INSUBCONTINENT EXCLUSIVE:
Sharekhan has a buy call on CESC with a target price of Rs 810.
The current market price of CESC is Rs 684.50.
Time period given by the
brokerage is one year when CESC price can reach the defined target.
Investment rationale by the brokerage:
Revenue growth remains stable;
Gross margin contracts slightly: During Q2FY2019, CESC reported revenue growth of 6.3 per cent y-o-y to Rs 2,220 crore
Higher cost of electricity purchased and fuel consumed, up 5.9 per cent and 15.4 per cent y-o-y, respectively, resulted in gross margin
contraction of 143 BPS at 43.1 per cent
However, despite gross margin contraction, gross profit was marginally up by 2.9 per cent y-o-y to Rs 957 crore
EBITDA witnessed slightly better growth of 4.5 per cent y-o-y, as compared to gross profit
This was due to employee and other expenses being lower by 35 BPS and 68 BPS to 10.8 per cent and 9.3 per cent of sales, respectively
Sharp surge in regulatory income (up by 311 per cent y-o-y) helped PAT to report growth of 15.3 per cent y-o-y to Rs 271 crore, despite a 20
per cent y-o-y decline in other income as depreciation and interest expense almost remained flat in Q2FY2019 on a y-o-y basis.
Business
matrix - Revenue growth led by volume increase and improved realisation: CESC witnessed revenue growth of 6.3 per cent y-o-y, led by a 2.6
per cent y-o-y increase in units sold (at 3,333 million units) and improved realisation, up 3.6 per cent y-o-y at Rs 6.66/unit
The ratio of power generated: power purchased changed slightly to 52:48 in Q2FY2019 as against 54:46 in Q2FY2018
This was largely due to an increase in power purchased to 1,602 million units, up by 6.2 per cent y-o-y, whereas power generation saw a
marginal decline of 0.5 per cent y-o-y to 1,731 million units
Cost of power generation increased by 16 per cent y-o-y to Rs 2.51/unit as compared to a marginal decline of 0.3 per cent in cost of power
Power generation volumes were slightly lower as PLF in southern unit was lower by 630 BPS to 24.7 per cent, resulting in a 22 per cent y-o-y
decline in units generated to 73 units
However, this unit just contributes less than 5 per cent to overall volumes generated
Budge Budge unit operated at a 100 per cent PLF and generated 1,658 million units, contributing 95.8 per cent to overall volumes in Q2FY2019
On the TD loss front too, there was an improvement of 115 BPS, wherein TD loss was at 9.7 per cent in Q2FY2019 as compared to 10.8 per cent
in Q2FY2018.
Chandrapur unit yet to reach full potential: Haldia Thermal Power Project (2x300 MW) in West Bengal witnessed improved PLF,
backed by rising demand from CESC
The unit PLF improved by 807 BPS y-o-y to 96.26 per cent in Q2FY2019, resulting in a 9.5 per cent y-o-y increase in units generated being at
However, full potential is yet to be tapped for the Chandrapur Thermal Power Project (2x300 MW) unit as it has been operating at a PLF of
48.73 per cent (an improvement of 555 BPS y-o-y)
Volume generation in the unit increased by 12.2 per cent y-o-y to 589 million units
However, the supply of full contracted capacity of 187 MW to NCPL (Noida Power) and 185 MW to MSPGCL (Maharashtra SEB) has been continuing
as per the stated contractual terms
228 MW potential is yet to be captured from the Chandrapur unit, which can provide additional 361 million units.
RP-SG Retail and RP-SG
Business Process Services expected to be listed soon: The Board, at its meeting held on October 12, 2018, decided to demerge its retail and
venture businesses into separate entities effective from October 1, 2017
Consequently, the existing shareholders holding 10 equity shares (FV Rs 10) on the record date (i.e
October 31, 2018) shall be receiving six equity shares (FV Rs 5) of the retail company and two equity shares (FV Rs 10) of the venture
Moreover, the company i.e
CESC shall be receiving five lakh fully paid-up preference shares of Rs 100 each of the retail company
Demerger of the generation business will be effective post receipt of PPA approval from the Honourable West Bengal Electricity Regulatory
Commission to the power purchase agreement in terms of the NCLT Order
The Board had fixed October 31, 2018, as the Record Date for the demerger
shareholders as on the record date
These two entities are expected to be listed in the next few weeks.
Maintain Buy rating on the stock with a revised PT of Rs 810: CESC has
continued to report stable performance at the standalone level and is expected to do so going forward as well
Revenue, EBITDA and RPAT are expected to report CAGR of 9.4 per cent, 13.2 per cent and 13.9 per cent, respectively, during FY2018-FY2020E
With the demerger finally taking shape as planned (power businesses still operating in a single company as they await regulatory approval),
the company is expected to have unlocked value for shareholdeRs Moreover, as clarity emerges on the new tariff order going forward, the pace
of growth prospects of the power portfolio will be clear
The demerger has resulted in increased net debt/equity from 0.28x in FY2017 to 0.39x in FY2018
The company is currently trading at 0.8x its FY2020E P/BV
We have fine-tuned our earnings estimates for FY2019E and FY2020E and maintain our Buy rating on the stock with a revised price target (PT)
