Analyst Corner: Maintain ‘Buy’ on CESC with TP of Rs 760, stock trades fair

CESC’s 1Q results highlight the impact of lower volumes on the S/A business. S/A PAT declined sharply by 38% YoY, resulting in a miss on our estimates (29% miss).

Consol. PAT, on the other hand, declined 15% YoY, partly supported by a better performance at Dhariwal. While a muted power demand environment has impacted profitability in the near term, the longer-term story remains intact. Performances at Dhariwal and distribution franchises (DFs) continue to improve. Despite factoring in the tightening of norms at Haldia and S/A, the stock trades attractively at 7x FY21 P/E. Maintain ‘buy’ with target price of Rs 760/sh.

S/A PAT declined ~38% YoY to Rs 1.3 billion (29% below our estimate of Rs 1.9 billion). This was largely on account of decline in sales volumes (-31% YoY) to 2.1BU. This, given the lack of a revised tariff order, impacted efficiency gains, in our view. Consolidated PAT decreased ~15% YoY to Rs 2.0 billion in the quarter, partly supported by an improved performance at Dhariwal.

Dhariwal reported profit of Rs 240 million (v/s loss of ~Rs 240 million in 1QFY20) on account of a new PPA signed and the pass-through of higher coal cess in tariff. Dhariwal had signed a 185MW PPA with Maharashtra in 3QFY20, and the same has been extended up to October 31. Losses at DFs in Rajasthan declined to Rs 330 million in 1QFY21, from Rs 530 million in 1QFY20, despite lower demand. The company’s recently acquired Malegaon DF reported loss of `310 million in 1QFY21 due to collection issues. Profits at Haldia improved to Rs 850 million in 1QFY21, v/s Rs 760 million in 1QFY20, owing to O&M savings. Profits at Crescent and Surya increased to Rs 120 million in 1QFY21 v/s Rs 30 million in 1QFY20.

Subdued power demand would impact the profitability of CESC’s businesses in the near term.

However, the medium-term story remains intact. Dhariwal’s 170MW PPA with Maharashtra from November 19 has been extended for another six months. The performances of its DFs should improve as the company gains a better understanding of the circles and leverages from its experience in Kolkata. CESC’s existing distribution business has high RoE and delivers steady growth. Generation assets generate healthy FCF. The stock trades at an attractive ~6x FY22E P/E, even as earnings visibility at Dhariwal improves, and factoring in the tightening of norms at Haldia and S/A. Untied generation capacity and the scale-up of DFs have the potential to boost earnings. We value the stock at 9x 1year forward P/E. Maintain ‘buy’, with TP of Rs 760/sh.