You know how stuff like ‘the future of renewable energy’ seems like an obvious bet? Looking around, you would blindly take a bet in favour of renewable sources of energy, and perhaps against planet-choking stuff like coal.
But, climate and geography are a funny thing. While India is setting ambitious renewable power targets, there is a small country in Africa called Zambia, which is going the other way, and increasing reliance on coal.
Zambia is rich in water resources - it has 5 rivers, numerous reservoirs, and several large lakes, which enabled it to set up large hydro power projects, contributing to almost all of the country’s electricity needs.
But a major draught a few years back caused havoc, which forced the government to diversify into other power sources - including coal, which Zambia has abundant mines and reserves of. Taking advantage of this, was, surprisingly, an Indian company called Nava Limited.
While the stock has already gone 2.5x in the past year, peddling harder on the Zambian power sector, Nava Limited is now doubling its coal power generation capacity. Perhaps a good addition to your portfolio too then?
Nava Limited, Who?
Nava Limited, which started as Nava Bharat Ventures back in 1972 gets most of its revenue from Zambia.
And while its popular for its coal power plants, it actually does a bunch of other things - including mining coal, manganese and silicon, distributing healthcare products in South East Asia, and even growing avocados in Zambia.
Business Segment | Key Operations | % of Revenue (FY24) |
Energy/Power | Operating thermal power plants in India (434 MW) and Zambia (300 MW), with plans to double capacity in Zambia. | 63% |
Ferro Alloys | Leading manufacturer and exporter of manganese and silicon alloys with production capacity of 175,000 TPA. | 18% |
Mining | Largest coal mine in Zambia with proven reserves of 193 million tons, supplying to major industrial consumers. | 9% |
Healthcare | Distributing lifestyle-improving products in Singapore and Malaysia with a low-capex, asset-light model. | 5% |
Agriculture | Engaging in commercial agriculture in Zambia, particularly avocado plantation, aiming for 400,000+ plants by 2027. | 4% |
Why Has the Stock Doubled?
While Nava Limited’s bet on Zambia’s power shift seems to have worked out well, the path hasn’t been all that rosy. For some time now, Nava Limited has been marred by delayed payments from ZESCO, Zambia’s state-owned power company.
As ZESCO failed to make payments according to the agreed schedule, Nava Limited’s started finding itself choked - difficult to repay the debt it had taken to put in place the power plant.
In 3QFY23 however, Nava Limted won an arbitration award from a UK court against ZESCO, which mandated that ZESCO pay US$ 518 million to Nava Limited, by the end of 2024.
This legal victory ensured a clear path for recovering the dues. Half the dues came in, and Nava Limited reduced its debt from Rs. 1,575 crore to Rs. 300 crore, and the stock doubled!
The rest of the payment due is expected to come in, post another delay, by the first half of 2025 - which will further improve Nava Limited’s standing.
Doubling Capacity From Here
At present, Nava Limited operates the only integrated thermal power plant in Zambia, generating 300 MW of power, and making up 9% of the country's total power capacity.
Nava Limited intends to increase its power generation capacity to 600 MW, with an investment of US$ 400 million.
It will be able to do so without seeing a mess on its balance sheet, as the ~US$ 280 million balance of the dues from ZESCO, come in towards the first half of 2025.
This will enable Nava Limited to double its revenue from power generation in Zambia, over the next 3-4 years, which already makes up for 37% of Nava Limited’s total revenue.
Other than reduced debt, a healthy capital allocation for new capacity and doubling of revenue, the real kicker for Nava Limited is in the fact that this is an extremely profitable business, and contributed to 67% of its total EBITDA.
Thanks to Nava Limited owning the largest coal mine in Zambia, it is able to source coal in-house, there by boosting its profitability, which is already high given an impressive Plant Load Factor of 90% (PLF is a capacity utilisation metric for a power plant).
And That’s Not All
While Nava Limited’s coal and power businesses look sorted, it is also a major player in the ferro alloys market - being a major manufacturer and exporter of manganese and silicon alloys with production capacity of 175,000 TPA.
This segment too had a rocky FY24, with the market in a bearish cycle, leading to negative EBITDA. But there’s a silver lining. Prices for silicomanganese, a key product, have surged by 40%, from Rs. 65,000 to Rs. 90,000 per tonne, since 4QFY24.
The price increase, secured manganese supply, and captive power plant all give Nava Limited not just the competitive edge, but also the right environment to stage a turnaround, and contribute to financial performance improvement.
Additionally, Nava Limited is also in the exploration phase in Côte d'Ivoire for manganese mining. If anything clicks here, it can become a further trigger.
Financials Likely to Drive Re-Rating
Over the last year, Nava Limited has seen its stock price more than double. This has been a function of:
Impressive financial improvement,
Visibility on recovery of dues, and
Transformation from a mining company to a power-focused one
This has has led to it been rewarded with a re-rating, from an average of 4x 1-year forward earnings over the past three years, to 10x.
Going ahead, there is potential for a further re-rating, driven by:
Recovery of full dues from ZESCO, and its usage for debt reduction and/or expansion
Doubling of capacity in Zambia’s power generation
Turnaround in the mining business
Who knew going against the tide, and actually investing in coal power at this day and age could make money?!
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