Event update: CESC (Outperformer) - Demerger to proceed sans generation
Event update
CESC Board has approved the demerger of the company into three entities – CESC, RP–SG Retail and RP–SG Business Process Services. The company expects to demerge the power business into separate generation and distribution businesses, post the regulatory approval
Details
- In May 2017, CESC announced a demerger scheme, which entailed segregation of the company into four parts: 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). While CESC is already a listed entity, the other three companies will be listed subsequently.
- The National Company Law Tribunal (NCLT) has approved the demerger scheme with a rider that WBERC’s approval would be required for the demerger of the generation business of CESC Kolkata License Area. Pending WBERC’s approval, CESC has decided to proceed with the demerger sans the generation business. The demerger of generation will be undertaken post WBERC’s approval.
- Post demerger, the power business will consist of Kolkata distribution area, Noida distribution area (49.5% stake), Kota distribution franchisee, Bharatpur and Bikaner distribution franchisees and 1.1GW of generation business in Kolkata License Area, 600MW of Haldia TPS and 600MW of Dhariwal TPS. Retail business will be held by RP – SG Retail, while RPBL will hold investments in first source, sport franchisee and residual businesses.
- Each CESC shareholder will receive 6 shares of RPRL, 2 shares of RPBL and 500,000 fully paid up preference shares of Rs100 of RPRL will be issued to CESC. Record date of demerger is 31 Oct 2018.
View and valuation
CESC’s restructuring into 3 specific companies with mirror shareholding of the parent, will lead to value unlocking in the retail and BPO businesses. Moreover, Dhariwal’s tie-up for 300MW under long term and 185MW under short term will help reduce losses in the plant in FY19E, in our view. CESC trades at an attractive 9.2x FY20E earnings and 1.2x FY20E P/BV. We reiterate our Outperformer rating on the stock with a SOTP-based target of Rs1,184 (no discount ascribed to FSS stake and retail business valued at 1x FY19E sales).
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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