CESC de­merger: in­vestors check in for val­u­a­tion gains

Mint Asia ST - - Otherviews - R. SREE RAM

PRES­SURE POINTS Much of the gains from CESC'S de­merger will de­pend on loss re­duc­tion at its retail busi­ness and Chan­dra­pur power plant. CESC (stand­alone) Hal­dia En­ergy Cres­cent Power Noida Power Co. (As­so­ciate) Spencer’s Retail First­source So­lu­tions CESC (con­sol­i­dated) Dhari­wal In­fra­struc­ture (Chan­dra­pur plant) CESC

Ltd’s shares, which lost 15% when the firm first re­vealed its four-way split plan in May, are back above the pre-de­merger an­nounce­ment lev­els. The stock re­couped the losses as the gen­eral up­trend in the equity mar­kets and ar­tic­u­la­tion of the de­merger ben­e­fits by the man­age­ment helped in­vestors eye val­u­a­tion gains.

The scheme is ef­fec­tive 1 Oc­to­ber though the ac­tual de­merger and list­ing of the en­ti­ties will take time as CESC will have to take sev­eral ap­provals. The de­merger per se does not lift CESC’S earn­ings. But it sim­pli­fies the hold­ing struc­ture, which can help its power util­i­ties busi­ness at­tain bet­ter val­u­a­tion.

“This is be­cause the power busi­ness funded the di­ver­si­fi­ca­tion ini­tia­tives un­der the ear­lier struc­ture, which de­pressed val­u­a­tion mul­ti­ples. Con­sid­er­ing growth op­portu- ni­ties such as dis­tri­bu­tion fran­chis­ing, the busi­ness will ar­guably com­mand a pre­mium over a plain-vanilla gen­er­a­tion busi­ness,” IIFL In­sti­tu­tional Equities said in a state­ment.

The sec­ond ben­e­fit is the value un­lock­ing op­por­tu­ni­ties. The retail busi­ness, which till now was losing money, will be­come debt­free. As the unit im­proves its op­er­at­ing met­rics, it is ex­pected to break even and de­rive bet­ter value upon list­ing. “CESC ex­pects the change in prod­uct mix to boost mar­gins and ex­pects Spencer’s to cash break-even in FY2018 and PAT (profit af­ter tax) break-even in FY2019,” Sharekhan Ltd said in a note.

The other pain-point—chan­dra­pur plant— which is also losing money due to in­suf­fi­cient power off-take agree­ments is es­ti­mated to ease as CESC is scout­ing ad­di­tional con­tracts.

“The com­pany is con­fi­dent of sign­ing the en­tire ca­pac­ity of Chan­dra­pur on long-term PPAS in FY18 and achieve PBT break-even,” IIFL adds. PPA is short for power pur­chase agree­ment and PBT is profit be­fore tax.

That said, given the his­tory of losses and missed tar­gets, ev­ery­body is not con­vinced about the time­lines.

Many bro­ker­ages, in­clud­ing IIFL, are not pen­cilling in the Chan­dra­pur power plant break-even in the cur­rent fis­cal year.

While ex­pec­ta­tions are run­ning high on the retail busi­ness, for now, the cre­ation of the pure elec­tric­ity dis­tri­bu­tion busi­ness un­bur­dened from the loss-mak­ing units re­mains the most promis­ing out­come of the on­go­ing ex­er­cise. The power unit al­ready gen­er­ates strong op­er­at­ing cash flows and can sup­port its fu­ture growth plans by it­self.

“Cash flows of the power busi­ness will be fur­ther used to scale up that busi­ness given un­til now retail busi­ness was a drag on the for­mer’s cash flow,” ICICI Se­cu­ri­ties Ltd said in a note last month.

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