>Neyveli Lignite Corporation Ltd. (INDIABULLS)

Neyveli Lignite Corporation Ltd.- Buy

Valuation remains attractive
Neyveli Lignite Corporation Ltd. (NLC) posted a 9.7% yoy increase in the net profit in Q3’09. This was partially driven by the finalisation of the FY04–09 power tariffs for TPS-I, resulting in an additional revenue of Rs. 1.7 bn during the quarter. We maintain our target price of Rs. 100 for NLC’s stock and reiterate our Buy rating on the back of the following factors.

* New CERC guidelines to provide marginal benefits: We believe that CERC’s decision to increase the cap on return on equity (RoE) for tariff determination from 14% to 15.5% for FY10–14 will improve NLC’s profitability only marginally because:

· NLC has been accumulating significant amounts of cash and not ploughing them back in its power business; thus, its overall RoE has been on the lower side.

· With only 750 MW of additional capacity expected to be commissioned by FY10 and no major capacity additions planned during FY11–13, NLC would not be able to fully exploit the revised tariff determination norms for FY10–14.

* Long-term growth prospects remain promising: A number of projects proposed by NLC are in various stages of implementation. Of these, advance action proposals for a combined capacity of 6,850 MW have been sanctioned by the Government of India (GoI). Given NLC’s strong balance sheet position and the GoI’s thrust to increase the country’s power generating capacity, we believe NLC’s long-term growth prospects remain intact.

To see full report: Neyveli