HSBC says BUY CESC- Doubling capacity

CESC- Doubling capacity
 Growing equity base of regulated business with cash flow margin
of over 30% protects any downside and provides stable growth
 Chandrapur and Haldia projects with 400-500MW merchant
capacity provides strong growth momentum in FY13 and 14
 Spencer performance disappoints but to become less significant
compared to earnings from power (50% in FY10 vs 10% in FY13)
 Reiterate OW rating with TP of INR475 (INR518 previously)


Investment summary
We assume coverage of CESC with an
Overweight rating and a price target of INR475,
which offers c25% potential return from the
current levels. We believe that the group remains
well positioned to continue to grow its regulated
power business with a gradual expansion in its
equity base.


Steady regulated business
We believe that the regulated business of CESC
provides the company with strong and steady
income flow. The business, servicing mainly the
Calcutta region and with a capacity of 1,225 MW
(1,600 MW peak load) has two clear streams of
Return on Equity (RoE). While the group earns a
RoE of c15% on distribution, it earns an
additional RoE of c14% for equity invested in
their generation capacity (including the latest 250
MW Budge Budge III plant)
We expect the equity base of the regulated business
to grow to cINR24.6bn by FY13 from the current
levels of cINR21bn in FY10. CESC currently
earns a steady return of c18-20% on average on
their total regulated power business. We expect this
business to grow at a CAGR of c5.4% over the next
three years and provide a cash flow margin of c30-
32%. This should provide the group with sufficient
additional cash and equity to execute their existing
expansion plans.