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