Stock review: NEYVELI LIGNITE

NEYVELI Lignite Corporation's performance has lagged the growth of other power and mining companies for years. Despite sufficient reserves of lignite for power production, the company has remained less aggressive in its growth plans. This may change now, as the company embarks on ambitious growth plans. Besides expanding its lignite-based power capacity, it also wants to explore coal-based, wind and solar power generation projects. Neyveli has a fully integrated business model, generating power using fuel from its captive lignite mines. It plans to expand the current power capacity of 2,740mw by more than half by FY14 and by four times by FY20. Its current annual mining capacity of 30.6 million tonnes is sufficient to produce more than 4,500 mw of power.

   It has partnered various states, including Rajasthan, Gujarat, Uttar Pradesh and Orissa, to expand its power generation and mining operations outside Tamil Nadu. These places have large lignite reserves, which would enhance its lignite capacity by over 27% in three years.

   Lignite is the lowest-quality coal with low calorific value and requires higher consumption than other fuels. Hence, the power plants are generally very close to the mines to keep transportation costs under check.

   Power and mining companies work on regulated (constant) return on equity model. The new tariff norms have increased the mandated post-tax RoE from 14% to 15.5% till FY14. This is likely to improve its cash generation. Tower Capital's senior analyst Rahul Modi says: "The company is expected to generate . 16.4 billion of operating cash in FY11E, which will increase to . 22.4 billion in FY13 due to the commissioning of new mines and power projects."

   Neyveli Lignite's stock took a beating after its poor show in the September 2010 quarter. Its volume growth failed to match the pace of capacity addition since its contract workers were on strike for more than a month.

   Due to the fully integrated business model, the company has a stable supply of fuel unlike other power companies. It has cash of around . 600 crore on its balance sheet. Its aggressive expansion and diversification plans are expected to keep its cashbook ringing in the coming quarters.