Hold CESC; target Rs 331: Nirmal Bang

Nirmal Bang has recommended hold rating on CESC with a target price of Rs 331, in its February 20, 2013 research report.

"CESC's Q3FY13 performance was below expectations with revenue growing by 5.8% yoy and PAT growing 36.5% yoy aided by margin expansion at operating level. Firstsource Solutions' open offer has been completed and management is optimistic about the company based on its improved sales figures and margins.

EBITDA at Rs 266 cr was up by 24.9% yoy. EBITDA margin expanded 390bps to 25.6% as compared to 21.7% in Q2FY12 due to lower raw materials costs and lower T&D losses (12.0% for Q3FY13 as compared to 12.8% in Q3FY12). PAT for the quarter was Rs 101 cr, up by 36.5% yoy. PAT margin was at 9.5% for the quarter which is significant improvement from 7.4% in Q3FY12.

Spencer's average sales have increased from Rs 1087/sq ft in 9mFY12 to Rs 1230/sq ft in 9mFY13, a growth of 13.2%. Same stores sales grew from Rs 1124/sq ft in 9mFY12 to Rs 1303/sq ft in 9mFY13, registering a growth of 16%. Spencer's has made a store level EBITDA of Rs 51/sq ft per month in Q3FY13.

CESC has won the distribution franchisee for Ranchi, Jharkhand via a competitive bidding. Formal handover would take place over next 6 months. The Ranchi distribution circle currently has an annual revenue Rs 400 cr and around 3 lakh consumers. CESC will earn from bringing down the T&D losses (which are currently ~50%). Management has said that Firstsource Solutions (FSL) sales are looking better than expected and margins are also looking better than what they had estimated.

Valuation & Recommendation: Stable earnings from standalone business, improvement in performance of Spencer Retail and upcoming commissioning of Chandrapur power project should support the stock price in the near term. At the CMP, the stock trades at 0.76x its FY14E book value per share. We have valued the stock on SOTP basis with its Kolkata regulated business valued at 1.1x its FY14E regulated equity for Rs 263, Haldia & Chandrapur valued at 0.8x equity invested for Rs 52, Real estate business at Rs 10 and FSL at Rs 6, to arrive at our target price of Rs 331. We recommend investors to HOLD the stock for a potential upside of 11%," says Nirmal Bang research report.

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