Neyveli Lignite Corporation Ltd (NLC) posted a 9.7% y-o-y 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 additional revenue of Rs1.7 billion during the quarter.
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.
The company 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, the company would not be able to fully exploit the revised tariff determination norms for FY10–14.
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.
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.
At Rs72.55, the stock trades at a forward P/E of 13.5x and 11.4x for FY09E and FY10E, respectively.
We maintain our target price of Rs100, based on our DCF valuation. Since our target price implies a 38% potential upside from the CMP, we maintain our BUY rating.