Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC (CESC.BO)
Buy: Deep Value In Power - Despite Retail Drain
Power business — Continues to deliver with FY11 PAT of Rs4.9bn up 13% YoY.
Capex in Kolkatta is expected to be Rs5bn/ year (adding Rs1.5bn/ year to the
regulatory equity block). This will add Rs225m every year to the profits. Another Rs100-
150m could get added to the profits on incentives and costs savings.
Retailing business — Recurring PBT loss has reduced in quantum in FY11 to
Rs2.6bn from Rs2.9bn in FY10. We estimate the recurring cash loss in FY11 was
Rs2.1bn v/s management’s figure of Rs1.5bn. Management expects this to come down
to Rs1.1bn whereas we assume the same would be Rs1.6bn in FY12E.
Consolidated business — EPS should grow at a CAGR of 27% over FY11-14E
(higher than parent at 7%) given an expected reduction in retailing losses. Average
RoEs of the consolidated entity should improve to 13.6% by FY14E from the current
9.1%.
Deep value stock — We maintain our Buy rating on the stock as we believe investors
are ignoring the two new projects, Chandrapur and Haldia Phase-I of 1200MW (which
will commission over FY14E-15E), given the retail business overhang. As retailing
losses come down or if there is any indication of a change in laws on foreign direct
investment (FDI) in retail, there could be a significant re-rating in the CESC stock.
Target price cut to Rs440 — We change our valuation methodology from sum-of-theparts
to one based on P/E, given investors have stopped looking at projects that are
getting comissioned beyond the next two years. Furthermore, this gets even more
pronounced in the case of CESC given the retailing overhang. As a consequence we
cut our target price to Rs440 from Rs498 earlier. Our target P/E multiple is set at 13x
Sep12E, in line with thPublish Poste historical average. Our target multiple is well supported by
consolidated EPS CAGR of 27% and average RoEs improving from 9.1% to 13.6%
over FY11-14E.
CESC
Company description
CESC is a vertically integrated electric utility engaged in the business of generation,
transmission and distribution of electricity to consumers in its licensed area, which
covers Kolkata and Howrah. It currently has four power plants with a generation
capacity of 1225MW servicing 2.4m consumers in its 567sqkm license area. CESC
has a 26% stake in Integrated Coal Mining Ltd (ICML) (74% held by RPG group
companies). ICML supplies c.2.5m MTPA of coal to CESC (52% of CESC's coal
requirement) with the remaining being sourced from Coal India and imported coal
from Indonesia. Imported coal with 6% ash content is mixed with domestic coal that
has 42% ash content to bring it down to 37% ash content and fed into the power
plants. CESC generated 7.8 billion units (bu) of power, bought 1.8bu of power and
sold 7.6bu, with a transmission and distribution (T&D) loss of 13.2% in FY10.
Investment strategy
We rate CESC as Buy/Medium Risk (1M). Having turned from a loss of Rs1.3bn in
FY99 to profit of Rs4.9bn in FY11, the power business, aided by the West Bengal
Electricity Regulatory Commission's (WBERC's) benign tariff orders, continues to
create value. However, we have been worried about the company's retailing
business which on merger with CESC led to a 37% equity dilution and has been a
drain on CESC power cash flows. We view that the retail business could see some
improvement in FY11E, although losses are expected to continue. This aside, we
had also been worried about the slow progress in the power expansion projects.
However, developments on the power business in the last 12 months have
impressed us, including: (1) acquisition of 600MW Chandrapur project, and (2)
significant progress on the Haldia Phase - I project.
Valuation
Our Rs440 target price is based on a target P/E multiple of 13x Sep12E on the
consolidated EPS, which is in line with the historical average P/E multiples. CESC
has traded in a band of 1x to 45x over the 9 years. Our target multiple is well
supported by consolidated EPS CAGR of 27% and average RoEs improving from
9.1% to 13.6% over FY11-14E.
Risks
We assign a Medium Risk rating to CESC. While our quantitative risk-rating system,
that tracks 260-day historical share price volatility, rates the company High Risk, we
view a Medium Risk as more appropriate given a significant portion of CESC's
business value emanates from an assured RoE business where costs are a pass
through. Key downside risks that could impede the stock from reaching our target
price include: 1) The SEBs are still loss-making and trifurcation-corporatizationprivatization
process has yet to be completed; 2) India has a significant power
deficit, and the question remains whether private generating companies can earn
expected returns with adequate payment security; 3) Following passage of the
Electricity Act, a number of High Tension industrial consumers have set up captive
capacity and are not purchasing power from the grid. If the speed of switching to
captive power increases beyond our expectation, CESC's operations could be
negatively affected; 4) Despite having access to substantial coal for its operations,
future growth beyond the Budge Budge operations will depend on CESC's ability to
secure captive mining blocks in Orissa and Jharkand; 5) Free power remains an
area of risk; and 6) Future capacity expansion dependent on clearance from various
regulatory authorities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC (CESC.BO)
Buy: Deep Value In Power - Despite Retail Drain
Power business — Continues to deliver with FY11 PAT of Rs4.9bn up 13% YoY.
Capex in Kolkatta is expected to be Rs5bn/ year (adding Rs1.5bn/ year to the
regulatory equity block). This will add Rs225m every year to the profits. Another Rs100-
150m could get added to the profits on incentives and costs savings.
Retailing business — Recurring PBT loss has reduced in quantum in FY11 to
Rs2.6bn from Rs2.9bn in FY10. We estimate the recurring cash loss in FY11 was
Rs2.1bn v/s management’s figure of Rs1.5bn. Management expects this to come down
to Rs1.1bn whereas we assume the same would be Rs1.6bn in FY12E.
Consolidated business — EPS should grow at a CAGR of 27% over FY11-14E
(higher than parent at 7%) given an expected reduction in retailing losses. Average
RoEs of the consolidated entity should improve to 13.6% by FY14E from the current
9.1%.
Deep value stock — We maintain our Buy rating on the stock as we believe investors
are ignoring the two new projects, Chandrapur and Haldia Phase-I of 1200MW (which
will commission over FY14E-15E), given the retail business overhang. As retailing
losses come down or if there is any indication of a change in laws on foreign direct
investment (FDI) in retail, there could be a significant re-rating in the CESC stock.
Target price cut to Rs440 — We change our valuation methodology from sum-of-theparts
to one based on P/E, given investors have stopped looking at projects that are
getting comissioned beyond the next two years. Furthermore, this gets even more
pronounced in the case of CESC given the retailing overhang. As a consequence we
cut our target price to Rs440 from Rs498 earlier. Our target P/E multiple is set at 13x
Sep12E, in line with thPublish Poste historical average. Our target multiple is well supported by
consolidated EPS CAGR of 27% and average RoEs improving from 9.1% to 13.6%
over FY11-14E.
CESC
Company description
CESC is a vertically integrated electric utility engaged in the business of generation,
transmission and distribution of electricity to consumers in its licensed area, which
covers Kolkata and Howrah. It currently has four power plants with a generation
capacity of 1225MW servicing 2.4m consumers in its 567sqkm license area. CESC
has a 26% stake in Integrated Coal Mining Ltd (ICML) (74% held by RPG group
companies). ICML supplies c.2.5m MTPA of coal to CESC (52% of CESC's coal
requirement) with the remaining being sourced from Coal India and imported coal
from Indonesia. Imported coal with 6% ash content is mixed with domestic coal that
has 42% ash content to bring it down to 37% ash content and fed into the power
plants. CESC generated 7.8 billion units (bu) of power, bought 1.8bu of power and
sold 7.6bu, with a transmission and distribution (T&D) loss of 13.2% in FY10.
Investment strategy
We rate CESC as Buy/Medium Risk (1M). Having turned from a loss of Rs1.3bn in
FY99 to profit of Rs4.9bn in FY11, the power business, aided by the West Bengal
Electricity Regulatory Commission's (WBERC's) benign tariff orders, continues to
create value. However, we have been worried about the company's retailing
business which on merger with CESC led to a 37% equity dilution and has been a
drain on CESC power cash flows. We view that the retail business could see some
improvement in FY11E, although losses are expected to continue. This aside, we
had also been worried about the slow progress in the power expansion projects.
However, developments on the power business in the last 12 months have
impressed us, including: (1) acquisition of 600MW Chandrapur project, and (2)
significant progress on the Haldia Phase - I project.
Valuation
Our Rs440 target price is based on a target P/E multiple of 13x Sep12E on the
consolidated EPS, which is in line with the historical average P/E multiples. CESC
has traded in a band of 1x to 45x over the 9 years. Our target multiple is well
supported by consolidated EPS CAGR of 27% and average RoEs improving from
9.1% to 13.6% over FY11-14E.
Risks
We assign a Medium Risk rating to CESC. While our quantitative risk-rating system,
that tracks 260-day historical share price volatility, rates the company High Risk, we
view a Medium Risk as more appropriate given a significant portion of CESC's
business value emanates from an assured RoE business where costs are a pass
through. Key downside risks that could impede the stock from reaching our target
price include: 1) The SEBs are still loss-making and trifurcation-corporatizationprivatization
process has yet to be completed; 2) India has a significant power
deficit, and the question remains whether private generating companies can earn
expected returns with adequate payment security; 3) Following passage of the
Electricity Act, a number of High Tension industrial consumers have set up captive
capacity and are not purchasing power from the grid. If the speed of switching to
captive power increases beyond our expectation, CESC's operations could be
negatively affected; 4) Despite having access to substantial coal for its operations,
future growth beyond the Budge Budge operations will depend on CESC's ability to
secure captive mining blocks in Orissa and Jharkand; 5) Free power remains an
area of risk; and 6) Future capacity expansion dependent on clearance from various
regulatory authorities.
No comments:
Post a Comment