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MOSL: CESC (Buy)-Wins Malegaon distribution franchisee

CESC: Wins Malegaon distribution franchisee; Maintain Buy

(CESC IN, Mkt Cap USD1.2b, CMP INR653, TP INR801, 23% Upside, Buy)

 

Maharashtra DISCOM recently concluded auction of two distribution circles under the distribution franchisee (DF) model.

 Malegaon circle was won by CESC

• The input energy was ~1,000MU in FY18 and AT&C losses stood at ~45%. The license is for 20 years, extendable by 10 years. More than 80% of the energy supply is to industrial/commercial customers. Based on preliminary data, Malegaon circle is equal to CESC’s Kota distribution franchisee circle in terms of input energy. We understand the gross margins are higher than Kota but so also are the AT&C losses.

 Shil, Mumbra & Kalwa sub-divisions under Thane circle won by Torrent Power

• The input energy was 677MU and AT&C losses stood at 47%. The contract is for 20 years, extendable by 10 years. The circle is adjacent to Torrent’s existing Bhiwandi operations. It can leverage its existing team for quick ramp-up of operations. In terms of input energy, the circle is ~20% of size of its Bhiwandi operations.

In a DF model, the key driver of profit is the pace and scale of reduction in AT&C losses. The winning bidder is selected on the price of input energy it will pay the DISCOM. DF has no role in fixing tariff (it is determined by the regulator for the DISCOM’s operating area). Capex is generally low as the basic infrastructure for supply of electricity is already in place.