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For 3QFY2011, CESC recorded healthy 7.8% yoy growth in standalone net profit,
primarily on account of a 48.8% surge in operating profit. During the quarter,
operating profit increased due to higher power generation (up 14.6% yoy to
2,147MU) and lower power purchase. The monthly per sq. ft. sales of Spencer’s,
CESC’s 94% retail subsidiary, rose by 22.7% yoy to `1,048 in December 2010.
EBITDA/sq. ft. for Spencer’s has turned positive since June 2010. We continue to
maintain our Buy recommendation on the stock.
OPM up 512bp yoy aided by higher power generation: CESC registered 20.5%
yoy growth in its standalone top line to `939cr, aided by 7.1% higher sales
volumes and better realisations. However, top-line growth was affected by lower
power purchase at 229MU (v/s 366MU in 3QFY2010). OPM expanded by 512bp
yoy to 26.9% on account of a 14.6% yoy increase in generation due to the
commencement of 250MW Unit III Budge-Budge plant, resulting in 48.8% growth
in operational profit. However, net profit rose only by 7.8% yoy on account of
higher interest (up 64.3% yoy) and depreciation expenses (up 40.8% yoy).
Valuation: Going ahead, we expect CESC’s growth to be driven by the timely
execution of its projects. We expect the company’s standalone top line and
bottom line to grow at CAGR of 16.9% and 13.5%, respectively, over
FY2010–12E. We expect Spencer’s to take another 12–15 months to breakeven
at the corporate level. At the CMP, the stock is trading at 6.7x FY2012E EPS and
0.8x FY2012E P/BV. We maintain our Buy recommendation on the stock with a
revised SOTP-based Target Price of `468 (`474).
Investment arguments
Power business being scaled up
CESC's huge expansion plans to increase its generation capacity to 5,745MW from the current
1,125MW are expected to propel its growth going ahead. This includes having a national
footprint and 3,750MW of capacity via different routes such as regulated return, merchant market
and competitive bidding. Currently, CESC enjoys assured returns from its operations in Kolkatalicensed
area. Going ahead, we expect the company’s merchant-based plant at Chandrapur
(600MW) to be operational in 2QFY2014. The EPC and BTG orders for the Chandrapur plant
have been placed with Punj Lloyd and Shanghai Electric Group. CESC has already acquired 90%
of the land required for the Haldia project and has obtained coal linkage and environmental
clearances. We believe the proposed expansion would drive the company’s growth going ahead.
Leading private sector player with a proven track record
CESC is one of the oldest utility companies in India. The company has been
generating and distributing power in Kolkata since 1897. CESC is a fully
integrated power player with presence in power generation, distribution and coal
mining. As of FY2009, the company had a customer base of about 2.3mn
customers in Kolkata and Howrah. CESC’s existing plants have enjoyed high PLFs
with the Budge-Budge plant in particular reporting PLFs in excess of 99% over the
last four years. The company’s efficiency has improved in the distribution front as
well with AT&C losses reducing to 13.3% in FY2009 from 18.8% in FY2003.
CESC, which is involved in distribution only in Kolkata, is now looking at entering
into power distribution in other cities as well. Further, the company has tied up with
SP Global Solutions, a subsidiary of Singapore Power, to improve reliability of its
distribution system, which could aid further reduction in losses.
Retail business showing signs of recovery
Currently, Spencer’s has 206 outlets spread across the country and operates
18 hyper stores and 10 super stores with total area of 431,000 sq. ft. and
64,000 sq. ft., respectively. In December 2010, per sq. ft. sales of Spencer’s rose
by 22.7% to `1,048 from `854 in December 2009. As a result, EBITDA/sq. ft. has
turned positive at the store level. We expect the retail business to breakeven at the
corporate level as well in another 12–15 months.
Tapping the unexplored land bank
CESC Properties, a 100% subsidiary of CESC, plans to develop a 0.4mn sq. ft.
shopping mall in Central Kolkata. Going ahead, CESC Properties also has plans to
monetise its 35-acre land at Mulajore.
Outlook and valuation
At the CMP, the stock is trading at 6.7x FY2012E EPS and at 0.8x FY2012E P/BV.
We have assigned 1.15x FY2012E blended P/BV multiple to the company’s
existing power business, considering its lower RoE and higher cash component.
Thus, the total value of the power business works out to `446/share. We have
valued Spencer's on mcap/sales basis, after considering the mcap/sales of peers
such as Pantaloon Retail, Shopper's Stop and Trent. On one-year forward
mcap/sales basis, peers of Spencer’s are trading broadly in the range of 0.5–0.7x.
Due to the low-margin business model and cash losses, we have assigned
Spencer’s mcap/sales ratio of 0.15x FY2012E sales, which is at a significant
discount to the average of its peers. Thus, the total value of its retail business works
out to `12/share. We have valued CESC’s mall in Central Kolkata and land in
Mulajore (35 acres) on NAV basis and have arrived at a price of `10/share for its
real estate business. We maintain our Buy recommendation on the stock with a
revised SOTP-based Target Price of `468 (`474).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC – 3QFY2011 Result Update
Angel Broking maintains a Buy on CESC with a Target Price of Rs. 468.
For 3QFY2011, CESC recorded healthy 7.8% yoy growth in standalone net profit,
primarily on account of a 48.8% surge in operating profit. During the quarter,
operating profit increased due to higher power generation (up 14.6% yoy to
2,147MU) and lower power purchase. The monthly per sq. ft. sales of Spencer’s,
CESC’s 94% retail subsidiary, rose by 22.7% yoy to `1,048 in December 2010.
EBITDA/sq. ft. for Spencer’s has turned positive since June 2010. We continue to
maintain our Buy recommendation on the stock.
OPM up 512bp yoy aided by higher power generation: CESC registered 20.5%
yoy growth in its standalone top line to `939cr, aided by 7.1% higher sales
volumes and better realisations. However, top-line growth was affected by lower
power purchase at 229MU (v/s 366MU in 3QFY2010). OPM expanded by 512bp
yoy to 26.9% on account of a 14.6% yoy increase in generation due to the
commencement of 250MW Unit III Budge-Budge plant, resulting in 48.8% growth
in operational profit. However, net profit rose only by 7.8% yoy on account of
higher interest (up 64.3% yoy) and depreciation expenses (up 40.8% yoy).
Valuation: Going ahead, we expect CESC’s growth to be driven by the timely
execution of its projects. We expect the company’s standalone top line and
bottom line to grow at CAGR of 16.9% and 13.5%, respectively, over
FY2010–12E. We expect Spencer’s to take another 12–15 months to breakeven
at the corporate level. At the CMP, the stock is trading at 6.7x FY2012E EPS and
0.8x FY2012E P/BV. We maintain our Buy recommendation on the stock with a
revised SOTP-based Target Price of `468 (`474).
Operational highlights
During 3QFY2011, CESC’s total power generation stood at 2,147MU (1,873MU),
up 14.6% yoy. Overall PLF excl. New Cossipore plant stood at 83.1% (92.6%)
during the quarter, down by 950bp yoy due to the lower PLF of 250MW
Budge-Budge Unit-III. Power purchased by the company reduced by 37.4% yoy
during the quarter to 229MU (366MU).
Investment arguments
Power business being scaled up
CESC's huge expansion plans to increase its generation capacity to 5,745MW from the current
1,125MW are expected to propel its growth going ahead. This includes having a national
footprint and 3,750MW of capacity via different routes such as regulated return, merchant market
and competitive bidding. Currently, CESC enjoys assured returns from its operations in Kolkatalicensed
area. Going ahead, we expect the company’s merchant-based plant at Chandrapur
(600MW) to be operational in 2QFY2014. The EPC and BTG orders for the Chandrapur plant
have been placed with Punj Lloyd and Shanghai Electric Group. CESC has already acquired 90%
of the land required for the Haldia project and has obtained coal linkage and environmental
clearances. We believe the proposed expansion would drive the company’s growth going ahead.
Leading private sector player with a proven track record
CESC is one of the oldest utility companies in India. The company has been
generating and distributing power in Kolkata since 1897. CESC is a fully
integrated power player with presence in power generation, distribution and coal
mining. As of FY2009, the company had a customer base of about 2.3mn
customers in Kolkata and Howrah. CESC’s existing plants have enjoyed high PLFs
with the Budge-Budge plant in particular reporting PLFs in excess of 99% over the
last four years. The company’s efficiency has improved in the distribution front as
well with AT&C losses reducing to 13.3% in FY2009 from 18.8% in FY2003.
CESC, which is involved in distribution only in Kolkata, is now looking at entering
into power distribution in other cities as well. Further, the company has tied up with
SP Global Solutions, a subsidiary of Singapore Power, to improve reliability of its
distribution system, which could aid further reduction in losses.
Retail business showing signs of recovery
Currently, Spencer’s has 206 outlets spread across the country and operates
18 hyper stores and 10 super stores with total area of 431,000 sq. ft. and
64,000 sq. ft., respectively. In December 2010, per sq. ft. sales of Spencer’s rose
by 22.7% to `1,048 from `854 in December 2009. As a result, EBITDA/sq. ft. has
turned positive at the store level. We expect the retail business to breakeven at the
corporate level as well in another 12–15 months.
Tapping the unexplored land bank
CESC Properties, a 100% subsidiary of CESC, plans to develop a 0.4mn sq. ft.
shopping mall in Central Kolkata. Going ahead, CESC Properties also has plans to
monetise its 35-acre land at Mulajore.
Outlook and valuation
At the CMP, the stock is trading at 6.7x FY2012E EPS and at 0.8x FY2012E P/BV.
We have assigned 1.15x FY2012E blended P/BV multiple to the company’s
existing power business, considering its lower RoE and higher cash component.
Thus, the total value of the power business works out to `446/share. We have
valued Spencer's on mcap/sales basis, after considering the mcap/sales of peers
such as Pantaloon Retail, Shopper's Stop and Trent. On one-year forward
mcap/sales basis, peers of Spencer’s are trading broadly in the range of 0.5–0.7x.
Due to the low-margin business model and cash losses, we have assigned
Spencer’s mcap/sales ratio of 0.15x FY2012E sales, which is at a significant
discount to the average of its peers. Thus, the total value of its retail business works
out to `12/share. We have valued CESC’s mall in Central Kolkata and land in
Mulajore (35 acres) on NAV basis and have arrived at a price of `10/share for its
real estate business. We maintain our Buy recommendation on the stock with a
revised SOTP-based Target Price of `468 (`474).
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