NLC India Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Mining profit surged YoY, but Q2 hit by monsoon and land issues: Mining segment profit more than doubled YoY to ₹819.36 crore in H1, yet Q2 revenue fell 15% QoQ as monsoon and land acquisition problems constrained lignite operations and outside sales.
• Power tie-ups de-risk the pipeline: A 400 MW PPA with Kerala for Talabira and Assam’s consent for 25% of Ghatampur’s power bring Talabira to 2,000 MW tied up out of 2,400 MW, improving visibility on upcoming projects.
• Coal gasification bets are now moving to execution: The board approved a ₹4,394 crore lignite-to-methanol project, the first EPC tender is out, and an MOU with BHEL targets indigenous technology, positioning NLC for the government’s 10 crore ton gasification target by 2030.
• Receivables and regulatory overhang persist: Receivables rose ₹700 crore on beneficiary disputes and unilateral deductions, while management sees the legal battle on truing-up as long and inevitable, with a sector clean-up still some time away.
• What to watch next quarter: Progress on the Neyveli 1,320 MW tender award targeted for this fiscal year, the pace of land acquisition clearing the lignite supply bottleneck, and any concrete dividend policy commitment as CapEx rises.

Operational Performance & Constraints

• Mining profit doubled YoY on coal production: Mining segment profit reached ₹819.36 crore in H1 FY23 versus ₹377.24 crore in H1 FY22, driven substantially by higher coal production.
• Q2 revenue dropped sequentially on seasonal and structural factors: Mining revenue fell from ₹2,155.47 crore in Q1 to ₹1,838.26 crore in Q2 because monsoon affects mining operations and lignite mining was specifically hit by land acquisition problems.
• Lignite sales nearly halted outside: Hardly any sale of lignite outside occurred in Q2 because land acquisition problems constrained lignite supply, which also put a constraint on power supply.
• Coal sales mix shifted toward power sector: In Q2, more coal was supplied to NTPC rather than sold via auction because of demand in the power sector, reducing higher-margin e-auction volumes.
• Lignite commands a sharp premium over coal in Rajasthan: Lignite at Barsingsar realized ₹4,800+ per ton versus coal at ~₹2,750 per ton because lignite availability in the Rajasthan market is scarce while coal supply is more abundant from NLC and Coal India auctions.
• Interest cost rose on revaluation and bond issuance: Interest cost increased from ₹221 crore in Q1 to ₹337 crore in Q2 because of an ₹88 crore provision on trade receivables revaluation in H1 and ₹500 crore in bonds issued in Q3 December 2021 at 6.85%.
• Other income fell ~₹300 crore YoY on three factors: The decline came from an ₹88 crore provision under the June 3 circular, the absence of a ~₹194 crore dividend from NTPL that was received in H1 last year, and a substantial reduction in surcharge income as realization improved on an invoice-to-invoice basis.

Rakesh Kumar: “The surcharge, which was although adding to the income, but it was not very happy moment for us, and it was adding risk to our business we are able to mitigate that risk and we are able to consolidate our position on real business through other sources...”

Power Project Pipeline & Tie-Ups

• Talabira thermal project now 83% tied up: With the KSEB PPA for 400 MW signed on 19 October 2022, total tie-ups reach 2,000 MW out of 2,400 MW (TANGEDCO 1,500 MW, Pondicherry 100 MW, KSEB 400 MW), and GRIDCO is willing to purchase the balance 400 MW with management expressing little doubt on their proceeding.
• Ghatampur power offtake improving: Assam expressed willingness to take 25% of power from Ghatampur (495 MW), and a proposal has been sent to the Minister of Power for allocation; with UP already at 75% PPA, management stated the power tie-up will “definitely be better.”
• Ghatampur construction expedited: The GA4 package was awarded on 30 September for ₹979.61 crore, expected to expedite project completion, with the 1,980 MW project expected to be commissioned in the next one year and start contributing revenue and profit.
• Neyveli 1,320 MW tender on track for FY23 award: The tender was floated on 1 October 2022 and is scheduled to open on 23 November 2022, with management targeting finalization of the award by the current financial year itself.
• Talabira 3×800 MW tender in evaluation: PQ evaluation is completed with L&T and BHEL participating; techno-commercial evaluation is in progress with correspondence on deviations ongoing.

Rakesh Kumar: "We are working on that target only that we want to finalize the award by this year, by the current financial year itself."

Coal & Lignite: Supply, Demand & New Blocks

• Coal demand outlook is bullish in the near term: Management stated that a lot of demand is coming up in the coming months for coal, the short and medium term coal future is bright, and the company wants to avail this opportunity to its maximum.
• Talabira coal sales follow a strict priority order: First priority is the NTPL end-use plant, second is NTPC under an MOU for 0.3 crore tons and any additional beyond the MOU, and surplus coal goes to e-auction; management has also applied to the Ministry of Coal for permission to supply coal from Talabira to Ghatampur since Ghatampur’s linked mine will take a few more years. [8-9]
• Management declined to quantify e-auction volumes: When asked directly for guidance on e-auction coal volume, management did not provide a figure and instead reiterated the priority order and pending permission for Ghatampur supply. [8-9]
• South Pachwara coal block advancing through approvals: Phase 1 activity is completed with geological report and mining plan approved; forest clearance proposal has reached the state government; public hearing for Environmental Clearance is conducted; MoEF&CC recommended certain studies that are underway; R&R benefits approved by the Board and an R&R committee constituted; a railway siding SPV has been formed with WBPDC, PSEB, NUPPL, RVNL, and GoJ, and a feasibility report by RITES has been submitted to Eastern Railway with a bankability meeting scheduled next week.
• Commercial coal mining bids resume: NLC previously applied but was unsuccessful due to high rates; it is now applying for two more mines, one in the Talcher coal field and another in Chhattisgarh.

Rakesh Kumar: “In the short and medium term coal future is bright and we want to avail this opportunity to its maximum.”

Coal & Lignite Gasification Strategy

• Lignite-to-methanol project approved at ₹4,394 crore: The Board approved the project cost, PFR and DFR are approved, BMC work has been awarded to Engineers India Limited, and the first EPC package tender was floated on 22 October 2022 with the second package being expedited.
• Technology-agnostic tendering with strong bidder interest: Two technology providers have been identified (Air Products and Sinopec), and approximately 10 EPC contractors including Tatas and L&T are showing interest; management is hopeful of getting a competitive price.
• BHEL MOU targets indigenous lignite gasification: An MOU has been signed with BHEL for development of indigenous lignite gasification technology; BHEL has proven technology for coal gasification but has not yet tried it on lignite, so a pilot project is planned initially with expansion in a big way once proven.
• Government target creates a large addressable opportunity: The Government of India has set a target of 10 crore tons of gasification by 2030, and management sees lignite gasification as a very big opportunity for NLC.

Rakesh Kumar: "Government of India has set a target of hundred million ton of gasification by 2030, we see a huge opportunity. Therefore lignite gasification throws a very big opportunity to NLC."

Financial Health: Receivables, Under-Recovery & Dividends

• Receivables rose ₹700 crore on disputes and deductions: The increase is attributed to beneficiaries’ difficulties, disputes on truing-up orders, and unilateral deduction of payments by Tangedco and others; an earlier reduction had been achieved via the Atmanirbhar scheme discounting.
• Thermal under-recovery improved but TS 2 remains a drag: Overall thermal under-recovery improved from ₹243.30 crore in H1 FY22 to ₹189.72 crore in H1 FY23, and the newly commissioned NNTPS under-recovery fell sharply from ₹76.74 crore to ₹1.65 crore, but TS 2 extension problems continue and TS 2 stage one and stage two under-recovery increased from ₹4.55 crore to around ₹40 crore.
• Regulatory recovery is a long battle: Management is hopeful of getting truing-up petitions in line with claims but acknowledged the legal battle is long and power sector disputes are inevitable; the government is trying to reduce dues via merit ordering and Atmanirbhar Bharat, and management is hopeful the power sector will witness a clean slate, but “that will take some more time.”
• State-wise receivables conversion discussions ongoing: Beyond Tamil Nadu, Telangana and Karnataka are in discussion for converting receivables into installments, though management did not provide amounts.
• NTPL interim dividend to be booked in H2: A 5% interim dividend has been declared by NTPL but is yet to be received and will be accounted for in H2.
• Dividend policy reassurance without a specific commitment: Management believes high CapEx will not affect the capacity to service shareholders with a respectful dividend and will balance growth plans and shareholder returns, but did not commit to a specific payout ratio when pressed.

Rakesh Kumar: “The legal battle is long, but the power industry is definitely one sector where these disputes are inevitable. ... we are hopeful that in the time to come, the power sector will also witness clean slate. ... however, that will take some more time.”

Guidance & Commitments

Key Metrics