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Higher RoE to boost future earnings
CESC on 6th March 2012 was finally awarded the tariff order for FY12 by WBERC. The commission not only
allowed CESC to raise tariffs by 13.3% for the current fiscal but also raised blended RoE to 16% for the tariff
period. We understand that the company has already started to bill its clients as per the new order from the
current billing cycle. The arrears of FY12, along with interest, will be collected over a period of 48 months. In the
retail business, we assume a further delay in its breakeven owing to a slower growth in the overall economy.
However, we believe the stock continues to offer value even after assuming increased cash infusion into the loss
making retail business. Maintain BUY on the stock with a target price of Rs350/share.
13.3% tariff hike approved
Tariff hike approved by the regulator, although late, is in our view both sentimentally and fundamentally positive for the stock.
Despite raising tariffs by Rs0.46/unit at the start of FY12 - thereby increasing tariffs to Rs5.21/unit - CESC's earnings were
marred by growing under-recoveries of its fixed costs. We believe the company had under-recoveries of Rs350-450mn for the
preceding three quarters. This latest increase of Rs0.69/unit, in our view, should adequately compensate CESC for these
under-recoveries.
Blended rate of return increased to 16%
The regulator has allowed CESC to earn 15.5% and 16.5% post tax RoE for the block FY12-14 for its generation and
distribution business respectively. We believe this a key positive as it will aid the company to earn an incremental Rs250-
300mn/year. This coupled with interest on arrears translates into 6.7% and 6.2% increase in our FY13 and FY14 earnings
estimate.
Tariff order hints at consuming lower grade coal
The tariff order highlights that CESC will consume lower grade coal going forward. Budge Budge (highest capacity) will
consume 3,476kcal/kg grade coal - lowest amongst CESC's stations compared to 3,713kcal/kg as per the 2008-11 multi
year tariff (MYT) order. Also, its New Cossipore station will consume 5,800kcal/kg grade coal - lower than 6,035kcal/kg
reported in its previous order. New Cossipore is CESC's only station which consumes high grade coal. This will lead to an
increase in coal consumption to >7mtpa.
Outlook and recommendation
CESC is one of the most efficient power generators and distributors in the country with its stations being available for over
90%. Despite this, we believe the company will continue to trade at discounted valuation given the cash infusion from its
generation business into its loss making retail venture. However, we believe the parent shall be able to generate sufficient
cash to fund Spencer's losses and other capex. We upgrade our earnings estimates to reflect higher RoE and interest on
arrears for FY12. We estimate standalone earnings to be at Rs5.0bn and Rs5.4bn during FY12 and FY13 respectively.
Maintain BUY on the stock with a target price of Rs350/share, implying 20% upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher RoE to boost future earnings
CESC on 6th March 2012 was finally awarded the tariff order for FY12 by WBERC. The commission not only
allowed CESC to raise tariffs by 13.3% for the current fiscal but also raised blended RoE to 16% for the tariff
period. We understand that the company has already started to bill its clients as per the new order from the
current billing cycle. The arrears of FY12, along with interest, will be collected over a period of 48 months. In the
retail business, we assume a further delay in its breakeven owing to a slower growth in the overall economy.
However, we believe the stock continues to offer value even after assuming increased cash infusion into the loss
making retail business. Maintain BUY on the stock with a target price of Rs350/share.
13.3% tariff hike approved
Tariff hike approved by the regulator, although late, is in our view both sentimentally and fundamentally positive for the stock.
Despite raising tariffs by Rs0.46/unit at the start of FY12 - thereby increasing tariffs to Rs5.21/unit - CESC's earnings were
marred by growing under-recoveries of its fixed costs. We believe the company had under-recoveries of Rs350-450mn for the
preceding three quarters. This latest increase of Rs0.69/unit, in our view, should adequately compensate CESC for these
under-recoveries.
Blended rate of return increased to 16%
The regulator has allowed CESC to earn 15.5% and 16.5% post tax RoE for the block FY12-14 for its generation and
distribution business respectively. We believe this a key positive as it will aid the company to earn an incremental Rs250-
300mn/year. This coupled with interest on arrears translates into 6.7% and 6.2% increase in our FY13 and FY14 earnings
estimate.
Tariff order hints at consuming lower grade coal
The tariff order highlights that CESC will consume lower grade coal going forward. Budge Budge (highest capacity) will
consume 3,476kcal/kg grade coal - lowest amongst CESC's stations compared to 3,713kcal/kg as per the 2008-11 multi
year tariff (MYT) order. Also, its New Cossipore station will consume 5,800kcal/kg grade coal - lower than 6,035kcal/kg
reported in its previous order. New Cossipore is CESC's only station which consumes high grade coal. This will lead to an
increase in coal consumption to >7mtpa.
Outlook and recommendation
CESC is one of the most efficient power generators and distributors in the country with its stations being available for over
90%. Despite this, we believe the company will continue to trade at discounted valuation given the cash infusion from its
generation business into its loss making retail venture. However, we believe the parent shall be able to generate sufficient
cash to fund Spencer's losses and other capex. We upgrade our earnings estimates to reflect higher RoE and interest on
arrears for FY12. We estimate standalone earnings to be at Rs5.0bn and Rs5.4bn during FY12 and FY13 respectively.
Maintain BUY on the stock with a target price of Rs350/share, implying 20% upside.
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