Buy CESC; target of Rs 406: Ventura

“CESC’s retail operations continue to lose money and the losses at the operational level over the past five years have dented CESC’s profitability. However over the past few quarters, the business is witnessing some signs of recovery with losses being controlled and the management is optimistic about a possible turn around by FY14. While we share the managements optimism of achieving a turn around, we believe that the onset of profitability would be sometime in FY16. Backed by a three pronged strategy of closing unviable stores, shift to high margins products and concentration on double digit same store sales, we expect revenue to grow. Spencer Retail revenue are expected to grow at a CAGR of 12.8% to Rs1526.7 crore by FY14 and losses should stand reduced to Rs220 crore from the current Rs255 crore by FY14, leading to a re-rating of the stock.”

“nlike other industry players who are grappling with issues of erratic power purchase and delayed payments by SEBs and fuel supply issues, CESC with its integrated & regulated business model remains largely unaffected with assured returns. In addition low T&D losses and secured fuel supplies (with more than 50% of the requirement met through captive mine) places CESC in a favorable spot compared to its peers. Led by insulated business model & strong performance of the existing assets, we expect the CESC standalone revenues and profitability to grow at a CAGR of 10.0% and 5.7% to Rs5666.1 crore and Rs618.8 crore respectively by FY14. In addition, aggressive capacity expansions, at Chandrapur (600 MW) and Haldia (600 MW), scheduled to commission by April 2013 and January 2014, would lead to doubling of the generation capacity over the next two years & would fuel future growth through creation of generating assets”

We initiate coverage on CESC as a buy with a sum of the parts (SOTP) valuation based price objective of Rs406 representing a potential upside of 26.2% from the CMP of Rs322. We have valued the generation assets at a P/B multiple of 0.9x which is a significant discount of 30% compared to the other generation utilities. We expect this discount to narrow over time as CESC is relatively better placed than other power utilities in terms of offtake and fuel supply. The distribution assets are valued at a P/B multiple of 0.9x, taking into account the ongoing investments while the new assets Chandrapur and Haldia, which are nearing completion are valued at P/B 0.7x. Overall we have valued the power business at Rs312 per share,” says Ventura research report.

Public holding more than 90% in Indian cos

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