I Anticipate Joint Ventures In Rajasthan And Assam Will Diversify Future Energy Mix

Key Takeaways

• Strategic expansions in thermal, coal, and renewable energies are expected to diversify NLCIL's energy mix and enhance revenue streams.
  
• Operational improvements and capital efficiencies are likely to reduce costs and improve net margins for NLCIL long-term.
  
• Maintenance issues and project delays pose risks to NLC India's earnings and future growth, amid environmental costs and regulatory uncertainties concerning coal dependency.

Catalysts

Operates in the mining and power generation business in India.

• The commercial operation of the 660 MW Ghatampur Thermal Power Station Unit #1 has increased NLCIL's installed power generation capacity to 6,731 MW, likely improving future revenue streams through expanded power production.
  
• The execution of a coal mine development and production agreement for the New Patrapara South coal mine project, with a capacity of 12 million tonnes per annum, positions NLCIL to enhance its revenue base and reduce reliance on lignite, potentially improving net margins due to coal's higher calorific value.
  
• Joint ventures in Rajasthan for setting up a lignite-based thermal power station and developing renewable power projects, as well as a solar power project in Assam, are anticipated to diversify NLCIL's energy mix and boost revenues from cleaner energy sources.
  
• With CapEx achievements surpassing targets, including significant investments in mines and renewable energy, these strategic expansions are expected to result in capital efficiencies and higher earnings growth over time.
  
• The reduction in under-recovery figures due to operational improvements, such as modifications to improve availability and reliability of TPS-II expansion units, suggests a reduction in costs and improved net margins in the future.

NLC India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NLC India's revenue will grow by 21.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.0% today to 12.2% in 3 years time.
• Analysts expect earnings to reach ₹32.6 billion (and earnings per share of ₹23.36) by about February 2028, up from ₹22.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 13.8x today. This future PE is lower than the current PE for the IN Renewable Energy industry at 28.6x.
• Analysts expect the number of shares outstanding to decline by 4.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.1%, as per the Simply Wall St company report.

NLC India Future Earnings Per Share Growth

Risks

• NLC India is facing under-recovery losses due to maintenance issues in its TPS-II expansion units, which could negatively impact the company's net margins if not resolved in a timely manner.
  
• The company's dependency on coal and lignite with consistent under-recovery losses, if not mitigated, poses a significant risk to its earnings due to potential regulatory changes and increased environmental costs.
  
• Delays in strategic projects like renewable energy initiatives, which are crucial for long-term growth, could affect future revenue stability and investor confidence.
  
• NLC India faces potential financial challenges from grid-scale renewable energy project delays and infrastructure constraints, which could hinder expected revenue growth from their significant RE investments.
  
• The uncertainty in realizing critical minerals and green projects like overburden to sand conversion may impact the company's future diversified revenue streams, posing a risk to projected earnings enhancement.

Valuation

• The analysts have a consensus price target of ₹304.0 for NLC India based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹267.5 billion, earnings will come to ₹32.6 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹223.6, the analyst price target of ₹304.0 is 26.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.