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CESC Ltd. is a fully integrated power utility engaged in the generation and distribution of electricity across
567 square kms of licensed area in Kolkata and Howrah in West Bengal. CESC is also operating a retail chain of
208 stores through its subsidiary Spencer's Retail (SRL). SRL has been incurring losses for the past five years
and has dented CESC's core profitability by ~42% in FY11. However the retail business has already started
earning at store level and we expect it to breakeven at corporate level by FY14E.
Capacity to double by FY15
CESC has increased its generation capacity by over 25% within a
year to 1225 MW in FY11. The company is expected to double its
generation capacity to 2425MW by FY15 through addition of
600MW in Chandrapur and 600MW in Haldia, scheduled to
commission by May 2013 and Sept 2014 respectively. In addition
to this, 3240 MW of thermal capacities are under development.
Integrated Power Utility
In India where most of the power generating companies sells power
to distribution companies, CESC is in an advantageous position as it
has its own distribution arm in Kolkata area which secures company
from delayed payments and longer debtor days. Besides, for securing
its coal requirement, CESC has also acquired 26% stake in its group
company ICML which meets ~50% of the company's coal needs.
Stable and Regulated business with fixed ROE
CESC's current power capacity earns fixed post tax ROE of 14% on
generation and 15% on distribution. The combined regulated equity
for this business stands at INR 22.8 bn. We expect the company to
invest INR 5 bn every year in distribution segment. This translates
into a growth of combined regulated equity by INR 1.5 bn (6%-7%)
every year.
Secured Coal Linkages
CESC's current capacity requires 6mmtpa of coal and it depends
on domestic coal for most of its fuel requirements. About 50-55%
of its coal requirements are met through ICML, 40% from Coal
India linkage and the balance 5-10% is imported from Indonesia.
Additionally CESC has invested 10% in Resource Gen which is
developing mines in South Africa and would potentially provide
access to 3.6 mmtpa of coal.
Spencer's to breakeven by FY15E
Spencer's Retail has already started earning at store level and we
expect it to breakeven at corporate level by FY15E. Overall the retail
business is expected to recover from the loss of INR 1.6bn in FY11
to INR 152 mn in FY14E and is estimated to breakeven in FY15E. This
would be driven by closing of unviable stores, increasing the number
of same stores (stores that have been open for a year or more) and
changing the product mix to higher margin segment.
Outlook & Valuation
CESC is one of the cheapest utility stocks available in the Indian
equity market. One of the key reasons for the lower valuation is
the concern related to loss in its retail business. CESC's core
regulated business is fully secured in the terms of fixed ROE,
secured fuel availability and power offtaking agreements. We
believe future growth would come from capacity expansion
through SPVs, expected turnaround in retail business and
commissioning of premium mall within a year. The company is
expected to deliver CAGR of 14% and 31% in consolidated revenues
and profitability over FY11-FY13E. We recommend BUY on CESC
with a target price of INR 346 based on SOTP Valuation approach.
At CMP the stock is trading at P/E of 5.1x FY13E EPS and P/BV of
0.44x its FY13E book value on consolidated basis.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CESC Ltd. is a fully integrated power utility engaged in the generation and distribution of electricity across
567 square kms of licensed area in Kolkata and Howrah in West Bengal. CESC is also operating a retail chain of
208 stores through its subsidiary Spencer's Retail (SRL). SRL has been incurring losses for the past five years
and has dented CESC's core profitability by ~42% in FY11. However the retail business has already started
earning at store level and we expect it to breakeven at corporate level by FY14E.
Capacity to double by FY15
CESC has increased its generation capacity by over 25% within a
year to 1225 MW in FY11. The company is expected to double its
generation capacity to 2425MW by FY15 through addition of
600MW in Chandrapur and 600MW in Haldia, scheduled to
commission by May 2013 and Sept 2014 respectively. In addition
to this, 3240 MW of thermal capacities are under development.
Integrated Power Utility
In India where most of the power generating companies sells power
to distribution companies, CESC is in an advantageous position as it
has its own distribution arm in Kolkata area which secures company
from delayed payments and longer debtor days. Besides, for securing
its coal requirement, CESC has also acquired 26% stake in its group
company ICML which meets ~50% of the company's coal needs.
Stable and Regulated business with fixed ROE
CESC's current power capacity earns fixed post tax ROE of 14% on
generation and 15% on distribution. The combined regulated equity
for this business stands at INR 22.8 bn. We expect the company to
invest INR 5 bn every year in distribution segment. This translates
into a growth of combined regulated equity by INR 1.5 bn (6%-7%)
every year.
Secured Coal Linkages
CESC's current capacity requires 6mmtpa of coal and it depends
on domestic coal for most of its fuel requirements. About 50-55%
of its coal requirements are met through ICML, 40% from Coal
India linkage and the balance 5-10% is imported from Indonesia.
Additionally CESC has invested 10% in Resource Gen which is
developing mines in South Africa and would potentially provide
access to 3.6 mmtpa of coal.
Spencer's to breakeven by FY15E
Spencer's Retail has already started earning at store level and we
expect it to breakeven at corporate level by FY15E. Overall the retail
business is expected to recover from the loss of INR 1.6bn in FY11
to INR 152 mn in FY14E and is estimated to breakeven in FY15E. This
would be driven by closing of unviable stores, increasing the number
of same stores (stores that have been open for a year or more) and
changing the product mix to higher margin segment.
Outlook & Valuation
CESC is one of the cheapest utility stocks available in the Indian
equity market. One of the key reasons for the lower valuation is
the concern related to loss in its retail business. CESC's core
regulated business is fully secured in the terms of fixed ROE,
secured fuel availability and power offtaking agreements. We
believe future growth would come from capacity expansion
through SPVs, expected turnaround in retail business and
commissioning of premium mall within a year. The company is
expected to deliver CAGR of 14% and 31% in consolidated revenues
and profitability over FY11-FY13E. We recommend BUY on CESC
with a target price of INR 346 based on SOTP Valuation approach.
At CMP the stock is trading at P/E of 5.1x FY13E EPS and P/BV of
0.44x its FY13E book value on consolidated basis.
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