Why NLC India’s offer for sale could be worth considering

NLC India | Company resumed mining operations of Neyveli Mines. (Image: nlcindia.com)

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Jitendra Kumar Gupta
Moneycontrol Research

NLC India, formerly known as Neyveli Lignite Corporation, has come out with an offer for sale (OFS) where government is selling 5 percent stake. The OFS is worth participating in light of the attractive valuations it is offering. Interestingly, retail investors will be allotted shares at 3.5 percent discount or at Rs 90.7 per share as against the offer price of Rs 94 a share.

Attractive valuation

At the discounted price the stock is valued at 6.3 times earnings and 1.3 times book value of FY17, which is cheap considering NLC is an integrated player generating about Rs 1,000 crore of annual cash from operations. Among power utilities, the state-owned NLC has a much better balance sheet. In FY17, the company reported a debt-to-equity of 1.3 times and interest coverage ratio in excess of 20 times, which is quite healthy for any company. Not just financial leverage, the operating business is equally strong. The company has consistently maintained its operating margins in the range of 40 percent and last year reported return on equity in excess of 20 percent.

Employing growth capital

Return on equity would have been higher had there been no capital work in progress, which stood at Rs 5,219 crore in FY17. However, one good takeaway is the company is using the excess cash generated from the business for building growth capital and investing in new facilities.

NLC India operates coal and lignite-based integrated power generation plants with the total installed capacity of 3,240 mw. It has recently added 1,000 mw of coal-based power facility, 10 mw of solar and 30 mw of wind power capacity taking the overall capacity to 4,280 mw. Importantly, with these new capacities coming on stream, company could see better earnings growth with headroom for further improvement in return ratios. Over the last three years, the company's revenue has grown at decent 23 percent annually followed by strong growth in profits at 31.4 percent.

Moreover, valuations which are based on the FY17 financials will actually look even more attractive in the light of earnings visibility for the next two years and possibility of higher dividends.

Over the last five years, on an average, the company has distributed dividends in the range of about Rs 550 crore. Even if 80 percent of this average pay out is maintained, the dividend yield of close to 3 percent on the price at which the retail investors will be allotted shares.

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