, time and leverage issues at hand
Besides, power generating units are constrained by the very important cost, time, and leverage issues. The first 500 MW unit of a 1,000 MW plant, by the company's own admission, may take some 46 months to commission, from the date of sanction, (though the additional 500 MW can be commissioned in another 5 months). Just having all the sanctions in place to start construction may itself take years. Further, power units are constrained by the rates that they are allowed to levy for the power that they supply. Power tariffs are determined by the Central Electricity Regulatory Commission which fixes the power tariff for generating companies owned or controlled by the Central Government and generators selling power in more than one state. These tariffs are apparently revised twice by the CERC at intervals over a five year stretch. The plus factor of course is that generating units have control over the raw material cost that is used to generate the power supply, and hence has a fix on input costs. For example the input cost of lignite in FY10 was Rs 1,335 per ton, against Rs 1,329 in the preceding year.
The expense schedule
A power generating unit's biggest single biggest expense item is employee costs, atleast going by the figures in the annual report of Neyveli Lignite. Employee costs accounted for close to Rs 17 bn, and it makes this payout to a workforce of 18,356 members, at an average cost of Rs 925,000 per employee per year. How these numbers compare with similar sized thermal units is not known. Looked at it another way, it realized Rs 2.1 m per employee per year from power sales. And, inspite of the 'hold' that the Electricity Tariff Commission has over the pricing of power sold by power generating units, Neyveli was able to 'patao' a 33% hike in the tariff that it charged its buyers during the year at Rs 2.6 per unit, against Rs 1.95 per unit that it got in the preceding year. It also made do by selling some lignite in the open market at Rs 1,438 per ton, which is not very much higher than its own consumption cost. Given that Neyveli effects sales only to the electricity boards, it does not have to make any provision for bad and doubtful debts, nor make any write off for bad debts. What's more, the hard pressed electricity boards seem to ponying up their dues without any hiccups. Trade debtors at year end at Rs 16 bn was only 39% of sales of Rs 41 bn, or put differently, accounted for 142 days supplies. The interesting aside here is that compared to the previous year when trade debtors over 6 months was more than the debtor dues under six months, in the latter year the company had squeezed the departments to pay up faster. Consequently debtor dues under six months in the latter year were substantially more than the dues over six months. This is a minor miracle for sure.
Some interesting asides
Another very interesting factor about its revenue operations is the considerable dependence that it places on 'Other Income' to give a boost to its bottomline. At year end it had close to Rs 48 bn (Rs 54 bn) parked in fixed deposits with banks which is the biggest spigot. Another Rs 6 bn was parked in tax free bonds. Total other income at Rs 6 bn accounted for an impressive 37% of the pre-tax profit, against a humungous 64% in the preceding year. The handling of its cash resources shows the innate conservatism of the management.
The company has even provided segmentwise working results. That is to say it has shown separately a profit and loss statement of its two product lines, Lignite Mining and, Power Generation. Such segmentation does not really make any sense, as the company is primarily in the business of only selling power to earn revenue. The lignite mines do not primarily sell lignite and besides, for a sale to be effected there has to be a change in ownership, and for value received.
There is really very little to commend in this share
PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.