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CESC: Stable returns in power, improving metrics in retail
CESC (CESC)
Utilities
Stable returns in power, improving metrics in retail. CESC reported another
quarter of stable earnings from its core power business, with net income of Rs1.1 bn
from its distribution business at Kolkata. We maintain our BUY rating and target price
of Rs440/share. We are encouraged by the reducing losses in the retail business
reported in FY2011, continued improvement in operating metrics of the retail business
and progressive reforms for foreign direct investment in multi-brand retailing, which will
likely address concerns on the cash drain of the retail business.
Operating results broadly in line with estimates
CESC reported revenues of Rs11.7 bn (39% qoq, 8% yoy), operating profits of Rs2.5 bn (18%
qoq, 5% yoy) and net income of Rs1.1 bn (-1% qoq, 1% yoy) against our estimate of Rs11.1 bn,
Rs2.5 bn and Rs1.3 bn, respectively. Operating results were broadly in line with higher-thanestimated
revenues primarily on account of higher fuel cost (Rs1.92/kwh against our estimate of
Rs1.6/kwh). Net income miss was primarily on account of lower-than-estimated other income.
Visibility improves on FDI in multi-brand retail
The Committee of Secretaries (CoS), in July 2011, has recommended the proposal for allowing
51% FDI in multi-brand retail and the same will now be considered by the Cabinet.. We note that
allowance of FDI in multi-brand retail augurs well for CESC’s cash-strapped retail business and any
positive development could act as a stock catalyst. We are further encouraged by the first visible
signs of improvement in retail operation with retails losses coming down to Rs2.8 bn in FY2011
from Rs3.5 bn in FY2010 driven by expansion in gross margins and shutdown of less profitable
small store formats.
Reiterate BUY with a target price of Rs440/share
We reiterate our BUY rating on CESC maintaining our target price of Rs440/share. Our target price
comprises (1) Rs340/share for Kolkata business, (2) Rs77/share for 100% ownership in DIPL for
capacity of 600 MW and (3) Rs23/share for cash and investible surplus on books. We estimate an
outflow of Rs7.5 bn to fund the losses in retail business.
Core power business relatively insulated from general macro concerns
We continue to remain optimistic on CESC’s core power business which accounts for 77% of our
fair value estimate of Rs440/share. CESC’s near-term earnings are relatively immune to concerns
over financial health of state electricity boards (SEBs), while its dependence on coal through
linkages is also minimized on account of an operational captive block (extant production of 3
mtpa) operated by the promoter group.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC: Stable returns in power, improving metrics in retail
CESC (CESC)
Utilities
Stable returns in power, improving metrics in retail. CESC reported another
quarter of stable earnings from its core power business, with net income of Rs1.1 bn
from its distribution business at Kolkata. We maintain our BUY rating and target price
of Rs440/share. We are encouraged by the reducing losses in the retail business
reported in FY2011, continued improvement in operating metrics of the retail business
and progressive reforms for foreign direct investment in multi-brand retailing, which will
likely address concerns on the cash drain of the retail business.
Operating results broadly in line with estimates
CESC reported revenues of Rs11.7 bn (39% qoq, 8% yoy), operating profits of Rs2.5 bn (18%
qoq, 5% yoy) and net income of Rs1.1 bn (-1% qoq, 1% yoy) against our estimate of Rs11.1 bn,
Rs2.5 bn and Rs1.3 bn, respectively. Operating results were broadly in line with higher-thanestimated
revenues primarily on account of higher fuel cost (Rs1.92/kwh against our estimate of
Rs1.6/kwh). Net income miss was primarily on account of lower-than-estimated other income.
Visibility improves on FDI in multi-brand retail
The Committee of Secretaries (CoS), in July 2011, has recommended the proposal for allowing
51% FDI in multi-brand retail and the same will now be considered by the Cabinet.. We note that
allowance of FDI in multi-brand retail augurs well for CESC’s cash-strapped retail business and any
positive development could act as a stock catalyst. We are further encouraged by the first visible
signs of improvement in retail operation with retails losses coming down to Rs2.8 bn in FY2011
from Rs3.5 bn in FY2010 driven by expansion in gross margins and shutdown of less profitable
small store formats.
Reiterate BUY with a target price of Rs440/share
We reiterate our BUY rating on CESC maintaining our target price of Rs440/share. Our target price
comprises (1) Rs340/share for Kolkata business, (2) Rs77/share for 100% ownership in DIPL for
capacity of 600 MW and (3) Rs23/share for cash and investible surplus on books. We estimate an
outflow of Rs7.5 bn to fund the losses in retail business.
Core power business relatively insulated from general macro concerns
We continue to remain optimistic on CESC’s core power business which accounts for 77% of our
fair value estimate of Rs440/share. CESC’s near-term earnings are relatively immune to concerns
over financial health of state electricity boards (SEBs), while its dependence on coal through
linkages is also minimized on account of an operational captive block (extant production of 3
mtpa) operated by the promoter group.
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