A better year ahead for CESC

Biz outlook and value unlocking to help drive stock price

A nod from equity shareholders last weekend takes the demerger scheme of CESC’s businesses a step ahead and this will help unlock value. Together with improving prospects for most of the company’s business segments, it indicates better days for the stock’s price.

The demerger of CESC’s power distribution, generation, retail and other ventures such as information technology (IT) is directed towards streamlining of operations and, more importantly, enhancing focus of each business. Analysts said these ventures were unrelated in nature and led to stronger businesses such as power distribution getting lower valuation multiples.

While the power distribution business continues to do well, the prospects of CESC’s power generation business, too, are improving. For instance, the company’s generation facilities in Haldia remain the main contributor, and its Chandrapur capacities are the weak link. For the September quarter, while the Haldia plant operated at a healthy plant load factor (PLF; capacity utilisation) of 88.19 per cent and supplied to CESC’s licensed area of Kolkata, the Chandrapur unit (600 Mw) operated at just 43.81 per cent PLF, according to analysts’ data. But, the prospects of the Chandrapur unit are improving with the company securing a shortterm PPA (power purchase agreement) for 185 Mw, for supplying to Maharashtra under the flexi-coal scheme, in late November. It has also emerged as the lowest bidder for 100-Mw supplies to BEST in early December. These, together with already existing PPAs for 100 Mw with Tamil Nadu and 185 Mw with Noida, should improve the overall outlook of the power generation business. Ashutosh Adsare at Sharekhan said the generation business is expected to improve and the company is participating in shortterm PPA bids and exploring other options as well.

Analysts at Elara Capital said the PPA to supply to BEST would also make CESC eligible for coal supply allocation under the Shakti (Scheme to Harness and Allocate Koyla (Coal) Transparently in India) policy (the BEST PPA is expected to be signed by Q4FY18). Analysts at Motilal Oswal Securities (MOSL) estimate the Chandrapur project’s earnings before interest, tax, depreciation and amortisation (Ebitda) to increase to ~460 crore in FY19 (from ~10 crore in FY17), with the full benefits of all the PPAs. Consequently, they expect CESC’s net profit estimates getting upgraded by 13 per cent each for FY19 and FY20.

At Spencer’s, the CESC’s retail stores, although goods and services tax (GST) transition and some licensing issues in Andhra Pradesh and Telangana may have impacted sales in the past few quarters, it has been able to report an operating profit (versus operating loss in FY17) helped by cost controls. Analysts at Sharekhan expect the retail segment to report net profit by the end of FY18, while those at MOSL said sales had begun to recover from October and cost savings should continue.

Not surprisingly, improving outlook for its businesses and given the value-unlocking opportunity, analysts are positive on the stock. Their target prices of ~1,360 (MOSL) and ~1,165 (Sharekhan) indicate decent upside from current levels of ~1,006.65.