Buy CESC; target of Rs 101: Emkay Global Financial

Emkay Global Financial's report on CESC

CESC has corrected ~12% in the last one and a half months since the FY19-20 tariff order for the Kolkata license area came out. Investors are mainly concerned about the nonconsideration of interest on short-term borrowings and working capital in the present tariff, though WBERC has clearly mentioned submitting details in APR. WBERC will examine the necessity of such loans on the tariff gap during the year and will decide accordingly. We believe that it will be eventually passed on to consumers. It is important to note that capex for FY19-20 has been approved and that the T&D loss has been kept unchanged at 14.3%. The actual T&D loss for FY19-20 stood at ~9%, and hence CESC will benefit. We believe that the Kolkata license area will remain a steady cash cow for the company. Stocks of pure utilities sector like NTPC and Power Grid have remained firm in the recent past despite a significant increase in commodity prices, as they are not affected by it. Hence, we believe CESC’s standalone earnings will also not be impacted by it.

Outlook

We maintain our positive view on CESC with a Sept’22 TP of Rs101 (unchanged). At CMP, the stock offers a 6% dividend yield and mid-single digit earnings growth. We believe CESC remains one of the key beneficiaries of the distribution reforms anticipated in the country in the coming years. With ~13% RoE and PB of 0.8x, it remains attractively priced. Maintain Buy.

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