18 May 2017
Update
| Sector:
Utilities
CESC
Buy
BSE SENSEX
30,435
S&P CNX
9,429
CMP: INR830
TP: INR1,040(+25%)
Driving value through simplification
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
CESC IN
133.2
1002 / 531
-5/23/33
110.6
1.6
358
50.1
Financials Snapshot (INR b)
2017 2018E 2019E
Y/E Mar
Net Sales
139.0 152.3 161.1
EBITDA
31.6
38.1
39.4
PAT
6.9
9.8
10.7
EPS (INR)
51.9
73.4
80.6
Gr. (%)
86.6
41.6
9.8
BV/Sh (INR)
442.2 503.6 572.3
RoE (%)
11.4
15.5
15.0
RoCE (%)
10.1
11.3
11.4
P/E (x)
19.3
13.6
12.4
P/BV (x)
16.0
11.3
10.3
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
49.9
49.9
49.9
DII
20.3
20.2
19.1
FII
21.1
21.8
22.6
Others
8.7
8.1
8.4
FII Includes depository receipts
Stock Performance (1-year)
CESC
Sensex - Rebased
1,100
900
700
500
In a major development, the board of directors of CESC has approved a scheme for
demerger of the company into four separate entities, which would be listed
individually. Economic interest of shareholders in each of the companies would
remain the same as their current holding in CESC. The four entities are carved out
such that they specialize in a particular line of business – distribution (CESC),
generation (Haldia Energy), retail (RP-SP Retail) and others (RP-SP Business Process
Services). For every 10 shares of CESC, shareholders will receive five (of INR10 each)
shares of distribution, five (of INR10 each) of generation, three (of INR5 each) of
retail and two (of INR10 each) of others. The demerger would require approval of the
Company Law Board and the West Bengal Electricity Regulatory Commission.
Management expects the merger process to be completed by 1 October 2017.
We see significant benefits of the demerger:
Exposure to the only pure-play distribution business:
It would be the only
pure-play distribution business in India. A regulated distribution business is one
of the best regulated businesses to own, given low gestation period (high IRRs),
steady growth and negative working capital. The Kolkata business is high-RoE
and growing at a steady rate (5-6%). Noida is growing rapidly, with regulated
equity having increased 3x over past five years. Growth will also be driven by
the entry into new circles through the distribution franchise model, which is
low capex and would leverage on CESC’s 100+ years of experience in the
distribution business. The closest comparable peer is Power Grid.
Healthy dividends likely from generation business:
The generation business
would have capacity of ~2.5GW. Of this, ~2.3GW is coal-based generation, with
long-term, largely regulated nature PPAs for ~2GW. The untied capacity of
0.3GW at Dhariwal has the potential to enter into a regulated PPA with CESC’s
Noida distribution circle in 2-4 years. In the interim, the untied capacity will
look at opportunities in the merchant power market (Maharashtra is a
possibility). The regulated generation business earns +17% RoE (incl.
incentives) and, with limited growth opportunities, should be a healthy-
dividend-paying business.
Pure-play retail chain:
Spencer is a growing retail chain with a store count of 124 and
area of 1,176k.sq.f as at end-FY17. The operations expected to turn profitable in FY18
through focused expansion, optimization and operating leverage. The organized retail
sector represents just 10% of the estimated market size of USD600b, and provides a
huge growth opportunity. Spencer recently entered the apparels business, which has
gathered strong momentum with the initial launch. Sales increased from INR20m in
April 2017 to INR80m by June 2017. Apparel is a high-margin business and would drive
faster turnaround at Spencer.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 6129 1523
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549