Neyveli: Coal block allocation ups visibility

Recent developments are positive, but re-rating of power stocks is still some time away

The news of public sector power producer Neyveli Lignite Corporation being allotted Talabira-II and Talabira-III coal blocks in Odisha boosted sentiments, as the stock gained nine per cent on Tuesday. The company, which is looking to increase coal-based electricity generation capacity, plans to attain 19,000 mega-watt (Mw) capacity by 2025.

With the commissioning of unit 1 and unit 2 during 2015-16, Neyveli is operating five pithead thermal power stations with an aggregate capacity of 3,240 Mw. The said coal block allocation will help meet coal requirements for the power projects of Neyveli’s subsidiaries as 2x500 Mw NLC TamilNadu Power Ltd (five million tonnes per annum or mtpa coal requirement), 3x660 Mw Neyveli Uttar Pradesh Power (10 mtpa) and Sirkali Power Project (20 mtpa).

The allocated coal mines are expected to start coal production in two years, which is a big positive.

The company, which has been generating power from lignite resources, had forayed into thermal power as well as renewable energy. Its wind power capacities have touched 13.5 Mw, while it has a 10-Mw solar photovoltaic power plant in Neyveli. Together, these have increased Neyveli’s overall power generating capacity to 3,263.5 Mw.

However, the core issues impacting the power sector have been the soft demand and realisation scenario. The company has been seeing better plant load factor (PLF) compared to peers. During FY15, its PLF at 81.2 per cent was higher than industry average of 65.11 per cent. However, power producers around India are feeling the heat of low demand and realisations.

Although the December 2015 quarter performance of Tamil Nadu-based firms was impacted by rains, for the first nine months, Neyveli’s profitability was soft. With revenues during the first nine months having grown 9.2 per cent year-on-year, operating profit grew only four per cent and margins declined 96 basis points. With lower other income, net profit fell compared to the year-ago period.

According to analysts, re-rating is still some time away. The government’s efforts, such as Uday, to revive state electricity boards will take some time before benefits accrue.

Looking at expansions, captive raw material supplies and strong balance sheet, analysts remain positive on Neyveli.

Analysts such as those at Batlivala & Karnani have given target price of Rs 110 indicating adequate upside from current level of Rs 72.5. A relatively low free-float in the counter could lead to high volatility at times. Besides, being a public sector firm, the overhang of the government’s stake sale always remains.