CESC's Q1FY19 results (Outperformer) - Positive tariff order; demerger awaiting regulatory approval

Q1FY19 Highlights

• CESC operated its three key power plants Budge Budge (standalone), Dhariwal and Haldia (operating under subsidiaries) at a PLF of 98% (-265bps), 93% (+725 bps) and 81% (+2659 bps) in Q1FY19 respectively whereas T&D loss for distribution license area was 9.65% (-135bps) in Q1FY19. PLF of Budge Budge along with reduction in T&D losses (compared to norms) are key to CESC earnings
• Regulator notified tariff order and norms for FY18 with a delay of four quarters (expected to be notified in April 17). The norms for FY18 were similar to FY17, a major relief. CESC has filed petition for new tariff period FY19-FY20. We expect the tariff order and norms for the current tariff period and norms to be decided by December 2018.
• Reported Standalone PAT was Rs1.8bn, a growth if 2.2%, for Q1FY19 (below est of Rs2.0bn). Muted growth in the quarterly profit is led by delay in tariff order for FY19-20
• Subsidiaries’ performance: Spencer reported break even at EBITDA level in Q1FY19. Haldia reported a PLF of 93% and Dhariwal reported a PLF of 81%, +2659bps, sharp improvement with a new six month contract with Maharashtra utility.
• CESC demerger process has received the approval from NCLT in March 18 subject to WBERC, the state regulator, approval. WBERC approval for demerger is likely by Sep 18 and listing of all the four entities is likely by October 18.

Key positives: Demerger likely to be completed in next two three months; T&D losses at 9.65% and reduction in losses at Spencer in FY18.

Key negatives: Delay in tariff order and setting of norms for FY19-20E time period

Impact on financials: Maintain our earnings estimates

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 tie up of 300MW under long term and 185MW under short term will reduce the losses for the plant in FY19. CESC trades attractively at 9.3xFY20E earnings and 1.2xFY20E P/BV. We maintain our Outperformer rating on the stock with a SOTP based target of Rs1,184 (we are ascribing no discount to First Source Solutions stake, and valuing retail business at 1x FY19E sales).