MOSL: CESC (Buy)-Gets 185MW PPA under flexi-coal scheme-Demerger to unlock value
​CESC: Gets 185MW PPA under flexi-coal scheme; Demerger to unlock value; maintain Buy
(CESC IN, Mkt Cap USD2.1b, CMP INR1016, TP INR1360, 34% Upside, Buy)
Dhariwal wins 185MW short-term PPA under flexi-coal scheme
- Dhariwal is L1 to supply 185MW (net) to Maharashtra (MH) at INR2.76/kWh during December 2017 to June 2018. The contract is part of the flexible coal scheme (report link) under which coal will be supplied by MH at Coal India’s notified price. We estimate contribution margin of INR0.7-0.8/kWh. Dhariwal will supply the power from its second unit of 300MW (2x300MW plant). Though the margin is low, the strategy partially de-risks it from the volatile merchant market. Moreover, Dhariwal can now look to supply in day-ahead market from the remaining 115MW capacity, given that operation of part of the unit is now assured. MH could extend the contract, as the price is lower than variable cost of its own plants. We have increased PLF estimate from ~50% earlier to ~70% over FY19-20 for Dhariwal.
- UP regulator rejects additional regulated PPA for Noida; no surprises
- In another development, the Uttar Pradesh (UP) regulator has rejected the proposal for an additional regulated PPA between Dhariwal and Noida DISCOM. It has argued that a competitive bid can fetch lower tariff than the regulated tariff offered by Dhariwal. The decision does not come as a surprise. We were building in just ~50% PLF over FY18-20 at Dhariwal (existing long-term PPAs of 287MW and some merchant sales). There is no impact on our estimates. The probability of a long-term PPA was already low, given attractive merchant power rates.
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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