Stock Pick From The Power Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is from the power sector. The company's lignite-based power generation capacity looks good, with a comfortable fuel security position as opposed to many of its peers.

Here is why

• The company enjoys significant fuel security by virtue of its ownership of lignite mines.
• Its new capacity addition and the overhauling plans for its existing plant are expected to yield higher revenues and profits.
• A consistent dividend history which is likely to continue in the future as well adds to its overall fundamental strength. 

Founded in 1956, NLCL is a power generation and lignite mining company based in Chennai. It owns and operates four lignite mines with a total mining capacity of 30.6 MTPA and has a power generation capacity of 2740 MW (end of June 2012). Lignite (a type of brown coal) is available in plenty for this company as it is among the few that operate lignite-based power projects. At a time when many power companies are building coal-based plants, NLCL’s lignite-based power generation capacity looks good, with a comfortable fuel security position. Of the total 41 billion tonnes of lignite reserves, 80 per cent is based in Tamil Nadu. Hence, NLCL’s backward integration has a significant locational advantage.

Another significant point to consider while looking at this stock is its consistently higher dividend payouts. The Government of India is a major shareholder in the firm. Thanks to this, NLCL would keep paying good dividends in the future too. Besides, its lignite mines keep the projects insulated from coal price shocks, which adds to the worth of investing in this company.

Over the last 10 years, the company has shown a three per cent growth in lignite mining and production. It uses about 90 per cent of this for its own power plants. As its capacity increases, so will its lignite production. A total of 90 per cent of its revenues come from power generation while the rest 10 per cent comes from the sale of leftover lignite produced.

In the power generation business, the company has four plants and expects to add another 500 MW capacity by the end of the current fiscal. In addition to this, it is also looking at overhauling an existing plant with a capacity of 600 MW of generation and increasing it to 1000 MW. Following these additions, the total capacity is expected to touch 3640 MW by 2015.

Besides, NLCL has consistently posted profits while its peer companies have been facing hurdles in the last two years. With the new plants coming onstream, we believe that the company is entering a high growth zone.

On the financial front, in FY12, NLCL saw its revenues rise by 13 per cent to Rs 4866 crore while the net profit grew by nine per cent to Rs 1411 crore. Though the profit margins declined, its return on net worth (RONW) improved by 10 basis points. Its debt-to-equity ratio stood at a comfortable level of 0.3x as at the end of March 2012.

On the valuations front, at a CMP of Rs 84.45, the scrip is trading at a PE of 10.4x its trailing 12-month EPS of Rs 8.09. However, with cash per share of Rs 20, the actual business is available at Rs 60 per share. With the expansion of its power business by adding 500 MW this fiscal and the improved sentiment on the sector, we expect a price appreciation of around 15 per cent in this stock and advise a buy on the scrip.