The FDI in retail is a positive development for CESC as it entails not only incremental fund requirements to come from a foreign partner, but also a benchmark value for Spencer’s (CESC’s retail arm) along with benefits from such a strategic tie-up. We believe this eliminates the overhang of earnings diversion from its power business to retail venture, thereby leading to a potential re-rating once the deal gets finalized. Maintain BUY with TP of INR431 (excl Spencer’s).
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Event: The Union Cabinet has approved the proposal to permit FDI in multi-brand retail with individual state governments having the freedom to accord final sanction. The Centre said state chief ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Manipur as well as union territories of Daman & Diu and Dadra and Nagar Haveli have expressed support for the policy in writing. However, Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations. The approval is subject to:
· Retail sales outlets may be set up only in cities with a population of more than 10lakh as per 2011 Census and may also cover an area of 10kms around the municipal/urban agglomeration limits of such cities
· At least 50% of total FDI brought in shall be invested in `back-end infrastructure` within three years of the induction of FDI
Management comments: The company believes this would help unlock value (through minority stake sale) in the Spencer’s retail business which is expected to break even at EBITDA level in the next 4 -5 quarters (INR1.5bn operating loss reported in FY12).
Our view: Given that Spencer’s is largely present in bigger cites (population > 1mn) and 47% of its 1mn sq ft is in states which have shown interest in FDI, we consider this move to be positive for CESC. Since the management had few rounds of talks with select foreign players in the past, we believe that the deal could take around 3-4 quarters to fructify. At 1x EV/Sales (FY12 sales of INR12bn and outstanding debt of ~INR4.5bn), we estimate the equity value of Spencer’s retail business at INR7.5bn. This, however, is not factored in our SOTP of INR431/share. Considering that the investment in the loss making Spencer’s was a key overhang, we expect this policy move to have a positive impact on the stock. Reiterate BUY.
Regards,
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