Kotak Sec, CESC: Boils down to Dhariwal

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CESC: Boils down to Dhariwal
 Dhariwal - risk of cancellation of linkage may not eventually materialize
 Commissioning of Haldia will bring some cheer in FY2016E
 Maintain ADD rating with target price of Rs695

Boils down to Dhariwal. Concerns on potential cancellation of linkages for Dhariwal

may be excessive in our view, as the regulator possibly takes a more pragmatic stance.

However, concluding sale arrangements for the balance capacity of 300 MW hold key

to long-term earning trajectory. We continue to like CESC for (1) steady standalone

business that could benefit from favorable positioning on coal auctions, (2) earnings

contribution from Haldia project in FY2016E and (3) declining retail losses. Maintain

ADD rating with target price of `695.

Dhariwal—risk of cancellation of linkage may not eventually materialize

Concerns on absence of off-take arrangement for the part-capacity at Dhariwal (600 MW) have

been accentuated by the potential cancelation of linkage considered by the Standing Linkage

Committee. We remain hopeful that a comprehensive policy that is looking into the implications

on linkages allotted in circumstances of change of ownership of a project, may take a more

pragmatic approach. Our revised earnings estimates for FY2016E reasonably factor the risk

associated with Dhariwal project with PLFs of 55% with negligible earning contribution (loss of

`155 mn).

We note that Dhariwal will likely be a drag on consolidated earnings in FY2015E owing to

absence of off-take from the extant 100 MW PPA with Tamil Nadu, and overall low generation

of 445 MU up to November 2014.

Commissioning of Haldia will bring some cheer in FY2016E

Commissioning of Haldia I (600 MW) by end-March 2015 will give an incremental earnings

contribution of `1.8 bn (`14/share) in FY2016E. Comfort of sale arrangements with the

distribution business in Kolkata insulates the earnings from fuel-related risk as well as gives the

benefit of assured off-take. We note that the Haldia project already has in place fuel-supply

agreements with MCL for 2.8 mtpa, which can likely be supplemented by potential coal block

wins by CESC that have been discussed in greater detail in a subsequent section.

Maintain ADD rating with target price of `695

We continue to like CESC for (1) steady standalone business that could benefit from favorable

positioning on coal auctions, (2) earnings contribution from Haldia project in FY2016E and

(3) declining retail losses. Our revised earnings estimates take into consideration (1) dilution on

account of issuance of 7.6 mn shares at an issue price of `644/share and (2) lower earnings

contribution from Dhariwal primarily owing to accrual of interest and depreciation cost with

limited generation leading to 47% cut in FY2015E consolidated earnings and 15% cut in

FY2016E earnings. 

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily24122014an.pdf