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MOSL: CESC (Buy)-S/A miss on higher-than-expected expenses

CESC: S/A miss on higher-than-expected expenses

(CESC IN, Mkt Cap USD1.3b, CMP INR756, TP INR890, 18% Upside, Buy)

 

DFs' performance improves; Dhariwal remains profitable

• CESC's S/A 1Q results highlight a modest profitability improvement. Volumes for S/A improved 23% YoY (on a low base), but S/A PAT was up just 3% YoY. Consol. PAT, on the other hand, rose 37% YoY on lower losses in its Distribution Franchise (DF) business.
• Dhariwal has turned profitable and DFs are showing signs of a turnaround. CESC's integrated business in Kolkata is high RoE and generates strong cash flows. Even as we factor in the tightening of norms at Haldia and S/A, the stock trades attractively at 7.3/6.8x FY22/FY23 P/E. Maintain Buy, with TP of INR890/sh based on 8x FY23EPS. 

S/A profitability below expectations

• S/A PAT rose just 3% YoY to INR1.4b (29% lower v/s our estimate: INR2.0b). The large miss was on account of 1) higher O&M and other expenses and 2) a marginally lower than expected rise in volumes amid the impact of the second COVID wave.
• As per the co., the previous year had seen certain cost measures being implemented, which were unsustainable. Other expenses at S/A were up to INR2.7b v/s INR1.5b in the previous year.
• Sales volumes rose 22.5% YoY to 2.6BU (on a low base; 1QFY21: -31% YoY). S/A other income for the quarter was lower at INR0.1b (v/s INR0.3b in the previous year).