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CESC - OUTPERFORMER (RS272, MCAP: RS34BN / US$753MN)
• Distribution circle profits being driven by capacity expansion: CESC’s current capacity is 1225MW, including the
recently commissioned Budge Budge III (250MW) power plant. It is running the plants at 93% PLF, with T&D losses at
less than 13.5% and collection of 99.5%. CESC has tied up coal for its power plants through long-term agreements with
Coal India and captive coal mines. The current tariff is 4.73/ unit, driven by an increase in costs as also equity base.
CESC incurs a capex of Rs5bn annually on maintenance capex.
• Construction of new power plants on track: The construction of the Chandrapur (600MW Dhariwal) power project is
on track (initial piling work done), with commissioning likely in 2013. The 600MW Haldia project has achieved
financial closure and is likely to invite bids for equipment soon. The management expects construction to begin in
three months. CESC is awaiting coal linkage for its 1320MW Orissa power plant, work at which has been completed.
CESC has a top score of 90% for securing coal linkages and is confident of obtaining the same. Work on the 1320MW
Balgarh project started late as the company only recently acquired land and received environment TOR; this accounts
for the project’s low score of 70% for coal linkage. On the 600MW Jharkhand project, CESC has begun some work on
captive power but is facing land acquisition issues.
• Acquired Resource Generation Ltd (Australia): CESC has taken a controlling stake in RGL for 600MT to 1bn tonnes
of coal in South Africa to hedge itself against any volatility of coal availability for its projects in India. Mining is
expected to begin in 2013 and has a formula-based pricing.
• Retail business losses reducing: The management is working hard at reducing losses in the retail businesses –
shutting unviable stores and focusing on large-format stores (e.g., hyper stores) to ~50% of total area. The company is
also boosting back-end systems, trimming marketing spend, and reducing fixed costs by renegotiating lease rentals. It
is also strategically focusing on large-format stores and high-margin verticals like private labels. Overall sales
increased to Rs983/ sqft in September 2010, compared with Rs758/ sqft in September 2009. Higher revenues and
various cost saving measures resulted in store EBITDA/ sqft turning positive in June 2010. CESC expects losses to
reduce to Rs2bn in FY11 from Rs3bn in FY10. To reduce losses further, it would need to add more stores and funding
the same through internal accruals as well as seek external funding.
• Attractively valued; maintain Outperformer: CESC is pursuing growth at its core power business through various
power projects, which are steadily progressing. Apart from the acquisition of a 600MW merchant power plant
(Chandrapur, Dhariwal), CESC is developing a 1,000MW merchant power project in Jharkhand. It has been jointly
awarded a coal mine of 110m tonnes (CESC’s share) which would ensure fuel supply and thereby profitability of the
plant. Financial closure has been achieved for the 600MW Haldia power plant and ordering is under way. The retail
business, which is still a drag on shareholder value, is being strategically modified to help it break even. The company
is also looking at strategic partners or fund raising for the retail business. The stock currently trades at 7.5x FY11E
earnings and 0.9x FY11E P/BV. We maintain our Outperformer rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC - OUTPERFORMER (RS272, MCAP: RS34BN / US$753MN)
• Distribution circle profits being driven by capacity expansion: CESC’s current capacity is 1225MW, including the
recently commissioned Budge Budge III (250MW) power plant. It is running the plants at 93% PLF, with T&D losses at
less than 13.5% and collection of 99.5%. CESC has tied up coal for its power plants through long-term agreements with
Coal India and captive coal mines. The current tariff is 4.73/ unit, driven by an increase in costs as also equity base.
CESC incurs a capex of Rs5bn annually on maintenance capex.
• Construction of new power plants on track: The construction of the Chandrapur (600MW Dhariwal) power project is
on track (initial piling work done), with commissioning likely in 2013. The 600MW Haldia project has achieved
financial closure and is likely to invite bids for equipment soon. The management expects construction to begin in
three months. CESC is awaiting coal linkage for its 1320MW Orissa power plant, work at which has been completed.
CESC has a top score of 90% for securing coal linkages and is confident of obtaining the same. Work on the 1320MW
Balgarh project started late as the company only recently acquired land and received environment TOR; this accounts
for the project’s low score of 70% for coal linkage. On the 600MW Jharkhand project, CESC has begun some work on
captive power but is facing land acquisition issues.
• Acquired Resource Generation Ltd (Australia): CESC has taken a controlling stake in RGL for 600MT to 1bn tonnes
of coal in South Africa to hedge itself against any volatility of coal availability for its projects in India. Mining is
expected to begin in 2013 and has a formula-based pricing.
• Retail business losses reducing: The management is working hard at reducing losses in the retail businesses –
shutting unviable stores and focusing on large-format stores (e.g., hyper stores) to ~50% of total area. The company is
also boosting back-end systems, trimming marketing spend, and reducing fixed costs by renegotiating lease rentals. It
is also strategically focusing on large-format stores and high-margin verticals like private labels. Overall sales
increased to Rs983/ sqft in September 2010, compared with Rs758/ sqft in September 2009. Higher revenues and
various cost saving measures resulted in store EBITDA/ sqft turning positive in June 2010. CESC expects losses to
reduce to Rs2bn in FY11 from Rs3bn in FY10. To reduce losses further, it would need to add more stores and funding
the same through internal accruals as well as seek external funding.
• Attractively valued; maintain Outperformer: CESC is pursuing growth at its core power business through various
power projects, which are steadily progressing. Apart from the acquisition of a 600MW merchant power plant
(Chandrapur, Dhariwal), CESC is developing a 1,000MW merchant power project in Jharkhand. It has been jointly
awarded a coal mine of 110m tonnes (CESC’s share) which would ensure fuel supply and thereby profitability of the
plant. Financial closure has been achieved for the 600MW Haldia power plant and ordering is under way. The retail
business, which is still a drag on shareholder value, is being strategically modified to help it break even. The company
is also looking at strategic partners or fund raising for the retail business. The stock currently trades at 7.5x FY11E
earnings and 0.9x FY11E P/BV. We maintain our Outperformer rating on the stock.
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