CESC Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Power Generation / Distribution

Company

CESC Ltd

Power Generation / Distribution


September 14, 2017

Sensex: 32241.93


CNX Nifty: 10086.60

NSE: CESC


BSE: 500084

Reco Price
Rs. 1053
Price Target (1 Year)
Rs. 1264
Upside
20.04%

Date

September 14, 2017

Sensex

32241.93

CNX Nifty

10086.60

Exchange

Code

NSE

CESC

BSE

500084

Stock Data

CMP (Rs)
1058.90
Face value (Rs)
10
52 Week Range (Rs)
1064.40 - 533.00
Market cap (Rs Crores)
14020.56
Price To Book Value (x)
0.99
P/E Ratio (x)
15.47
EV/EBIDTA (x)
8.95

One Year indexed Stock Performance

CESC Ltd Sensex
CESC Ltd
Return (%)
1m
6m
12m
36m
Absolute
12.50
28.95
62.02
30.11
Sensex
2.52
9.51
13.64
20.23

Shareholders

(in %)
30-Jun
Promoter
49.92
Public
50.08
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Demerger to unlock value for the company

Demerger on its way:
CESC has announced that it will demerge its four business verticals – a) CESC Ltd – power distribution b) Haldia Energy Ltd - power generation c) Spencer Retail – retail d) CESC Ventures – FSL, IPL and Quest. The demerger is expected to unlock value for the shareholders in the mid to long term as the different businesses will achieve their fair valuation. Along with unlocking the value, it will also provide greater flexibility in accessing capital and will enable to prepare a focused strategy for sustained growth across different entities. This demerger is expected to be done post-October 2017 when all the four entities will be listed. Existing shareholders will be entitled to the shares of each business demerged for their holding in the pre demerger entity. This would lead to elimination of holding company discount and allow discovery of true worth of all the businesses, which is expected to be higher than the combined market cap of CESC.

Focus on distribution business:
Since 2010, CESC has invested Rs. 8,000 crores in its power-generating capacity, ramping it up from 800 Mw to 2,600 Mw. CESC produces 1,125 Mw through its three power-generating stations, supplying electricity to 3 million people in and around Kolkata. The company is now going to focus on its distribution business and less on power generation since it expects sufficient power generation capacity across the country. The company’s power business is expected to drive future growth for the company as it accounts for 65% of the group’s total annual turnover of Rs. 16,311.98 crores. Further, the company expects pan-India power demand to increase from 2,035 Mw in 2015-16 to 3,000 Mw in 2025-26 for which it will be a direct beneficiary.

The decision to focus on distribution is led by two factors – a) The group wants to focus on sectors that need less capital infusion and b) it wants minimal government or regulatory intervention.

Spencer to aid growth:
Spencer, the company’s retail chain, is India’s fourth largest food and grocery retailer with an area of 1,176 square feet and store count of 124 as of FY17. The company’s aim to expand its business in the non-food categories had led to its recent entry in the apparels business, which has shown a strong momentum with its initial launch. The sales for apparels have increased to Rs. 8 crores in June 2017 from Rs. 2 crores in the previous quarter. Spencer has also launched its online services in Kolkata and NCR and plans to expand to 6-7 cities within the next 12 months. The company aims to achieve revenue of Rs. 500 crores by 2020 through its online as well as offline channel.

Going ahead, with the debt of Rs. 280 crores being transferred to the parent company in power business, Spencer will become debt-free and will be able to scale up its operations to achieve profitability.

Demerger to reduce risk:
CESC’s diversification into unrelated businesses had increased risk and remained a key overhang on the stock. With the demerger, the management will address this risk and explore opportunities for individual businesses. This risk of unrelated business will be reduced to a great extent as the demerged companies will emerge.

 

Industry

During 2016-17, the Indian power sector added 28.8 GW in power generation capacity, a growth of 9.7% over the previous year. Hydro and other renewable sources accounted for 20 GW or around 70% of the increase in power capacities in the country. With these additions, generation capacity in India stood at 327 GW at the end of the year. The addition of transmission and distribution infrastructure was also in line with targets. With the step-up in the last few years, the shortfall in generation and transmission capacities has come down considerably. During 2016-17, the all-India peak demand for power was 159.5 GW of power, whereas the actual power met was 156.9 GW. 

Profile

CESC is India’s first fully integrated electrical utility company since 1899 in generating and distributing power in Kolkata and Howrah. It is the sole distributor of electricity within an area of 567sq km of Kolkata and Howrah, and serves 2.9 million consumers which include domestic, industrial and commercial users. CESC owns and operates three thermal power plants generating 1125 MW of power. These are Budge Generating Station (750 MW), Southern Generating Station (135 MW) and Titagarh Generating Station (240 MW). From their three generating stations, the company accomplishes 88% of its customer’s electricity requirement and remaining 12% is achieved by purchase of electricity from third parties. More than 50% of coal is sourced from captive mines for generation of electricity. Besides power generation and distribution, the company has a presence in retail, properties and BPO as well.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E
Net Sales 11066.63 12124.19 13903.50 14737.71 15769.35
Growth (%) - 9.56 14.68 6.00 7.00
Total Expenditure 9095.02 9047.61 10684.08 11274.35 11984.71
EBITDA 1971.61 3076.58 3219.42 3463.36 3784.64
% Margin 17.82 25.38 23.16 23.50 24.00
Other Income 160.30 264.93 346.57 250.00 275.00
Operating Profit 2131.91 3341.51 3565.99 3713.36 4059.64
Interest 1044.87 1592.94 1607.04 1425.00 1410.00
PBDT 1087.04 1748.57 1958.95 2288.36 2649.64
Depreciation 588.94 766.48 816.40 870.00 900.00
Profit Before Taxation & Exceptional Items 498.10 982.09 1142.55 1418.36 1749.64
Exceptional Income / Expenses 0.00 -3.97 -0.46 0.00 0.00
Tax 199.21 313.01 380.29 453.88 559.89
Profit After Tax 298.89 665.11 761.80 964.49 1189.76
Minority Interest 100.38 130.65 119.35 120.00 150.00
Share of Associates 0.00 64.02 48.39 50.00 40.00
Consolidated Net Profit 198.51 598.48 690.84 894.49 1079.76
Adjusted EPS 14.98 45.15 52.12 67.15 81.06
Source: Stockaxis Research, Company Data

Valuation

We expect that demerger will unlock value for the shareholders in the medium to long term as all the four businesses will get their fair share of valuation. The retail business will be re-rated on the back of improved operational performance and cash flows from the power business will be further used to scale up that business. Hence, we recommend ‘Buy’ with a target price of Rs. 1,264 at a valuation of 15.60x its FY19E earnings with a holding period of 1 year.