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CESC (CESC IN, INR 268, Buy)
West Bengal Electricity Regulatory Commission (WBERC), in its tariff order dated March 6th 2012, has approved a tariff hike of 13.3% which will increase the average realization for CESC from INR5.19/kWh to INR5.88/kWh. The hike which has been pending for long is a definite positive for the company as it eliminates the regulatory risk of delay in tariff approvals. Maintain BUY with TP of INR 399/share.
Much awaited tariff hike a breather
CESC, in its 2011-12 tariff petition filed in July 2011, had demanded a hike of INR1.11 (i.e. hike of 21%) per unit on various heads, but WBERC has allowed a hike of 69 paisa (i.e.13.3%) with retrospective effect from April 2011. Arrears for the past 12 months would have to be recovered via 48 monthly installments, going forward. The hike which was much needed due to increase in costs has come at a time when the company was mulling legal recourse as the last resort. The tariff order is a definite positive given that the State, under political duress, has been strongly resisting any increase in power tariffs.
Outlook and valuations:Cloud over cashflow vanishes;maintain ‘BUY’
With the current tariff hike, the near term overhang of regulatory approvals and its impact on cash flows has been addressed. However, clarity on FDI in multi-brand retail will provide the much awaited impetus for the stock. We have revised our numbers to incorporate the tariff revision (expect the company to book a differential income of INR5.86 bn during Q4FY12) that will enable recovery of its fixed costs for the year. The company has also stepped up its capex program for distribution entity from earlier INR 5bn to INR 6.5bn annually which will enhance earnings. With the regulatory risk easing off we have revised our P/B multiple for regulated equity to 1.2x from 1.1 earlier. Maintain ‘BUY/UP’ with revised SOTP of INR 399/share (INR 372/share earlier).
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