Given the current power supply situation in the country, yesterday's "touch-me-nots" can potentially become the "live wire" your portfolio so desperately needs. I am talking about Neyveli Lignite now officially known as NLC India.
This company, a central PSU, has a track record not many would envy with both power sales volumes and profitability falling since FY17. The company is the largest lignite based power producer in India and also a merchant seller of the fuel.
So what has changed for the stock to warrant any attention? Well the answer is fairly simple and it is a four letter word which is hogging much of the media attention for all the wrong reasons - COAL. Yes, NLC has been allotted two coal mines Talabira II and III in the Ib Valley in Odisha for its upcoming 3 x 800 MW thermal power plant which is not expected before 2027. So what to do with the coal till then? Yes sell it to those who need it!!
With Adani Enterprises as the MDO, the Talabira coal block produced 1 mn MT of coal in FY21 which went up to 6.3 mn MT in FY22 and expected to surpass 10 mn MT in FY23 and ultimately will reach 20-25 mn MT by FY25.
With the express permission of the Coal Ministry. NLC will be selling coal through three channels. First, will be to NTPC's non-pithead power plants. In this regard, NTPC has entered into an agreement with NLC to buy coal at a price which is FSA plus a certain percentage. In FY23, NTPC has already floated tenders to transport 1.5 mn MT of coal to its Khargone plant, another 0.7 mn MT to Lara and an unspecified quantity for Darlipalli. NPTC has also floated tenders to import coal for these plants, the total volume purchased from Talabira for FY23 may be around 3 mn MT. The second buyer will be NLC's JV power company NTPL based in Tuticorin. This unit to buy 1 to 1.2 mn MT in FY23. Another 0.5 mn MT of 5,800 kcal/kg coal will be imported for which the contract was awarded in Feb-22.
However, the real story is the company's sale through e-auctions which started in a small way in FY21 but has the potential to be decent in FY23 and FY24. In FY23(April 22), the company has already sold 0.5 mn MT of coal through e-auctions. Given the current demand situation, we should not be surprised to see very healthy pricing and margins in this business. In 9mFY22, the mining division's EBIT per MT was around Rs 1,300 which has the potential to go higher with higher e-auction sales.
The Power division which has been an Achilles heel for the company did well in FY22 after demand recovered post Covid-19 disruptions. Given the power situation today in South India, which is a coal deficient region, we should expect the division to put in a steady performance in FY23 too. On the receivables front, the news is also much better. As of Feb-22, consolidated receivables is lower at Rs 54.7 bn vs Rs 82.8 bn as of end FY21.
NLC is quoting at a P/BV of around 0.75x FY22 estimates.