Stock Pick From The Electric Utilities

HERE IS WHY: 

• Retail Business in on track to turnaround. 
• First full year of operations of CESC’s expanded capacity. 
• Consistent dividend payment since 2005.

The emergence of stable government at the centre has enthused optimism not only among the citizens but also the stock and the equity markets. The confidence is such that many sectors that have remained in the sidelines for years are all set to come out of hibernation. The power sector is one such sector that is all set to witness better movement going forward. Here in this issue we present to you CESC, the flagship company of RP-Sanjiv Goenka Group. Why? Let us take a look at the investment rationale for the same.

CESC operates in three segments, namely power, retail and property. The first and the foremost investment rationale is that the company has been declared H1 through competitive bidding in Ranchi, Jharkhand for distribution franchising. The Distribution Franchisee Agreement has also been signed. This agreement is likely to generate an annual revenue of Rs.400 crore and the company will be able to add 0.3 million consumers.

Coming to the operational part, at present company owns and operates four thermal power plants generating 1225 MW of power in West Bengal. The company is all set for doubling power generation capacity by end of FY15, which is likely to be value accretive for the company. It can be said that FY15 will see reversal of tide for the company. This is backed mainly because this fiscal will be the first full year of operations of CESC’s expanded capacity and its retail arm Spencer is likely to profit in FY15. The Plant load factors (PLF’s) of its three power plant that is at Budge Budge, Titagarh and Southern for Q3FY14, stood at 89.5 per cent, (+130 bps yoy), 76 per cent (+1240 bps yoy), and 76 per cent (+180 bps yoy) respectively. This has come against normative PLF’s of 80 per cent. In addition, the T&D losses for the quarter were 11.8 per cent as against normative loss of 14.3 per cent.

On retail side of the business, sales per square feet for Spencer have increased by 13 per cent to Rs.1363/sq. ft per month. The store level EBITDA increased 25 per cent to Rs.64/ sq. ft per month. Talking about the operational metrics, the company has shut small size store and opened new large format stores. The total area under operation is 1.02mn sq. ft. The sales per square feet have increased to Rs.1316/sq. ft per month, an increase of 4.6 per cent yoy. The company needs to achieve store level EBITDA of Rs.100/sq. ft per month to break even on cash flow basis. CESC’s operational performance in Kolkata License area has been exemplary over the years. On the other hand, its project in Haldia Phase 1 (300x2 MW TPP in Haldia, West Bengal) is in advanced stage and its first unit is expected to commission by the second quarter of the FY15. Coming to the valuations, the stock discounts its trailing twelve month earnings by 12.31x, which is cheaper as compared to its other listed peers. The Q4FY14 numbers are also expected to be a better one and we recommend a buy on the stock with a price target of Rs.770 per share in next one year.