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CESC: Stepping on the growth accelerator
Exploring funding options
Power business: targets commissioning of 2.5GW capacity by FY15/FY16,
to enhance distribution portfolio
CESC has embarked on a two-pronged strategy for its power vertical: (1) increase
generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) enter into
new distribution circles (recently emerged as lowest bidder for Patna circle).
The company intends to transform from a regional player to a national player.
2.5GW of generation projects are at advanced stages of development / have
entered the construction phase, with all initial clearances (water, environment,
etc) and land acquisition largely in place. These comprise of 600MW project
each at Haldia and Chandrapur and 1.3GW project in Orissa.
Retail business: focus on "profitable growth"
The management highlighted its strategy to attain "profitable growth", with
gradual expansion in total area under operations from 0.85msf to 2.5msf over
the next three years. In the interim period, 0.22msf of retail space is being
added and incremental pipeline stands at 0.3msf. Store level EBITDA stands at
Rs20/sf and the target is to increase this to Rs50/sf over the next 12-14 months.
Same stores revenue growth was 17% in December 2010 and 14% for YTD
FY11 [combination of 7% volume growth and 7% inflation]. In terms of geographic
expansion, the management prefers going deeper to going wider and is focusing
on 8-9 key markets.
Exploring funding options; continued investments into Spencer to fund
losses
Total funding requirement for power and retail business is expected to be ~Rs40b
over the next four years. This comprises of Rs30b+ equity funding requirement
(including Rs5b already invested) for 2.5GW of generation capacity addition, Rs3b-5b towards funding of Spencer's
losses (FY11E at Rs1.1b-1.3b) and capex funding (~Rs0.6b per year), plus funding requirements towards distribution
business.
The management indicated that the company is working on fund raising options both for the power and retail
business. CESC had cash and cash equivalents of Rs13.7b as at FY10, and core profit is estimated at Rs4b in FY11.
Valuations reasonable; maintain Buy: Our SOTP-based target price is Rs568, comprising of existing power business
at Rs346/share (10x FY12E EPS), investment in Spencer Retail at Rs39/share (Rs5b and FY10 EV/Sales of 1x), investment
in Haldia and Chandrapur projects at Rs57/share (Rs7b), and cash at Rs110/share (Rs13.7b). Buy.
Power business: targets commissioning of 2.5GW capacity by FY15/FY16, to
enhance distribution portfolio
CESC has embarked on a two-pronged strategy for its power vertical: (1) increase
generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) enter into new
distribution circles (recently emerged as lowest bidder for Patna circle). The company
intends to transform from a regional player to a national player.
2.5GW of generation projects are at advanced stages of development / have entered
the construction phase, with all initial clearances (water, environment, etc) and land
acquisition largely in place. These comprise of 600MW project each at Haldia and
Chandrapur and 1.3GW project in Orissa.
In addition, project pipeline stands at 3.3GW, comprising of (1) 1GW in Jharkhand, with
captive coal mine; land acquisition has just commenced, (2) 1GW in Bihar, where land
acquisition has just commenced, and (3) 1.3GW expansion in Haldia is in initial stages
with TOR approved recently.
Fuel linkages are available for Haldia and Chandrapur, while Orissa project has score of
90 out of 100, as appraised by CEA and thus has higher chances for getting linkages in
next meeting of standing linkages committee (SLC) for 12th plan. Additionally, CESC
has invested 10% in Resources Gen, which is developing mines in South Africa and
potentially provides access to 2mtpa of coal. Phase-1 mine development is expected to
be completed by 2013, with production of 6mtpa.
Equipment order for Chandrapur project has been already placed, while BTG award for
Halida project is likely soon, post approval from West Bengal Electricity Regulatory
Commission (WBERC) for the project cost, as 450MW is to be sold to the existing
distribution business. In terms of project commissioning, Chandrapur project unit-1 is
expected by August 2013, Haldia Unit-1 in 2014 and Orissa in 2015.
CESC has emerged as the preferred bidder for Patna distribution circle, pending award
by the state government. Management expects equity IRR of 18-20%. CESC is also
actively looking at other distribution circles, which are being privatized.
Retail business: focus on "profitable growth"
The management highlighted its strategy to attain "profitable growth", with gradual
expansion in total area under operations from 0.85msf to 2.5msf over the next three
years. In the interim period, 0.22msf of retail space is being added and incremental
pipeline stands at 0.3msf.
Store level EBITDA stands at Rs20/sf and the target is to increase this to Rs50/sf over
the next 12-14 months. This is being achieved through renegotiation of existing rentals,
increased share of large format stores, with lower rentals and rentals linked to revenue/
EBITDA sharing, operational efficiency (large format, pilferage/damage down from 10%
to 2.5%) and change in revenue mix (higher share of private labels, high-end offerings
to overall revenue, etc).
Spencer Retail currently clocks revenue of Rs1,000/sf/month, Same stores revenue
growth was 17% in December 2010 and 14% for YTD FY11 [combination of 7% volume
growth and 7% inflation]. In terms of geographic expansion, the management prefers
going deeper to going wider and is focusing on 8-9 key markets.
Plant Remarks
Chandrapur FC achieved (DER 75:25), linkages received from SECL.
Coal linkage received from South Eastern Coal Fields.
Land has been acquired (455 acres), Environment clearance received, etc.
EPC contract for the project is awarded in 2 packages: Balance of Plant (BoP) to
Punj Lloyd and BTG sets to Sanghai Electric, China.
300MW on merchant, 300MW on CERC tariffs.
Haldia Entire 345 acres required for the project is acquired.
Financial closure achieved
Fuel requirement through linkages (granted from MCL), additional cushion from
import (Possible through acquisition of stake in Resource Gen)
Will sign PPA agreement with CESC for supply of 450MW on PPA basis
CESC has invited BTG equipment tender and expects to award projects by Sept-10
Dhenkanal, Orissa Large part of the land has also been acquired [678 acres of the 1094 acres required]
As per prioritization for coal linkages, theproject has secured 90 marks out of 100
Terms of Reference for the project have been approved and the Environmental
Impact Assessment studies have been completed
Exploring funding options; continued investments into Spencer to fund losses
Total funding requirement for power and retail business is expected to be ~Rs40b over
the next four years. This comprises of Rs30b+ equity funding requirement (including
Rs5b already invested) for 2.5GW of generation capacity addition, Rs3b-5b towards
funding of Spencer's losses (FY11E at Rs1.1b-1.3b) and capex funding (~Rs0.6b per
year), plus funding requirements towards distribution business.
The management indicated that the company is working on fund raising options both
for the power and retail business. CESC plans to raise Rs10b through a PE transaction
for HOLDCO (Haldia Energy) or project SPVs. Towards Spencer, it intends to cap
incremental investments at Rs3b and meet additional needs through PE transaction.
Options are also being explored for PE transaction in Beverly Hills Polo Club franchise
(apparels), Au Bon Pain (Bakery), etc.
CESC had cash and cash equivalents of Rs13.7b as at FY10, and core profit is estimated
at Rs4b in FY11. Equity raising is imminent for progress in power projects and sustenance
of retail business; however, given the comfortable financial scenario, the company has
sufficient time.
Valuations reasonable; maintain Buy
We expect CESC to report standalone net profit of Rs4.1b in FY11 (up 7.2%), Rs4.3b in
FY12 (up 4.9%) and Rs5b in FY13 (up 4.9%). The stock trades at 9x FY11E, 8.6x FY12E
and 8.4x FY13E EPS, and 1.2x FY11E, 1.1x FY12E and 1x FY13E BV.
Our SOTP-based target price is Rs568, comprising of existing power business at Rs346/
share (10x FY12E EPS), investment in Spencer Retail at Rs39/share (Rs5b and FY10
EV/Sales of 1x), investment in Haldia and Chandrapur projects at Rs57/share (Rs7b),
and cash at Rs110/share (Rs13.7b). We have additionally valued the real estate business
(mall development) at Rs17/share (Rs2.2b). Spencers has been a drag over the past
three years, with investments of Rs20b (including shares issued to promoters on
acquisition) valued at Rs4.9b, currently. Possible upsides: (1) progress on 2.5GW projects
under construction and development pipeline of 3.3GW, (2) reduction in cash losses /
operational turnaround / PE investor for Spencers. Maintain Buy.
Mr Sumantra Banerjee,
Managing Director, CESC & President/
Chief Executive, Retail Group
Mr Sumantra Banerjee is the
President and Chief Executive
of RPG Enterprises' power
business. He serves as Member
of Management Board of RPG
Enterprises. He has been
Managing Director of CESC
since 1 August 1993.
He has over 32 years of
experience in India and abroad
in manufacturing, engineering,
finance, marketing and general
management functions. In
India, he has been in various
companies of the RPG Group
since 1984 at senior
management level.
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