CESC : 1HFY11 PAT up 15% YoY :Citi

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CESC (CESC.BO)
Alert: 1HFY11 PAT up 15% YoY
 1HFY11 PAT up 15% YoY — CESC’s 1HFY11 PAT was up 15% YoY despite tepid
5% YoY growth in 1QFY11 on the back of 23% YoY growth in 2QFY11. This was
because of tariff revision for FY11E and the company booking the benefits of
1QFY11 also in 2QFY11 by adjusting other expenditure.

 Dhariwal (2X300MW) and Haldia (2X300MW) updates — Dhariwal is under
construction and for Haldia the financial closure has been completed and the ICB
is under process for the EPC contract

 Other updates — For the Orissa (1320MW) project all major approvals have been
obtained and the coal linkage has been applied for. For the Jharkand (1000MW)
project CESC has joint allocation of coal block (110mn tons) and the company has
obtained a prospecting license for the mine.

 Retailing update — Sales has increased from Rs736/sqft in Jun09 to Rs1100 /sqft
in Aug10. Store level EBITDA/sqft has turned positive in Jun10

 Possible PE deal in Haldia Energy — According to Times of India the private
equity arm of Credit Suisse is in the race to pick up a stake in Haldia Energy, a
subsidiary CESC. It is expected CESC will divest ~20% in Haldia Energy (holding
company for Haldia (600MW), Orissa (1320MW) and Dhariwal (600MW)) to raise
~ Rs10bn. Haldia Energy will require Rs30bn of equity funding for the 3 projects.

 Maintain Buy (1M) with a target price of Rs498 — As we continue to like CESC’s
power business with 1225MW of generation capacity and the transmission and
distribution circles of Kolkata/ Howrah. Parent FY10 PAT at Rs4.3bn was up 6%
YoY and we expect it grow at a CAGR of 7% over FY10-13E. We also are positive
about the: (1) 600MW Chandrapur project where the company has already
invested Rs7bn and construction work has started and (2) 600MW Haldia Phase I
project where the last mile land acquisition issues are being sorted out. CESC’s
retailing business continues to be a major drag with recurring cash losses of
Rs2.5bn in FY10 vis-à-vis management guidance of Rs2.0bn. Further the
company also booked exceptional cash losses of Rs430mn.


Valuation
Our Rs498 target price is based on a sum-of-the-parts (SOTP) methodology. We
value the power business using a DCF at Rs405 (WACC = 12% and g = 2.5%). We
also value the Chandrapur and Haldia projects using DCF (Cost of Equity = 13%).
The negative NPV of the power business support is Rs46.


Risks
We assign a Medium Risk rating to CESC. While our quantitative risk-rating
system, that tracks 260-day historical share price volatility, rates the company
High Risk, we view a Medium Risk as more appropriate given a significant portion
of CESC's business value emanates from an assured RoE business where costs are
a pass through. Key downside risks that could impede the stock from reaching our
target price include: 1) The SEBs are still loss-making and trifurcationcorporatization-
privatization process has yet to be completed; 2) India has a
significant power deficit, and the question remains whether private generating
companies can earn expected returns with adequate payment security; 3)
Following passage of the Electricity Act, a number of High Tension industrial
consumers have set up captive capacity and are not purchasing power from the
grid. If the speed of switching to captive power increases beyond our expectation,
CESC's operations could be negatively affected; 4) Despite having access to
substantial coal for its operations, future growth beyond the Budge Budge
operations will depend on CESC's ability to secure captive mining blocks in Orissa
and Jharkand; 5) Free power remains an area of risk; and 6) Future capacity
expansion dependent on clearance from various regulatory authorities.