Buy CESC; target of Rs 350: PINC Research

“CESC on 6th March 2012 was finally awarded the tariff order for FY12 by WBERC. The commission not only allowed CESC to raise tariffs by 13.3% for the current fiscal but also raised blended RoE to 16% for the tariff period. We understand that the company has already started to bill its clients as per the new order from the current billing cycle. The arrears of FY12, along with interest, will be collected over a period of 48 months. In the retail business, we assume a further delay in its breakeven owing to a slower growth in the overall economy. However, we believe the stock continues to offer value even after assuming increased cash infusion into the loss making retail business. Maintain BUY on the stock with a target price of Rs350/share.”

“Tariff hike approved by the regulator, although late, is in our view both sentimentally and fundamentally positive for the stock. Despite raising tariffs by Rs0.46/unit at the start of FY12 - thereby increasing tariffs to Rs5.21/unit - CESC's earnings were marred by growing under-recoveries of its fixed costs. We believe the company had under-recoveries of Rs350-450mn for the preceding three quarters. This latest increase of Rs0.69/unit, in our view, should adequately compensate CESC for these under-recoveries. The regulator has allowed CESC to earn 15.5% and 16.5% post tax RoE for the block FY12-14 for its generation and distribution business respectively. We believe this a key positive as it will aid the company to earn an incremental Rs250- 300mn/year. This coupled with interest on arrears translates into 6.7% and 6.2% increase in our FY13 and FY14 earnings estimate.”

“CESC is one of the most efficient power generators and distributors in the country with its stations being available for over 90%. Despite this, we believe the company will continue to trade at discounted valuation given the cash infusion from its generation business into its loss making retail venture. However, we believe the parent shall be able to generate sufficient cash to fund Spencer's losses and other capex. We upgrade our earnings estimates to reflect higher RoE and interest on arrears for FY12. We estimate standalone earnings to be at Rs5.0bn and Rs5.4bn during FY12 and FY13 respectively. Maintain BUY on the stock with a target price of Rs350/share, implying 20% upside,” says PINC Research report.

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