CESC's Q3FY18 results (Outperformer) - Delay in tariff order impact profits
Q3FY18 Highlights
- CESC operated its two key power plants Budge Budge and Haldia (operating under a subsidiary) at a PLF of 99% and 88% whereas T&D loss for distribution license area was 10.8%. PLF of Budge Budg and Haldia power plants along with 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 Kolkata distribution Area (KLA) increased by 12% yoy to 2.4BU in Q3FY18. 9mFY18 growth is 5.7% (vs NIL growth in FY17). As a result, net revenue grew by 6% to Rs18bn in Q3FY18
- Reported PAT was Rs1.5bn for Q2FY18 (+1.3% yoy, est of Rs1.6bn). Muted growth in the quarterly profit is led by delay in tariff order for FY18 (we expect tariff order to be notified in Q4).
- Subsidiaries’ operations: Spencer reported positive EBITDA for second consecutive quarter. 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 voted in favour of demerger during the quarter. Now, NCLT approval for demerger is likely by March 18 and listing of all the four entities is likely by June 18.
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
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 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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