The Hindu Business Line : Neyveli Lignite: Buy

Given the strong fundamentals and reasonable dividend yield, the stock appears to be undervalued. Shareholders may get a better value when the Government divests its stake in the company.

A low public shareholding (less than 7 per cent) will ensure that all the shares are accepted if an open offer is made post divestment. Considering the strong fundamentals, the downside from the current price appears limited. Hence, shareholders can buy now.

Background: Neyveli Lignite is a public sector firm engaged in the business of lignite mining and power generation. . It is one of the largest power generating companies with a capacity of over 2000 MW. The Tamil Nadu Electricity Board (TNEB) is the primary customer for its power. The lignite mined is used as a feedstock for power generation in its plants.

Fundamentals: Neyveli Lignite is one of the Government-owned companies with a good financial track record. The average return generated on shareholder funds for the last three years is close to 13.5 per cent. High profit margins (around 30 per cent) and free cash reserves ensure that the company has enough resources to plough back into the business. Also, a low debt position allows it the flexibility to raise external funds to finance its expansion plans. Rapid expansion: Neyveli Lignite has been expanding at a fast rate. It has almost completed phase I of expansion adding 500 MW capacity and will start contributing to the topline in the next fiscal.

The second phase expansion is on. Apart from this it will be erecting power plants in Rajasthan and Madhya Pradesh. It is also planning to expand through the joint venture route and has proposals from TNEB and Chennai Petroleum for setting up power plants.

Overdues: The successful implementation of the securitisation programme has solved the problem of overdues from SEB's that has been haunting power generating companies for long. As on March 2002, outstanding dues from SEB's on account of sale of power amounted to Rs 2,963.16 crore more than a year's turnover. These dues would be converted into bonds and henceforth all dues will be paid on time. This will ensure smooth cash flow.

Dividend yield: Consistent dividend track record and low payout makes it all the more attractive. The current dividend yield works out to 4 per cent. Divestment too would unlock the value of the firm and shareholders would stand to gain.

Divestment blues: It has been a harrowing experience for public sector undertakings lined up for divestment. It will not be any different for Neyveli Lignite.

First the issue of allowing private companies to sell coal to other private companies has to be settled. There is also a proposal to hive off the power segment and sell it as a separate unit.

Whatever the approach adopted, it is not going to be easy and is a time consuming process. But in light of the underlying fundamentals of the company, the wait might be worth it.

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