CESC 􀀗 Power distribution business in Kolkata to provide steady income : ::HSBC Research

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CESC
􀀗 Power distribution business in Kolkata is expected to provide
steady income in 2Q
􀀗 Overhang of loss-making retail business to weigh on the stock;
continued reduction of retail losses should boost investor
sentiment in the long term
􀀗 Trading below book value (0.7x FY13e PB) and offering strong
growth; reiterate Overweight and a target price of INR475


2Q preview – decent quarter, retail
business to remain an overhang
We expect volumes to remain flat given no
capacity addition in the last year. Thus revenue
growth is forecast to grow modestly, up 10% y-o-y
to INR12.1bn, on the back of a rise in fuel cost,
which will be passed through to customers.
We expect generation to rise 1% y-o-y to 2.38bn
units, with sales volume up 3% y-o-y to 2.3bn units.
However, net profit is expected to fall 25% y-o-y
to INR1.16bn on a high comparative base, as last
year’s net profit was boosted by a one-time
increase in tariff (up 16 paise per unit) allowed by
the regulator in 2Q, while the expenditure was
booked in the preceding quarters.
Strong growth and valuations are
attractive but no near-term catalyst
Our investment thesis is built around: a stable
power business with capacity additions in FY14;
and improvements in its retail business with
breakeven expected by FY15.
We expect EPS to grow at a CAGR of 48% over
FY12-14, as retail losses narrow (from INR2bn in
FY11 to INR400m by FY14) and the power
business grows at a 28% CAGR over FY12-14e
due to capacity additions at Chandrapur and
Haldia in FY14.
We believe there does not appear to be any nearterm
catalysts for the stock. Further out from in
FY12, the following factors may act as catalysts

Completion of the commissioning of the
600MW Chandrapur power project (in March
2013) and 600MW Haldia (in May 2013)
􀀗 Breakeven in its retail business in the next 6-8
quarters as guided by the company
􀀗 The potential sale of a stake in its retail
business, which could happen earlier
Investors’ focus on retail loss reduction
and progress on capacity addition
We expect investors to focus on how quickly the
company can reduce losses at the retail business
and the progress on the Haldia and Chandrapur
power projects.
Reiterate Overweight rating and TP of
INR475
Using a SOTP approach to value CESC, we arrive at
a target price of INR475 (unchanged). This implies a
potential return of 79.4% (including dividend yield),
which is above the Neutral rating band of nonvolatile
Indian stocks of 6-16%; hence we maintain
our OW rating on the stock.
Our target price of INR128 implies an FY13e PB
of 1.1x versus the current FY12e PB of 0.7x, and
an FY13e PE of 8.7x versus the current FY12e PE
of 9.5x.
Risks
Downside risks to our view include: higher-thanexpected
losses in the retail business; execution
risk in the power projects under development,
disallowance of capex by the regulator in the
distribution business; and merchant tariff risk,
particularly on the Chandrapur power project.

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Indian Power- A muted quarter ::HSBC Research