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CESC Limited
FDI getting closer
Event
The journey to allow foreign direct investment (FDI) in multi-format retail in
India seems to be getting closer to proceeding, with a Committee of
Secretaries (CoS) on Friday reported to have recommended such a move.
While this still needs Union Cabinet approval, we consider the impact. Our
381/share price target includes a -55/share impact from Spencer’s. Stripping
this out would increase the price target to 436/share – a further 24% upside
potential. However, in the absence of such a transaction, we would look to
take profits should the stock reach our current 381/share price target.
Impact
What has happened: On Friday, a Committee of Secretaries (CoS), headed
by the Cabinet Secretary Mr Ajit Kumar Seth, gave the go-ahead to allow FDI
up to 51% in multi-format retail, which will now have to be approved by the
Union Cabinet. Reports indicate that officials have noted "the panel wanted
any investment by a foreign firm to be worth at least US$100m".
What would FDI actually mean? Three key benefits for Spencer’s:
⇒ 1. Creating a look-through valuation: Any value realised for Spencer’s
would positively surprise a market which prices-in a negative valuation for
the business. Our current price target is Rs381 for CESC, with Spencer’s
creating a -Rs.55 impact to value. Stripping out this negative valuation
would increase our price target to Rs436. Selling a part of Spencer’s
would also lower consolidated losses. CESC (ex retail) currently trades on
9.3x FY12E NPAT and 0.7x FY12E P/BV.
⇒ 2. Capital infusion from FDI: would likely allow Spencer’s to grow
quicker than it would with 100% CESC ownership, thereby potentially
lowering losses at a faster pace and allowing CESC to reallocate capital.
⇒ 3. Expertise to improve competition: From meeting multi-format
retailers over the past months, it has become clear to us that they are in
the early stage cycle of learning 'what works' in terms of efficiency and
margin in multi-format retailing. International expertise is likely to hasten
this learning process, thereby leading to an improvement in profitability.
The attraction to large foreign retailers: Spencer’s, in our view, would
provide a good-fit for large international retails due to its focus on food
retailing (75% of revenues for Spencer’s, 57% HyperCITY, 30% Big Bazaar).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs381.00 based on a Sum of Parts methodology.
Catalyst: Cabinet approval for FDI, ongoing Spencer’s margin improvement
Action and recommendation
Outperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC Limited
FDI getting closer
Event
The journey to allow foreign direct investment (FDI) in multi-format retail in
India seems to be getting closer to proceeding, with a Committee of
Secretaries (CoS) on Friday reported to have recommended such a move.
While this still needs Union Cabinet approval, we consider the impact. Our
381/share price target includes a -55/share impact from Spencer’s. Stripping
this out would increase the price target to 436/share – a further 24% upside
potential. However, in the absence of such a transaction, we would look to
take profits should the stock reach our current 381/share price target.
Impact
What has happened: On Friday, a Committee of Secretaries (CoS), headed
by the Cabinet Secretary Mr Ajit Kumar Seth, gave the go-ahead to allow FDI
up to 51% in multi-format retail, which will now have to be approved by the
Union Cabinet. Reports indicate that officials have noted "the panel wanted
any investment by a foreign firm to be worth at least US$100m".
What would FDI actually mean? Three key benefits for Spencer’s:
⇒ 1. Creating a look-through valuation: Any value realised for Spencer’s
would positively surprise a market which prices-in a negative valuation for
the business. Our current price target is Rs381 for CESC, with Spencer’s
creating a -Rs.55 impact to value. Stripping out this negative valuation
would increase our price target to Rs436. Selling a part of Spencer’s
would also lower consolidated losses. CESC (ex retail) currently trades on
9.3x FY12E NPAT and 0.7x FY12E P/BV.
⇒ 2. Capital infusion from FDI: would likely allow Spencer’s to grow
quicker than it would with 100% CESC ownership, thereby potentially
lowering losses at a faster pace and allowing CESC to reallocate capital.
⇒ 3. Expertise to improve competition: From meeting multi-format
retailers over the past months, it has become clear to us that they are in
the early stage cycle of learning 'what works' in terms of efficiency and
margin in multi-format retailing. International expertise is likely to hasten
this learning process, thereby leading to an improvement in profitability.
The attraction to large foreign retailers: Spencer’s, in our view, would
provide a good-fit for large international retails due to its focus on food
retailing (75% of revenues for Spencer’s, 57% HyperCITY, 30% Big Bazaar).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs381.00 based on a Sum of Parts methodology.
Catalyst: Cabinet approval for FDI, ongoing Spencer’s margin improvement
Action and recommendation
Outperform.
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