CESC's Q2FY19 results (Outperformer) - Simplified business
Q2FY19 Highlights
- CESC operated its three key power plants Budge Budge (standalone), Dhariwal and Haldia (operating under subsidiaries) at a PLF of 100% (-265bps), 96% (+806 bps) and 49% (+553 bps) in Q2FY19 respectively. T&D loss for distribution license area was 9.65% (-115bps) in Q2FY19. PLF of Budge Budge along with reduction in T&D losses (compared to norms) are key to CESC standalone earnings
- 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 Rs2.7bn, a growth of 10% yoy, for Q2FY19 (above est of Rs2.5bn). Power sold in Kolkata License area grew by 7.4% in Q2FY19
- Pending the approval of the regulator for demerging generation and distribution business, CESC Board approved the demerger of the company into three entities – CESC, RP–SG Retail and RP–SG Business Process Services. Demerger of power business to separate generation and distribution businesses, post the approval of the regulator.
- The record date was 31st Oct 2018. As a result, existing CESC business consists of power generation and distribution RP–SG Retail and RP–SG Business Process Services will get listed in next few weeks
Key positives: T&D losses at 9.65% and reduction in losses at Spencer in FY18; demerger of CESC into three entities
Key negatives: Delay in tariff order and setting of norms for FY19-20E time period
Impact on financials: Introduced our earnings estimates of the demerged entity for FY19E/FY20E at Rs11bn/Rs11bn.
Valuations & view
CESC’s operational performance in Kolkata License area (KLA) has been exemplary over years. Especially, T& D losses and PLF has been superior to benchmark in KLA, thus enabling a superior return profile from KLA.. The focussed entity should be able to pursue growth opportunities in the power sector without being burdened by the losses at retail business. Moreover, Dhariwal’s tie up of 300MW under long term and 185MW under short term PPA will reduce the losses for the plant in FY19. CESC trades attractively at 8xFY20E earnings. We introduce our SOTP based target of Rs810/share and reiterate outperformer rating
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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