Buy CESC; target of Rs 366: SKP Securities

SKP Securities is bullish on CESC and has recommended buy rating on the stock with a target of Rs 366 in its April 19, 2012 research report.

“CESC Ltd. (CESC), Flagship Company of RP-Sanjiv Goenka Group, is a fully integrated power utility engaged in the generation and distribution of electricity to 2.5 million customers across 567 square kilometers of licensed area in Kolkata and Howrah, West Bengal since 1899. CESC generates around 1225 MW of power through its four thermal power plants. CESC also has interests in retail and real estate through its subsidiaries - Spencer’s Retail Ltd. and CESC Properties Ltd. respectively.”

“Despite raising tariffs by Rs 0.46/unit at the start of FY12 to Rs 5.19/unit, West Bengal Electricity Regulatory Commission (WBERC) approved another 13.3% (Rs 0.69/unit) hike in tariffs retrospectively to Rs 5.88/unit for FY12. The hike in tariff will help CESC to recover its costs. As allowed by WBERC, CESC will earn a guaranteed post tax ROE of 15.5% and 16.5% on the equity invested in power generation and distribution business respectively in the period FY12-14E. CESC plans to invest Rs ~600 crores for its distribution business each year. It is expected that CESC will earn an incremental income of Rs ~30-33 crores in the next two years. CESC has reported strong financial performance over the last four years. Net sales of the company has risen at a CAGR of ~12.2% in FY07-11 period. During the same period, CESC’s PAT increased at a CAGR of ~12.9%. It is expected that CESC’s topline will grow at a CAGR of 12% in the period FY11-14E. During the same period, we expect CESC’s PAT to grow at a CAGR of ~5.8%.”

“We recommend a BUY rating on the stock with an 18 month price target of Rs 366/share, implying an upside of ~36% from the current levels. We value CESC based on SOTP method. The power business is valued at Rs 361/share, at 0.6x FY14E BV of Rs 600.9/share. Using DCF, we have valued Spencer’s Retail Ltd. and CESC Properties Ltd. at negative Rs 6/share and Rs 11/share respectively,” says SKP Securities research report.

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