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CESC exceeded our expectations reporting excellent Q2FY11 results – PAT was
at Rs1.55bn (I-Sec: Rs1.28bn) as the company accounted for benefits from the
new tariff order in Q2FY11. Capex for the Kolkata distribution region was in line
with full year guidance of Rs5bn – CESC spent Rs2.3bn in H1FY11. Distribution
business’s operational performance was largely stable – T&D losses were steady
and plant load factor (PLF) declined marginally. We reiterate BUY on CESC owing
to: i) improvement in execution visibility for Haldia and Chadrapur projects
(Rs1.4bn invested in H1FY10), ii) better performance by retail operations, which
assuaged concerns over growth-led losses and iii) compelling valuations at
FY12E P/BV of 1.3x, the cheapest among private distribution companies.
Power – Strong performance. CESC reported a strong YoY jump in profitability on
account of benefits from the tariff order. The company purchased lesser power
(505mu in Q2FY11 versus 577mu in Q2FY10) due to the commissioning of Budge-
Budge plant as generation rose to 2,344mu in Q2FY11 versus 2,036mu in Q2FY10
and PLF was at 98.2%. Pace of capex for the power business has been in line with
distribution capex at Rs2.3bn.
Spencer’s – Strong operational performance mitigates concern over growth
intent. Retail sales per square feet grew 26% YoY to ~Rs1,000/sqft in Q2FY11 from
Q2FY10 levels (Rs1,100/sqft level touched in August ’10). Store count increased
marginally during the period. Improving operational performance in retail should
address concerns over growth intent. We believe CESC can achieve break-even at
Rs1,150/sqft/month.
Cheapest distribution utility despite superior financials. CESC is trading at 1.3x
FY12E P/BV (adjusted for retail exposure) versus other distribution utilities (such as
Tata Power, Reliance Infra and Torrent Power) – the valuations ascribed by the
Street is >2x BV. While other utilities have significant under-recoveries, CESC has
nil, leading to superior cashflows.
Reiterate BUY with a target price of Rs520/share.
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