Upbeat on Spencer’s Retail sales; to maintain healthy debt-equity ratio: CESC

The re-listing of businesses would happen around Q4FY17, he said.

On the debt front, he said they have always strived to maintain healthy debt-equity ratio, even though power companies have leeway to go in for higher debts. Going forward post re-listing the generation debts will remains with generation and distribution debts will remain with distribution.

Going forward the generation company is expected to be cash surplus and the board will take a decision on as to how the cash can be best deployed. I would prefer to reduce debt and temper with worthwhile acquisitions, said Goenka.

He is also upbeat on the Spencer's Retail business doing well. Despite GST impacting sales in first quarter, Goenka said the sales in next few quarters are expected to be robust.

Spencer's Retail Limited, part of RP Sanjiv Goenka Group, is a multi-format retailer providing a wide range of quality products across categories such as food, personal care, fashion, home essentials, electrical and electronics to its key consumers. Specialty sections such as Spencer’s Gourmet, Patisserie, Wine and Liquor, and the recently launched Epicuisine section are some of the key differentiators in our hypermarket stores.

Below is the verbatim transcript of the interview.

Prashant: I want to start with something topical which may not affect you that much, but this is with regards to the jump in short-term power rates that we have seen almost to about Rs 5 plus, north of Rs 5 now. Do you think this is sustainable?

A: This is something that probably will carry on for another few weeks. The thermal power production is impacted because of coal and I think my own sense is that this will carry on for about 3-4 weeks more maybe up to Diwali.

Prashant: And then, you would imagine they come back to the Rs 3 odd mark from where they jumped up quite dramatically post Diwali?

A: It is difficult to say whether it will go back to that level or it will settle at lower levels, but not that low. It is a question of supply and demand, quite honestly at the end of the day. And you do have certain supply demand issues at this point of time which have led to this increase and I see that mismatch continuing for 3-4 weeks more.

Prashant: Just to tie this back to your specific business, for the Chandrapur unit, one understood that you were participating in a short-term tender which was by the Maharashtra government for about eight months or so. Could you give us an update there and whether the current surge in short-term prices has had any effect there?

A: We have made a bet. Now let us see what the result of that bid is. We would know in the next few days, but the first unit, unity number two, the first unit to be operational, actually is operating at 93 percent plant load factor (PLF) and that is going full steam. So that gets us to very close to profit before depreciation and tax (PBDT) breakeven situation, just marginal short of a PBDT breakeven. So all our interest, liabilities and everything else are met by this. So, now it is a question of the other unit getting operational. So we will participate in short-term bids, but we are very hopeful of coming to a long-term power purchase agreement (PPA) with a utility in the next few months.

Anisha: When you mentioned about the bid that you have given for the Maharashtra PPA, is this for a short-term one or the five year PPA that Brihanmumbai Electric Supply and Transport (BEST) has come out with?

A: This is the short-term PPA for three months.

Ekta: Moving away from the specifics of the power business and talking about the status of the demerger, can you share with us where exactly the approval process stands? How many more approvals are you expected to get and when exactly would the process be completed in terms of the demerger?

A: Between the SEBI and the stock exchanges, we are expecting the final clearance to come through within the next few days. We are at the fag end of that process and then we apply to National Company Law Tribunal (NCLT) formally for the process which could take whatever time. I think NCLT is a new phenomena and nobody is able to predict the exact time that it takes. But I would imagine that will be about three months or so, but I cannot specifically say. But it is very much on track, it is very much on schedule, the effective date is October 1. So whenever it gets implemented, the effective date will continue to be October 1.

Ekta: The street is working with a possible relisting timeline of around Q4 of FY18, the last quarter of this fiscal. Is that a fair enough assumption?

A: I would imagine so.

Anisha: An accounting question on the demerger. We know that Spencer's is practially debt free, but the holding company right now has a long-term debt of around Rs 14,000 crore which one would imagine would get split between the generating company and the distribution company. Can you help understand what amount will go to which company as far as debt is concerned?

A: At an overall level, our debt equity ratios are considered to be very healthy and we have always emphasised upon the fact that we will not allow our debt equity levels to go high even though power companies do have the leeway to go in for higher debts. We have confined our selves to fairly low levels of debt.

I think the exact numbers are sort of fainalised and the generation debts will remain with generation, the distribution debt will remain with distribution and that is pretty much the thing. So it is exactly as per if the money was spent on distribution it goes into distribution. If the money was spend on generation, it goes into generation. Large part of the money was actually spent on generation. We have spent about Rs 5,000 crore over the last few years on distribution. So it will go in direct proportion to the capital expenditure (Capex) spend.

Anisha: Moving on to your generating business, most of the assets are throwing cash right now. Even Chandrapur is expected to turnaround. Now once this happens, let us say in FY19, how do you plan to use the cash? Are you going to go ahead and do more acquisitions? Are you going to repay the debt or is some special dividend on the line?

A: Frankly yes, the generation company will be fairly cash surplus. It will be for the board of the company to take a call as to how the cash could be best deployed. But I think I would actually go in for a reduction of debt and temper it with acquisitions if there are worthwhile acquisitions available. Not acquisitions for the sake of acquisitions, I do not believe in acquiring assets which are stressed and do not have the prospect of turning around.

As far as distribution is concerned, we do expect to grow, we have grown with these three franchises in Rajasthan. We do believe there will be other opportunities coming up in other states and we expect to participate competitively in those.

Anisha: Talking about the distribution business, when will that be earnings before interest, taxes, depreciation and amortisation (EBITDA) positive, FY19, the three franchises in Rajasthan? And also a word on Spencer's if you can, just when it will be PAT positive, it just turned EBITDA positive last quarter?

A: In Rajasthan there are three circles and Kota is already showing very good promise. I had promised that between month 19 and month 24, we should turn EBITDA positive, and I think we are on course for that. Bharatpur came subsequently and Bikaner has been just about three months ago. I think I would stick to my original timeline forecast of EBITDA break-evens between month 19 and month 24.

As far as Spencer's is concerned, this quarter we expect to be PBDT break-even. The first quarter we were EBITDA break-even, now we expect to be PBDT break-even. Next year should be PAT positive. So that is the way I look at it. The business is growing well; GST impacted the first quarter as I had said earlier, but it seems to be bouncing back in quarter two.

We have reduced operational cost and post store debits by about Rs 1 crore a month which is significant. Our margins have increased by 1 percentage point a month which again is significant and so I think these are helping despite GST having impacted sales for a while. I think now that sales are expected to bounce back, you should see fairly robust numbers in the next few quarters.

Prashant: I am going to read out these couple of lines from Macquarie broker, an analyst who tracks the sector. This is on the generation side and I quote, ‘disruption in the Indian power sector should happen even before renewable and storage technology becomes mainstream led by capacity surplus, reduced transmission bottlenecks, and energy efficiency measures. This would structurally lower return ratios in the sector.’ I want your thoughts and opinion on this.

A: One cannot generalise the sector as a whole. You have to look at assets based on the quality of the assets. There are some assets which are good and there are some assets which are not so good, and there are some assets which are not good at all. So the good assets would continue to do well and good assets my sense is could actually do better, and the weak assets would do badly. I think that is where it is, so, I would not generalise anything, I would take asset by asset, I would make a specific – if I had to do a forecast then I would do it specifically asset by asset, not generally.

I think there is nothing called a generation sector per se because even generation is broken up between wind, solar, hydro, thermal, how far is your thermal connection, what is the quality of the connection, from which mine it is, what is the kind of strip ratios of the mine, are you importing, are you port based. So, this generalised things are very theoretical, I firstly don’t think they have much meaning.