Hold CESC; target of Rs 324: Emkay

Emkay Global Financial Services has recommended hold rating on CESC with a target of Rs 324 in its October 26, 2012 research report.

“CESC will acquire 49.5% stake in Firstsource Solutions Ltd (FSSL) by subscribing to fresh equity and acquiring shares from existing institutional holders. The acquisition will be effected through CESC’s wholly owned subsidiary, Spen Liq Private Ltd. FSSL is a Mumbai based BPO service provider and serves the geographies including US, UK and India in the healthcare, telecom & media, and banking, financial services and insurance industries. The three large institutional holders are ICICI Bank (Promoter, 18%), Metavante Investments (18.2%) and Aranda Investments (18.8%). FSSL has about Rs22bn of outstanding debt at the end of FY12 including FCCB of ~$170mn due in Dec’12 (redeemable at 139%). Networth stood at Rs14bn, goodwill at Rs24bn and cash and cash equivalents at Rs7.7bn at the end of FY12.”

“Management do not expect great response to the open offer and aims a total stake of 51% or near about for a total consideration of ~Rs4bn, Aims to fund the deal by Rs2.5bn debt raising at CESC (with securitization of FSSL) and Rs1.5bn through CESC’s cash Cheaper deal as this is a compulsory sale by ICICI. Mgmt expects first source to report PAT of Rs1.5bn in FY13 vs Rs600mn in FY12. Rational for acquisition is that-CESC is not finding avenues to grow in power, so was looking for something else to grow and found this deal, from management’s perspective, the deal is an investment of Rs1.5bn and attributable profit of Rs0.75bn.”

“We think more than the earnings and deal valuations of first source, investors will look at persistent non-core diversification tendency of CESC mgmt and which is unlikely to go well with investors. The stock has re-rated in past 6-8 months driven by tariff order, improvement in Spencers and FDI in retail. However, post this deal, it might face derating again. Consequently we have increased our assumption for cost of equity from 12.5% to 13.5%. This alongwith impact of cash outflow and increase in gearing due to FSSL acquisition, will lead to cut in our target price by Rs47/sh. Though the stock remains cheap at 0.7x FY13E book vs other utilities but might continue to remain cheap. We downgrade the stock from buy to hold rating with revised PT of Rs324/share,” says Emkay Global Financial Services research report.

Non-Institutions holding more than 90% in Indian cos

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