CESC Ltd

(BSE Code: 500084) (CMP: Rs.656.35) (FV: Rs.10)

Money Times - - Stock Watch - By Amit Ku­mar Gupta

In­cor­po­rated in 1897, CESC Ltd is an in­te­grated elec­tri­cal util­ity com­pany en­gaged in the gen­er­a­tion, trans­mis­sion and dis­tri­bu­tion (T&D) of elec­tric­ity to around 2.9 mil­lion do­mes­tic, in­dus­trial and com­mer­cial users in Kolkata. It owns and op­er­ates three ther­mal power plants with a to­tal gen­er­a­tion ca­pac­ity of 1,225 MW. Its trans­mis­sion lines links its gen­er­at­ing and re­ceiv­ing sta­tions with 105 dis­tri­bu­tion sta­tions as well as 8,211 km cir­cuit of HT lines and 12,269 km cir­cuit of LT lines. It also owns and op­er­ates four wind power projects with a ca­pac­ity of 24 MW in Ra­jasthan; 26 MW in Gu­jarat; 36 MW in Mad­hya Pradesh; and 70 MW in Gu­jarat. Its so­lar plant in Tamil Nadu has a gen­er­a­tion ca­pac­ity of ~18 MW. In ad­di­tion, it is en­gaged in the busi­ness of or­ga­nized mu­sic re­tail­ing stores; sell­ing of mu­sic ac­ces­sories; busi­ness process out­sourc­ing (BPO); and prop­erty de­vel­op­ment ac­tiv­i­ties. CESC’s power dis­tri­bu­tion in­cludes Kolkata and Noida (49% stake) and three fran­chisee (DFs) cir­cles in Ra­jasthan. Its gen­er­a­tion port­fo­lio in­cludes an in­stalled ca­pac­ity of ~2.5 GW, of which only 300 MW is without any long-term PPA (power pur­chase agree­ments). Its reg­u­lated dis­tri­bu­tion busi­ness of Kolkata and Noida gen­er­ates a healthy RoE (re­turn on eq­uity) of ~20%. CESC’s cash flow is fairly pre­dictable and the busi­ness of­fers steady growth. We ex­pect reg­u­lated eq­uity (a key driver of earn­ings growth) CAGR of ~5% over FY18-21, af­ter the ~10% growth wit­nessed over FY13-18. Noida, which is a new cir­cle, has grown at ~21% CAGR over FY13-18 and we ex­pect ~11% CAGR over FY18-21. We ex­pect a mean­ing­ful con­tri­bu­tion from DFs af­ter a cou­ple of years as they are in the ini­tial years of op­er­a­tion. The gen­er­a­tion ca­pac­ity un­der long-term PPA gen­er­ates healthy dou­ble-digit RoE on ac­count of ef­fi­cient op­er­a­tions and fa­vor­able norms. There is no un­der-con­struc­tion as­set. and capex in its ex­ist­ing port­fo­lio is min­i­mal. The 300 MW ca­pac­ity without any long-term PPA at Dhari­wal has a 6-month sup­ply con­tract for 187 MW. Although CESC’s busi­nesses gen­er­ate RoE of ~20%, the re­ported RoE is lower due to reval­u­a­tion of as­sets in FY17. Its RoE is ex­pected to im­prove from 8.7% in FY18 to ~11% by FY20. We ex­pect FCF (free cash flow) gen­er­a­tion of ~Rs.9001000 crore. In our view, net debt will de­cline from Rs.12900 crore in FY18 to ~Rs.11800 crore by FY20. CESC will ben­e­fit on its un­tied 300 MW ca­pac­ity. It could also gain from in­or­ganic op­por­tu­ni­ties and even­tu­ally de­mand for new ca­pac­i­ties. Its ex­ist­ing dis­tri­bu­tion busi­ness is high-RoE and de­liv­ers steady growth. Gen­er­a­tion as­sets boast healthy FCF. Un­tied gen­er­a­tion ca­pac­ity and scale-up of DFs will boost its earn­ings go­ing for­ward. We ex­pect div­i­dend pay­out to in­crease from ~20% in FY18 to 25%, led by strong FCF gen­er­a­tion.

Tech­ni­cal Out­look: The stock looks good on the daily chart for medium-term in­vest­ment. Its daily chart shows a con­sol­i­da­tion phase. The stock trades be­low all im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart. Start ac­cu­mu­lat­ing at this level of Rs.656.35 and on dips to Rs.615 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.785+ in the next 12 months.

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