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CESC Limited
Passing on higher fuel costs in Kolkata
Event
CESC has increased power tariffs by Rs.0.46/kWh in Kolkata from April
2011 and has moved to a Monthly Variable Cost Adjustment (MVCA) model.
Structurally this is a positive as higher fuel costs can be offset by passing on
to customers sooner (reducing working capital requirements).
With the stock price recently weakening, we highlight that CESC trades at a
compelling valuation of 0.7x FY12 cons P/BV and 10x FY12 cons NPAT (vs
market at 15x and sector at 12x). Preferred mid-cap in Utilities.
Impact
Significant price hike by Coal India drives tariff lift: around 40% of CESC's
regulated generation assets in Kolkata (1,225MW) source Grade A and B coal
from Coal India (Eastern Coalfields) via linkages. The Rs.0.46/kWh tariff hike
to all customers follows CIL's substantial price hikes in February 2011
for Grade A and B coal (ECL Grade A-B was increased 73%-115%).
Fuel cost pass-through on a monthly basis with truing up at year end:
CESC will now be able to pass-through coal price increases on a monthly
basis, which helps during a period of rising fuel price volatility and reduces
large working capital requirements. We understand that there will be a true-up
at the end of each year based on audited accounts to ensure that CESC
is not over/under charging customers based on actual fuel costs.
WBERC notification hasn’t seen any change to regulated operating
norms: the dull 321pg notification doesn’t seem to suggest any change in key
operating norms for the regulated CESC assets over FY12-FY14 such as
PLF, availability, heat rate and OM norms.
Retail results, end of June: the FY11 results for Spencer's should be out in
the last week of June, when the CESC consolidated results have been
audited. We expect losses of around Rs.1.4bn (an improvement of Rs.1.2bn
from FY10). Recent feedback from our CESC NDR in Asia highlighted that
management forecasts losses in Spencer’s to fall to Rs1.1bn in FY12,
Rs0.7bn in FY13 and zero in FY14, while expecting property to add Rs0.25bn
NPAT from mid-FY13. This implies material upside to our earnings forecasts
(18% FY13, 33% FY14).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs384.00 based on a Sum of Parts methodology.
Catalyst: 1. Private Equity invest in power growth portfolio; 2. loss reduction in
retail over next 12 months, 3. FDI law relaxed for multi-format retailers.
Action and recommendation
Outperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
\
CESC Limited
Passing on higher fuel costs in Kolkata
Event
CESC has increased power tariffs by Rs.0.46/kWh in Kolkata from April
2011 and has moved to a Monthly Variable Cost Adjustment (MVCA) model.
Structurally this is a positive as higher fuel costs can be offset by passing on
to customers sooner (reducing working capital requirements).
With the stock price recently weakening, we highlight that CESC trades at a
compelling valuation of 0.7x FY12 cons P/BV and 10x FY12 cons NPAT (vs
market at 15x and sector at 12x). Preferred mid-cap in Utilities.
Impact
Significant price hike by Coal India drives tariff lift: around 40% of CESC's
regulated generation assets in Kolkata (1,225MW) source Grade A and B coal
from Coal India (Eastern Coalfields) via linkages. The Rs.0.46/kWh tariff hike
to all customers follows CIL's substantial price hikes in February 2011
for Grade A and B coal (ECL Grade A-B was increased 73%-115%).
Fuel cost pass-through on a monthly basis with truing up at year end:
CESC will now be able to pass-through coal price increases on a monthly
basis, which helps during a period of rising fuel price volatility and reduces
large working capital requirements. We understand that there will be a true-up
at the end of each year based on audited accounts to ensure that CESC
is not over/under charging customers based on actual fuel costs.
WBERC notification hasn’t seen any change to regulated operating
norms: the dull 321pg notification doesn’t seem to suggest any change in key
operating norms for the regulated CESC assets over FY12-FY14 such as
PLF, availability, heat rate and OM norms.
Retail results, end of June: the FY11 results for Spencer's should be out in
the last week of June, when the CESC consolidated results have been
audited. We expect losses of around Rs.1.4bn (an improvement of Rs.1.2bn
from FY10). Recent feedback from our CESC NDR in Asia highlighted that
management forecasts losses in Spencer’s to fall to Rs1.1bn in FY12,
Rs0.7bn in FY13 and zero in FY14, while expecting property to add Rs0.25bn
NPAT from mid-FY13. This implies material upside to our earnings forecasts
(18% FY13, 33% FY14).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs384.00 based on a Sum of Parts methodology.
Catalyst: 1. Private Equity invest in power growth portfolio; 2. loss reduction in
retail over next 12 months, 3. FDI law relaxed for multi-format retailers.
Action and recommendation
Outperform.
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