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Key highlights
�� CESC’s Q2FY11 PAT grew by 23% yoy to Rs1.55bn, above our estimates (Rs1.26bn), led mainly by lower other costs
on account of writeback of expenses due to adjustments of revenues/expenses post receipt of tariff order from WB
Regulatory Commission.
�� CESC's own generation units grew by 15% yoy to 2.34bn units led by the commissioning of the 250MW Budge Budge
III unit in March 2010. The blended overall PLF has improved to 98.4% (compared to 95.3% in Q1FY11), led by ramp
up in generation of the new unit (average PLF of Budge Budge improved from 93.5% in Q1FY11 to 99.2% in Q2FY11).
�� The units sold during the quarter grew by 8% yoy to 2,244 mn units. Realizations improved by 5.5% yoy to
Rs4.86/unit, led by pass through of higher fuel costs as well as higher cost of purchased power.
�� The purchased power units fell 12.5%yoy during the quarter due to an increase in internal generation, post
commissioning of the 250MW Budge Budge III unit. However, an 18% increase in purchased cost per unit
(Rs4.81/unit), led to 3.4% yoy increase in total purchased power cost to Rs2.4bn.
�� The T&D losses during the quarter were at 14%, down 20bps yoy and marginally higher by 30bps on a qoq basis.
�� Post receipt of tariff order from West Bengal Electricity Regulatory Commission, all adjustments to revenues/costs
have been accounted in ‘other costs’, instead of adjustment in each respective accounting head. For e.g. under cost
heads, the company has recorded a writeback of Rs2.17bn during the quarter. The net effect of all such adjustments is
a writeback in other expenses of Rs140mn, resulting in a sharp 570bps increase in EBITDA margins to 27.8% vs our
estimate 24.5%. Although the effect of the adjustment on the EBITDA margin appears to be substantial for the quarter,
such adjustments are recurring in nature and hence not treated as extraordinary. Resultant, EBITDA increased
44%yoy to Rs3.03bn, above our estimates Rs2.67bn.
�� Depreciation charges jumped by 30.6% yoy to Rs640mn, while interest increased by 67.4%yoy to Rs770mn due to
commissioning of new capacity.
�� Consequently, PAT grew 23%yoy to Rs1.55bn.
�� Progress on other power plants
�� The work for the 600MW Chandrapur, Maharashtra (Dhariwal) project is progressing as per schedule. The EPC and
BTG orders were placed to Punj Lloyd and Shanghai Electric group respectively in 4Q10.
�� The 600MW Haldia power plant has achieved financial closure, while the International Competitive Bidding (ICB)
process is under progress to award the EPC contract.
�� CESC is looking to set up a 1,320MW thermal power plant in Orissa for which all major approvals have been obtained
and the coal linkage has been applied.
�� The company is also looking to set up a 1,000MW coal based plant in Jharkhand, for which a joint allocation of 110MT
capacity coal block has been obtained. CESC has also obtained a prospecting license for the mine.
�� The construction work on the development of shopping mall, under CESC Properties Ltd is ongoing.
�� The company is looking to raise funds in the power holding company (100% subsidiary) to meet part of the funding
needs of large project pipeline.
�� Taking various steps to reduce losses in Spencer
As part of management’s strategy to reduce costs and enhance profitability through focusing on large format stores,
Spencer has launched Guntur Hyper in July ’10, taking the total hyper stores to 19 with total area 452k sqft (~50% total
area 876k sqft). Another hyper format store is planned in Pune shortly. Overall sales have increased to Rs1,100/sqft in
August ’10 compared to Rs906/sqft in June ’10. Higher revenues and various cost saving measures have resulted in store
EBITDA/sqft turning positive in June ’10. The management expects the losses to reduce in FY11 to Rs2bn vs Rs3bn losses
in FY10. As part of management’s efforts to reduce costs, unviable and loss making stores are being closed, back end
systems being strengthened, marketing spend trimmed and fixed costs reduced by renegotiating lease rentals. The
company is also strategically focusing on large format stores and high margin verticals like private labels. The BHPC
franchisee model is expected to be launched by Nov ’10, while the B2B venture is estimated to be launched by March ’11.
�� Maintain Outperformer
We have upgraded our earnings estimates by 5% for FY11E and 3% for FY12E due to the lower than estimated other
expenses. CESC is pursuing growth in its core power business through various power projects that are witnessing steady
progress in development. Apart from acquisition of a 600MW merchant power plant (Chandrapur, Dhariwal), CESC is
developing a 1,000MW merchant power project in Jharkhand, where the company has already been jointly awarded coal
mine of 110mn ton (CESC’s share) thereby ensuring fuel supply critical to ensuring profitability of the plant. The financial
closure for 600MW Haldia power plant is completed and ordering process is underway. The retail business, which till
now has remained a drag on shareholder value, is being strategically modified towards breaking even, while the
company is also looking at strategic partners or fund raising in the retail business. Post upgradation in earnings
estimates, our revised sum of parts valuation for CESC is Rs470/share. The stock currently trades at 10.2x FY11E earnings
and 1.2x FY11E P/BV. Maintain our Outperformer rating on the stock.
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