Macquarie Research:: CESC- Cash cow utility, turnaround retail

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CESC
Cash cow utility, turnaround retail
Event
 CESC owns and operates the 110 year-old integrated, regulated utility in
Kolkata, which comprises of Distribution and Transmission and 1,225MW of
power generation assets. All assets are regulated by the West Bengal
Electricity Regulatory Commission (WBERC) on three-year regulatory resets.
 In FY2008, CESC acquired Pathik Retail Ltd, the holding company which
owns 94% of the equity stake in Spencer's Retail. Spencer currently operates
216 stores with a cumulative area of 890,000 sqft across the country.

Impact
 Monopoly utility assets in Kolkata: With an existing generation capacity of
1,225MW and presence across transmission and distribution, the company
enjoys a monopoly position in distributing power to Kolkata city in West
Bengal. Its generation capacity coupled with 16,500cktkm of transmission and
distribution network, the company distributes power within 567sq.km of
licensed area, serving 2.3m customers.
 With existing projects enjoying fuel security: Diversified fuel source,
including access to captive generation, which meets ~50% of existing fuel
requirement, coal linkage with ECL providing 40% requirement and the
remaining 10% sourced through imports.
 4,440MW of expansion plans – key driver for growth: The company plans
to increase its coal based capacity by 4,440MW over the next five years
taking the cumulative capacity to 5,665MW by 2016. With a linkage
dominated growth portfolio, fuel security is highly reliant on Coal India
delivery.
 Retail: We understand that the strategy of Spencer’s is to increase gross
margin via store expansion in order to dilute the impact of the high fixed costbase.
The company plans to increase current retail space from 0.9msqft to
2.4msqft by March 2013.
Outlook
 CESC currently trades at ~9.5x FY11E PER and 8.5xFY12E PER (Bloomberg
consensus). A key trigger to the company’s valuation could be turnaround in
its retail business, which has been a drag on profitability.


CESC Aide Memoire
Questions for Management
1. Please give us the latest update on your upcoming and under development generation projects (various clearances,
equipment orders etc).
2. Do you plan to sell stakes in any of your power generating plants (existing and upcoming)? If yes, what is the level of
dilution you would look at?
3. In the event you do not get adequate linkage for your upcoming projects, what alternatives are you pursuing? (coal asset
acquisition, etc)
4. What is the current and forecast volume growth in the Kolkata distribution asset? What sort of annual regulatory capex do
you budget over the next five years?
5. When does the WBERC make its decision on regulated tariff for the next five year period? Where will they target tariff
reduction, capex, operating efficiencies and ATC losses?
6. Have you considered alternate strategies such as closing business, selling business, transferring to other RPG group? Can
you go through each of these. Why/Why not?
7. How does the gross margin differ between stores types – hypermarkets, supermarkets, single brands etc?
8. To break-even, how many new stores would be required to be opened?