Can the CESC demerger unlock value for investors?

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Jitendra Kumar Gupta
Moneycontrol Research

Finally, the wait seems to be over for shareholders of CESC, who have been waiting for the demerger of the non-power business, thus unlocking value. The board has fixed October 31 as record date for determining the eligibility of shareholders and the demerged companies will be listed in December.

Initially, the management had plans to demerge the business into four listed entities. However, due to delays in securing approval for the demerger of its power generation and distribution business, it has now decided to demerge into three entities: power, retail and other ventures.

Can it unlock value?
According to the scheme of arrangement, investors holding 10 shares of CESC will be entitled to six additional shares of RP-SG Retail and two shares of RP-SG Business Process Service: its power generation and distribution business comprising of 2,425 mw of assets. The assets are well discovered, provide steady growth and generate double-digit return on equity (RoE).

Based on attributable equity invested in these projects of about Rs 6,500 crore and a reasonable 2 times price-to-book value ratio, the power generation and distribution business alone is worth Rs 983 a share as against its current market share price of Rs 904 a share. The stock has corrected by about 24 percent in the recent past from its 52-week high of Rs 1,188 per share.

Scope for reratingIts retail business - Spencer - has seen a turnaround and could command higher valuations after a separate listing. Spencer was losing money, but post-restructuring it turned earnings before interest, tax, depreciation and amortisation (EBITDA) positive last year. It generated an EBITDA of Rs 17 crore on sales of Rs 2,091 crore. It initially reduced its store count from 215 in FY10 to 118 by FY16-end and then expanded to 128 by FY18-end. The management’s focus has shifted to larger format stores and thus revenue per square feet per month has risen Rs 1,477 in FY18 from Rs 1,239 in FY14 and Rs 881 in FY11.

Considering 20 percent sales growth in FY19 and a moderate 15 percent growth in FY20, this business can achieve a sales turnover of about Rs 2,800 crore. Even at one time its FY20 sales, this business would be worth Rs 217 a share. This is conservative, considering that other listed players such as Aditya Birla Fashion & Retail, Trent and Shoppers Stop are on an average currently trading at 1.96 times their FY20 estimates sales.

Its third business segment includes 55.5 percent stake in Firstsource Solutions and Quest Mall. Firstsource is a well-established player, with annual sales of Rs 3,541 crore and net profit of Rs 327 crore. The value of these businesses, based on 8-9 times FY20 estimated earnings, is pegged close to Rs 2,000 crore, or around Rs 165 a share.

Our calculation suggest that sum total of these individual businesses on a conservative basis accrues to about Rs 1,350-1,365 a share, which is quite attractive compared with the CESC’s current market price of Rs 913 share, a discount of about 32 percent per share.

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