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CESC – 2QFY2011 Result Update
Angel Broking maintains a Buy on CESC with a Target Price of Rs474.
For 2QFY2011, CESC recorded healthy 23.0% yoy growth in standalone net
profit, primarily due to certain prior-period tariff adjustments relating to fuel and
electricity purchased, amounting to `217cr, which helped in reducing expenses.
The monthly per sq. ft. sales of Spencer’s, the company’s 94% retail subsidiary,
increased by 35% to `1,100 in August 2010 and is currently EBITDA/sq. ft.
positive at store level. We maintain a Buy rating on the stock.
Bottom line up 23% yoy, aided by prior-period tariff adjustments: CESC’s
standalone top line grew by impressive 14.6% yoy, aided by 7.4% growth in sales
volume arising out of the commissioning of 250MW Budge-Budge Unit-3, which
became operational in 4QFY2010. Top-line growth was also aided by higher
tariff charged by the company in Kolkata-regulated area. The company’s OPM
increased by 543bp yoy to 28.8% due to lower other expenses, which stood at
negative `14cr in the quarter as against `131cr in 2QFY2010. Interest and
depreciation expenses for the quarter increased by 67.4% yoy and 30.6% yoy,
respectively, on account of capacity addition.
Valuation: Going ahead, we expect CESC’s growth to be driven by the timely
execution of its projects. In 3QFY2011, construction work is set to begin at the
600MW Haldia project. We expect the company’s standalone top line and bottom
line to grow at CAGR of 19.9% and 16.9%, respectively, over FY2010–12E.
We expect Spencer’s to take another 12–15 months to breakeven at the corporate
level. At the CMP, the stock is trading at 8.1x FY2012E EPS and 1.0x FY2012E
P/BV. We maintain a Buy rating on the stock with a revised SOTP-based
Target Price of `474 (`470).
Leading private sector player with proven track record
CESC is one of the oldest utility companies in India. The company has been
generating and distributing power in Kolkata since 1897. The company is a fully
integrated power player with presence in power generation, distribution and coal
mining. As of FY2009, CESC had a customer base of about 2.3mn customers in
Kolkata and Howrah. The company’s existing plants have enjoyed high PLFs with
the Budge-Budge plant in particular reporting PLFs in excess of 99% over the last
four years. The company’s efficiency has improved in the distribution front as well
with AT&C losses reducing to 13.3% in FY2009 from 18.8% in FY2003.
CESC, which is involved in distribution only in Kolkata, is now looking at entering
into power distribution in other cities as well. Further, the company has tied up with
SP Global Solutions, a subsidiary of Singapore Power, to improve reliability of its
distribution system, which could aid further reduction in losses.
Retail business showing signs of recovery
Currently, Spencer’s has 208 outlets spread across the country and operates
19 hyper stores and 10 super stores with total area of 452,000 sq. ft. and
57,000 sq. ft., respectively. Spencer’s has plans to selectively open hyper and
super stores in FY2011E, with a special focus on the southern states for growth.
In August 2010, per sq. ft. sales of Spencer’s rose by 35% to `1,100 from `811 in
March 2010. As a result, EBITDA/sq. ft. has turned positive at the store level.
We expect the retail business to breakeven at the corporate level as well in another
12–15 months.
Tapping the unexplored land bank
CESC Properties, a 100% subsidiary of CESC, plans to develop a 0.4mn sq. ft.
shopping mall in Central Kolkata. Going ahead, CESC Properties also has plans to
monetise its 35-acre land at Mulajore.
Outlook and valuation
At the CMP, the stock is trading at 8.1x FY2012E EPS and at 1.0x FY2012E P/BV.
We have assigned a 1.15x FY2012E blended P/BV multiple to the company’s
existing power business, considering its lower RoE and higher cash component.
Thus, the total value of the power business works out to `452/share. We have
valued Spencer's on mcap/sales basis, after considering the mcap/sales of peers
such as Pantaloon Retail, Shopper's Stop and Trent. On one-year forward
mcap/sales basis, peers of Spencer’s are trading broadly in the range of 0.7–0.9x.
Due to the low-margin business model and cash losses, we have assigned
Spencer’s mcap/sales ratio of 0.15x FY2012E sales, which is at a significant
discount to the average of its peers. Thus, the total value of its retail business works
out to `12/share. We have valued the company’s mall in Central Kolkata and land
in Mulajore (35 acres) on NAV basis and have arrived at a price of `10/share for
its real estate business. We maintain a Buy rating on the stock with a revised
SOTP-based Target Price of `474 (`470).
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