25 Oct 2012
Update |Sector: Utilities
CESC
CMP: INR
Acquisition of stake in Firstsource at INR4b for 49.5% stake,
Unrelated diversification – a cause of concern
-
CESC announced acquisition of minimum 49.5% stake in Firstsource (FSL) for
INR4b through its wholly owned subsidiary Spen Liq. This comprises of a 34.5%
stake acquired through fresh issue of shares by FSL and 15% through acquisition
from existing investors. It would also make a buyback offer to acquire 26% of
paid up capital at INR12.2/sh. Management believes that as 2/3rd of the holding
is with CESC group (49.5%) and existing investors (23% post offering), and
hangover of FCCB repayment/divestment of stake by existing investors are
behind, tendering in open offer would be limited. CESC is determined to hike
stake to at least 51% to allow full consolidation.
Funding for the same is through leveraged buy-out and would be met through
debt of 70% (INR2.8b) and 30% equity (INR1.2b). Given FSL’s profitability track
record, management perceives the investment to yield “favorable returns”,
while also provides “potential new growth business segment”. For FY13E,
management expects PAT accretion of INR750m (going by earlier PAT range of
INR1.5b, while FY12 PAT was INR620m) from FSL, which net off acquisition
interest of INR200m would be INR500-550m, on equity investment of INR1.2b.
Management is determined to stay with business and grow it.
FSL will use cash infusion, along with INR7.6b cash on books to repay INR13b
FCCB, due for repayment in Dec-12. FSL’s FY12 balance sheet is bit discomforting
given higher goodwill of INR24b on net worth of INR14b. Total debt on books is
also higher at INR21b, while cash is INR7.6b.
In our view, while CESC does not have any major cash flow crunch despite its
commitment to power projects (INR10b), Spencer (INR 3b), regulated business
(INR4b), given cash of INR13b and recurring cashflow from regulated business
(INR5b+ pa), unrelated diversification is a cause of concern. BUY.
-
-
-
Financial summary
* Excl Spencers; fully diluted
Details of transaction
- CESC’s (CESC IN, Mkt Cap US$0.8b, CMP INR332/sh, BUY) 100% subsidiary, Spen
Liq, will acquire
34.5% stake
in Firstsource Limited (FSL) through a fresh issue of
shares by the company. This amounts to issue of 227m shares at a price of
INR12.1/sh, an outgo of
INR2.7b for CESC.
- Secondly, existing share holder’s stake would be reduced to the extent , viz. ICICI
Group stake would be 13% vs 19.9% earlier, Aranda Investement (Temasek
entity) stake at 12.3% vs 18.8% stake now and Metavante Investment stake at
11.9%, vs 18.2% stake now. CESC will buy
5% stake from each entity (15%
stake),
entailing 98.7m shares of the expanded capital of FSL at price of
INR12.2/sh –
an outgo INR1.2b.
1
 Motilal Oswal Financial Services
CESC
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Thus, CESC group will own
49.5% stake,
while stake of the three investors would
come down to ~23%. CESC is determined to take up the stake to 51%.
Management feels that once the overhang of FCCB and divestment concerns are
behind,
tendering in the open offer would be limited.
CESC would make an
open offer to acquire 26% of fully diluted paid up capital of the FSL at
INR12.2/sh.
Considering 5% tendering, CESC would have to invest an additional INR400m.
This would increase the total stake of CESC to 69.5% stake for a sum of INR4.4b.
Particular
Shares
(m)
Price
(INR/s
h)
12.1
12.2
12.2
Value
(INR
m)
2,745
1,204
401
Remarks
Money will go into First Source
5% each from 2 PE investors and ICICI group
5% tendering assumed, as 72% would be owned by CESC group and existing
promoters
Existing promoters cannot tenders in open offer
Fresh Issue
Buyout of existing share
owner
Buyback
226.9
98.7
32.9
Total
358.4
4,350
ICICI Bank could have additional stake to offer, CESC is not willing to look at the
same
- ICICI Bank was looking to divest its stake in the entity due to regulatory
requirement as per US Federal Reserve, which mandates its holding to be below
5%. With revised share holding, stake of ICICI Bank would come down to
6.9%
(11.9% - 5% tendered to CESC) and thus, there would be additional shares on
offer.
- Management has indicated that the CESC group will only buy the minimum
shares required to hike their stake to 51% (to fully consolidate) and are not
willing to acquire the balance stake on offer or have any call/put option
mechanism.
Shareholding pattern, now and revised
'Sep-12
Particulars
Foreign
Institutions
Non Promoter Corp
Promoters
Public & Others
Totals
New issues*
Revised capital
m share
196
14
27
86
108
431
227
658
% Stake
Existing
45.5
3.3
6.3
19.9
25.0
100.0
Revise
d
29.8
2.2
4.1
13.0
16.4
65.5
34.5
100.0
Promoters
- ICICI Bank
- ICICI Pru
PE Investors
- Aranda Investments
- Metavante Invt
Total
Key shareholders – holding now and post infusion
% Stake
Existing
19.9
18.1
1.8
37.0
18.8
18.2
56.9
Revised
13.0
11.9
1.2
24.2
12.3
11.9
37.2
FSL will repay FCCB worth INR11b, balance sheet less comforting:
- FSL will use funds infused by CESC (INR2.7b) along with INR7.6b cash on hand to
repay INR13b of FCCBs, due for payment by Dec-12. Shortfall would be met
through an interim arrangement of funds.
25 Oct 2012
2
 Motilal Oswal Financial Services
CESC
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As at FY12, FSL’s networth stands at INR14b, while goodwill on books is INR24b
due to past acquisition. Debt on books is INR21.1b, while cash on books is
INR7.6b.
Rationale, funding for acquisition and intentions ahead…
- The acquisition is a leveraged buy out by mobilizing INR4b through a mix of debt
: equity in the ratio of 70:30. Since FCCB payment is to be made in USD, CESC
will raise debt in USD, where cost of borrowing could be lower – 6.5-7%, in
management’s view. Thus,
equity contribution from CESC’s balance sheet
would be restricted to INR1.2b only.
- Key rationale for the acquisition is the “favorable returns” on investment and
“potential new growth business segment”. Management indicated that FSL has
a proven track record and PAT was robust in the range of INR1.5b, except for
FY12 (INR620m). Management expects that on the back of robust 1QFY13, PAT
for FY13E could be in earlier range (INR1.5b). This would translate into CESC’
share at INR750m. Adjusted for ~INR200m interest on acquisition debt, PAT
accretion would be INR500-550m, translating into a healthy return on equity
investment of INR1.2b.
-
Also, the group believes that CESC would have sizable cash flows once the
1200MW upcoming power projects is commissioned (600MW Chandrapur and
600MW Haldia), while regulatory business anyways provides steady cash flows.
This, along with no major growth pipeline on power projects and improving
profitability at Spencer, could mean that there would not be any cash flow
crunch. Investing in return accretive investment like this could thus be explored.
Our view: Unrelated diversification is a cause of concern
- CESC’s intent of venturing into unrelated business is a negative.
- CESC’ equity commitment for 1.2GW upcoming power projects stands at
INR10b, while existing distribution business would require INR4b as equity
contribution over next 2 years. This, along with INR1.5b pa funding for Spencer,
would mean cash outflow of ~INR3b over the next 2 years. Given cash of INR13b
and recurring cash flows from existing business, CESC is well placed to fund
these commitments. However, any further commitment for a diversification
would be a cause of concern.
-
We expect CESC to report standalone PAT of INR5.8b in FY13E and INR6.5b in
FY14E. Stock trades at PER of 7x FY14E and P/BV of 0.8x. Maintain
BUY.
25 Oct 2012
3
 Motilal Oswal Financial Services
CESC
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25 Oct 2012
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