Buy CESC, target of Rs 372: Microsec

Microsec is bullish on CESC and has recommended buy rating on the stock with a target of Rs 372 in its August 29, 2012 research report.

“CESC is a fully integrated power utility engaged in the generation and distribution of electricity across 567 sq km of licensed area in Kolkata, West Bengal since 1899 serving 2.5 million consumers. This includes domestic, industrial and commercial users. CESC owns and operates four thermal power plants generating 1,225MW power. These are Budge Budge Generating Station (750MW), Southern Generating Station (135MW), Titagarh Generating Station (240MW) and New Cossipore Generating Station (100MW). More than 45% of its coal requirement is sourced from captive mines.CESC owns and operates the T&D system, which comprises 474 km circuit of transmission and 85 distribution stations; 3,837 km circuit of high tension (HT) lines further linking distribution stations with low tension (LT) substations, large industrial consumers and 9,867 km circuit of LT lines connecting the LT substations to LT consumers.”

“CESC, flagship company of RP-Sanjiv Goenka group, was incorporated in 1978, now operates in 3 segments – Power (as generation and distribution utility), Retail (Spencers) and Property. Company owns 1225MW of generation capacity and provides electricity distribution services in Kolkata circle. Unlike other power utilities, CESC is immune to the deteriorating financial health of SEBs, since it buys power from them to meet increasing demand for its distribution business. Current valuations at 0.75x trailing adjusted book value fail to assign any value to its turnaround in Spencer and capacity additions in FY14-15. FDI in retail would be the key catalyst for the stock and furthermore its stable RoE in regulatory business, foray into merchant power post expansion and coal linkages for expansion till 2015, will improve its cash flow.”

“CESC is a unique distribution franchise play with back ended capacity additions. CESC has its own distribution arm in Kolkata area, which secures company from delayed payments and longer debtor days. Besides, for securing its coal requirement, CESC has also acquired 26% stake in its group company ICML which meets 45% of the company's coal needs. CESC has a generation capacity of 1,225 MW. The company is expected to double its generation capacity to 2425MW by FY15, through addition of 600MW in Chandrapur and 600MW in Haldia, scheduled to commission by May 2013 and Sept 2014, respectively. In addition to this, 3240 MW of thermal capacities are under development.”

“At the CMP of INR303 per share, CESC is quoting at 0.75 xs and 0.69x its FY13E and FY14E book value, respectively. The company has seen no deterioration in working capital since it buys power from SEBs (unlike other utilities) and on track execution of the upcoming power plants in Chandrapur and Haldia, will gradually improve the overall business ROEs of CESC.  We believe CESC is better placed than most of its peers. Furthermore, the stock is trading well below the book value of INR 384 per share. We assign a PE of 10.77 xs and arrive at a target price of Rs 372 which reflects 22% upside over the current stock price of INR303,” says Microsec research report.

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