CESC : Maintain Buy – Target Price Cut on Regulatory Overhang  Citi Research

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CESC (CESC.BO)
Maintain Buy – Target Price Cut on Regulatory Overhang
 Regulated business suffers on delayed tariff order — CESC had filed a tariff
petition for FY12 with WBERC (deadline for tariff order was Dec 15, 2011). CESC
currently has a tariff of Rs5.19/kWh (after a fuel cost hike of Rs0.46/kWh) and had
asked for a hike of Rs0.90/kWh and expects a minimum hike of Rs0.25/kWh. The delay
in the tariff order has led to 9M12 parent PAT at Rs2.9bn falling 20% YoY
 If the tariff order had not been delayed — CESC would have delivered FY12E PAT
of Rs5.2bn and FY13E PAT of Rs5.5bn. However, lack of timely tariff revision implies
FY12E PAT would be Rs3.7bn. If tariff revision comes through in 4Q12/ 1Q13, it would
be affected retrospectively. However, we remain conservative and assume PAT of
Rs4.6bn in FY13E. We worry if change in political leadership in West Bengal would
continue to affect CESC’s regulated business in the future like it has affected in 9M12.
 Update on retailing business — Based on 9M12 performance management believes
retailing would deliver cash loss of Rs1.5bn in FY12E (Rs2.1bn in FY11).
 Update on Chandrapur 2X300MW — Likely commissioning (CoD) by May13 (CIRA
Dec13). Off-take not been tied up, but management believes it will not have problems
tying up the same given Maharashtra will remain in power deficit. Project has LoA for
2.73mn from SECL and expects 80% of the same post recent PMO advisory.
 Update on Haldea 2X300MW — Likely CoD by Sep14 (CIRA Dec14). 75% off-take
tied up with CESC at 15.5% RoE + cost pass through and 25% is open. The project
has LoA for 2.83mn from MCL and expects 80% of same post recent PMO advisory.
 Maintain Buy - Target price cut to Rs357 — From Rs440 to factor in (1) -13% to -
29% cut in parent EPS on adverse regulations in West Bengal and (2) cut in target P/E
multiple to 10x (13x) because of regulatory overhang and (3) roll forward of target P/E
to Jun13E (Sep12E). At our target price CESC would trade at 1.1 cons P/BV FY13E.