MOSL: CESC (Buy)-Annual Report-Turnaround in Spencer & Dhariwal-Demerger to re-rate Distribution business
​CESC | Annual Report: Turnaround in Spencer & Dhariwal; Demerger to re-rate Distribution business; Upgrading TP to INR1360
(CESC IN, Mkt Cap USD1.8b, CMP INR897, TP INR1360, 52% Upside, Buy)
We went through the FY17 annual reports of CESC and its various subsidiaries. Asset sweating and cost reductions are driving turnaround at Spencer and Dhariwal. Efficiencies and cost reductions are driving core RoE improvements at Kolkata and Haldia businesses. Equity has been infused into Spencer and Dhariwal to reduce their debt burden and optimize finance cost at the group level. The planned demerger into four independent businesses will unlock value. Distribution business valuation will get re-rated on reduced volatility in earnings thereby cost of equity. Spencer too will command better valuation after expected turnaround in FY18E. We upgrade the SOTP to INR1360/sh. Reiterate Buy.
Standalone – efficiency savings offset impact of negative bid for coal block
CESC was able to offset the impact of negative bid for the captive coal block (estimated at INR1.4b) on the back of an increase in incentive income on lower distribution loss, reducing under-recoveries of repairs and consumables cost (R&C), and sale of merchant power. Core RoE declined 130bp to 20.6% in FY17.
Haldia – core RoE of over 25%
Core RoE improved from ~19% in FY16 to 25%+ in FY17 on higher PLF and efficiency-related incentives. Interest cost declined ~200bp to ~10% in FY17, aiding 27% growth in PAT to INR2.9b. CESC is leveraging Haldia’s balance sheet to optimize its borrowing cost.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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