ICICI Direct is bullish on CESC and has recommended buy rating on the stock with a target of Rs 668 in its November 16, 2015 research report.
ICICI Direct’s research report on CESC
CESC reported 6.7% YoY increase in revenues to Rs. 1,757 crore driven by 7.7% increase in tariff to Rs. 6.9/Kwh during the quarter. EBITDA margins declined marginally by 76 bps YoY to 24.1% due to a 58% YoY increase in power purchase cost and 6.9% YoY increase in employee cost, which was partially offset by 20.0 % YoY decline in fuel cost and 13.8% YoY decline in other cost during the quarter. For the year, plant load factor (PLF) declined to 79.5% vs. 98.0% YoY. Spencer’s monthly store sales/sq ft increased 6.5% YoY to Rs. 1,539
Outlook and Valuation
At the CMP of Rs. 558, the stock is trading at an attractive P/BV of 1.0x for FY17E. Factoring in FSL’s investment and its improved operating performances, we value the same by assigning a multiple of 1.1x on the determined value of CESC’s investment (I-direct -FSL target price Rs. 50). Declining cash losses at Spencer’s continue to impress and the management remains optimistic on breaking even by Q4FY16. Factoring in the same, we now assign a value of Rs. 84 (earlier Rs. 88 – factoring the delay in breakeven) to Spencer’s at (0.7x FY16 EV/Sales) Further, while CESC’s base business continues to remain a cash cow (RoE- ~18%), the commissioning of Chandrapur 600 MW, likely FSA from CIL and signing of the 300 MW PPA would slightly ease the anticipated pressure on cash flow. Accordingly, we value the same by assigning 1.2x book value. However, the project still faces hindrances in signing long term PPA for the balance 300 MW capacity as the project is incurring a cash loss of Rs. 90 crore/quarter. However, Haldia is less risky compare to the Chandrapur plant as the plant would operate on a regulated business model with assured fuel supply and PPA arrangement in place. The company has approached WBERC for the finalisation of the capex and tariff for the project and the same is expected to get finalised by Q2FY16.
Thus, we assign a higher P/B multiple of 1.8x for Haldia project. We continue to value CESC on an SOTP basis. However, factoring in the two scenarios of recovery and non-recovery of Rs. 230 crore annual loss (for negative bidding of Rs. 470/tonne) we have valued CESC on both base and bear scenario by assigning an equal weightage to both cases. Accordingly, we assign a 50% weightage to both base case and bear case valuation to arrive at an SOTP revised target price of Rs. 668 for CESC. This still provides an upside potential of 19.7% from the CMP of Rs. 558. Thus, we maintain our BUY recommendation.
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