Stock in Action – NLC India

Movement of the Day

Analysis

1. Strong Momentum: Price above short, medium and long term simple moving averages respectively.

1. Probable Rationale Behind the NLC India’s Surge

1. Successful Bid for Coal Block

NLC India Ltd. secured the bid for the North Dhadu (Western Part) coal block in Jharkhand through a successful bid in a commercial coal block e-auction held on August 1, 2023.
The vesting order for the coal block was formally issued to NLC India Ltd. by the Secretary (Coal) in a ceremony on December 14, 2023.

2. Coal Reserves and Capacity

The North Dhadu (Western Part) coal block has substantial reserves of 434.65 million tonnes, with a peak rated capacity of three million tonnes per annum.
The formal allocation of the coal block positions NLC India Ltd. for comprehensive development and production responsibilities.

3. Environmental Sustainability Commitment

NLC India Ltd. reported a commitment to environmental sustainability, aligning with the Ministry of Coal, Government of India's directives.
The company's M-Sand Plant is expected to produce 2.62 Lakh Cubic Meters of Civil Construction Grade M-Sand annually from Mine Overburden, addressing the scarcity of natural sand for construction purposes.

4. Future Expansion Plans

NLC India Ltd. plans to commence operations of the M-Sand Plant by the end of January 2024 and is exploring similar or higher-capacity plants in other mines at Neyveli.
Contracts have been awarded for execution, emphasizing the environmentally friendly nature of the initiative and its potential for future expansion.

5. Positive Price-to-Earnings (P/E) Ratio

NLC India Ltd. exhibits a P/E ratio of 14.7x, indicating potentially bullish signals. This is notably lower than many companies in India, where P/E ratios greater than 30x are not uncommon.
The low P/E ratio may be attributed to cautious investor sentiment, prompting further investigation to determine its justification.

6. Robust Earnings Growth

NLC India Ltd. has experienced exceptional earnings growth, with a 26% gain in the last year and an overall 47% rise in EPS over the latest three-year period.
Analyst estimates suggest a 21% annual earnings growth over the next three years, aligning closely with the market's predicted 19% growth each year.

7. Market Skepticism and Potential Volatility

Despite the strong earnings performance, the lower-than-expected P/E ratio indicates some shareholder skepticism about future forecasts.
Investors appear to be accepting lower selling prices, possibly anticipating future earnings volatility.

Financial Summary

Analysis

1. Gross Profit Margin:

The consistent increase in NLC India's gross profit margin from 81.74% in January 2021 to 90.7% as of September 30, 2023, reflects a notable improvement in operational efficiency and cost management. 

How Investors Should Pursue this?
This upward trend suggests a positive trajectory in the company's financial performance, indicating sound business strategies and potential for sustained profitability. Investors may view this as a favourable indicator of NLC India's ability to generate higher returns on sales, emphasizing the company's resilience and effectiveness in optimizing its cost structure.

2. Operating Profit Margin:  

The upward trend in NLC India's operating margin, increasing from 26% in March 2021 to 35% in 2023, indicates a consistent improvement in the company's operational efficiency and profitability. 

How Investors Should Pursue this?
Investors should view this positive trajectory as a strong indicator of NLC India's ability to manage costs effectively and enhance overall financial performance, making it an attractive prospect for investment.

3. Net Profit Margin:  

The fluctuation in NLC India's Net Profit Margin (NPM) reveals a decline from 25.68% in March 2021 to 10.73% in March 2022, followed by an improvement to 16.41% in March 2023. 

Why it Fell?
On the conference call of 30-10-23, Prasanna Kumar M told that “See in the first half of the current financial year, the overall under recovery is Rs.403 crores for NLC alone and as a group company it is Rs.510 crores against last year’s under recovery of Rs.230 crores.”
 

The Solvency & EPS

Analysis

1. Earnings Per Share (EPS) Trend:

The consistent upward trend in EPS from 2018-19 to 2022-23, reaching a peak of 9.00, reflects the company's sustained profitability and positive earnings growth, indicating a favorable outlook for investors.

2. Debt/Equity Ratio Trend:

The declining trend in Debt/Equity ratio from 1.06 in 2018-19 to 0.64 in 2022-23 signifies an improving financial leverage for NLC, suggesting effective debt management and potential financial stability, which may enhance investor confidence in the company's financial health.

Outlook

While the P/E ratio may not fully reflect the positive earnings outlook, there could be unobserved threats to earnings preventing a higher valuation.
The risk of a price drop appears subdued, but investor sentiment suggests an awareness of potential volatility in future earnings.