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Value play…
CESC is a unique distribution franchise play with back ended capacity
additions. Robust cash flows from the distribution business compensate
for the misadventure of diversification in retail (Spencer’s). The
operational capacity of CESC stands at 1225 MW with no merchant power
exposure. The company plans to double its capacity (FY14-15) backed by
fuel security. Unlike other power utilities, CESC is immune to the
deteriorating financial health of SEBs since it buys power from them (to
meet increasing demand for its distribution business). We believe the
current market price reflects a negative valuation of the retail venture
(Spencer’s). However, current valuations at ~ 0.8x trailing adjusted book
value fail to assign any value to 1) turnaround in Spencer’s, FDI in retail
(key catalyst), 2) capacity additions in FY14-15 & 3) possibility of acquiring
a distribution franchise (that can increase RoEs). Hence, we are initiating
coverage on the stock with a BUY rating and a target price of | 302.
Base business: A cash flow machine to fund growth plans
An integrated utility model supported by a 2.5 million customer base in
Kolkata that generates | 800-1000 crore of cash flow every year in the
standalone business. This is sufficient to support the loss making retail
venture and fund the upcoming projects of 1200 MW.
Visible turnaround in retail business to re-rate perception
Various initiatives taken by CESC’s management have helped the loss
making retail business (Spencer’s) to turn around consistently at the store
level. Though the management expects an overall turnaround by FY14,
we believe the same will happen by FY16 with reported EBITDA at | 51
crore in FY16. This will be a big boon from an investor’s perspective
towards CESC.
Valuations
Valuations at 0.8x and 0.7x FY12E and FY13E adjusted book value,
respectively, seem unjustified given the presence of a solid integrated
utility business, visible turnaround in the loss making retail venture and
upcoming power capacity. Hence, we are initiating coverage on the stock
with a BUY rating and a target price of | 302 (based on SOTP valuations).
Company background
CESC is a fully integrated power utility engaged in the generation and
distribution of electricity across 567 sq km of licensed area in Kolkata,
West Bengal since 1899 serving 2.5 million consumers. This includes
domestic, industrial and commercial users.
CESC owns and operates four thermal power plants generating 1,225 MW
power. These are the Budge Budge generating station (750 MW),
Southern generating station (135 MW), Titagarh generating station (240
MW) and New Cossipore generating station (100 MW). CESC owns and
operates the T&D system, which comprises 474 km circuit of transmission
and 85 distribution stations; 3,837 km circuit of high tension (HT) lines
further linking distribution stations with low tension (LT) substations, large
industrial consumers and 9,867 km circuit of LT lines connecting the LT
substations to LT consumers.
Besides power generation and distribution, the company ventured into
organised retail via Spencer’s Retail. As on September 2011, the company
owns 195 stores spanning 9,96,000 sq ft. Music World Retail is a wholly
owned subsidiary of Spencer’s Retail having 92 stores across India selling
all genres of music albums, movies and books. Au Bon Pain, another
subsidiary of Spencer’s Retail, caters to the retail and fast food segment. It
is a master franchise of ABP Corporation, US.
In FY10, the company entered the real estate business through CESC
Properties. Through this subsidiary, CESC is currently developing a 0.4
million sq ft luxury mall on a 3 acre land parcel in Central Kolkata. The
mall is being constructed by Larsen & Toubro.
In September 2010, an affiliate company of power producer CESC Ltd
inked an offshore coal procurement contract with Resource Generation
(RGL) to purchase 37 million tonne (MT) of coal over 20 years from RGL’s
Boikarabelo mine in South Africa. Integrated Coal Mining Ltd (ICML) will
purchase 1 MT of thermal coal per annum for three years and two MTPA
for a further 17 years. This was recently increased to 139 MT over 38
years – 73 MT in phase-I and 66 MT in phase-II. CESC currently holds
11.6% in RGL. The coal will feed future greenfield projects in Haldia in
Bengal and Chandrapur in Maharashtra of RPG flagship CESC.
The company has 1200 MW under construction and 3240 MW under
development while ~5860 MW is under the planning stage.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Value play…
CESC is a unique distribution franchise play with back ended capacity
additions. Robust cash flows from the distribution business compensate
for the misadventure of diversification in retail (Spencer’s). The
operational capacity of CESC stands at 1225 MW with no merchant power
exposure. The company plans to double its capacity (FY14-15) backed by
fuel security. Unlike other power utilities, CESC is immune to the
deteriorating financial health of SEBs since it buys power from them (to
meet increasing demand for its distribution business). We believe the
current market price reflects a negative valuation of the retail venture
(Spencer’s). However, current valuations at ~ 0.8x trailing adjusted book
value fail to assign any value to 1) turnaround in Spencer’s, FDI in retail
(key catalyst), 2) capacity additions in FY14-15 & 3) possibility of acquiring
a distribution franchise (that can increase RoEs). Hence, we are initiating
coverage on the stock with a BUY rating and a target price of | 302.
Base business: A cash flow machine to fund growth plans
An integrated utility model supported by a 2.5 million customer base in
Kolkata that generates | 800-1000 crore of cash flow every year in the
standalone business. This is sufficient to support the loss making retail
venture and fund the upcoming projects of 1200 MW.
Visible turnaround in retail business to re-rate perception
Various initiatives taken by CESC’s management have helped the loss
making retail business (Spencer’s) to turn around consistently at the store
level. Though the management expects an overall turnaround by FY14,
we believe the same will happen by FY16 with reported EBITDA at | 51
crore in FY16. This will be a big boon from an investor’s perspective
towards CESC.
Valuations
Valuations at 0.8x and 0.7x FY12E and FY13E adjusted book value,
respectively, seem unjustified given the presence of a solid integrated
utility business, visible turnaround in the loss making retail venture and
upcoming power capacity. Hence, we are initiating coverage on the stock
with a BUY rating and a target price of | 302 (based on SOTP valuations).
Company background
CESC is a fully integrated power utility engaged in the generation and
distribution of electricity across 567 sq km of licensed area in Kolkata,
West Bengal since 1899 serving 2.5 million consumers. This includes
domestic, industrial and commercial users.
CESC owns and operates four thermal power plants generating 1,225 MW
power. These are the Budge Budge generating station (750 MW),
Southern generating station (135 MW), Titagarh generating station (240
MW) and New Cossipore generating station (100 MW). CESC owns and
operates the T&D system, which comprises 474 km circuit of transmission
and 85 distribution stations; 3,837 km circuit of high tension (HT) lines
further linking distribution stations with low tension (LT) substations, large
industrial consumers and 9,867 km circuit of LT lines connecting the LT
substations to LT consumers.
Besides power generation and distribution, the company ventured into
organised retail via Spencer’s Retail. As on September 2011, the company
owns 195 stores spanning 9,96,000 sq ft. Music World Retail is a wholly
owned subsidiary of Spencer’s Retail having 92 stores across India selling
all genres of music albums, movies and books. Au Bon Pain, another
subsidiary of Spencer’s Retail, caters to the retail and fast food segment. It
is a master franchise of ABP Corporation, US.
In FY10, the company entered the real estate business through CESC
Properties. Through this subsidiary, CESC is currently developing a 0.4
million sq ft luxury mall on a 3 acre land parcel in Central Kolkata. The
mall is being constructed by Larsen & Toubro.
In September 2010, an affiliate company of power producer CESC Ltd
inked an offshore coal procurement contract with Resource Generation
(RGL) to purchase 37 million tonne (MT) of coal over 20 years from RGL’s
Boikarabelo mine in South Africa. Integrated Coal Mining Ltd (ICML) will
purchase 1 MT of thermal coal per annum for three years and two MTPA
for a further 17 years. This was recently increased to 139 MT over 38
years – 73 MT in phase-I and 66 MT in phase-II. CESC currently holds
11.6% in RGL. The coal will feed future greenfield projects in Haldia in
Bengal and Chandrapur in Maharashtra of RPG flagship CESC.
The company has 1200 MW under construction and 3240 MW under
development while ~5860 MW is under the planning stage.
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