Description

Summary

Nava Limited is a small cap Indian equity name with a ¬$415m market cap listed on the BSE and NSE. The free float is 51.19% with the Promoter Group (Ashok Devineni) owning 48.81% of shares.

The Group’s main asset is Mamba Collieries Limited, a 300MW thermal coal power plant and captive coal mine in Zambia producing high grade coal and thermal coal.

The equity is currently cheaply priced considering the recent favourable arbitration award of $518m for non-payment by Zesco, the state-owned off-taker in Zambia which will likely result in a hefty special dividend payment on or before August 2023 of up to $228m or ¬55% of the market cap after clearing debt arrears of $220m at MCL.

NAVA is currently trading at an EV/EBITDA of 3.3x. Pro forma for the arbitration proceeds, Nava Limited would trade at a EV/EBITDA of 1.5x. We think NAVA shares are extremely cheap for the following reasons.

1. Excluding MCL, Nava Limited has a cash balance of INR 3,850 mm at the holding company and could be distributed. The cash balance at the holdco equates to 11% of the current market cap. The company has committed to shareholder dividends of at least 20% excluding the potential windfalls from the arbitration proceeds and sale of non-core assets.
2. The historical mismatch of cash flows at MCL has been a huge overhang for the shares despite the fact that Zesco’s obligations under the PPA are secured against a sovereign guarantee from the Government of Zambia. The payment of the arbitration award will significantly deleverage the Zambian project and result in dividends going forward with the Zambian asset generating EBITDA of $132 million and PAT of $40m on an LTM basis. Furthermore, the precedent of a successful arbitration award should increase likelihood of timely payments by Zesco and the recent renegotiation of the off-take agreement with a reduction in capacity sold to Zesco should allow some degree of revenue diversification through spot market sales.
3. Nava also has non-core assets which can be potentially monetized, including a large land bank in Hyderabad. The land bank consists 65 acres in Nacharam, East Hyderabad which could be worth as much as INR 15,000mm or 45% of the current market cap.

Company Background and Operations

Established in 1972 as a Indian ferro-alloys manufacturer, Nava Bharat is a diversified group with operations in India, Southeast Asia, and Africa. The group’s core interests span power generation, coal mining, and ferro alloys with non-core operations in O&M services, sugar and healthcare.

Zambia – Mamba Collieries Limited

Nava Limited’s principal asset is Mamba Collieries which consists of Zambia’s largest coal mining concession and a integrated 300MW coal-fired thermal power plant accounting for 10% of installed generation capacity in the country.

In 2010, Mamba Collieries was privatized by a JV between Nava Bharat Singapore, the external investment wing of Nava Bharat Limited and ZCCM-IH (Zambia Consolidated Copper Mines Investment Holdings) which is majority owned by the Zambian government. Mamba Collieries is 65% owned by Nava Bharat Singapore and 35% owned by ZCCM-IH.

MCL owns and operates Zambia’s largest coal mine which supplies high grade coal to industrial consumers in Zambia including Lafarge, Dangote among others and exports coal to neighbouring countries under long-term contracts. Estimated coal reserves are 193 million tons (SAMREC) in the active mining area which represents 18% of the total concession area.  

MCL is the only thermal power producer in Zambia, a country which is heavily reliant on hydropower which accounts for 85% of its generation. MCL’s thermal coal plant is therefore a critical asset in the country to supply power for mining and manufacturing operations given the low reliability of hydro plants and Zambia’s overall power deficit.

Mamba Collieries sells power to Zesco, the government-owned utility under a take-or-pay 20-year PPA based on plant availability which is backed by a sovereign guarantee. As mentioned above, the integrated 300MW plant benefits from a captive coal mine which estimated reserves of 193 million MT. PPA-payments are denominated in USD.

The plant’s load factor for FY 2021-22 ending 31^st March 2022 was 66.5% compared to 77.7% in FY 2020-21. The reduced load factor in FY2021-22 was due to scheduled maintenance during the first half of FY 2022. MCL’s operations have shown stabilization since Q3 2022 with plant load factors of 91%, 89.2% and 91% in Q4 2022, Q1 2023 and Q2 2023, respectively.

MCL and Zesco recently signed a new tariff and offtake-agreement which is expected to improve reliability of expected cash flows. The new tariff which took effect on 1 May 2022 is USD-denominated of $0.0906 per unit plus taxes based on plant availability with increases are linked to US PPI escalation. Under the old PPA, the tariff was around $0.1157 per unit but all of the capacity was contracted by Zesco. Under revised the arrangement, Zesco will pay MCL approximately $16.5 million per month (gross) which works out to 245.65MW per month for the full invoice of power supplied to Zesco with payments secured by a pledge on Zesco’s bank account in favor of MCL. MCL can sell surplus capacity of 22MW on the spot market to external customers. From May onwards, Zesco has been current on payments to MCL excluding the arrears accumulated under the old PPA through 30^th April 2022.

MCL recently became a member of the South African Power Pool (“SAPP”) which affords it the flexibility to sell the balance surplus power on SAPP over and above the capacity contracted by Zesco at similar rates, which will further stabilize cash flows to a certain degree and allow MCL to opportunistically take advantage of the structural power deficit in Southern Africa.

India

In addition to Mamba Collieries, Nava Limited operates thermal power plants with 434MW of installed capacity including 204MW which sells power on a captive basis to the company’s ferro-alloy plants in Odisha (90MW), Telangana (114MW) and 230MW selling power on merchant basis in Odisha (60MW), Andra Pradesh (20MW) and Telangana (150MW) through its NBEIL subsidiary.

In India, although thermal coal accounts for 52% of generation capacity, the sector is under strain due to heavy dependence on monopolistic state-owned coal suppliers, lower supplies of coal, spiralling coal costs and delayed payments by utilities. Lower coal availability and an unofficial embargo by state-owned mining companies to not supply coal to the private sector for a brief period made thermal coal plants vulnerable to government policies.

Captive consumption remains the main driver of the business although the Company is trying to increase spot market sales through short-term PPAs. The Company is banking on year-round operations of the 60MW IPP in Odisha where although there is no PPA in place, the unit has been allocated enough coal under the government’s Shakti scheme.  

In Telangana, coal costs have spiked resulting in increased generation costs and reducing the ability to sell power during non-peak periods over power exchanges. Operations of NBEIL’s 150MW plant are dependent on tariffs in the spot market through power exchanges and availability of coal from Singareni Colleries. To overcome coal shortages, NBEIL is planning on procuring coal through rail rakes from far-off mines.

Nava is also a leading manufacturer and exporter of manganese and chromium alloys with annual production of 125,000 TPA and 75,000 TPA, respectively. The captive power plants are used to supply power to the ferro-alloy assets. The ferro alloy industry is highly correlated to the steel industry demand. For the company, the ferro chromium business has been a steady cash flow generator due to a conversion agreement in place with TATA for the long-term manufacturing and supply of ferro chromium on a fixed margin basis which insulates the company from fluctuations in high carbon ferrochromium prices. Nava exports 40% of its manganese alloy production to East Asia/Southeast Asia and the Middle East. The current capacity utilization at both of these plants is above 80%.

Other assets

Nava Limited owns 65 acres in Nacharam, East Hyderabad which could be worth as much as INR 15,000mm (1,500 crores) according to one of the analysts on the Q1 23 earnings call.

Debt Restructuring and Arbitration Case Against Zesco

MCL has been facing payment shortfalls from Zesco, the state-owned utility. As of 30  September 2022, the outstanding receivables from Zesco were $575 million (INR 46,792 mm) due to the accumulated payment shortfall which has severely impacted MCL’s cash flows as a result. Starting on 25 March 2020, MCL has defaulted on 5 semi-annual principal instalments totalling $147.5 million on its outstanding debt at MCL of $412 million (note the debt at MCL is non-recourse to NAVA) which is due to be repaid in instalments over the next 5-6 years. With the conclusion of tariff negotiations with Zesco, MCL is in the process of negotiating with lenders to restructure their project loans for longer tenure.   

The MCL debt is non-recourse to NAVA Limited and secured against the assets of MCL and by a sovereign guarantee issued by the Government of Zambia for all of Zesco’s payment obligations under the PPA. In the event of Zesco’s default on payments owed to MCL, MCL has the option to enforce the guarantee and the Government of Zambia would be required to pay the specified amounts due from Zesco which mitigates risk around debt service for project loans.

Additionally, certain lenders benefit from insurance which is around 65% of the total debt at MCL. In the event that MCL defaults on payments, lenders can claim on the insurance and the insurance company would step in under the financing arrangements which would make lenders unlikely to accelerate their loans as long as they continue to receive timely payments. The invocation of the insurance claim does mandate the completion of arbitration proceedings with the award being in favour of MCL. Under the insurance policy, the insurer would make lenders whole on defaulted payments while the remainder of the debt would be paid by MCL per the original repayment schedule.

In 2020, MCL together with lenders began international arbitration proceedings against Zesco regarding the payment arrears. Zesco initiated a second arbitration alleging mistakes in the calculation of the tariff when the PPA was executed and bias on the part of the Tribunal. The Tribunal decided to consolidate the second and first arbitration and passed a favorable interim partial payment award of $250 million and ordered Zesco to make the payment by January 31, 2022. Zesco sought relief from the Commercial Court in London to quash the Tribunal order on partial payment and consolidation of the second arbitration with the first one. In September 2022, the UK high court passed judgment on the partial payment in favor of MCL.  The final hearing on the arbitration took place on 16 December 2022 and under a consent award, Zesco has agreed to play $518 million by August 2023 in tranches to clear outstanding arrears. Of the $518 million, $70 million will go towards payment of VAT liabilities owed to the Government of Zambia and $220 million will repay the outstanding overdue amounts to lenders, leaving approximately $228 million which could potentially be upstreamed to Nava Limited.

Financials and Valuation

Around 50% of Nava’s EBITDA is non-cyclical including the (i) captive energy assets in India which have steady off-takes from the Ferro Alloy plants that generate approximately 33% of EBITDA, (ii) the Ferro Chrome business due to the conversion agreement in place with TATA Steel, and (iii) the MCL power plant which has a 20-year take or pay PPA with Zesco with availability based tariff revenue of $16m per month.

Most of the company’s debt is non-recourse debt at Mamba Collieries Limited (INR 37,403 mm of INR 38,556 mm total debt as of 30-June-2022 or approximately $459m) mainly related to the power plant. Consolidated LTM EBITDA was INR 19,504mm or $239 million of which INR 8,869 mm or 45% excludes Zambia. Based on the current market cap of INR 33,808mm and EV of INR 31,112mm excluding the non-recourse project debt at MCL, the Indian business is created at an EV/EBITDA of 3.51x, which is extremely cheap given the potential monetization of the land bank in Hyderabad and the net cash position.  

The arbitration proceeds from Zambia are therefore a free option on an already cheap standalone Indian business. If the Zambian operations are included, Nava Limited is currently trading at ¬3.3x EV/EBITDA (based on an EV of INR 64,987 mm or $798m and consolidated LTM EBITDA of INR 19,504 mm or $239m).  After adjusting for the expected arbitration proceeds of $518m net of a $70 million VAT liability and $220m of debt paydown, NAVA is trading at 1.5x EV/EBITDA.

With the current share price of INR 233, the expected special dividend from the excess arbitration proceeds would be almost INR 128 per share after making the MCL project debt current.

Going forward with consolidated LTM PAT of approximately $129m (INR 10,532 mm) and $62m for the domestic business (INR 5,022 mm), the expected dividend yield would be INR 73 per share or a 31% yield including Zambia and INR 34 per share or a 15% yield on the domestic business. This does not take into account the substantial upside from return of capital expected from (1) the sale of the land bank (potentially INR 15,000 mm or INR 103 per share) and (2) special dividend from arbitration proceeds.

Catalyst

1. Earnings call on Feb 3
2. Deleveraging of MCL / sizeable equity dividends going forward
3. Improved MCL cash flows and collections from Zesco
4. Announcement of special dividend or share buyback upon receipt of arbitration proceeds