CESC's Q2FY18 results (Outperformer) - Operationally inline
Q2FY18 Highlights
- CESC operated its two key power plants Budge Budge and Haldia (operating under a subsidiary) at a PLF of 99% and 88%. Where as T&D loss for distribution license area was 10.8%. PLF of Budge Budg and Haldia power plants alongwith reduction in T&D losses are key to incentive income. However, the norms for new tariff period FY18-FY20 are yet to be set by the regulator.
- Sales volume in CESC’s Kolkata distribution Area (KLA) increased by 4% yoy to 2.8BU, in Q2FY18. FY17 growth was muted at 1% yoy. Net revenue grew by 4% to Rs21bn in Q2FY18 in line with sales volume.
- Reported PAT was Rs2.4bn for Q2FY18. We expect continued under recovery from the coal block to the extent of Rs500 - 600m per year from the coal block due to reduction in sourcing of the coal from the Sarasthalli coal block.
- Subsidiaries’ operations: Spencer reported a store level EBITDA of Rs100/sq ft/month (vs Q2FY17 of Rs97/sq ft/month). Dhariwal thermal power station operated at a PLF of 43% in Q2FY18. Haldia thermal power station operated at 88% PLF (operating on cost plus basis). First source reported a PAT of Rs688m,a decline of 4% yoy.
- CESC had announced its demerger into four separate companies: a) Distribution Business - CESC Ltd b) Generation Business in Haldia Energy Ltd (HEL) c) Retail Business in RP-SG Retail Ltd (RPRL) and d) CESC Ventures business in RP-SG Business Process Services Ltd. (RPBL). Shareholder voting on the demerger is scheduled on 15th December, 2017
Key positives: Demerger likely to be completed in FY18
Key negatives: Delay in setting of norms for 2018-20 time period
Impact on financials: Maintain our earnings estimates; introduce FY20 earnings at Rs13.9bn
Valuations & view
CESC’s restructuring of its businesses into four specific companies having mirror shareholding of the parent CESC will lead to value unlocking for the retail and BPO businesses. Moreover, Dhariwal’s short term PPA for 300MW will reduce the losses for the plant in FY18. CESC trades attractively at 9.1xFY19 earnings and 1.3xFY19 P/BV. We maintain our Outperformer rating on the stock with a revised SOTP based target of Rs1035 (No discount ascribed to First Source Solution stock price, CESC holds 55% stake and valuing retail business at 1x FY19Sales)
CESC is engaged in the business of generation and distribution of electricity within the licensed area of 567 sq. km in the city of Kolkata and adjoining areas and does not operate in any other reportable segment. The peak power demand in the licence area is now approximately 1,460 MW, which is met through CESC's internal generation capacities as well as through power purchased from the state and national grid. Power demand, however, fluctuates based on seasonality and the time of the day; the maximum demand for power is usually during the evening hours, with less power needs during rest of the day. The combined generating capacity of Co.'s four plants is 975 MW.
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