>NEYVELI LIGNITE (ICICI DIRECT)

Changing fortunes...

Neyveli Lignite (NLC), a Mini Ratna government enterprise, is an integrated thermal power generator with a fuel base of lignite. It operates a 2,490 MW generation capacity split into three plants (viz TPS-I, TPS-II and TPS-I Exp) and has a captive mining capacity of 24 MTPA. Capacity addition (expected at 4,440 MW), new CERC norms and a possible tariff renegotiation with Tamil Nadu Electricity Board for its TPS-I (600 MW) will be key drivers for earnings. Consequently, with a slew of positives in the offing, we are initiating coverage with an OUTPERFORMER rating.

■ Expanded generation capacity to provide revenue upside in Q1FY10
We expect the overall generation to deliver ~25% growth YoY in Q1FY10E. Operations have normalised after roadblocks observed in Q1FY09 due to the strikes witnessed at the plants. We expect the company to achieve a production of 4,938 million units (MU) as compared to 3,937 MU in the corresponding quarter last year.

■ New CERC tariff policy should offer significant upsides
New CERC regulations (2009-14) should boost the PAT by Rs 229 crore and the EPS by Rs 1.4 per share. We expect a major improvement in earnings from incremental RoE of 1.5%, retention
of tax benefits, relaxed station heat rate and ease in operational and maintenance expenses (relaxed by~60%) under normative clauses.

■ Renegotiations of tariff for TPS-I (600 MW) to boost bottomline
NLC is renegotiating the PPA with Tamil Nadu Electricity Board (TNEB) for its 600 MW TPS-I plant that is nearing the end of its operating life. We expect the new realisation per unit to be around Rs 3 per unit against the current Rs 1.8 per unit. Tariff renegotiation should contribute to an incremental PAT of Rs 270 crore annually. This will raise the EPS by Rs 1.6 per annum for the next three years.

■ Valuations
At the CMP of Rs 118, the stock is trading at an EV/EBITDA of 9.1x FY10E and 7.2x FY11E EBITDA, respectively. We expect the new CERC policy and renegotiation of PPA with TNEB to enhance the financial performance. Thus, we are initiating coverage on NLC with an OUTPERFORMER rating and a price target of Rs 155.

To see full report: NEYVELI LIGNITE