CESC: Correction is Overdone – Expect Stock to Rise ::Karvy

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Correction is Overdone – Expect Stock to Rise
The stock price of CESC has corrected almost 17% since Jan’11, while the
BSE Power Index corrected by 13% during the same period. We believe that
the correction is overdone and stock is currently trading at attractive levels
and trading below its book value. Looking forward, we believe that CESC’s
earnings from power business – being used to fund losses of its retail arm i.e.
Spencer's – would decline as its retail business has started showing positive
EBITDA at the store levels.
Stable & Regulated Biz with Assured RoE
CESC operates under regulated business model, which provides the
Company with strong and steady income flow. Currently, CESC caters
mainly to Kolkata region and with a capacity of 1,225MW with assured RoE
at 15.5% & RoE of 15% on distribution. We expect the equity base of the
regulated business to grow to Rs. 34 bn by FY14E from Rs. 26 bn in FY11.
Capacity seen at 2,450MW by FY14E – Four Mega Power Projects in
the Offing
With commissioning of 600MW capacity each at Chandrapur (Maharashtra)
& Haldia (West Bengal), CESC would touch 2,450MW capacity mark by
FY14E from 1,250MW currently. It plans to sell 500MW-300MW power from
Chandrapur on merchant basis & 200MW power from Haldia – as merchant
in FY14E, but we believe it is still long away.
Loss in Retail Biz to Decline – Profits Expected by FY14E
CESC’s retail business has been incurring losses, which peaked in FY09 at
Rs. 2.5 bn. It has closed 60 loss making stores over FY09-11 to reduce loss.
We expect the losses in its retail business to reduce from Rs. 1.4 bn in FY11
to Rs. 710 mn in FY13E & Rs. 70 mn profits in FY14E. We expect CESC
would register positive EBITDA by FY13E – with the rerating of its power
business – as it would cease to fund retail business out of its income from
core business.
Outlook & Valuation
At its current price, the stock is trading at 0.7x FY13 BV, which in our view
does not reflect the strength in its core assured RoE power business,
progress on expansion and the expected turnaround of retail business. We
expect peak value to be created for CESC in FY14-15E, when its future
projects would start commercial production. We have valued power
business on FCFE methodology to arrive at Rs. 296 per share. Valuing
Spencer's on EV/sales basis, we have assigned Spencer’s EV/sales ratio of
0.4x FY12E sales. Thus, the total value of its retail business works out to Rs.
22 per share. Valued CESC’s mall in Central Kolkata and land in Mulajore
on NAV basis, we have arrived at a price of Rs. 8 per share for its realty
business.
We initiate coverage on the stock with a “Buy” recommendation.