Neyveli Lignite: A stable utility to own

Company a preferred bet due to fuel security, strong balance sheet

Neyveli Lignite is among the public sector undertakings (PSU), which are in the news for divestment. Though the government's stake sale move might not have much impact on the navratna PSU's financials and earnings, the Street believes it could have a negative impact on the share price in the near term, led by supply of additional shares in the market. To meet the Securities Exchange Board of India (Sebi)'s minimum public holding norm of 25 per cent over three years, the government has to sell almost 15 per cent (worth Rs 2,500 crore) of its current 90 per cent holding in the company. Though it could do the divestment in phases, it is still an uphill task, say experts.

The company is one of the preferred stocks in the power space, because of its consistent performance and the integrated business model. Neyveli has consistently delivered good returns to shareholders and managed its business and finances very well.

The company is also in a good position to take advantage of the opportunities in the power sector, given its huge lignite (a source of thermal energy) reserves. Over the longer term, the company has plans to increase its lignite production to 38 million tonnes (mt) from current production of 30 mt and expand its power generation capacities from the current level of 2,740 Mw to 4,586 Mw by FY17. This will help sustain growth and since the fuel risk is less, the predictability of the business is high.

The company is also looking to foray into coal-based power generation. Here, it could also blend coal with lignite to power its plants. Importantly, since the operating cash flows from existing plants are good, the company has the advantage to fund its future projects, including equity contribution, from internal resources. If the company continues to deploy these funds at regulated post-tax return on equity (RoE) of about 15.5 per cent, over a period of time the same will create more value for its shareholders besides, strong cash flows for higher dividends. Notably, even at current levels, the stock is offering a decent dividend yield of 2.7 per cent.

Growth, along with reasonable valuations, makes Neyveli Lignite an attractive investment. Its stock is currently trading at 10 times its estimated FY15 earnings. In terms of price to book value as well, it is trading at just 0.95 time its FY15 estimated book value, which analysts believe is attractive as they believe the stock could trade at about 1.2-1.3 times its book value.