CESC's Q4FY18 results (Outperformer) - Subsidiaries performance shine; standalone performance impacted by regulatory delay

Q4FY18 Highlights

• CESC operated its three key power plants Budge Budge (standalone), Dhariwal and Haldia (operating under subsidiaries) at a PLF of 90%/92%, 48%/46%  and 84%/86% in Q4FY18/FY18 respectively whereas T&D loss for distribution license area was 9.65% in FY18. PLF of Budge Budge and Haldia power plants along with reduction in T&D losses are key to incentive incomes. However, norms for new tariff period FY18-FY20 are yet to be set by the regulator (regulator proposed T&D loss norm of 11.5%).
• Sales volume in Kolkata distribution Area (KLA) increased by 16% yoy to 2.4BU in Q4FY18.  FY18 growth is 8.8% (vs flat growth in FY17). As a result, net revenue grew by 9%/10% to Rs21bn/81bn in Q4FY18/FY18
• Reported PAT was Rs2.9bn for Q4FY18 (flat yoy, est of Rs3.2bn). while PAT for FY18 was Rs8.7bn, flat yoy.Muted growth in the quarterly profit is led by delay in tariff order for FY18 (we expect tariff order to be notified in next few months). 
• Subsidiaries’ performance: Spencer reported EBITDA of Rs170m (vs loss of Rs260m in FY17) and loss of Rs300m (vs loss of 1.4bn in FY17).   Haldia reported a profit of Rs3.1bn (Vs Rs2.8bn in FY17). First source Solutions (FSS) reported a PAT of Rs3.3m, growth of 17% yoy.
• 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 June 18 and listing of all the four entities is likely by August 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 FY18-20E 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 9.4xFY19E earnings and 1.3xFY19E P/BV. We maintain our Outperformer rating on the stock with a revised SOTP based target of Rs1,184 (revision in target price on 80% increase in share price of FSS since last update; no discount ascribed to FSS stake, and valuing retail business at 1x FY19E sales).