CESC: TP: INR474 Buy::Motilal Oswal

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 2QFY12 numbers in line with estimates: CESC 2QFY12 numbers were in-line with estimates. De-growth in PAT
was expected given FY12 tariff order revision is expected in 3QFY12 (v/s done in 2Q last year). Operating performance
was also strong with PLF of 92% (excluding New Cossipore).
 Spencer's performance remained strong: Performance at Spencer level has remained strong, driven by higher
revenue, consolidation, etc. Spencer closed 16 Daily/Express stores and despite this its area under operation
slightly looked-up led by addition of 4 Hyper store. As at Sept 2011, Spencer operated 195 Stores v/s 208 stores as
at 1QFY12 vs 208 stores as at 2QFY11. Sales for Spencer have seen an uptick and for 1HFY12 it stood at INR1066/
sq.ft/month up from INR940/sq.ft/month as on 1HFY11. Store level EBIDTA has seen slight moderation in 2QFY12 at
INR31/sq.ft/month, vs INR37/sq.ft/month in 1Q. This was due to lower concessionaire income, which generally gets
booked in 1Q and is not accounted for in 2Q.
 Steady progress in projects under construction: CESC is currently constructing 1.2GW of power projects (current
installed capacity of 1.2GW) and has obtained major clearances/placed equipment orders for the entire capacity.
Additionally, CESC is working on ~6GW of projects. It has consolidated its power business holdings through a
wholly-owned subsidiary, CESC Infrastructure, which in turn owns Haldia Energy (600MW coast-based project) and
Haldia Energy owns Dhariwal Infrastructure (600MW Chandrapur project in Maharashtra). This provides a platform to
induct a financial investor for meeting the funding requirements of the Power business.
 Funding requirement at ~INR40b: We estimate total funding requirement for the Power and Retail business over
the next four years at ~INR40b. This comprises of ~INR35b equity funding requirement (including INR7b already
invested) for 2.5GW of generation capacity addition and ~INR3b towards funding of Spencer's losses (INR1.7b in
FY11). CESC is exploring fund raising options both for its Power and Retail business and expected increase in the
FDI in multi brand retail to 51% could be positive.
 Valuation and view: We expect CESC to report standalone net profit of INR5b in FY12 (up 3%) and INR5.3b in
FY13 (up 4%). The stock quotes at 7x FY12E and 6.7x FY13E standalone EPS. Maintain Buy.
Company description
CESC, an RPG Group Company, is one of the oldest
integrated power utilities in India, with presence in mining,
generation, and distribution of power. Installed generation
capacity stands at 1.2GW and distribution network
encompasses 2.3m consumers in the Kolkata and Howrah
regions. 1.2GW of generation projects are under
construction and additional 4.3GW of projects are in the
pipeline. CESC has a presence in the retail business through
Spencer's, which has 0.95msf area under operations.
Key investment positives
 Assured return from existing generation / distribution
business provides steady cash flows (regulated profit
at over INR3b per year).
 1.2GW project has entered construction phase and the
company has made equity investments of over INR7b.
 Consolidation and restructuring at Spencer's has led to
reduction in operational losses to INR1.7b in FY11 v/s
INR2.1b in FY10. Further reduction in losses/value
unlocking is possible.
 Project pipeline of 6GW provides growth opportunity,
going forward.
Key investment risks
 Continued losses at Spencer's and funding through
standalone cash flows of CESC.
 Fuel availability for Chandrapur project and partially
for Haldia project.
Recent developments
 Final approval received for 450MW power tie-up on
CERC terms from Haldia project.
 In 1HFY12, Spencer's store level sales were INR1,066/
sf/month v/s INR940/sf/month in 1HFY11.
Valuation and view
 We expect CESC to report standalone net profit of
INR5b in FY12 (up 3%) and INR5.3b in FY13 (up
4%).
 The stock quotes at 7x FY12E and 6.7x FY13E
standalone EPS. Maintain Buy, with an SOTP-based
target price of INR474.