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Stepping on the growth accelerator
Exploring funding options
CESC is stepping on the growth accelerator across business divisions. The company
will expand power generation capacity from 1.2GW to 3.7GW by FY15/16 and the area
under operations in the retail business from 0.8msf to 2.5msf by FY15. The company
will require Rs40b over the next four years for its power and retail business expansion
(including funding of retail business losses) and is exploring funding options. Valuations
are reasonable, cash balance is Rs6.2b and regulated core business PAT is Rs4b, which
offer comfort.
Regulated business provides steady cash flow; target to commission additional
2.5GW by FY15/16
CESC’s regulated business, largely comprising generation (1,225MW) and distribution
assets in Kolkata generates steady profit of Rs4b+ a year. This enables CESC to
fund equity contribution towards new power generation capacities and other expansion
plans. CESC has embarked on a two-pronged strategy in its power vertical: (1) to
increase generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) entry
into new distribution circles. Projects of 2.5GW are in advanced stages of development/
have entered the construction phase, with initial clearances (water, environment) and
land acquisition largely in place. This comprises a 600MW project in Haldia, a 600MW
unit in Chandrapur and 1.3GW unit in Orissa.
Retail business expansion to reach 3x current space over FY11-14, investment
likely
CESC is working on expanding the area under operations in its retail business from
0.85msf to 2.5msf over the next three years. Strategies are being formulated to attain
‘profitable growth’ and plans to enhance store level EBITDA from the current Rs20/sf
to Rs50/sf over the next one year. Lately, revenue traction has been good and FY11
same-store revenue growth was ~14%. CESC will need funding for its capex, expansion
and to tide over initial losses.
Funding inevitable; CESC explores options
We estimate the funding requirement for CESC’s power and retail businesses at
~Rs40b over the next four years. This comprises Rs30b+ equity funding requirement
(including Rs5b invested) for 2.5GW of generation capacity addition, Rs3b-5b towards
funding of Spencer’s losses (FY11 estimate Rs1.1b-1.3b) and capex funding (~Rs0.6b
per year), plus funding requirements for the distribution business. CESC is exploring
fund raising options for its power and retail businesses.
Valuations reasonable; maintain Buy
Our SOTP-based target price is Rs439, with the existing power business at Rs277/
share (8x FY12E EPS), investment in Spencer’s at Rs39/share (Rs5b; EV of 1x FY10
sales), investment in Haldia and Chandrapur projects at Rs57/share (Rs7b) and cash
at Rs50/share (Rs6.2b). Maintain Buy
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