Good 1QFY08 But Tariff Risk Persists

Neyveli Lignite's 1QFY08 results were 5% above MLe, both at the top line and bottom line levels. Sales at Rs 7.8 billion were up 22%YoY, on a 25%YoY increase in generation. PAT at Rs 2.8 billion represented a 26% rise YoY. Despite inexpensive valuations and good growth prospects from FY09E, we maintain our Neutral rating due to lack of near-term earnings growth (6% CAGR over FY07-09E), the risk of a cut in its tariff led by uncertain lignite transfer prices over FY05-09, and falling RoE until FY09E.

Revenue +22% YoY; PAT +26% YoY, but tariff concerns

Neyveli Lignite's 1QFY08 sales were 5% above MLe at Rs 7.8 billion (+22%YoY), led by 25%YoY increase in generation at 4.9bu. Operating profit was up 25% at Rs 3.9 billion. PAT was up 26%YoY at Rs 2.8 billion. The company may be accounting lignite transfer prices at Rs 1124/tn v/s recent regulatory order price of Rs 977/tn (for one of the plants). This creates risk of future write-off as in FY06-07.

Work on delayed capacity addition on-track

Neyveli's much-delayed capacity addition of 750MW (30% of capacity) at Tamil Nadu and Rajasthan projects has started, with the placement of equipment orders on BHEL after a delay of 6months. These projects are likely to be commissioned in FY10E v/s FY09, limiting growth in generation / profits till then.

Maintain Neutral rating in absence of near-term triggers

We see the NLC stock moving sideways due to 1) lack of tariff visibility esp. of lignite, 2) slow earnings growth (6% CAGR FY07-09E) due to delays in capacity addition & 3) falling RoE until FY09E. Hence, despite good growth prospects from FY10E onward & inexpensive valuation (P/BV of 1.4x FY09E), we remain Neutral. We expect the stock to bottom out over the next year on clarity over its tariffs.